Date: 12/28/2022
Author: Chris Hood
I make a clear distinction between the two types of trades.
On the one hand, there are speculative trades.
Pure, single-direction trades like long calls, long puts…and debit spreads…require a significant movement in the underlying stock or index to be winners.
And that movement must be timely.
Each day that passes eats away at potential profits.
They can also get hammered if the stock moves far enough against your position before it goes your way.
Even great traders rarely have a win rate higher than 50-60% on these.
If and when they’ll be profitable is anyone’s guess.
On the other hand, there are what I call income trades.
High-probability positions with a predictable profit and hold time—a way to create a steady stream of earnings into your account.
Let’s discuss them.
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My arsenal’s three primary income trades are call credit spreads, put credit spreads, and iron condors.
It’s beyond this short article’s scope to discuss those trades in detail.
However, they are pretty forgiving about stock’s movement and can profit even if the price goes nowhere.
My income plan focuses on meeting daily, weekly, and monthly profit goals.
If I know the expected profit of my credit trades – about 60-80% on credit spreads and 50-70% on iron condors, and the expected loss – 1-2 times the credit received – it’s possible to calculate my expected return.
I have to establish a “trade pipeline.”
Here’s a typical week for me.
On Monday, I have trades that will be near my profit zone or expiring that day. So I’ll take profits, exit, or adjust and manage.
Tuesday is much the same.
But I would have had nothing save day trading to bring in these profits had I not placed the trades the previous week.
I might supplement Monday and Tuesday’s income with some day trading, and any closed trades will be immediately replaced with others.
As the trades set last Monday and Tuesday provide profits for Wednesday, Thursday, and Friday, I’m placing next week’s trades.
Of course, not every trade will win.
However, I cut losers quickly and reset new trades to keep my P/L ticking upward.
So let’s assume your goal is $200.00 per day or $1,000.00 per week and your profit target on a spread is 50%.
How do you hit those numbers?
The key is ensuring you have enough working trades set to close each day with a maximum profit of at least $400.00.
While not every trade will be a winner, you should hit your target most of the time.
All you need to do is set your strikes correctly, take profits and exit losers according to your plan, and immediately reset any closed trades.
Sometimes you’ll miss your goal.
But other days, you could double or triple it…especially if you can take profits from one of your more speculative positions.
All that’s required is planning.
Cheers,
Chris Hood
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