A Better Way to Trade Using Defined Risk Strategies

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The objective of this trading program is to participate in trends while defining risk on each trade and for the duration of every trading period.

Performance dates

2, January 1998 through  30, April 2015.
Net profit per $50,000 trading unit = +$422,641
Greatest net drawdown  = -$10,480

Performance is based on trading one unit and deducting the net profits annually. Clearing and execution vary from firm to firm below I’m allowing 8 pips per round turn trade for bid/ask spreads and any potential order execution slippage.

Risk disclosure

2) Strategy

Let’s start by looking at the Eurodollar FX chart below is it really that hard to define the overall trend for this market during the last 12 months and the current reversal?

Click here to enlarge the chart below
Click here for a current chart

Once the trend is identified we employ strategies that define risk on every trade and for the duration of every trading period without wasting inordinate amounts of precious investment capital on purchasing option time premium.

3) Methods used

A) Option collars
B) Writing at the money, buying out of the money options against the trend
C) Writing deep in the money, buying out of the money options with the trend

4) Option collars

A) Establish you position with the trend in this example we’re long
B) Buy an out of the money put to define risk
C) Write an out of the money call collecting premium to pay for the put

If the trend continues the long position will be called away at a profit
If the trend reverses the risk is defined by the purchased put
If the market stays the same you have not wasted money on time premium.

Click here to enlarge the chart below
Click here for a current chart

5) Collar Definition

Establishing a collar to protect a long position involves purchasing puts for downside insurance, while at the same time selling calls, with the premium taken to finance the cost of the puts.

The purchased puts will have a strike price the same or less than that of the calls sold, and very commonly both options are out-of-the-money when the position is established. The short calls will limit upside profit potential of the position for the duration of the option.

Collars can always be liquidated to lock in profits and then reestablished at the current level allowing additional gains while defining risk.

The degree to which the collar’s protective puts are paid for by the premium received from the written calls depends entirely on the current level of the underlying currency, the strike prices and premium amounts of the contracts chosen. It is possible to construct a collar so that not only are the puts fully paid for by the call premium, but that the call premium actually exceeds the puts’ cost. In other words the whole position may established at a net credit, which the collar investor keeps whether the level of the underlying currency increases, decreases or remains unchanged.

6) Benefits of using a “Collar”

A) The position cannot be stopped out regardless of market volatility
B) If you are correct in identifying the trend the trade will be profitable
C) Risk is objectively defined on the trade and for the duration of the trading period (expiration)
E) Collar’s can be lifted any time locking in gains and reestablished to capture more of the move
F) Trade frequency is defined for the duration of the trading period (expiration)
G) The only way the position can be called away is at a profit
H) If the market stays the same the call premium collected covers most if not all the put premium paid

7) Writing at the money options buying out of the money options against the trend creating a credit. In this example we’re anticipating the market moving higher. 

A) Write an at the money put collecting ” fat option time premium” .

B) Using a portion of the collected premium buy an out of the money put to define risk.

C) If the market continues its uptrend both puts will expire worthless generating a net credit for the account.

D) If the market reverses risk is defined by the purchased put with the loss being in part offset by the differences in option premium. 

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Click here for a current chart

Defined

In options trading, an option spread is created by the simultaneous purchase and sale of options of the same currency but with different strike prices.

Any spread that is constructed using calls can be referred to as a call spread. Similarly, put spreads are spreads created using put options.

Option buyers can use spreads to define risk and profit on any trade and for the duration of the trading period.

Using this strategy premiums received from the short leg(s) of the spread are greater than the premiums paid for the long leg(s), resulting in funds being credited into the option trader’s account when the position is entered.

The net credit received is also the maximum profit attainable when implementing this spread strategy.

Benefits

A) The position cannot be stopped out regardless of market volatility
B) If  you identify the trend correctly the position will be profitable
C) Risk is objectively defined on the trade and for the duration of the trading period (expiration)
D) The spread can be lifted at any time to lock in gains and reestablished with defined risk
E) Trade frequency is defined for the duration of the trading period (expiration)
F) If the market stays the same with the trend continuing the premium collected generates a net credit to the account.

8) Writing deep in the money options buying out of the money options with the trend, in the example below the short term trend is higher.

A) Write an in the money put collecting “in the money” and “time premium“

B) Using a portion of the collected premium purchase an out of the money put to define risk

C) If the trend continues both puts will expire creating a net credit for the account, If the market reverses the loss will be contained by the purchased put.

Click here to enlarge the chart below
Click here for a current chart

Defined

Long; we write a deep in the money put option collecting “in the money” and “time value”  then purchase an out out the money put with a portion of the money collected from the write to define risk with the expectation that the market will move higher and both options will expire worthless. Should the market move substantially lower the risk will be limited by the purchased “out of the money” put and risk is objectively defined on this trade and for the duration of the trading period (expiration)

Short; we write a deep in the money call option collecting “in the money” and “time value” then purchase an out of the money call to define risk with the expectation that the market will move lower and both call options will expire worthless creating a net credit. Should the market move substantially higher the risk is objectively defined by the purchased “out of the money”  call on the trade and for the duration of the trading period.

Benefits

A) The position cannot be stopped out regardless of market volatility
B) Risk is objectively defined on the trade and for the duration of the trading period (expiration)
C) The spread can be lifted at any time to lock in gains and reestablished with defined risk
D) Trade frequency is defined for the duration of the trading period (expiration)
E) If the market stays the same with the trend continuing the premium collected generates a net credit to the account.

Fees

Front load = 0.00%
Management fee = 0.00% to 2.00% annually dependent on account size
Incentive fee = 10% to 20% of net new high profits quarterly
Recommended minimum = $50,000 or equivalent major currency,
Minimum $25,000 in actual funds $25,000 notional funds.
Positions and liquidation value are available online at anytime.
Accounts can be funded and maintained in any major currency
Liquidity in portion or all 2-48 hours in any major currency.

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If you have any questions or need additional information contract us

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RISK DISCLOSURE STATEMENT

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. EXAMPLES OF HISTORIC PRICE MOVES OR EXTREME MARKET CONDITIONS ARE NOT MEANT TO IMPLY THAT SUCH MOVES OR CONDITIONS ARE COMMON OCCURRENCES OR ARE LIKELY TO OCCUR.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT.

IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADE PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF THE HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

BID/ASK SPREADS, BROKERAGE COMMISSION, CLEARING, EXCHANGE AND REGULATORY FEES WILL HAVE AN ADVERSE IMPACT ON THE NET OVERALL PERFORMANCE OF YOUR ACCOUNT. PRIOR TO MAKING A DECISION TO PARTICIPATE IN ANY INVESTMENT MAKE SURE YOU FULLY UNDERSTAND THE FEES ASSOCIATED WITH TRADING.

THE INFORMATION PROVIDED IN THIS REPORT CONTAINS RESEARCH, MARKET COMMENTARY AND TRADE RECOMMENDATIONS. YOU MAY BE SOLICITED FOR AN ACCOUNT BY ONE OF OUR REPRESENTATIVES OR EMPLOYEES. IT SHOULD BE KNOWN THAT THE REPRESENTATIVES OF OUR FIRM MAY TRADE FUTURES AND OPTIONS FOR THEIR OWN ACCOUNTS OR THOSE OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS MARGIN REQUIREMENTS, RISK FACTORS, TRADING OBJECTIVES, TRADING INSTRUCTIONS, TRADING STRATEGIES, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE LIQUIDATION OR INITIATION OF FUTURES OR OPTIONS POSITIONS THAT DIFFER FROM THE OPINIONS AND RECOMMENDATIONS FOUND IN THIS REPORT.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS.

YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES