Veteran options trader I built a process to earn extra income via options Free masterclass 👉 options-insight.com/free-mas…
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The way I work out my conviction is by counting how many uncorrelated things agree.
If I'm bullish on a name, the next question is how bullish, and that decides the structure more than the direction does.
So I'd run a checklist. Technicals, positioning, sentiment, the macro news flow, what the research I read is saying. The thing that matters is that those inputs aren't all measuring the same thing.
If they're all pointing the same way, I've probably got high conviction. If they're all over the place, I'm scratching my head, and that's useful information too.
You don't have to trade every view you have. A weak view and a strong view shouldn't get the same structure or capital allocation anyway.
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Selling a put spread to express a bullish view puts the risk reward about 3 or 4 to one against you.
The one I priced up collected a bit over $200 on a $10 wide spread, so the most it could lose was getting on for $800.
I don't generally like doing trades where the risk reward is against me like that. So if I'm going to, I want a proper reason. High conviction on the direction, and a short strike the market's already telling me is unlikely. That one was a 30 delta, so roughly a 30% chance of getting down there in the month.
The premium is nice and the probability's on your side, but the leverage is running the wrong way. That's why this is the one trade where I'd decide my stop before I put it on.
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When a single stock rips, the vol catches a bid, and that's what makes rolling a winner awkward.
You bought the call, the stock's gone your way, the delta and the vol have both worked for you. Now you want to keep the view alive with a longer expiry.
The problem is you'd be buying that new option on a much higher vol than the one you originally paid. It happens in single stocks far more than it does in the index, where vol usually goes the other way on a rally.
So roll into a call spread instead of another outright. You're selling some of that expensive vol back, you keep leverage to the remaining premium, and what you give up is gamma and explosiveness.
That's a trade-off I'd take when something's already had a big run, I don't know when it stops, and I don't want to be out of it either. If they vol has repriced materially higher, lightening up on the VEGA makes sense.
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Never forget this.
The reason to hedge something you love is so you don't have to sell it.
Gold's a long-term allocation for me. Structurally I've got no reason to be out of it. But when the short-term price action goes parabolic, the odds of a pullback go up, and sitting there doing nothing isn't much of a plan either.
That's what the hedge is for. You keep the position, you lean against it for a few weeks, and if the consolidation you thought was likely turns up, you take the money out of the hedge and go back to being plain long.
And if it just keeps ripping, you've sold a call above the market, so you get taken out of a bit of your position at a price you were happy to sell at, and the rest carries on making money.
Options let you have an opinion about the next month without having to act on it with the whole position...
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When vol spikes on the way down, the way I sometimes monetise a put hedge is by selling the strike below it.
You own a put, the market's dropped, you're up on it. The obvious move is to sell it and take the money, but then you're naked again when you probably still want protection.
Instead, sell the strike below and turn what you own into a put spread. You bring premium into the book, you keep protection down to that lower strike, and the put you've sold is the one that evaporates first on a bounce, so you can buy it back cheap and go back to owning the outright.
What makes it work is the vol spike. That's what makes the lower strike juicy enough to bother with because it's setup to shrink fast on a bounce.
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If a credit spread doubles against me, I'm generally cutting it or rolling it.
My win rate isn't 80 or 90%. I don't know many people whose is. So what I've got to protect is the gap between my average winner and my average loser, and short premium trades are where that gap gets ugly, because the leverage runs against you.
Take that bullish put spread. If the stock's down 10% and halfway through the strikes, the view's been answered. Cut it there and you lose about what you were trying to make. Sit on it telling yourself it'll bounce, and if it never does, you're out 3x that by expiry.
You don't want to be stubborn about a view the market's already invalidated. Take the L, and go and find the next one
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The theta on your whole book is the number I'd want in front of me every day.
It's easy to buy a bit of optionality on every view you've got. Each one looks small on its own. But the aggregate bleed runs every single day whether or not any of those views do anything.
Market makers can carry that, because they're scalping around the position and making money elsewhere to pay for it. If you're just expressing views, you've got no such income, and the decay adds up.
I've watched it happen at the professional level too. Long vol guys who paid the bleed all year waiting for the big move, and gave back a big chunk of what they'd earned market making while they waited for it.
Paying theta is easy to sleep on, because it's death by a thousand cuts. Which is exactly why you have to stay on on top of it.
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Two traders can be equally bullish on the same stock and end up on opposite sides of the vol.
One buys the call. Leverage to the move, long vol, paying time decay every day.
The other sells a put spread below the market. Short vol, getting paid by time, and it works as long as the stock doesn't crack lower. Sure selling the outright put sells more vol, but you need a lot more margin and take the tail risk.
Same direction, opposite volatility expression. What decides it for me is the vol I'm being asked to pay, more than how bullish I am. Cheap or mid-range and I want the leverage, so I'll pay for the call. Expensive and I'd sooner use it than pay it.
So I'd answer the vol question before I pick the structure.
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I generally don't use stop losses on long option positions.
The premium is the stop. That's most of the reason I'm using an option instead of futures with a stop underneath.
With futures you're relying on a level holding. The market's noise can take you out of a position you still believe in, and then it goes and does exactly what you thought it would without you. The option doesn't do that to me. I've decided what I'm willing to lose when I pay for it, and then I've bought myself the time for the view to work.
The exception is when the view itself changes. If something comes along that invalidates why I did the trade, I'll sell whatever premium's left and put it somewhere I actually have a view. Nothing to do with the market taking me out. I've just changed my mind.
Worth saying that's easier the longer dated you went. Short dated and there's usually nothing left to sell.
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You can be completely right on the direction and still get nothing out of the option.
The rally comes. It's just a few weeks later than you wanted. The market drifts lower for a fortnight first, most of your premium's gone, and by the time it moves you don't get back through the strike.
There's nothing wrong with the view there. It's the timing that did you.
So I'd treat them as two separate questions. How convicted am I on the direction, and how convicted am I on the timing? I might be sure something's 10% higher in six months and have absolutely no idea whether that's next week or in two months.
When the timing conviction is the weak one, push the maturity out and give yourself the wiggle room. I learned that one the hard way.
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I'm very anti selling naked calls on the VIX, including the zero-cost ratios people post about.
You can make money doing it for a long time, and that's exactly what makes it dangerous. The trade pays you small and steady, right up until the day it doesn't.
The VIX can double in a day. It has done. And when that happens, the thing quietly paying you for months takes your account with it.
My objection is the risk-adjusted one. You might well make money on it. I'd just rather you made money in a way where one day can't undo years of it.
There are ways to get short vol with the wings on. They cost you some of the premium, and I think that's a price worth paying.
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Rolling the strike up after a rally takes money off the table without giving up the view.
Say you paid $18 for a one-month call and the stock's gone through your strike. That option's worth $30 now. You can sit there, but if it drifts back you hand all of that over.
So sell it at $30 and buy the next strike up, which is worth about $20 with the stock up here. You've pulled $10 out of the trade. Your total spend has gone from $18 to about $8, and $8 is now the most you can lose, whatever happens next.
It's a bit like a trailing stop, I suppose, except the market's noise can't take you out of it. You keep the position and you keep the view.
Rally enough and you can get the whole premium back out, and then there's nothing left to lose on it.
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The easiest money on a hedge is buying back the call you sold.
Say you've got a collar on against a long. The market comes off, and the call you sold for $4 is worth $1. You've got 75% of everything that leg can ever make, and there's still two months left on the trade.
For me that's a no-brainer. Buy it back.
Now you're left holding the protection, you're not short the upside any more, and if the market bounces you can go and sell that call again. Do that a couple of times in a chop and a hedge that people think of as a pure cost has actually paid you.
The put's a different question. Early in the trade it's still got a long way it can go, so it isn't the leg I'd be in a hurry to monetise.
This is exactly what I did with and $FCX collar that I've had on recently. Haven't resold the calls yet.
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I think 0DTE volumes went through the roof because a lot of people reached the same conclusion I did.
When I sell theta on the S&P, I keep it very short-dated. It's such a deep options market, with so much 0DTE volume, that the gamma trading every day has a big impact on it. You can get half decent estimates of whether the options complex is running long or short gamma at any point.
It's a read on today, and it might completely change tomorrow.
So there's not much point slapping on a one-week or one-month trade when the conditions are set for the market to sit around today. If what you know is today's gamma, you might as well trade against it with today's options, and you get your theta faster anyway.
There's a long side to it as well. If someone only wants to hedge one macro number that's out today, the cheapest option in dollar terms is probably a 0DTE put.
More and more people are gravitating to 0DTE, and it's not just retail gamblers.
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Plenty of times on the desk, a junior suggested a trade I hadn't thought of, and I went and did it.
That's how it should work, I think. You empower people to learn your techniques, then they make them better and bring you ideas that improve on yours.
It's what I'm after in our Discord too. When I was doing wide 0DTE condors in the European morning, a lot of the guys did their own variations of it, which is exactly the idea. I don't want anyone blindly copying me.
I've always said the best teachers are the ones who are forever students. Markets keep changing, so we have to keep evolving with them. If we'd all figured it out, it'd be quite boring.
So if you run your condors differently to me, I'm very open to hearing how.
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I think the most powerful setup is bots running the trades and a human who only gets to turn the dials.
A lot of people have moved to purely systematic trading, and I get why. Any time you bring discretion in, you open yourself up to deviating from your plan. A bot you've preprogrammed won't do anything you didn't tell it to do.
I do think a human overlay makes sense, though. The bots risk manage and execute, based on the backtesting and the strategies you've formulated. The human gets the dials, turning certain types of strategy up or down depending on the regime they think the market's in or heading into.
What I don't think you should be doing is meddling with individual trades. Anyway, that's how I picture it longer term.
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If I had to sell a straddle or a strangle naked, I'd sell the strangle.
Generally I'd use condors or flies to do this, they're better risk-adjusted ways to do it in my opinion.
But if I had to sell one naked, and I was planning to run it quite close to expiry, I'd go for the strangle.
A short straddle only makes its maximum at one price. That's one little sweet spot, and I've got no real way of calling exactly where the stock's going to be. I'd much prefer to pick a range I believe it'll stay in and give myself some room for error.
Greeks are more stable too because you spread the strike risk.
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