Updated Trading Strategy

Here is my updated trading strategy:

• Trade high volume, high price stocks
• Look for the stock to be around the middle of its 52 week trading range
• High IV rank of 30% or better preferably 50% on up
• 90% probability of success and at least 1-2 standard deviations away
• Between 7 and 35 days left till expiration
• Leg into an iron condor with vertical spreads
• Collect at least .70 for each trade 
• Look to close each side at .15 one week later but no longer than 2 weeks later
• When the stock moves big one way look to close the winning side for a profit and re-deploy another iron condor
• Always stay at 90% probability OTM (out of the money) when you place your trade
• Never trade this strategy during earnings – use a different strategy 
• Use Person’s Pivots (PPS) to time entry
   

*Cash management

Leave $2000 available for options trading so you can fix any situations that go against you or jump on opportunities that may arise

Making A Successful Trading Plan

When you make a plan you need to stick to it as best as possible.  You can refine it along the way but the point of having a plan is to learn what variables are out there so you can account for them in future revisions of your plan.  That’s what the Constitution is: a plan for governing this country. We add amendments to it to help refine what it is because of events that have happened over the years.  These variables have helped to clarify what our nation’s purpose is.  

When you trade you should clarify your trading with your intent.  Are you just trying to make monthly income or are you looking to build a nest egg for retirement.  This should be factored into what type of trades you will make and which securities you will trade.  Stick to your plan for a few tries and if it’s successful review what made it successful and stick to it.  If there are problems try to find out what went wrong and refine what you are doing to address those problems.  

Making a trading plan takes time and if you are consistent you will come up with a successful plan that works for you.  

Using Fibonacci To Time Your Trades

After some more study about how to better time my trades, I had an epiphany today.  If I could use the Fibonacci series on time cycles I can plan the best moment to place a trade.  Of course there is no crystal ball but nature’s own math can help you come close to being in harmony with the “organized” chaos of the market. 

I was introduced to the Fibonacci Queen Carolyn Boroden through watching Jim Cramer.  Her analysis turned on my light bulb about using the Fibonacci series over time and not just over price action.  I started using the Fibonacci time tool in Think or Swim this morning on my Facebook trade and realized that I could have made a better decision about timing my entry point than I did.  I entered in on Monday when I could have waited till Tuesday before I entered the trade.

If you look at the chart you can see where I placed the Fibonacci tool at the beginning of the trend and it traces the moment where I could have placed the trade.  I placed my trade on Monday (yellow circle) but I should have placed my trade on Tuesday (blue circle).  The line drawn in black shows the Fibonacci measurement at where I should have been focused.

I used the tool on the 5 minute and 1 minute chart too and it works just as well.  This is groundbreaking for me because I learned from trial and error that it is always best to wait for a pullback before entering a trade but the key is timing the end of the pullback.  This Fibonacci tool will help me plan my entry a lot more efficiently. 

Long Straddle and Strangles

I had an idea over the holidays to play one of the energy ETFs by watching to see if it will go higher or lower very quickly. I was late in taking this trade because I missed the opportunity when oil was going down really fast. But I now know how to play volatile markets more effectively. The strategy that I really like is the strangle option play. This is where you buy and out of the money put and an out of the money call. You are basically playing both sides of a trade.  One of the options will expire worthless while the other could potentially be a big winner. This will only happen if the stock moves quickly in one direction. Otherwise both options will expire worthless. So I call this my lottery play.  Instead of going to buy Powerball tickets I can buy options contracts when the market is really volatile.  This way I have the potential of making a lot of money very fast.  I will only allocate small amounts of money for these plays and I will only take them when I know the market is moving up and down erratically.

The straddle play is not as appealing to me because I don't want to lose large amounts of money for a risky bet. Both of these plays are betting that the market will move fast in one direction.  I would rather play the cheaper of the two. A straddle play is basically buying near the money or at the money options on either side and again hoping the market moves fast in either direction. with this play you are paying more money up front and of course you can potentially make more money but it is still a risky bet.

Current Market Conditions

There seems to be a bias to the downside in the current market because of the bottoming oil price fear mongers.  I personally (and apparently many others) think low oil prices are a good thing because the general consumer has more money to spend.  Many pundits on the other hand think failing oil companies will cause loan defaults that will bring down the banks and that will somehow reach other markets.  

I don't think low oil prices are going to be a problem but the market has it's own reason for moving which may or may not coincide with my belief.  Because my current strategy is bullish I am going to proceed with caution and look to time my trades after pullbacks.

Yahoo and Alibaba are Climbing Higher

Alibaba and Yahoo have been steadily crankin' these past few weeks even when the rest of the market has been chopping up.  I've been trying my new strategy on YHOO options and have been doing well.  I also picked up some BABA too.  Technically they are both on a trend and the "trend is your friend." Fundamentally they both are sound companies and trading at low multiples,Yahoo especially. The P/E for the technology software service industry is 20-60 and YHOO is at a bargain rate of around 6.  With all that new 6-8 billion in cash from selling some BABA IPO shares, that is a serious discount. 

Bull Put Spread and Cash Secured Put Strategy

Sorry I’ve been a little absent but I wanted to refine my new option strategy before I shared it. I made a couple of trades that went south on me and I didn’t want to share a strategy that didn’t work.

After some losses and then some wins after doing some tweaking I feel that this strategy is something that will have a high success rate.

As I started my strategy I originally only wanted to trade ETF’s because of their improbability of going under.  However I feel that you can successfully trade this strategy on reputable stocks that are trading at a discount.  

Here’s the strategy in a nutshell:

• Decide what you are willing to risk and then divide that by 100 for the 100 shares you may have to buy for on options contract. 
• That will give you the price of the underlying stock you are going to scan for.  So for instance if I am only willing to risk $4,000 then I need to look for stocks that trade around $40 a share.
• I only look for reputable companies or ETF’s and that’s about the lowest price range you will find.  A good range to trade at is around $60-$100 a share.
• For this cash-secured put strategy you need to have the money to buy 100 shares of the stock just in case you get assigned.  Our goal is to not get assigned but in case you need to save a trade that went bad you have another option of selling a call to make back some money.
• Make sure the stock is on an uptrend – the trend is your friend.
• Check the weekly options chain and look for a Bid price on the Put side of at least .60 (it can be .50)
• There should be less than a .30 difference between the Bid and Ask price.
• The strike price should be at least 2 strikes out of the money.
• Check probabilities to make sure that the probability of the option being in the money is less than 30% and the probability of it touching that price is less than 50%
• You want to execute your trade between Monday and Thursday before the next week’s option expiration to get the most premium and to take advantage of the accelerated time decay.
• Sell the put close to .60 and buy the closest put that costs .05 or less.  This is for insurance in case the trade moves against you but you don’t want to pay too much for insurance.  It makes this a bull put spread.
• Set your alerts on your trading software to notify you of 10% moves of the stock either way.  This way you can go about your day and not have to watch the stock until the end of the day. 
• If the stock starts moving against you, get out of the trade and find another stock.  But don't be too scared if the stock moves down to a technical line of support, let the trade play out especially if it's in an up trend.
• If the stock price moves in your favor be patient and wait for the next week Wednesday or Thursday before expiration and then close your positions to get as much profit as possible.