Trading is all about odds. The odds will be in your favour if you understand how far otm contracts behaves and if you don’t, you’ll just end up losing.
I am not going to explain the option greeks here, how they behave, or why they change so quickly that is because probably 99% of option traders today don’t even pay attention to this.
What I am going to explain to you is that far OTM contracts will only work when there’s a big catalyst and if and only if the market is reacting to it.
I am going to give you an example of my trade yesterday and I don’t care if you will judge me on my trading. I am writing this to serve as my reference in the future.
This is the NVDA 1 minute time frame chart and my trade log (IBKR-sa).
Choosing a contract is so important in trading 0DTE (zero date to expiry) option premiums. If you are so far, the risk of taking that trade is so big compared to the reward it will give you even if it trades in your direction.
Pay attention to the 9:49:39 trade NVDA May 10’24 925 call (blue arrow). NVDA was trading at 911.75 something at that time. I bought that contract for 2.38 as “I was thinking that it was flagging after the big pop but only it failed on the next candle”.
I cut that contract right away at 9:50:43 (red arrow) – when I cut my position I always sell this at market – to avoid developing hope to yourself. NVDA was trading at between 910.00 – 911.00 level.
The range on the trade was 2 points away from my entry. 2 points and the call contract loses its value by -52.10, that’s almost 22%.
Now let’s go to my next trade.
QQQ index was showing heavy sell off during this time so I took NVDA May 10’24 890 put contract at 1.38 then I added another from that VWAP rejection at 9:57:29, the same contract that time was now at 1.04 (notice how value depreciate so fast and this is because of the theta and the IV)
NVDA was trading at 909 – 908 level when I bought those contracts.
I sold those put contracts at 10:08:27 and 10:09:28 when NVDA was trading at 903.51 – 904.00 levels and that is 6 points away from my entry level. 6 points. And the gain I got from each contract (33.90 + 31.90) was not that much compared to the loss I took.
I lost $52.10 in trading 1 contract only while I traded 2 contracts and got $65.80 back from the market.
In summary:
I cut the loss 2 points away from my entry, result: – $52.10
I exit in the winning trade 6 points away from my entry, result: +$33.90 +$31.90
Key points:
In trading far OTM contracts, assess the intraday range of the stock, in scalping the premium you need speed and range. If these two are not present, do not trade. Speed and range should be happening at the same time.
If you trade the move, and you are right, keep in mind you need to respect a certain range to get the most reward, as long as the tape tells you that you are in a right direction, try to hold a bit longer because the next big move is where the money is. We call this patience. (which I don’t have during this trade).
and lastly, believe in your trading plan as you believe in yourself.
Now that you see the outcome of that NVDA move that day, it will be easy for you to say, “why you didn’t hold??, it went to 894 – 892 level (put premium went to 4.00+).”
Now this is on me. I have no excuse on this one.
All I know is that MB Trader was on the same trade during this time too and she killed it.
MB Trader even traded the midday pull back.
She’s 100x better than me at that moment and for that I am so grateful. I learned a lot from her and this is why I am writing this too.
To share what she taught and told me:
“If I trade – I don’t care how much gain I will lose, If it’s a high probable trade and will reach that level, I only care about the gain I will get from that level. It is not about being greedy, it is all about believing in yourself that your trade plan will work out”
– MB Trader–
Oh, I fucking love trading!