- Position Sizing
- Trade entry strategies
- Profit management strategies
- Staging Trades
- Pattern Day Trader Hack
Position Sizing Strategy
Perhaps the most important aspect of trading is position sizing, because this is where all your risk management stems from. Your position size is a direct reflection of your capacity and tolerance for risk.
This is particularly important with 0-DTE because of the asymmetric nature of the strategies we employ. Your maximum position size will represent a small portion of your overall trading capital and will be sized based on the concept of always having enough capital to continue trading, even after the worst conceivable event occurred.
So, for example, imaging that you went on a losing streak for 1 month straight, losing every trade. Ask yourself how much could you lose after 25 straight losses where you could still say you were comfortable with continuing with the strategy?
Whatever that number is, divide it by the number of losses, say 25, then take each instance and divide that by 3 to 5. That number will be your minimum sized trade, the size you start each trade with. We call it a tranche, and you max position size is made up of 3 to 5 tranches, you decide.
Let’s assume you have a $25K account, and you could see losing 1/5, but no more, and still feel okay with trading. Now, let’s take that 1/5, or $5k and divide it by the number of trades in a month. We’ll use 20 as a standard. That comes out to $250. This is your maximum position size.
Now let’s figure out how much one tranche equals. 250 divided by 5 is $50. So, one tranches, or the smallest sized trade you would put to work, is $50. You might decide to break that up into 3 possible positions. Start with 2 tranches, and if necessary, add 2 more, and then under certain circumstances you add the last, to make your max position size.
You can devise many different strategies with up to 5 tranches, so long as you always start with no more than 3/5 of the max position. This is purely an example, but a good guideline to follow. If you had a $10k account, then the numbers are going to change and you may have fewer tranches in a max position.
Position Size Based on % Capital
The following chart suggest a common way to select your ideal maximum position size.
The first exit strategy occurs more often, and that is price is outside the profit tent, but close enough so that the strategy shows an unrealized gain. The image below shows a fly with $1 of risk with about 75 cents of profit. So, ignoring commissions and fees for now, that represents 75% profit on the capital at risk. And we want to figure out an objective way to preserve that profits.
There’s no doubt that 75% profit is an excellent return, and very few people would tell you it’s not a good idea to take profit. Except maybe in this situation, where you could potentially realize far more profit, maybe many times more. So the decision you make here can mean a lot to your bottom line, and the future decisions you make should at least try to maximize your return. So, the big question is, do you get out now, or do you wait for a potentially bigger return. The answer is a qualified …it depends. It depends on a lot of things, but you need a way to make a decision now…do you exit, or do you hold?
What you need is an objective way to make the decision, a way that will tell you it’s better hold or better to fold. This decision can be made by creating a decision framework
If you follow the options trading strategy and advice shared here, you will experience a pinned trade about 10-15% of the time. The ideas here do not guarantee a pinned trade. However, they do describe a way to increase the probability that you will get to a pin.
This post will provide tips, techniques, and knowledge that will help you achieve a greater profit with the 0-DTE strategy. Each of these tips are valuable, but in the absence of developing your skill around these things, they are pretty much useless information. These tips aren’t some kind of magic butterfly option trading secrets that transform your results with little or no time invested on your part.
In other words, if you think you are going to achieve a lasting performance boost, without taking the time to test, build routines, and truly make this information part of your trading playbook, then there’s really no need to read the following…
If you can truly and thoughtfully incorporate this aspect of options butterfly strategy into your own approach, however, it can support better outcomes.
The number one thing that will increase the probability of getting a pinned trade is the width of your butterfly trading strategy. A 15 wide fly has a much greater chance at a pin than a 10 wide, and a 20 wide a better chance than a 15.
Your return on capital will improve if you set your target area in the leading 1/2 of your fly, instead of the short strikes. So, your analysis should reflect this. In other words, you have a greater degree of confidence that this is where the price is destined by the end of the session.
You also can increase your odds dramatically by getting a good price, and risk to reward. Your 15 wide spread that only costs $1 will have a greater probability of profit than one that has a cost of $2.50. The former risk to reward is 14, while the latter is 5. The sweet spot for me is 6-8.
I call this the Higher and Wider principle of the butterfly option trading strategy.
When placing your short strikes, you shouldn’t be placing them based on where you think price will end up. Because quite frankly, it is unknowable where the price will end up.
Trying to guess a specific strike price as the landing area will eventually create negative feedback. Think more in terms of overlapping areas, using the area from your short strikes all the way out to the break-even point nearest to your current price as your target (yes, it is a big target — the bigger the better). And try to position that so it overlaps where you think the price will end up.
Higher is Better Given the Same Width
If you can get a better price on your spread, it is going to sit higher relative to the zero profit line. Therefore, it can provide both a bigger reward to risk, but also a wider range of prices between your break evens. This will increase your probability of profiting from your butterfly strategy for options. And this is why I often hang limit orders for the price I want, rather than the price that is available when I input the strategy parameters.
In this example, both of these have a 15 wide spread, but the bottom one has a much better risk to reward (5 vs 9). Consequently, the profitable range is bigger, a greater range in prices will work, AND the overall potential profit is greater.
This is why I try to get the best price I can. It is also why I try to reduce my cost basis sometimes by adding an additional position if the price of the spread drops significantly, but is still a viable trade.
Gamma Risk Favors Wider Fly
The gamma risk of a narrow fly, or slope of the profit curve, is much steeper on narrow spreads compared to wider spreads. The wider fly has a smaller risk due to the flatter profit curve with lower gamma.
Basically, this means that changes in market price on small gamma does not affect the change in price of the value of your fly spread. Therefore, wider flies are better and more stable from a profit management view.
Probability of Touch (PoT)
I found that the ideal probability of touch measure when entering a fly, is that the nearest strike is > 67% Probability of Touch (PoT). At this distance, you will have about a 10-15% chance of a pinned trade. 70-80% seems ideal, but only if you can get a good risk to reward.
Most platforms will show you the PoT of a strike, some do not or it is hard to find. In general, the PoT is approximately 2X the delta of a strike.
Day trading options strategies are complex and nuanced. Even so, you have the power to study and incorporate effective processes into your trading playbook. This advice to boost the possibility of a pinned trade is just one part of a much larger process for truly taking control of your trading efforts.
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