Option trading methodology. Opinions and comments please
I am going to lay out, my thoughts and conclusions, that I have come up with from the past 3 weeks, where I have done nothiong, but focus my attention on everything Options.
If there are things that I could add to it or take away from it, please feel free to add any and all suggestions
Trading Plan I hope to Implement................
On the higher priced stocks ( $75 and up ) , the options on the 2-3 month out options are to expensive for my trading account size at this time. So with that and still wanting to trade the AAPL, XOM, AMZN and GOOG type options , but not having a big enough account to buy just regular Calls and Puts, this lead me to Vertical Spreads ( Bull Call and Bear Put spreads )
Since I base my entries for my trades on high timeframe charts ( weekly and Monthly ) where each candle on the chart represents 1 weeks worth of trading and 1 month of trading , it can take any where from 2 - 5 weeks for the trade to finally play out.
So given that, I need to have time on my side ( by having 2-3 months till expiration on my option trades ).
The problem there is, since you don't make anywhere near the max profit on a vertical spread until it gets close to expiration, if my trade exceeds the call or put that I sold and I still have 2 months till expirtation, I won't be up hardly any profit on the trade or close to my Breakeven price on the trade, in order then to buy back the option that I sold
My main purpose in trading vertical spreads is, that as soon as I hit my BreakEven price on the trade , I want to buy back the strike that I sold and leave on a runner , to capture the majority of the move . So I need to base the spread that I buy , on one that requires the stock to move at a max of 2% to get me to the BreakEven price and then as soon as it's reached, I'll buy back the option that I sold and have my Runner on, in order to capture the majority of the move
By buying a near term spread vs a 2-3 month out ( even though I need that amount of time for my trades to play out , more times than not), I have time going against me and the trade ( Net Debit ) will cost me more, vs just buying the current month, and getting in for cheaper, and alsmost just be willing to lose $50 - $100 as a " Gamble " in a sense, if my trade doesn't hit my Breakeven price right away
Hope what I'm looking to do, isn't to confusing.
I'm just trying to narrow it all down, to a method that I can implement, trade after trade ( systematically ), that will get me to a Breakeven on the trade as quick as possible ( reaching that breakeven with a max move in the stock of 2% ) and as soon as the Breakeven is reached, buying to close the option I sold and having the option I bought be my Runner ( to capture the majority of the expected move )
Have you considered calendar spreads as opposed to vertical spreads? If you are trading the more popular stocks with weekly options, you gain the flexibility to roll your short contract up or down as necessary and reduce the time decay while waiting for your move to occur.
Since you are doing a directional trade, you might look at selling a credit spread to help pay for your debit spread. It won't use any more margin if it's the same strike width and it will lower your breakeven.
It is not easy to make money with calendar spreads, that's my experience. You need quite a big account for adequate risk and it is hard (impossible?) to track the position without costly software i.e. Optionvue. And that's a problem if you whish to adjust the position. I feel much better now with selling option spreads on futures and wiriting covered calls or synthetic covered calls.