tastytrade Tasty Bites

A "Wing" is a term used uniquely in options trading to describe the risk of a trade through the protection that is purchased. For example given a naked short put in SPY, we could define the risk and turn this into a put spread by buying a Wing $10 away. Join Tom and Tony today as they dig deeper.

We are currently experiencing one of the most volatile markets since 2008. What can a new options trader do? Today, Tom and Tony discuss what and how a new trader with limited capital can do in this special market.

Tom and Tony discuss how correlation risk can negatively impact our positions in a market that is selling off. In severe market selloffs, correlations of equities converge towards 1. In all other markets, correlations can be anywhere from -1 to 1. This means that diversification in equities is virtually non-exisitant when the market sells off. To combat this, try putting positions in other asset classes that hold their non-correlation better in market selloffs than equities.

With the gold to silver ratio climbing, how can traders with smaller accounts take advantage of the environment without breaking the bank on futures? Notionally, gold and silver ETFs are much smaller products, making them more appealing for tastybite-sized accounts. Instead of trading gold and silver futures, one can trade GLD/SLV call spreads according to the spread notional to benefit from the high ratio with a bunch lower buying power.

In this tastybites, we take a look at various different ETFs that we can sell premium in while keeping the same benefits as if we were selling large market ETFs. The benefits include: Underlying diversification Liquidity Selection of multiple underlyings Trading sector ETFs can provide smaller accounts with more opportunities to trade because they are smaller priced products.

Today’s tastybite discusses why we manage winners instead of just holding our trades to expiration. When we manage winners, we close the trade at 50% of our potential maximum profit. This allows us to collect profits more often. If we hold to expiration, we face the risk of decreasing theta in short OTM options, decreasing P/L per day, and increasing gamma. Therefore, we like to manage our winners in order to collect profits more often and minimize risk.