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- $100K Challenge Cheat Sheet
$2,000 Small Account Journey
Updated September 16, 2023 (Only cheat sheet going forward, download ready Sunday)
Thanks for coming to today’s training.
Next training Sunday 12-1p EST. Link will be provided in the morning.
Here is the approach I am targeting. It might need refinement if things don’t go the way I’d like. But it’s always good to have a reasoned starting point and then to reflect and refine. Nothing promised and my plan might not work exactly the way I’d like. I have the experience and expertise to refine and move forward with confidence.
After about 150 trades with an 88% win rate I’m updating the cheat sheet based on what I’ve learned. The best I’ve done so far is take $2,000 to $32,000 before a drawdown and profit taking. My goal remains $2,000 to $100,000. Here are the adjustments that will help.
THE EDGE
Options are time-limited, expiring trades.
Near expiry, the trade “spoils” with less chance for buyers to make a profit.
In the final 30 days, the rate of decay picks up speed, with the steepest decay occurring in the final 5-7 days.
This is why option sellers have an edge.
Have you ever bought an option, only to watch it expire worthless? The seller took your money.
All I do is sell risk-defined option spreads.
For simplicity I refer to them as a bull put (neutral to bullish) or a bear call (neutral to bearish).
You’ll also hear them called short (credit) vertical spreads.
$2,000 MARGIN ACCOUNT
Why do I need a margin account to trade risk-defined spreads?
A margin account is required when trading any long or short options spread/vertical spread.
Margin’s primary function in options trading is for relief since short equity options can be exercised by the counterparty (owner of the long option) at any time up until expiration, resulting in an assigned position.
Cash accounts cannot trade vertical spreads.
What are the margin requirements for a short (credit) vertical spread?
The margin requirement for a short (credit) vertical spread is equal to the difference between the
strikes multiplied by the number of spreads. The credit received from the spread may apply to the margin requirement.
For example, to open the following short call vertical spread, you would need $65 in your account (the margin requirement less the credit received).
Sell to open 1 ABC $100 Call for $1.40
$1.40 x 1 x 100 = $140
Buy to open 1 ABC $101 Call for $1.05
$1.05 x 1 x 100 = -$105
Margin requirement: ($101 - $100) x 1 x 100 = -$100
Net credit: $140 - $105 = +$35
Buying power effect: -$100 +$35 = -$65
Don’t get hung up on this, especially if you are new. All you need to know is you need a $2,000 margin account to trade this edge.
BALANCE ALLOCATION
I run two $2,000 balances.
One has a goal of going from $2,000 to $100,000. I call this the Challenge.
My goal is 1X a year.
The allocation for the Challenge is as follows:
$2K-$5K 100% allocation (1 $2K-$5K trade open at a time)
$5K-$10K 50% allocation (2 $2.5K-$5K trades open at a time)
$10K-$20K 25% allocation (4 $2.5K-$5K trades open at a time)
$20K-$100K 15% allocation (7 $3K-$15K trades open at a time)
$100K+ is 10% allocation (10 $10K trades open at a time)
Two has a goal of going from $2,000 to $10,000, moving profits to my bank, and rebalancing at $2,000. I call this the Income.
The allocation for the Income is as follows:
$2K-$5K 100% allocation (1 $2K-$5K trade open at a time)
$5K-$10K 50% allocation (2 $2.5K-$5K trades open at a time)
My goal is 6X a year.
DIVERSIFICATION
I follow a 2:1 bullish to bearish philosophy. As a general rule strong stocks should go up, so I always want to have 2 bull puts on for every bear call.
A bull put is neutral to bullish.
A bear call is neutral to bearish.
I also never want more than 50% of my positions from the same sector. So if I have 5 open trades in Challenge, only 2 can be from tech since 3 would be more than 50%.
ORDERS
As a general rule the quickest way to learn about your platform is to call your broker. There are too many for me to be able to teach each subscriber exactly what it’ll look like.
Just call and ask them to teach you how to do a bull put and a bear call.
Any broker will work for this strategy but TastyTrade is by far the best for spread trading.
Here’s a bull put in TD Ameritrade.
For this trade all I want is for the stock price to stay above $170 and I win. That means the stock can go lower by $5, sideways, or higher and I make 100%.
As the seller you want the Premium to go from your entry, $1, down to $0.
Here’s an open order from the Think or Swim APP on my iPhone.
For this trade all I want is for AAPL to stay above $175. Theta decay or time decay works in my favor each minute it’s above $175. That $.89 will go down fast if the stock price goes up.
10-DAY EMA
Trending stocks will respect the 10-day EMA.
At least two moves off the 10-day EMA would indicate a trend.
Below is bearish. Above is bullish.
If the stock is trending above, enter a short put vertical below on pullbacks to the 10-day EMA
Wait for bullish price rejection to enter the short put vertical.
The 10-day EMA inside bar breakout.
Current candle is within the previous candle signaling indecision.
Since we’re in a strong trend, the market is likely to continue higher after the breakout of the inside bar.
Enter a short put vertical at or below the 10-day EMA as the inside bar breakout occurs.
Ride the trend if price remains above the 10-day EMA.
Pay much closer attention to the sold strike and bought strike if the 10-day EMA breaks.
If the 10-day EMA no longer acts as support the stock could make a deeper pullback or a complete reversal.
Summary:
In a strong uptrend the 10-day EMA should act as support
Sell put spreads at or below the 10-day EMA on bullish price rejection or an inside bar breakout
Pay close attention to the sold strike and bought strike i.e. stop loss using the 10-day moving average
KELTNER CHANNELS
We use the Keltner Channels to monitor for reversion to the mean.
Keltner Channels use Average True Range (ATR).
The easy way to understand ATR is how much it moves daily across the last 14-days. If NVDA is trading at $500 and has an ATR of $20, our sold strike on a bull put sure be -$480 / +$460 for 30% of the width or a $6 entry.
See how the Keltner Channels and ATR helps us structure the width of our spread.
Again, ideally we’d like to sell a strike one or two ATR from the current price and our bought strike two or three ATR from the current price.
The mean is the dotted line. Top left is the legend. The blue line is +1 / - 1, the red line is +2 / -2 and so on. Looks like about $10 ATR here. And we’re above the mean or dotted line.
With the stock price at $274, the trade would be -$265 / +$255 putting us 2 ATR away from max loss. Do you see how I found that?
To simplify things I always keep the ATR on my 10-day EMA chart.
$10.92 ATR on a 14-day lookback. See?
Reversion to the mean involves retracing back to the long-term average. It assumes a stock that strays too far from the long-term average will again return.
If we see a stock trading at +4 ATR we might want to be careful because it’s going to revert to the mean soon or drop 4 ATR.
Or if it’s at -3 ATR we might want to be careful because it’s going to revert to the man or rise +3 ATR.
But remember, just because a stock is oversold or overbought, doesn't mean it’ll revert.
STOP LOSS STRATEGY
My entry goal for every trade is 25-30% of the width of the spread. If I sell the $300 put and buy the $290 put, that’s called a $10 wide bull put. My entry goal is $2.50-$3.
Since theta decay or time decay of the option is the fastest in the final 5-7 days, I’m always targeting 1-2 weeks from expiration.
Let’s say the trade above has 9-days to expiration.
Days 1-3 is the bought strike or $290.
Days 4-6 is the middle of the spread or $295.
Days 7-9 is the sold strike or $300. This is because we’re at the most risk in the final few days.
Let’s say a different trade has 6-days to expiration.
Then it’s 2, 2, and 2-days. Make sense?
PROFIT GOAL
30% of the credit on day 1 or 2. Otherwise 50% of the credit. As much as possible we do not want to be in the trade the latter half of the week of expiration.
So if I get in that same -$300 / +$290 bull put for $3 credit falls to $2 on day 1 or 2, I’d be looking to get out with 33%. Otherwise it’s a swing for 50% or $1.50 exit.
Rarely do I make more than 50%, but it does happen if we get a nice gap in our direction.
We do not hold for 100%. The risk reward changes dramatically after 50% profit.
JOURNAL
I will upload all the trades to TraderSync and you can follow along in the RagingBull dashboard.
There will be a journal for Challenge and another for Income.
Are. you with me?
Jason Bond