Learn everything about John Carters Favorite Option Trading Strategies.
What I’m going to talk about tonight is my three top favorite option trading strategies. And what is interesting is that the same principles apply to volatile and quiet markets.
One of the main differences between a volatile market and a non volatile market is simply the Average True Range that you’re dealing with each day. And as a general rule if the VIX is trading over 17 I’ll cut my position size in half and double my stop-loss. Why? Because you’re giving your trade a better chance to work out yet you’re risking the same amount of money. The monetary risk is still the same but you’re giving it enough room to survive the volatility
Until you go through a volatile market you don’t really know that’s something that should be important to do so let’s dive into this…
We recently did a live event in San Francisco and this actually applies to Nevada as well because marijuana is legal here.
This meme is kind of funny for a couple of reasons but mostly because that’s a true photo.
How many people here are trading without a plan? To be honest, you know, I’d say about half of the audience, even though only two people raised their hands.
When I first started trading full-time I worked corporate America for a while. And during the time I was really focused on trading I would miss meetings that interfered with the open and the close.
The ironic thing is as my trading got better and better, I became kind of obstinate. I would skip meetings that interfere with trading. Well, upper management took that as a sign of independence and they kept promoting me. I got my own office and I could lock the door and I could trade and so it actually worked out there’s a win-win for everybody.
In trading, everybody starts off with this plan. Typically the plan is, “oh, I’m going to learn some skills and I’m gonna make some money and this is gonna be great.” Oftentimes the reality is a lot different. There’s things that you don’t realize the market can do to you until you experience those things. And I found the magic line in the sand is once you get about three years of trading experience, you’ve been through enough experiences to realize there’s only two truths in trading:
You have no idea what’s gonna happen next
That’s fine there’s no reason to be fearful of what’s gonna happen next.
So, don’t focus on the fear of not knowing what’s gonna happen next. Just focus on the risk of not knowing exactly what’s gonna happen next. That means you focus on position sizing and risk control.
People ask, “gosh, you know, I’d love to have a win ratio of 99 percent.” Well, you can. Just know if you’re trading the S&P 500 with a 100 tick stop you’re gonna win ninety-nine percent of the time. It’s just that one time you don’t win you’re gonna lose all your profits.
The key is just really getting comfortable with the idea this is a probabilities game.
If you can get to the point where your setups have about a 75% win ratio, and your wins are twice as big as your losses, then trading turns into a profitable endeavor. Remember, “martyr” is not part of your job description!
Where I see traders get in trouble the most is they become married to what they think should happen next. And they will defend their point of view right up until their broker issues a margin call request.
The more you can disassociate yourself from the outcome, the better you’re gonna be able to do because then you’re gonna be able to take losses without any shame or anger or guilt. Instead, you’re gonna be able to move seamlessly through these trades.
The last time I blew up my account was in the mid 90s. My fiance and I met in college. I was sitting there in history class one day and this cute girl next to me was talking about how she was trying to figure out what to do with the $20,000 she got from financial aid. Should she put it in a checking or in a savings account?
And I said, “hey babe, I could trade that for you.” Shockingly, she gave me the money.
At the time I was really into Investors Business Daily. That’s where I found a $5 stock called Iomega. I put all $20k of her financial aid in that stock. I remember this trade for a couple of reasons.
First, Because the Iomega went from $5 up to $35.
Second, because I placed a stop loss at 18 and ¾. The stock price came down to 18 and 3/4 and stopped me out – and then went to 300.
The good news is, I made her money. That one trade tripled the account. Which was good, because that could have been a horrible nightmare. Today, we’re married – we just celebrated our 22 year anniversary and we have three kids. So, so far so good.
But, at one point while we were engaged, there was a situation. I had a job promotion up to Minnesota, which was very cold in January. Now, my fiance, Maria, was born and raised in Austin, Texas. She’d never seen snow before we showed up in Minnesota in the middle of a blizzard. At least I spent a couple winters in Nebraska, so I knew what to expect.
Around March she said, “Look, I love you and everything, but if you expect me to stay here we need to get a house with a garage to park our cars.” Because we lived in an apartment and our cars from Texas would not start. So, she was trapped in the apartment all day.
By that time I had built up a hundred and fifty thousand dollar trading account and I was still working in corporate America. But I was on the verge of quitting because I was building confidence that I could trade consistently and every week I wired out a couple thousand dollars.
I got into a good trading rhythm and we decided to buy a house (or rather, my partner decided we needed a house and I agreed). I needed $30,000 for the down payment. At that point, the money I was investing was tied up in rare coins, which were not very liquid. So to get the $30,000, I would have to withdraw it from my trading account.
One night, about a week before closing, I thought that I didn’t want to take the money out of my trading account because I had a good rhythm going with the $150,000 account balance. That’s how traders think – if I took out the $30,000, my balance would drop to $120k. That change would throw me off psychologically. I would have to try to make that money back before starting to generate consistent income again.
So I had this great idea: I would make one big trade, earn $30,000 in profits, increase my account to $180k, withdraw the $30k needed, and get back to my $150k balance so we could all live happily ever after.
The next morning, I was analyzing the charts, specifically OEX options which I traded at the time. The stock market was rallying towards an existing downward trendline, seemingly a perfect setup for my plan. I was excited – this was meant to be! I bought 100 put option contracts at $7 each (about $70k total), which was half my account at the time.
The trade started working immediately! Then the market bounced back up slightly, giving me a chance to add to my position. So I bought another 100 contracts at around $8 each (now $80k allocated), maxing out my entire account on this single trade.
At the close that day, I was up about $12,000 in profits. I thought, “If there’s just a small gap down tomorrow, I’ll have my $30k and we can all live happily ever after.”
But the next morning when I turned on CNBC, the Dow futures were up 154 points pre-market, indicating a gap up open rather than down. Now at that point in my trading, I knew well enough this wasn’t going to work out positively. But I also knew there might be a partial gap fill intraday where I could close out my losing trade and lose only about $20,000. C’est la vie – life goes on.
What actually happened was that the market gapped up sharply at the open, traded sideways all day, then rallied strongly into the close. This pattern repeated for the next three brutal days – gap up at open, sideways chop, rally into the close. I honestly don’t remember much as I was completely shell-shocked by the situation. But I realized I needed that money for the house closing the next day no matter what. So I called my broker and liquidated the entire losing position. At that point, my account balance was about $8,500.
This was an extremely difficult time. I did what any responsible soon-to-be husband would: I went to the bank and maxed out my credit cards to the point I had enough money sitting in my account for the house closing the next day. We went to the closing and there was a small hiccup from the bank about where the funds had come from. I played dumb for 30 minutes and somehow they let me sign the paperwork to buy the house anyway, which I still can’t believe.
After dropping my future wife off, I went straight to the golf course. For nine holes, I’d hit the ball, then bend over gagging trying not to vomit. I had a lot of soul searching to do about whether I would keep trading after this loss. At that point, I had bought some real estate and rare coins on the side so I could start a new trading account if I wanted. But I had to seriously contemplate whether this career was something I wanted to put my wife and future family through, with its boom-and-bust cycles.
During this period, I met up with a couple mentors from my brokerage firm. One was a trader based near Atlanta who agreed to let me visit her and observe for a week. Here is what she taught me:
She had been a broker with Merrill Lynch for 12 years. During that time, she noticed 95% of her clients lost money doing the same three things: Using market orders instead of limit orders, having stops too close that were easily triggered, and overtrading by excessively buying and selling instead of patiently waiting for setups.
So when she retired from brokering, she became a trader doing the exact opposite:
Holding positions with wide stops using limit orders only
Rarely trading
When trading, scaling into large sizes
When I arrived, we sat at her small dining table with just a TV showing CNBC, another screen with a 30-minute chart of the E-mini S&P 500 futures, and displays of related data like the volume and price action. We talked for 20 minutes and I started growing impatient because I still wasn’t sure if she actually traded or just managed her husband’s account.
Suddenly, she ordered 100 E-mini S&P contracts by phone then hung up casually and gave me her full attention. She shared how her strategy was the opposite of most traders – under trading, avoiding tiny stops, limiting orders. The next day the S&P made huge point swings up and down. But she did not take any additional trades even with all the movement.
I asked if she felt bad missing all those potential trades. She just smiled and said most traders lack patience. The next day, she waited patiently for her setup, traded just once for 100 contracts, profited 20 S&P points, and was done for the day.
I learned an incredibly valuable lesson – patience is not the ability to wait but how you act while waiting. If you can grasp this concept fully, the setups I teach have a much higher probability of working.
My last quick story… During the summer of 2009, I agreed to let a troubled 15 year old niece intern with me. She dressed goth, hung out with druggies, and had no respect for authority. But we made a deal:
I taught her my simple strategy of trading e-mini Dow futures off a Squeeze signal. We started with a $500 account. The first two weeks she lost money because my approach was too advanced. So I oversimplified it to two basic rules:
Wait for the specific Squeeze signal
Trade exactly at the signal, nowhere else
Once she consistently stuck to only those two rules and nothing more, the results were incredible. She cranked out trades, made money daily, and simply minimized the charts to play online Scrabble while waiting for setups. She didn’t sit around analyzing markets aimlessly.
After two months, she had compounded her $500 account to around $18,000! Meanwhile, a group of doctors observed us trading one day. They lost money while my 15 year old niece made $1000. By the end, the doctors completely ignored me to surround her and figure out what she was doing right!
On to strategy #2, which uses expected moves versus greater than expected moves…
The key concept is that if you tune into the right market psychology indicators, you’ll more easily end up on the correct side of trades.
Often we buy when euphoric, sell when panicked – exactly wrong. Think about trades causing the most frustration. Hanging onto losers, finally capitulating, then the market reverses. Why? Because mass liquidation flushes out the weak hands before rallying on fresh demand.
My goal is having entries based on others’ forced panic selling. Like Daniella’s early struggling trades, before mastering patience. Markets recapitulate the same boom/bust emotions. We must recognize mass panic as buying opportunity, not respond emotionally.
If you trade options, you know about already implied volatility. An earnings report anticipated to move shares $3 won’t reward call buyers if it moves only $3. But a surprise $6 jump will, from the greater volatility.
The key is diagnosing when outsized moves can happen. I use Bollinger Bands set at 2 standard deviations, plus Keltner Channels set to average true range. Bollinger Bands show when volatility contracts, Keltner’s show the expected range.
When Bollinger’s “squeeze” inside Keltners, it signals the market is coiling tight for an expansion. It’s like an Olympic sprinter settling into the blocks – you know kinetic energy is about to be unleashed.
Specifically, when the red Bollinger Bands fall inside the blue Keltner channels, volatility has compacted as far as it can. When the bands then pop back out of the channels, volatility explodes. If momentum is already positive before the pop, 80% of the time it will break upward.
The TTM Squeeze indicator paints this visually. Red dots inside at bottom signals the Squeeze. The first green dot exiting the Squeeze signals an upside momentum explosion likely coming.
So in options trading:
Wait for Squeeze
Enter calls on first green dot
Exit when momentum turns lower days later
This captures the premium expansion from realized volatility exceeding implied volatility – perfect for call buyers.
Now, what about trading Squeezes on the short side? I combine pattern analysis like Head & Shoulders. If a downward Squeeze aligns with a Right Shoulder, it typically resolves lower after.
We’re actually seeing some market index Squeezes as they form bullish inverse H&S now. Will be interesting if a bottom culminates soon. But in shorting setups, Squeezes remain critical…
On to the last key strategy around expected moves. Thinkorswim publishes these – the range stock is expected to stay within. But Squeezes defy those expectations!
When a Squeeze drives volatility expansion beyond what’s expected or priced into options – called a greater than expected move – paper losses accumulate for the market makers short options, forcing them to buy/cover, pushing prices exponentially further.
That’s why buyers of calls/puts just before Squeezes profit from escalating volatility way beyond expectations. Yet another reason defined, rules-based Squeeze entries are so powerful. When you see setups… act!
So in summary:
Buy out-of-money calls entering confirmed Squeezes
Exit calls on momentum turn
Fade Squeezes identifying bearish chart patterns
Trade breakouts only – no interpretations!
Strategy #3: Sell Premium After Squeezes Finish
Once a Squeeze ends and volatility contracts, stocks tend to trade sideways back within expected ranges. This presents great opportunities to sell premium and collect income while waiting for the next tradable Squeeze setup.
Looking at a monthly chart of the S&P 500 futures as an example – the two dot Squeeze in July 2012 preceded an eight to ten-month uptrend (remember, monthly chart so each bar is one month). Price hugged the upper Bollinger Band through that whole move.
In early 2017, another monthly Squeeze triggered an aggressive rally for months again to the upper band. The key lesson is not to short Squeezes and breakouts to the upside. Time to get cautious comes when Squeezes roll over on slowing momentum.
So around major Squeezes in 2012 and 2017 we saw multi-month directional runs. But now, with the latest monthly Squeeze decaying, expect the S&P to trade sideways in a two to three year range, much like what we saw in 2015. Have to adapt strategies to changing market conditions.
On a daily chart, the red dots confirmed a Squeeze, price exploded upward accordingly, but eventually those exponential gains always fade. Two daily bars closing lower with reduced momentum is the signal. Rather than directional plays, this flags sideways conditions perfect for selling premium via strangles, straddles and iron condors.
I typically sell 30 delta strangles expiring in 10-15 days out and place GTC orders to close at 80% max profit. If I collect $1 credit initially, I’ll set a $.20 close order, locking in 80% rapidly. Never hold to expiration grasping for leftover pennies while risking large overnight gaps. Close at 80% without exception!
The key to longevity is embracing strategies aligned with everchanging markets rather than rigidly forcing the same tired tactics. Trade what the market gives you! Right now it means lots of premium selling until volatility expansion resumes anew or a sentiment shift catalyzes a directional bias. Be adaptive.
