Criteria For Entering An Options Trade

go ahead Linda first side please so what is the minimum requirement for liquidity again what we're trying to do here is like to always get back to uh over the course of a week we like to challenge challenges as much as we can but for new people that are just turning tuning in stay straight for the first time and so many of you are so thank you so much because it means a lot to us and we're trying to keep up with everything and i'ma tell you the we're also working ridiculously hard on our new technology which is also very much for new traders and a ton of you have signed up for our beta testing which is Austria to support the supports incredible and it's it's going to make this platform so much better even our devs are ridiculously fired up it's hard to fire a bunch of devs you know that okay they're they're they're ridiculously fired up over their response so far just go to doe comm correct just dokkan sign up to receive an invitation and you'll be on that BAE list you'll get the software about a month before it goes out to publicly yep all you gotta do is put your free free yeah we're not gonna there's no Sui don't spam anybody on anything so don't worry about that stuff it's just you'll get the software about a month ahead of time we'll take your feedback it's very important to us it's awesome but for everybody signed up so far thank you so much again we'll keep you updated um we're still a little behind on a couple of formulas and stuff but it looks slick as hell it's good very good and it's not a replacement for toss or anything like that it all it is is a complimentary platform it's an engagement platform it's designed to keep you excited and to deliver a lot of the stuff we're gonna talk about now look you even got sazonov site excited on the platform what do you mean well putting it up a little sauce enough no hey what is the what is the minimum requirement for liquidity first and foremost the underlying needs to be active a minimum of a million shares a day I mean it's hard for me to say in a really strong market I would say that the minimum I'm sorry in a really active market I would say the minimum should be at least a couple of million shares a day I would say in a slow market like we have now a million shares a day but generally speaking um if these markets are trading like they have for the last five or six years you're looking for multiple millions of shares a day you're looking for enough liquidity to trade through the platform now is there a difference between a 200 our stock as you say comes out like a Google right right Google trades under a million shares some days but you can just kind of you know remember he's a guideline okay just something to put you in that's what it says this is a general guideline so if you're looking at if you're looking at a stock that's somewhere between thirty and sixty dollars you're looking for multiple millions of shares a day that's essentially that the reason a stock liquidity even if you're not trading stock is because derivative liquidity is just what it's just what it actually that is what it is it's a derivative of the stock so you're in order to have decent derivative liquidity you need underlying liquidity yes sir the people that make the rivers markets have to be able to go to kind of the parent the underlying in order to edge their positions you don't care about what they do with the positions you just care that they have a very tight hedge so they can go off make tighter derivatives markets that's all it is we look for the tight bid-ask spreads and then volume on the option market do we look at open interest well if we see typedef spreads open interest is not that important if we don't see tight bid a spreads then of course we're to look for open interest a little bit we're gonna look for by him we're looking for something trading you know listen there's no set rule liquidity is a common-sense thing mm-hmm that's all that's it let's it was down to yeah you know if you're gonna buy I'm trying to think about this for a second but if you're if you're gonna buy certain things like a piece of artwork or something or you know a piece of artwork from a random no-name artist whatever and you may love the piece artwork sure great go buy it but understand that it's not going to be a liquid investment correct you know you want to go out and buy something from an own artist you may have a lot more liquidity around that particular piece sure and and as we get to more and more liquid markets like that same thing you know you you buy a relatively inexpensive piece of real estate and that's kind of in the in the middle somewhere price-wise you're going to have a lot of liquidity around that piece of real estate if you buy a piece of real estate that is unique and I've bought very few unique properties in my life it is very hard it is extremely difficult to find liquidity when you want to get out correct okay what risk assessments are made at the time are made at order entry well most importantly well let's write read this first management of risk after trades been place is a common fallacy the only time to do this is really on order entry we do this by staying small one of the coolest things about tastytrade is that is that we redefined order entry when I first got into the retail business and we were building toss the every every email we got was about order types that we didn't have exotic order types like e Trade offers an order type that lets you cancel every single order if you know if it if V mini ESPYs trade a certain that's right or or this firm lets you do a trailing stop as a brick you know these ridiculously exotic order types and we know we understand it okay trust me really smart developers they get it it's just you can code anything right you can code a rocket ship to the moon okay I mean it's no big deal you know the developers we used at one point when they were 18 or 19 they were coding you know they were they were they this is a true story they were building and coding nuclear submarines okay since the time they're about 16 these are genius kids and they were off you know they were writing code for for nuclear weapons I'm sure they could code a trailing stop it was not the issue issue for us was do we really need this ridiculous all these ridiculous order types you know how important is that what we didn't know at the time was that it had all those order types was complete waste that's right a total waste but we knew we'd never used it on the floor we thought it was a waste but we couldn't prove it right now I think we can prove it all there all you need to know about order entry is stay small correct stay small grasshopper just don't just whatever you do just stay small because you only get one chance to manage risk very good you don't get another out every other out cost you you know your first time you get to make a decision up front and you can manage risk on order entry later on it becomes very expensive correct you think you're paying the time you think you're paying too much for the house well try to sell when you're paying then you rise how much you really extra you paid just look at the housing crash right make a good trade on entry you don't make a good trade on exit but yes most of the time when you really sit down and think about it the decision the initial entry point and listen I'm not a scare trigger I'm not one of those people that think hey don't do this I'm not scared of being successful except you have to maintain your size you know we have all these different reasons maybe it's ego maybe it's just design maybe it's because you think you know something but whatever it is you manage your order entry you manage your orders on entry and entry means staying small and that's all the risks you can always add to it mm-hmm you can always get bigger down the road and and this is that's always adding risk right I mean roading adding buying yeah sure and this is the most difficult thing to do in all of trading because we've watched literally thousands of I think thousands of traders not just hundreds but thousands of traders through the years and the number one take down his size always we had a kid come in the office the other day he's not a kid anymore about 50 and he came to the opposite he used to trade for me years ago and no names no and time time and um yeah and he used to trade for me back when he was in his 20s and and he said to me sighs because I had no idea sighs took me down right I'm like no kidding sighs took you down hmm yeah it's that's it listen you told a good story about how he was nothing going on the pit and then you start hearing a little bit noise down at the bottom you this ice it's all sighs it everyone's gonna trading him up and you're like was he winging him down there and I'm not doing anything I don't see any opportunity he's trading like crazy get him up here sighs we had another trader once his acronym was sighs and I'm like and now thinking back at it I want to kill him for that because you know what that's footage it was we just thought wrong that's why Z okay we just everybody thought wrong yep we just we didn't understand it and learning about sighs and staying small more sauce Grande okay he ever trained sighs let's go next slide tell everybody no chef are there specific times of the day that are better for Phil's on average volume is greater to open and close it is at these times we see less slippage and quicker fills however recognizing when underlying spearing moments of illiquidity is critical to the timing of the order entry process you know I'm gonna argue that I'm gonna argue both sides to this because I don't I'm one of those traitors that used to think that I used to think that the first half hour or the last half hour were more interesting to trade I'm not sure I believe that anymore I think that I think we are giving more credit than we should to the first and last hour I think we have to recognize who the counterparty is the counterparty is a server and the server really doesn't care Dorota it's a robot okay and the robot doesn't really care what time the date is the robot strictly is driven by theoretical edge or the need for a certain position like if the robots selling something selling something in New York or selling something in San Francisco and it needs to buy something and that's offered in Chicago the robot will buy what's in Chicago if the robot is only focusing on theoretical edge and there's the right theoretical edge the robot will do whatever you want to do so I actually don't think that anymore that it makes a damn bit of difference in fact I think we can argue now that when things slow down the robot makes with tighter markets when things are busy the robot has to make wider markets so I'm not so sure that the counterparty really cares the time of the day anymore I used to think it was when was me as the counterparty or Tony as a counterparty no question okay the first hour in the last hour there were more bodies correct in the middle of day they were liquidity meaning more liquidity middle a day less bodies less liquidity end of the day wider market that's right now I don't believe it now I just think that everything is the same mm-hmm let's go next slide how does price movement of an underlying how does the price move it on the underlying factor into order entry because the majority of our trades have some directional component we look for price extremes of either weakness or strength for order entry I think there's no question at this point because inside no question in this at this point in time with all the studies we've done that that you could argue against um using that for whatever edge you think it is there's no question that buying when somebody else wants to sell and selling when somebody else wants to buy is to your advantage and I think that the more we study this just the more evidence wait to see the market measure today because it's exactly this point the more evidence that we unearth or uncover it's just it's overwhelming you have in order to be successful you have to essentially buy when somebody else wants to sell and someone somebody else wants to buy and you just it's not a close your eyes thing it's just absolutely correct it's the mechanical way we doing it doesn't mean that mean it doesn't mean the trades going to be successful it just means that on entry you put yourself in a statistics show that you're just setting yourself up to be successful let's go last slide this one what are the guidelines for days to expiration well we've done a lot of research on days to expiration and I'm sure we'll do a lot more as time goes on we'd like to think we have enough time in the trade that allows us to be right we've found that roughly 45 days to expiration allows us to collect a decent premium while affording the flexibility let time work in our favor um we don't know for sure if it matters if it's three we don't know for sure what three days to expiration really means or seven days to expiration really means but what we have found is that looking at hundreds if not thousands of studies based on time to expiration that the that the most let's see how best way to say this that the greatest returns we can validate researched validated and kind of built into different various models for risk versus reward for just for risk for us rewarding show that 45 days to expiration is the optimal time to enter trade now that zone right I mean that's right all that's telling me what um right it's not 45 days exactly I have to put all my trades in it just tells me if there's 30 to 45 days left to expiration I'm kind of active if there's less than 30 days I start you know kind of paring away from that month of there's less than that I move away from it completely I think if we get enough of a rise in long-term volatility you'll end up with that number actually coming down a little bit but and it will tighten but in current IV range which is about historical norms the 45 days seems to be the duration that gives you an opportunity to win at least once perfect and and and again it's not that twenty days doesn't work or 55 days doesn't work it's that the return on capital is greatest at 45 days the return on capital amount of movement that we feel that a retail investor should be you know looking at be able to absorb we did a great market measure segment on this and essentially it shows about a hundred and fifty percent difference in the forty five-day slot than it does in the three weeks a lot of 21 to 25 days or in the 55 or over it doesn't mean those don't work it just means there's a hundred and fifty percent difference in that 45 days to expiration kind of range so that's why I went with that

Channel: tastytrade

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Keywords: tastytrade, tastytrade.com, tasty trade, tastytrade network, tom sosnoff, tony battista, finance, options trading, how to trade options, trading options successfully, tastytrade options, financial investment, stock market, best pratices, entry criteria, Stock, Trading, Market, Analysis, risk management, Options Strategies (Consumer Product)

Id: diskN74_paQ

Length: 13min 55sec (835 seconds)

Published: Mon Oct 07 2013