This special presentation from Don Kaufman is from Benzinga’s first-ever virtual Benzinga Options Boot Camp, which took place April 18. Click here for more coverage of this event with options trading experts giving traders of all experience levels real, dependable strategies for hitting the ground running or expanding an existing portfolio.
After years of employment at thinkorswim and TD Ameritrade Holding Corp (NASDAQ: AMTD), Theotrade co-founder Don Kaufman said he learned that the secret to making money consistently is to take advantage of strategies that benefit from volatility.
Growing A Small Account
“Volatility is opportunity,” he said in a discussion of why traders fail during uncertain market environments.
“How you handle your risk is directly correlated to your success in the markets.”
Trading isn’t about home runs, he said. It’s about consistent small wins achieved through a rule-based system, strict risk management and an understanding of volatility, trade strategy and logic.
Volatility And Duration Over Direction
“The vast majority of people involved in the markets are infatuated with market direction, attempting to predict the next move a stock is going to make,” Kaufman said. “You’re not going to be right [when] picking direction in the markets.”
One trade Kaufman recommended was the risk-twist spread, which he said puts traders on the right side of volatility and time.
“You don’t necessarily have to be right to make money.”
The trade consists of an “in/out” at-the-money debit spread that levels risk and reward.
The capital efficient strategy overcomes the high probability of being stopped out and defines risk, while never requiring the purchase or sale of stock, he said.
Risk vs. reward is a “flaw in this business,” Kaufman said, giving the example of traders who purchase Twitter Inc (NYSE: TWTR) stock at $23 while setting a stop at $22 and target at $25.
“The probability of hitting the stop is inordinately high.”
In fact, using the options chain, Kaufman revealed the probability of trading through the stop was 73%, while the probability of hitting the target was 44%.
“Rather than buying Twitter at $23, we’re going to use an In/Out Spread, [since] it overcomes the high probability of being stopped out because there is no stop order.”
At expiration, the bullish at-the-money debit spread would net traders a $100 win or $100 loss.
The strategy allows traders to get on the right side of risk and volatility during uncertain markets, Kaufman said.
“This is about consistency.”
Photo by Engin Akyurt from Pexels.
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