Smart Options Traders Should Match Strategy to Conditions
05/27/2014 8:00 am EST
The ability to adjust your trading strategy to handle varying market conditions is the hallmark of a successful strategy, says John Locke of SMB Training Blog.
Are you frustrated with the lackluster returns and poor performance of most so called “income trades?” Directional and trend following traders tend to take repeated losses in sideways markets.
Most common strategies such as buying stock, covered calls, naked puts, and bull verticals and collars do very poorly in down trending markets.
Most market-neutral strategies take major losses in extremely volatile and quick down-trending markets.
All of which can cause major damage to your account.
How to Recognize the Limitations of Your Income Strategy
I don’t know about you but when I first switched to high-probability vertical spreads, iron condors, butterflies, and calendars, I was pretty disappointed with the potential returns of the trades. But then I was told, “Yes but they are high probability and win most of the time” so I gave it a shot.
What I found is that when the market conditions happened to match the trade, they do win a small profit most of the time.
I also found out when market conditions change, they lose and when they lose, there are often multiple losses. Most of those losses end up being significantly more than an average win. This results in a system that fails over time.
I knew there had to be a better way.
I created high-yield, high-probability trading system called the bearish butterfly. It is hands down the most powerful income strategy I’ve ever seen.
How to Apply the Strategy in Your Current Market Environment
The bearish butterfly is an options trading system specifically designed to take advantage of volatile, choppy, and down-trending markets, as well as, sideways and mildly bullish markets.
The system is designed to handle as large a market move as any income trade you will find. The potential yield is at least three times that of your average market neutral trade.
The bearish butterfly takes the benefits of directional trading and combines them with the advantages of high probability income trading to create a high probability, high yield, positive theta trading system.
Some things I love most about the strategy are:
- There is no searching for stocks
- No need to pick direction
- No need to perfectly time the market
- No need to sit in front of the computer all day
The bearish butterfly can withstand a substantial move against the position. It can even do well in extreme up trending markets if the trade is timed to the market cycle.
Does this mean the trade always wins? Of course not, no trading system wins all the time.
But it does give the position a higher probability of winning than wide iron condors while maintaining a much better risk reward profile.
By John Locke, Contributor, SMB Training Blog