Return to the basics in option trading

I almost called it "Return to Fundamentals" but I am not a fundamental trader, never have been and I don't see that changing. Oh, this involves naked options, not really basic but the strategy is easy and should prove consistently profitable and, overall, relatively low risk.

I still like my latest trading plan but I don't like the need to hold a bunch of stocks in the wings waiting for trade setups. I look at tweaking the system every once in a while in order to generate more trades but I realize that more trades does not equate to more profit, often it is quite the contrary.

So, I return to an option trading strategy that I started a while back and add a few incidental facts that I did not have available at the time. If any were following along then and are still here it was my iron condor option trade strategy. While it happened to produce 100% profitable trades while I worked it, I shut it down as the SPY ETF options were getting rather cheap. This only served to drive the risk up while trying to optimize the profitability as I have to take options that were further away from expiry and closer to the strike prices. Besides, I had another grand trading scheme in mind at the time.

The little fact that I did not have at the time was that weekly expiry options were becoming available for various index ETFs. I had determined that I would need to start trading futures in order to see enough premium in option selling to justify running iron condors but I had tried that using a service already, and it did not pan out very well. Losses were more frequent and larger than I would have figured, but that is sometimes what happens when you work with a service and have less control over the trades directly.

Now, rather than selling options then having to buy the corresponding protective options to look after loss control I can directly sell options and set stop orders to exit for protection.

This allows two things to happen. One, cost savings for the trade overall, no buying and Two, I can take cheaper options which means closer to expiry (days) and/or farther out of the money.

This is where the weekly options come into play. Each week I can place a trade that is one, two or maybe three days away from expiry and select options that are far enough out of the money that the chances of them closing in the money are very very slim, I'll work that one out next post. These options are using the European method where they cannot be assigned prior to expiry so there is zero change of getting stuck with stock pre-maturely and they are traded right through to Friday evening which means I don't have to just sit and wait to see what happens on Friday as the prices could go anywhere. I had that happen where a loss turned into a larger loss over the Thursday night. Not fun.

I know this is an all over the place post but I wanted to get some information down and out of my head so I could focus on the particulars that I need to work out before this actually can be deem ed a workable trading plan. 15 years of backtesting for starters... even though the weeklies have not been around for more than a few years this lets me track the underlying price activity in order to see historically significant moves which provides me some idea of the possible risk involved.

Jeff.