Risk Management when Trading Options through Technical Analysis and Money Management Thread

Discussion in 'Options' started by teragreg, Sep 12, 2018.

Do you set stops on the underlying or on the chain?

  1. Underlying

  2. Chain

    0 vote(s)
  1. teragreg


    Hello everyone,

    I have created this thread to share and debate our methods of risk management.

    As far as I am concerned, in this context, there are two (2) major pieces to risk management in trading options; technical analysis, which manages intra-market risk and; money management, which manages intra-account risk. This is how I manage my risk:

    Part 1: Intra-market risk (technical analysis)
    1. Technical analysis of blue chips (SPY, AAPL, BAC, FB and TSLA) to find market sentiment, trend, condition and best risk-returns;
    2. After macro analysis, I set my three (3) points of interest; the entry, the stop and the profit;
    3. The three (3) points of interest are targeted to be traded in the volatility and liquidity of market open where best intraday risk-returns exist and finally;
    4. My risk-return on the market open has a massive edge of at least 5:1, and I do get stopped out more than 50% of the time, but my winners are worth the pain.
    Part 2: Intra-account risk (money management)
    1. The best intra-market risk determined in part 1 is transferred to weekly option contracts by taking 2% of the trading account, dividing it by the difference between the 'the entry' and 'the stop,' dividing it by ATM contract delta (usually .50) and finally subtracting 1 contract to account for spread risk to arrive at my order quantity for that particular trade. It looks like this;
      1. OrderQuantity = [(2% of Account) ÷ (TheUnderlyingEntry - TheUnderlyingStop) ÷ (100Shares/Contract) ÷ (Weekly ATM Delta)] - 1
      2. Example; If my risk on SPY one morning is $0.10 and my account $1200 dollars, I would trade 4 contracts
    2. I enter the trade at 'the entry' where the market sentiment is favourable and the ticks are moving in the direction opposite of my trade to buy the contracts at the ask. I exit at the stop, no more, no less, no fucking around. I pay the account on the way to 'the profit' and the position is fully off by the time the market is still crossing 'the profit' so that all the contracts sell at the ask.
    The whole goal is to;

    a) Find the edge through technical analysis and;

    b) Give the least amount of money away through money management.

    Thanks for reading. Please share yours below.
    Last edited by a moderator: Sep 12, 2018
  2. Do you consistently make money? You don’t, do you?
    tommcginnis likes this.
  3. tommcginnis


    My brain hurts.
    yobo likes this.
  4. Robert Morse

    Robert Morse Sponsor

    I read this a few times and started and stopped a few times trying to determine how best to offer advice. Like tommcginnis, now my head now hurts a little bit. This is what I decided to focus on. Your #2. money management

    You have to have a process to rate your set ups in #1. You have to have a process to review past trades. From that information, you can manage your money management by placing more money and risk toward what works and less toward what does not work. That to me is the difference between random trading and running trading like a business. This overall provides the best chance at success. This is why I was successful over 25 years of trading.

    Good luck.
    imjohn and Reformed Trader like this.
  5. I would not classify TSLA as blue chip. Nor spy (b/c it is an index). I think proper categorization ( however you want to do it) is essential to risk mgmt.
    Reformed Trader likes this.
  6. teragreg


    Thanks for the condescension Sweet Bobby, I am new to day trading. Do you have something professional to say, perhaps about the relationship between gamma and delta per realized volatility of the underlying on weeklies? Because that is something on my mind and you certainly have the answer.

  7. teragreg


    If by proper categorization as an essentiality to risk management you are referring to the realized volatility of the underlying, I agree 100% and would like to hear you out more in this regard as this is a major question to me. To illustrate;

    How do you equalize risk between trading weeklies on an index like SPY, that has much lower realized volatility than, say, NFLX, which has high realized volatility? Because a move on SPY has the same weight dollar-for-dollar as a move on NFLX in regards to delta. The complication is, to your point on categorization, that a dollar move on SPY carries far more risk than a dollar move on NFLX. Perhaps you would use gamma?

    Last edited: Sep 13, 2018
  8. teragreg


    Hey Robert,

    Thanks for the reply. Would an exceptable process be recording the entry and exits of the underlying AND the contracts, the date of entry and quantity? This way I could run stopped-out analysis on my trades, therefore having a quality ranking system?

  9. teragreg


    Which part hurts your brain?
  10. Robert Morse

    Robert Morse Sponsor

    Whatever gives you confidence to properly manage your sizes and when to enter and exit.
    #10     Sep 13, 2018