Podcast – Episode 013 – Interview With Jeff Stanton
Allen: Welcome Genius nation to another edition of the Option Genius Podcast. This is going to be a special edition because not only am I here by myself but today I am joined by Jeff Stanton. It’s going to be our first ever interview podcast. So in the past all the other episodes that we’ve done I’ve basically been talking to the mic and I’ve been talking about whatever topic interests me and we go on and on and try to help and try to share my knowledge. But this time I’ve actually been lucky enough to get Jeff on the phone and I’m going to be asking him some questions. Jeff is a professional trader who lives out in New Jersey right now. How are you doing Jeff?
Jeff Stanton: I’m doing fine.
Allen: Awesome. Cool. Let’s get down to it. Let’s get started. How was it that you got started in training?
Jeff Stanton: Long interesting story, but basically when I was a kid I took a summer school class when I was like 10-12 years old that had to do with markets and learning about businesses, and we sold stock, and ran a business, and actually made a bunch of money as a summer school class. At that point, as a 12 year old, I thought making money off of the stock market seemed like a really great idea. My parents were arguing all about stocks all the time and so literally on the morning of my 18th birthday I took all my savings, opened a brokerage account so my parents could not interfere. A broker laid out 10 different stocks. I picked one and over the course of about 4 years I made 400% on my first trade. I spent a lot of hours in college trying to figure out the markets, as in charts and balance sheets, and what, technical analysis, or just monkeys throwing darts at a Wall Street Journal. I really fell in love with technical trading and charts. This was back before computers and I did everything by hand. Over the years, I got married in college, and unfortunately I had a wife that wanted to spend 120% of whatever we earned so there wasn’t much in the way of investment funds.
I then got divorced in my early 30s and I was able to put some trading stakes together. I was a full-time employee in the computer programming/billing area for phones and cellphones most of my life. I did very well in the late ’90s with the internet bubble. I was able to hold on to a lot of that money and I was able to save a lot of money. I have a new wife that is very like-minded which turned out being very great. I’ve tried different things, futures, options, stocks, Mutual Funds, all different types of systems with varying degrees of success and trying to do that while working full-time. I accumulated a nice stake of money. Then finally my job decided they did not need me anymore.
Allen: Oh man.
Jeff Stanton: I last my job last December and decided to do this full-time, which it just seemed like the starts aligned properly with finances and my knowledge I think, and the fact that my other half provides me with health insurance which is a good thing. I find myself here to today spending about six to eight, nine hours a day with a bunch of screens trading.
Allen: So you’ve been doing this about a year, almost a year now professionally, full-time.
Jeff Stanton: Yeah, my previous job allowed me to do a lot of trading because a lot of my clients were international. So I was working all hours of the day. That freed up a lot of mornings for me. I was probably for about the last five years been very, very active.
Allen: What do you trade? Or what have you had the most success with?
Jeff Stanton: That’s another thing. I believe in if you’re trading options, or you’re trading stocks, or futures, or whatever, you need to do things in a way that allows you … You need to diversify in my beliefs. You need to do things in a way that reduces stress as fast as possible. So actually, I have my money kind of divided up into multiple buckets. I have a bucket for fixed income, I have a bucket for Mutual Funds, I have a bucket for dividend stocks, I have a bucket for options, and then I also have a bucket for an S&P mechanical system that I also trade.
My main trading, as in my short-term trading that I’m really doing every day is really in the options’ field. The majority of my trades are in options. Most of the other stuff is multiple weeks, multiple months, and sometimes years.
Allen: What percentage do you put in each bucket?
Jeff Stanton: It’s different. The fixed income I think has about 10-12%, the Mutual Fund has probably about 35%, the S&P system has probably about 25%, the dividend stocks have about 10%, and the options about 15%, off the top of my head. I hope that adds up to 100%.
Allen: It’s close to it. I didn’t do the math but it’s close to it. Cool.
Jeff Stanton: Each hat … So what I hope to … Because I still feel like I’m learning a lot about options, and so a lot of the other stock is fairly automatic. I want to increase my option trading. I want to increase my goals in options. I want to learn more about options. Right now it’s been a very frustrating year, in my opinion, of the options trading with the low IBR and the low volatility. So it’s been very frustrating that I’ve been in my options account, I seem like I’ve been bouncing around between up to zero and up 8% back and forth. I’ve had about a 5% draw now over the last month.
But also too I feel like I’m still in the learning stage. I’m spending a lot of time trying to educate myself the best I can. I’ve done some bonehead rookie mistakes like defending trades way too quickly. With the options trading I’m trying to push myself that during higher volatility times I hope to have about 40 positions on, 40 different underlines. Right now I’m actually sitting on I think this morning I’m at about 17 or 18 tight now. It’s been frustrating with the way that I trade.
Allen: Right, right. That’s very different from the way I do it. For me I would like not to be that active as you are. Obviously you said earlier that you’re trading about six, seven hours a day. My main focus is I want to be doing as few trades as possible while hitting my monthly goal. The volatility in the iron condors, the credit or something like that that I do it’s not as big of an issue.
We came across you in our Facebook group which is called the Option Traders Alliance on Facebook I asked you, because you were pushing your trades graciously, and you put at least one or two trades every single day. I asked you, “How many trades do you do?” And you responded with about 30. I was like, “Wow.” Knowing myself I lose focus if I have more than maybe 10-15 trades on at a time. If I get up to that many trades, like 15 trades I found out that I’m missing stuff, and stuff happens, and I start screwing up. I start taking losses when I don’t have to. It’s really interesting that you have that many on and that you’re frustrated that you don’t have enough trades on.
Jeff Stanton: Some of my philosophy with this is that I think that one of the things that any option trader has to do is that they have to have reduced commissions. You can’t be paying ticket prices or really paying more than a $1 or a $1.50. With paying a small amount that allows you a lot of flexibility with all the different strategies. Instead of concentrating on a couple of stocks I try concentrating all over the place or I try spreading it out all over the place. I try my best to be diversified also in the options trading that I try having currency trades on, on bond trades on, gold trades on, oil trades on, and different industries and stocks so that you have it all spread out. I keep my number of my contracts down very, very small because I just believe that you should be constantly trading, constantly harvesting gains.
I’ve mentioned on the website, on the Facebook, that I’m kind of a hasty trade philosopher type of trade which they have the idea of trade small and trade walking. I believe also to is you get better at trading the more decisions you make. I think that my basic goal is to, in a given year, have 1,000 trades during the course of the year. It comes about to being about three a day. You’ve seen my trades going up on Facebook. It’s been very hard to with the low implied volatility. I’ve not had too much luck with debit and credit spreads. I don’t do a lot of them. I typically stick a lot of my trades are just strangles.
Allen: The one thing about [crosstalk 00:11:21] trade is I know they say that, “Trade small, trade often,” but they’re pretty much a broker now. They were a broker before when they were tied to Ameritrade and now they’re tied to the new one, Tastyworks I think it is. I kind of feel like would they really be doing that or not. But I totally agree with you that the more you trade, the more experience you get. Somebody who’s trading 1,000 trades in a year is going to learn 10 times faster than somebody who’s doing 100 trades a year. That, I definitely agree with you there.
Back testing I think would also be a huge benefit to somebody who’s just trying out. A lot of times that’s how I started. Well I didn’t get started that way but I learned much faster that way by getting myself a good back testing software and then doing it over, and over, and over again through multiple different time frames. What I see you’ve been traded in 2017 where we have a very low volatility environment and the market has just been melting up slowly, slowly. People who get started at this time frame they might master it, and they get really good at it, but then when the volatility comes back they’re going to get shocked. That’s one thing that you really have to be careful of.
So what was like…
Jeff Stanton: Yeah I mean like…
Allen: Sorry, go ahead.
Jeff Stanton: I was just going to say last year when we had higher volatility it felt more like shooting fish in a barrel. It was a lot easier to trade with the volatility and not a one-sided market. But go ahead with your question.
Allen: My next question was what was your biggest aha in trading? When was it that the light bulb went off or something clicked and started working out for you? Obviously you’ve been doing different types of trading for a long time and I know that the decision was made for you in a way, that you were laid off. But there had to be that confidence that you had that said, “I’m going to go do this on my own.” What was that for you?
Jeff Stanton: It was funny with the thought that comes to mind was simply okay I have this opportunity to try this full-time, and I’m going to take this opportunity, and the worst thing that happens is I have to go get a job basically. Like I said, there’s a lot of ideas that I’ve picked up from PACEY trade but I also just from all my experiences with all the other groups that I have come across over all these years. I have my own method of madness as in how I trade and all this type of stuff. But I just really believe from the standpoint that it is funny, I just felt like thinking about all this is when I first started trading options I was basically writing cover calls. Then I stumbled across the idea of okay there’s these stocks that I would like to be cheaper, so I would just put in naked puts and I’m going okay low and behold you get the stock at a cheaper price or you get the premium. Then I noticed when I was doing that a couple of times something crazy in the market would happen, some volatility, and the premium would get a lot higher. Suddenly I was waiting for sell offs or something like that to do this. I noticed I could get more premium.
Then I stumbled across it, I got kind of screwed up on a trade by earnings because I thought okay this is rich premium. I didn’t quite understand the concept of earnings and how that affected options. So then I put options on earnings plays. The craziest thing with that was I had put on 44 earnings trades, I had made money on 42 out of the 44, but yet I was down money because the 2 that went against me had 4 standard deviations going against me. That was the moment I’m going like, “If I’m going to do this at any type of regular basis I need to get some training.” I’d start picking up anything that was free on the internet. Like I said, I also came across PACEY trade and really been crazy with all their free type stuff.
The aha moment I guess was that selling premium one day just dawned on me that seemed like it was less riskier than owning stocks, that the probability seems higher to make money than actually owning stocks because it seemed like stocks were more of a 50/50 shot and you could set up options strategies that you could pick your probabilities. By properly managing the trades you could generate a better success rate.
Jeff Stanton: Also to that, something I didn’t understand, is that options are typically overpriced because they can’t properly price in the black swan event. Something might be out there with like a delta of 16, so you have an 84% chance of it staying in the money. But statistically if you really look at it it’s more like an 88%. Then if you put some simple rules around on how you’re going to manage your trades that go good and bad hopefully you make money.
Allen: Right, right. Definitely I think options are an awesome way to go about it. I think stocks should be in the portfolio and for people who are just starting out, like you said, the story that you told that you started with covered calls and then you moved on to the naked puts, I think everybody can pretty much relate to that because that’s how everybody gets started originally. When you first get started that’s the only thing you’re allowed to trade by the broker until you get more experience. So yeah, I have many stories about covered calls and then covered calls gone bad.
One of the things that we always tell everybody when they’re new especially is that, “Earnings, you should stay away from.” Whether you’re selling premium or another it’s just there’s too many unknowns out there that yeah you can win so many times in a row but you miss that one time, even if the company knocks it out of the park, even if they have good earnings sometimes that stock is just going to drop because the stock went up too much already or some analyst came out against it, or whatever reason. So it’s definitely something.
How do you go about finding your trades now?
Jeff Stanton: Actually to give you one story on the whoops type of thing. Back in the ’80s I was trading commodities and I was along the broad market or the value line, for people who actually remember what that was, and I was short. This spread would move maybe $100-$200 a day, up or down, and not have anything happen. Well low and behold, in Chicago there was the Tylenol scare with Johnson & Johnson, somebody had poisoned people using Tylenol pills. Johnson & Johnson crater on that and in the course of 15 minutes that spread moved $28,000 on me.
Jeff Stanton: I was just lucky to be in that position where it was a $28,000 profit. But at that time my account was only worth $30,000. So I could have been wiped out. Getting back to your question about how I look for trades, I frankly believe that the best timeframe of taking money out of the market with the options is to put a trade on where there’s like 40 to 55 days before expiration with the idea the idea that you would either role or get out of the trade say 20 days before expiration. That seems to give you the least amount of risk but the most decay in premium. Basically on a couple of different platforms I have a bunch of lists of stocks broken down by industry that I will sort by either IV or IVR rankings to see which stocks have the most or the least amount of premium in it. Based upon the stock chart patterns, I really like selling strangles when a stock is within the middle of a move. Where if it’s in a range try picking it within that middle of that range. Something that is a very, very important point I think for any option traders, especially new option traders, you must pick liquid stocks, you must pick liquid option contracts.
I typically stay away that if the spread on these option contracts on say the strangle that I want to put on is more than say 20 cents I usually stay away. You can go into strangles on Facebook, and Apple, and a bunch of these guys where they’re penny wide. Sometimes if I’m doing something in Amazon, or Google, or whatever I’ll break that rule because they’re just good stocks to trade, but they try being liquid. Also if a stock is at a top of a range or at a bottom of a range I might do call or put ratios where I buy one and sell two, kind of picking a top or picking a bottom. Or, another way that I set up trades is a stock like Boeing, it just had been going to the moon. What I’ve been doing is I’ll sell a call spread and finance it with a put so that if the stock continues to go up I will collect enough premium that I will not loose money on the call spread that I sold if the stock goes beyond the call spread, but that I only have downside risk. With Boeing it’s worked out pretty well for me on something like that.
Allen: So you would sell..
Jeff Stanton: I also [crosstalk 00:23:08]…
Allen: … The call spread on Boeing?
Jeff Stanton: Yeah I’ll sell the call spread and I’ll sell a put. So if the call spread is like 2.5 points in Boeing I will try selling the call spread and the put that I would like collect like $3 so that if Boeing keeps on going up I make 50 cents. If I get lucky with Boeing and Boeing goes sideways for a couple of weeks I might be able to pull like $1 out of it.
Allen: Right, okay.
Jeff Stanton: It’s…
Allen: Yeah because you mentioned that your risk was only on the downside. So I was like wait a minute, if you’re selling a call spread and it keeps going up then your risk is on both sides. But okay, I see what you’re saying. You’re trying to get more credit [crosstalk 00:23:55] the spread.
Jeff Stanton: Somebody coined the phrase, they refer to those as J lizards, why I have no idea why the name is called that. I had never even heard it up until about 6 months ago. Also too is I will do Earnings Plays. I don’t do many and probably, actually my worst losses this year have been on a couple of earnings plays. I’ll keep an eye out for that. But I’ve also been quick on the fact that you put on a trade and you roll it, for whatever reason it hasn’t met your profit target. So you just roll it to the next month. Unfortunately, that month has the earnings in it. I had a lot of fun with that a couple of times too.
Allen: If I heard you correctly, what you said is basically you look first for maybe you do a scan or use some kind of screener that will show you which stocks right now, or which options have the highest IV or volatility so that you get more premium than normal, right?
Jeff Stanton: That’s correct.
Allen: Then you go ahead and you put those in a list, then you take a look at each of those charts and then you see what can you play with it. Then you say, “Okay, this is what this is doing. I can play it as a strangle if it’s going sideways. If it’s moving on one direction then you can do the J lizard either up or down.” Then based on that. Okay, that’s cool. That’s interesting.
Jeff Stanton: If have these lists set up and I probably go through the lists like twice a day. You have special situations where maybe Donald Trump tweets about some company and suddenly the volatility will pop up on it, or there will be rumors of a merger, or they’ll preannounce, anything that will suddenly increase the volatility. The one thing that I haven’t mentioned is that I definitely do not believe in holding on to the position until expiration. Depending upon the trade type and how I feel about the stock I’ll typically have for a lot of the strangles I’ll try taking 50% of the premium out if I’m doing like a straddle or a J lizard, or a ratio, I’m looking for 25%. Sometimes that also too … If I have a profit goal of like 50% but for whatever reason recently right after Facebook had its earnings I put on a trade on Facebook and it’s premium just collapsed over a couple of day period of time. I took a 25% gain in 3 days. So if I can take a real fast profit I’m taking the money and getting out of there. I’m not going to hang around for my 50%.
Allen: Do you have a dollar goal on each trade and how much you want to make in dollar terms?
Jeff Stanton: Not necessarily. Last year when the volatility was much higher I was always trying to put on trades that had $2 worth of premium at least and trying to collect a $1 out of it. But there’s been so many trades this year, I just recently put on a iron condor on GM that I only collected I think 88 cents. I might take 30, or 35, or 40 cents out of something like that. Also too on the other side, sometimes with a strangle I will put something on Facebook, Netflix, or Apple that is a little farther. I might 60 days out and put on something that has $5 worth of premium with my goal of only take $1 out of that, just allowing the premium to collapse a little bit where the strangle will be a little tighter and you’re looking to quickly get the profits out there. But if we had normal volatility I would love to pull a $1 out of each trade that I make, but that’s just not possible this year.
Allen: We haven’t had normal volatility in a while. For the way I was doing it, even last year was pretty low volatility. But the cool things about options is I’m listening to you and I was like you trade in one way, I trade in a totally different way and it’s cool that options are so versatile. There’s so many different ways to do it, so many different people doing it in their own way with their own styles that you can accommodate everybody. It’s so cool.
Jeff Stanton: The only problem, just that statement that you just made there, you look on the Facebook group and there’s a handful of people who are posting some trades. It’s the whole different realm all over the place as in how people trade. It’s a real cool thing that you can really do.
The one thing that I believe you would probably preach this in your website and everything like that, the thing that bothers me, that kind of drives me crazy with new traders, is that somebody will sell a 10 delta call put and so they have, in theory, a 90% of chance of winning. So they have this mindset that I sold it for 10 cents, that means I can make $10, so 9 times I’ll make $10 and on the 10th time I’ll lose $10.
Allen: Or $90.
Jeff Stanton: And it just doesn’t work that way. Options are typically well precisely priced. If you have a 90% of chance of winning and you’re going to win say $90 on 9 trades that 10th trade is really priced in way that you’ll possibly lose $90. It’s a kind of a zero sum game with the weight. That’s how you need to manage your trades and manage your winners.
Jeff Stanton: And have some thought process about that. But that seems to be a real misconception there for new traders that really drives me crazy.
Allen: We get asked that all the time. It’s like the math doesn’t work on this. Just like you said, and our answer is always the same thing is why would you let yourself go and lose that whole amount on that last trade?
Jeff Stanton: Right.
Allen: If you had the ability to sit there and watch it … If your child doesn’t know how to swim and they’re going towards the edge of the pool wouldn’t you get up and stop your child, and pull them back? You wouldn’t just let them dive into the water and drown. That’s the same thing with this concept. We always preach that you should have a max loss and it should be somewhere close to what you can make. If you’re trying to make let’s say 10% on a trade your max loss should not be more than maybe 30%. If you’re down 30% it’s going to take you 3 trades to get that back. That’s time to bail out especially if you don’t know any other way to do it.
Do you have anything like that? Do you have some kind of max loss or adjustment? How do you know when the trade’s going bad? How do you deal with it?
Jeff Stanton: I can be stubborn about that to put it into simple terms. It’s funny at the beginning of the year I shorted the utilities UTF and start writing cover puts against it. I have never really been up on the trade. Now the trade is 11 months long, I’m still down about 200 on it and I think at last count I’ve made 14 trades on it. So with earnings a lot of times sometimes you just get in a situation that you can try minimizing your loss but you start calculating, or I calculate, as in what the average premium I could probably pull out from this position if everything worked okay per month and how far am I down? Does it make sense based upon the chart? What type of loss I have if I should continue on. I don’t have any set rules of where it’s a one times loss, two times loss, three times loss. But I will manage trades for a considerable period of time if I need to if it seems like I can get myself back to a much smaller loss or if I can scratch it.
Allen: So you just keep rolling it forward then?
Jeff Stanton: Yeah. From a standpoint that you’re allowed to do that as in from a standpoint of the undefined risk trades. The defined risk trades, like the credit spreads, or the debit spreads, you really don’t have an option of rolling those. There’s only so much you can do to defend a position like an iron condor. Many times with an iron condor if it’s going against you you can turn it into an iron fly and collect some more premium in the since that you have a butterfly and you just hope that you hit the middle just perfectly.
But with a strangle one side gets tested or one side loses so much premium. I roll the untested side down. Then if the stock continues to go against me then I might roll the untested side to a point where I have a straddle on. Then sometimes it’s necessarily to even become inverted on the spread where you’re trying to make money that particular way. Once you get to the point where you go invert it and you’re not collected the amount of money of the inverted spread then I question is this good to continue in. Sometimes I will collect $1 and my loss on the trade is $5, $6, $7. That doesn’t happen often, thank God, but I’ve had trades I’ve posted a couple of trades I believe on the Facebook where I had a trade go against me that I collected $1.25 and the trade went 800 against me and I just kept on defending it. After about 3 months I took it off for a $75 profit.
Allen: As an individual trader when you’re managing your own money it’s such a relief to be able to do that because you don’t have to answer to anybody. A lot of times if it’s a trade that I’m doing with one of the services that we run I have to cut it off. I have to say I can’t just keep this going for six months at a time. I just have to stop it and say, “Hey, this is a loss, I’m taking a loss. I’m just going to start over next month and we’ll do it again.” I remember when I first got started, when I first was learning, I kept a tally of every single ticker symbol that I had traded. At the end of the year I would go in and I would say did I lose money or did I make money? I still have this list with me. It had a number so for the year how much was I up or how much was I down on each ticker. Then my thing was I’m going to go back into the ones I lost and I’m going to go get that money back. I’m going to make them give me my money back.
Eventually I realized that maybe I should the opposite. The ones that I’m doing really well on maybe I should just focus on those, and grow up, and now worry about the losses. I was giving them emotions and feelings where they’re trying to hurt me when it’s not really true. They don’t care. The tickers, they don’t care, they’re not even real. So when I realized that I was like, “Okay, yeah there are some symbols that you can trade, at least depending on the style that you have. For some styles these tickers will work really well and for other styles they don’t.” For me that was a big aha moment when I realized that. But that was…
So basically Jeff now that you’ve been doing this for a while. You’ve learned a lot, you’ve taken your lumps and like you said, you’ve been putting on 100s of these trades. What advice would you give to somebody who was looking to make the change to go from I’m a part-time I’m learning about this to I want to go do it full time where I want to pay the bills doing this stuff? What advice would you give someone like that?
Jeff Stanton: You need to do this in an environment that produces as less stress as possible because this can drive you crazy. You can’t just run into the market and go, “Okay, I need to make $200 for a car payment,” type of thing. You have to have … I would not recommend anybody doing this with borrowed money, definitely. You’ve got to first, even before you quit your job and all that type of stuff, you’ve got to know the mechanics. You’ve got to have a method on how you are going to go against this. How you’re going to make this work. Personally for me, paper trading doesn’t do it but I do know a lot of people that paper trading is extremely helpful. I also believe that anything you do, if it’s paper trading, or if it’s real trading, or other things, you need to keep statistics on yourself.
Jeff Stanton: You need to figure out what works for you and what doesn’t work for you. The best that you can do before you go on to this adventure is figure out what you are comfortable with. Maybe it’s just staying with iron condors or defined risk trades. Maybe finding a small group of socks that you’re very, very happy with. It’s also very, very helpful if you have a support of spouse.
Allen: Oh yes.
Jeff Stanton: You have a spouse that with this. I also too, one of the nice things is my wife works at home a lot so I have that communication with her. But there’s times that she’s at work and I’m just stuck in my man cave by myself. You have to deal with the idea that you’re just looking at a bunch of screens. You may be chatting with a bunch of people online and everything like that but it can be lonely.
Also too is that there’s a learning curve. When you’re risking money you’re not going to walk on water the first, the second, the third time. It’s going to take a while to figure this all out. I’ve had so many fits and starts with this I could write a couple of books on it.
Also too is that I truly believe that, this may sound counterintuitive, but to just, especially when it comes to options, maybe just pick a couple of cheap stocks like some $5 to $10 stocks that has options on it. Try finding something with some IBR and volatility on it. Just put trades on it and who cares if you make money or not, just manage them trying to figure out, see how it all works, how the prices change. I’m surprised that some new people have come across where somebody buys a call spread and the stock goes way beyond the call spread forum. They believe they should have a full winner on but you still have intrinsic value in the options. So it’s not a full winner yet. So if you just understand the mechanics. I have many brokerage accounts. I have the Tastyworks, I have a Toss account, I have an Interactive Brokers’ one. Interactive Broker’s is very difficult in my mind as into rolling options. It’s not user friendly in and all that side of stuff.
Allen: I agree.
Jeff Stanton: Toss and Tastyworks are very, very easy. I’ve done some really stupid things on Interactive Brokers as in thinking I’m buying when I’m selling, or I’m in the wrong money, or that type of stuff where it’s much easier to trade. You need to find a platform that you’re comfortable with. You need to also, as simple as this is that I went out and spent some decent money on a nice chair because I’m going to be sitting in this chair a lot. You don’t want to have back issues or anything like that.
Something too is that during the trading day I don’t stay 100% stuck to my terminals for 8 hours, I would go nuts. I take a lunch break. If I get stressed out there’s a park a block away, I go and take a 20 minute walk. Sometimes I just go upstairs into the kitchen and read The Wall Street Journal for a while just not to allow the stress to build up because a lot of things … Also, the other thing with a lot of these trades, when you put on a strangle 85% of the time you will have the strangle show a negative profit and loss within the first week or two. And…
Allen: And a strangle for anybody that doesn’t know is when you’re selling a naked put and a naked call on the same stock at the same time.
Jeff Stanton: Yeah. Seldom do you just put a position and it starts immediately making money for you.
Jeff Stanton: You have to deal with it. If you put on a strangle, or you put on an iron condor, or whatever, maybe within a few days one side or the other will get tested. You have to not panic about it that you sold something for $1 and suddenly it’s moved 75 cents against you. You need to let the numbers play out. You need to let the chart play out. You need the trade to play out. You can’t panic about it. The majority of the positions I have on right now go negative profit and loss because I’m waiting for the trade to work out.
Allen: You’re working for the data to kick in.
Jeff Stanton: I wanted the [crosstalk 00:44:46] profits … Yeah, and the ones that have shown profits and everything like that I harvest the profits and I put on new trades. Option trading you get to see a lot of red on your screen from time to time. You just have to get used to it. A crazy thing too to just expand my own knowledge with all this, sometimes I’ll hear somebody come up with this crazy idea. I think you made a couple of comments about it on the Facebook page. I put on a double calendar on [t-mounts 00:45:26], I’ve never put on a double calendar before. I have no idea even how visually to look at how the provides would work on that. I put it on knowing I could make $30 or lose $30 on this because they’re not fast moving or anything like that. But I just wanted to watch and learn how to these trade. So that I just add another tool my arsenal.
Also something else, if you are a new trader and you have a small account, you don’t want to do iron condors because they’re too stifling or whatever, that you would prefer doing undefined risk. Well you can put on a strangle or a straddle and you can buy cheap wings on it to reduce your buying power on it. In many cases you can cut your buying power by two-thirds. So you still have in a sense an undefined risk but because you have the protection on either side you can trade with a smaller account and you can also use that idea to do that in an IRA.
Allen: Yeah so it’s just like an Iron Condor but it’s just got really, really wide spreads between the strikes.
Jeff Stanton: This is correct.
Allen: So if you chop it one way, you chop it the other you’re still dealing with the same thing. You’ve given a lot of great tips but the one thing that stood out to me, and you said it twice, and I don’t hear that many other people talking about it is you should trade in a way where the stress level is very, very low or as low as you can get to it. I thought that was really wise to say that. That was one of the reasons that we have a product that we just came out with this year called Trading Hacks and that’s the whole point of it. It’s different ways that I use to reduce the stress level and you’ve mentioned three or four of them already in your interview. I’m not going to go point them out but the way that I see a lot of people losing money, especially in new traders, and even experienced traders, it’s not just the new ones, but if you’re operating at a capacity that is above where you can handle it emotionally and mentally you make mistakes and you mess up.
If the stress level is too high or if something is going on emotionally, even in your life, and you’re just not centered mistakes are made because a lot of people think, “Oh I’m going to go trade the markets,” they think that they’re actually fighting somebody else on the other side. They’re fighting the screen, or they’re fighting Wall Street, or they’re fighting other traders. In actuality, I think we’re actually fighting ourselves. That’s the ultimate. If you can master yourself and you can stick to the game plan, you can stick to your trading plan, you should have more losses and more profits than losses. That, to me, is the ultimate adventure. It’s great to say, “Yeah we’re trading options and we’re making money out of thin air, and we’re just clicking buttons, and we’re making money.” But it’s more of emotional challenge I think. So that’s cool.
Jeff Stanton: Very much so.
Allen: You’ve given a lot of…
Jeff Stanton: I totally agree. If you’re not sleeping at night you’re not going to do well. I’ve had a few of those moments in my career with that.
Jeff Stanton: It’s funny, there was a point too is that options trading in my opinion with this is you have a high success rate. I can look at my statistics right now and I have about 85% winners this year. Because of the low IBR that I’m just above water. I’m not having an exceptional year. If you have a lot of volatility and I’m making 85% winners I would thinking that I would be hitting it out of the ballpark. People have to have reasonable expectations. Also too with a new trader, what I would also say to a new trader is that you can do these systems, and you can get this set up where you’re winning 80-90% of the time but that also doesn’t guarantee you’re going to make money. You have a certain curve of you have winners and losers. At 85% on a given year you could be having a really, really great year. 85% you could have a marginal or you could actually be losing money. It all depends upon your methods and how well your timing, and how well you have harvest the money that’s coming out of the market, to have proper expectations too.
I don’t know what you tell people with your website and everything like that, but if you have $100,000 of risk capital available to you I believe that you should be able to generate on an average year say $30,000 in profits in trading. Some years you could make $150,000 out of that 100. Other years it will be a real struggle.
Jeff Stanton: It depends upon how much risk, how many trades you’re going to put on, how much … The Greeks always lose me but theta, how much you’re going to collect out of that. The other thing too for the new trader is we’ve had a great market in the stock market this year and I know a lot of option traders that are struggling. Over the last two years the market has done okay, has gone up a little bit, but I know a couple of options traders who have just hit it out of the ballpark. You can’t base your expectations on your account on what the Dow does. Option profits are not correlated to how the general market is doing.
Allen: Right, right.
Jeff Stanton: That’s one of the things that is interesting about the options market in my mind.
Allen: Even just not the stock versus options, just option strategy versus option strategy is different. I think you said that some of your trades, because the volatility is not being there, you’re struggling to get some good returns. We have a service called The Weekly Trading System where I think it’s up to 20 trades now for the year and it hasn’t had a losing trade all year. We’ve been hitting 5% on each trade and they’re weekly trades so they only last a couple days long. But the fact that no losing trades in the whole year, we’ve never had that before. It’s interesting. You can go from strategy to strategy and get different results based on what’s going on in the markets. I think that gives a good way for people to understand that maybe you have to be able to adapt as well.
A few years ago when I got started I was in different groups and stuff where mostly everybody was condor traders. Then we had the whole recession, or the Great Recession, and the volatility went through the roof. Then after that all that stuff happened and there were so many people that only knew how to do iron condors and they only knew how to do it one way. They only knew how to adjust it in one way. They all left. They all stopped because they couldn’t adjust, they couldn’t hack it. They couldn’t change it. One of the things definitely when you learn with options is that there’s always another way to play the game and you have to be willing to make that change. Cool.
Is there anything else you want to share with us Jeff?
Jeff Stanton: I did take notes but it looks like I’ve captured a lot of what I was thinking that I was going to say. If anybody wants to get ahold of me or anything like that point them to the Facebook page and they can connect with me there. I’m willing to … As my wife says, there’s times that I just don’t shut up. I’m willing to talk…
Jeff Stanton: With anybody about this and teach them.
Allen: Like you said, it gets kind of lonely, especially with probably 99% of the population has no clue what we do. When you talk about options they kind of get scared. Then when you talk about selling options you lose everybody else, even the people that are kind of interested because they’re like, “What? What’s a call? What? What’s going on?” One of the basic questions I get is, “How do you sell something if you don’t own it? You got to buy it first and then you sell it?” No, it doesn’t work that way.
It’s call the Option Trader’s Alliance and it’s a private Facebook group but it’s free for anybody on Facebook. You just have to go and apply and we’ll let you in. That’s not a big deal. Jeff is in there and he’s posting every day. He’s very, very generous with his time and he posts his trades in there as well. If you want to see what a J lizard looks like, or what kind of stuff, strangles, Jeff is putting on you can contact Jeff in the group.
I do appreciate you Jeff. I appreciate your time. I appreciate you sharing your wisdom with us. Like I said, normally how I sign off is always trade with the odds in your favor.
I really enjoyed the podcast. I got the realization
that as much as I’m learning I really don’t know squat. I am trying to learn the credit spread and get as proficient as I possibly can but I realize I still need some experience. When a trade moves against me I have a strategy now to cut my losses and buy back the trade. I know I can roll the trade forward just haven’t been in enough trades. Lot of stuff to learn.
Allen Jeff made a comment I didn’t get. Probably a dumb question but what is IBR.
Try finding something with some IBR and volatility on it.
IVR – is implied volatility rank.
Some brokers provide this.
Basically they tell you to sell options when IVR is high.
I do not but into that. Just using IVR is a way to get killed because the volatility is high for a reason. You need to know that reason before you get in.