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

Disclaimer

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.

License
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All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.