🔴 The Stock Market Crash 2020 – Day 52 | My 4 Step Approach For Developing A Trading Strategy Pt. 2

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📉The Stock Market Crash 2020 – Day 52 | May 6, 2020

My 4 Step Approach For Developing A Trading Strategy Part 2

In this video, I’m going to continue the discussion on my 4 step process for how I develop a trading strategy, from beginning to end.

So first, let’s review the template for my 4 step approach for creating a consistent and profitable trading strategy:

1) IDEA
2) TEST
3) RULES
4) TOOLS

In the first video (which is available here: https://youtu.be/UXuFnjBYsGM) I began my process of developing a new trading strategy focused around trading earnings.

There’s a phenomena around earnings that is know by more experienced options traders:

-Before Earnings, the volatility slowly rises the closer you get to the company announcing. With high uncertainty comes high volatility.
– After Earnings, the option contracts experience what is known as “volatility crush.” This is where basically all the uncertainty has disappeared and with the uncertainty, also goes the volatility.

This “volatility crush” is what we’re basing this strategy around. The idea that right after earnings all of that premium in the options basically vanishes, significantly reducing the overall value of the options.

The strategy I’ve been testing out is called a “Strangle.” With a strangle you’re selling a call and a put, looking to contain the price of the stock within put strike and option strike you sold.

So here’s what we need to determine with this strategy we’re developing:

– What stocks are we going to trade?
– Strike Price?
– What expiration?
– When to enter the trade?
– When to exit the trade?
– With a profit or
– With a loss

Now, let’s take a look at actual example of this strategy with a trade I currently have in Disney (DIS) who reported earnings this week. The thing I liked about Disney for this strategy is they have historically had small moves post earnings.

So what I did on Monday was I sold the:

– $111 Call
– $91 Put

These strikes were outside what I saw as a normal or expected move for DIS around earnings and in two days this trade returned $99.5. Now remember, this was way below my normal positions size, but for the test I just used one contract.

Now let’s discuss the profitability of this strategy. Here’s what I’m looking for in this strategy:

– 90% chance of success
– I want to make at least $100/contract
– I only want to be in the trades 2-3 days
– Limit my losses to $200/contract

Realize that these aren’t the hard rules of the strategy yet. These are basically the loose parameters for the strategy we’re testing.

We’ll get into the rules in the next video, but I hope this has been helpful so far. When I develop any new trading strategy I try to be very systematic about how I do it.

Subscribe to my channel to make sure you don’t miss the next video in this series.

See you then!
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#developtingatradingstrategy #tradingstrategy #optionstradingstrategy
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