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Using Options for Swing Trading


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Using Options for Swing Trading

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  #21 (permalink)
Market Wizard
Chicago, Illinois
 
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Watched some excellent webinars over the past 2-3 weeks on futures.io (formerly BMT)'s youtube channel. Check it out when you get a chance.

Right now I am going to work on adding a layer to my trading by daytrading/scalping price action with options on the Sim. I don't have conviction in the setups yet because I haven't tested them extensively to believe they will work in the long run. I will work the kinks out on the Sim and then take it live after I get 25% profit on the Sim. I was doing this using real money and less contracts, but no sense wasting real $$$.

In the meantime, I will still execute live trades w/ real money using front month and back month option (options that expire in 1-2 months), but this is based off of indicator divergences instead of price action.

I've got a lot of reading to do because I have much more capital than before, so I am thinking about low-risk, consistent income by selling options instead of only buying them. Still working towards that financial freedom

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  #22 (permalink)
Sunnyvale, CA
 
 
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Be very careful about selling premium for income. It is an unlimited risk, fixed reward thing. It has a tendency to work for periods until one day when it goes so wrong as to erase all the profits you had made up to then.

The only situation I recommend selling options is when being exercised is an acceptable part of your trading strategy. For example if you plan to buy stock then you can sell a put and let it be exercised if it goes in the money.

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  #23 (permalink)
Market Wizard
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Thanks for the insight mwtzzz.

Fear not, the idea of selling naked makes my stomach turn to the point that I don't even trade in my boxers.

I thought about saying "I wanna profit by selling time premium via spreads" but I don't want to alienate people who are new to options trading. In this time of frequent M&A, I definitely don't want to be on the 'short' end of a buyout.

Hope to get some more discussion going down the road. Thanks again

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  #24 (permalink)
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Bermudan Option View Post
Thanks for the insight mwtzzz.

Fear not, the idea of selling naked makes my stomach turn to the point that I don't even trade in my boxers.

I thought about saying "I wanna profit by selling time premium via spreads"

this is perfectly fine because there is a predetermined, limited risk.

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  #25 (permalink)
Market Wizard
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Finished rereading Trading in The Zone last week. I had read the book 1-2 years ago but recently I realized that although I understood probabilities and randomness but I was applying them and my confidence was taking a beating as a result.

Since finishing TitZ, I have started reading a book called Talent is Overrated by Geoff Colvin. It suggests that extremely talented people from all types of fields: sports, business, writing, etc, aren't born talented. The difference that separates these people from the rest of us in the same field is the way that extremely talented individuals practice. They use deliberate practice to work on individual areas of weakness and, eventually the constant refinement of skills that everyone else is average at allows 'talented' people to actually become talented. It kinda fits into the 10,000 hour discussion thread going on.

Deliberate practice is such a simple idea but only the minority of people do it because it is always mentally taxing to work on areas that you are not strong at. In trading, reviewing a losing trade, identifying what you did wrong and setting a goal that can avoid repeating the mistake is an example of deliberate practice at work. However it is painful to do all of these steps because, almost everyone believes they have what it takes to be a successful trader and so making mistakes/bad trades, and seeing those errors with your own eyes subconsciously makes us question our ability to be successful. It is ironic because our subconscious need to mentally believe we are a good trader actually prevents us from completing the work that will actually make us a good trader.

Now that I think about it, this is exactly like the idea of beliefs discussed in Trading in The Zone... Douglas discussed how traders who 'know' that the market is going to sell off subconsciously avoid all the signs that the rally will continue because that evidence will throw their initial belief into question and cause internal conflict... Similarly when traders project expectations about their skillset as a trader, they subconsciously avoid information to the contrary (making excuses for: not keeping a journal, not reviewing trades, not setting concrete attainable trading goals, etc)

Douglas states that the key to tackling the market from a less stressful context is to avoid projecting strong beliefs about market direction into the future. Perhaps in the same vein, we can avoid a lot of internal struggle about ourselves as traders if we didn't commit so much energy into the idea that we are great or infallible when it comes to trading. If we accept the fact that we can and will make mistakes, then Delibrate practice will provide an opportunity for you to get even better, instead of what it currently possess (a sign that you are not as good as you think you are). It is a simple reframe but it goes a long way

I've been reviewing my notes on Spread Trading using my copy of Options as a Strategic Investment (aka the Option Trader's Bible). I want to note that I am not trying to change my set-up at all... I've heard Big Mike harp about too many traders changing their setups, and I gotta admit that after being made aware of it, I see it everywhere! The changes I am making is to hopefully execute my setup more efficiently. I am using the same setup criteria but I expect the use of spreads to increase the probability of profitable trades and limit slippage 100%.

The main set ups I am attracted to are Verticals spread, Calendars spreads, and Reverse ratio spreads. I am gonna be using directionally based debit spreads with $200 - $250 of risk if the options expire. Currently I am using the simulator but when I take it live, I anticipate using at least 50% of my trading capital trading debit spreads. That will decrease the volatility in my trading account and provide for a (hopefully) consistent form of revenue that doesn't require sitting in front of a computer 8 hours a day.

That's it for now. If you are looking for a good read, check out bijeremiad's Trading journal. His analysis of his trading results is unlike most journals on futures.io (formerly BMT). Really reinforces consistency and the fact that small trends in your trading make the eventual larger overall trend in your profitability curve.

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  #26 (permalink)
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Another idea, since in my opinion "swing trading" is basically just directional trading which is pretty str8 forward with vertical spreads/directional calender and ratio spreads depending on vega, is to strategize something to trade ranging markets(since markets range more than they trend in general.

The basic idea is to identify the top and bottom of a channel and sell a short dated(front month) strangle outside of the channel(OTM options), collect the premium until price reaches the top or bottom upon which you sell the stock at the top or buy it at the bottom and exit the concurrent short option. The outcomes of the trade will hinge entirely on the movement of the stock(but you make profit consistently)

1. Price just sits in the channel and does not go to the top or bottom- keep selling the strangle to collect premium ( or Iron condor if your broker doesnt allow naked options)

2. Price moves to the top- short the stock, buy back the short call(depending on how price moved to the top short call may or may not be a loss)

3. Price moves to the bottom- Buy the stock, buy back the short put(depending on how price moved to the top short put may or may not be a loss),

4. wash, rinse, repeat and just play the channel
- manage short options with a .05 bid OR relative Rate of Return( in other words if the next month rate of return is higher and you can get out at .15 or whatever then by all means do that).

Exit: If the underlying asset breaks your channel buy/sell back the stock and exit the offset short option



obviously this this isnt for intraday trading or anything. But on daily/weekly TF's it can generate a great income for quite some time.


Wulf

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  #27 (permalink)
Market Wizard
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EXC: Trend is bearish but too much time left to close out the calls. Will let them expire worthless more than likely or buy them back @ $0.05 when it looks more dire

Had on OpEX day rally here and ended up with a $280 profit. Whodda thunk it

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  #28 (permalink)
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Just read your thread with interest. I've been doing credit spreads for about a year now. I'm still not convinced it's a good long term strategy because of the large potential loss for the small gain. I'm playing the 90% probable trades so only picking up between 4-6% on the bear and the same on the bull side. I play the monthly expiration's and have gotten into trouble with a few of the positions a couple of times.

Keep going on this thread.

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  #29 (permalink)
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dynoweb View Post
Just read your thread with interest. I've been doing credit spreads for about a year now. I'm still not convinced it's a good long term strategy because of the large potential loss for the small gain. I'm playing the 90% probable trades so only picking up between 4-6% on the bear and the same on the bull side. I play the monthly expiration's and have gotten into trouble with a few of the positions a couple of times.

It's those large/unlimited loss scenarios that eventually cause a world of hurt. It's best not to use those kind of trading strategies. You can set up credit spreads with a known limited risk instead, a simple example being a vertical spread such as a bear put. At least there you know the maximum downside.

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  #30 (permalink)
Market Wizard
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FXwulf View Post
Another idea, since in my opinion "swing trading" is basically just directional trading which is pretty str8 forward with vertical spreads/directional calender and ratio spreads depending on vega, is to strategize something to trade ranging markets(since markets range more than they trend in general.

The basic idea is to identify the top and bottom of a channel and sell a short dated(front month) strangle outside of the channel(OTM options), collect the premium until price reaches the top or bottom upon which you sell the stock at the top or buy it at the bottom and exit the concurrent short option. The outcomes of the trade will hinge entirely on the movement of the stock(but you make profit consistently)

Thanks for the input FXwulf, the idea of trading channels is appealing but I am always nervous about the inevitable breakout/breakdown that occurs. I mentioned it in response to mwtzz earlier, but I don't see myself using any naked short positions so the short strangle isn't something I can add to my repertoire unfortunately.

You are right that I am basically attempting to trade directionally, and one tactic that I am really interested in using that would work in your channel trading example is diagonalizing a bear call spread so that the front month (or week) premium I collect can offset the costs of my longer term bet.

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