The phrase "Have a plan; Trade your Plan"
has been used over and over again, and applies to many different business applications. I am a firm believer in having a plan, whether it is a one year plan or a 10 year plan, to achieve your goals in life. Do you have a plan? What goals are you expecting from your trading? This will vary from trader to trader depending on your lifestyle, risk tolerance, and desired results.
I begin this introductory article as the new writer of The Couch Potato Trader newsletter with these words that may be "overdone"; but this basic statement has helped in carving my current career path as a full time options trader.
My background is a diverse one in a variety of finance, marketing, and business management positions. I grew up in Connecticut and currently live with my husband and best friend, Ken. I have worked as sales promotion manager for a capital equipment manufacturer. I then moved into project management at the Mystic Seaport Museum, managing several successful American's Cup campaigns during the San Diego defense. I progressed through increasing levels of business and financial management before settling into my goal of trading for a living.
Having said that, I have been now been trading options full time for five years. Several books have inspired me along the way; "Reminiscences of a Stock Operator" by Edwin Lefevre being the most memorable. This fascinating story of the legendary Jesse Livermore was truly inspirational in confirming my decision to pursue trading as a career. I also believe that the psychology of trading is equally important as the technical aspect; and the book "Trading in the Zone" by Mark Douglas has helped me gain the discipline and confidence necessary to become a successful trader.
My approach to trading is a non-directional one, rather than attempt to pick the right direction and be wrong. I primarily trade Iron Butterflies because of their high risk/reward profile. Whenever possible, I look for a 1:1 risk/reward profile. For example: The maximum margin, or risk, on a 30 point wide Iron Butterfly is $3,000 per contract. A $15 credit yields $1,500. Therefore, at trade entry you have $1,500 risk, or a 1:1 risk/reward. The iron butterfly allows more room for the trader to make adjustments without destroying the trade's potential gains. Time diversification is also a consideration for my trades; I prefer to minimize the length of time in the market whenever possible. Weekly options give traders this flexibility.
Risk management is of the utmost importance to me, as it is for any successful trader. I look to take smaller, consistent gains and control losses carefully. No one likes to swallow a loss, but it's the nature of the business and the key is to keep losses smaller than gains on an annual basis in order to achieve your plan. There is actually less risk with a weekly trade because there are more opportunities to enter a trade. With a weekly there are 52 potential trades, versus a monthly which has a potential of 12 trades. Let's use a simple example: You have $4,000 per month to allocate towards a trade. With a monthly, you could potentially have $4,000 at risk for the entire month. With a weekly, you could allocate only $1,000 per week. Hence, less market exposure with same potential gain on a monthly basis. Trading more frequently also gives the trader the flexibility to sit on the sidelines for a cycle and not lose an entire month's worth of income.
The shorter term trades also allow a trader to make up a loss more quickly. If a monthly trader has a losing month, there are only 11 months to recover. With a weekly trade that is closed for a loss, there are 51 opportunities to recover. It is, however, important to stress that trading weekly options are not suited to everyone's personality, trading style, or lifestyle. They can require more "due diligence" and attention than longer term trades, although the duration of the trade is shorter. My trade plan includes an SPX Iron Butterfly on a weekly basis. Depending on market movement and volatility, this trade can sometimes be exited for target gains in 1 or 2 days. I have a target gain of 5% of the maximum allocated capital ($3,000 per contract), or $150 per contract. The trade is exited if a 10% max loss is reached ($300 per contract).
What to look for at trade entry? I've learned over the years that the K.I.S.S. (keep it simple, Sam) approach best suits my trading style. I do not get overly technical analyzing the charts for entry; although upcoming economic news is something to be aware of. Friday is the usual entry day for the 7 day weekly SPX Iron Butterfly. A Thursday entry is sometimes considered for a higher credit and the possibility of a Friday exit the next day before the weekend. However, I will avoid a Thursday entry if there is some potentially market-moving news on the economic calendar.
The next article will cover trade management of the weekly SPX Iron Butterfly. As with any new strategy, it's always best to backtest before putting on a live position, and start with a small size. You can enter this trade with just one contract.
Stay keen on your risk management, live to trade another day, and trade your plan, whatever plan you may have!