The following is a guest post from a friend on trading. Give it a read and use the comments section for additional thoughts! As always, your risk and decisions are your own.
The individual retail investor has the ability to invest more aggressively than the average institution and with a greater security than the average hedge fund. There is a wave of retail investors, that’s you and me, who are coming to a realization that the investment firms are not necessary. There is a whole world of investment opportunities in the public markets that require no advice from the people that have always been the ones that “know what they are doing”. Rant complete!
With this weekly update, we are going to see if a regular Joe can create consistent positive returns with relatively small quantities of capital. How? Trading options… with a twist. This is a study of a person’s ability to remain profitable and control losses with an account size that really can’t afford to lose. The method selected for the task is the sale of credit spreads at or near one standard deviation from the at the money strike. This is not intended to be an education on option trading, so I won’t go over the basic concepts. If education is required I can link some YouTube videos that would do better justice than I. Every week I will update this page with open positions, updated PL and a breakout of returns per expiration week. I have had the strategy on for a little over a week already, so there is a some activity to look at right away. Before I post the details, here are some of the rules of the trade.
- Trade small and often
- Take credits that are between 20-30% of risk
- Always use limit orders, never use market orders
- All trades terminate if price touches short strike
- Trade strikes at 1 standard deviation from at the money (sometimes I bend this one a little to squeeze extra profit, but only when I am very sure about direction)
This study supposes an account size of 2000 dollars to start with. You will notice the importance of protecting capital with so little available. Credit spreads require more cash to put on the trade than simply buying options, but it is way less of a gamble when it comes to being directionally correct. I find that many people who are familiar with trading options are either unaware of this strategy or simply do not use it. We will see here whether it is the best strategy, or at worst something that should be in your tool belt.
This was the very first trade. Not the best but it worked.
Lessons learned. Use wider strikes instead of more contracts. The premium was not ideal and I should have been able to find a much better credit. You can see that risk was $840 which tied up my cash and inhibited my ability to trade often.
Here are the current open positions, with notes.
Still ironing out the process, but getting there. This is the Profit and Loss per trade
The AAPL position is closed for a profit(green), the others are open positions, closed losses will be highlighted in red.
There is a lot going into these trades that you do not see like technical analysis and scouring option chains to find the best spreads. This is not intended to be education. Merely a proof, maybe, of the efficiency of this method. Future updates may include more of the process of selection and execution.
If you are interested in knowing more of the details, or have questions, use the comment section to let me know.