You have probably heard the horror stories of people that have lost everything trading options. Options are risky! Don’t do it!
Well when I started trading options I found out that was true for me! I lost a lot of money too!
However, I then started tracking my trades and learning more about the business. After getting thousands of trades under my belt, I now shoot for a 90% win rate in my options trading account.
In this video we’re going to talk about 7 steps to becoming consistently profitable trading options.
We’ll discuss:
- Step#1 – The Mindset Needed To Be A Consistently Profitable Option Trader
- Step #2 – Picking Stocks And Sectors To Trade
- Step #3 – Follow the Macroeconomics
- Step #4 – Best Strategies For Accomplishing High Win Rates
- Step #5 – How To Place A High Win Rate Trade (Showing a real example on the option trading platform)
- Step #6 – Managing Trades For a 90% Win Rate
- Step #7 – Tracking Option Trades
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What’s up guys, it’s Darren here. Thanks for watching. We talk about action steps you can take today to increase profits and reduce risks in your portfolios by trading options.
Before we start, if you appreciate all the research and information that goes into making a video like this, it does help out tremendously if you hit the like button or subscribe to be notified of more videos like this.
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Be sure to download the FREE options Workshop in the link below. It talks about the two main benefits of trading options over buying stocks.
DISCLAIMER, I am not a financial planner and I am not recommending trades. Please do your own research and if you are new or learning options, I recommend you start small.
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Step #1 – The Mindset Needed To Be A Consistently Profitable Option Trader
For every gimmee there’s a gotcha. Nothing in life is free.
I love options and I believe options are a microcosm of life. Like everything else in life, they take time to learn and the more you do it the better you get. When I started out I lost a lot of money in my first year. I was overconfident and lacked experience.
After getting hurt you can either get back up and fight again or run and hide and just write it off as a lesson learned. I knew there was more to options and a way to consistently make money. Because people were doing it. However the people doing it had much more experience than me.
So I started following the guys on Tastytrade and watching youtube videos of people that knew options and were doing well. I read books and learned everything I could. I am still learning today and will continue to learn.
Dunning-Kruger Effect
Here is a graph of the Dunning Kruger Effect. This is exactly what happened to me. I started out with a couple of winning trades and thought. Hey this is easy. I think I think I’ll double up on the next one.
Well pretty soon I had a naked option on in Crude Oil futures, oil shot up and I lost a lot of money. So what did I do. I learned from experience. Going forward I did not risk more than 5% on any one underlying or stock. I never traded naked futures. Only spreads in futures to limit my risks.
That loss made me a much better trader. The Dunning Kruger effect basically says that the more experience that you get over time. Like anything “practice makes perfect”. Eventually you work yourself to the expert level. That is if you don’t give up and forge ahead.
Step #2 – Picking Stocks And Sectors To Trade
There is quite a bit that goes into this step.
Sectors and Diversification
First off I recommend that you don’t only trade 1 sector. Even Jim Cramer says diversify in 4-5 sectors. I think it is good to trade what you know and are familiar with but at least have 3 or more sectors.
If you are an engineer maybe trade the semiconductor or technology sector. If you are into fashion apparel, or autos maybe Ford or the EV’s like Tesla.
You get the picture, the more you know about the sector the better. You want to eventually know the top stocks in those sectors so you know when one is a deal or when one is overvalued from the research that you do reading the earnings reports conference calls and following the news and technical charts.
Liquidity
You also want to trade stocks that are liquid and have good trade volume. Otherwise you give up too much between the bid and the ask. If you want to know more about how that works check out the FREE Options Workshop in the link below.
So you want to trade the GOOGL’s or TSLA or Bank of Americas with several million shares traded and penny wide spreads. Not illiquid stocks that don’t have good volume.
Step #3 – Follow the Macroeconomics
You will want to know the macroeconomics and what is going on in the world today. Is inflation increasing or decreasing and are interest rates increasing or decreasing. Is the market at all time highs, are we entering a recession or a bull market.
This will help you to know how much you should be in the market or on the sidelines and leaning long or shorter.
Step #4 – The Best Strategies For Accomplishing High Win Rates
Selling vs Buying Options
Guys, if you have seen the FREE Option Workshop you know that selling options has a much higher win rate than buying options. And you can pick your Win rate! So you can pick a 90% win rate right off the bat when you place your trade.
However, in doing that you probably won’t collect too much in premium. I recommend picking between 70 and 80% to collect more premium.
I like to sell puts and calls, credit spreads, strangles and iron condors.
Alright let’s show:
Step #5 – How To Place A High Win Rate Trade
Alright let’s go to the tastytrade trade platform. It’s the best for trading options. I’ll put a link down below.
We punch in SCHW in the upper left on the trade page and bring up the option chain. We want to trade closest to 45 DTE so we go to the May 19 chain at 34 DTE.
Now click on the bid to sell the 45 strike option and we collect $131 for selling this option since each option contract controls 100 shares of stock.
Look 2 pennies wide between the bid and ask so it is very liquid. Now let’s click on the curve mode to get a visual of the profit zone in green.
We can see the POP which stands for probability of profit is 87%. Schwab is trading at $50.76 now. As long as the stock stays above the $45 strike price in the next 34 days, we keep the entire $131.
We collected $131 and utilized $451 in buying power to place the trade. That is a 29% ROI in the 34 days. Annualized it is 311%!
The stock price can actually drop to the break even of the $45 strike price – $1.31 collected or $43.69 and we are still profitable. So it would take a 14% drop in 34 days for us to lose money.
Step #6 – Managing Option Trades For A 90% Win Rate!
Not all trades will work in our favor. However a trade like this will more often than not!
If a trade does move against us then we just roll the trade out to the next monthly option cycle and collect more premium for doing so. We can almost always do this for an additional credit. More times than not the stock price will recover and we will be profitable.
So even if a stock is a loser initially, we can stick with the trade and roll it to make it profitable. Very rarely will we not be profitable after the roll however sometimes it may take a couple of rolls to be profitable. This is how we reach a 90% win rate!
If you want to see a video of the exact steps to roll let me know in the comments below.
Step #7 – Track Your Option Trades
Lastly, we need to keep track of our option trades. How do we learn from our mistakes and know what we did if we don’t track our trades? Tastytrade has this all set up for you on the platform so you can see your option chains for particular stocks as well as YTD numbers for each underlying.
I also keep a simple spreadsheet that I update every month using Tastytrades information. So it makes it easy to make notes and see which stocks and strategies are profitable and which are not.
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Alright guys, I’ve put a link down below for the FREE Options Workshop. Be sure to grab that.
Remember to hit like and subscribe and leave a comment below with your thoughts on the video.
Thanks and see you in the next one!