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My Strategy Toolbox

April 18, 2007

Some of you have been asking in one way or the other, what are the strategies that I employ for my real-money option trading portfolio. Let me briefly highlight these by separating into two sections i.e. Income trades and speculative trades.

  • Income Trading: I allocate major proportion of the portfolio to income strategies. I have a toolbox consisting of few strategies but I choose the ones that is appropriate for the prevailing market conditions and also availability of underlying. Implied volatility, absolute prices, support and resistance sometime affect the selection of strategies. I have my own trading plans defined for each strategy and as soon as market requires an action, I get into action. The strategies, though not limited to below list only, are:
    1. Double diagonals
    2. Iron condors
    3. Calendar spreads (Multiple, double or single)
    4. ATM Butterflies or Iron Butterflies
    5. Ratio spreads or broken wing butterflies
    • Speculative trading: This amounts to a very little percentage of overall portfolio. There are several ways to predict a direction and place speculative trades. These trades requires almost constant monitoring, very tight entry and exit criteria and there is no room for “Greed’ and “Fear”. Sometimes any of these is used to play intra day trading opportunity. There are several tools that I use to pick an speculative trade, mainly are:
      1. Credit Spreads
      2. Backspreads
      3. Straight calls and puts
      4. Out of the money butterflies
      5. Diagonal spreads
      6. Directional calendars and
      7. Straddles or strangles when a very large move is anticipated
  • Each income and speculative strategy has a role to play in my overall portfolio. Overall I aim to achieve roughly 5%-7% per month on overall portfolio with a mix bag of strategies. Speculative ones, if turns out to be the way I anticipated, adds-up huge returns for overall portfolio and also pay out those didn’t work out in my favor. But if goes the other way, doesn’t hurt much as I am investing only a small fraction.

    Stay tuned,

    Profitable trading, OptionPundit

2 Comments

  • Tan says:

    An option educator touts 1000+% ROI on his method of options trading? Is this realistic and is it consistent and what strategy in options can yield those sorts of returns?
    thanks for enlightening

  • OptionPundit says:

    Dear Tan,

    the 1000+% ROI is possible. I personally myself have delivered record 1200% in one day!! But need to understand few things:
    – Is this repetable, can you do in month in month out?
    – If I had a million dollar, will invest using this strategy?
    -If the market goes agains what I was expecting, can I sleep?
    – How consistent returns are?
    – What is the % probability to win over and over again?

    Some says 1000% ROI becuase they have been investing in single iron condor month after other, ask yourself, will you put all your money into single trade?

    These are some soul searching questions, and I am sure you will find the answer to your question..

    BTW, even though I made that record, I no longer trade that way.

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