Once a trade is deployed in the market, there are numerous factors that can adversely affect the position.
In order to minimize our risk in the trade life cycle, we therefore try and reduce potential hazards by sticking to a clear set of foundational guidelines.
On a recent episode of Best Practices, hosts Tom Sosnoff and Tony Battista discuss these guidelines and their close relation to a trader’s ability to avoid trading mistakes.
Listed below are some of the core principles that comprise the tastytrade approach to options trading:
It's one thing to list an efficient approach, but it's quite another to utilize such a philosophy on a daily basis.
On this episode of Best Practices, Tom and Tony discuss the above list in detail to help traders build a solid shield of awareness in trade deployment and portfolio management.
Looking at the first item listed above, we find "high probability trading" as one key to a successful approach.
Trading with high probability means trading small enough that your capital is not concentrated in only a few positions. Deploying a greater number of high quality trades with lower capital requirements will increase your chance for success as compared to high-concentration positions that lack diversification.
Another key aspect to high probability trading is to filter opportunities for the most theoretical edge. Implied Volatility Rank (IVR) is a tastytrade measurement that tells a trader how high implied volatility is in an option relative to the last 52 weeks of trading in the symbol.
For example, if XYZ stock has had an implied volatility between 30 and 60 over the past year and implied volatility is currently at 45, XYZ would have an IVR of 50%. Filtering potential trade opportunities for those options that have higher IVRs would therefore assist in deploying a strategy with a higher theoretical probability of success.
Tom and Tony expand on the subject of high probability trading by highlighting several other important considerations for trade deployment, including:
- selecting trades with enough premium
- selecting the proper strikes
- ensuring liquidity is sufficient
The three items listed above are also critical considerations for deploying higher probability trades. Obviously, the more premium that is sold increases the amount of buffer between profit and loss. An aspect of strike selection involves choosing options that have sufficient “meat on the bone.” Selling nickels and dimes isn’t a recommended strategy as the risk-reward equation is skewed significantly to the “risk” side of the scale.
Liquidity is of course an essential piece to any great trade. Focusing on symbols and strikes with sufficient liquidity is critical for exiting a winning trade. A lack of liquidity has turned innumerable great trades into losing trades, and if you have a good idea, it’s likely you can deploy it in something liquid enough for not only trade entry, but also trade exit.
We encourage you to watch the entire episode of Best Practices for the best possible understanding of how traders can avoid making elementary mistakes.
If you require additional information on any of the concepts discussed on this episode, we encourage you to leverage the search functionality on the tastytrade homepage many of the topics will have been highlighted in other tastytrade programming.
If you still have questions, don't hesitate to send your questions and feedback to firstname.lastname@example.org
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the entire spectrum of industries in the single-stock universe.