It’s funny how non-directional  options trading differs from many other kinds of trading.

For example,  most forms of   trading require price  change to be taken advantage of by the trader.   Day traders salivate when they look at charts that are vertical, in either direction. Directional options traders are the same way.  But,  non-directional options traders normally do best when the market is channeling.

Similarly, the greater the  number of volatile days there are in a month, the happier day traders are–it provides them with so many opportunities to catch price movement. Whereas income options traders, once they’ve entered a trade, want the opposite. We prefer as few volatile days as possible once we have actually initiated a trade–that calm in the market  allows time to pass and the time decay of the short options that we have sold to accumulate.

What is counter-intuitive about income options trading is the fact that once we get into a trade,  we are looking to exit, as quickly as possible. Why? Because the more time the market has to play havoc with our trade–by moving strongly in one direction or another, thereby piercing through the profitability zones of the trade structure,  the  more difficult it will be to exit a trade profitably.

One of my favorite income strategies   is  the “55 day bearish butterfly” (which I have demonstrated   in the past  on this blog as some of you may know).   The premise of the trade is that in most bull markets, there are pullbacks. The trade is designed to take advantage of those pullbacks by placing the profitability zone of the position somewhat behind the current market price.

My particular variation on this trade involves two phases. In phase one, I stay behind the market until the almost inevitable pullback occurs–I wait for my profit level to reach 10% of planned capital and then I  “trap” that profit and move into phase two–what I call the “milking” phase. In this part of the trade, I become extremely conservative as I have made my target profit for the  month. I’m willing to expose a quarter  of that target profit to  market movement  ( in exchange for a possible  further doubling of    profit if things go really well). However, I’m not willing to drop below a 7.5% gain for the month once I’ve reached my 10% profit.

This month, I reached the milking stage   twelve days into a trade that can go as long as 55 days in the extreme case. This is very early to reach the target profit on this trade, but it can and does happen. And so, while I am still exposed to some extent, the trade is largely over–it’s just a matter of whether I can manage to manipulate the position over the next month or so to squeeze some more profit out of the trade, applying a trailing stop as the profit picture improves but allowing only the most extreme market moves to rob me of more than a quarter of the target profit I have set for  the trade.

So on this trade,  in the words of my first options mentor Dan Sheridan, “I’m “sittin’ on the front  porch sippin’  iced tea”  12 days into a 55 day trade.  Now that’s what I’m talking about……

Here at   SMB,   we are busily putting the finishing touches on the Options Training Program  and we are now officially on our 10- day Countdown to launch. We’ll be making some exciting  announcements shortly  as the launch day approaches.  We really look forward to your becoming a part of our options community.  Have a great weekend everybody!

Seth Freudberg

Director, SMB Options Training Program