How To Be Successful Paper Trading Options ,wealth builders HQ

Hey, welcome ladies and gentlemen to The Stock Market Millionaire podcast. This is episode number 22, “Creating An Options Trading System by Identifying Candidates, Utilizing My Strategy Creation System.” Now, on episode number eight of the podcast, I went through and offered an idea of what Strategy Creation System is, and went through and kind of analyzed it, broke it down into the big picture. So, if you’re not sure what strategy creation system is, make sure you go ahead and check that episode out, episode number eight. Today, I want to talk about the identification component for building a great options trading system.

So if you look at the overall system – identify, enter, manage exit – the first component is how do we identify a candidate? What does that actually mean for us to find a candidate? See, I can’t give you a rules-based system right this second for everything. And here’s why: it doesn’t work that way. Every system, every strategy has its own set of rules. If you’re a buyer versus seller, if you’re day trading versus swing trading, if you’re doing a credit spread versus a diagonal spread, or versus an iron condor, versus an upside-down flint rubble-bubble cake – whatever strategy you’re trading, it’s going to have its own set of rules. So, we need to identify a candidate for that particular strategy. But basically the identify component is just, how do I add a candidate to my list today for that particular strategy? What pieces of the puzzle am I looking for to add that? In other words, what criteria you use will be determined by the options trading strategy that you use, right?

So here’s a question for you. Does identification change for let’s say day trading, option strategies versus swing trading options strategies? And the answer is, absolutely. It does. See for myself, I start off and I use Omega Chartz for this. I start off with what I call a base filter. You can probably build these in TradeStation, in TOS and so forth, right? And, my base filter has three major components in it, sometimes four. The first major component is price. What’s the price range that I’m looking for? If I am a swing trader for options or a day trader actually, doesn’t matter, I’m going to find stocks for me, for my trading style, normally that are $50 and higher. “Oh, but Rob, I don’t want to go too high!” Great. Then you can say 50 to 100. “Oh, Rob, 50 is too expensive.” You could say 20 to 50. “Oh, Rob 20 is too cheap.” You could say 50, no 50 is too cheap. You could go a hundred to infinity, a hundred to 500. You choose what it is. If it is a selling strategy, as an example, a covered call, my rules are $8 on the low end, up to $40. Anything higher than that, I will use a diagonal from $40 up to $200. Anything above $200, I don’t want to do a diagonal. I don’t want to do a coverage position on it. I don’t want to do a naked put. I would rather go ahead and use a credit spread on them. See where I’m going with this? Every strategy has its own rules, but price, closing price, will be an important one. Now for me, I just use the close. I don’t use close five days average. None of that, just what was the close yesterday? That’s all I care about.

The second component is volume. Almost every one of my strategies require 1 million shares in volume for me to even add the candidate to my list. Yes, a million shares. Now, that’s not hard to get any longer these days. It’s actually fairly simple to find a million shares available, you know, traded in a day on a company. And, if it has less than that, then pass or set the volume for your risk profile. If you will accept the risk of taking the stock that only trades that half a million – “Rob, that’s a risk?” It can be, yes. There’s not enough people at the party. I want to make sure there’s lots and lots of people at the party. If you go to an AAPL party, there’s a lot of people at that party, right? You go to a MSFT party. There’s a lot of people at that party. You go to, you know, PFA, (Plucked From Air), eh, you might not have so many people at that party. You want to make sure there’s enough volume.

Third component, which almost sounds silly is it needs to be optionable. And for me, normally I want it to be a weekly option. So, I can program, based on a filter that I do not create or a watch list rather than I do not create, it’s already an omega charts it’s done automatically every week – it finds all the stocks and have weekly options, uh, positions on it. So I want to trade the weeklies. “Oh, but Rob I don’t mind trading monthlys.” Then, great. Then you go ahead and you do a regular option strategy, nothing wrong with that, where you’re doing a monthly just options, you’re not looking for weekly options. For me, I want the weekly.

The fourth component that becomes more of the iffy one that you may or may not add in is a criteria that I have written on finding stocks that have a Wilder’s Average True Range as a minimum. So I may want, as an example, Power Option Plays – my minimum Wilder’s Average True range is $2.50. That means in one day, XYZ stock has to move at least $2 and 50 cents from the low to the high. And, I don’t mean it had an open at the low and close at the high, but throughout the course of the day, the lowest low, all the way up to the highest high has to be at least $2 and 50 cents.

Now, that’s a bare minimum. I really do prefer higher numbers, but it’s a restriction, and every time you put another restriction on a position, you have less candidates, as long as you’re okay with that. If you say, well, I’ll go with a two and a half dollar Average True Range on an optionable stock that’s weekly optionable, maybe you wind up with your criteria with 40 or 50 candidates. Now you say, I want to have a $4 or $5 while this average true range on the same position. Maybe you have 8 or a 10 or 12 candidates. But you say I’m going to go with a two and a half dollar, and I’m going to do it on any price optionable stock of any options, it doesn’t matter, you may wind up at 400, which is way too many where 8 or 10 or 12 might be way too few. So, you could play with parameters a little bit, but I saved that what I call it a base filter.

I save all my filters with the initial RR. Let’s see, what does RR mean? Okay, good. I think you got it. They’re my initials. Why do I do that? So I know I created it and it’s not something that came with the program. I know it was mine, I did that, that filter or that criteria, whatever it is. I save it as “RR Base Filter,” so all my files are in the same exact place when I sort and search for them on Omega Chartz. Now I can open that up, I could Save As whatever the new filters going to be – it definitely will start with RR unless I’m creating it for somebody else, it definitely will start with RR – and I already have all those components in there.

And now it’s very easy for me to change, “I don’t want this 50 to 200. I want this one to be 50 to infinity, or I want to cap this one off at $800 or 2000,” whatever the numbers are going to be. Same with volume and anything else that’s in there, weekly versus monthly options. I use that filter as a starting point. From there, I could add other things in. Maybe I’m looking for a moving average cross, where the eight crosses up or down through the 21. Whatever it is, I can do all of that from inside of the position, from inside of the filter for that.

So when you look at setting up your candidates to identify which stocks you’re adding in, this is going to become extremely, extremely important. Now, guys, if you’ve not been exposed to Strategy Creation System, maybe you want to pop your head into our free Power Hour training that we do every week, every Monday at noon, Eastern time, you can go to our website and you’ll find the link for it right there. It’s right on the main page. And go ahead and register for that training. As we get in there, we talk about strategy after strategy, after strategy, I look at candidates, your candidates, my candidates, so that may be a good place for you to get more real time live, help on what strategy creation system actually is.

Now, it sounds very simple, doesn’t it? Well, you got to identify a candidate, so what? But, Strategy Creation System as a whole up of the four components, each of the four components are very easy. They’re easy, right? Math for some people is easy. English is easy. Social studies is easy. Science is easy, right? But getting that degree with a 4.0, not so easy. Attainable, but not easy. Strategy creation system is the simplest process you’re ever going to hear when it comes to trading, but it’s one of the most complex to achieve. And the reason for that, the reason for that is when it’s done, right, it’s a fully functional, profitable trading system – whether you’re trading funded or non-funded, that makes no difference. We’ll call it all non-funded, that system has to work. And, that’s what strategy creation system allows you to do.

If you’re looking for how to find out more about Power Hour, check out the show notes, and you’ll see the description down below, and that’s where you’re going to find the information for it. Would that ladies and gentlemen make it a profitable day, stay focused on the quest to becoming a great trader, keep crushing it. And remember, you’re just one trade away. Take care, and I’ll see you at our next update. Bye for now.