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Perhaps you see the value and potential in options trading, but you’re not ready to take the plunge? Are you reluctant to start, feeling like already have too much on your plate? Or maybe you're very lucky and love your day job and want to do both.
I think you can get there with a few, practical options trading time management tips.
While your reason to juggle the day-job/options-trading-job may vary, the challenge remains: how do I manage my time effectively in order to be successful at both? Obviously you cannot sit trading all day at work – that's a sure way to get fired. On the other hand, you can’t neglect your options positions each time you have a hectic week.
The 10 tips that follow have helped me tremendously over the years balance the time requirements between my own career, entrepreneurship endeavors, and options trading. Many are hard-learned lessons, while others are more straightforward. My hope is that these tips will be equally useful for you.
Options allow you to play markets, commodities, and companies to the downside, upside, or sideways (i.e., no change at all).
This is incredibly powerful when compared to stocks where you can only profit from anticipating an appreciation or depreciation of the stock. This is what pulled me into options initially. See, I didn't enjoy "picking" stocks. First, the research took tons of time. Second, I was constantly concerned I was consuming biased information. Finally, while trend trading was profitable when I got my start during the dot com boom, it was an eye-opener to first experience gaps over stop-losses and trend breakdowns.
Learning that you can make money when stocks go "nowhere" vs. the "up-only" variant was incredibly empowering. Soon every optionable stock became a trading candidate. The only problem is with so many expiring positions in the portfolio, how to manage them effectively and ensure that the portfolio's overall exposure is still delta-neutral?
Introducing technology! It is simple these days to beta-weight your portfolio to your benchmark of choice to check your portfolio's delta. Which benchmark to use? I use the SPY like many other traders, but any index would work so long as you use it consistently.
If you beta weight your portfolio and delta starts to go negative (i.e., you’re now getting short the market) then you have the opportunity to make your next trade a slight long bias to bring the portfolio back to neutral.
Managing your portfolio's overall beta-weighted delta is a powerful way to keep a neutral outlook and prevent you from chasing trends.
Well because markets go up and down and usually end up nowhere at all. Think about it, if the average return on the S&P is around 6-7% per year with dividends of 2-3% then that means the true directional move is less than 5% per year. A slightly-positive portfolio delta in a bull market and slightly-negative portfolio in a bear market will position your portfolio for maximum profitability.
If you're a directional trader, the majority of your time is (or should) be spent on research for trade entry and position management. If you're properly diversified, this can quickly become a full-time job. On the contrary, a directionless portfolio allows you to largely divorce yourself from market news, individual company news, analyst upgrades and downgrades, and technical analysis. Imagine how much time that would save you?
When you sell more options than you buy you'll have time working on your side. You might be thinking: "What about spreads". Notice the important distinction of selling more than you buy. Spreads are a great way to manage risk. If you stick to credit spreads, you're still a net-seller of options as you're selling a bigger option than you are buying.
All options have ‘time value’ (also called extrinsic value) associated in their price. Assuming no dramatic moves in the underlying stock, when you own the option you pay as the clock ticks; as a net-seller of options you're paid.
More than saving you time, being a net-seller of options provides you a piece of mind and affords you more situations where you can respond to the market at your own time.
If you’re familiar with the time management technique of “batching tasks” then you’ll appreciate the power of trading on your own timing.
Imagine you’re stuck in a meeting or a crisis comes up at work. As a net-seller you are assured that the option has made you some time-value each day despite what the markets are doing. Of course, you can lose money on a day (i.e., the markets move more than the time decay pays you) but at least you always have time on your side.
When you're a net-buyer of options you're always fighting time. You pay (lose) money each day for the privilege to hold those option. This is true despite the direction the stock moves.
Buying options will force you to be more active and take more decisions as the market demands vs. at your convenience.
For traders that are looking to manage their time while trading options, being a net-seller is usually a better choice.
This is especially true when you’re beginning to trade options. It is wise to start trading mostly defined-risk spreads as briefly mentioned above.
These can include: credit spreads, iron condors, butterflies, broken-wing butterflies, calendars, etc.
The value of these types of spreads will change much slower with the same move in the markets when compared to naked option selling and buying. In addition, using defined-risk spreads will cap your maximum loss at the time of trade entry and not subject to gaps over a stop-loss order.
Defined risk spreads are not only great for risk control but also great to help you minimize the amount of time you need to spend managing your positions.
As you become more experienced, you can then work in undefined risk trades (short puts and calls). Why undefined risk? Higher returns on your risk capital – especially if you have portfolio margin on your account. You'll know when you're ready.
Brutus can rank options trades for both defined-risk spreads as well as undefined (naked) strategies. Later when you're ready to transition to high-risk-high-reward strategies you can add more strategies to include this in your investment mix.
Similar to the tips above, we're looking for opportunities to manage our portfolio on our timing versus the market's timing. Unless you can be glued to the computer screen during market hours, it will be difficult to manage many naked positions.
You might be thinking: "Yea, but I can't afford to lose the maximum loss on a defined-risk spread". Well, then to me that means you're trading too large. In general, I go into a trade where the margin required is 1-3% of the value of the portfolio with no more than 50% of the total portfolio invested at any time. This usually equates to 30-50 open trades in any snapshot of time.
The more capital you have to work with, the easier options trading will be. There’s no way around this fact and I don’t mean to be discouraging if you’re starting with a small account. I often get the question from friends and beta users on how much money is required to trade options. I will tell you honestly, as I tell them, that a broker requires $2,000, but this is a very, very small account and will be difficult to manage.
I would recommend $10,000 as a minimum. $25,000 is even better. $125,000 or more is ideal. Why this number? Because it is the minimum required for portfolio margining versus “Reg-T” margin.
What’s this have to do with time management? It’s human nature to exhaust extra energy (and time) when we have more risk in our lives.
With a small account, you need to spend extra time finding appropriate trading vehicles for your account size so you can keep appropriate, small, diversified positions in your account. Small accounts almost always lead to trading too large with more stress, more energy and time wasted.
With options trading like any other form of investing, you should only invest that which you are (in theory) prepared to lose. This why we always recommend that traders invest in small positions.
The course of developing into effective trader can be very exciting. Keep this excitement at a healthy level. You should never risk your house or your kid’s college fund. Might sound obvious now, but many have fallen into the trap of overconfidence and the allure of striking it rich overnight. Don’t become a statistic!
Most people use stop orders to prevent losses and help them sleep at night. However, if you've used stops before, think about the emotions and thoughts you have as the price gets close to your stop loss?
Usually (I’ve certainly been guilty of this in the past) you nervously watch the stock in a panic that you’ll be stopped out or (even worse) you adjust the stop not to get stopped out only to be stopped out later at a worse price.
My take is that stop-loss orders force you trade on other people’s terms and forces you to take a loss when you should focus on repairing, not leaving the trade.
Stop orders aren't always effective. The if the stock or options move dramatically it is possible for the stop to be "gapped". It also requires discipline not to move the stop - which means you'll constantly fight trader emotions - a time and energy consuming battle.
What to do? Consider managing risk at trade entry. This can be done by entering small positions as well as using defined-risk spreads.
When most traders think of risk management they automatically default to various types of stop-loss orders.
I believe that it is much better to manage risk at trade entry. That means that you deploy small amounts of your total capital so that you are comfortable with any movement in the underlying.
First, stop orders take time to place and are especially difficult if you are using spreads (if at all possible with certain brokers).
Second, worrying about your stops when the underlying approaches wastes time and energy that you should put into trade management and finding new, profitable trades in order to properly manage risk and portfolio delta.
Technology (well, good technology) makes all our lives easier and save us time. The same is true with your trading life.
So what are the essential tools of the trade? For me, it starts with a good broker, which is the foundation for all your trading. Do you think all brokers are the same? I'll share my journey shortly..
Beyond the broker, you'll need a good suite of options trading tools which includes: An options trading platform (via the broker), search & analysis tools, and, finally, portfolio management tools.
I use TD Ameritrade after a long journey of evaluating multiple discount brokers. In theory any broker can make your trades, but when you start to consider their reliability and infrastructure, the 'cheapest' brokers start to fall short.
I grew quickly out of my first discount broker because they offered no options trading besides covered calls and cash secured puts (this was many years ago, so they probably offer now).
My second discount broker was even cheaper than the first and offered all the options trading levels I desired. I was in love with the fees, and thought I could increase my yearly return with the discount. Boy was I wrong.
Why was I wrong? This horror story starts with me day trading options at expiration
note: this isn’t a strategy I use anymore, but I read a book on the subject and was getting more aggressive after a couple successful months.
My broker’s website appeared online but orders weren’t being accepted. After calling the broker, waiting on hold for what felt like an eternity, then having the slowest trade desk rep confirm my order 3 times, I finally got my closing trade off – for a $12k loss. For some that will sound like a lot and others it will sound like a little – but the point was it was enough to pay for the difference between the best-in-class and the super-discount broker commissions for lots, and lots, of trades.
Been with TDAmeritrade ever since and never once had a problem. I'm not recommending TD, but rather share this story to stress the importance of going for quality vs. deep-discount. I'm also not including a referral link as OptionAutomator isn't interested in this - we're interested for you become or grow as a successful, self-directed Options Trader. As you become a more confident trader, I believe you’ll see the value in the Brutus Options Ranker - whether this is with the free plan or with one of our various premium upgrades.
Besides efficient executions, you're broker also needs to bring a great trading platform to the table. Here are a few important things to consider:
1) Desktop & Mobile Native Apps
Make sure your broker offers a robust trading platform that is available as stand-alone software and mobile app and not through a web browser like many discount brokers offer. This will save you loads of time.
Make sure your broker has great mobile tools for trading as well. With mobile, you’ll never miss a moment to execute a quick trade/close/adjustment – think coffee queues, lunchtime, and the grocery store line.
Anytime you feel tempted to pull out your phone and check Facebook, email, or play a mindless game, you can add a quick check of your positions into your routines.
2) Quick Access to Real-Time Data
In addition, make sure your platform can quickly look up options chains and display all relevant data (the Greeks, probability of touch/profit/out of the money, and so on). If you're loading multiple webpages to get this data or using custom spreadsheets, then you have major time-saving opportunities you can realize.
Many brokers offer scanners and position analysis tools within their platforms. This is a good start, however in full transparency, this is where our interests collide. At OptionAutomator we're developing an automated options screener which both analyzes and ranks options trading opportunities based on decision-making algorithms unique to a user's trading strategy. We're also working to integrate this tool with TD Ameritrade and other brokers. OK, enough with the plug, back to time management.
The Brutus Options Ranker not only provides you a force-ranked list of the most relevant options trades against your personalized strategy, but can also generate order codes which can be directly pasted into ThinkOrSwim.
Another must is to have portfolio management tools integrated with your brokerage platform. Features such as portfolio beta weighting (discussed above) as well as tools to visualize your risk exposure and diversification. However, I must admit, I haven't found a solution meeting my expectations and think it could be dramatically improved.
Keeping a steady stream of new options trades is not only critical for time management, it's critical to your overall success as well.
I introduced trade frequency via a bakery metaphor in a previous article, but to summarize:
A large number of trades allows you to approach the statistical average of your options strategy/strategies. With sufficient trades, a great strategy is almost guaranteed to perform great, while a poor strategy is almost guaranteed to perform poorly. Let's assume you have a great strategy with a good edge. No matter how great, it's still left to chance if you execute infrequently and inconsistently.
Imagine a casino. A casino performs millions of "transactions" in the form of various games, slots, etc. All have a great edge and it's nearly guaranteed for the casino to make money. However, the edge isn’t enough. If the casino doesn’t keep gamblers coming through the doors they risk short-term, catastrophic losses from a few lucky gamblers placing large bets.
A steady stream of new and repeat gamblers placing steady small bets is the key to bring their games to the statistical house advantage.
A large number of trades allows you to approach the statistical average of your options strategy/strategies. A great strategy executed a few times leaves your outcome to chance, while a mediocre strategy executed many times in a cold-mechanical has a better chance to perform.
Keeping lots of open trades diversifies your risk provided the trades are adequately diversified. The key to keeping on so many trades is to maintain consistent, small positions.
When you're making too few trades it is very tempting to trade too large in order to keep your capital deployed. Small positions are not only easier to manage but will allow you to adjust the trade if it moves against you versus over-relying on stop losses.
So how can more trades save you time? This is a tricky one; but again it goes to the idea of the amount of time we spend with our trades.
Imagine you're trading a risk-defined strategy that has an 80% chance of making 20% and a 20% chance of losing the full risk on the trade. How much time and energy would be drawn from you if underlying stock drifts towards the level required for the '20% chance of losing the full risk' if that risk is 20% of your portfolio? On the other hand, if you have 20 such positions (properly diversified) with defined risk at 1% of your portfolio value, I'm willing to bet you'd spend much less time in trade management and more time letting things "play out".
Please don't confuse the previous statement with "not caring" or "not managing" your positions. Quite the contrary. You'll have an opportunity to manage with a much clearer head and adhere to your predefined mechanical rules when less emotions are involved.
It's important to remember that some trades will go against you and cause drawdown. After putting on new trades, your focus should be to repair these 'bad actors' until you break even or take a small profit no matter how small the position.
Managing a big portfolio of solely large trades needing repair will suck up all your time and energy, sabotage your excitement and engagement and replace it with anxiety and poor decision making.
Continuous new trades keeps the revenue stream flowing and will allow you to sharpen your efficiency and execution.
Have you ever logged into Facebook in the evening to send a quick message and find yourself reading the same news feed a second time a few hours later? Maybe you logged into your fantasy sports league and completely lost track of time? Well, options trading can be a bit like that. There’s endless intoxicating information once you’re sufficiently engaged.
This one may be obvious, but it's even more difficult to achieve. If you stay disciplined and limit your trading time each day, not only will you better manage your trading time, you’ll also be more decisive and focused on the actions you need to take.
I like to focus on placing opening orders to start, and then move to management of existing positions. Limiting your management time will focus you on positions that really need repair. Over-repairing positions also doesn’t work, so it’s good not to go completely crazy. A ticking clock helps prevent this.
Another nice piece of advice is to place opening trades a couple of minutes after the open and revisit your existing trades near the close if your schedule allows.
Try to put a time limit on your trading. I like to trade for a maximum of 1 hour a day: Either 1 hour at the open, close, or 30 min at both.
Trading right before the close is particularly powerful as the clock can't be ignored.
Once your new position is opened, put in a Good-Til-Canceled (GTC) order to close your trade for between 20-60% of the max return (depending on the strategy).
By closing your trades earlier you are increasing the velocity of your money. If you have some profit, why not take the money and run? There's always the next trade.
40-60% of the trades maximum profit is a good target for >50% Probability of Success (PoS), 20-30% is better for <50% PoS.
I'm sure that there will be experienced traders who would disagree with this advice. Therefore, I have to address some of the common objections on GTC closing orders with a list of pros and cons. In the end, for the most experienced traders, it may make sense to avoid the GTC closing orders and rely on manual management. However, considering this article is addressed to traders looking to accent a primary income stream, I believe the pros outweigh the cons.
Pros of GTC Closing Orders
Cons of GTC Closing Orders
Any prudent opportunity for automation is a time-saver in trading. I'd argue it's best not to waste your time closing your order manually. Furthermore, when you consider time-sucking emotions that you'll avoid, the case gets even stronger.
One of such emotions is greed and it can really cause some problems – it's natural that once you have a gain that you will want more. Therefore, It is best not think about profit taking at all and place this step on autopilot. Ring the cash register often and automatically; it’s one of the best feelings in trading.
If you were starting a new exercise regime or diet, one of the best ways to keep you on track is to communicate your commitment to friends, family, and colleagues. The same is true for options trading. Can you commit 30 to 60 minutes to options trading 3-5 times a week? Sounds a lot like exercise and it's equally transformational.
Don’t be afraid to let others know that you’re an options trader – but be clear that you have time management rules and that it will not get in the way of your other responsibilities (especially when communicating to colleagues). You’ll be surprised of the interest from your family, friends, and peers. Maybe you can help them learn to manage their own money as well.
Your commitment is not only about consistency; it's about limiting your time as well. I think you'll be amazed what you can accomplish in 1.5 to 5 hrs per week. If you slip up, and find yourself spending more time, jot a quick note into your trading journal. Similar to slipping up on an exercise program, answer questions related to how you were feeling or what happened that day will help recognize those emotions down the road.
This was a long article - so let's recap how to manage your trading time in a slightly different format:
Strategy and execution: Consider short contracts vs buying calls and puts. Directionless premium trades are your best bet unless you have a strong directional hypothesis. If you are beginning or don’t have as much time to commit, stick with mostly defined risk trades such as credit spreads and iron condors. Drop the stop losses, trade small, and set GTC orders to close the position for a 20-60% profit (depending on strategy).
Commitment: Make a commitment to trade each day or every other day starting at a specific time and ending at a specific time. Communicate this commitment to friends and family to keep you accountable. Commit enough capital to keep you engaged and interested (the more capitalized the easier) but make sure it you’re not at risking your livelihood or future by overcommitting your capital.
Technology: Equip yourself with the best broker and tools. Online brokers are more and more competitive and have brought down prices to very reasonable levels and include free tools. OptionAutomator Options Screener and other tools will be made available for free and we hope that you will add this to your arsenal (that will be the last shameless plug in this article).
Apply your what you've learned with related Brutus Options Ranker components (Templates, Critieria, Market Groups, and Setups)