Gatekeeping happens in every industry when top gurus refuse to share their knowledge and experience. However, you can still learn key points that nobody tells you when trading options.
David Jaffee with BestStockStrategy.com has shared some key points that are going to help you improve your trading.
The most important aspect when trading options is to make sure that your sizing is in check so that you don't trade too large and are then forced to close out a position for a loss.
However, the other aspects that are extremely important are knowing when to trade and knowing when not to trade.
A lot of this information is very nuanced, and you're going to get better at this the more experience that you gain.
Learn When to Trade Options
Personally, David Jaffee tries to keep things as simple as possible.
In order to know when to trade and when not to trade, David Jaffee usually looks at volatility. He also looks at the trading range of the underlying that he’s trading.
As long as the individual stock that David Jaffee is looking at is trading at either the low or the high end of its recent trading range, then he will either sell a put or sell a call.
However, David Jaffee also looks at volatility, including both the VIX and the VVIX. He wants to make sure that there is not a large spike in the VIX and VVIX. When there are large spikes in the VIX and VVIX that means that there's a large increase in fear and panic in the stock market.
As a result, when you sell an option, you are committed to that position. The worst thing that could happen is that shortly after you open up a new position, the trade goes against you, and you experience a large volatility expansion event.
Options Trading Examples
By looking at the VIX and VVIX, you're able to determine the amount of overall fear and panic in the marketplace, and that will give you some clues to better time your entry points.
For example, on September 14, 2021, and the previous week, the market sold off. The VIX was trading at about 15, and then it spiked up above 20.
Even more importantly than that, you saw significant weakness in the market where the S&P would open up: but as the day progressed, the S&P 500 was unable to hold on to those gains. That's a sign of weakness.
When you combine the price action of the overall market and with the spikes in volatility, where the VIX increased from about 15 to over 20 (which is a 33% increase in over a week), then that’s a major cause of concern.
During periods of large volatility expansion, it’s important to be more conservative in choosing puts and David Jaffee is going to become more aggressive in selling call options on stocks that have appreciated in value.
For example, Microsoft is currently trading over $300. From David Jaffee’s perspective, he considered that there is elevated VIX, more fear and panic in the market, and the market showed a decent amount of weakness in the past week. In this situation, David Jaffee would target selling the $335 or the $340 call option with a short-term expiration of 1 to 2 weeks (in case the position was challenged and had to be rolled).
In the trade alerts for September 14, 2021, UNH was up around $6 or $7 in the morning. He sold a call option on UNH, which then pulled back as the day progressed. He closed out that position just a few hours later for a 40% gain.
How to Earn a Consistent Profit Trading Options
To recap, the most important aspect when trading, if you want to be consistently profitable, is making sure that your sizing is correct and that you're not trading too large.
You need to leave enough excess liquidity in your account so that if the trade goes against you, you're not forced to close out the position.
The second most important aspect is making sure that you understand both the VIX and VVIX.
You should monitor the overall price action for the market, so that if the market is showing you signs of weakness and you still want to sell put options, then you're going to be more selective and more conservative in the underlyings that you choose.
You can also sell further out of the money.
Additionally, David Jaffee believes it's more important when we're in a weaker market to be more aggressive and sell call options.
You can do this by scanning watch list, and if an underlying stock is trading euphorically to the upside, and close to its 52-week high, or you think that it's overbought, David Jaffee thinks it is to your advantage to sell a call option and get some negative delta in your portfolio.
This is especially advantageous if you already have some short puts in your portfolio so that you can even out those deltas.
David Jaffee with Beststockstrategy.com has taught more than 1,500 traders to win up to 98% of their trades through his online options course and live options trade alerts.
You can learn more about these options trading tips to better time your trades and entries, so you can know when to trade and when not to trade.
Visit BestStockStrategy.com to enroll in David Jaffee’s course and sign up for his live options trade alerts. You can also receive $400 of free options trading training material.