One year into options trading: lessons learned

by whitethunder9

I started trading options with actual money May of 2017. I keep notes as I trade so I thought I’d share some of the lessons I learned along the way, going from noob to an intermediate level. Interested in your thoughts and criticisms.

I should note that I am almost exclusively a premium seller so my notes are biased that direction.

Lessons learned:

  • Have a plan. What will you do if the position goes your way? Against you? What’s your profit target?
  • Don’t be too greedy. Take profits when the market hands them to you. When volatility shoots higher, stick with a similar profit target – don’t try to make a ton more money from the opportunity.
  • Have a large variety of liquid underlyings to choose from with a variety of betas. Try to stay delta neutral in your overall portfolio.
  • In general, hard-limit single position size to 5% of your portfolio. I make exceptions for naked puts where I’m ok owning the stock, small accounts, and particularly fat pitches thrown my way (Kelly Criterion helps here).
  • Primarily focus on managing the portfolio as a whole, not just individual positions.
  • When an underlying is on the move, wait until it floors/ceilings up before opening a position.
  • Always lowball/highball the mid when opening a position. This also creates a better anchor in your mind.
  • Be patient. Don’t feel like you need to place another trade right away just because one just ended. Wait for a solid opportunity. Don’t fall victim to FOMO.
  • Far OTM options don’t decay the same as ATM options. It’s important to understand why this is.
  • Keep a decent-sized chunk of your portfolio in cash to cover margin expansion where applicable
  • Don’t fool yourself into thinking you have a crystal ball or have regret over not having had a crystal ball. Just stick to a strategy that works and make consistent returns.
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Here are the strategies I’ve been using (more or less in order of frequency):

  • Bull put spreads, primarily on SPX, RUT, NDX, and highly liquid equities
  • Short puts on equities where I don’t mind owning stock or want to own the stock
  • Covered calls
  • Short strangles
  • Bear call spreads, usually within an iron condor or with the intention of going into an iron condor
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Resources I’ve found most helpful:

  • tradingview.com for charting
  • www.barchart.com/options/most-active for finding liquid options
  • ThinkOrSwim for backtesting ideas
  • Google Sheets for tracking trades across accounts and brokerages
  • Custom software I wrote to calculate things like Kelly Criterion and annualized return for various spreads and option premiums (very much a work in progress but here is what it looks like)
  • And of course, r/options

Goals for the next year:

  • Become confident with a few more strategies
  • Develop realistic backtesting software for strategies I use
  • Finish reading Option Pricing and Volatility (Natenberg)
  • Read Trading Options as a Professional (Bittman)
  • Seek mentorship
  • Don’t make any clearly boneheaded trades
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