Options Traders frequently find themselves in heavily drawn down trades near their maximum losses.
Often it’s a good idea to restructure the trade at that point, to create a realistic opportunity for a significant reduction in a loss as opposed to an improbable win.
In this video, we review an example of such a situation and the proper way to think through a realistic loss reduction goal.
October 10th, 2017
Andrew Falde presented the latest in his Netzero trading strategies which includes shorter terms spreads, momentum trades, commodity options, and the results of a 2008 study.
Learn more at official video series: smbu.com/netzero
Learn about Andrew’s weekly workshop: smbu.com/workshop
Seth Freudberg
Director, SMB Options Training Program
The SMB Options Training Program is an eight-month program designed for novice and intermediate level options traders who are seeking an intensive training process to learn how to trade options spreads for monthly income. For more information on this program contact Seth Freudberg: sfreudberg@smbcap.com.
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Risk Disclaimer
Futures Risk Disclaimer
October 31st, 2017
This week, Gavin McMaster of Optionstradingiq.com returns to present the Wheel Options Trading Strategy for cash income generation. We look forward to seeing you then.
Options Tribe meetings are generally free to the public and are held every Tuesday at 4:30PM ET. If you wish to register to this meeting, please click here.
We look forward to seeing you at the meeting!
Seth Freudberg
Director, SMB Options Training Program
The SMB Options Training Program is an eight-month program designed for novice and intermediate level options traders who are seeking an intensive training process to learn how to trade options spreads for monthly income. For more information on this program contact Seth Freudberg: sfreudberg@smbcap.com.
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Risk Disclaimer
Futures Risk Disclaimer
Our weekly workshop with options desk trader, Andrew Falde, has the purpose of teaching you how to find reliable trading edges and create practical trading plans that can be implemented in the real world.
Andrew has been developing systematic options and swing trading strategies and sharing them with the SMB community for over 5 years. He earned a seat trading at SMB with his popular “Netzero” options strategy. The workshop is a great place to learn about his unique perspective on developing a simple/robust portfolio of low correlation strategies.
Join the workshop to attend the live meeting each week and watch the archive of recordings going back to April 2016.
November 7th, 2017
This week, Bubba Horwitz of Bubbatrading.com returns to the Options Tribe to discuss how he trades ratio back spreads utilizing stock to exit the options position.
Options Tribe meetings are generally free to the public and are held every Tuesday at 4:30PM ET. If you wish to register to this meeting, please click here.
We look forward to seeing you at the meeting!
Seth Freudberg
Director, SMB Options Training Program
The SMB Options Training Program is an eight-month program designed for novice and intermediate level options traders who are seeking an intensive training process to learn how to trade options spreads for monthly income. For more information on this program contact Seth Freudberg: sfreudberg@smbcap.com.
No relevant positions
Risk Disclaimer
Futures Risk Disclaimer
Intraday and Swing Equity traders will often find their best opportunities in volatile markets. Market Neutral Options Traders will usually have strong months when the market is calm. In this video, we discuss why trading in both styles can be a beneficial strategy for traders seeking to smooth their equity curves.
November 14th, 2017
This week, John Locke returns to the Options Tribe to present the M21 options trading System which synthesizes many of his signature trading strategies, technical analysis, and trade planning.
Options Tribe meetings are generally free to the public and are held every Tuesday at 4:30PM ET. If you wish to register to this meeting, please click here.
We look forward to seeing you at the meeting!
Seth Freudberg
Director, SMB Options Training Program
The SMB Options Training Program is an eight-month program designed for novice and intermediate level options traders who are seeking an intensive training process to learn how to trade options spreads for monthly income. For more information on this program contact Seth Freudberg: sfreudberg@smbcap.com.
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Risk Disclaimer
Futures Risk Disclaimer
In today’s Options and Systems Workshop, Andrew will go over some recent studies on vertical spreads and the possible implications for improving Broken Wing Butterfly trades. Join the workshop by Noon Eastern today to get your invitation to the 3pm Options and Systems Workshop.
No relevant positions. Options risk disclosure. All trades are hypothetical.
Intraday options traders are often faced with a large theoretical gain on their trades, if a stock gaps in the aftermarket in a favorable way to the trader. However, in many cases the options market for that stock is closed and therefore the trader can’t harvest his or her gain. In this video, we review a solution to that problem that intraday options traders should find helpful.
Getting your priorities correct really helps shape the trading day for optimal progress.
One trader with, with whom we are working, is coming along nicely. Firm is happy with his progress. Our sense is he has a real chance to become good.
Our job is to help him set priorities. Is that to make money? Or is that something else?
In a recent review trader honestly wrote:
There are two issues with this that really grind my gears..
1.) the issue of missing the trade in the first place. This alone usually drives me crazy and often times leads to tilt and bad trading. Missing a trade for me can happen for a number of reasons (not focusign on it, forget to set alerts, bad mindset, ect…) in this particular example, the trade I missed today was XNET. This was one of my main watches today as it has been very parabolic on the daily chart. Chinese cloud computing company up on no news. It faield hard on the open and offered a great opportunity when it retraced to VWAP and went sideways. For me, this was a high conviction trade that I need to be FULL SIZE in. I did take the trade, but I was way too small in this. Short from 11 and it came off all the way to 8.25. I did take the trade, but the lack of size was even more frustrating because it was such a great swetup. I essentially missed this trade because i was not big enough and in my eyes, a blown opportunity.
2.) lack of size in good trade + oversize in lesser trade – Because I lacked the size in my best idea, I went chasing size in lesser ideas. This led to a grind type of a day where I would go down in one trade and simply just try to make it back in the next. Essentially trading P/L. I knew in the back of my head that I should have traded that much larger. That lack of size in my higher conviction idea led to a subpar mindset.
This is an opportunity to pull a trader aside and get his priorities straight.
I like the idea of trader working on sizing.
I like the expectations trader has about performance.
What needs focus is what we are trying to accomplish at this stage of his career. And massive PnL is not that.
A first step at our firm is to find the setups that are worth study. What trades make the most sense to you? Build your PlayBook of trades that will be your trading business.
Next is to become consistent trading these setups.
Notice that massive PnL and trading huge size are not first nor second goals. That comes after building your PlayBook and then consistency.
My observation working with traders is that skipping to sizing and massive PnL interrupts the natural sequence of trader development. And that if you get the sequence wrong that just might mess up everything for a developing trader.
As always, your comments/questions are appreciated- mbellafiore@smbcap.com.
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I received this email from a trader:
Hi Mike,
Terrific piece yesterday on trader development. You have a wonderful way of clarifying things.
Step 1. Build your playbook of trading ideas
Step 2. Become consistent trading these plays.
I have come across the word “consistent” more and more frequently but have never fully grasped just how important it is.
Dr. Brett talked about it this week and now so have you. One of the things I’ve learned is just how inconsistent I have been in my developmental process. Becoming consistent is a top priority for me now.
If I am honest, I have been anything but consistent trading my playbook. And of course my results reflect that.
Finally, after making good progress in steps one and two, what are some of the additional steps traders will face? I know you talked about PnL and sizing but I’d like to know some others as well that would make your list.
Since I will become a CPT, it makes sense to know what that really means and what I will be facing on the journey.
@MikeBellafiore
You have identified and important next step for you. Trade your PlayBook.
It makes sense that your results are not consistent if you are not consistently trading your PlayBook. Your PlayBook is filled with the setups best for you. Trade outside of that and your results are an accumulation of lesser trades and some of your better trades. This is not the true reflection of your trading potential.
For the next month, set a goal of trading your PlayBook daily. Keep a report card on how successful you are each trading session on this goal. Intensive work on one goal that you grade each night, I suspect will bring improvement to your trading consistency.
Let’s leave what comes after that until after that.
As always, I appreciate your comments/feedback- mbellafiore@smbcap.com.
*no relevant positions
Recently another firm trader earned a Green Shirt. You earn a Green Shirt for producing 1 million in net profits for the year.
Dr. Steenbarger, trading coach and author, instructs that we ought to study the trading success stories. Why are they winning? What can we co-opt from their success to improve our own trading.
From my seat, here are a few things I have observed about this trader.
This Green Shirt trader has a specefic niche.
This trader trades a niche best suited for his personality and cognitive strengths. He knows what he does well. He spends trading sessions playing to his strengths.
Trader possesses unusually high processing power, allowing him to make very fast decisions in real-time. Trading success requires a talent for it. He has it. And more importantly, he has developed his trading talents.
This Green Shirt trader has consistently and purposely pushed his trading size, within his trading niche. We all shared a laugh about his 4 million shares plus of volume after 50k lot positions during one trading session this week. His net trading profits were approximately 6xs fees on this trading session.
Trader has embraced working in a Team and finding value from junior traders for his own trading. This value has emanated particularly from technology (offensive entry stock scripts, filters, models) that junior traders built for him.
The latest member of the Green Shirt hall, is a master of consistency. There are few home runs that drive his PnL, but, in fact, perpetual single after single.
Trader embraces coaching to help him improve both as a trader and Team leader.
I look forward to sitting with Dr. Steenbarger and the latest Green Shirt receipient and setting new goals for 2018. My sense is 2018 will be much more profitable for this trader. Time for him to start planning for the next level of trading success.
As always your questions/feedback are welcome- mbellafiore@smbcap.com.
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SNAP was our #1 In Play stock last Wednesday. Tuesday, after the market closed they reported earnings below expectations and gave weak guidance. The stock was battered dropping from 15 to 12 in after hours trading. But then at 6AM Wednesday it was reported that a Chinese internet company had purchased a large stake. So what initially appeared as a relatively straight forward short setup had thrown traders a curveball. SNAP popped from 12 to 16 between 6-6:30AM. By the time I started watching it in the pre-market it had settled down below 14. My initial thought was regardless of whether SNAP had a large Chinese shareholder many investors would still head for the exits.
Based on the after hours and pre-market trading I developed my game plan. I would short a pop on the Open between 13.80-14 
and look to cover most of the position at pre-market support. If SNAP traded below pre-market support then it would make sense to build a larger short position. Because of the poor earnings report volume in SNAP was likely going to be multiple of its normal average trading volume making it relatively easy to trade large blocks at a time (one trader on the desk was moving in/out of 50k shares per trade with little slippage).
at 9:30 SNAP opened around 13.50 it quickly dropped to pre-market support at 13.25 before reversing quickly and hitting my “short zone”. As if it was reading directly from my morning game plan script it failed at 14 and in the next few minutes traded down to 13.50.
Once it trade below the Opening low and pre-market support of 13.25 it offered another opportunity to press shorts. Most of the experienced traders on the desk were short at this point with sellers in control. From a price action perspective SNAP did just about everything I could have hoped for to confirm a short position. 1)Dip buyers quickly pushed the price up in the first few minutes after the Open; 2)It failed at a well defined pre-market resistance area; 3)It traded below pre-market support and the Opening low; 4)It consolidated below the after hours resistance. As short term traders we develop a thesis but without price confirmation we must not press a position and be prepared to exit quickly.
Steven Spencer is the co-founder of SMB Capital and SMB University which provides trading education in stocks, options, forex and futures. He has traded professionally for 21 years. His email address is: sspencer@smbcap.com.
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November 21st, 2017
This week, Options Tribe member Luis Guerra returns to the Options Tribe to discuss his analysis of the M3 trade, focusing on its financial and profit drivers.
Options Tribe meetings are generally free to the public and are held every Tuesday at 4:30PM ET. If you wish to register to this meeting, please click here.
We look forward to seeing you at the meeting!
Seth Freudberg
Director, SMB Options Training Program
The SMB Options Training Program is an eight-month program designed for novice and intermediate level options traders who are seeking an intensive training process to learn how to trade options spreads for monthly income. For more information on this program contact Seth Freudberg: sfreudberg@smbcap.com.
No relevant positions
Risk Disclaimer
Futures Risk Disclaimer
One developing firm trader struggled trading the open. He sought a one-on-one to discuss improvement trading the open with me. He sought counsel from Dr. Steenbarger as well.
I made some suggestions and it was up to this trader to execute on solutions to improve.
He did. Boy did he!
After implementing solutions for this challenge of trading the open trader wrote:
Hi Bella,
We talked a little over a month ago about The Open. I had identified in my Monthly Review that this was an area I needed to improve on, and we talked about the idea that I should have a separate Playbook for The Open. I’ve been working on this. I’m really excited that I’ve been starting to find more success during this time period (see below for my stats on the open since October). In an effort to review and try to identify what is working in order to distill the variables for my Playbook for The Open, I’ve compiled a template reviewing all my profitable plays made at The Open in October (attached). I’m looking for patterns and looking to widdle this down to the “best of the best” for my Playbook. I will continue to do this exercise for November.
Some of the things I’m learning are:
I’m finding more success when coming up with specific stocks and specific ideas for The Open that are separate from my top ideas for the day. Most of the time, my top ideas for the day are not good ideas for the open…they are often too volatile and are usually meant for a bigger picture intraday swing idea setup later in the morning/day.
I’m finding more success with targeting lower priced stocks and/or less volatile stocks to trade at the open that help make it easier to control my risk.
I’m finding more success when focusing on taking profits and reassessing. However, this is not to say I should not be trying to hold an Opening Drive for the meat of the move. And I’m finding that if I enter a Backside Short into strength at the open, this is often an opportunity to hold a piece for a swing.
The trades I’m making at the open are usually not my most profitable trades of the day, but if I can build consistency at the open, they can provide a nice cash flow that can put me in a position of strength when attacking my bigger picture ideas later in the day.
My plays at the open are looking a lot like my general Playbook (higher timeframe momentum + outside ranges + intraday triggers) but with a different approach.
@MikeBellafiore back again
Let me be clear. This is extraordinary work by a developing trader. The quality and thoroughness of his work stands out relative to his peers. It is worth copying by the trading community.
What I like most about his note, is trader found solutions for a challenge. Trader developed specific trades for the open, with clear variables, to trade that made the most sense to him. Trader measured his results. He archived the real-time examples of the best traders for him on the open for study. Trader now knows what to look for on the open.
In short, this is how you do it. This is how you improve as a trader.
As always your questions/feedback are welcome- mbellafiore@smbcap.com.
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A reader asked:
Hello Mike.
I have been involved in trading for a number of years and follow your youtube channel with interest.
A quick query when you have some time.
Going back a few years, the main ‘focus’ for trading (mainly using the tape) was on the open and the first hour of trading. Then also the last hour before the close.
I’m just wondering if this is still the case in today’s markets. The open is still obviously important, but with regards to the last hour before the close, is this still a viable time to trade in your view?
I seem to be getting more of a ‘lunch time’ vibe in the final hour, where it seems that the main move has happened early on and now we are in sideways chop with not much in the way of ‘tape signals’ to guide you if you want to trade in the last hour before the close.
Would be interested in your view on this when you have some time.
@MikeBellafiore
I would agree with your observation for tape readers/scalpers. On the open offers the best opportunity to scalp as there is more volatility. I do notice our best scalpers profiting midday, trading the stocks most In Play. I do notice less of this type of trading into close, but still opportunity for the best tape readers. Overall, there does appear to me to be less opportunity to tape read and scalp into the close than in the past.
There are different strategies that work well into the close that traders gravitate towards. There are positions to be managed for swing traders. There is stock movement to be watched for setups for the next trading session.
You make an important observation for your trading. You do an excellent job seeing the different business plans you might build for the different trading time frames- open, midday, close.
As always, I welcome your questions/feedback- mbellafiore@smbcap.com.
*no relevant positions
It is not uncommon for developing traders to stare at this decision: should I quit? This is true for even traders who go on to become successful, even 7-figure traders.
I share this because I know that there are readers facing this question. And many wonder whether they can make it, if they start poorly. You can.
Let me share a recent anecdote from our trading desk.
Recently, a developing trader at our firm, asked to speak with me about whether he should continue. He was coming near the end of his personal funds. He wanted to know if the firm would help him financially if necessary. More importantly, he asked me whether I thought he should continue.
I was a bit startled by the question as I never sensed this trader had doubts. If he has them, so many more must.
This developing trader had asked his mentor whether he should continue. His mentor shared that he showed more promise than all of his past junior traders. But then mentor suggested this developing trader ask me. That I would be honest with trader and would be a good resource given my experience watching traders develop.
Thxs mentor! Put all the pressure on me.
I reviewed the developing trader’s results and they had been mostly flat overall. You could see internal pressure to make money infecting certain months and causing progress to wane. Importantly, you could clearly see growth prior to these periods and then the waning. He contributed importantly to his team. He loved trading. He fit in well with the firm culture. He was well positioned to improve with an outstanding trading mentor.
More for form than substance, I discussed this trader with the partners for agreement to approve firm resources for trader. The partners quickly and unanimously agreed. We assured the trader that he would have financial support from the firm and mapped out a plan for the next 6 months.
Financial stress is a very real issue that developing traders face. Backstopping from a firm can often make all the difference between success or failure for a trader’s career. And it is not just the financial support to pay the bills, but it is the relief to trader that they can now just concentrate on their trading. Full focus breeds their best results.
Fast forward to this month, and trader is having his best month to date. A month, in fact, that clearly shows he has the ability to succeed and sustain as a professional trader.
These are the very real discussions that occur at a professional prop firm. These are the very real challenges that developing traders face. Many do find solutions and go on to have lasting and rewarding trading careers.
So if you are like this trader above, and wondering whether you ought to quit. Do not feel inadequate solely for facing this issue. We face it here as well. And some come through on the other side to become winning traders.
Happy Thanksgiving to all!
I welcome your feedback/questions- mbellafiore@smbcap.com.
Bella
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It is important to study the traders who are succeeding and learn from them.
In his Daily Report Card, that this top trader shares with Dr. Steenbarger and myself, you can see he is “crushing it”:
entry quality 9/10
+ 75k
Great finish to a great month – think I netted around 775k for the month. Pretty staggering considering my best month was 350k just last month. I did a great job of using my momentum and my profits to scale up as the opportunity was there and I had great focus and consistency throughout.
What is even better perhaps, is this month really pushed me past some bigger goals I had – making a million dollars of income on a year from trading, being the top guy at the firm (not sure but I think I am there). These goals didn’t seem attainable even after last month but sticking to the process got me there in the end.
Yes these results are staggering.
What we can learn most from this trader is: “sticking to the process got me there in the end”. This trader was working on sizing intensively, middle of the year. He was not breaking out to new highs in PnL. We could see his improvement, but the PnL was not skyrocketing relative to his improvement.
He kept working on sizing. Specifically being patient AND aggressive. This is a tough thing to do as a trader. You want to trade bigger and it’s hard to wait. Getting in early causes sloppy trades that can find your stops.
He was close. We could see it was coming. But he needed to stick to the process.
And then heightened opportunity visited. He was ready. His trading muscles had been developed during those months were he was improving, but the PnL was not cooperating.
It all came together in October with a personal best.
And then last month, with even more opportunity, he made a new personal best for the month as you can see above.
Bitcoin, other cryptocurriences, and blockchain are offering multiples of opportunity in the market. Opportunity met preparation for this trader.
One developing trader on our desk has found inspiration from watching traders like him “crush” the markets. That trader wrote:
Was really cool watching some of the guys have monster days today. Really was quite inspiring and motivational. It gives hope that someday that will be me. The more important aspect of today was the lessons I learned from these traders and the takeaways from why they were so successful today. I need to study what they did to understand why they had such fantastic days.
Perhaps this trader will inspire you as well.
Just four years ago he was a 10k a month trader. Last year he was a 7-figure trader. This year he is even better. In four years? Who knows? Expect that he will be much better.
I end The PlayBook with, “You can be better tomorrow than you are today.” This trader above is Exhibit A.
As always your feedback/questions are welcome- mbellafiore@smbcap.com.
*no relevant positions
One scalper on our desk proudly wrote to Dr. Steenbarger and me about his progress recently:
Had 3 personal best this week:
1) Best day: 167K net
2) Best month: 601K net
3) Best year: 1.5M net
Cheers!
$601,000 in net profits is a sensational trading month!
A scalper is a trader who makes very short-term trades. He is active. He focuses mostly on price action and reading the tape. His skill is in placing bets on where the stock is to trade next. And not where the stock or trading vehicle will be on a longer time frame.
This trader had developed goals with Dr. Steenbarger at the start of the year and hit them. Mostly he has worked on trading his edge bigger. That edge is scalping. Where before he might have scalped 5-10k shares in a trade, he is now up to 50k shares in some names.
The firm does not upcharge for trading commissions. We are a PnL firm. So in the case of this trader, he executes at a base rate of 70 cents per thousand shares. There are many prop firms who do mark up commissions, some to as much as $7 per thousand and some even more. This trader is able to recognize enormous net profits because of the firm’s commission structure.
What can we learn from this trader?
You can make real money scalping. I am puzzled at times with statements made in and at the trading community that you cannot. I have read things like: Scalpers earn “crumbs”, while swing traders make real money. You can make real money as a swing trader. Here is a recent post about a firm trader we would describe as more of a swing trader: Why this trader is “crushing it”. Also, and this trader above shows, you can make real money as a scalper.
Play to your strengths. When this trader takes his check to the bank for deposit, they will accept it. They are not going to sit him down and ask him how he made his money. They are not going to refuse the check because his profits were not from fundamentals analysis, trend trading, global macro plays, or swing trading. They are going to accept these “crumbs” at their bank, gladly. He is a great scalper. A winning day trader. So he continues to scalp with larger and larger size.
Embrace Team trading. This trader has also embraced Team Trading. Building a Team where junior traders help him express his edge in markets. Junior traders, who have built technology for this trader, so he can make more of and on his best trades. And with Junior traders who get to learn from a great trader to improve their chances of becoming a successful trader.
Work intensively and purposely on your trading game. Year 2 of his trading career, this trader was consistently a 4-8k a month trader. His results were very consistent as a scalper. Today he remains just as consistent as a trader. But he has worked intensively and purposely to increase his size consistently, with his trading edge. He shows the trading community that if you get to a point in your trading where you can consistently bank 4k a month in trading profits, you can grow a career from there.
Be one of the good guys in the trading community. We are often inspired to work harder for our trader because of his gratitude:
Keep raising the bar for the goals you wish to achieve. We will meet with this trader and his Team this month to discuss goals for 2018. Both for his trading personally and his Team. With opportunity, they will expect to do even better, trade even bigger, and hit their new goals.
For those who have an edge in markets, but feel they should be making more or feel they are never going to make enough, perhaps this trader will inspire you to continue forward and achieve your goals.
As always, your comments/feedback are welcome.
*no relevant positions
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