Lessons learned on trading cash position

Some are new and some will be repeated all the time. 

1. There is very little point in selling weeklies. Selling weeklies removes almost all theta decay and exposes you to very high Gamma moves. 

2. There is very little reason to sell low volatility. You simply will not get enough premium back to justify the risk. Low volatility means you have to sell closer to the money. Selling closer to the money means you increase your chance of getting creamed on a spike in implied volatility. 

3, Buy low implied volatility and sell high implied volatility. This is a “duh” but is worth  repeating. 
Side note: implied volatility is very low on the indices and companies like Google, Facebook, and so on. With the indices at all time highs and a trending general bear  market over the long term I’ll go out on a limb and say that it is time to get long volatility. Buying puts on the indices and a company like tesla could pay off big time. 

Look at theta curves for further interest. Recognize that theta decay is different depending on where the strike is relative to the current price of the underlying. That is: Deep OTM, OTM, ATM, and ITM all decay at different rates. 

4. Run your checklist before pulling the trigger. Have a process in place. Know why you are taking the position and the conditions you will exit on. 

5. Always be hedged. 

6. Always define risk. 

7. Do not overconcentrate your position. You can blow up on an options trade. 

8. If you’re a seller then selling at 60 days and taking profits off the table around 30 days is a good general strategy for optimizing Greek exposure and decay.  

9. Do not take a position into the final weeks. This is related to selling weeklies. 

I sold weeklies, and a position went against me on the SPX. I was deep in the green, tried to get out and the B/A went crazy. I was being squeezed out. I waited until the last day to exit. I could not get filled and so I took the position to expiration. SPX and RUT trading days close on Thursday but are calculated based off the value of the Friday open. You probably know where this is going. I took an out the money position to expiration because I couldn’t get a good fill and didn’t think the market would move overnight to my strike. The market opened the next day precisely in the money on my position and thus I was assigned and took a solid loss. It’s a lesson learned and a mistake I won’t repeat again. 

10. Manage risk. Manage risk. Manage risk. 

11. When the iron gets hot, hit it big time. 

Every day is not a home run. In fact you are almost always taking pitches or fouling bad balls off in a full count. Don’t swing at curveballs in the dirt. 

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