Trading Philosophy
We view ourselves primarily as traders and therefore typically enter positions with a near-term expiration (ranging from a few days to a couple of months) with the intent of closing the position beforehand. However, we may consider a longer-term horizon and act as a long-term investor when advantageous or necessary. This flexibility allows us to make time an ally as we may take ownership of the underlying and wait for it to move back to our advantage. We consider this key for those seeking to become the best option traders.
Photo by Pedro Lastra
Photo by Chris Liverani
Due Diligence
We consider one or more data points to guide our decision-making process such as price action, volatility, fundamental analysis, technical indicators, volume, open interest, fair value and earnings estimates, as well as macro-economic and geo-political events. We only use public information when gathering data to assist in our trade entries, exits, and adjustments. We believe in trend and momentum but always consider the possibility of reversal. We use our best judgment for trade entries, adjustments, and exits but can never guarantee success nor provide recommendations by sharing our trades as we are not aware of your specific situation. Our free educational program seeks to help you become the best option trader possible in order for you to adjust your own trades according to your personal constraints and objectives.
Net Option Sellers
Back-testing has shown that implied volatility often overestimates the expected move of a stock’s or ETF’s price. Since options premiums are based on implied volatility, they are overpriced most of the time. For that reason, we lean towards selling options with high implied volatility whenever possible and appropriate. In our opinion the best option traders tend to be net option sellers. Another benefit of selling options is to take advantage of the passing of time, which is the one and only dimension of options for which direction is known in advance with 100% certainty.
Photo by M.B.M.
Photo by Adam Nowakowski
Position Sizing
We believe that position sizing is the number one rule in prudent risk management and therefore, we limit each ticker to 10% of our overall portfolio. We avoid taking excessive risk on any one single stock or ETF. To further mitigate risk, we set aside 20% – 60% of our overall portfolio in cash or cash equivalent. This also allows us to seize value opportunities following a specific stock/ETF or market decline.
Limited Number of Open Trades
Time (for adequate risk management in particular) is of the essence and a scarce resource to most people including ourselves, consequently we prefer to limit our number of open trades to a range of 5 to 15 at any one time. Depending on market conditions, this range may fluctuate but remains our target. In our opinion a limited number of open trades facilitates proper due diligence – a crucial requirement for you to become the best option trader possible.
Photo by William Iven
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