Update (July 2017)
This article was updated and expanded to include even more tips and feedback from users.
Do you feel like many traders and investors and feel that the time requirement to trade options is too demanding? In this article I'll give you 10 actionable tips to trade options like a pro and balance your other commitments.
- How to manage your time effectively to juggle both a day job, personal commitments and options trading activities.
- Choose the right strategies that will match the time you have available for trading.
- Enjoy the satisfaction of belonging to an elite group of retails traders on the top of the market.
Do you feel that your day job gets in the way of giving options trading a real shot?
You see the value and potential in options trading, but you’re not ready to take the plunge? Perhaps you are reluctant to start, feeling like you have too much already on your plate? Or maybe, (gasp) you really love your day job and want to do both. I think you can get there.
While your reason to juggle the day-job/options-trading-job may vary, the challenge remains: how do I manage my time effectively to do both? Obviously you cannot sit trading all day at work – sure way to get fired. On the other hand, you can’t ignore your options positions each time you have a hectic week.
Just Imagine - Where Do You Want to Get?
Imagine trading options like a pro and keeping your day job – this means consistently bringing in extra money each month, managing challenging trades with confidence, and the feeling of satisfaction to be part of an elite group of retail traders on top of the market.
10 Actionable Tips That Have Helped Me Tremendously
1) Keep a directionless (or slightly directional) portfolio.
Options allow you to play markets, commodities, and companies to the downside, upside, or sideways (i.e., no change at all). That is awesome power in comparison to stocks where you can only bet on a direction (up or down). It is simple these days to Beta-weight your portfolio to your benchmark of choice with the right tools. I use the SPY.
OptionAutomator Trading Tip
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.
Why is this so powerful?
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. Also, it allows you to divorce yourself from market news, individual company news, analyst upgrades and downgrades, and technical analysis. Imagine how much time that would save you?
2) Be a net seller of options.
When you sell more options than you buy you have time working on your side.
This is because all options (especially options out-of-the-money) have ‘time value’ (also called extrinsic value) associated in their price.
What does this mean for you? It means that if you’re stuck in a meeting or a crisis comes up at work you know that the option has made you some money 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.
Options Trading Tip
When you buy options you are always fighting time (i.e., your contract will lose you money some money every day despite the markets making a move or not). Buying options forces you to be much more active and take decisions at the markets convenience vs. your convenience.
For traders that are looking to manage their time while trading options, being a net seller is usually a better choice.
3) Trade strategies that match your available time/capacity to manage those trades.
This is especially true when you’re first beginning. It is wise to start trading mostly defined risk spreads (credit spreads, iron condors, butterflies, broken-wing butterflies, etc). These spreads values change much slower with the same move in the markets and caps your maximum loss.
Trading Tip - Start With Defined Risk Spreads
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.
Working with The Brutus Options Ranker
Brutus can rank options 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.
4) Proper Capitalization
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 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 plus 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.
Trading Tip - Trade Small and Frequent
As with any investing, you should only invest that which (in theory) you are 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!
5) Never use stop orders
Most people use stop orders to prevent losses and help them sleep at night. However, for those who have used stops before, think about what happens once the price gets close to your stop loss? Usually (I’ve 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. 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.
Trading Tip - Manage Risk at Trade Entry
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.
What to do? Consider managing risk at trade entry. This can be done by entering small positions as well as using defined-risk spreads.
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.
So what does this have to do about time management in options trading?
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 management and finding new, profitable trades.
6) Use Powerful Technology and Tools
Technology (well, good technology) makes all our lives easier. The same is true with your trading life. So what are the essential tools of the trade? For me, it’s broker and trading platform:
Broker - I use TD Ameritrade after a long journey of evaluating multiple discount brokers.
Finding My Broker - It Was a Long Road Full of Mistakes
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. Well, one day I was day trading options at expiration (this isn’t a core strategy, but I read something on it and was playing around after a couple successful months) and 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 $12,000 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. Plus I seem to get better pricing and more fills than my last broker.
Are you expecting an affiliate link? I recognize that you can read many blog posts with broker reviews and an associated affiliate link. This is because brokers pay high affiliate commissions for referral business. We’re not interested in this. Before I would refer you to Dough.com to sign up with a TD account through their link which would give you even better pricing. Recently, Dough has introduced their own brokerage which you might find interesting. We also have no affiliation or profit sharing with Dough.com.
I’m interested for you to become or grow as a successful, self-directed Options Trader – not to get some easy affiliate commissions by referring you to a broker. 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.
Trading Platform - If you’re on TDAmeritrade then this one is already taken care of. If not, make sure you broker offers a robust trading platform that is available as stand-alone software and not through a web browser. This will save you loads of time. In addition, make sure your platform can quickly look up options chains and display all relevant data (probability of touch, probability out-of-the-money, the Greeks, and so on).
Working with Brutus
The Brutus Options Ranker not only provides you a force-ranked list of the most relevant options trades against your personalized strategy, but Brutus can also generate order codes which can be directly pasted into ThinkOrSwim.
Trading Tip - Use Mobile to Make Use of Downtime
Make sure your broker has great mobile tools for trading as well. With that, you’ll never miss a moment to execute a quick trade/close/adjustment – think coffee queues, lunchtime, and the grocery store line. Basically 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.
7) Focus on putting on new trades
Not only is this critical to time management, keeping a steady stream of new options trades is critical to your overall success as well. I’ve discussed in other articles the importance of trading frequently, but in short:
A large number of trades allows you to approach the statistical average of your options strategy/strategies. Imagine a casino. A casino makes money because it has an edge. However, the edge isn’t enough. If the casino doesn’t keep gamblers coming through the doors they risk short-term losses from a few lucky gamblers placing large bets. Large numbers are required to bring the games to their statistical advantage.
Trade Small Positions
A large number of trades allows you to approach the statistical average of your options strategy/strategies.
Keeping lots of trades on diversifies your risk. The key to keeping on lots of trades is to keep your positions small. With too few positions 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.
Some trades will go against you and cause drawdown, your focus should be to repair these trades until you break even or take a small profit. Managing a big portfolio of solely large trades needing repair will bring your excitement and engagement down. Putting on new trades keeps the revenue stream flowing while you spend a little extra management time on your challenging positions.
8) Place a time limit on your daily trading
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.
If you stay disciplined and limit your trading time each day, you’ll be more decisive and focused on the actions you need to take. 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. We'll cover profit taking in the next session.
Options Trading Tip
Try to put a time limit on your trading. I like to limit my trading to 1 hour a day: Either 1 hour at the open, close, or 30 min at both.
9) Set GTC orders to close your positions (for profit taking only)
Put in a GTC order to close your trade for between 20-60% of the max return as soon as you get filled (or the next day if away from your account) then forget about it.
Trading Tip - Target Profits
40-60% of the trades maximum profit is a good target for >50% Probability of Success (PoS), 20-30% is better for <50% PoS.
Don’t waste your time by closing your order manually. Greed can get in the way – you have a gain and will want more – this is so hard to avoid. 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.
Pros of GTC Closing Orders
- Automated profit taking and discipline.
- Less time watching positions
- More consistency
- Eliminate trading emotions (greed) when profits need to be taken.
Cons of GTC Closing Orders
- Can leave 'money on the table'
- Can only choose one target profit
10) Communicate to others that you prioritize a little trading time each or every other day
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.
Don’t be afraid to let others know that you’re a 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 colleagues. Maybe you can help them learn to manage their own money as well.
10 Actionable Options Trading Tips - The Takeaways
This is a pretty long post - 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 PoS).
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).
As always, hope to hear your comments to keep the discussion going! Have you uncovered any other tips and tricks that help manage your trading time? Please share, we all learn together.