2014 was a roller coaster of a learning year…mostly plunging down with my arms flailing in the air trying to just break even!
I came through it a little beaten up and a little worse for wear, but much smarter on how to approach options trading. Now the question is can I execute?!
Of course execution without a strategy or a plan is just like driving with your eyes closed. Sure, you might get lucky but chances are it’s gonna end up bad for you.
So, how am I going to approach this year? What are my goals and targets for this year? How will I execute on those goals? Let’s see!
In the past I’ve set goals in a very haphazard sort of way. Usually it’ll read something like:
Work out more
Make more money trading options
Yeah, all-in-all these are pretty worthless when it comes to goal setting.
Over 30 years ago George Doran wrote about S.M.A.R.T. goal setting. His system broke out goals into five different fields:
Specific: What specifically will I achieve?
Measurable: How will I measure it?
Achievable: How will you achieve it?
Relevant: Is it relevant to my larger goals?
Time-framed: By what dates will I achieve it?
So, my first goal above instead of being just
gains a lot more detail and turns into this
Lose 10 lbs of fat in 90 days by running 2-3x a week
MUCH better! My goal is now very specific, I know how I’ll do it and by when I need to be done to achieve my goal. So, now let’s apply this technique to developing a trading goal for 2015.
Consistent, steady wins
Looking back at my trading log from 2014, I noticed a trend of mostly consistent small wins. A few poor trades set the whole year back, but for the most part this trend persisted throughout the year and I’d like to continue it.
Beyond the consistency of my trading, many of the wins I had were small but still captured about 60% of the available premium on the trade.
So, there’s definitely part of a goal there, create small, consistent wins which capture 60% or more of the available premium.
Sounds pretty good so far!
Though I created small, consistent wins last year I didn’t have an overarching target to aim for. Many of the other options traders I’ve read about talk about aiming for a 1% monthly return, or a 12% annual return.
That’s not too bad considering many of my mutual funds would consider that a great year!
So, my goal has grown into:
Create small, consistent wins which create a 1% monthly return and capture 60% or more of the available premium.
Everything above is specific, measureable and time bound, but lacking in the achievable and relevant characteristics. Let’s see what I can do about that!
Getting from A to B
I think it’s too easy to just say “create small, consistent wins” without really nailing down more specifics. How am I going to do that?
I began my trading last year trading naked puts on Cliff’s Natural Resources (CLF) to get into the stock. Once I was assigned CLF stock, I began selling covered calls against it and still do to this day. Since those strategies were so successful for me I’ll stick with those this year.
However, I also want to expand my horizons a little bit, so I’ll add in collar trades as it’s a natural complement to the covered call. Where does that leave me now?
Create small, consistent wins through trading naked puts, covered calls and collars which create a 1% monthly return and capture 60% or more of the available premium.
Much, much better! That sounds pretty awesome when you put it all together. However, there’s still one part I still want to tweak and it has to do with the relevancy to my larger, long-term goal of creating a $5,000/month income trading options.
What you build your foundation on counts!
Those of you which followed me throughout 2014 know I’ve had a rough time with Cliff’s. It’s the source of much heartache and it just got worse today as I write this on 26 Jan, 2015.
You see, Cliff’s finally decided to cut their dividend. It’s probably the right move for the company, but it’s not a move I like. Trading around stocks which provide a dividend is one of the keys of my overall strategy and one of the ways they provide income beyond the options income.
So, now with Cliff’s an unreliable foundation to trade on I need to figure out how to get out of it. On the flip side, I also need to add another stock to the portfolio. But when you look at it from a slightly bigger picture, the reality is I’ll probably be trading around three stocks this year.
Cliff’s, my friend turned nemesis, Trinity Industries (TRN) and GE will be my stocks for the majority of the year. You’ll recognize GE as a new addition to my lineup. I’d like to say there was much deliberation which went into its selection…but there wasn’t. I’ll pass along how I came about that decision a little later.
Okay, let’s finalize this 2015 strategy now. Here it is:
Create small, consistent wins through trading naked puts, covered calls and collars on CLF, TRN and GE which create a 1% monthly return and capture 60% or more of the available premium.
Putting it into action
Great! I have this awesome strategy…now what?
It says I’m going to do some very specific things which must meet set targets, how do I meet those milestones?
Well, those of you who have traded options for a while have probably heard of a trading plan. Many of the contexts in which I’ve seen it tend to focus on a single trade; how to get in, manage the roller coaster ride and get out with your dignity intact.
In my next post I’ll dive into how I’m going to do this specifically with each of the stocks I’m trading around. I think the trickiest part will be trying to dig myself out from under Cliff and replace it with a new company. We’ll have to see what I can come up with!
What do you think about this trading strategy? If any of you have ever created an overarching strategy like this before, I’d love to hear about your process, strategy selected and how it went for you. Drop a quick comment in the space below and tell us all about it.
Until next time, happy trading!