Hello again options traders or investors. I hope as we get ready to start the weekend, this week wasn’t similar to the market movement today. An absolute beating! If it was, I have some encouragement from Psalms 89:24, “My faithfulness and unfailing love will be with him, and by My authority he will grow in power.” Meaning, no matter what you’re experiencing, the God of the universe is with you and by His authority you will be made strong. In this moment of hardship look forward to this being gone and you being strong.
Now, I wanted to share with you a game I play that will benefit you exponentially as an options trader. An options trading challenge, if you will. In this challenge you’ll be putting your skills to the test through the gauntlet of a simulated market. Therefore, there isn’t any real risk but the idea is to be profitable through every attempt.
Similar to an athlete training for sports, I believe it’s important to challenge ourselves in our trading as well. It’s really almost counter-productive to implement strategies in a live market without first becoming proficient. I wouldn’t expect to be able to walk into an NBA arena and score points against Lebron James. I would need years of practice and some elite level strategies to even get a shot off. As such, in today’s post I want to introduce you to an options trading challenge that will, in my opinion, make you a better trader. Further, it will always be there for you to continue testing and refining as your knowledge grows.
Before we begin, you may also benefit from journaling or documenting your trades throughout your own options trading challenge. If you haven’t already, have a look at the Option Boxer Portfolio. Inside you’ll be able to evaluate, identify, and of course track every options strategy you’ll dream up. All of which will assist you on the journey to success with options.
Post Agenda
Why Waste the Time?
Well, I guess the truth is…it’s up to you. If you’re a prodigy level trader with photographic memory and instantaneous recall then for you, this would probably be a waste of time. However, for those like me that do not fit that description we have to acclimate to the challenges of trading a live market. As of today, there are really only a few ways to progress those skills, that I’m aware of. They are;
- Paper Trading
- Simulated Trading
- Live Trading
Any of the above will acquaint you with the decision making processes required to trade successfully. However, only the first two allow you to do so without risking limited capital. Therefore, paper trading or simulated trading are my preference for gaining or improving trading skill. But stay with me because I can already feel your eyes rolling. Right, we’ve heard it a thousand times, “paper trade for 6 months before ever going live…blah…blah…blah”. Words that really fall on def ears because we’re ready to start earning money, now!
If that’s you, you’re going to love what I’m getting to in this post. I’m not going to suggest you paper trade for 6 months, though you certainly could. The reality, depending on your knowledge (or use of AI) you may be able to begin trading much faster. If you’re a seasoned professional, then you’ll enjoy the risk free challenge to implement some of the strategies you haven’t yet taken live.
Lastly, as we move forward you could probably view this as an options trading game. You versus the market and only one will win. Let’s dive in.
Required Software
This section will be brief. There are probably several other software packages that can accomplish this goal but I use ThinkorSwim for my own practice purposes. Further, I’m not familiar with the others so I won’t discuss them here. If you absolutely despise TOS or Schwab then a quick Google search will likely yield some alternatives. For those willing to or are already using TOS they have a separate PaperMoney section as well as a simulated live trading environment, called onDemand.
Inside onDemand virtually every tool within the platform is available and the options for testing your skill set are vast. If you’re familiar with TOS then there is no doubt you’ve utilized this function at some time or another. That said, there are a few quirks to using it that I won’t get into today but you’ll experience them fairly quickly and see how to overcome them.
As a virtually simulated live environment you can choose between thousands of assets and test nearly any strategy. Making it a robust simulation option that is absolutely free to use. The only requirement is opening a Schwab investment account and downloading the ThinkorSwim software.
OptionBoxer Preferences
I’ll keep this section brief as well. As I’ve already mentioned, TOS has both paper trading and a live simulated environment and either will serve you well to practice. However, for me, I’ve largely moved away from paper trading at this point. Why? Because I want immediate feedback.
With traditional paper trading you’ll have to wait, sometimes for months, just like it were a live trade. This is a problem because I for one am not likely to be as interested 6 months from now. With live trading and real money, we’re locked in from start to finish as we try to make money. With paper trading, we’re usually ready to move on after a week or two and even that’s probably a stretch, in my opinion.
That’s where simulated trading comes in, and really the focus of this post moving forward. In a simulated live environment I’m able to get feedback almost immediately. I can enter any trade, advance the date, and see the result. It really is that easy.
Now, many of you reading this have already used onDemand and are, at this point, wondering what I could possibly show you that you don’t already know. For now I’ll ask, have you ever traded an entire portfolio inside onDemand? Likely you’ve traded individual strategies or even several strategies simultaneously inside the tool, but have you ever challenged yourself to an entire portfolio?
I’ll show you what I mean now.
Options Trading Challenge Simulation
This section could get rather long because I want to share images as I do my best to highlight the options trading challenge. Before I do though, it’s probably a good idea to go ahead and create a watchlist with a few symbols you’ll want to test. I prefer to test my ability on liquid underlying’s but the sky’s the limit inside onDemand.
My List of Liquid Options Assets
- TLT
- EEM
- SOXL
- SPY
- IWM
- DIA
- QQQ
- GLD
You could have more or less but this give’s me a nice mix of options so that I can simulate a diverse portfolio of trades. Additionally, several of them currently trade under $100 dollars per share making them realistic for my account size as well.
Next you’ll want to determine what options strategies you’ll prefer. If you’re only wanting to test your ability to trade the vertical spread then calendar spreads will be of little use to you. Similarly, if you’re only interested in covered call’s then iron condors will be a waste of time. For me, I have a preferred list of strategies that I’ve determined through years of trial and error.
My List of Preferred Options Strategies
- Baby Rhino Options Strategy
- Poor Man’s Covered Call & Put
- Iron Condor
- Covered Collar
- Put Ratio Spread
- Vertical Spreads – bullish or bearish & debit or credit
- Long Calls or Puts
Now, because I’m testing my options ability today, I’m going to remove the covered collar for this challenge. In live trading it would be there for me but I want to make this as beneficial for everyone as possible. The collar isn’t likely to be a strategy most will use, mostly because it’s capital intensive. That said, this mix of options strategies will allow me to manage my portfolio, align my greeks, and hopefully come out with a profit.
Finally, I need to set some parameters for the options trading challenge so that I’m simulating a true to life scenario.
Options Trading Challenge Parameters
- Account Starting Value – $5,000
- Duration – 3 months maximum
- Return goal – 10% or $500
But let’s stop talking and I’ll let you follow along as I conduct my own simulated options trading challenge. I don’t know if I can make any money but we’ll see as we go.
Options Trading Challenge Day 1
Entry Trades
- EEM – Baby Rhino Strategy
- IWM – Bear Put Debit Spread
- QQQ – Bull Put Credit Spread
- SOXL – Poor Man’s Covered Call & Put
- SPY – Iron Condor
- Total Buying Power Usage – $2,000
Day 7 – Options Challenge
Week 1 Trades
- Rolled EEM Baby Rhino
- Rolled SOXL Short Call & Put
- Rolled to center SPY Iron Condor
- Total Buying Power Reduced
Day 14 – Options Challenge
Week 2 Trades
- Closed IWM Debit Spread
- Rolled QQQ Credit Spread
- Rolled SOXL Shorts & Longs
- Rolled to center SPY Iron Condor
- Total Buying Power Unchanged
Day 21 – Options Challenge
Week 3 Trades
- Rolled EEM Baby Rhino
- Rolled SOXL Short Put
- Total Buying Power Unchanged
Day 28 – Options Challenge
No Trades or Adjustments
Day 35 – Options Challenge
Week 5 Trades
- Closed EEM Baby Rhino
- Rolled SOXL Shorts & Longs
- Rolled SPY Call Credit Spread
- Total Buying Power Reduced
Day 44 – Options Challenge
Week 6 Trades
- Closed SPY Iron Condor
- Closed QQQ Credit Spread
- Closed SOXL Poor Man’s Covered Call
Final Thoughts
Well, that worked out pretty great but I can assure you this won’t always be the case. I was able to make some adjustments along the way to keep my probability of success as high as possible while also respecting my account parameters. In this instance in less than 2 months I was able to use just $2,000 dollars of buying power to earn $426 dollars of profit. That’s a return on investment of 21% in just a few short weeks.
That said, I purposely kept things relatively simple for this post and example but hopefully you see the power in this practice. There is literally no limit to how you could challenge yourself to improve as a trader. Moreover, if you’re a geek like me, it’s actually quite fun. I’ve personally spent hours at a time conducting years of simulated trading inside onDemand.
The overall goal here is to find the assets you’ll prefer, the strategies that work for you, and then how you’ll adapt as the market changes. In live trading several things may be different, namely emotions, but at least when that time comes you’ll have been down a similar road before. The market jump higher? No problem, I know exactly what I want to do. The market not moving? Got it, let me get a neutral trade placed.
In all, this is just the best and fastest way to test your options trading ability that I know. If you’re serious about making money trading options then I believe this options trading challenge will serve you well as you reach toward that goal.
Until the next post.
God bless,
Jeff
