High-Probability Options Strategies

I learned early on to keep it simple. Pick a few indicators and follow them forever. I can’t tell you how many traders that I know that want to follow bull flags, bear flags, candlestick patterns, Fibonacci retracements – the list goes on and on. They will try to teach you about their long list of indicators to make themselves look impressive, but in reality most are horrible traders and unsuccessful over the long term.

Why rely on the barometric pressure, Gulf Stream speed, humidity, ocean temperature and astrological temperament to tell the weather when you can just look out your window?
The High-Probability Strategy uses a few basic RSI models plus my proprietary model to take advantage of sentiment and technical extremes.
Highly liquid ETFs are my underlying instrument of choice when trading options. Basically, I only want to trade ETFs that have a large enough volume to create tight bid/ask spreads. Moreover trading options on ETFs offers huge tax advantages (tax code Section 1256).

Unfortunately, this strategy is partly proprietary so I am unable to give you all the details, but the ones I will mention below are the key facets to the strategy. Again, I keep it very simple … although I am certain if you follow my commentary and any subsequent trades you should gain a firm grasp of the strategy essentials.
So, with that being said, I would like to share with you a few of the technical indicators I use in my proprietary model to give you a head start on learning how I trade the strategy.
One of the most powerful technical indicators I use in my proprietary model is RSI Wilder (2), (3), (5), and (14).

The Relative Strength Index (RSI), developed by J. Welles Wilder, Jr. is an overbought/oversold oscillator that compares an entity’s performance to itself over a period of time. It should not be confused with the term “relative strength” which is the comparison of one entity’s performance to another.
I prefer to set my time frame at 1 year.

RSI allows me to gauge the probability of a short to intermediate-term reversal. It does not tell me the exact entry or exit point, but it helps me to be aware that a reversal is on the horizon. Knowing that a short-term top/bottom is near I am able to increase the probability of a potential trade. Conversely, knowing that a reversal is on the horizon I am able to lock in profits on a trade.

Again, I am a contrarian at heart and I prefer to fade an index whether overbought or oversold when the underlying index reaches a “very overbought/very oversold” state. Fading just means to place a short-term trade in the opposite direction of the current short-term trend. We’re leaning into the wind a little with the expectation that we’ll catch the next big gust going the other way.

Of course, other factors must come into play before I decide to place a trade, but I do know that, in most cases, when an index reaches an extreme state, a short-term reversal is imminent. Again, I will keep all of you abreast of the overbought/oversold condition in the Weekly Report and on the Wyatt Investment Research website.


The following is the baseline for my High-Probability Trades:

•  Very overbought - greater than or equal to 85.0
  
•  Overbought - greater than or equal to 75.0
  
•  Neutral - between 30.0 and 75.0
  
•  Oversold - less than or equal to 30.0
  
•  Very oversold - less than or equal to 20.0
  

I use the RSI over various time frames and the shorter the duration of the RSI the more I want to see an extreme reading.
Again, I keep it simple, very simple. Why would I attempt to create a complex options strategy when the High-Probability Strategy has a win ratio over 85% with an average return of over 8% per month?

Simple often equals boring, and that often does not entice traders. But I am not here for excitement, I am here to provide a sound options strategy that makes people money over the long haul. That is exactly what the High-Probability Strategy has succeeded in doing.


So let’s review the benefits of the Options Advantage High-Probability Strategy:
1. Short-term strategy that holds a position 7-56 days on average
2. Can make 5% to 15% a month
3. Uses a diverse group of highly liquid ETFs
4. Only exposed to the market for a limited number of days
5. Section 1256 tax advantage

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I am also a realist. I realize there is no holy grail in trading. However, with that being said, one thing I do know for certain is that I have found a unique and concrete opportunity that makes a world of sense to me and I trade it to make money over the long-term.

Furthermore, I realize that the less I trade, the better the strategy will perform over the long term. And the long term is what matters. This likelihood is what makes my High-Probability Strategy unique and successful.

Patience is the key ingredient to the success of the strategy and again I can’t emphasize this enough, forcing a trade is detrimental to any long-term options strategy.
The High-Probability Strategy is a short-term directional strategy that utilizes single calls and puts based on overbought/oversold extremes in the market. The strategy requires patience

coupled with a disciplined approach. The strategy will make approximately, on average, 8 to 12 recommendations a month with holding periods of 7 to 56 days.
Again, the key to this strategy is patience. Waiting for the appropriate scenario to recommend trades with a high probability of success is what makes this strategy a success. As I always say, opportunities are made up easier than losses. So if you let a few pass you by, don’t dwell on what could have been. There will always be more opportunities around the corner. Remember, trading is a marathon, not a sprint.

“Don’t take action with a trade until the market, itself, confirms your opinion. Being a little late in a trade is insurance that your opinion is correct. In other words, don’t be an impatient trader.” -Jesse Livermore
My typical response is, “I don’t care.”

OK, that may be a bit harsh, but it is true. For the most part I really don’t care about the daily news that flows in and out of the market. I am an options trader. I trade strategies based off probabilities. I create statistical advantages based on my current market assumptions.

We must realize that knowing what is going on in the news and knowing how to make money consistently are two separate things. For successful options investors it’s about your strategy, your logic, your process. It doesn’t matter what you think the market is going to do tomorrow. I realize it’s a difficult concept for the options newbie to understand.
You see, it doesn’t pay for me to try to absorb every financial story out there. All I care about is when my indicators hit extremes. I allow probabilities, not the talking heads, to define my options strategies.

And this means that the strategy enters periods of stagnation. Trades should never be forced. A forced trade is not a statistically sound trade. Again, this is a long-term approach to options trading and should be expected if you wish to bring in profits over the long-term.

Boring? Maybe to the aggressive crowd out there. But, I am more interested in the profitable trades – not trying to be the short-term hero who tries to trade every scenario out there. I am confident in trades that consist of short-term extremes that have entered the stock market – high-probability trades.