Ok so making millions is not as straightforward as the title suggests, no snake oil sales here. If it was easy, everyone would be doing it 🙂 i see many ways of making millions – for example, long-term investing is one approach which we know works – Warren Buffet but that isn’t trading. There is short-term trading which is far more risky as you really need a very particular type of persona to handle the violent ups and downs but it is possible aswell. This post will be focused on the latter but it is an intriguing approach.
While i was learning various techniques last year, i came across a really interesting set of videos which definitely have merit but there are caveats which i will go into later.
I found them via TastyTrade, a spin-off from ThinkorSwim with one of the founders Tom Sosnoff at the helm. This dude is an options veteran of 30 years, a great listen and if you ever want to learn about options or futures, this is not a bad place to start.
Anyway, these guys posted up a few videos last year and one recently of a retail investor affectionately known as Karen the SuperTrader. She’s a wonderful, charitable investor – i wish there were more of them around. A little options knowledge will be required but grab a cup of coffee, sit back, relax and enjoy the following 3 videos courtesy of TastyTrade. I’ll cover the approach in more detail after.
First video of Karen
It is actually quite a simple strategy, here are the bulletpoints that i see:
- Focus on writing calls and puts on the SPX, NDX and RUT with the main focus on the SPX due to liquidity.
- She is always on about non-directional focus. Why? You want as many parameters in your favour, selling premium means you have time as your friend, you get paid every day that passes. If you focus on direction i.e. long calls and long puts, you have to be right on direction AND you are fighting theta decay which is time. It’s making your life more difficult.
- Volatility can be your friend aswell but needs careful monitoring. The transition from a low volatility to high volatility or high volatility to low volatility environment is the most dangerous time.
- Use of bollinger bands and experience to help determine extremes of the market and then step out further. This means getting paid on positions that have a 5%-10% chance of going in the money which means she has a 90-95% chance of success with each position.
- Sells the puts into market weakness and calls into market strength which means she can take advantage of the premium boost that occurs and collect more for the same probability.
- Contracts are sold up to 56 days out. The further the time out, the more premium you collect but also increase the risk that the market may swing against you. The time decided is a judgement call based on market conditions and the premium paid but the in-the-money probability is never more than 10%.
- If the in the money probability starts approaching 20%-30%, the warning lights go off and course adjustment maybe needed.
- Selling LOTS of contracts all the time. Use of portfolio margin ( as provided by thinkorswim ) allows you to sell more with lower margin. This requires $125,000 minimum plus a good trading record.
- Use of indexes only, reduces the ‘unexpected’ behaviour that you often get with stocks and also the liquidity is much higher so she can buy and sell a ton of contracts easily.
- A lot of capital is needed to follow this strategy, she had a huge amount of capital invested in her once the strategy works out and as a result can trade several hundred contracts actively.
- Never gives money back, not had a losing month in 2013.
- No use of stop losses.
- Selling calls much tougher than selling puts, tend to focus on puts. Calls often 10% in the money and closer in time..
- Risk management is absolutely key. If a position is in trouble, often take that position and move it further out in the same month or counter-balances with calls or puts. Rarely pushes it out in months but had to do that once or twice in an extreme situation like the flash crash.
- Only 50% of capital ever committed max ( maybe 70% if market conditions warrants but prefers 50% ). You need that buffer in there in case something goes wrong and you need to change positions quickly.
- Always watching net liquidity of account which represents the value of your account if all positions were liquidated at the mid-point between the bid and ask.
- Low volatility is tricky, prefer high volatility.
Following these rules guarantees success? No obviously. She is very experienced, a great eye for support and resistance in the market is absolutely key.
Can this be done with $100,000 – yes but difficult, you will be able to manage 1-5 contracts at best. She ramped to almost a $1,000,000 with investment from friends which helped boost the number of contracts and following that, she received by the looks of it around $40,000,000 investment. With that capital it looks like she made about $40,000,000 over 4 to 5 years as mentioned in the second video.
The alternative is to sell options on futures, the buying power reduction is much lower, take advantage of SPAN margin, this essentially replicates the same strategy above but the time frame can be much shorter,such as weeklies option contracts.
It is funny that people don’t think this strategy is possible but it is, i’ve seen other traders follow suit but with variations and most of them do well at it – the one thing they all have is an iron discipline with regards to risk.
She seems to be very genuine and at the end of video 3 covers a charity that she gives most of her money to, that to me is a worthy cause if anything else.
So in summary about the strategy, it’s probably worth a shot once you practice enough and have the capital to do it. I’m going to keep practising with it for the next year while i build up my capital.
Image courtesy of sheelamohan / FreeDigitalPhotos.net