Using leading indicators for trading otm binaries17 comments
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A well known options trader has been involved in an SEC fraud investigation. The easiest path to take here is anger, or perhaps to mock the whole situation. Yet I'd like to take a step back and see what we can learn from this.
If you have any experience in options trading, this will be crucially important to read. Before we dive into what potentially happened, remember that this is currently an open and ongoing case. Facts and revelations may completely change by the time it is settled. I'm taking a few guesses here and I'm also pulling from my own experiences to give you crucial lessons if you want to succeed as an options trader.
She became a kind of a cult figure in the options world, showing how this simple strategy could be used by anyone to earn significant returns in the market. Since the SEC investigation became public, the videos have been since taken down.
However I have looked into the strategy her firm used as to whether it was possible to earn those returns. She would "stress test" her positions, figure out how much stretch the market could have, and size up so that the value at risk was her net liquidation value.
Which is what they did. And with that size and the kind of market environment we had from , it was very possible to earn those kinds of returns by selling options. This is a "high odds" trade, meaning that you should expect to make money most of the time. From reading the SEC investigation, it appears that things started to fall apart around the end of A lot of option sellers got smoked then.
In case you don't remember the backdrop of this trade The ebola scare had started to take hold of the markets. It got ugly out there. Overeager option shorts started selling calls way too early.
And too many people got short. This happens a lot more than you think. A recent example is March of , where Goldman Sachs put out a note that calls were way too cheap. So in late , coming into obvious resistance everyone sold calls too early. And call sellers got ran over. When you are a net seller of options, the biggest risk is not to the downside It's much harder to manage a losing income trade to the upside.
So that's my guess here. They were doing fine, but then sold too many calls in size and got runover on the Ebola trade. Once I read how they took a performance fee, I knew that it was the main reason why the SEC went after them.
A normal fund structure is "2 and When you sell options every single month, you can plan for that cash flow until things go bad.
But if you're trading serious size One way to manage those losses is to roll the bad options further out in time. You get stuck in the trade for another month, but it allows you to work your basis down in the position. But when you tell your investors you "realized profits" on that roll The monthly performance fee can set you up to be tempted in ways unimaginable when you trade your own accounts.
That means you won't get that monthly performance paycheck for quite a while. The well has dried up. But if you just do some fancy accounting, that gravy train can keep going When you get into a massive drawdown as an option seller, you can get stuck into the rolling trap. You try and figure out some fancy options technique to get you back to breakeven, even if it takes you months to do. You may get you capital back, but you end up with a massive depletion of your psychological capital.
My guess here is that this is what happened with their fund, and they couldn't keep the numbers game going.
I could go into a lot more detail about this case, but since it's ongoing I don't want to try and speculate too much on this. I'm talking about psychological capital. There are trades you can put on that are losers. You can roll the trade, you can oversell spreads, you can convert a trade into an even more complex option strategy. Yet there are some times you just need to take the loss and put your capital to more productive trades. If you try and stick in this trade, you'll end up with blinders.
You'll be so focused on working a bad trade to breakeven that you'll miss out on all the other opportunities in the market. This is going to fly in the face of many other "gurus" out there, but I believe that using odds alone for your trading strategy can lead to disaster. It doesn't matter your religion, you must understand that the Market Gods exist. And when you utter that sentence and send it to the universe In fact, I think the strategy they use at Hope Investments is incredibly lucrative and profitable in the long run Blindly expecting the odds to eventually be in your favor is bad voodoo.
The Market Gods will come after you. The major risk in selling options is how your directional exposure delta can increase as the position moves against you. So you buy back that put option at 1. You have a loss of. If you roll options, treat it as a single position and track your basis on a mark to market pricing. I've had people who have shown me trades where they got blown out on some put sales with massive losses Yet if you're looking to create consistent, sustainable income from options while keeping risks low, then you should look to other trading strategies.
The way we trade iron condors at IWO is a little different If you want to learn all about iron condor trading, click here for your free iron condor toolkit. I've put together an Iron Condor Trading Toolkit that gives you the case studies and training needed to be consistently profitable in the market.
Click Here to Get the Toolkit. Shocking news in the option trading world has come out recently. And for those skeptics, a victory lap may be in order. Diving Into The Strategy The way they earn returns is to sell options and profit from the time decay. What made Karen's technique interesting is the use of margin. So far, nothing out of the ordinary. Now, the only way to get those returns is by taking outside money. What the Strategy Looks Like Here's an example option strategy that would be similar to what Hope Investments would put on.
There's other considerations here like position sizing, scaling in, scaling out and so on. The tricky part is how you manage the trade when it goes wrong. Where it Turns South From reading the SEC investigation, it appears that things started to fall apart around the end of That's probably not where things fell apart.
It was on the rebound. After the capitulation in October, the market rallied back to 2, just as fast. And then it continued to squeeze.
It setup the case for a massive short squeeze. This in and of itself wouldn't be a problem with the SEC. It's that they got greedy. If you're trading your own accounts Yet if things go wrong, you can end up in a serious drawdown.
It's not a terrible strategy. You get smoked on a bad trade, and it may take 6 months to work back those losses. What would you do in that situation? Would you have plenty of integrity and own up to your investors that you screwed up?
Sure it's easy to say sitting behind a keyboard They See Me Rolling The Major Takeaways I could go into a lot more detail about this case, but since it's ongoing I don't want to try and speculate too much on this. Yet I think we have enough to get the lessons we need. Protect Your Capital In terms of capital, I'm not talking about money. Don't Blindly Use Odds in Your Trading This is going to fly in the face of many other "gurus" out there, but I believe that using odds alone for your trading strategy can lead to disaster.
Say you sell an option. Immediately, you psychologicall anchor onto that level. And you start to say to yourself