Top Options Trading Strategies From OptionPundit.com

CEO Manoj Kumar talks about how investors can profit from using options

SmallCapPower (SCP): So we’re here today with Manoj Kumar, the CEO and Founder of OptionPundit. Welcome, Manoj.

Manoj: Thank you. It’s a pleasure to be there.

SmallCapPower: Can you give our viewers a background on you and your newsletter?

Manoj: My name is Manoj, and as you mentioned I’m the Founder and CEO of optionpundit.com. And I was brought up in India. I did my engineering in India and then MBA at National University of Singapore. And as part of my studies, I also stayed some time at University of Texas, Austin. And around the same time, I started up OptionPundit in 2006 with the whole idea of helping retail traders. And the approach was to give them some powerful strategies, portfolio approach, etc. which they can actually reapply to their portfolios.

Since then, OptionPundit has evolved into a boutique company focusing primarily on options, and our clients range from retail traders to the high net worth individuals, to the portfolio managers who are looking for trading options to enhance their returns. And it’s been just a wonderful journey since then. And now, we also organize educational events, workshops, and seminars in all the Asia-Pacific including Singapore, Malaysia, India and the Asian countries as well.

SmallCapPower: It sounds fantastic. So can you explain how you employ options to achieve superior returns?

Manoj: Well, Mark, as you know, options are beautiful trading instruments. Now, our strategy is to focus on options grids and use those grids to our advantage. And then we look for theta positive, delta neutral kind of trades. And then shift those towards either regular positive or regular negative trades, and then we build our full portfolio around that.

Now, at times, we do include some of the directional trades which are based upon qualified price patterns, and then we structure the trades using options for those directional trades. The plan is to have trades which has a good risk to reward ratio, structure it using grids, and then employ the knowledge of options to make sure that we have solid risk/reward in our favor for our trades.

SmallCapPower: So can you give us an example of an options strategy that you successfully used in the past month?

Manoj: Well, just last month, I can give an example of a powerful trade that we did last month. It’s a simple but yet very strategic trade. It’s called strangle. And we did this strangle on VIX. And as you might know, VIX is the index for CBOE market volatility, and people also call it fear index. So as there was volatility going on in the market, so we structured the trade called strangle. We purchased the call, at the same time we also purchased the puts.

Now, as the markets dropped during the first week of May, we sold our calls, and soon when the market stabilized, we sold upwards netting the gains on both the legs and finally ended up with about 22% gains on these for just holding it for about four weeks or nearly a month. It turns out to be a fantastic trade that we did last month.

SmallCapPower: Are options just for aggressive traders? And how can conservative investors use options?

Manoj: Actually it’s a misconception that people think options are for aggressive traders only. Just like any other trading instrument, you’ve got to understand how options behave. What are the things you require in order to trade options successfully? One need to understand and learn how should you be trading options very well. So it’s a simple, three-step process. You just go and learn how to prepare to profit in the markets. Then you profit with discipline. And then you learn how to preserve those profits as well. And once you have that qualified approach, you go and start trading options step by step. Make sure you understand what you’re doing.

Now, as far as the conservative investors are concerned, options offer you a great opportunity to structure high-probability trades, which you could do it by utilizing fantastic models. Now, the conservatism, it also comes with the kind of risk and reward you are willing to take. Some people would like to trade options because they want triple-digit returns every single trading day, but that’s not really the case. So you’ve got to be structuring trades and also being very realistic in the returns that you’re going to generate from the markets. And options can offer wonderful trading strategies for conservative investors as well.

SmallCapPower: So can you provide us an example of an option trade that you’re currently recommending to your subscribers?

Manoj: Okay. Absolutely. This is a trade that we’re doing on SPX, S&P 500, and these are the options which are expiring next week. So what we have done is we have structured a bear put spread. It’s called a vertical spread, and the strikes are 2075 and 2065, 10 strike wide. And we’ve purchased that bear vertical spread, and we financed it by selling two times of the same expiry, but 2045, 2035 puts, which is called a bull put spread. And that credit financed the purchase of these bear put spread.

Now, the interesting thing is that overall combo cost us just hardly 15 cents. So if the S&P 500 continues to go up, the most we can lose is only $15. But if the S&P drops below 2035, we can lose up to $2,000. But here is the beauty of the trade. Before the S&P drops below 2035, it actually starts dropping from the current levels. And once it starts to drop from the current levels, our trade will convert into profits because of the way grids will work out. And the trade will be much more nicely profitable, and we don’t have to wait for the S&P to drop all the way to 2035, and we can be happy with our profits. Now, that’s the way of trading options smartly.

SmallCapPower: So thanks, Manoj. Can you tell our viewers how we can learn more from you, and optionpundit.com?

Manoj: Well, Mark, we have authored more than 800 blog posts and articles. It’s a very extensive reservoir of educational articles. So the viewers can go to optionpundit.com. And there is a lot of information. There are a lot of useful articles which you could read. In fact, we have a dedicated section which is called resources. And in the resources, you will find there are two sections. One is focused on articles, and there you can find information about how to structure the trade, how to look about the brokers, how to find out which broker is good, which is not good, how do you take care of the volatility, how to understand about the implied volatility, and you will also find the real trades there.

At the same time, there is another section which is called toolbox. And in the toolbox, you will find different kind of services and resources that you could actually use for free. So before your viewers go and spend thousands of dollars to buy those tools or software, they can just browse through the website, look at the tools, and start using it. And at the same time, they can also drop me a mail anytime. I would be more than happy to support your viewers, Mark. My email, personal email address is ask, A-S-K, ask@optionpundit.com, and just drop me a mail anytime. I’ll be much more happy to answer any questions you have.

SmallCapPower: That’s great, Manoj. Well, thank you very much for taking the time for today’s interview.

Manoj: It’s my pleasure to be there.

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