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:
- Double diagonals
- Iron condors
- Calendar spreads (Multiple, double or single)
- ATM Butterflies or Iron Butterflies
- 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:
- Credit Spreads
- Straight calls and puts
- Out of the money butterflies
- Diagonal spreads
- Directional calendars and
- 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.
Profitable trading, OptionPundit