It’s funny how non-directional\u00a0 options trading differs from many other kinds of trading.<\/p>\n
For example,\u00a0 most forms of \u00a0 trading require price\u00a0 change<\/strong> to be taken advantage of by the trader.\u00a0\u00a0 Day traders salivate when they look at charts that are vertical, in either direction. Directional options traders are the same way.\u00a0 But,\u00a0 non-directional <\/strong>options traders normally do best when the market is channeling.<\/p>\n Similarly, the greater the\u00a0 number<\/em> of volatile days there are in a month, the happier day traders are–it provides them with so many opportunities to catch price movement. Whereas income options traders, once they’ve entered a trade, want the opposite. We prefer as few volatile days as possible once<\/strong> we have actually initiated a trade–that calm in the market\u00a0 allows time to pass and the time decay of the short options that we have sold to accumulate.<\/p>\n What is counter-intuitive about income options trading is the fact that once we get into a trade,\u00a0 we are looking to exit, as quickly as possible. Why? Because the more time the market has to play havoc with our trade–by moving strongly in one direction or another, thereby piercing through the profitability zones of the trade structure,\u00a0 the\u00a0 more difficult it will be to exit a trade profitably.<\/p>\n One of my favorite income strategies \u00a0 is\u00a0 the “55 day bearish butterfly” (which I have demonstrated \u00a0 in the past\u00a0 on this blog as some of you may know).\u00a0\u00a0 The premise of the trade is that in most bull markets, there are pullbacks. The trade is designed to take advantage of those pullbacks by placing the profitability zone of the position somewhat behind the current market price.<\/p>\n My particular variation on this trade involves two phases. In phase one, I stay behind the market until the almost inevitable pullback occurs–I wait for my profit level to reach 10% of planned capital and then I\u00a0 “trap” that profit and move into phase two–what I call the “milking” phase. In this part of the trade, I become extremely conservative as I have made my target profit for the\u00a0 month. I’m willing to expose a quarter\u00a0 of that target profit to\u00a0 market movement\u00a0 ( in exchange for a possible\u00a0 further doubling of \u00a0\u00a0 profit if things go really well). However, I’m not willing to drop below a 7.5% gain for the month once I’ve reached my 10% profit.<\/p>\n This month, I reached the milking stage \u00a0 twelve days into a trade that can go as long as 55 days in the extreme case. This is very early<\/strong> to reach the target profit on this trade, but it can and does happen. And so, while I am still exposed to some extent, the trade is largely over–it’s just a matter of whether I can manage to manipulate the position over the next month or so to squeeze some more profit out of the trade, applying a trailing stop as the profit picture improves but allowing only the most extreme market moves to rob me of more than a quarter of the target profit I have set for\u00a0 the trade.<\/p>\n So on this trade,\u00a0 in the words of my first options mentor Dan Sheridan, “I’m “sittin’ on the front\u00a0 porch sippin’\u00a0 iced tea”\u00a0 12 days into a 55 day trade.\u00a0 Now that’s what I’m talking about……<\/p>\n Here at \u00a0 SMB,\u00a0\u00a0 we are busily putting the finishing touches on the Options Training Program\u00a0 and we are now officially on our 10- day Countdown to launch. We’ll be making some exciting\u00a0 announcements shortly\u00a0 as the launch day approaches.\u00a0 We really look forward to your becoming a part of our options community.\u00a0 Have a great weekend everybody!<\/p>\n Seth Freudberg<\/p>\n Director, SMB Options Training Program<\/p>\n","protected":false},"excerpt":{"rendered":"