Not all traders make money trading; this is due to common trading mistakes like the ones I discussed in a previous post about trading mistakes.
In this post, I will be sharing with you how to make more money trading options in 2020.
I specifically share tips on how to make money even when the market is entering a recession and how to invest in a bear market.
Before we proceed, I want to clarify that no matter who you choose to learn from, BestStockStrategy.com, Option Alpha or Tastytrade (both of which have, in my opinion, an inferior strategy), selling option premium is the only way that you can earn consistent and predictable money in the stock market.
As long as you are selling option premium, you can earn a lot of money.
However, you need to ensure that you're disciplined and not greedy (like OptionSellers.com).
How to make money trading options? It's quite simple. You can definitely learn how to be a consistently profitable options trader.
But, if you are trying to day trade, make money trading penny stocks, using technical analysis, or forex trading, then I don't believe that you're a trader, instead you're a fraud victim and a gambler. In general, it's important to avoid scams and bad information like here and here.
I don't recommend trading ETFs because you'll receive about half as much premium when compared with selling options on individual securities.
Additionally, if you sell an iron fly or strangle, you are inherently putting on a position at an inopportune time.
Why trade an iron fly on SPY when you could make more money trading a put or a call on Apple or Facebook?
In November 2018, my alert subscribers and I created a strangle at an opportune time.
Amazon fell to about $1,650, so I instructed them to sell a $1,480 put.
Those who wanted to turn their trade into a vertical credit spread sold the $1,480 put and bought a $1,300 put.
The next day, Amazon increased in price by around $120 so I instructed my subscribers to close out the previous trade. But, for those people who didn't close out that trade, I told them that it was an opportunistic time to sell a $1,860 call.
By waiting for Amazon to increase in price, traders who sold the call option were able to receive a large amount of premium.
In our Amazon example above, if they had sold that call when Amazon was trading at only $1,650, they could have received around $1 in premium (instead of the $5 that they received).
When offered only $1 of premium, it would not have been worthwhile to enter that trade.
That is the problem when selling strangles.
You are inherently NOT maximizing the amount of premium that you receive.
In a bear market, I recommend that you should primarily sell calls because the trend will be your friend. You can sell calls on rallies.
Selling calls will permit you to make money trading when the market is extremely volatile.
I do not agree with aimlessly selling strangles and straddles.
Also selling iron flies on ETFs that have high implied volatility is also a poor strategy because your positions will get tested frequently.
"Trading often", like what Tastytrade recommends, is also very dangerous because you're better off allocating capital to only the best opportunities.
You will deal with constant stress when you sell a straddle.
You'll have to log into your account 5 to 6 times a day to make sure that your position is not exceeding either the upper or the lower bounds.
Even if you sell a straddle and immediately enter a Limit Buy to Close order to take off that trade at 25% of the profits, you still have to log into your account multiple times a day to make sure that the position isn't being challenged.
Additionally, the market volatility during times like late 2018 exhibited 2 - 3 standard deviation moves; because of this, you will have to log into your account multiple times and make many adjustments.
You will likely feel like a pinball by making many adjustments only to find out later that perhaps you shouldn't have touched that options position at all.
Overall, selling a straddle is not a SMART idea to make money trading especially during a bear market.
"There is a ZERO 'safety net' when you sell a straddle. You will deal with constant stress when you sell a straddle." - David Jaffee, BestStockStrategy.com
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When you sell puts or calls on underlyings that are at price extremes, you are giving yourself an advantage because you have a large safety net and there's a high likelihood of price reversion to the mean.
In November 2018, Facebook traded up to ~$150 after it exceeded earnings.
We waited until Facebook fell down to $142 and we sold the $134 put that gave us an
incremental of $2 of premium.
By waiting for the volatility of Facebook to increase, we received about twice as much premium as we could have received when Facebook was trading around $150.
Remember, you need to mitigate risk and build in a large safety net when trading.
In our Amazon trade example earlier, prior to waiting for Amazon to fall to $1,650 (and then selling the $1,480 put), we did not try and predict future price movements.
Instead, we took what the market gave us and when Amazon increased in price by $120 in one day, we felt that it was overextended and opportunistically sold the $1,860 calls to capitalize upon the opportunity.
When Amazon, as one of the largest companies in the world, appreciated 5% in one day, we took advantage of the fact that Amazon was too far extended to the upside.
Additionally, we sold a call that was ~$100 out-of-the-money, and collected a lot of premium as well.
Once we executed that trade, we entered a closing order at 50% of the maximum profit.
Two days later, we actually closed out that trade for a ~50% gain.
This is a high probability trade.
Will it be profitable all the time? No, but the odds are in your favor.
The trade above is an example of your best way to trade and make money consistently in the stock market.
You can minimize risk and be opportunistic while, at the same time, trade with a substantial safety net.
Some securities are better than others.
For example, in 2018, Amazon was actually a lot more stable to trade than Facebook because Facebook fell from $218 to ~$125.
Amazon traded around $2,000 and fell below $1,350 (but it rebounded quickly).
Amazon's normal trading range had been between $1,600 and $1,800.
You can make money trading (and, more importantly, reduce your risk) when a stock is less volatile like Amazon versus when a stock is more volatile like Facebook.
You can also protect yourself and minimize portfolio volatility by selling vertical credit spreads.
You need to look at the trading range of an individual security and then discern whether it is an A or A+ trade opportunity.
It's important to only trade the best opportunities because when the market goes down, everything has high implied volatility, and the Volatility Index (VIX) is also very high.
When the VIX is high, this means that you will collect a lot of premium when selling options, but you're also assuming heightened risk and it's important to remember that NOT all opportunities are the same.
This is another reason why you need to pay attention to which of the securities on your watch list are performing well so that you make good decisions on which trades to make.
From my personal experience, the worst trades have always been with the "B" or "C" stocks such as Baidu or Electronic Arts.
On the other hand, I rarely lose money with Facebook, Amazon or Visa.
In fact, I have never lost money with Lockheed Martin and Raytheon.
I've probably made a few hundred thousand dollars by trading these securities.
"When Amazon, as one of the largest companies in the world, appreciated 5% in one day, we took advantage of the fact that Amazon was too far extended to the upside." - David Jaffee BestStockStrategy.com
Overall, the best strategy when selling options and trading options should be to sell puts on large cap market-leading stocks that are trading at the low end of their range.
As they increase in price, you can then sell a call.
I usually do not proactively sell calls on many securities.
I sold calls on McDonald's in 2018 when it was around $185 because it had appreciated in value too quickly and I felt that it was overextended to the upside.
However, it is extremely rare for me to aggressively sell calls unless the market is declining consistently and we're in a bear market.
If the market is weak then I will wait for Facebook, Amazon, Mastercard, Lockheed Martin, and Raytheon to fall to the low end of their trading range.
If that happens, I will sell a put that is around 10% - 15% below the current trading price.
I'll then wait to see if the stock quickly rebounds in price.
If it does, I will opportunistically sell a call on that specific security and turn the trade into a strangle.
In general, I rarely sell a naked call or vertical call spread on a stock that I don't already have an existing put position on.
It is much more capital efficient for you to sell a put AND also sell a call because it doesn't use up any incremental buying power when converting a short put or short call position into a strangle.
When Amazon was trading around $1,650, I sold a $1,480 strike put.
Then, when Amazon quickly appreciated in price to $1,750, I then then sold a $1,860 call.
By doing that, you are not using any incremental buying power.
By opportunistically turning the existing AMZN $1480 put position into a strangle by selling the $1860 call, there is no incremental buying power that's being used.
Remember that Amazon cannot trade above $1,860 and below $1,480 at the
same time, so as long the number of contracts and the expiration dates are the same, then I can collect additional premium without using extra buying power.
I do not recommend trading iron flies on ETFs.
In 2018 and 2019, I traded more verticals to protect myself against the heightened volatility.
In general, I feel that vertical credit spreads provide greater capital efficiency and also protect against tail-risk. This more than compensates for the small decrease in premium received.
As a result, I have been trading more spreads recently.
I accept collecting less premium in exchange for limiting my downside risk during a large drawdown in the S&P 500.
In December 2018, I bought puts for portfolio insurance when the market was extremely volatile.
When volatility spikes, your primary goal should be to reduce risk and not lose money.
As a result, if you need to buy some protective puts for your existing positions during "black swan" events, then I am okay with that strategy to overcome a major selloff.
When you trade vertical credit spreads, it is difficult to manage / roll that position, however I still feel that the more efficient capital usage and protection outweighs the smaller premium and rolling difficulty.
Overall, it's important to build a wide moat and a strong safety net. This is how I make money trading.
My strategy minimizes risk while maximizing returns, even during volatile times.
You can definitely make money trading options. The best way to do so is by selling option premium.
Review all of the tips that I have shared in this post and also read my other posts where I share valuable information about options trading.
I want to remind you that selling straddles do not provide you with a safety net and I would NOT recommend trading straddles.
If you want to know more about how to make money trading, enter your e-mail address below and receive $400 worth of free training.
Can you make money trading stocks?
Unfortunately no. Research has shown that it's "virtually impossible" to be a profitable day trader. Stick with selling option premium if you want to make money trading.
My free materials are significantly better than anyone else's paid materials.
You can also leave your questions in the comments section below and I will answer them. Thank you!
I (David Jaffee) help people become consistently profitable traders while minimizing risk. I graduated from an Ivy League University and worked at some of Wall Street's most successful investment banks. Subscribe to my YouTube channel for valuable videos - BestStockStrategy YouTube Channel. Finally, if you're looking to Land a Finance Job, then I've put together the best step-by-step course at : LandaFinanceJob.com
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