Index Option Trader - Options Trading Strategy

Welcome to Index Option Trader

Learning the ins-and-outs of options trading can be a daunting and very time consuming experience. We've spent years studying and monitoring the equity & options markets, as well as the elements that drive market movements.

Through the application of advanced fundamental and technical analysis, we have devised a simple method to garner profits through trading options. We take the guess work out of the trade, and perform the research for you. You may have heard that options are "wasting assets" since time, when you purchase calls and puts, is always working against you. Our strategy actually takes advantage of time decay, putting time in your favor instead of the other way around, as common with 'basic' calls and puts.

Index Option Trader - Strategy

The core Index Option Trader strategy is primarily centered around monthly, market neutral, index option credit spreads on major index products such as the SPX, SPY, and QQQQ. This is known as an Iron Condor, which is a type of options spread trade that involves simultaneously buying and selling multiple options contracts in order to profit from a 'neutral' market movement. Iron Condors are sold at a net credit to the traders account, meaning that funds are deposited into the account once the Iron Condor is filled.

Here is a visual representation of the profit & loss chart:

As you can see from the image above, if the price of the underlying instrument (index) stays between, in this case, 40 - 50 by expiration, the net credit to the account is kept. In the case that the underlying rallies or falls outside of the two 'strikes', then the position experiences a loss.

For more information about credit spreads and Iron Condors, click here.

Each month in the Trade Report, the range of the Iron Condor is issued in the Trade Report. The trades parameters are based upon our own proprietary models that incorporate technical and fundamental analysis as well as various other factors that impact index option positions.

We choose to trade index options over stock options for a variety of reasons. Index options are much less volatile than individual stock options. A stock can move +/- 10% in a given day, whereas an index probability of doing so is extremely rare (and would constitute a crash). We primarily only trade european style, cash settled index products so that A) there are no shares to buy, and B) My short options, as part of the strategy, cannot be assigned before expiration day.

I've never traded options or credit spreads. Will I be able to trade your setups?

Many of our subscribers started with little or no experience trading options or credit spreads. Consequently, we provide very detailed and precise strategies that our members have no problem entering and exiting. However, we strongly recommend paper trading and educating yourself on our strategies to the point where you feel comfortable before ever actually making a live trade. We also recommend checking with your options broker to make sure you are approved to trade credit spreads in your account.

What is a credit spread?

The spread is constructed by buying one stock option and selling another of the same type (call or put) in the same expiration month but at different strike prices. The option that we sell is more expensive than the option that we buy, thus resulting in a net credit (deposit) to our trading account. The advantage of this spread is that in order to profit, we don’t need a directional move in the stock. Instead, we profit from time erosion.

Aren't complex options spreads risky?

Every trade has inherit risk, but my strategy encompasses a favorable risk to reward ratio (max gain to max loss, usually around 1:1 - 1:2) and is also limited risk, limited profit. Now you may be thinking limited profit? Yes! Limited profit, limited risk strategies enable us to put on higher probability trades each and every time.

How much should I allocate each month to each trade?

We recommend allocating anywhere from 5-15% of your total account size per trade, depending largely on your tolerance for risk. In the rare event that an adjustment is issued and you cannot get filled and your position takes the max loss (as defined in each month's Trade Report) you will have only lost 5-10% versus losing 10%+ if you allocated more. This is proper money and trade management. We firmly believe in capital preservation and proper money management techniques.

How many different positions do you recommend each month?

We usually issue between 2-3 different positions each month (starting November 2007), sometimes more depending on the current market conditions. For example, we will issue a trade on the SPX and SPY, as well as a position on the QQQQ, or the RUT. You can choose to trade 1 or all of the recommended trades. The choice is yours depending on how much capital you would like to commit and how many simultaneous positions you would like to be in.

How do we know when to exit a trade?

A majority of the time we will just let the options expire worthless on the expiration date. In the case of a drastic market movement in our favor or against us, we would send out an email alert stating to exit the trade, or make an adjustment to the trade. One of our main concerns for our clients is capital preservation and disciplined money management. Due to this, at times we might even exit a trade prematurely just to take the risk off the table or book a profit on the trade. If you ever feel uncomfortable in a position for any reason, it’s important for you to exit a trade without waiting for an email from us. We have the same goals: keep our losses small and our profits large.

How are index option spreads taxed?

The IRS defines a non-equity option as "any listed option that is not an equity option." According to the IRS, non-stock options include debt options, commodity futures options, currency options, and broad-based stock index options. A broad-based stock index is based upon the value of a group of diversified stocks or securities (ten or more). Standard and Poor's 500 index (SPX) is one example of a broad-based stock index. Generally, capital gains from stock or stock option investments held less than one year are considered short-term and those held longer than one year are considered long-term.

However, according to the IRS, under the marked to market system, 60% of a capital gain or loss may be treated as a long-term capital gain or loss and 40% may be treated as a short-term capital gain or loss, even if the position was held for less than a year. The ramification of this rule is that capital gains or losses considered to be long-term have lower marginal tax rates than short-term capital gains or losses, and index options on broad-based indexes qualifying under the 60/40 rule have a more favorable tax treatment over options on equities considered short-term investments. We strongly recommend consulting your tax advisor for more details on ITC Section 1256 contracts.