Most Important Options Trading Lessons Part 1 | Market Measures

we did a segment we wrote up a segment called best of 2014 part one and since there's only one day left in 2014 that we're open which is tomorrow I guess there's no this is a two-part series mm-hmm that's about all you can do so we'll go through it fast we'll have some fun there are some there were some incredible takeaways this year and I don't want to mess them up today we recap a few of the most viewed market measures segments in 2014 we had just we're approaching 5 million YouTube views across 4 million we're approaching 5 million YouTube views now when you think about that like 3 million people watch a dog video you know and and 2 million people watch pictures of smoking Jay Cutler yeah and you know and you're thinking you know and and and 3 million people watch watch you know some somebody put a GoPro on their cat and you're thinking ok well any monkey could do 3 million videos it's a lot harder when it comes to finance yeah a little different yeah this is a little different and you don't watch things twice and you're it's not exactly oh here's a great viral video of Tony Bautista you know explaining you know probability of success it's not the same thing but we are approaching 5 million YouTube videos which is awesome and that doesn't include what people have gone to the archives on our site but we track so let's say total it's maybe I don't know 8 or 9 million views of different stuff that we've done so we don't we basically track what people watch because we want to make sure that we cover things that people are interested in and sometimes we don't always don't even make sense right you know you're the craziest response to certain things of all the things you've ever done we got the biggest response to Karen the super trader yeah a million people have over time have looked at you know Karen videos but there's you know there's a lot of other ones and a lot most of them most popular market measures and so we went back to the ones that were the most viewed segments in 2014 and it's interesting with people what people picked out first review and remember this is just the first day part 1 of 2 2014 videos October 23rd September 19th and November 13th and premium why selling it works return on capital straddles and strangles and rolling strategies which I found interesting because rolling strategy is something that that I never cared about you know I never even I never liked if you had a vote we probably would have covered it well detail years ago we wrote it become second nature there's nothing to think about I'm an extender ation I'm gonna roll so a long long time ago back when dinosaurs dinosaurs roamed the earth I wrote a course with I think it was with TP but if somebody else taught it and we did a course on kind of professional rolling strategies and we did it around the country maybe seven or eight times and it was not again I didn't teach it somebody else did and it was it was we got a decent attendance around the country and it kind of opened up my eyes but I thought oh my god this is the most boring class we've ever put together like there's nothing interesting about it and yet people would come because they liked you know that discussion so it's always stuck stuck with me I don't know sure see so we're often asked why choose to limit the profit profitability of a trade by selling premium it's the first question I had a guy in here last week and he's he's been in the business for I don't know maybe 15 years and he used to be a writer for another network and he said to me he goes what why would anybody limit profitability this was a big like like this is a big issue years ago when when financial media came out with like you know when Bloomberg like why even discuss limiting profitability what does that how does that turn somebody can Vegas talked about limiting profitability except what is Vegas you everything is limited profitability right how many people play the slot machines for unlimited profitability I mean how many people play play games where there's uneven that is limited I mean talks about the concept of limited profitability because in Vegas loaded profitability is defeats the whole purpose of why you're in Vegas mhmmm you know I live in anything right but when it comes to trading there's a very logical thing hey limit profitability to reward yourself with a better chance of winning see Vegas you limit profitability but you don't get it you don't get that kicker right you have a negative return okay so limiting profitability for a negative return makes no sense but limiting profitability for a higher statistical chance of success okay that's that's a reason right so in the world of investing most people will take limited returns like if you go to a bank let's just say and you have two choices at your bank choice number one is you can receive one percent return on your money okay one percent return in a non guaranteed cash fund money management fund okay money market fund whatever you want to call cash management fund you can receive one percent in a non guaranteed cash management fund or you can receive half a percent in a guaranteed fund okay what do you do one percent unguaranteed yes half percent guaranteed that's right in what kind of fund some money market fund by Joe Blow XYZ bank I go with one percent on I know you want me to say half in Guinea guaranteed thank you for helping beyond the statement yeah I go for I go no question about it I go for the guaranteed why don't have because because I don't want to because I before the actually habits now goodness I got listen if you're gonna pay me 10 percent if there's a money market fund whatever okay I'm just telling you if you're gonna pay me 10% verse one half a percent then you're thinking about then you're thinking about if you're pay me 1% first half a percent it's a no-brainer so here's the first study keys of money mark as an example but God first study we sold a strangle at 15 Delta's every 5 days over the past years we this is something we've done already roughly 70% of profit percent a probability property which means 15 Delta call 15 Delta put those the ones we sold we sold them every 5 days for 5 years the expiring month closest to 45 days to expiration so we just moved everything out to 45 days and we examine the profit loss over the course of the trade now again we've published this before but we want you to see was that buying strangles comes in right about 17% which is exactly where it's supposed to and a 70% statistical chance of success selling is 83 that's your that's the embedded not edge because it's not there's no there's no theoretical edge that's volatility being being bit up for that for the risk group yeah so the first thing this does is it basically reaches out to everybody that's ever traded an option and it says hey I want you to under cause I was one of the casino to publish this I've always wanted to casino cuz they don't tell you well listen if you play blackjack right by the rules steady as can be whatever at the end of an hour okay if you're playing with if you're if you're playing with a thousand dollars you're gonna lose one you're gonna lose one and a half percent okay so you're telling me at the end of an hour I'm gonna lose fifteen dollars that's the way the numbers should so if I take out a thousand dollar marker and I play everything by the books at the end of the hour I'm gonna lose $15 as are you telling me mm-hmm but in reality at the end of the hour I'm losing five I know they're not I know they're lying okay I don't know what the actual numbers are with everything ball said it but it's not 1.5 percent okay maybe it's 15 percent maybe it's further saying their edges 1.5 percent this is the real here now you have it night at least you know what you're up against in the world of finance if you buy crap you're gonna be you buy crap with a 30 percent chance of being successful it's gonna be down to be right 17 percent of the time because you have unlimited profitability now you want to know why take limited versus under properly that's the reason why if you're selling stuff okay the answer is 83% of the time on 70% so you have a 13% a little bit that's your cushion over time but you and you give up that quote/unquote unlimited homerun that's right so limited profitability gets you 83% limit unlimited profitability gets you 17% all that based around a 30% starting number so so next thing next study so now we're gonna sell the 15 Delta on days where the implied volatility rank is high and then the implied volatility rank is low because now we're gonna see if we add an implied volatility to the equation how much does that help and and basically the difference is the number of winners doesn't change the money the changes so it's the average trade almost double it's about 40% more so the average the average winner goes from 119 to 179 dollars the average loser barely changes it all and the average credits you take in for each trade goes up dramatically so what happens is you just make a lot more money yeah if you trade smart you just make a lot more money and then oh I'm sorry and but but that's one of the type of things I'm gonna cover in Scottsdale it's just kind of some of this stuff conceptually and then we can argue it we can debate it we can do it ever but next we look at straddles and Strauss laws I want to run out of time here so when we look at different strategies we also focus on return on capital because hey is this strategy worth whatever the risk is that we're taking so by utilizing strategies with a high return on capital can we more efficiently allocate a limited amount of capital that's a big question so especially when we think about the industry changing with respect to how much capital we're gonna commit to trading to start with so when comparing to market neutral strategies such as a straddle or strangle how do they compare from a Total Return standpoint we've got a lot of a lot of people checking this out so additionally can the lower expected win rate our straddle compensate by taking in more credit and how does the biggest loss compare between the two so we took data from 2005 the present which is a lot you only picking three we were picking three ETFs that are widely yeah and then we sold the one standard deviation strangle we're just showing you the difference between big cap small cap and and bonds doesn't make any difference at all with respect to results the underlying is insignificant you know as the underlying itself is not a big piece of the equation and then we did the same 45 days to expiration and what you're seeing here is that the return on capital for taking the additional risk and again this is using an average IV rank of 38% which is which is on the low side okay but you're we're just comparing risk and return on capital understood okay and you can kind of see the difference there it's almost you make double the money than you do on that's right this triangle the max biggest loss is basically the same couple arrows more on the straddle but basically the same it leans towards a straddle right what it does is it puts into perspective for people that the sometimes you can afford to take a smaller number of wins the slower trying sugar a smaller number of wins in return for in return for a higher return on capital and all this stuff because using basically the same amount of buying power yep but now we're to look at the two strategies appearance of low and high IV so we did here now as we compared the two and this is low IV mm-hm which was before there was a combination of both now we're gonna look at the IV rank is ya down by 12 or 13 now we're to look at them independently low IV this didn't make a lot of sense because because what happens here is you even though you have where's the the numbers aren't nearly as strong as I'll show you here which is you froze I need help technology breaks hey Linda there you go so with the IV rank up at so I push the button too many times you knew it was gonna do that Linda you knew he was slicing trick pony over there slide 14 it was a it was a delayed reaction I don't I was trying to do say can you take me back to slide 14 take me back to paradise city the grass is green and the girls are pretty one more slide 15 why don't you please take the back can you not sing at 69 percent Tony the the numbers are dramatically different so the return on capital is bigger the the the average return on capital is bigger the average credit is bigger the number of wins goes up and what happened all it shows you is that when you're when you're focusing on return on capital there's a very important message in there about differentiating between you know number of wins and how much money you can make but then when you do with high IV it gets even much more juicier yeah sure hmm now because the number of wins was was lower on the stretch before so the next one is rolling strategy traditional position management would suggest that rolling the testin side of a spread so is this the optimal rolling strategy or do we benefit more by rolling the untested side tons and tons of research on this one as well so we did 2012 to present in the spy in GLD we do the same same background but we rolled when tested at 30 deltas based on the following criteria so at 30 deltas we rolled up the tests that we roll the tested side up to the initial probability out to the same expiration cycle and up to the initial probability and out to the next expiration or we roll the untested side up to the initial probability in the same expiration okay we just basically we're essentially testing everything so in the process of doing that what you can see here is when we rolled up the untested side it blew away everything else that we did and that's why we roll up the into this put to bed the question why don't we move out to the following month why don't we roll the tested side this put to bed everything that we've done rolling untested side two hands down this put this was the this was this was a monster amount of capital that we committed to researching rolling strategies I don't think anybody's ever done that before and we've changed the industry with respect to how people now look at you know bad positions and we've always argued that in the professional world the first like if I was short calls the March started move against me I sold puts I was short puts in the market started move against me I sold calls it was the mechanical thing this year the professional world always said you're doing the your your figuring out what the untested side is and you're doing something over there it was automatic it was since I got to the retail world it was like oh no take this position and try to salvage it I'm like you can't salvage a car wreck you can't salvage a train wreck so what you've got to do is to ask me something else people have it wrong but we needed to spend the money on the research and we finally figured it out and rolling up the untested side was the answer the P&L per day is the dramatic number in here it's a dollar sixty six per day rolling up the average side and with only 47 days held this was a giant learning process and then here's GLG it says the exact same thing it's a dollar fifty two per day and you're talking about everything from number wins and just look at the money it's dramatic so we spent a lot of time rolling up the untested side sure sure but it's cool but it works right I mean you do because it works yeah so so after just after just after just a lot of questions on what do you do with bad mmm way to put it all together guys nice job what's up everybody thank you for watching our video you want to check out some more of our segments you should definitely subscribe to our channel which you can do right beside case as well as watch more videos or you can check out tastytrade.com next to katie

Channel: tastytrade

Views: 30,933

Rating: 4.9728355 out of 5

Keywords: Investing, Investing for Beginners, Finance, Stocks, trading, options trading, Option, personal finance, how to trade, options trading strategies, Market, tastytrade, tastytrade.com, tasty trade, tastytrade network, tom sosnoff, tony battista, Market Measures, trade research, selling premium, strangles, implied volatility, defending trades, rolling, straddle, trade mechanics

Id: 809iTf5EWRs

Length: 17min 0sec (1020 seconds)

Published: Tue Dec 30 2014