Tag Archive for: tastytrade Method

What is the Tasty Trade Options Trading Method?

The Tasty Trade options trading method emphasizes the importance of trading high implied volatility and selling premium. This approach advocates for the selling of options because they believe that, over time, options tend to be overpriced.

So, by selling premium, traders can take advantage of the rapid time decay on an option’s price as it nears its expiration date. Furthermore, Tasty Trade encourages trading small and often to increase statistical chances of success, and managing winning trades early to minimize risk.

The typical options trading strategy to accomplish selling options premium is shorting Iron Condor, Strangle, or Straddle. 

45 Days to Expiration

You have probably heard it before if you have watched or followed Tasty Trade.

Trading options with 45 days to expiration (DTE) is the sweet spot. This is also what I have been doing since I learned that information from Tastytrade.com and Optionalpha.com.

The following slides taken from this Tastytrade.com video further solidify that claim. The key here is the “Average Profit and Loss (P/L) per trade”. The study was done based on exiting at 50% of the max profit (which was not made clear in the video but that’s what they normally do).

So, even though the overall profit was higher with the 90.25 DTE trades when looking at the daily P/L basis, 45.75 DTE makes a more significant profit.

Sensitivity of Volatility

In addition to these data, another Tastytrade.com video shows that longer DTE options are less sensitive to changes in volatility.

This data also backs up the claim that 45 DTE options are the best ones to trade because it’s in a sweet spot in terms of volatility sensitivity.

My Initial Trading Plan

I followed their recommendations by trading 45 DTE options initially.

However, after testing it out with 45 DTE on a bunch of earnings trades and getting burned several times, I started to think what if I extend the timeline of the options? In addition to volatility, what if I also take advantage of time decay more?

One thing that got me thinking was that what if I exit the position at 35% max profit rather than 50% like what the Tastytrade method does?

Since the premium I would get is much higher with longer DTE options, exiting at 35% max profit could potentially be somewhat close to 50% max profit of shorter DTE options.

Also, the studies done by Tastytrades are on indexes but Vega could vary widely from stock to stock. So what if I focus on stocks that have high Implied volatility and high Vega?

The reason for this is I am not an active trader so I don’t want to actively adjust my positions often. With 45 DTE options, the safety margin is much smaller compared to longer DET options, so a relatively small move in the underlying stock could easily cause my 45 DTE position to become a loser.

Using the longer DTE options, not only gives a much wider out-of-the-money range, but I could also keep the position open and wait for it to come back without the need of checking on it too often. While I am waiting, the time decay would also be working in my favor. This sounds like a Win Win.

As I mentioned in the SPX Iron Condor Strategy post, based on the small-scale testing showcased in that post, trading options with 100 days to expiration seem to be the best choice in terms of benefiting from time decay. So, I decided to look for around 100 DTE options where possible.

In case you are not familiar with selling strangles, it is a high volatility options trading strategy and essentially the same as selling an Iron Condor with unlimited risk. It sounds dangerous but in reality, the risk is within an expected range when executed correctly.

The initial result of trading longer DTE options is shown below.

Tasty Trade Method Experiment Update #1

Video Notes:

https://www.optionsplaybook.com/options-introduction/option-greeks/

Tasty Trade Method Experiment Update #2

It has been almost 2 months since I started testing to sell strangle with longer days to expiration options.

Now that I have some data, I decided to do a correlation study to see if my hypothesis was correct.

The idea was to trade long days to expiration options with high Vega and Implied volatility. Based on the results and the correlation study, it seems high Vega and high volatility do seem to help the winning ratio.

For more details please watch the following video.

Short Strangle Summary Table

Correlation Charts

Tasty Trade Method Experiment Update #3

It has been almost 4 months since I started this strategy and as of now, it is looking promising as far as the winning ratio goes. Since the strategy requires a high IV percentile, most of the trading activities happen around earning seasons.

The strategy is to get out as soon as one of the following criteria is met.

• When the target ROI is met – 35% of the maximum return.
• When the IV drops after the earnings. Even if the target ROI (35% of the maximum return) is not met.
• When there is a substantial positive ROI even if the IV has no change.
• When the market condition changes that would change the outlook of the return.

The biggest concern I have right now is the magnitude of the drawdown. As you will see from the data, the losing trades have very large negative PNL. This is because the losing trades are left alone until expiration to give it more time to recover, as long as it is within a reasonable losing range.

As you can see there are some trades left alone and the options will expire on Jan 18th, 2018. So we will find out if indeed this strategy works as we get closer to that time.

For more details please watch the following video.

Correlation Studies

Tasty Trade Method Experiment Update #4

Conclusion

While the winning ratio of 70% was achieved by trading the Tasty Trade method, ROI in the end was negative.

The negative return does not necessarily mean the Tasty Trade method doesn’t work, because the fact that I achieved close to the win rate that they presented, shows it is a good method in theory.

However, just because it looks good on paper, does not necessarily mean it would work out in practice. This was especially true when a method does not match one’s personality.

In the end, I decided to move away from the Tasty Trade method, not just because of the negative ROI outcome, but also because it did not match the amount of time I wanted to spend managing trades.