CPT's How To Trade
FREQUENTLY ASKED QUESTIONS
Q: What kind of strategies do you use?
A: I currently trade weekly Iron Condors on SPX, monthly Iron Condors on SPY, and monthly Iron Butterflys on RUT.
Q: Why do you trade the shorter term (weekly) trades?
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 can be 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. From a educational viewpoint, a weekly trade gives more time to practice…you have 52 weeks to improve your skills on a weekly strategy.
Q: Why is the column called "Couch Potato Trader"?
A: Once positions are entered, the adjustment guidelines are relatively basic and simple, without a lot of technical expertise being required. Many of the trades are managed as "no touch", meaning the position remains open until target gain is reached, or exited at the pre-set maximum loss. Depending on which broker you use, the use of conditional orders can facilitate management of the trade, minimizing time spent at the computer.
Q: Can anyone trade these strategies?
A. The "Couch Potato Trader" column assumes you already have an understanding of options, how they work independently and how they work together. The Option Investor site has some Options 101 lessons. Without the proper background, trading any strategy can be very confusing and very expensive.
Rule #1 - don't ever trade anything you don't understand.
Q: Do you sell options at all strike prices and on all stocks?
A: No, I'm very particular about the stocks or indices I select. I generally prefer indices, more specifically SPX and RUT. I choose the ones that I believe have the best chance of working in the strategies I use. I also selected SPY for the monthly Iron Condor because of its liquidity.
Q: Do you ever lose money?
A: Of course. Even the casino gamblers guess right on occasion. It's a matter of controlling the losses. They're a part of life as a trader and a part of doing business. That's what options trading is -- a business! Treat it as a business and you can be consistently profitable. The key to any successful business is keeping the gains more than the losses.
Q: Do your strategies work in all market conditions?
A: No strategy works in all market conditions, but that doesn't mean I can't make money. The market is in a trading range over 80% of the time. It's a matter of recognizing the trading range and applying the strategies. The rest of the time, the markets trend. There are adjustments and variations of these same strategies that I use to position myself to be profitable -- even in trending markets. You can't blindly apply any strategy. You'll learn to be flexible and creative.
Q: What is your track record?
A: The results are summarized below:
- 2012: Average gain per month was 8.7%.
- 2013: Average gain per month was 6.2%.
- 2014: Last year's results are summarized by the four strategies we traded:
Weekly SPX 10 point Wide Credit Spread
This play was traded early in the year, and put on the back burner in May when too much day to day volatility was having a negative impact on the overall results. Basically the trade was a breakeven on a cumulative basis for the time it was in our Trade Plan. Cumulative Results:
- Weeks Traded: 14
- Gain/Loss Ratio: 9 Gains, 5 Losses
- Average gain per week over 14 weeks: +.7%
Weekly SPX 10 Point Wide Iron Condor
This trade was incorporated into the trade plan after the weekly credit spread was removed.
- Weeks Traded: 21
- Gain/Loss Ratio: 16 Gains, 5 Losses
- Average gain per week over 21 weeks: + 3.0%
SPY Monthly Iron Condor
The 5 point wide SPY Iron Condor was traded each month since April 2014. Cumulative results:
- Months Traded: 8
- Gain/Loss Ratio: 7 Gains, 1 Loss
- Average gain per month over 8 months: + 7.1%
RUT Monthly Iron Butterfly
The 50 point wide Iron Butterfly was entered into the Trade Plan the last quarter of this year, so only has 3 months of statistics. Unfortunately for the cumulative results, the trade entered for November was caught in a large opening gap that caused RUT to blow by our stop loss exit order. Cumulative results:
- Months Traded: 3
- Gain/Loss Ratio: 2 Gains, 1 Loss
- Average Gain(Loss) per month over 3 months: -1.9%.
2015: The year-to-date results for the first half of this year are summarized by strategy:
SPX Weekly Iron Condor
- Average gain per week: 3.6%. 15 Gains, 4 losses.
SPY Monthly Iron Condor
- Average gain per month: 6.3%. 5 Gains, 1 loss
RUT monthly Iron Butterfly
Average gain per month: 4.7%. 6 Gains, 0 losses.
Q: How much do I need to start?
A: Some students begin with as little as $5,000 others with $125,000. I post trades using an example of one contract. Depending on the size of your account, you can increase the number of contracts accordingly. Every trader is different. The size of your positions depends on your trading style, risk tolerance, and desired goals.
Q: Why have you switched to using non-directional strategies recently?
A: Because after analyzing the results this year for the weekly credit spreads, I felt more confident not picking a direction, and working with theta-positive trades such as the Iron Condor. By using non-directional strategies, I feel I'm giving myself a much higher probability of success.
Q: How many and how often do you make trade recommendations?
A: My primary trades are the SPX Weekly Iron Condor, the monthly SPY Iron Condor, and the monthly RUT Iron Butterfly. These trades are entered on a consistent basis, as long as market conditions are within the guidelines. Any adjustments to the position, as well as closing details, are published. Anytime there is a new entry, you will be notified by email. You can be sure of two things -- 1) I'm going to do my best to keep the profits flowing; and 2) We're going to have fun doing it!
Q: Will you be available to answer questions online?
A: You will be able to email questions to me - I value your feedback and questions! I will address the questions as quickly as I can. For the benefit of all the readers, I may elaborate on your questions in a subsequent article.