Best Practices

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Trade Mechanics for Entry & Management

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.

When entering a trade, we aim to check the following characteristics for each underlying:

  • Liquidity
  • Implied Volatility
  • Price
  • Strategy

When it comes to Liquidity, we avoid illiquid underlyings because those underlyings place a drag on profits when opening the position as well as managing the position. We prefer to stick with liquid stocks that typically have “bid” and “ask” prices that are only a few pennies different in price.

To determine whether to buy or sell premium, we use an IV Rank indicator to signal high or low implied volatility (IV) relative to an underlying's past Implied Volatility. Selling premium when IVR is typically high reaps better profits than when IVR is low.

The price of a stock has an affect on the buying power in a portfolio. An expensive underlying can take up a big portion of a portfolio’s buying power. For directional bias, if a stock has had a large run up (or run down) the outlook may be bearish (or bullish) and Tom and Tony will look for reversals.

Additionally, past research we've done can help us indicate the optimal times to place a trade according to IVR, Directional Bias, Probability of Profit and Buying Power Reduction. Specific stategies also have specific profit targets that we aim for when closing a trade.

Last but not least, we prefer placing Limit Orders as opposed to Market Orders since they allow for enough time to get a fair “fill” price for the trade and it helps avoid getting caught up in short-term price movements.

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