In the following, we would
like to outline our
options trading strategy. As a valued
subscriber who follows our signals, our strategy obviously
influences your trading to a certain extent. In formulating our
strategy, we have embodied a set of trading rules, the most
important of which you will find below. This summary should give
you a clearer picture in regards to:
The types of signals you
can expect from our trading system;
The frequency with which
we might issue them;
The maximum length of
time we may remain in a position.
We have drafted our
trading rules with the following objectives in mind:
Firstly, to avoid
wherever possible the risk of total loss. Remember: if an
option expires worthless – which happens frequently – losing
your entire premium is a very real possibility;
Secondly, to reduce
substantially the risk of a significant drop of an option's
contract price due to the erosion of its time value (a stark
reminder that options are decaying assets).
Here are three key rules
we apply to our trading signals:
The trading signals we
issue are always for options with expiration dates at
least 3 months into the future. With 3 or more months
left to expiry, the erosion of an option's time value (time
decay) has not yet affected its price to a significant
degree, and it still remains liquid (See examples below);
The trading signals we
issue always apply to in-the-money options.
In-the-money options are less affected than out-of-the-money
options by short-term volatility of the underlying security;
Our trading signals are
always issued for around-the money strikes in order
to ensure high liquidity.
Finally, here is a key rule we adhere to in regards the
closing of a position:
Whatever the status of a current signal, we always close a
trade and go to cash if we have been in the position for
more than 30 days. For instance, assume we initiated a trade
23 days ago. We now have a maximum of 7 days remaining until
the trade must be closed.
True, this is a very restrictive rule. The reason we
implement it is the overriding impact the time decay factor
starts to exert on an option (with expiry in 3 months) after
the first 30 days. If after 30 days you are still in a
losing options position, your chances of making a profit on
that position become very remote. It would be much better to
take an early (i.e., relatively small) loss and then look
for a new, potentially more profitable trade.
The only exception we apply to this rule is – if after 30
days in a trade– we are in a winning position and the market
is moving in our favor.
Now, here are two examples
of how these rules may be applied to actual trading situations:
July 14 and the next options expiration day is set for July
16. The QQQQ are currently trading at $35.80. According to
our rules, the trading signals we could issue today are "Buy
Calls with a $35 strike price and expiry in September", or
"Buy Puts with a strike price of $36 and an expiration date
in September". That is the most risky signal we could issue
given the current market situation. Of course, we could also
issue the signal "Buy Calls with a $34 strike and expiry in
October". On the other hand, our rules would prevent us from
issuing the signal "Buy Calls with a $36 strike and
expiration in August". This would be too risky and thus
contrary to our strategy.
July 19 and the QQQQ are currently trading at $35.80. The
previous options expiration day was last Friday, the next
expiration is set for August 20. According to our rules, the
only signals we could issue today would be: (1) "Buy Calls
with a strike price of $35 and an expiration date in
October"; or (2) “Buy Puts with a $36 strike and expiry in
Options trading is a very
risky business. Our trading rules were put in place in
recognition of this fact. The above rules serve to protect
invested capital by limiting the amount of risk while still
maintaining a high level of profit potential.
When we publish a new
signal, we always state a number of “alternative options”
that you could trade in respect to that signal. Among them, you
will find trades of a more risky nature (i.e., trades that may
not necessarily abide by the rules discussed earlier), as well
as more conservative trades. For a given signal, you thus have
the opportunity to select among a number of options - pick the
one that best suits your level of risk tolerance. While higher
risk options are cheaper (but offer more profit potential),
conservative (lower risk) options are more expensive (but less
volatile, and consequently associated with a reduced profit
here to read more about this topic.
Here is a cardinal trading
rule: never allocate all of your
trading capital to options. In all of your trades,
invest only a predetermined and fixed amount of your trading
capital in options. This is a key strategy to help you protect
your profits and limit losses.
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read more about it.
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