• July 23, 2017

    Directional Options Trading Is Not for Me (Typically)

    I like directional trading—heck, I even blog about it from time to time—but for the most part directional options trading is a hobby, something I do for fun with my FU money. There is nothing better than picking a direction, applying a leveraged bet via options or futures, and watching that trade take off. I have risked $300 in the morning and closed the day with $2000; that’s a pretty big high. And when that happens, like a drug addict chasing a high each morning you wake up thinking you can turn $300 into $2000 again. Directional trading is exciting and can earn you a few bucks, but it very rarely turns into a long-term income-producing strategy.

    Marker-Direction

    Isn’t All Options Trading Directional?

    In my opinion directional options trading can be useful, but more on that later. Let’s first look at the type of trades I prefer. I seek statistical and probability-based trades, such as my Baseline Strategy. I want to deploy trading strategies that do not require me to form an opinion on anything. My trades are based on the statistical chances that I will profit. For example:

    During any 30-day period from 1993 through 2014 the SPY (the Exchange Traded Funds, or ETFs, tracking the S&P 500) closed down 5% or more 11% of the time

    Did you know that? Based on this simple fact I can build strategies that focus on profiting when the SPY does anything other than drop 5%. That is, the SPY dropping 4%, rising 10%, or staying flat all lead to profit. I know, based on past performance, that 89% of the time I will profit and 11% of the time I will lose money. I tend to trade options using credit spreads in order to take advantage of this statistical aspect of the market.

    This example is just one of tons of statistical opportunities in the market where options are an amazing tool for profit. I want to highlight the fact that my trading strategy is not based on news events, earnings reports, and the like. In the context of my statistical based trading strategy I simply do not care about what the market will do going forward. I have no directional bias.

    When Is Directional Options Trading a Good Idea?

    Just remember, these are one man’s thoughts. Tons of people do very well with directional trading. I submit, however, that these people have stressful lives and rarely see consistent (well, more consistent) returns. Typically only a select few survive—many directional trades go bust. But as I said, I do think there is value in directional trading. Though I tend to think directional trading should be done with small amounts of money (except in the case of buy and hold). Here are some cases when directional trading is a good idea:

    If non-directional trading is so smart why has directional trading been the core strategy on Wall Street for generations? Options products expanded just 10 years ago—once upon a time major indexes only offered monthly options. These days we have weekly options on almost every stock, ETF, and futures contract traded. Also, technology allows us to easily find statistical opportunities in the market along with the trades to take advantage of them. Lastly, high-frequency trading has created enough liquidity for our trades to get filled at profitable returns (perhaps more on that in a later blog post).  

    Directional trading is not the only way to make money in the market using options. I encourage all directional traders to spend sometime looking at statistical based options trading strategies.

    Read More...

  • July 20, 2017

    Stockpeer.com Blog Becomes Options Cafe Software: New Name, New Vision

    Dear Stockpeer Fans,

    Say hello to Options Cafe! As the Founder and CEO of Stockpeer, and a tenured software developer, I am excited to announce that the Stockpeer.com blog is retiring and Options.Cafe is taking over.

    New Name New Vision

    When I registered Stockpeer.com nearly 10 years ago, I had a much different vision. While I was trading options, at the time, stocks were my passion. Fast forward to today, and options have become the bulk of my trading activity. With the fluctuating state of the global marketplace, this is the route many self-investors are taking.

    Why? Because when leveraged properly, options have higher returns, less risk, and are far more predictable. A far more strategic method of investing your hard-earned money!

    More Than Just A New Name

    Our new name doesn’t just reflect our passion for options, but something far more exciting! For the last several months the Options Cafe Team has been tucked away working on something special. We have been building innovative new options trading software. Lots of it.

    It’s not just software, but an entire trading platform dedicated solely to options. This is the same options trading software I’ve been using for my personal trading for the last 5 years — rebuilt to serve the masses.

    Oc-Fading-Screenshot

    Graduating From Blog To Software Company

    What most trading software brokers provide is too generic. The software tries to be all things to all people. As you well may know, this approach doesn’t work.

    Read More...

  • November 12, 2016

    Backtesting Options Is Here

    Have you ever wondered how your options trading strategy would perform over time? I have, so I built a backtester. I wanted a way to simulate trading the options market day to day to see how well my strategies would have fared. Until now I have kept this backtester to myself, but today I am happy to introduce the Stockpeer backtester to the world. You can play with it by visiting https://stockpeer.com/backtest.

    Full disclosure: the backtester is far from complete. Consider this a super early alpha launch. I am offering only the ability to backtest the SPY, using put credit spreads, on end-of-day data. Want to see more options? More features? Share the love. Let me and others know you think the Stockpeer backtester is a cool tool by tweeting about it or sharing it on Facebook. Why? Because a good backtester is cumbersome and expensive to build, but your support and feedback will motivate me to continue making progress.

    Backtester Goals

    Although backtesting an investment strategy is not a new concept, the options world seems to lack good backtesting tools. My goal was to build something simple yet robust. Something that does not require the user to be a computer programmer. A backtester that allows you to test different strategies quickly just by pointing and clicking.

    Options_Backtesting_Results___Stockpeer_-_Learn_Options_Trading

    Read More...

  • October 07, 2016

    Staying Engaged in the Market Is Key

    When I first started Stockpeer I expected to mostly share my experiences trading the stock market via automation. But I find myself talking less about automation for an important reason: automation can lead to a lack of engagement—aka complacency. No trader has ever gotten rich by being complacent.

    I have written thousands of lines of code to backtest and automate different trading strategies. For awhile I was running software that fully automated my consistent put credit spread strategy. At the end of each day I noted which trades were made and checked for errors in my code, but that was it. I was not looking at charts or reading financial news. I was just watching the software do its thing. But the disconnect from the market was, I felt, bringing my personal growth to a standstill. So about a year ago I started to trade by hand again.

    Trading Options by Hand vs. Automation

    Don’t get the wrong idea—I did not give up on using my code to screen for trades; I just instructed the software not to place the trades automatically. Each day I reviewed a list of possible trades and decided whether to place them or not, thereby injecting some human intelligence and emotion to the final decision-making process. I was hoping to gain some edge by being more engaged in the market. I figured I would know better than a computer when to double down and when to sit on the sidelines. My mixed results the past year tell a different story.

    Engagment

    In auto mode my strategy was applied regardless of the headlines, but the human-powered version of my strategy formed opinions. When it was time to double down I did pretty well, placing multiple trades at the best possible times and besting my automated strategy, which would have placed only one. But I underperformed when it was time to sit on the sidelines. In fact, I discovered that my strategy does not want me on the sidelines at all. In the past year I often did not place trades when I should have because I believed the future held a better opportunity that hinged on some world event I knew was coming up. Therein lies the primary difference: automation does not care about tomorrow. Automation places trades based on the here and now. Sort of like a financial Buddha. (Is that an oxymoron?)  

    Read More...

  • October 05, 2016

    Trading Futures as a Hedge

    Recently I have been playing around with something new: trading the futures market as a hedge against my options trading strategy. Why hedge a good bet you ask? Though the strategy I rely on the most—trading put credit spreads on a consistent basis—is pretty reliable, it does occasionally break down, causing a big drawdown in capital. In 2015, for example, I earned profit every month except August and September. The market pulled back hard and fast during those 2 months, and major drawdowns ensued. Had it not been for those losses I would have ended the year with a gain of nearly 90%. But that’s not what happened, and I ended the year with a low double-digit return. This experience sent me searching for a way to protect against such blows.

    Hello Futures Trading!

    Buckle up because the futures market is the Wild West. If you’re not careful you can lose all your capital in the blink of an eye—or in that same blink your wealth can blow up. The futures market is by design highly leveraged. For instance, $500 in down payment (margin requirement) can give you access to around $100,000 in the case of the ES (S&P 500 index). A $0.25 move in the S&P 500 (future) is equal to $12.50. Translation: massive leverage.

    Futures-Trading

    What’s more, most futures brokers are stuck in the 1990s; the trading software stinks. Transferring money in and out of your account is painful and too often there are no safeguards to stop you from doing something dumb (like buying a future when you don’t have proper money—yeah, that crazy!).

    The futures market is for experienced investors and people willing to put in the time to learn the ins and outs. Rubes and slackers beware.

    Read More...