Q: What are the most important things to look for when deciding to place a trade? A: There are 4 main things we look at before placing a trade: Liquidity Implied Volatility (IV) Rank Notable Moves/ Pending Announcements Strategy Trading Checklist 1 of 9
10
Embed
Trading Checklist - Amazon Simple Storage Service · underlying by having a bid/ask spread that is very ... Butterfly (BWB) ! Credit Vertical Spread ! ... Example checklist for strangles
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Q: What are the most important things to look for when deciding to place a trade?
A: There are 4 main things we look at before placing a trade: ! Liquidity ! Implied Volatility (IV) Rank ! Notable Moves/ Pending Announcements ! Strategy
Trading Checklist
1 of 9
Q: Why is Liquidity important? A: Liquidity allows us to get in and out of positions easily. It also allows us to avoid slippage and get filled at a desirable price. We can define a liquid underlying by having a bid/ask spread that is very tight, approximately .01-.05.
Trading Checklist
2 of 9
Q: Why does IV Rank matter? A: IV Rank tells us where an underlyings current Implied Volatility is compared to where it has been over the last year. This allows us to quantify whether IV is rich or not and allows us to compare the IV of different underlyings.
Trading Checklist
3 of 9
Q: What should I be aware of before placing a trade?
A: We always want to check for upcoming earnings announcement or dividends. Unless its an earnings specific trade, we will avoid placing trades in a cycle that has earnings pending. This is due to the large moves that are normally accompanied by earings possibly testing our short strikes.
Trading Checklist
4 of 9
We also want to be aware of recent price movements, as well as if the underlying is at an extreme. If the underlying is at the bottom or top of its price range, we may look to place a contrarian directional trade, looking for a reversion to the mean.
Trading Checklist
5 of 9
Q: How do we choose a strategy?
A: After identifying a suitable underlying, we will select a strategy based on desired risk profile relative to trade assumptions, and overall portfolio. The following is a list of potential high IV, and low IV strategies we often implement: *See Market Measures Iron condors: analysis and variations 10/14/14 *See Market Measures High IV: strategy analysis 10/15/14
Trading Checklist
6 of 9
High IV Strategies ! Strangle ! Straddle ! Iron Condor ! Iron Fly ! Butterfly (BWB) ! Credit Vertical Spread ! Jade Lizard
Q: What metrics should we be aware of after selecting a strategy? ! Probability of profit ! Buying power reduction (BPR) ! Max return on capital (ROC) ! Break-even points
Trading Checklist
8 of 9
Trading Checklist
SPY: $189 IV Rank: 56% 1 SD 1.5 SD 2 SD
Probability of profit 72% 86% 95%
Buying power reduction $2,975 $2,685 $2,385
Max return on capital 5.7% 2.35% 0.84%
Break-even points 173.31 198.69
164.37 200.63
149.80 203.20
Example checklist for strangles on SPY:
Trading Checklist DISCLAIMER: The purpose of this material is to demonstrate market trading techniques and strategies designed to give you the skills and confidence to manage your own investments. The risk of loss in trading securi;es, op;ons, futures and forex can be substan;al. You must consider all relevant risk factors, including your own personal financial situa;on, before trading. Op;ons involve risk and are not suitable for all investors. You are assuming the en;re risk of any and all trades placed in the stock market. Due to the ;me-‐ cri;cal nature of trading, the varying fees charged by brokerages, and the ac;vity of other market par;cipants, tastytrade cannot guarantee that similar trades you place will mirror the exact performance of the tastytrade porColio. tastytrade is not a licensed financial advisor, registered investment advisor, registered broker-‐dealer or FINRA|SIPC|NFA-‐member firm. tastytrade does not provide investment or financial advice or make investment recommenda;ons. tastytrade is not in the business of transac;ng trades, nor does tastytrade agree to direct your commodity accounts or give trading advice tailored to your par;cular situa;on. Nothing contained in tastytrade’s porColio demonstra;on cons;tutes a solicita;on, recommenda;on, promo;on, or endorsement of any par;cular security, other investment product, transac;on or investment. BY USING THE TASTYTRADE WEB SITE AND ACCESSING THE TASTYTRADE MATERIALS, YOU AGREE, AT ALL TIMES, TO INDEMNIFY, DEFEND, AND HOLD TASTYTRADE (INCLUDING ANY OF ITS AFFILIATES, OR ITS RESPECTIVE SUCCESSORS AND ASSIGNS, OR ANY OF ITS RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, REPRESENTATIVES, LICENSORS, OPERATIONAL SERVICE PROVIDERS, ADVERTISERS, OR SUPPLIERS) HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, ACTIONS, DEMANDS, SUITS, LOSSES AND COSTS (INCLUDING ATTORNEYS’ FEES) RESULTING FROM TRADES YOU PLACE IN THE MARKET. TASTYTRADE SHALL NOT BE LIABLE FOR ANY LOSS OR DAMAGE, OF ANY KIND, DIRECT OR INDIRECT, IN CONNECTION WITH OR ARISING FROM USE OF EDUCATIONAL SERVICES PROVIDED AS PART OF THIS PORTFOLIO DEMONSTRATION.