I've had a few questions about my option trading, so here is a description of what I do. In addition to the very directional trades I make, as I have said before, I also do so called income trades.
These so called income trades are structured like the trades I did on the floor. On the floor, I made my money in two different ways:
- The edge from making markets and selling above fair value and buying below fair value. I made money off the spread I made. The more volume there was, the more I made. We - me and two traders I employed - traded about 2,500 contracts a day on busy days, usually with a tick edge at least.
- Price erosion due to the passing of time. For this to happen I traded within a very firm structure: short the middle strikes and long the wings. I had to make a choice of whether to be long or short gamma taking into account possible changes in market direction and volatility. We used futures to balance delta when needed. My usual stances was to be short gamma so I could benefit from the erosion. How short of gamma depended on my view of price movement and volatility. Of course I sometimes was wrong in my opinion and lost money.
On the floor, I was to a certain extent at the mercy of the "paper". My job was to take the other side of their trades while at the same time having a directional view, volatility view and strategy.
Since coming off the floor, I have, until the last few years, concentrated on futures trading rather than options, as the technology and liquidity of trading options from off the floor was not something I felt comfortable with. However things changed as option volumes have grown exponentially and I have done well since I started trading options again.
To trade options from off floor, I needed a strategy. I based what I do now on what I did on the floor with the added benefits of:
- being able to choose my trades rather than take the other side of customer trades
- creating a rule based strategy that is objective not subjective and that has been validated with backtesting.
- a written detailed trading plan
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