Hey everyone.
This is Kirk, here again at optionalpha.com.
In this video update, I want to explain the concept of laddering trades because we talk
about it often here at Option Alpha and it’s something that I’ve been doing for a long
time and I just want to make sure that everyone is on the same page as far as how we do things.
I often get questions like, “What is laddering?
Why do we do it?
How should I think about laddering positions?
What is the impact on position sizing?”
And then the last question usually is, “Do I have to ladder trades to be successful as
an options trader?”
The answer is that laddering is a concept of breaking your trade into smaller steps
or positions that are spread out over time.
Our back-testing 100% confirms that laddering across time and price is both more profitable
and generates higher expected win rates.
Here’s what I’m talking about.
Instead of entering one big trade of let’s say 10 contracts, instead of doing that, do
let’s say at the very basic level, two trades of five contracts and five contracts or do
five trades of two, two, two, etcetera out in a time.
It’s this idea of instead of doing one big position every month, every week, etcetera,
spread your trade entry out over time and price.
That means that you’re going to be moving with the market as the market moves higher
or lower or etcetera, etcetera.
I’ll show you how we’re doing it here actually.
Just even in this last month and a half, we’ve started to do this in a current position that
we have in FXE.
You can see here that we’ve got a bunch of sets of iron condors that we’ve been
trading.
We have the iron condor here, this is a set of two iron condors, then we have another
set here and another set here and then finally, our fourth set here which we’re starting
to build out into the February expiration month.
The whole idea here is that we could’ve done one big trade for January of six contracts
or we spread them out into three sets of two contracts.
Whatever you want to do, you spread them out into whatever groupings you want to do, twos,
threes, fours, etcetera.
There’s no hard set rule about anything.
You don’t have to do them every three days or every one day.
I’m just saying spread your trade entry out over time, so that you average into pricing
and average into the security.
What you end up getting is you end up getting a P&L graph or P&L diagram that’s much wider
than say an initial position.
Now our new position with everything included here in FXE is really wide from basically
100 up to 105 which is a pretty decent range for the stock basically for the next month
and a half or so.
If you look at the stock now, you could see we’re down here at 100 and then our topside
breakeven is at 105.
As the stock fell over the last month and a half, we’ve averaged into a position that’s
helped out with this thing overall and continued to sell premium as volatility has generally
been high.
When you look in here to the actual trades themselves…
Let me just click on these.
You can see this one was entered into on 11/21, this set right here was entered into on 12/5,
then you got another set here, this set was entered into on 12/23 and then finally, we
just entered into another set for February expiration on 1/3, so in January 3rd.
Notice there’s no set timeline or strategy as far as it has to be two days apart or one
day apart or etcetera, etcetera.
It’s just spreading the trade entry out over time, so you increase your occurrences,
increase the number of frequency that you have.
Now of course, obviously we can choose to manage these independently or separately,
whatever you want to do.
There’s no right or wrong way to do it here.
We choose generally to manage each of these independently.
As trades, usually if we have a lot of sets like this, we’ll create closing orders for
each one of these and just continue to let those automatic closing orders work.
But that’s really the concept behind laddering positions.
The whole idea here is that you’re moving and averaging with the market.
If we go back to FXE, our first position was in basically the middle part of November last
year, so the stock was right around here and then we got into another position and another
position and another position and another position.
We’re just continuing to move with the market.
And always be neutral, always be neutral around that stock price, so that we maintain a pretty
much Delta neutral or as much of Delta neutral portfolio as we can.
Hopefully that was a good little conversation about laddering trades.
Obviously if you have more questions, please let me know.
Search the website.
Check out the rest of the videos inside of this knowledgebase here on the website and
also check out our FAQ answer vault which has a ton of other questions and detailed
written answers from me.
Until next time, happy trading!