Find potential positions to open

[brian-petersen]

There's a lot that goes into choosing a position to open. Some relevant notes from scattered sources follows:

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US indexes and ETFs have tax advantages when holding short term. Symbols like SPX, NDX, IWM, SPY, RUT, XLE, QQQ, TNA, and GLD have those advantages.

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Basic decision making process:

1. Is the option liquid? (Tight bid/asks) - No? Look elsewhere.
   • Open interest and volume can also help with this.
   • Spread of 1-5 cents is a good metric.
2. Does the option have multiple months of expirations? (Weeklies) No? Look elsewhere.
   • Don't want to get locked into underlyings that we can't roll if needed to recover from losses.
   • Much of this can be controlled by fixing a list of symbols that meet this criteria.
3. Is the company large enough not to be taken over? No? Look elsewhere.
   • Take overs greatly affect stock prices -- we want predictability to a degree.
     • If company can be bought out, that's a no go.
4. Does the company operate in an tangible space vs intangible? No? Look elsewhere.
   • Technology (as an example of intangible) is too hard to properly value.
   • Companies that tangible have calculable assets that make the stock price a better refection of the company's value.
5. Is the company NOT in biotech or pharma? No? Look elsewhere.
   • These companies sleep in bed with the government -- they can change way to quickly.
6. Is the IVR higher than normal? No? Look elsewhere. (I use 25 and above, above 50 is optimal)
   • IV is a mean reverting thing. After a spike it will often retrace back to the mean.

Cheatsheet that can help:

Checklist:

• IVR = Is it favorable?
• Bin = Have you checked for binary events?
• Liq = Is it Liquid?
• T/O = Is it a take over target or subject to some kinda FDA ruling (essentially kills any BIO tech stuff except the ETF)
• Chart = Is the trade in line with technicals, specifically support/resistance.

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Avoid companies with scheduled binary events. They do increase IVR, but also make the underlying price very unpredictable.

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To choose strike price:

• Probability of success is determined by delta: stick between 8-28 (75%-92%) (or 10-20 if more risk averse).
• Anywhere from 45-60 days out is preferable. (Need to find explanations as to why.)

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Account requirements depending on IVR:

• IVR 0-24 Deploy 15% of capital
• IVR 25-49 Deploy 35% of capital
• IVR 50+ Deploy 45% of capital

(Though this may be if you're trading strictly on margin (Tier 3 instead of Tier 2). Difference is that on Tier 3 margin requirements can change. I'm not positive, but I believe they're fixed for Tier 2.)

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Types of trades:

• Verticals since not Tier 3 (cannot do naked)
  • Preferable for current market conditions anyways
• Iron condors?
  • Need to look this one up again and see if its viable
• Spreads?

Really just need to look up different trade types and when to use them all.

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Fundamentals/technicals really aren't needed if you choose index funds. If choosing another symbol, may be more necessary.

Support/resistance analysis can be used to form a bias as to if it'll go up or down -- but with thetagang analysis it may not be that necessary anyways.