I trade on the side. I learned to trade during a time in my life when I could devote my entire attention to it. Now, I have a demanding job with long and irregular hours and young kids at home. I have little time to ponder the market in the evenings and almost no time to study the market during RTH. So what to do? Honestly, I’m still figuring it out, but here are some of the things that have proven true in my experience so far.
None of these tips are groundbreaking. They’re mostly basic stuff that good teachers, like Paul, tell every trader. If you’re a part-time trader, you should find that encouraging. It means there’s no magic bullet, but it also means that the same solid fundamentals that work for professional traders will also help you.
So let’s get into it. And if you have other tips for part-time traders, put them in the comments!
5/21 UPDATE: Rule #11. Prepare!
No sooner did I finish this post than I realized I missed what may be the most important rule of all for part-time traders: Prepare for each trading session. The more you prepare the night before, the better equipped you will be to execute efficiently the next day. You won’t have to waste time at work “watching the market.” You won’t get suckered into chasing whatever moves. Find one or two setups you’d like to see the next day and only trade if those setups develop. Set alerts. Plan the actual trades you’d take. If your platform offers this option, consider actually creating and saving the order tickets so you’re ready to go. You’ll probably trade less. And you’ll probably trade better.
1. Keep It Simple
This is the biggest tip, and most of the others flow from it. Trade one or two core strategies. Trade one symbol. Trade from one timeframe. Use options strategies that are easy to enter, exit, and adjust.
Profitability is not positively correlated with complexity; you can trade simply and do very well.
I’ll admit that I’m a nuance guy. I love the complexity of the markets and of options trading. I’ve spent a lot of time studying it, and I think I understand it about as well as anyone who’s been in the market as long as I have. But even though I have a good grip on the nuances, I don’t have time to execute a complex strategy.
2. Use Efficient Tools That You Know Well
This point is related to Point 1, but it’s more focused on execution. If you trade part-time, you want to spend as little time as possible tinkering with your platform. You need a setup that: (i) conveys the information you need to execute your strategy in a format that lets you “see the pitch” clearly and (ii) allows you to execute your trades quickly and accurately. That’s it. Everything else is, at best, a distraction.
3. Trade Small
You will make mistakes–especially when you’re trading part-time. You’ll fat-finger an order. Or miss a sign of a major market reversal because you’re in a meeting. Or leave a trade on during FOMC that was not nearly as hedged as you thought it was. Trading small keeps those inevitable mistakes from killing your account.
Your job is not to make massive profits on every market gyration. Your job is to protect your capital and hit base hits. Occasionally, you’ll find yourself in a perfect position that you can ride for all it’s worth, and that’ll be fun. But trying to force that outcome for every trade is the path to ruin.
4. Buy Retracements, Not Breakouts
If you stick with Vega Options for long, you’ll hear this mantra often. Breakout trading is a legitimate trading approach, but it’s definitely not a good idea for the part-time trader. Trading breakouts is often a fast-moving strategy appropriate for full-time traders who trade very small timeframes on which they can effectively manage risks. If you trade part-time, you’re probably trading larger timeframes (30 minutes and up). Effectively trading breakouts on those timeframes is hard work. Trading retracements will help you to control risk and get better pricing on your options trades.
5. Make Sure Your Positions Remain Within Your Risk Parameters Over Time
One of the things that drew me to Vega Options was Paul’s skill and creativity at using options to increase leverage while decreasing risk. We decrease risk in two ways. First, by trading out-the-money structures that rely on gamma and theta to increase their leverage over time. Second, by delta hedging successful positions.
This is all great stuff, but it’s inherently way more complex than trading delta-one securities or ITM options. The primary complexity is that Vega Options positions evolve over time. As price moves and time passes, a position that started out mild will become increasingly aggressive. That’s what we want! But you have to be stay on top of your positions to make sure you don’t back yourself into positions that exceed your risk rules.
Here’s a simple check: Every day that you hold a position, ask yourself “Would I be happy entering this position as a new trade?” If the answer is “yes,” then great! Buy right and sit tight. But if the answer is “no,” then you need to adjust the position or close it.
6. But Be Wary of Over-Elaborating Your Positions
Rolling, hedging, and morphing positions is a big part of Vega Options, but you have to use these tools carefully. Every roll, hedge, and morph is a new position that should be entered with the same care and analysis as your original position.
Whenever possible, favor adjustments that simplify your resulting position. It’s easy to get carried away trying to hedge your way into the perfect position, and you can do more harm than good. If you get to “adjustment happy,” it’s easy to lose more money on your “hedge” than you’ve made on your original position!
If you’re managing a multi-leg position, break it into its component parts and look for subparts that no longer offer a good risk-reward and consider closing those parts. If closing those parts would leave you with more risk than you’re comfortable with, that’s a good sign that you shouldn’t be in that trade at all–the “hedge” isn’t doing any real work, it’s just tricking you into thinking you’re in a safer position than you really are.
Also consider how hard it will be to close your position quickly, should the need arise. If you have numerous, multi-leg positions–particularly time spreads, it can be very difficult to get out efficiently if the market gets volatile. Make sure you have a plan.
7. Have a Bailout Trade Ready
About that exit plan. One option is the Flatten All Positions button on your platform. Know where it is. If you need to use it, use it. You may have to eat an ugly bid/ask spread, but that’s better than sitting in a bad position.
Additionally, consider Paul’s approach of always having a trade cued up that would flatten your current beta-weighted delta. Keep this trade simple–long puts or calls or vertical spreads. The idea is that if you suddenly find yourself in an emergency, you don’t have to unwind a complex, illiquid position. Instead, you throw on a simple hedge that controls the bleeding, then unwind the position in an orderly fashion over time. If you do this right, it will save you a lot of money.
8. Be Sure You’re Trading the Greeks You Want To Trade
There are a lot of options greeks (I can think of nine). At every moment, all of those greeks are acting on each leg of your options position. You don’t need a masters degree in options greeks to trade well. You do need an intuitive understanding of how the greeks work in the real world so that you can know which of those greeks is driving your options position.
Try to structure your options positions so that the the greeks of that position align with your thesis for the trade. If you’re thesis begins and ends with “I expect $SPX to drop here,” that’s great. Your thesis is directional, so you want an options strategy that’s drive by delta. What you don’t want is structure that’s drive by vega or theta. You have no thesis related to volatility or time, so you have no business trading them. Your ideal position will be driven by delta, and will hedge against vega and theta.
Time spreads are a great example. Time spreads are really powerful, and Paul trades them often and well. But it’s important to know that time spreads are complex. They look simple because they only have two legs, but they are much more complex than verticals, butterflies, or condors. The legs of those spreads are clustered together within the same expiry, which means that the legs of the spread are direct hedges that prevent any one greek from dominating the trade. This makes them predictable and stable, especially early in the trade. The legs of a time spread sit in different expiries. this means that the legs do not hedge each other nearly as much. Instead, your position will be subject to strong cross-currents of delta, gamma, theta, and vega (for a start), each of which is acting differently on each leg of your spread. If your trade thesis doesn’t account for those greeks, then you have no edge in trading them. Best to steer clear.
9. Be Very Careful with Your Vega
This point is related to Point 7, but it’s so important that I think it deserves its own section. We often focus on delta and theta, but options positions can be made or broken over Vega. That doesn’t mean you have to be a vega trader. But it does mean that you should have a general understanding of how volatility typically behaves in your chosen security. What’s a typical range for IV30? What does the term structure usually look like? What is the typical skew? How does vol usually move around OPEX or earnings. This is especially true if you want to trade positions (like time spreads) that have significant exposure to vega. (See point 7.)
Keep an eye on your greek ratios–not only when you open a position but also when you adjust it. It’s easy to hedge your way into a position that has many times more vega than it has delta or theta. That’s not necessarily bad. Just known that you are now in a vega-driven position. If you don’t have a specific volatility thesis that aligns with that vega exposure, then you’re in the wrong position. It’s disheartening to be in a beautifully-hedged position with a wide, flat T+0 line only to end up with a loss because the vol floor fell out of the market.
10. Adjust Positions When You Can, Not When You Have To
When you hold complex positions, it can sometimes be hard to obtain fair value for your position. This is particularly true when the market is whipping around. If you get trapped in a complex position when the market turns sour, you may find that the bid/ask spread doesn’t remotely resemble fair value. If you have to market out of a position during one of these volatile periods, you’ll probably get soaked. (Some platforms, like IBKR will seek out the fair price for you, but most platforms won’t–they’ll just hit the NBBO, no matter how ridiculous the quoted spread may be.)
You can avoid this situation by using options calculators and actively working limit orders. You can also sometimes use options pricing rules to convert positions or build box spreads that neutralize your position or make it easier to exit, but those are topics for another time.
The easiest way to avoid this risk is to adjust your positions when the market is moving in your favor. That way, you’re well-positioned to ride out the storm.