People keep asking me how I trade, how do I set up trades what do I look for to create a trade. So here is my view reposted:
I try to keep it very simple and with no studies behind it. I have a certain set of rules or steps and I execute them pretty much without thinking. I want my trading as automated and brainless as possible, trade like a robot to eliminate guessing, worrying, fear, double guessing, predicting, searching for reasons, and so on.
So I start with how much I can trade per account, usually 50% of the available cash for trading or buying power (BP). So any trade I plan to open, I check what it would do to my BP, if it falls below limit, I do not open a trade, if I have plenty of cash to trade I may take it.
Next I have a watch list of about 30 stocks I selected before on a set of criteria such as – must be a dividend stock (I have two exceptions – AMZN and SPX), must be optionable, must offer credit of $15 or more for 7 DTE or more, etc.
Then I create a trade around 1SD or more or expected move (EM). So, for example, I look at 10 DTE trade bid price. If the bid is 0.02 then that’s not tradeable. So I change DTE to 45 and see bid price 0.20. That’s acceptable (must be a price at 1SD (or +/- 0.15 delta).
I check the chart where the stock is, where the supports are, resistances are and what a trend is. If bullish trend I may change my strike and go higher (20 or 30 delta, also depends on the stock). If the stock is neutral or going sideways I tend to be wider as the stock may move in a sudden rally or selloff which is unpredictable and I do not want to get busted. So with a trending stock I can choose a skew, without a trend I want to be wider on both sides (call or put side; e.g. strangles, or omit one side whatsoever).
I always try to select as short DTE as possible.
So, when 1SD is OK, credit is OK, DTE is OK,overall BP is OK, I take a trade. There is nothing much you can do about it anyway. Any search for reasoning analysis or whatever will do nothing to you. It will ruin your mindset and convince you about something which is not true. And on top of that any analysis you ever make will be invalidated the moment you take the trade as it will become a past. The goal is not in a setting a trade based on your expectation, the goal is not to be stuck in that expectation. Your mind must be free to judge two things once you take a trade: – the trade works, – the trade doesn’t work. So when all those four steps/rules are met, I place the trade and then my focus is on managing the trade.
I watch the trade carefully – I immediately place a buy back order – for longer DTE at 50% of creidt, for short DTE 15 days or shorter at 0.05 debit, for 5 days or shorter I let them expire (unless there is a strong move against me and I need to react). For example, I open AMZN 4 DTE, collect 0.75 credit, block $2,000 BP; and in 2 days I can close it for 0.05 debit, then I do that, close it, release cash and end up with 0.70 credit profit. If however I have SPX trade, block $500 cash, collected 0.30 credit and have 4 DTE, then most likely I let it run until expiration unless there is a strong move in one direction – for example I have a Condor then I place a separate closing on puts and separate buy back on calls, so if the stock runs up, the puts get close early and I will have free hands (no additional margin required) to roll or convert the calls.
If I start feeling uncomfortable with a trade I proceed to manage it – close it, roll it, convert it. Sometimes you get stuck in a trade longer than you wanted or you will have to accept assignment. If nothing works, close it, take a loss, and move on.
Over time you get in tune with the market and “your” stocks. But “your stocks” shouldn’t be a love until the death departs you or “fomo” thing. The goal is to be completely unemotional and cold headed (probably the hardest part) and not looking for reasons is what will help you. That’s why generally I do not want to know which company invented what, who is buying who, who made money, who didn’t, what the crowd thinks, what you think, or what I think in that matter. Once you make your mind and become a believer of a stock doing something you will have a hard time to change your belief and mind set and change your trade. We are in a strong bull market with 8.5 years of bullish move. It is very easy to get caught in this market as “what can go wrong?” mind set and when the trend changes many will be caught in disbelief and paralysis. I may sound like I have mastered this but I am afraid myself that I may be in this trap too. I am saying myself all the time, “don’t worry, if the market reverses, you start trading bearish trades such as call spreads or naked calls” but I still have a doubt whether I will be able to manage it once this comes. I have been through 2000 and 2008 crisis but not as involved as today… The big test is coming and no one knows when. We just need to be prepared for it with a proper money management and trade management.
Hope this helps.