1) I understand that you initiate your positions 30-40 days prior to expiration but you also talk in your videos about adding to your positions. Are you referring to adjustments that may become necessary due to a breakeven being threatened? If not, could you explain?
ANS: I only add to positions to increase my profits and if I feel confident that the adjustments will result in a better trade.
2) How do you decide whether you should structure an Iron Condor or Double Calendar for a given ETF?
ANS: If volatility is high and falling I will use an iron condor. If volatility is moving sideways I will use a DC.
3) I’m wondering what your capital allocation guidelines are. Of your total investment capital, what percentage do you allocate for the monthly income system? Of that, what portion do you reserve for initiating positions and what percentage for adjustments?
ANS: I use about 20% of my total available capital on initiating monthly incomes trades. I set aside an additional 10% for adjustments.
4) What has your experience been in terms of being exercised? Has it happened very often? If it does happen I’m a little fuzzy on how to deal with it. Could you clarify?
ANS: You will not get exercised unless your short option has less than
.25 of intrinsic value or it’s close to a dividend payout. It doesn’t happen very often and actually almost never with etf’s. If it happens I simply sell the shares and close my long option position.
5) After reviewing the Theta Scalping video on module 11 I just want to be sure of what you’re doing. If I understand correctly you initiate a position 30-40 days prior to expiration, then adjust if necessary for the next couple of weeks and then in the final 2-3 weeks you will buy/sell deltas using the underlying to remain delta neutral. Is this correct?
ANS: When scalping theta you have to make adjustments when your deltas tell you to. You can’t wait until the last 2 weeks, you have to adjust when it’s necessary. The goal is to adjust as little as possible so that you make more money from the theta you collect than the losses you’ll have from adjusting deltas.
6) During especially volatile periods like late 2008/early 2009 do you still put on monthly income type trades or do you wait for volatility to wane a bit first?
ANS: Please see the Market Report 11-22-08
Q: A couple of weeks ago I purchased the Trading Pro System and also subscribed to the Daily Market Advantage.
You have provided an unbelievable resource and I am still working on paper trading and learning the adjustments on the iron condors and Calendar spreads. It is very interesting information.
I have watched the video on the Victory spread strategy several times. In attempting to utilize the strategy in the video I am not currently finding trades that match the low downside risk demonstrated in the video.
It seems currently many options front month I.V. is lower than further out months – I am not sure if this is affecting my analysis of the trade. I was also wondering if the relative close time until Oct expiration affects the outcome of this strategy? I did try numerous examples with selling either the Oct or November options.
Do you have any current examples of the Victory Spread strategy that could help me understand what I am missing or do I need to wait until after Oct expiration and then retry my analysis.
I greatly appreciate your expertise and enjoy listening to your market review each night. Keep up the great work.
A: The front month (Oct) has only 8 days left- that is the reason you cannot find any trades. There’s no time premium left in the front month.
The general rule is: Never use a front month with less than 30 days remaining.
In addition, the Vol will give you different risk profiles that may not be favorable. You want the front month to be a slightly higher vol than the back month.
A trick to finding those types of trades is to look for a stock that has sold off hard. For example – RIMM (on 9/25/09)
It lost about 15+ points in one day skyrocketing the front month Vol while the back month had a lower Vol.
The setup was very favorable at that time – it’s too late to do it now.
So use the 30-40 day month options and find stocks that have that positive volatility skew.
Q: I was able to make it through some of the videos last night and this morning.
Pretty straight forward so far, I understand the criteria for placing the Iron Condors and Double Butterflys and also, the adjustments and when and why..
But I would like to see you do a video or tell me how to handle the rare case of getting exercised on either a short put or call. Especially how to handle getting exercised for the vertical spreads of a Iron Condor and also the shorts of a Calendars.
Perhaps this is just my lack of knowledge of this, but I know more than most about options and I still have question about closing out or handling my PUT/CALL shorts being exercised. I would expect this type of trading can result in several shorts being in the money before expiration.
Great videos, I will keep going..
A: As far as getting exercised goes… here’s the general
If a ‘short’ option is:
1) ‘in-the-money’ AND
2) there is less than .25 of extrinsic value left
… then you’re likely to get exercised.
3) you are MORE likely to be exercised if it’s a stock or etf and it pays a dividend and you’re short the option near ex-div dates if the option meets the criteria above.
The exercise happens overnight and if you meet the criteria above you will get exercised and you’ll see in your portfolio that the option position that was in the money is gone and you will have the stock in your account instead (long or short, depending if the option that was exercised was a put or call).
If you do not want the stock position you can sell it in the pre-market if your brokerage account allows trading in the pre-market.
Q: I hope that at sometime soon that you can put the daily videos on line
I find it a bit cumbersome and time consuming to download and unzip for viewing.
A: I understand your video concern… since we do a video almost every day the bandwidth for all members accessing the current video – if it’s online like youtube vids- plus all past videos being accessed online at any one time could require more servers than we are prepared to manage and/or the cost would be prohibitive and we would have to discontinue the service. In addition, most member prefer a download so they can review them on their computer at any time in the future without having to login.
Q: I bought your training videos 3 weeks ago , which appear to be your first version of the training course “trading as a business”, in a hope to learn option trading cashflow secrets regardless of the market move, the videos are great and I am really happy with them, but they were recorded few years ago I believe, but that is ok as according to you , this is an evergreen business as the principles will never change because the markets never change.
the thing is , after I signed to your daily market advantage a week ago , I noticed that some of your comments were based on some techniques that were somehow different than the videos I am learning of , and I am referring at the video of 31/08/09 where you mentioned something about the put spread calendar that is good to trade now and that the iron condor is not suitable at the moment.
– my question is, as a new trader what would be the best strategy that you recommend from your videos to trade the current market for monthly cash flow, something does not need too much of the advanced technical analizes or too omplicated and easy to handle until i pick up the knowledge from your daily market advantage.
A: I appreciate you feedback and your questions.
It’s true that the principles I taught are evergreen in the videos from last year. The ‘greeks’ will never change – but *how* you use them is a different story.
I have slightly revised my strategy to take better advantage of market moves using income trades with technical analysis on volatility as the most important component.
I released 2 important white papers: One paper on the greeks and another paper last November 2008 to take advantage of the volatility. (These are included in the download area for all paid customers)