Levels of Risk
Risk is everywhere. There is, in reality, nowhere without risk. Every thought can trigger risk. Every act can be risky. Every result, happy or sad, is a balance between risk and reward.
For any trade, low risk to high risk, there are two rules that rule them all:
- Have a defined rule for entering a position.
- Have a defined rule for exiting a position.
I’ve traded outside of those universal rules on occasion, and have always regretted it.
High Risk: Options Contracts
My options 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.
Positions: Short vertical or iron condor spread.
- Set the short leg or legs somewhere from delta 16 to 30. The higher the delta, the greater the risk and the smaller the odds of success.
- Select an underlying stock whose Implied Volatility Rank (IVR) is 25% or greater. The higher the IVR, the greater the potential return. (This is similar to the IV Percentile found on many trading platforms.)
- Set the width of the wings so as to be as close as possible to a third of the credit received.
Entry timing: As close as possible to 45 days prior to expiration, giving preference to monthly options. Generally, I won’t enter after 43 days prior to expiration.
Due diligence before entry:
- Avoid earnings announcements
- Avoid ex-dividend days
- Ensure that the potential loss is within the trader’s guidelines for managing trading funds.
- Up to 21 days prior to the options expiration
- Exit at 50% of maximum potential profit.
- Exit at 50% of maximum potential loss.
- 21 days prior to the options’ expiration
- Exit if profitable.
- Hold the position if unprofitable.
- Fewer than 21 days prior to the options’s expiration
- Exit if the position returns to profitability or at expiration.
By Tim Bovee, June 25, 2021, Portland, Oregon
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.
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.