blog

Reader Challenge

Options Trading 101 - The Ultimate Beginners Guide To Options

Download The 12,000 Word Guide

Get It Now
As Seen On
by Gavin in Blog, Reader Challenge
September 8, 2014 10 comments

One of my responsibilities here at Options Trading IQ, is to push you to become a better trader. I try to do that by writing helpful articles on things like implied volatility and by providing great market analysis and trade ideas. But I also need to encourage you to take action and move forward. It’s one thing to read a blog post or educational article, it’s another thing entirely to put those ideas into practice.

So this week, I am putting a challenge forward to you. Between now and the expiry of the October monthly options (Oct 16th), I’m challenging you to paper trade a new option strategy.

When you try out the new strategy, I want you to make a note of the following:

  • Why you are making the trade
  • Where your stop loss and profit targets are set
  • Where your adjustment points are set (if any)
  • How you will adjust (if applicable)
  • Delta, Vega, Gamma and Theta values at trade initiation (for the total position, not the individual legs)

At the end of each trading day, take a not of the stock price, greek values and the P&L on the trade. Put these into a spreadsheet or Word document and make notes of how the trade progresses as time goes by.

Once your trade is completed, report your findings here in the comments section of this post so that everyone can benefit. If we have 20 traders trying different strategies and sharing their discoveries, that will be a whole lot of learning for the entire group over the course of just 1 month.

I’ll even join in. I haven’t traded many Ratio Spreads, so I will do a Put Ratio or a Call Ratio and report the findings here as well.

Below of some strategy ideas that you might like to choose from.

  • Iron Condor
  • Bearish Butterfly
  • Reverse Butterfly
  • Double Butterfly
  • Broken Wing Butterfly
  • Christmas Tree Butterfly
  • Calendar Spread
  • Double Calendar
  • Double Diagonal
  • Diagonal Spread
  • Put Ratio Spread
  • Put Ratio Backspread
  • Call Ratio Spread
  • Call Ratio Backspread
  • Short Straddle
  • Long Straddle
  • Short Strangle
  • Long Strangle

The person that provides the best analysis of their new strategy will receive a $50 Amazon voucher. The winner will not necessarily be the person who makes the most money off their trade. What I am looking for is the person who applies a strict process to their trade idea and keeps the best records / notes.

What have you got to lose? Absolutely nothing, but you’ve got a lot to gain, especially if lots of people get involved.

So who is in? Let me know below and hold yourself accountable for it.

Cheers, and please feel free to share this post if you know any other traders who might benefit from this challenge.

Butterfly Option Strategy

10 Comments
  1. Lawrence says:

    Gavin

    How about doing some pair trade by selling short and buying long? It is one of the famous strategy used by hedge fund manager to hedge their stocks Portfolio by eliminating the delta and theta values within the option stocks.

    Or perhaps we can just do a simple buy Call or Buy Put options?

    For me I prefer to play simple option spread either credit spread or debit spread due to putting up so many leg around other option strategy we have to pay too much commission and too much risk compare to the credit of the premium we sold. Unless we can strictly and do a proper analysis to sell 1 or 2 SD when play the butterfly spread or Iron Condor.

  2. Gavin says:

    Hi Lawrence,

    Any of those options would be fine. An analysis of any of those trades would add value.

    Gav.

  3. Chandran says:

    I just started a weekly Iron Butterfly for the Sep 14 expiration, as follows:

    1165/1135 Put credit spread, 1165/1195 Call Credit spread
    Initial credit: $1680
    Max Loss::$1320

    Greeks:Delta -11, Theta 58, Vega: -65

    Plan to get out: 10-15% of Margin required = ~$130-$150
    Days in Trade: 2-3 days or if loss point reached
    Plan for cutting losses: 15% loss on initial margin.
    Potential Adjustment plan: buy call/put depending on which way the market turns, In this case buy 1175 Call for 6.6 (as of today) if the market continues to go up

    Pros of the trade: High theta
    Risks: No time to adjust and losses mount quickly

    1. Gavin says:

      Nice trade and excellent analysis Chandran!

  4. Chandran says:

    Day Update: The moment I put the trade in RUT jumped up to my adjustment point, but fortunately or unfortunately I did not get a chance to adjust and the market is down and as of right now the profit is about $80 – about 6% on margin at risk. I might wait until Monday before I close it out as there does not seem to be a huge movement in the market today, so will close on Monday (that is the plan as of now Theta is about 64. This is mainly a theta trade, so will try to get that decay for one more day.

  5. Chandran says:

    Final day update: Closed out position with a profit of $132

  6. Chandran says:

    Started a weekly iron condor

  7. Chandran says:

    Started a weekly iron condor:

    vehicle: RUT
    shorts: delta 10 or outside of one standard deviation (looking at that in TOS)
    positions: 1120/115 put 4 lot, 1180/1185 call 4 lot for a total credit of $0.60
    no adjustments
    Close when loss is double the initial amount so if the condor costs me 1.2 I’ll buy it back
    Theta trade, Vega is not a big factor its more a gamma and price risk
    Max risk is 2000, but wont wait to lose the whole thing

  8. Chandran says:

    Closed out my weekly iron condor yesterday for a loss of about $300, the market move was too huge to take any more risk

  9. Brooks says:

    I’m doing a 30 trade test of call and put credit spreads. I began on August 22 and will continue until 30 trades have closed. To date, I have 18 closed trades, 14 winners, 4 losers. Tradables: stocks, ETFs and indexes (NDX, RUT). Holding time: use weekly options, minimize time in the trade. Entry: must capture a minimum of $0.50 premium per contract on a 5 point spread. Target profit: 90% of total profit (i.e. exit when spread is $0.05. Maximum loss: 2x premium received. Other rules: no earnings due before the expiration date, price must not have touched the short strike price recently, underlying trend must be flat or away from the spread direction (i.e. for call spread, stock trend should be flat or down, vice versa for puts, there should be a margin of safety between the short strike and the current stock close (5%+), ETFs are preferred over stocks (no news), higher risk/rewards are preferred, shorter days to ex are preferred, delta should be 15 or less (preferable much less). I will post final results when 30 trades complete. Why credit spreads? Because they are easy to manage while I work full time. I do analysis at night, place orders for the next morning. After filing, I do an OCO order to exit with a profit or loss.

Leave a Reply

Your email address will not be published.

Options Trading 101 - The Ultimate Beginners Guide To Options

Download The 12,000 Word Guide

Get It Now