My Philosophy & Strategy

 

On this page I list some of my philosophies, strategies and rules I follow when trading. The subjects I cover are listed below in the same order they will be discussed on the page. This way if you want to scroll down to a specific subject, you can do it without searching. Subjects may be covered completely here or there will be a link to where it’s covered on another page.

Las Vegas Lovers, News, Focus on a few, Rules-Based Trading, Directional Trading, Owning Stock, Selling Call Options, Naked Call Options, Time Decay, Huge Premiums, Covered Calls/Assignment, 1 Week/1%, Hedging, Triple Play Hedge, Buying Options, Margin, Opportunity Lost, Have a Plan With Goals.

Las Vegas Lovers

Are you a gambler? Do you go to Las Vegas a few times a year?  Do you bet on football games? Do you have that gambling chromosome where you get juiced up placing a wager on anything? If you answered yes to these questions you better find  a different game to play. The stock market game, especially involving options, is not for a gambler. Many call it gambling, and what many do might be gambling. My suggestion is if you do have that chromosome, stick to the football games or nice vacations in Vegas. Many justify what they do in the market and call it investing but the truth is, many are gambling. Investors study! Investors study the fundamentals of a company. They learn how to do technical analysis. I do not consider my trading/investing gambling. If you are as successful at betting on football games as seasoned investors, stick with it. However, I know the betting game, and Vegas, is rigged against the bettor and for the house. This is a fact!

News

Its news that moves the market! One of my rules is not to get into a position if news is imminent on a stock. For example, if earnings are due out on the stock. The earnings report is a news item that can make a stock move up or down big, and fast, while the market isn’t open. A big move can lead to all kinds of problems. Another example, if you’re involved in a pharmaceutical  company and approval on a new drug is being announced. This news will move a stock in a large way. I do not want to be involved. This is complete gambling. There are plenty of news reports that come out so often that are hard to avoid; like employment reports, consumer confidence reports or housing reports. Some reports are easy to avoid and others are not. Some easy to avoid are the news items on the individual stocks.

Focus on a Few

I do not like to watch too many stocks or options. I find if I try to watch 8 or 9 stocks along with the options, it’s just too much! Not too often am I in positions with more than 3 or 4 stocks or their options, except if I invest in a stock long term. If you’re a Grasshopper, I would suggest you get involved in 1 or 2 position for a while. No more than that.

Rules-based Trading

If you want to be successful trading options, I would advise you to make some very strict rules and stick to them. It’s very easy to stray from rules when the dollar signs are flying around you. Sometimes it’s unavoidable but you must try. Stick to your game plan. You will be better off in the long run. Watch my trade post in this blog, when I stick to my rules, which is most of the time, you will see the money flying in to my account. Check out my trade history pages. Trade History 2016, –  Trade History 2017, –  Trade History 2018, –  Trade History 2019. All trades posted as I made them.

Directional Trading

Picking the direction a stock is going to move is the most difficult thing to do while trading options. This is why I’m an options seller and I don’t like owning stock short term. As an option buyer, you have a time limit for the stock to move in the direction you want it to move. If it doesn’t move in the right direction, you lose money. If it moves in the correct direction but not in the time allotted, you lose money. Time is constantly decaying the value of your option. This is why I buy options infrequently and I strongly recommend you stay away from buying options, especially if you’re a Grasshopper. This direction picking dilemma also applies when buying stock. Although, buying stock is much safer than buying options, it will cost you more money, but with stock there is no Expiration Date or Time Decay. When you buy a stock you must do your fundamental analysis.

My strategies involves selling options, you don’t have to get the direction exactly correct. Many times you can be completely wrong and still make money. You can pick direction on stock with 100% certainty only in hindsight. My strategy is to find opportunities where I don’t have to get the directional pick perfect. That’s with selling options!

Owning Stock

Owning stock, short term, is not in my strategy. However, sometimes it’s completely unavoidable when trading options, but I still don’t like it even when I have to. I sell many Naked Calls and many times I have to cover my position which means buying the stock. I will continue buying stock but only with Covered Calls involved. Also, when working on margin, which I do, if I sell a Naked Call I pay no margin interest. If I do a Covered Call I pay interest on the price of the stock. When I buy a stock selling for $50 per share, the cost for 1000 shares is $50,000. I lay out $25,000 and my broker lays out the other $25,000. The $25,000 I get from my broker I pay margin interest. Check out the page under “Educational,” Margin Account. We must run our accounts as a business and when we can we must lower business expenses. As long as we don’t increase risk!

Selling Call Options

Selling Call Options is my #1 strategy for many reasons. You don’t have to get the direction of the stock perfect. You have Time Decay on your side. You collect money as opposed to paying money, just to name a few. Go to the link Selling Call Options and read my page on selling options.

Naked Call Options

Selling Call Options is my main strategy. You can sell Covered Options or sell Naked Options. My preference is selling Naked Option. I just don’t like owning stock. Many times I’ll find a great option to sell but I don’t have time to do the fundamental analysis to see the condition of the company. Especially for a 1 week option. I mainly rely on my technical analysis which is looking at the charts. This is where I get my ideas for an options play. I hope with my technical analysis I can take an education guess where a stock might go short term. Even then I’d rather sell a Naked Call. At least start Naked. If I have to Cover in a day or 2 I do. And I don’t like paying margin interest. Go to this link and read about Naked Call Options.

Time Decay

As you just read, I like selling options. When you sell options you have time decay on your side. Part of my strategy, I should say a major part of my stock options strategy, is using time decay as a tool. You must master the concept of time decay. Go to this link and read about Time Decay. If you don’t completely understand, you must get more reading material or send me an email. Time Decay is imperative to understand for an options Trader.

Huge Premiums

One of the major components of the value of an option (the premium) is volatility. A stock with a high volatility will have a much higher premiums than a stock with low volatility. With this in mind, I avoid options with very high premiums. If a stock has high volatility it has more of a chance to make big moves. While it’s nice getting big premiums, it’s very stressful when a stock is flying all over. This goes for Covered Calls and Naked Calls. My strategy is to get a middle of the road premium. “Slow and steady, steady and slow” with a lot less stress. Read my page “1 Week/1%.” This page talks about the size premium I look for with different priced stocks. Also, Know your risk tolerance!

Covered Calls/Assignment

90% of the time I like to get assigned. This means, when selling Covered Calls I want to lose my stock. My strategy is, if I buy a stock for $18.50 per share and sell the $20 Call and get a $500 premium, I want to get assigned. I make the $1.50 on the stock and make the $500 premium. On 1000 shares that’s $1500 on the stock and $500 premium. Deal over! Money in the mattress! Many times you don’t get assigned and the stock goes down and you end up holding it for a long time. I don’t like this, especially when spending money on margin interest. I want, in and out, move on! At the time of this writing my favorite stocks are Facebook and Netflix. With these stocks I like to keep them; not get assigned. I might go up a little on the Strike Price and take a little less premium, and hope not to get assigned. But if I do, no big deal. I move on to the next opportunity.

1 Week/1%

This strategy I named “1 Week/1%” for two reasons. I like to do deals that last a week and I like to get a return on my money invested of 1%. I do this constantly. If you follow my trades in my blog, you will see. I’ll do this at least once a week. If you have a problem with this return, you better invest in a gun and a mask! Go to the link “1Week/1%” and read more.

Hedging

Hedging is something I do and it’s something I don’t do. I like selling options for hedging, or you might call insurance. Getting paid for insurance, I love it! I do not like paying for hedging. I don’t like buying Puts or Calls to hedge a position. I find it’s too expensive. Go to the link Triple Play Hedge and read how I get paid to get insurance.

Triple Play Hedge

“Triple Play Hedge” is a strategy I came up with and named, as I did “1 Week/1%.” “Triple Play Hedge” is a strategy where I get paid to have insurance. I buy one stock and sell three Calls on it. One Call will be Covered and the other two will be Naked. As I just directed you in the Hedging paragraph above, go to the link Triple Play Hedge and read more.

Buying Options

Vary rarely do I buy options. NEVER short term options. I write about this in “My Philosophy & Strategy” so you understand how I feel about buying options. My philosophy is, don’t buy options! And my belief is, if you do buy options as a stand alone strategy, you will lose money. Period! Is my philosophy clear? If you do, I hope it’s only for hedging; to put insurance on another position. All my short term options strategies go against buying options. I like not having to pinpoint direction. With buying short term options you must pinpoint direction. I like having Time Decay on my side. I like getting paid premiums. Clearly there is a much higher return on investment when successfully buying options, but 80% of options expire worthless. That is a fact! Do you want to own something where 80% expire worthless, or do you want to be on the other side. Most people buying options are totally gambling. Go to the link Buying Call Options and read more.

Now that you know how I feel about me buying options, I must add something to the previous paragraph. Buying options is not part of my daily strategy, but from time to time I might buy options. Read on…

There are a few situations where I’ll buy options. One is I might have to buy an option to hedge a position, a short Call position. Another time is when I’m up big on the year. I might buy an option, add a little risk for a chance to hit it big with house money. If I lose I get a tax write off against my big gains. However, I’m still very careful. These will be long term options but I’ll stay in them short term. I go out with the Expiration Date for protection. I’ll also buy options instead of buying a stock long term. For example, if I want to own a stock long term because the fundamental analysis has been done, sometimes I’ll opt for an option. If I want to own 500 shares of a stock, I’ll buy 10 contracts (1000 shares) of a long term option. If I own a 10 contract option with a Delta of .50 it’s like owning 500 shares of the stock. With a Delta of .50 an option will increase in value by 50¢ for every $1 movement in the stock price. I will get the same gain as owning the stock only I’ll invest a fraction of what it would cost to own the stock. To get a .50 Delta these will be At-the-Money options and the Expiration Date will go out at least a year. This is a great option buying strategy.

As an options trader you must understand all parts of option trading. Selling, buying, Puts, Calls and combination positions, you must know it all.

As a Grasshopper, you will have to experiment with buying options. You must know how to buy options and know how Time Decay works against you. You must know how difficult it is to pinpoint direction, and when you don’t, see how fast you will lose money. This education you can only get from experience. Your best bet is to do this with paper trading.

Margin

My strategy is to work on margin. It leverages my money and gives me more buying power. There are some drawbacks like paying interest and getting margin calls, but if managed correctly, it’s a great tool. This will all be explained if you go to the link Margin Account. Margin accounts are not for Grasshoppers!

Opportunity Lost

One of my strategies is, don’t worry about Opportunity Lost! Opportunity Lost is the limit you put on the upside gain of the underlying stock you own when you sell a Covered Call. Go to the link Opportunity Lost and read what it is. I don’t worry about the opportunity lost but you must know what it is. Here’s an example: I buy 100 shares of XYZ Corp for $18 per share. I sell a Covered Call with the strike price of $20. I received a premium and I agree to sell my stock for $20 any time between the writing of the Call and the Expiration Date. On Expiration Date XYZ Corp is at $25. With the Covered Call I limit my upside gain on the stock at $20. I have to sell, to the Call buyer, my stock at $20. This is called assignment. The stock is at $25. I get the gain on the stock from $18 to $20 but the buyer of the stock gets the gain from $20 to $25. I don’t get it because I had a contract to sell at $20 and received a premium. I lost the opportunity to make the profit from $20 to $25. That is the Opportunity Lost because I sold the Call Option. I get into this deal knowing my profit is limited to the premium, and the stock gain up to my Strike Price, $20. I take the sure thing, the premium, in exchange for the potential upside gain above $20. I do not let the potential gain interfere with my sure thing. Many traders worry about this, I do not. I move on.