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A THREAD:

BEST OPTIONS STRATEGY FOR CONSISTENT INCOME -

OPTIONS WHEEL STRATEGY

Everything to know about this strategy I'm posting in this thread.

(1/12)

Step 1: Stock Selection

1. For this strategy you're going to have to choose some stocks that you think will be doing well in the future/long term.

2. Stock must be in an uptrend.

3. Stock options should be liquid enough to trade in.

4. List of stocks attached

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Step 2: Which option to sell?

1. Sell put at a support according to charts.

2. Sell put at a strike far away from the spot where you think the probability of the stock falling will be very very low.

3. Sell put at a price where you're willing to buy the stock at.

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Step 3: What to do when in profit/loss?

1. If in profit you can just roll up the puts thereby increasing the ROI or shift to other stocks to make more profit.

2. If in loss take delivery of the shares equivalent to the lot size in cash market.

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Step 4: What to do after taking the delivery?

1. Sell calls to lower your cost price of the stock. For eg, you took delivery of Reliance at 1900, sell 2100 CE which is about 10% away.

2. Keep doing this till your CE expires ITM and then give delivery of your stock away

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In my 20 years of trading I have noticed this cycle play out again and again with traders that "make it":

1. Overconfidently reach for returns
2. Get humbled by the market
3. Simplify + concentrate on clear, high probability edges.

1/n

Nearly everyone starts with a lack of respect for how hard it is to consistently make money trading.

That leads them to pass over high-probability sources of returns in favor of more marginal ideas.

Or they overcomplicate the trading of a good edge.

2/n

Here's an example...

It is 2015. You look at a simple strategy.

You hold an equal dollar exposure to:
- Cap Weighted US Stocks (VTI)
- 20+ Yr US Treasury Bonds (TLT)
- Gold (GLD)

And rebalance each month.

(I've extended back a bit with mutual fund prices.)

3/n

It made money consistently with a few blips.

You'd have 4x your money from 1997 to 2015.

It makes sense. It's harnessing two big sources of risk premia (equity + duration).

It diversifies across 3 macro assets that tend to outperform in different econ environments

4/n

But, naturally, you turn your mind to how you could do better...

And here is where it gets dangerous!

There are good ways to try to "do better", and there are bad ways to try to "do better".

5/n

FINDING EDGE IN OPTIONS

24/08/15: Nifty gap down 250 points & another 250 after that. Previous few months return gone, but since I'm quick to take my losses, was saved from ruin. Before that my only edge in option selling was adjustments & my forever edge of following PA. (1/n)

I soon realised that theta decay with sound adjustments is not an edge, which i earlier thought was & which gave me good returns over the years. After that i went deeper in understanding volatility behaviour, how/where it manifests & all the discrepancies in option chain. (2/n)

With finding edge in logistics i mean how to keep the greeks in check, SL in place & optimum ways of adjustments with minimum slippages. So the main aim here is to write theta without following vol behaviour & having any actual knowledge of what's going on in the markets. (3/n)

A dedicated trader can learn all this in few years & it is something which is 'obvious' to become successful. But majority can't reach this level, as this also requires consistent hustle in live markets. All the seminar/webinar business teaches you till this level only.(4/n)

If you get passed this level though, the real work starts, when you have to find your real edge. This can't be taught in a webinar. It needs serious introspection of your trading skills, psychology & strategies in use, which ultimately allow you to book excellent profits. (5/n)

How position sizing can affect your trading performance-

Assuming that you are trading a Trend-following system with Big RR and low win-rate.

For example, assume that you risk one percent per trade on a 100,000 account
and you have 20 straight losses.

That one percent is of your remaining equity and at the end of 20 losses, you would be down to 81,790.60.

Now if you got a 30R winner and you are risking one percent of your balance of 81,790.60, your new equity would be 106,327.9,

You’ve had 20 losses and one winner though you are still up 10Rplus your equity is up by 6.3R percent.

Now, let’s say you risk five percent per trade on your balance. At the end of 20 straight losses, you would be down to 35,772.89 or down 64 percent.

If you risk five percent on this amount and get a 30R winner, you would be up to 89,621.48. You are up 10R, but because of your position sizing, your equity is still down over 10 percent.

#positionsizing
#Trading
#nifty50

This is why position sizing is the most important factor in trading if you get it right and you have an edge, you will do good.

Thanks for reading till here.
@AnandableAnand @jitendrajain @quatltd @sohamtweet