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Best Practices

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

The factors we need to consider when we are placing a trade includes developing a directional assumption, considering ideal IV environment, identifying optimal time frame, and choosing appropriate delta.

According to our study on SPY, the probability of its upward movement in 30, 45 or 60 days is much larger than the probability of its downward movement. However, this doesn’t always entail a bullish trading strategy because there is a much larger probability of downside outliers, which implies larger downside risks for bullish strategies.

And based on our study in 16 delta put on SPY, the optimal timeframe that gives us the largest average daily P/L is entering at 45 DTE.

We recommend different IV environments for different trading strategies. Typically, we look to sell in high IV Ranking underlyings to collect higher premium. This method has a higher average daily P/L and higher average annualized ROC when we are entering the trade when the IV Rank of SPY is larger than 30.

We need to choose appropriate delta based on our risk preference, because delta approximates the probability that a simple call or put will end up ITM at expiration, and it also measures to what scale option value will change with regards to $1 increase in stock price.

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