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The Couch Potato Trader newsletter is for intermediate to advanced option traders applying market neutral option strategies.
Strategies: Condor and credit spreads.
FREQUENTLY ASKED QUESTIONS
Q: What kind of strategies do you use?
A: I currently trade weekly Iron Condors and Credit Spreads on SPX, and monthly Iron Condors on SPY.
Q: Why do you trade the shorter term (weekly) trades?
Risk management is of the utmost importance to me, as it is for any successful trader. I look to take smaller, consistent gains and control losses carefully. No one likes to swallow a loss, but it's the nature of the business and the key is to keep losses smaller than gains on an annual basis in order to achieve your plan. There can be less risk with a weekly trade because there are more opportunities to enter a trade. With a weekly there are 52 potential trades, versus a monthly which has a potential of 12 trades. Let's use a simple example: You have $4,000 per month to allocate towards a trade. With a monthly, you could potentially have $4,000 at risk for the entire month. With a weekly, you could allocate only $1,000 per week. Hence, less market exposure with same potential gain on a monthly basis. Trading more frequently also gives the trader the flexibility to sit on the sidelines for a cycle and not lose an entire month's worth of income.
The shorter term trades also allow a trader to make up a loss more quickly. If a monthly trader has a losing month, there are only 11 months to recover. With a weekly trade that is closed for a loss, there are 51 opportunities to recover. It is, however, important to stress that trading weekly options are not suited to everyone's personality, trading style, or lifestyle. They can require more "due diligence" and attention than longer term trades, although the duration of the trade is shorter. From a educational viewpoint, a weekly trade gives more time to practice…you have 52 weeks to improve your skills on a weekly strategy.
Q: Why is the column called "Couch Potato Trader"?
A: Once positions are entered, the adjustment guidelines are relatively basic and simple, without a lot of technical expertise being required. Many of the trades are managed as "no touch", meaning the position remains open until target gain is reached, or exited at the pre-set maximum loss. Depending on which broker you use, the use of conditional orders can facilitate management of the trade, minimizing time spent at the computer.
Q: Can anyone trade these strategies?
A. The "Couch Potato Trader" column assumes you already have an understanding of options, how they work independently and how they work together. The Option Investor site has some Options 101 lessons. Without the proper background, trading any strategy can be very confusing and very expensive.
Rule #1 - don't ever trade anything you don't understand.
Rule #2 - always back test any new strategy.
Rule #3 - paper trade before trading live so you have a complete understanding of the trade.
Q: Do you sell options at all strike prices and on all stocks?
A: No, I'm very particular about the stocks or indices I select. I generally prefer indices, more specifically SPX. I choose the ones that I believe have the best chance of working in the strategies I use. I also selected SPY for the monthly Iron Condor because of its liquidity.
Q: Do you ever lose money?
A: Of course. Even the casino gamblers guess right on occasion. It's a matter of controlling the losses. They're a part of life as a trader and a part of doing business. That's what options trading is -- a business! Treat it as a business and you can be consistently profitable. The key to any successful business is keeping the gains more than the losses.
Q: Do your strategies work in all market conditions?
A: No strategy works in all market conditions, but that doesn't mean I can't make money. The market is in a trading range over 80% of the time. It's a matter of recognizing the trading range and applying the strategies. The rest of the time, the markets trend. There are adjustments and variations of these same strategies that I use to position myself to be profitable -- even in trending markets. You can't blindly apply any strategy. You'll learn to be flexible and creative.
Q: What is your track record?
A: In 2012, my average gain per month was 8.7%. 2013 brought a bit more volatility to the market, but I was still able to achieve an average of 6.2% per month. For 2014 I have been primarily trading 3 strategies; and the results are below through June:
- Weekly Credit Spreads: Average gain .7% per week for 14 weeks.
- Weekly Iron Condor: Average gain 6.7% per week for 7 weeks
- SPY Monthly Iron Condor: Average gain 9.4% for 4 months.
I'm very proud of these track records. Will I be able to continue this success? There are no guarantees, but with my style of trading (small, consistent gains/minimize losses), I feel I can accomplish this, or increase, for the balance of 2014 and moving forward. I'm confident in the strategies and believe that readers of this column will be able to take this knowledge and apply it to their trading. If you take the time to learn the strategies thoroughly, and if you're not reckless or greedy, you have a real opportunity to become profitable. You need a combination of information, skill, and desire. I can provide you with the information. The desire and skill? It's up to you.
Q: How much do I need to start?
A: Some students begin with as little as $5,000 others with $125,000. I post trades using an example of one contract. Depending on the size of your account, you can increase the number of contracts accordingly. Every trader is different. The size of your positions depends on your trading style, risk tolerance, and desired goals.
Q: Why have you switched to using non-directional strategies recently?
A: Because after analyzing the results this year for the weekly credit spreads, I felt more confident not picking a direction, and working with theta-positive trades such as the Iron Condor. By using non-directional strategies, I feel I'm giving myself a much higher probability of success.
Q: How many and how often do you make trade recommendations?
A: My primary trade is an SPX Weekly Iron Condor. This trade is entered every week, as long as market conditions are within the guidelines. I typically publish the trade recommendation on a Wednesday, with trade updates as the week progresses. Any adjustments to the position, as well as closing details, are published. Anytime there is a new entry, you will be notified by email. You can be sure of two things -- 1) I'm going to do my best to keep the profits flowing; and 2) We're going to have fun doing it!
Q: Will you be available to answer questions online?
A: You will be able to email questions to me - I value your feedback and questions! I will address the questions as quickly as I can. For the benefit of all the readers, I may elaborate on your questions in a subsequent article.