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Make Your Trading Life Easy!

Make Your Trading Life Easy!

Make Your Trading Life Easy!

by The MoleAugust 28, 2019

In my time here at Evil Speculator I have come across a considerable number of traders who seem to have a particular obsession with a handful of symbols they feel ‘most comfortable’ trading. This seems to apply in particular to indices and ETFs – I can point at a few traders in this comment section who seem to be focused on three or four symbols they trade on almost a daily basis.

I view this as a grave mistake as every market – without exception – goes through cycles which are either conducive or detrimental to your trading style.

Disclaimer: When it comes to currencies there is a point to be made about trading the top five USD crosses (AUD/JPY/EUR/CAD/GBP) as they represent well over 90% of all Forex trading volume. In the futures we have perhaps 5 or 6 contracts (plus their mini versions) which I would recommend to the average retail trader, mainly due to a lack of volume and the risk that can be incurred.

As you know I have been rather prolific about structuring one’s trading business in a fashion that supports your general requirements, your long time goals, your risk tolerance, your psychology, as well as your personal limitations.

That however does not imply that you should limit your trading activities to only a handful of symbols or a particular market. In particular if your favorite stock, future, or forex cross is traversing a market cycle that simply doesn’t offer an edge to the type of trading systems you favor.

The E-Mini futures right now are a good example. I haven’t been shy about bitching about the current HV sideways range as it has a tendency to eat retail traders for breakfast.

Compare that with gold, which has been on a veritable rampage since we went long near GC 1300 – one of our most profitable campaigns this year!

How long we waited for a break out move on the ZB futures. When it finally came it was difficult to hitch a ride as it barely has corrected since early this year.

The point I’m trying to make here is that looking at equities all day and worrying about direction in a sideways market is not only a complete waste of time but borders on insanity.

Of course just because the indices are screwing around sideways doesn’t mean there aren’t thousands of stocks that are well behaved – whether or not you’re bullish or bearish.

I look at a chart like ROKU above and I’d say the ongoing trend is rather clear, especially since the last earnings announcement. Most people look at a chart like this and feel a bit uncomfortable about ‘chasing it higher’.

Whether or not buying high fits your trading style is neither here no there, but there are several ways one could peel this onion. Ask yourself this: What are the odds of ROKU starting to completely nosedive in the near future?

Anything can happen – always – but I propose that the odds aren’t very good. So instead of buying the stock or buying a call spread we could sell a put spread instead and collect a bit of premium from a distance.

My general requirements for selling spreads are as such:

  • Symbol has to be liquid and offer weekly options.
  • No earnings within the expiration cycle.
  • Sell Spreads 35 to 60 calendar days prior to expiration.
  • Sell against the ongoing trend.
  • Pick a short option with a call or put delta between +/- 0.24 and 0.10.
  • Buy a long option about $2 – $10 further out (depending on strike sizes).
  • Risk should be between 75% to 90% – if your spread doesn’t match change the strikes or the width.
  • Don’t risk more than 0.5% on any position.

The ROKU example above is a 120/115 put spread and it offers a 0.78 credit.

Is that good or is that bad? How do we know?

Price = Risk

That’s the easy part. When it comes to options, especially given the volume and efficiency of today’s markets, price equals risk.


Let me explain. The spread above is $5 wide – my credit is $0.78 which means that my risk is $4.22. If you divide that by $5 then you get 0.84 which means my spread has an 84% probability to make me 1c or more. Now of course probability of touching doesn’t mean probability of profitability.

Plus remember the risk – if it goes against you it has the potential to rip your face off as you are risking $4.22 to make less than $0.78. Of course unless the market paints a YUGE move down we will manage our trade so that we rarely if ever take a complete loss.

Here are my exit requirements:

  • Winners: Buy back the spread once its price has dropped by 55 to 60%. Which means it’s trading at about 45% to 40% of your original credit. Yes, we are not holding this thing into expiration – once we got paid in silver we are outta here!
  • Losers: Exit spread if the vega of the short strike touches 0.57. That’s it – simple rule (see example below).
  • In between: Always exit the entire spread several days before expiration.

So how much should we expect to lose? That’s actually a lot easier to calculate than one might think. Instead of going nuts with our Black-Scholes calculator all we have to do is to look at our current option chain.

All we have to do is to look at the put strike that is already near or at a delta of -0.58 (negative since it’s a put). Then we just count one strike higher and we are pretty much near what we should expect if prices drop like a rock TODAY and hit your exit delta of -0.58.

If we buy that put spread TODAY we’re going to pay around $2.93 – it’ll be less as time passes and we can figure that out as well, but that’s a topic for another day. As you received a $0.78 credit this comes out to a loss of $2.15. Again, the odds of this happening are low – but remember that it happens at least 16% of the time.

Speaking of stock options – here are a few juicy symbols for my intrepid subs:


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About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at the usual social media waterholes.
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