Trading in the financial markets always involves a degree of risk, and options trading is no exception. However, within the realm of options, some strategies are considered more conservative, offering a balance between risk and potential returns. Let's explore a few options trading strategies that are often deemed safer:

1. Covered Call Strategy

Overview: In a covered call strategy, an investor owns the underlying stock and simultaneously sells a call option against it.

Risk: This strategy carries limited risk, as the ownership of the stock provides a cushion against potential losses. However, profits are capped at the strike price of the call option.

2. Cash-Secured Put

Overview: The cash-secured put involves selling a put option while having enough cash to cover the purchase of the underlying stock if the option is exercised.

Risk: Risk is limited, as the strategy is cash-secured, and the investor is obligated to buy the stock at the strike price only if the put option is exercised.

3. Protective Put (Long Put)

Overview: This strategy involves buying a put option to protect an existing long stock position.

Risk: Risk is limited to the cost of the put option, which acts as insurance against a decline in the stock price.

4. Collar Strategy

Overview: The collar strategy combines the purchase of a protective put with the sale of a covered call.

Risk: Risk on the downside is limited due to the protective put, but potential gains are also capped by the covered call.

5. Iron Condor

Overview: In an iron condor, an investor sells both an out-of-the-money put and an out-of-the-money call, while buying a further out-of-the-money put and call for protection.

Risk: Risk is limited due to the defined maximum loss, but profit potential is also constrained.

6. Credit Spreads (Bull Put Spread/Bear Call Spread)

Overview: Credit spreads involve selling one option and buying another option with the same expiration date but a different strike price.

Risk: Risk is limited due to the spread structure, but profit potential is also limited.

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While these strategies offer a more conservative approach to options trading, it's crucial to understand that they come with limited profit potential. Traders should carefully assess their risk tolerance, market outlook, and financial goals before implementing any strategy.

Moreover, gaining a solid understanding of options mechanics and market dynamics is essential. For those new to options trading, seeking advice from a financial professional is highly recommended.

Remember, no strategy can eliminate all risks, and markets can be unpredictable. It's essential to stay informed, continuously learn, and adapt your approach based on market conditions.

Happy trading!

After being in the trading space for the past twenty years, I almost got scammed out of the assets in one of my accounts last night. 

It started with a phone call from a number that I didn’t recognize; most of the time I just let these roll to voice mail as they are 99% telemarketers…but for some reason I answered it. 

“Hello, this is Josh from xxxx exchange, we’ve seen some login attempts that don’t fit your normal pattern. Have you logged in recently from London?

“We sent you an email earlier today warning you about this potentially malicious login attempt, and haven’t heard from you so I’m calling tonight.” 

“Would you like me to lock out your account for 24 hours?”

At this point my radar was not going off yet because this is exactly the type of phone call that I get from banks if there is a bogus transaction that hits the wire. I honestly thought that he was relaying along important information and I was concerned that someone had gotten into my trading account. 

I did not see Josh’s email because it ended up in my spam folder. (Clue number one!) 

When I checked the “from” address, I saw that it was from a .co domain extension, and not a .com extension. Again, this was odd but still not a major red flag. 

At this point I told Josh, “OK, before I go ahead with this I need to know that you are who you say you are, so I know that you’re not trying to socially engineer me.” 

Something was starting to smell off since he kept rushing through his responses and I had to ask him to slow down several times when asked for his name and the ticket number with the exchange. The final flag for me was when I hovered my mouse over a link in his email and it was going to send me to a strange-looking destination. Uh-oh. “Hey Josh, I’m not going to click on that link as I’m not sure where you are directing me.”

<click> Josh hung up. 

Phew. I almost gave away the keys to the castle. I have no idea how my phone number and email address was compromised via this exchange. I immediately changed my password just to be sure, and will likely change my email address associated with this account. 

The Bottom Line

This type of scenario is evidently a very big problem with online exchanges; a wily scammer can talk their way into a back door into your account, lock you out, and then transfer funds before you can do anything. From what I have heard, no exchange will reach out to you with this type of information; we are used to this with banks. Instead, they will text or email you and then YOU have to call back into the exchange/broker to authorize a security action. 

In your corner……..Doc Severson

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There’s a perception that a professional trader is someone who is constantly tossing contracts into the market, going long and short on the tip of a hat, trying to catch a move. 
 
While some could be like that, I like the idea of trading like a sniper, waiting for the right moment to pull the trigger. In some ways, effective trading could be like musical composition. I believe that it was Mozart who said something to the effect of: “The music is not in the notes, but in the silence between.” 
 
So then “trading” could be defined as: “Profitability is not in the trades, but in the pause between.” 
 
Let’s show an example; in August and into Mid-September, we were quite busy with our non-directional trades since the market was in a low-volatility condition and nicely range-bound. But two problems started to emerge: 

• The price was starting to converge into the apex of a triangle
• The daily chart “energy” was spiking, showing the potential for a big move. 

 
We closed down all of our trades and waited for the Market to make the next move, and “move” it did! Over two hundred S&P points to the downside, and counting in just a few days. 

​In this chart, the red circle shows the energy peak, and the yellow arrow shows the triangle apex; while we’re not in the business of predicting the future, we know from experience that this is a condition that likely brings about big moves that we’d prefer to avoid if we’re trading non-directional strategies. 
 
Had we just kept trading those strategies, undoubtedly a number of them would have been closed for a full loss. 
 
While you’ll miss 100% of the shots that you don’t take (Wayne Gretzky) sometimes it’s better to let the silence between the notes (or your trades) play out. Know when to wait vs. when to act. 
 
In your corner……..Doc Severson

​In his classic trading text “Trading in the Zone,” author Mark Douglas finishes his book with an exercise that he calls “Learning to Trade an Edge Like a Casino.” 
 
And it’s this skill that separates most amateurs from professionals in this field. We might have a statistical edge, but we give up at the first hint of trouble and run off looking for the Holy Grail. Does a Casino do that? Not if they want to stay in business. They don’t panic when someone wins big, because they know the odds are in their favor. 
 
It’s really worth your time to read through the entire exercise, but I’ll summarize the steps here: 
 

• Pick a Market - choose one actively traded stock, option, or futures market to trade. 
• Choose a set of market variables that define an edge - this can be any trading system that you want, as long as you feel that it has a statistical edge over time. The variables that you use to define your edge have to be absolutely precise; the system has to be defined so that it does not require you to make any subjective decisions or judgements about whether your edge is present. 
• Define Trade Entry - again, precision is key. There must be no ambiguity about whether an entry signal exists or not. 
• Stop Loss Exit - your methodology must tell you EXACTLY how much you need to risk to find out if the trade is going to work. 
• Time Frame - entry and exit signals must be based on the same time frame. 
• Profit exits - creating a system with a decent reward-to-risk opportunity is key so that the profits are worth the risk. 
• Testing - if you do not have access to backtesting software, then running a defined exercise on paper seems to be prudent. 
• Accepting the Risk on a 20-Run Sample Size - Calculate the potential loss on a typical trade based on your precise stop limits, and then multiply this by your run size of 20. The potential risk is that you might lose all 20 trades. It’s important that you “let go” of this capital and assume that it is already gone before the test commences. 
• Run the strategy per your rules - take twenty trades based on your precise set of rules, no exceptions. Your goal is not to win nor lose money, but rather to see if this system does indeed “work” as you drive it. 

 
How is this different from most retail traders running a system? In many ways! First, few precisely define their entry and exit rules, and then they compound this error by giving up too early when they find out that they are not truly comfortable with the aggregate risk. 
 
Consider running the Mark Douglas challenge with your own strategy, and let us know if you need any help doing so!