40 Questions for a Professional Options Trader and Former Chicago Board of Trade Member
How does a full-time options trader make money? Read this.
We just had a live Q&A with Sean McLaughlin, who you can find on StockTwits @chicagosean. McLaughlin is our former Head of Community and now is a full-time options trader. He has 19-years experience trading stocks, commodities, and options. McLaughlin has managed money independently and professionally. He currently hosts the Gimme Some Options podcast that features interviews with real traders as well as insights into his own trading methods.
Today, McLaughlin is focused on trading a diversified portfolio of delta-neutral, positive-theta positions designed to exploit mean-reversion tendencies in stock volatilities and price extremes. What follows is a recap of our live talk. For the full transcript please go here and scroll down.
Do you buy out of the money calls after a large vix spike? — AlejandroMassari
I do not. But, that’s an interesting idea. My initial reservation is I’d likely be paying too high a volume premium.
If you had to learn options from Step 1 again, what would you change? What do you wish you knew then that you know now? — michaelbozzello
I would have put a tremendous amount of effort getting to know people who’ve walked this path before, and try to learn everything I can from them. Not just about strategies, but about how to make a living in the market. I wish I knew that going in. If I had somebody to point this out for me in the beginning, I’d be 100x more successful now.
Do you roll only the losing part of your butterfly or the whole butterfly? Are some chart patterns not good for your strategy, or you completely ignore price action? When you roll your butterfly, do you roll it at the money again? How do you roll it when the trend is strong? Do you know how many days your average trade is? How many losing months did you have in 2015–2016? Thanks for your answers, your SMB webinar was great. Do you use some sort of hedge strategy to your portfolio of IC(iron condor) flys? — kafkafranz123
Depends on how much premium is available on the other side. For example, if the call side is OTM(Out Of The Money) and I can roll the spread out for only 5–10cents, is it worth it? Probably not. I am always “aware” of the stock chart, and I like to view where my max loss points appear on the current chart, but I don’t apply any technical analysis to determine whether or not the stock is a good candidate for a spread trade. I am mainly focused on making sure there is adequate premium to be captured in relation to the risk I’m taking. I’ve given up trying to anticipate where a stock is headed. I’ve proven to be nearly completely incapable of that skill. When I roll a spread, I attempt to keep the exact same strikes, but I’ll only do the roll if I can do so for a credit. If I cannot collect a credit, then this adds risk to the trade which is something that does not interest me. If no opportunity becomes available to roll the same structure to next month for a credit, then I take the loss. So far in 2017, the average days held of all closed trades is 27 days. I had several losing months in 2015–2016, but I was also trading a completely different strategy then focused in SPX. I am currently experimenting with a “portfolio hedge” strategy but the jury is still out whether the juice is worth the squeeze. I have found that most portfolio hedging strategies are too expensive, but that doesn’t keep me from trying ;).
If a stock moves +10% would a slight out of the money option follow with a +30% and vice-versa? The further the option is out the money is it more sensitive to the underlying moves and vice-versa? If a stock moves +10% and an OTM option moves +30%, could I cash in at that time? Or do I need to wait till option is breakeven or positive? — yieldhawk
There are too many variables to know for sure. For example, what vol did you pay? how far OTM? How much time to expiration? etc. The only thing you could know “for sure” is that a slightly OTM call would definitely profit if the underlying went +10%. Changes in volatility will more likely have a more meaningful impact on far OTM options. If I bought way OTM options and they suddenly went in the money, I’d be looking to take profits or spread off risk ASAP.
What’s the best and easiest way to understand and learn about options ? — jaysteitz
Get started. Start small. Start with real money, but do it small. Learn about vertical spreads and build from there.
What are your favorite options brokers? — LoLoGramz
I am a long-time ThinkorSwim customer and I believe that they have the best options trading platform (for now…). TastyWorks is crushing them on commission rates and will soon become (if it isn’t already), the best retail options platform.
Is the market fun for you? Because, I find it so boring that I avoid it most of the time….12 years in. — NeoGenesis
That’s probably a GOOD THING. Most people who come to the stock market for excitement usually find it. But, it’s never free…
Given that you’re a seller of options, how has a lower VIX and volatility impacted your trading approach? — CharlieRev
What stocks are good during the summer? — Peggy1
There is no such thing as far as I’m concerned. However, an expert on seasonality might be able to offer better insight.
If my account value is 100k, how many $SPY puts do I need to hedge my account? Is there a formula that I can follow? — RitchBoy
I think the better question is: how much are you willing to risk on a daily/weekly/monthly basis to protect yourself?
If you want to carry a position into the next month and the option is in the money(ITM) do you roll it? Or sell and buy? — ChrisGDC
If it’s a single option or a two-legged spread (vertical spread, for example), I attempt to roll it as one trade. If it’s a four-legged spread (Iron Fly, Iron Condor, for example), then I found it’s usually best to close the existing one first, then enter the same trade (same strikes) in the next month, after the near month trade has been executed.
What does over-bought or over-sold mean? What does average down mean? — jderome2
If you’re a mean-reversion trader, it means you view the stock as having a high probability of reversing course soon. Averaging down means, buying more at lower prices, which brings your total average cost down. For example, lets say you bought 100 XYZ shares at $20. It then goes down to $19 and you buy 100 more. Then, instead of owning 100 @ $20, you now own 200 @ $19.50 (a better price).
What strategies do you deploy the most? Also, how do you look for opportunities (what indicators)? — PoorHomieSunny
My bread-n-butter strategy right now is Iron Flies and Iron Condors. I’m looking to put these on in stocks experiencing relatively high implied volatility (high options prices). Basically, I’m looking to sell high premium and capture the high probability of volatility reverting to it’s mean.
What options strategy should a rookie learn first? — scheplick
Covered calls are the gateway drug to options trading ;). From there, I’d dive into vertical spreads next. Vertical spreads (short one option + long another option in same expiration series) are the basic building blocks of most other, more complicated strategies.
What are your thoughts on AMD? — poshixi
With low implied volatility, it’s not a stock I’d be looking to sell options in right now (which is what I do).
Do you have thoughts on $BBY into earnings? — kurtbunde
I’ve got an Iron Fly on in $BBY that is currently getting hurt on the upside. Earnings burn!
How do you manage and define risk within your options trades? — Lonesome
Lots to unpack here with this question. I very rarely will trade naked short options. So risk is clearly defined in most positions.
Please share with us how you evolved into a butterfly trader. What was your path? — MartinKronicle
This would take a blog post or podcast episode to give it a full and proper treatment. With that said, I like trading Butterflies because I want to be selling options with the most premium, but I’m not comfortable with naked risk. I’m willing to give up some edge (via purchasing protective OTM options) in exchange for more certainty in risk.
To what extent do Options / O.I. influence the underlying security (ie: do options control the Underlying Stock at all? MaxPain seems worthless-and so does O.I. distribution on a dollar value for OPEX- is any influence on that day OPEX? — LuvShortLong
Sounds like a conspiracy theory ;) Though, I believe there is some weight to nearby high OI strikes on expiration day. I’m sure smarter people than me can cite numerous examples where OI “had an impact”, but on balance probably negligible.
How long can a stock such as PBYI be halted? — jffsmth
As long as the regulators or powers that be deem necessary. Not a situation you want to be involved in if you can avoid it.
Where did you trade? I was in 10 year and 30 year options and several pits at CBOE. — famisdave
During my time at the CBOT, I was mostly an upstairs trader (on 28th floor). But, for a time I did rent a booth above the Dow pit.
What is your strategy to make money? — john_smith
I’m looking to take advantage of the tendency of high implied volatility to revert to its mean. Therefore, I like to identify stocks with relatively high IV and sell premium there, hoping to buy back cheaper later. Overall, this philosophy has high statistical levels of success, but risk management is the secret sauce because losers > winners.
How can you roll opt calendar spread after May SC until June LC expiration? Can you change strike price? Thanks! — stcktrader78
Not sure I understand the question? If you change one strike price, you change the characteristics of the trade.
What are your top 3 most profitable plays and whats the best time to use them? — SolidSnoopy
I use Iron Flies, Iron Condors, and vertical spreads almost exclusively and I apply them to stocks with high implied volatility
Please recommend your top 5 books that helped you become a successful options trader. what is your opinion on selling covered calls while accumulating shares in large dividend whales like Exxon? — supasayin
Sadly, I love books, but there aren’t many great ones that deal specifically with options trading. Most deal with x’s & o’s of strategies, but give very little insight into nuances of how/when to employ and manage a portfolio. There is definitely an “art” to successful options trading that I haven’t found to be explained very well in anything I’ve read. However, I do believe the folks at @tastytrade are doing God’s work in educating people how to be better options traders. Also, I have found optionalpha.com to be a great resource for people new to options trading. Not a game I play, but I like the idea. Though I think I’d prefer doing it in an index like $SPY.
What is the minimum account value you suggest in order to actually ‘grow’ an account size? — apocalypse
In options trading, you probably want to have at least $50K, this will allow you some room for some naked options strategies.
I only buy to open. That said I like ATM(At The Money) strikes, more contracts to achieve lower gamma if trade goes south ideas? — ChrisMichaels
Buying ATM options is swimming upstream. Not a practice I recommend if you’d like to travel great distances.
What’s the best advice you can offer for someone just starting out with trading sticks? — Hoodrich91
Best advice is to quickly find a mentor, then just get started. The best way to learn is by doing. Just do it SMALL.
I am looking for solo cheap option trading account. Under $5k in options and I want to hedge the stock & safely short. — respectbear
I would recommend opening an account with @thetastyworks. Cheapest retail commissions for an account your size. If you do, please use my referral code? https://start.tastyworks.com/#/login?referralCode=Z2M828SYYMThank you!
How do you manage risk on options? Specifically, a risk and portfolio management strategy. — MrWisdom
The beauty of options trading is you can always define your risk via the purchase of long options.
How do you feel about futures? Not the options aspect. I take care of my mom who has dementia and she’s up during the overnight session. I have a good grasp of fibs and support/resistance. Just wondering if you feel RR(risk:reward) is there? — ChrisMichaels
Futures are a great product to trade if you have a clearly defined strategy. If it works for you, do it!
Any suggestions when trading leaps for fang type momentum companies? — SLNTradesNMusic
That’s not a game I play. I don’t have any domain experience in Leaps for investing.
How do you choose your strike price when writing calls? Is your strategy available somewhere for us to read? — ushie
I’m not a call writer. But, common wisdom is it’s best to sell 30 delta calls against long stock.
Which of the Greeks to you utilize the most and why? — BrotherBill01
Well, I always want to be positive theta, so I guess that’s the one most meaningful to me.
At what volume level should an active trader consider becoming an exchange member? — kevinbantzcom
Tough question. You’d need to weigh your current commission costs against member commission rates + monthly seat lease. Plus, you’d likely have to pay for data (if you don’t already) because you’ll then be considered a “professional”.
What is the best way to approach selling Put Credit spreads? I see lots of high odds ways, but you are making 10:1, & 1 loss kills you. — Trades2Win
Yeah, typically skew is unfavorable for put spreads (especially in index products). I wouldn’t recommend doing only put spreads.
Does the weekend 2-day time decay generally get built into the price on Friday? Or is there a drop Monday morning? Some cross-listed stocks (e.g. TD) have very different betas on the TSX & NYSE exchanges. Is there opportunity for arbitrage? — alexsimonelis
I don’t think it’s as consistent as people believe or would like. It happens, but the timing could be anytime. That’s above my pay-grade. However, it’s likely you can’t compete in this arena due to your speed disadvantage against HFT(high-frequency trading).
How can you better time volatility, can you give us some trading strategies on stocks and options? — javic
Timing anything is hard. However, you can put probabilities in your favor by selling premium when implied vol is relatively high.
Are options worth it for day-traders? Or just for swing-traders? — scorpionkick
I don’t do it. It can probably be done, but it’s probably EXTREMELY hard. Would need to stick to penny-wide bid/ask spreads.
Selling options I hear is best since most expire worthless. How do you feel about that versus buying options ? — danrube
The only thing that can be guaranteed in options is that premium decays away with time. That’s not a trend I’d like to fight.
What options trading strategy would you say is best suited to people with absolutely zero knowledge of options? Thanks. — DeathCubeA
Vertical spreads. They will teach you the nuances of how options are priced and how greeks affect your positions.
Thank you for letting me think more deeply about my own processes! Feel free to reach out to me for any further questions. Also, be sure to check out my podcast: Gimme Some Options
We hope you enjoyed this Q&A! Press the blue heart 💙below if you really liked it and feel free to highlight or comment on any part. We also have a newsletter for anyone interested in getting daily updates about the stock market.
This Q&A was compiled by Michael Bozzello, StockTwits Community Manager. Make sure you’re following him @michaelbozzello.
