So, you have ready 15 books on options trading, volatility, greeks and commonly known strategies such as “iron condors” and butterflies and calendars, yet you have no idea why your options trading equity curve embraces the ZERO line so tightly and won’t let go for the last 7 years. You are an accomplished technical analyst, having studies Fibbonacci and Elliot Wave Theories and you are on the first name basis with the leading Gann technicians. It takes you about a half-second glance at any chart to recognize support and resistance lines and you can bend oscillators to your will without a flute, yet you are still only “dreaming” of leaving your job for the glory of making a living in options trading and the dream is becoming fuzzier and fuzzier each year.
Unfortunately for many aspiring options traders, knowing how to put on a condor and knowing that it requires adjustments when the market goes against you is not nearly enough to become successful in options trading. First of all, trading options without a multi-level business plan that covers capital allocation and management, as well as risk management is a virtual guarantee of a disaster. Besides, there is a multitude of important factors to consider when trading options for consistent monthly income. Here is a high level, incomplete list:
1. How many days to expiration to initiate each position?
2. How far from the money should the short strikes be? What are the implications of positioning the shorts at certain strikes vs. others? (Quarters, halfs, wholes, fives, different deltas.)
3. How far from the shorts should the long strikes be?
4. What are the effects of increased distance between shorts and longs?
5. What time is best for entry during the day and week?
6. Which instrument is best? An index? A stock? A commodity? Perhaps a commodity ETF?
7. What are the effects of volatility on the position? Should the strategy be implemented exact same way in each market?
8. Should a filter be used to avoid certain volatility environments? What type of a filter?
9. How to enter multi-legged positions? Scaling in vs. full order entry (up to 4 legs)? How to enter if more than 4 legs?
10. Market or limit orders? Should this be same in fast vs. slow markets?
11. Hold to expiration or exit before expiration?
12. If exit before expiration, how long before and why?
13. If hold to expiration, what are the implications?
14. How much should the stop loss be compared to the profit target? Perhaps 50% of target profit? 100%? 150 or 200%?
15. Should the stop loss be brought in closer as the position ages or let the market run until your target exit?
16. How much to risk on any one position?
17. Should the position be insured in addition to the longs that are a part of the position formation itself?
18. If it should be insured, when should the insurance be bought and how much of it should be bought?
19. What form should insurance be bought in? Single options? Spreads? Butterflies? Back ratios?
20. Should both put and call insurance be bought and if so, should equal quantities be bought?
21. If insurance was bought, should it be held until the position is exited, or should it be sold back early?
22. Should the position be left untouched until it either reaches profit or loss?
23. If it should be “adjusted” or “repaired”, when and how?
24. If it should be adjusted, should any capital be added to the position?
25. Should your position be scaled out of or exited all at the same time?
26. Should portfolio level insurance be used? Self-insurance or purchased insurance?
I would highly recommend joining an options trading mentoring program, run by an experienced options trader, who trades a sizable portfolio himself, so that you can learn how to put together an actionable options trading business plan, learn some working options trading strategies and open a small options trading business.