One of the most frequent questions we get is how does Samantha trade options? Well here are her ‘Rules of Engagement’ for Trading Options
Volatility, Direction and Time are the three most important components of choosing an option. Expected duration of a trade guides the choosing of an option expiration date. I have learned it doesn’t hurt and often helps to add more time than you think is needed. Generally, I employ Directional (naked) Options in high-probability directional trades expecting increased volatility. Option Spreads are employed for gradual volatility in directional trades. Combination option tactics (ratio backspread, financed spread, butterflies, etc) are most beneficial for event-driven trades as well as for ‘set-it-and-forget it’ type swing trading to capture a trend further out in time.
Most often my options are bought (not sold naked), at the money with highest gamma, or out-of-the-money strikes based on projected price targets. I trade primarily three timeframes:
- Chases (1-3 Days employing options 1-3 weeks out)
- Swings (1-3 Weeks employing options 1-3 months out)
- Trends (1-3 Months employing options 3-6 months out)
Chases are largely news/event driven trades or volatility technical patterns that last a few ‘days’, sometimes just hours. Momentum drives the price action, which can be volatile, so active management is required. Samantha will share chase ideas in her LIVE Trading Room as they happen, calling out and/or annotating charts with entry, stop, profit (ESP) targets. Swing and Trend trades will be posted in the LIVE Fishing Plan (Google Doc) and Trade Log (Spreadsheet).
Trailing stops can be based on percentage of profit/loss of an option, the price level of the underlying, the theoretical price of the option at profit/loss targets… but in most all cases, the CLOSE of the underlying at its moving average guides the trade exit: 3D for Chases, 8D for Swing, and 21D for Trends.
Ideally, we want to use a Macro-to-Micro backdrop to get into a trade but a Micro-to-Macro approach to get out of a trade. By that I mean, when successful, we want to roll profits into further out-dated, higher-priced options, convert directional plays into spreads to protect profits, all the while taking partial profits/adding to positions along the way. We want to turn a profitable Chase into a profitable Swing into a profitable Trend while being mindful that losses are not to be feared but managed.
Consistency sounds boring and trading is neither consistent nor boring. But if we consistently manage our winners and our losers than the results will take care of themselves.
