How to Trade Earnings in Smaller Accounts

playing earnings with a tasty bite size account tasty bites counts if you're new to tasty trade well first of all if you're new to taste you're welcome howdy welcome thank you we're the fastest-growing we're the fastest-growing weak ourselves an alternative financial network we deal with strategies and we deal with I like to call a practical application of of financial strategies we couldn't care less about business news it's irrelevant to us we really focus on the what I think are the the mathematical side the logical side and I'm Tom saws knife he's Tony Batista that was banana Logan and we've got a about 60 people here all told and we do everything from our own software development which is dough all the way down to our own production everything here is done in-house good we have no outside contractors resource nothing we do a hundred percent of everything and how we don't have that and we do everything in-house and we basically are tours so we don't share anything we're not this is not a we don't make anything right well we don't business we don't share either which is important so we're not taking information from other places we're not we're not promoting other people we don't share your information okay we are very private and we think it's important and we do our own thing and we don't care anybody says because I think that's the most important thing playing earnings with a tasty bite account we call it tasty by TKO 25,000 bucks or less and it may be twenty-five hundred dollars it doesn't matter the minimum size account by the way for anything we do here in taste trade is two thousand dollars and the reason is two thousand bucks is because that's a FINRA minimum four margin accounts one of the nice things is people that have started to watch tastytrade in the past and weren't able to get permission and things like that for trading these kind of strategies with small accounts well we've worked through this one of the reasons we built dough was there is a series of questions and educational material built into dough and one of the things we did is we sat down with TD they were the only firm well they'd only firm we even considered because we've built a lot of technology that they now use but they're also one of the only firms that understand us we did as we built into the backend of tow a way for you to go through the educational piece and as long as you watch the videos and complete the educational section in doe which we call dojo on there we didn't have to pull it up right now but we'd call dojo and when you get to the dojo piece you can go through the whole thing and you will automatically go to what they consider to be level tier 2 it's correct so you'll be able to trade spread it's it's it's like a limited limited permissioning it's not Tier one all you can do is buy options or do covered call it hears you get there are three of them or - there's only three tiers so so tier 2 lets you do anything spread wise pretty much anything anything would define risk anything that you can do kind of in a retirement account is what you can do in tier 2 this is the first time and this is one of the special things about DOE there are people that don't go through doe that have retirement account they're not allowed to trade spreads I understand that so but anything that you could do in a retirement account is this level of tier 2 it's like limited margin that's we call it the reasons I bring it up is because I want you to I want you there's there's different distinctions what's neat about this is the first time that any brokerage firm has has figured out how to do this lecture or had it had to approve off of an electronic permissioning so we've done is we've taken out all that that all that that whole arbitrary piece oh I like you I don't like you yes yes no type thing and we've essentially said hey you go through this you watch this you complete this and you'll be approved and it's completely free of course and it's on dome yeah of course because the people know we're reading your mind that have never been on though they haven't checked it out okay so again commission rate well get inside a second I the most important thing for now is so there's a lot of people out there with small accounts that say it's the same thing how can I have experience if I can't get a job okay how do I get experience if I'm not allowed to do something well we understood that which is one of the reasons we said you know what just hang with us for a while let us build this and and I think the people at TD are very clear the concept and they understood that which is very hard for them to do it yeah so we built the whole thing out it's very slick it's very clean it's all part of it's called dojo and you'll you'll like it you'll even recognize some of the people in there and you go through the whole dojo series if you're a new trader with a small account and you'll be permission for level two you've been watching tasty trade for a short period of time you'll be able to breathe so this is the first time anybody's in the industry has ever done this we did this for you guys and you have permissioning already I think I do okay good but there's lots of cool stuff coming and that's just one of the first things to introduce to you so everybody been permission to do anything virtually anything we can do on tasty trade not necessarily naked options but all the spread types so there are no more rejections all I didn't get approved I got shut down that kind of thing and a tasty buddy count again 2000 is the FINRA minimum 2500 is the pattern date 25,000 is the pattern day training minimum you have to be somewhere in between correct okay then that goes with that has nothing to do with any firm that's just industry regulations okay so while earnings trades are not the core component of our overall strategy overall trading strategies they can help us keep us engaged in the markets and when the markets are quiet when markets are volatile necessarily well there's not a lot to do there hasn't been a lot to do lately it's traditionally they can add to our returns with strategic place when realized volatility is lower than implied volatility which we're hoping we see that big reversion to the mean in 2014 with earnings trades and larger accounts we often sell individual options with a directional bias or strangles for a more neutral place such trades are capital intensive and they are not necessarily accessible in a tasty bite size account so to tasty bites account we have to make sure that we have the capital available to make a few earnings trades as well as everything else they want to do and you know we have to be very conscious of how much capital we use for each trade so let's apply this in the best the best way we can because of this tasty bite traders can use spreads such as iron condors for or for directional or neutral place respectively it is iron condors we'll look at today as we attempt to capture the volatility collapse that follows a binary event it doesn't have to be a full-on Condor you just sell call spread you just saw put spread but for the purposes of getting the largest credit with the least amount of risk directional risk we decided today we'll focus on an iron Condor and tasty bite-sized account you know money is an issue in any size account whether it's millions of dollars or it's a couple of thousand dollars but when you do an iron condor you only margined or you only need to hold a risk on one side because the stock can only close either up or down through one of your call strikes or what through one of your put strikes so we do an iron Condor you're actually using only the same amount of margin or same amount of buying power that you would have used if you only did a call spreader if you only did it puts bread so it's beneficial if the first trade I ever made was a losing iron Condor I would have saved two years of learning I repeat that if the first trade I ever made in this industry was a losing iron Condor or the first 10 trades I ever made we're losing iron condors I would have added two years of successful trading to my career I can understand that you're saying cuz you use the capital we've been a lot better I used capital in the worst ways I just selected strategies in the worst ways I spend so much time trying to figure out what works best for me that I had no idea how to strategically use different derivatives so again if my first couple of trades ever we're losing iron condors I'd have been a hundred times better off so that's how we think about this do I use a lot of earnings iron condors now no none practically hmm now I can't even remember last time I did earnings on Condor probably a year and a half ago but that's irrelevant because again this is all part of the process to get you ramped up so we have to then assess which iron Condor works best around earnings we could use a general rule of thumb one-third the width of the strikes however given the binary nature of earnings and the susceptibility for outlier events is there a different iron Condor strategy that is better suited for earnings in a tasty bites size account to test this we decided to investigate the iron Condor collective 1/3 the width of the stripes compare it to a chicken iron Condor which we call we only call that because it you take in more credit so you have less risk and a one standard deviation iron Condor so here's what we did and a lower probability of success so here's what we did we went out and we said let's do a really wide iron Condor one standard deviation let's do a really narrow iron Condor in iron condor at basically a 50-50 and then we'll do the regular one through the width of a strike and see which one works best pretty good what else you gonna look at right I mean you know I basically have far out in the middle and close that's it so we looked at four higher priced underlyings that are still playable with defined risk in a tasty bite account we went back three years in Apple Amazon ma and Netflix now the reason we did this we were back and looked at seven cycles three years but the reason that we did this was so that we could get to that one standard deviation iron Condor just because we want to for the purposes of correct and these are high priced stocks me and not not necessarily high priced meaning that they're high and going lower they're just big stocks and at one standard deviation you can get a credit that's worth something all the way if you do something on GM you're gonna get six or seven cents it doesn't make sense the max risk by the way any of these trades I haven't even looked at it but I'm guessing it's gonna be around three hundred and thirty five dollars so we sold each iron Condor on the day of the earnings really taking it off the next day and here are the results now again there's a there's a really important takeaway here the chicken iron Condor P&L what now remember this is three years of data this is 43 different occurrences this is one single contract and the biggest loss is the inverse of the width of the strikes and the credit received from five-dollar white strikes in these cases we took in one hundred and thirty dollars or whatever was so just because that's probably what was there so you took 130 your risk you 373 those your max losses just so it just so makes sense the chicken iron Condor you're taking in half the width of the strike that's why your max loss is less the fascinating thing about this was the chicken iron Condor was supposed to have about a win rate of about somewhere between 55 and 50% let's see 52 and a half it was actually 58 the 1/3 of the width strike iron Condor was supposed to have a win rate of 67 and it was only 58 the one standard deviation I kinda was supposed to have a win rate of 82 and a half per surrey of 68 percent and it had 68 percent so so but the problem with it was that you only made a small amount of money on that one standard deviation on Condor so the funniest thing about this was the biggest payout which let me slice of it this is completely my last guess that's correct if you were gonna go with one of them you probably would if you were gonna put them in order you probably would have went one standard deviation as number one one-third reverse order pretty much the coolest thing about what we do here is we try to bust up some of the myths some are logical some whatever not right now this is only on for stocks for high-priced stocks for high-priced stocks over three years 43 occurrence is this legit study I mean it takes a ridiculous amount of work it takes it takes multiple people eight hours this is this is 25 hour 25 man hours of research to do this chick and iron condors paid almost $1,000 whereas because the the expectation it beeped at its expectation for a return and in the process of doing that because the payouts were so much greater the 1/3 the width iron Condor got killed and the chicken iron Condor made money which in a binary played out changes the way I think agreed because what they're basically saying is that when you're wrong you're really wrong right and when you're right you're really right - right because it's a binary event it happens immediately right so make the coin while you can that's right okay which we never had done before we always tell the wise we can go on the iron condors call yourself a trader you call yourself ya know I'm not a trainee told me yesterday I'm not a trainer you you're a trainer but you call yourself a trainer I found this to be really interesting because it was in almost in reverse order to what I thought the net results would be I thought I'd be surprised the chicken iron condors were 58 percent mm-hmm now here's kind of because I thought 52 and a half would be would be reaching well with the market we've had over the last three years going and basically one direction let's just call it up for the better half of the the whole process here you would think that maybe that win rate would had actually been lower I love the risk one to bake one I just didn't think it was as zippy 50 I didn't think it was a statistically strongest collecting one-third the width of the strikes during a binary event and I was wrong I liked the one save deviation remember having to say you're sorry we were wrong so it's okay don't worry the one standard deviation Kandra that you always used to tell me was the best one you were wrong

Channel: tastytrade

Views: 24,924

Rating: 4.8620691 out of 5

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, Get Tasted, Tastybites, Earnings, Trading, Options Strategies (Consumer Product), Market

Id: Mrx7fApr0MM

Length: 13min 40sec (820 seconds)

Published: Wed Jan 08 2014