Trading Rules

My trading rules are straight out of research conducted by Tom Sosnoff‘s Tastytrade financial network, with the exception of the exits rules, where I’ve expanded on his methods. The rules are intended for smaller accounts, and has the goal of many base hits rather than the occasional home run amid a lot of strikeouts.

Trading Rules

Positions: Short vertical or iron condor spread.

Short leg entry goal: delta 16

Implied Volatility Rank (IVR) 25% or greater. (This is similar to the IV Percentile)

Entry timing: As close as possible to 45 days prior to expiration, giving preference to monthly options.

Due diligence before entry:

  • Avoid earnings announcements
  • Avoid ex-dividend days

Exit rules:

  • Normal exit rules apply up to 21 days prior to expiration.
    • Exit
      • at 50% of maximum potential profit, calculated as this way:
        • (credit_received – current_debit) / credit_received
        • where credit received is maximum potential profit and current debit is the cost of exiting the position. If it’s negative, the position is a losing one at present.
      • 21 days prior to the options’ expiration
        • if the position is profitable, even if minimally so
      • if the share price is outside of the range of profitability, defined by the breakeven prices, by one day or more using the 14-day average Rate of Change (ROC) and calculated as follows:
        • Days_from _profitability = Distance_from_breakeven / ROC
  • The sudden-death exit rules apply fewer than 21 days until expiration.
    • Exit
      • if the price moves beyond the range of profitability by any amount.
      • if the position becomes profitable by any amount
      • in all circumstances on the Monday prior to expiration (i.e., all positions are closed by five days prior to expiration).

It is important to remember that a position can be within the range of profitability and yet still not be profitable. The range defines profit upon expiration. A number of movable metrics are involved, including the implied volatility and normal time decay in the options.

The upside of this rule set is that there is consistently an 85% or so chance of the position being profitable, with clear rules for management in those 15% of cases where the positions moves outside of the zone of profit.

The downside of the rule set is that the credit upon entry is relatively low compared to other strategies, and therefore the risk/reward ratio tends to be higher. The brokerage sequesters more of your funds to support each trade. It’s a common decision traders must make.

In earlier strategies, I would insist on a risk/reward ratio no higher than 3:1. That guideline has been tossed out. I’ll accept the higher risk, limiting it by the percentage of trading funds that I want to commit to a single position.

The positions are actively managed, so in practice, it would take a catastrophic move for a position to reach the maximum potential loss.

By Tim Bovee, Portland, Oregon, May 31, 2019


Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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Live: Friday, May 31, 2019

3:30 p.m. New York time

After today’s exits I have three positions remaining with June expirations: AAPL, XBI and XLB. I also have one July position, IWM.

I’ll play the three remaining June positions according to my revised exit rules: With fewer than 21 days before expiration, I enter the sudden-death phase, exiting if a position that becomes profitable to any degree, and if it moves out of the profit zone by any degree. I’ll exit all remaining positions on the Monday prior to expiration, or with five days to go.

See my Trading Rules on the menu bar a the top of the page. I’ve updated them with a more precise script for exits.

And on Monday I shall start looking for new July positions to make use of the cash free up by today’s exits. At 49 days prior to expiration, the July monthlys are in prime time for my sort of trading.

1:50 p.m. New York time

I’ve posted full results for my XOP exit.

1:30 p.m. New York time

I’ve posted full results for the UNH position I exited.

9:55 a.m. New York time

Today is 21 days before the June monthly options expire; they account for five of my six short iron condor positions.

By my trading rules, this is the day that I manage positions. I close profitable positions, while retaining those inside the profit zone yet unprofitable, and those outside the profit zone, except those that would take two days or more to return to the profit zone, using the 14-day Rate of Change metric to make a determination.

I’ll hold on to losing positions that would take less than two days to return to profitability.

So, by those rules, I have exited UNH at 9.2% of maximum potential profit. It’s a winner, but a small one. I have also exited XOP, which declined today, putting it 2.2 days away from the profit zone. That leaves AAPL, XBI and XLB which are within the profit zone but not profitable.

In any case, I shall exit all remaining positions by the Monday prior to expiration. For the June monthlys, that would be June 17.

Later in the session I’ll have full results for the positions I have exited so far today.

By Tim Bovee, Portland, Oregon, May 31, 2019

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Live: Wednesday, March 29, 2019

10:35 a.m. New York time

Under my trading rules, Friday is get-outta-town day on my positions that expire on June 21. The rule says, “Exit timing: No later than 21 days prior to expiration”, which is May 31 for the June monthlys. The rule is based on research conducted by TastyTrade, which in my opinion is conducting valuable research aiming at testing the lore of the options markets.

The way the TastyTrade team presented it, the best results come from exiting at the 21 day mark. It’s not a rule guaranteed to give the best results for every trade, but across a large enough sample of trades, it will give the best results compared to holding until expiration.

But I limit myself to half a dozen positions or so, not a big sample. And since to get a full sample I must amalgamate trades over time, I run into the problem that the markets broadly go through good periods and bad (however you want to define those two loaded words). In a bad period, all of your positions might be within the profit zone at expiration, but for a variety of factors, including the movement of implied volatility, all might well not be profitable 21 days out.

That’s the problem some of my June positions are facing now. All of my positions discussed here are short iron condors, with the short positions set as close to delta 20 as I could manage and with the wings set at around $2 wide.

One position, XOP, is below the profit zone. Given its rate of change, it would take 1.4 days to return to the zone. It comes under the 21-day rule, but I’ll exit earlier if the distance below profit increases to two days.

Two positions — UNH and XBI — are within the profit zone and are now showing a profit. UNH shows 30.3% of maximum potential profit, and XBI, 13.4%. They’re functioning as expected according to the assumptions of the 21-day rule, and if they remain profitable, I would anticipate exiting them on Friday.

But two positions, arguably, don’t really meet those assumptions. AAPL and XLB are showing losses, although each remains between the two breakeven points (the midpoints of the wings).

The way I measure a position’s prospects is to compare the profit zone to the current one standard deviation range. When position isn’t profitable this late in its lifespan, then that usually means that the price is near one of the boundaries.

And such is the case. AAPL, trading at $176.50 shortly after the open, is 0.9% above the lower breakeven price of $171.18, and XLB, at $52.82, is 1.1% above the lower breakeven of $49.48. AAPL has a rate of change of -12.27, and XLB, a ROC of -3.45. At those rates either could break below the breakeven in a fraction of a day.

At this point, I’m abandoning the statistical approach and doing some old fashioned chart and financial news work.

AAPL has been on a downward slope since May 1 and is well above its most recent major support level, a reversal at $142 on Jan. 3. XLB has been trending downward since May 29 and in fact this morning at the opening gapped down by $1.01. Its major support was set Dec. 26 of last year at $47.05.

Very grim on the chart, both of them.

On the news side, Citi on Tuesday lowers its target for AAPL from $220 to $205, while maintaining a bullish stance. Knowing the optimism built into brokerage analysis, I take that as a signal to be cautious with AAPL. Notably, 20% of the company’s revenue is from China, and trade relations with China are filled with uncertainty during that nation’s tariff dispute with the U.S.

XLB is an ETF invested in materials companies, such as DWDP. That sector trades with China and so is also affected by the tariff dispute. However, analysts are less cautionary with XLB than they are with AAPL.

I’ve heard it said, often, that “rules are rules”, implication being that they are to be followed under all circumstances. I’ve never really believed that. In trading, I think rules are important. They help me avoid trading by hunch or following my feelings. Yet, rules are useful tools, not unquestioned truths. Their other useful function is that when it makes sense, as a hunch, that they should be followed, then I’m forced to rationally analyze why breaking the rules makes sense.

So, I’ll follow the 21-day rule for the profitable positions expiring in June: UNH and XBI.

At this point, my inclination is to hold AAPL and XLB past the 21-day mark, subject to the tentative exit rules I added a few days back to the Management section. If a symbol moves below the profit range, then I’ll exit, immediately.

That’s a modification of the current exit rule. When I revise, I’ll add in a sudden death clause for positions expiring in fewer than 21 days. Also, if the current one standard deviation boundary moves more than 50% beyond the lower breakeven point, that will also be a signal for immediate exit.

I won’t revise the rules yet. I want to see how this plays out.

By Tim Bovee, Portland, Oregon, May 29, 2019

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Live: Tuesday, May 28, 2019

11:10 a.m. New York time

XOP remains below its profit zone, and at the present rate of change would take one trading to return to profitability. My trading rules presently require an exit if the return time exceeds two days. That’s a tentative time, and I may well decide to lower it, depending upon the outcome of this trade.

The other metric require an exit if more than half of the one standard deviation range lies beyond the profit zone on the tested side. Both 1SD boundaries for XOP this morning are within the profit range — by 6% on the lower side, which is being tested, and by not-even-close on the upper side. The lower side 1SD boundary gives me reason to wait before exiting, although the two metrics aren’t linked in my current rule set.

I adopted the new rules in March, and I’ve added them as a “Trading Rules” item on the menu at the top of the Private Trader site.

The target exit date for XOP and my other holdings expiring in June is May 31, this coming Friday.

By Tim Bovee, Portland, Oregon, May 28, 2019

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IWM Analysis

iShares Russell 2000 ETF (IWM)

Update 6/25/2019: IWM reached 50% of maximum potential profit and I exited the short iron condor position. During the month (plus change) holding period, IWM traced a wave to the upside and then began a decline. The implied volatility rank (IVR) decline by 4.4 to 23.5%.

The position produced a profit of $0.31 per share as the share price showed a net rose from entry of $0.91, although while I held the position it covered a bit more real-estate, peaking at $152.08, or $1.18 above the price at entry. In other words, it was a perfectly well behaved iron condor, of the sort I love to see.

Shares rose by 0.6% over 32 days, or a +7% annual rate. The options position produced a 100.0% return for a +1,141% annual rate.

I have entered a short iron condor spread on IWM, using options that trade for the last time 56 days hence, on July 19. The premium is a $0.62 credit and the stock at the time of entry was priced at $150.90.

The profit zone for this position is between $159.62 on the upside and $138.62 on the downside.

The implied volatility rank (IVR) stands at 28.

Premium: $0.62 Expire OTM
IWM-iron condor Strike Odds Delta
Long 161.00 87.0% 13
Break-even 159.62 84.0% 16
Short 159.00 81.0% 19
Short 140.00 80.0% 19
Break-even 138.62 82.0% 17
Long 138.00 84.0% 15

The premium is 31.0% of the width of the position’s wings.

The risk/reward ratio is 2.2:1.

By Tim Bovee, Portland, Oregon, May 24, 2019

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Live: Friday, May 24, 2019

4 p.m. New York time

I’ve posted the full IWM analysis.

3:40 p.m. New York time

IWM entry order filled at $0.62. Full analysis to follow.

3 p.m. New York time

I’ve placed an order for a short iron condor on IWM, expiring July 19, which has an IV rank of 29. The short wings are $159 on the call and $140 on the put, with the long wings $2 out on the strike price. I’m asking $0.62 and have not gotten a fill.

1:35 p.m. New York time

I’ve posted full results on IYR.

11:10 a.m. New York time

My order to exit my iron condor on IYR has finally been filled, at $0.19 with shares at $88.14. Full results to follow.

XOP remains below the profit zone, but not far enough to trigger an exit. My trading rules require an exit if the price is far enough out of the profit zone to require two days or more to return to profitability, using the present 14-day average rate of change of the price to calculate the time distance. By that method, XOP would take 0.73 session-days to return to the profit zone.

By Tim Bovee, Portland, Oregon, May 24, 2019

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Live: Thursday, May 23, 2019

3:35 p.m. New York time

XOP has moved below the profit zone, signaling that under my rules, I might take the loss. A tentative addition to my trading rules, as modified, says:

If more than half of the 1SD range is beyond the profit zone in the tested direction, then exit the position. If the price moves below the profit range and the number of days required for the price to return to the profit zone, as measured by the 14-day Rate of Change, is greater than two days, then exit the position.”

At present, XOP’s one standard deviation mark is 7.1% below the profit range, and the time taken to return is 0.65 days, or about two-thirds of a trading session. So, as to an exit, not today. But XOP will need close watching. The current price of XOP shares is around $27.08, and the lower boundary of the profit zone is at $27.47.

10:10 a.m. New York time

As I did the first three days of the week, today I have once again entered an exit order for my short iron condor IYR, for $0.19, with the bid/ask midpoint at $0.18. I shall keep doing that as long as the midpoint is at 40% of maximum potential profit or higher.

My positions are due for an exit or management eight days from now, which will be 21 days before expiration on June 21.

By Tim Bovee, Portland, Oregon, May 23, 2019

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AAPL Analysis

Apple Inc. (AAPL)

Update 6/4/2019My short iron condor on AAPL returned, barely, to profitability, with 17 day remaining until the options expired. Under my rules, I continue to hold unprofitable positions after the 21-day mark. Afterward, rather than waiting for profit reaching the 50% of its potential maximum, I exit at any sign of a profit.

In AAPL’s case, the profit was $0.02, with an exit debit of $1.16. That price was 2.5% of maximum potential profit. This won’t be enough to cover trading fees. But that’s my problem, not the market’s. I count this as a win for my new “sudden death” strategy for exits.

AAPL fell four days into the trade and continued to fall until the exit day, when it joined the market as a whole in a sharp rise. The stock price fell $10.46 during my holding period. The implied volatility rank rose 5.1 points to 44.4% at exit, providing no help in producing a profit. (With short options positions, declining implied volatility contributes to profitability.)

The shares decline was 5.5% over 18 days, or a -112% annual rate. The options position produced a 1.7% return for a +35% annual rate.

I have entered a short iron condor spread on AAPL, using options that trade for the last time 35 days hence, on June 21. The premium is a $1.19 credit and the stock at the time of entry was priced at $189.98.

The profit zone for this position is between $206.18 on the upside and $171.18 on the downside.

The implied volatility rank (IVR) stands at 39.

Premium: $1.18 Expire OTM
AAPL-iron condor Strike Odds Delta
Long 210.00 75.5% 27
Break-even 206.18 80.1% 22
Short 205.00 84.7% 17
Short 175.00 80.1% 17
Break-even 171.18 83.2% 14.5
Long 170.00 86.3% 12

The premium is 23.6% of the width of the position’s wings.

The risk/reward ratio is 3.2:1.

By Tim Bovee, Portland, Oregon, May 17, 2019

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Live: Friday, May 17, 2019

4:25 p.m. New York time

And the day ends without a fill on my exit order on the IYR iron condor. The closing bid/ask midpoint was $0.18.

1:20 p.m. New York time

I’ve entered a short iron condor position on AAPL.

10:15 a.m. New York time

I’ve re-established my exit order on IYR for a debit of $0.19. The bid/ask midpoint is now running at $0.14. My remaining positions —  UNHXBIXLB and XOP — remain within the call and put short strikes. All five positions are short iron condors with very wide short strikes. In building them I aimed at delta 20 or smaller for each short leg, which produces a profit zone covering around a one standard deviation or more.

By Tim Bovee, Portland, Oregon, May 17, 2019

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