tastytrade Best Practices: Recent Episodes
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This segment is designed to show every investor the best ways to execute their trading strategy. We deliver the practical side of options trading. It's tastytrade's research broken down to a more beginner level!
The market capitalization of a stock is the total market value (dollars) of a company’s outstanding stock shares.
Market cap is a way to estimate a company’s value according to the stock market, and it can be used as an approximate metric for diversification.
Tom and Tony look at liquid Tech stocks of different market capitalizations and analyze the trends in correlation over the past 6 months.
ETFs are inherently diversified, making them less prone to outlier moves and less volatile in general. However, does this diversification also make them more likely to experience significant short-term IV contraction? Today we determine how likely different sector ETFs are to IV contract short-term and compare those probabilities to contraction probabilities for high cap stocks in the same sector.
IVR can sometimes misrepresent IV inflation due to IV Skew, and referencing the raw IV of an underlying can give context to IVR. There are volatility indexes that track a range of instruments including U.S. indexes, commodity-related ETFs, single U.S. stocks, and foreign markets. Today we are going to cover some volatility indexes that track the raw IV for different instruments.
An option’s value is comprised of two components: Intrinsic Value and Extrinsic Value. Today, Tom and Tony discuss the important concepts between these two.
For Bullish and Bearish trades we profit from a directional move. Whereas Neutral trades are short premium plays that profit from little to no movement.
Join Tom and Tony today as they dive deeper into how trades can profit from a starting point of being delta neutral.
New traders trading stocks and ETFs should be cognizant of the trade-offs for each.
Today, Tom and Tony explains the important concepts between trading stocks and ETFs.
High implied volatility (IV) markets provide premium sellers with strategic advantages.
Today, Tom and Tony want to dig a little bit deeper to see what the Greeks tell us.
Earnings announcement is a binary event for traders.
The uncertainty around the results can cause large swings in the stock price and is often reflected in higher option premium.
What should traders look at before earnings and what can they do?
SPY is roughly normally distributed with constant mean and volatility. The strangles we sell we base on standard deviation of risk.
Today, we are going to dig a little deeper into the 1 Standard deviation strangle and run a study to find metrics around being breached.
Study:
- SPY, 2005 to present
- Sell 1 standard deviation (SD) strangles
- Expiration cycle closest to 45 DTE
- Manage at 50% max profit or hold through expiration
Managing winning trades greatly reduced the percentage of trades that eventually turned into a loser. On average, managing winners at 50% takes less time than getting breached on either the call or put side As a result, managing winners greatly reduced the percentage of trades that were breache
This segment of Best Practices discusses the advantages and disadvantages of active management.
When we actively manage strangles, we typically sell at 45 DTE and manage at 50% of max profit or 21 days. We do this because we can increase the number of occurrences. Plus, based on our study of managing strangles, there is a higher win rate and P/L per day when we actively manage our strangles opposed to holding until expiration.
However, one disadvantage of active management is that we miss out on the daily theta closer to expiration. Yet, we rarely capture this higher theta decay in our P/L due to gamma risk. Therefore, we like active management because it generates larger win rates and a larger profit overall.
Mistakes happen. Common ones that new traders can run into include:
- Not using probabilities
- Trading illiquid underlyings
- Legging in and out of trades
- Getting too big
- Buying out of the money options
By keeping these in the back of your mind and NOT doing them can increase your overall probability of success and average performance.
Volatility is a deciding factor in how much an option costs. The higher the volatility the higher the premium. But just how much of a difference does it make, and how does it impact our bottom-line.
Join Tom and Bat in today's segment as they look at credit received and how it varies in different environments.
Generic rules for capital allocation depends on VIX levels. The higher the volatility in the market, the more capital we want to allocate in our account.
Within the main allocation, we want to allocate 75% of our capital to undefined risk strategies and 25% to defined risk strategies. We want to use no more than roughly 5% our capital per trade. Finally we make sure to narrow our short strikes during times of High IV.
Periods of negative returns are unavoidable with any strategy, but excessive drawdowns may indicate that strategy adjustments are necessary.
Here we discuss what is considered an appropriate amount of drawdown, how not to respond when drawdowns become excessive and healthy ways to adjust your strategies.