Option alpha how to achieve alpha with options trading. David Jaffee from BestStockStrategy.com
BestStockStrategy.com and before we start I want to make it abundantly clear
that whether you choose to learn from me option alpha or tastytrade selling
option premium is the only way that you can earn consistent and predictable
money in the stock market. Even though I'm not a fan of Kirk du Plessis
I think that he's not a profitable trader and I think that his students do
not make money I also think that learning from Kirk du Plessis is way better than
learning from fake gurus
so remember as long as you're
selling option premium that's fine because if you're trying to day trade
or use technical analysis or trade Forex you're not actually a trader
you are a fraud victim so in this video we are going to discuss how you can
achieve alpha and one of my biggest criticisms of Kirk Du Plessis from
option alpha is I don't agree with the trade often principle well Kirk does is
he's essentially he trades iron flies on ETFs and I don't like trading ETFs
because they receive about half as much premium as the underlying securities so
for example why trade an iron fly on SPY when instead you could trade a put
or a call on Apple or Facebook additionally when you're putting on an
iron fly position or even a strangle position you are inherently putting on a
position at an inopportune time an example of a trade that we made this
past week with my alert subscribers where we put on a strangle at an
opportune time Amazon fell to about 1650 I then
instructed my alert subscribers to sell a 1480 put those people who wanted to
turn that trade into a vertical they could sell the 1480 put and buy like a
1,300 put the next day Amazon increased in price by a hundred or $120
around $120 I then told my alert subscribers to close out the previous
trade but for those people who didn't close out that trade I also told them
that this was an opportunistic time in an opportune
time to sell an 1860 call so for those people who do not close out the trade
there will be short a 1480 put and then they would also be short in 1860 call
they received a tremendous amount of premium from that position because they
sold the call after Amazon increased in price by about 5% if they sold that call
when Amazon was trading at 1650 instead of receiving around $5 they would have
received around $1 in which case it would not have even been worthwhile to
enter that trade so that's my problem when you sell strangles in that you're
inherently not maximizing the amount of premium that
you receive and in a down market you should definitely sell calls like
over the past month we have sold a lot a lot of calls because that's how you make
money when the market is extremely volatile and the market is going down
but at the same time I do not agree with with indiscriminately selling strangles
and I definitely don't agree with indiscriminately selling straddles and I
a hundred percent don't agree with indiscriminately selling iron flies on
ETFs that have high implied volatility because that is a situation that's going
to be incredibly stressed but you're gonna have to manage the position you're
always gonna have to log into your account five or six times a day to make
sure that that position is not exceeding either the upper or the lower bounds,
it's not showing you a loss etc there's no safety net when you sell a straddle,
zero. So even though I understand like all the logistics behind it even even if
it's profitable right like even if you sell a straddle and then you immediately
sell you immediately enter a limit closing order to take off that trader to
25% at 25% of the profits you're still going to have to log into your account
multiple times a day to make sure that you're not showing a massive loss and
especially with the volatility that we've seen in the marketplace over the
past two or three months where a one or two or three standard deviation move is
not uncommon as it has been over the past few months you are really going to
have to you know log into your account multiple times make too many adjustments
and you're gonna feel like a pinball because you know the stock on the upper
end is gonna it's we show you a large loss and on the
lower end it's going to show you the big loss you're going to make adjustments
only to find out later on that you should not have even touch that stock at
all. The point that I'm making is that selling iron flies on ETFs or
even iron flies on regular large cap securities is not a smart way to make
money because you're going to have to constantly deal with the stress you're
going to have to manage your position and deal with multiple adjustments and
especially in this situation where volatility is very high and one or two or
three standard deviation moves are becoming relatively commonplace that is
not a good strategy at all. When you sell puts or calls on positions that are
too far extended you are giving yourself a tremendous advantage because you have
a tremendous safety net a good example right so Facebook last week I believe in
like the early part of the week who's traded up to around 150 152 right like
it exceeded their earnings and then traded up to 152 to 153 we waited until
Facebook fell down to 146 until we sold the 135 put that gave us an
incremental $6 of cushion the difference between 152 and 146 and because the
volatility of Facebook was increased from when was trading in 152 to 146 we
received around twice as much premium as we would have received how we sold the
135 put when Facebook was trading at 152 again remember you need to mitigate risk
and build in the most safety net that you possibly have and that's why in that
Amazon trade that I gave you as an example before we waited until Amazon
fell to 1650 then we sold the 1480 put then since we have no idea what future
price movements are going to do we waited until Amazon was up around $100
and then we sold the 1860 call because that was an incredible opportunity if
Amazon one of the largest companies in the world was up 5% in a day we don't
think that the probability is high that the next day it's going to also increase
by 5% so we took advantage of the fact that at that moment we believed that
Amazon was too far extended on the upside so we
had a built-in you know we we had a very large safety net we still gave ourselves
over $100 where Amazon could still go up over $100 and we also once that trade
executed we entered in a position to close a 50% of the maximum profit and we
actually close out that trade two days later for around a 50% gain that's how
you trade you minimize risk and you are opportunistic while at the same time
building in a substantial safety net. Alright, like I said before I don't believe
that Kirk du Plessis' desire to trade solely
based on high IV (implied volatility) and you're not basing it on market conditions and it's an
inopportune time for you to enter trades you believe that it's an opportune time
solely because there's high IV but at the same time some securities are way
better than others like over the past three months Amazon has actually been a
lot more stable to trade than Facebook because Facebook was trading at
around two hundred and eighteen dollars and it fell all the way down to around a
hundred and forty Amazon were traded around two thousand and it fell all the
way actually I think two weeks ago fell down to around 1,500 but that was
relatively temporary it's the majority of Amazon's trading range has been
between around 1700 and 2000 generally within like the 1700 and 1900 range you
can make a lot more money when the stock is less volatile like Amazon than you
can when a stock is extremely volatile like Facebook but the point that I'm
making is that you have to look at the trading range of the individual security
and then discern what is an A+ opportunity relative to like a C or a
C opportunity because when the market goes down everything has high implied
volatility the the VIX is very high the VIX right now is around 18 last week it
was around $22 right 22 that's extremely high that means that any time
you sell option premium you're going to collect a lot of money but all of the
opportunities are not the same so you have to discern and because it's your
money you have to discern what's an A+ opportunity versus a B opportunity
even a C opportunity and I can tell you from personal experience that the
times that I've made the worst trades it's always been with the B or the C
trades like those type of securities like the Baidu or the EA Sports the
Electronic Arts like I rarely ever lose money with Facebook or Amazon rarely
ever maybe like one out of 30 trades on Facebook or Amazon are not profitable or
I've never lost money on Lockheed Martin I've made hundreds of
thousands of dollars on Lockheed Martin. I've made over a hundred thousand on
Raytheon I've never lost money on those securities. But the Electronic Arts, the Baidu
those are the securities which are like the B or the C players that I
have lost money on the other thing is I do think in general even when even right
now where it's like mid November of 2018 where there's been a lot of volatility I
still think that your goal should be to sell puts on large cap market-leading
stocks that are on the low end of their range and then as they
increase in price you would then sell a call great example of this right so so a
great example would be my great example will be Amazon but I do not at this
moment proactively sell calls on many securities maybe I did do that on
McDonald's because McDonald's right now is around like 185 and it's gone up
consistently so this past week I sold a 195 call on McDonald's but it's
extremely rare for all intents and purposes even in this market unless the
market declines consistently so that I know that we're in a bear market I'm
still in the mindset where I'm going to wait for the Facebook Amazon Boeing
Lockheed Martin and Raytheon to fall on the low end of its range and then I'm
going to sell a put that's around ten or fifteen percent below the current
trading price then I'm going to wait to see if they're if the stock price
appreciates just like Amazon when went up like a hundred and twenty dollars
around five percent and then at that time and only at that time am I going to
be opportunistic and sell a call on that specific security to turn that into
strangle it is extremely rare that I proactively search to sell a naked call
or a vertical call on a stock that I don't already have a put position on so
if I'm going to sell a call it's extremely rare that I don't already have
an existing put position on that and the reason is that its much
more capital efficient for you to sell a put and then also sell a call because it
doesn't use up any incremental buying power so for example when you sell a put
on Amazon when he's trading around 1650 if we sold the 1480 put and then I
waited for Amazon to go up to around 1750 and then I sold an 1860 call by me
selling that 1860 call I'm actually not using up any incremental buying power if
I put the position if I put if I match up the expiration so the expiration is
on the 1860 call and the 1480 put were the same as a result there is no
incremental buying power that's being used by me selling that 1860 call
because remember that Amazon cannot be trading over 1860 and below 1480 at the
same time so as long as I match up the same number of contracts and the
expiration then I'm essentially collecting premium when not without
using any additional buying power so like I said option alpha how to achieve
Alpha with options trading I do not ever
recommend trading iron flies on ETFs recently over the past month or two I
have been trading more verticals mostly to protect myself against the heightened
volatility I'm still not a huge fan of selling verticals because I do recognize
that when the market is is increasingly volatile you can turn any naked position
into a vertical credit spread and also at the same time when you trade vertical
credit spreads it's incredibly difficult for you to manage that position I mean
you effectively can't roll that position instead the only thing that you can do
is really close it out now I know that that's not a hundred percent true you
can roll that position but it's incredibly expensive and instead of
allocating some of that money towards reducing or having a more favorable
strike price or even reducing the size you're instead going to use that money
that you're that you would have used to reduce the size or have a more favorable
strike price in order to buy an overpriced put option
so what I sometimes will do like I did around three weeks ago in the middle of
October is I did buy some puts just for portfolio insurance because the market
was going crazy in October 2018 was the worst month in around 7 years but I'm
still not a fan of using vertical credit spreads although lately I have been
using them a lot more but I'm not a fan of trading iron flies on ETFs I think
that you should definitely be more opportunistic and build yourself in a
wider moat and a much better safety net which is the way that I trade. My
strategy is much more opportunistic you build yourself a much greater safety net
and that's why my returns are substantially higher in 2017 I made
around 72% I don't think the Kirk makes makes much money but at the same time I
also don't think that he loses money I just don't think that he's a profitable
trader maybe he makes maybe he breaks even maybe he loses one or two percent
maybe he makes you know one or two or five percent but I don't think that he
makes that much money and I think that a lot of his students lose money because
they're going to be pinballed back and forth and they're constantly
going to have to make adjustments only to find out later on that the
adjustments that they made because they had an overreaction to one specific day
and then they're gonna see that a day later that's not pulled back like a
great example is if you sold an iron fly on Amazon you would have been shitting
yourself literally because Amazon increased in price by five percent but
at that time we use it as an opportunity to make money because we were patient we
had a very wide safety net we sold the put when Amazon fell down to the
relative low of his trading range at 1650 and then we sold a fourteen eighty
foot and then we waited for Amazon to go up it just so happened that was the next
day and it went up around $120 and then we were opportunistic and we collected a
lot of premium by selling that 1860 by 1860 call and then two days later we
closed out the 1860 call for a 50% profit so by selling just in by
indiscriminately selling iron flies you are not maximizing your probability
profit you're also not giving yourself any type of safety net
and inherently you are giving yourself a much higher probability of giving in to
temptation to manage positions way too early only to then realize days later
that you should not have touched that position at all this is David Jaffee with
BestStockStrategy.com remember that straddles do not provide
you with any safety net even if you close out that same position as straddle
a 25% maximum profit straddles do not give you any safety net you can go to
BestStockStrategy.com and receive $400 of free training which is better than anyone
else's paid materials just go to BestStockStrategy.com and enter in your email
address if you have any questions let me know by just do you want I also want to
reiterate that I'm not anti Option Alpha. Well I do think
that tastytrade is much better than option alpha I think that TastyTrade is an inherently
far superior resource to option alpha but I'm not anti option alpha like I
definitely think that all of us are saying the same thing that you have to
sell option premium and I do think that like Tim Sykes, Ricky Gutierrez,
but Kirk du Pless from option alpha he's definitely not a fraud. I just don't
agree with the strategy so if you have any questions let me know I'm here to
help you and thank you for watching