Investment Philosophy | Index ETF Credit Spread Iron Condor Option Advisory Options Trading System Service Using Puts and Calls, Spreads, Condors Trader Strategies and Alternative Investments
Option Trading
 

Investment Philosophy

There are myriad ways to trade options. There are directional trades and non-directional trades. Directional trades speculate that a particular stock or index will go either up or down. Once the stock or index starts to move in the correct direction approaching or surpassing a certain threshold, called the strike price, the purchaser of the option will begin to make money. Another type of trade is a non-directional trade that makes money when the stock or index remains within a trading range for a certain period of time.  Monthly Cash Thru Options (MCTO) primarily focuses on this latter strategy - non-directional trades, which is classified as an income generating strategy.  Periodically we will also open directional trades like butterflies, debit spreads and straight calls and puts to hedge and/or augment our income generating credit spreads to take advantage of macro level cycles of the indexes.  To our knowledge, we're the only credit spread advisory service that also mixes in some directional trades when the opportunity arises.

Adding another dimension to the directional and non-directional trade, we can either be a buyer of an option or a seller of an option.  Buyers of options are primarily placing a bet that a particular stock or index will go either up or down within a certain period of time. When buying an option we are opening a “debit” trade where we pay a fee, called a premium, to open the position.  When we "sell" an option, on the other hand, we get on the “other side of the trade” and we are betting that the stock or index will remain unchanged or go in the opposite direction to what the buyer is hoping for.  When we sell an option it's called a "credit" trade and we will collect a premium from the buyer and place the funds into our account when we first open the trade.  MCTO primarily focuses on non-directional, credit trades called credit spreads and iron condors.  (for more on credit spreads and iron condors please visit the Learning Center in this website)  And when we periodically open directional trades to hedge and/or augment our credit spreads, these are classified as debit trades.

A third aspect to consider is the amount of time and effort required to place and manage your trades.  The non-directional, income generating credit-spread strategy only requires 1 to 2 hours of effort per week, while generating an excellent 6% to 10% return per month, or 50% to 65% return per year.  This strategy does NOT require you to sit in front of the computer watching your trades and does NOT require you to become an options expert on the dozens of available options strategies. In contrast, if one were to focus on directional option trades, which is the typical strategy that most option training programs and advisory newsletters focus on, (100's of directional services exist) the directional strategy takes more time & effort in identifying the trades, placing the trades and the stop losses, managing the stops, and exiting them;  also, about 55% of the time directional option trades go the wrong way then requiring the trader to continually replenish the trades that stopped out.  Because directional trading is difficult, inconsistent, and take a lot of time and effort, this is why we primarily focus on non-directional, index credit spreads and Iron Condors that have proven year after year that they offer an excellent return with consistent monthly cash flow requiring the least amount work, stress & hassle. 

A fourth aspect to consider is the underlying security that is traded.  MCTO focuses on placing non-directional, income generating, credit spreads and iron condors on the S&P 500 Big-cap ETF (SPY), the S&P 400 Mid-cap Index (MID), and the Russell 2000 Small-cap index (RUT) and avoids placing trades on individual stocks.  The advantages of placing option trades on indexes are the following:  1) The major indexes move enough so we're able to collect a reasonable premium each month, usually between 5% to 9% return per month;  2) The major indexes move slowly enough where we're able to win on about 90% of our trades;  3) The indexes move slowly enough, and we set our strike prices wide enough where we can get out of our credit spreads if needed when the market surges or drops unexpectedly;  4) Options placed on the MID and RUT broad based indexes trade European style, meaning that options placed on these indexes cannot be exercised until the last day before expiration, giving us more time and flexibility to adjust our trades if necessary;  5) And finally, options placed on the major indexes are immune to company specific news.  We've all seen how a stock can be cut in half overnight due to an unexpected announcement such as the CEO stepping down, or an accusation of fraud against a company.  We avoid company specific risk by only trading indexes that comprise hundreds or even thousands of companies. 

A fifth aspect to consider, and being specific to index credit spreads, is how aggressive to set the strike prices for both the top and bottom credit spreads that create the iron condor.  For more on credit spreads and iron condors, please visit the Learning Center on this website.  Some competing advisories set their strike prices more aggressively at about 1.0 standard deviations away from the underlying index that represents an approximate 70% probability of being profitable.  In contrast, we set our strike prices at about 1.3 standard deviations away from the underlying index, which represents a 90% probability of being profitable.  If we were to set our strike prices more tightly around the underlying index like what our competitors do, we'll have more losing months per year, endure more stress, and be required to work more during these losing months since we'll be forced to adjust our trades.  The MCTO team came to the conclusion many years ago that we like to sleep well at night, especially when the markets get volatile, and we're happy with a 45% to 65% annual return, thus the reason that we set our strike prices wider.  As a result, our credit spreads get in trouble about 2 times per year, our losing months are less severe as compared to our competitors that select more aggressive strike prices (our losing months usually are around -5% to -10% loss), it's a lot less stressful, this strategy requires less work, and we can still achieve an excellent 6% to 10% per month, or 45% to 65% per year. 

A sixth aspect to consider is what happens if one of your credit spreads gets into trouble and goes in-the-money (ITM).  Once in a blue moon one or more of our credit spreads will get into trouble and go ITM.  What differentiates us against our competition is that we fight hard to save our original risk capital by utilizing sophisticated adjustment strategies.  We're experts when it comes to the "difficult" situations and our Learning Center is loaded full of case studies on the topic.  (you'll notice that no other credit spread service has a Learning Center like we have)  Case in point when the market crashed 30% in October 2008, a few of our better known competitors just threw in the towel and let their subscribers lose all of their risk capital on their ITM spreads, which was very sad.  In contrast, the MCTO team stayed the course, constantly guiding and educating our subscribers on how to keep rolling and adjusting our spreads until we were able to get most of risk capital back.   We hate to lose money and we always fight hard to make sure that we don't lose our trading capital.

A seventh aspect to consider is portfolio allocation and how to get most or all of your money working for you each month.  Because the MCTO team opens wider strike prices that have an 90% probability of being profitable, we're able to put more of our money behind just a handful of index credit spreads. The MCTO team personally allocates 60% of our portfolio to non-directional, income generating credit spreads, we hold 20% as reserve cash, (for more on why we need to hold reserves please visit the Learning Center and read the entry entitle "what if the market surges unexpectedly, how do we protect ourselves?"), and we periodically open directional trades on the remaining 20% or our portfolio.  A negative for directional option trades, however, is that they take more time & effort in identifying the trades, placing them, managing the stops, and exiting them;  also, about 50% of the time directional option trades go the wrong way then requiring the trader to continually replenish the trades that stopped out. Therefore, we recommend that our subscribers allocate a larger proportion of their portfolio to the less stressful and more consistent, non-directional credit spreads.

In summary, the MCTO team believes that the strategy of trading far out-of-the-money, non-directional, index credit spreads and Iron Condors provides the highest return and most consistent monthly cash flow requiring the least amount work, stress & hassle. This strategy takes a few hours per week and generates an excellent 6% to 10% return per month, or 45% to 65% per year.  If this sounds interesting to you, please read on and consider signing up for a free 30 day trial.  If you decide that like our approach after 30 days, you can continue the service for $85/month, and you always have the flexibility to cancel your monthly subscription at any time.

   

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