Transcript:

In this lecture, I want to share with you my checklist for success and my checklist for averting major
risks.

What is the first item on the list here? It's BETA balancing. Essentially, if you already have 10 bullish
trades and you're about to make another trade, if it's also bullish, don't do it. You are going to have to
find some bearish trades. You're going to want to balance out that portfolio. Now, you're never going
to be 100 percent neutral; I get that. You can be a more bullish trader or more bearish trader, that's
fair enough. But just don't skew it all in one way or another. Find some balancing acts that can allow
you to make money and reduce your risk.

Number two; liquidity, liquidity and liquidity is incredibly important. Imagine you make a great trade
and you see a huge profit. You want to cash in that profit. You want to close the position and you
can't, because there's no market. No one is willing to take these options off your hands, one way or
another. Do you think that's not going to happen? Yes, it's going to happen. It's possible. I've been
there. I've done it and it's not a great feeling because even if you are willing to give up some of that
gain, you might not be able to close that position. Which means you have to hold it until the expiration,
which is not really ideal for some strategies.

You sometimes just want to lock in that immediate gain there. So liquidity is hugely important. Just
don't go into stocks or tickers that have low liquidity. It's not worth it. There is always one out there
that's just as good or better with decent liquidity. That's really the key thing here.

Check IV percentile or IV rank or whatever you want to call it. You basically need to understand the IV
percentile of the stock and of the market overall. For that, I would look at VIX or any of the volatility
indices out there. During times of low implied volatility, you want to do one clear thing, you want to
have very little money in your options because there is going to be inevitably that spike in IV and that's
going to hurt your positions. So you want to keep most of the money in cash.

I'd say probably 80 percent, maybe even more, for your options portfolio and each trade that you are
in. You want to make them very small as a percentage of your portfolio. Perhaps one percent only for
each trade that you are in. In that case, don't have more than 15 to 20 of them while volatility is very
low because IV spikes tend to hurt.

How about our strategy? Our strategy overall, is to be a net options seller. That means using
straddles, strangles, iron butterflies, iron condors, credit spreads, and so on. That is always, in the
long run, better than being a net options buyer. Because volatility, as I explained in a previous lecture,
always overstates... The volatility indicators overstates the actual volatility that's to come. Which
means if you are buying options, you are paying more for those premiums than you should be. Better
to be an options seller, because now you getting that overstated premium instead so you're on the
winning side of that skew. Now you can, of course, buy options sometimes; especially when you're
hedging positions.

I'm not saying you should never buy an option. It's just overall, a strategy that I would recommend
would be to be an options seller.
Number five, the big five. Every single time you place a trade, before you hit that send button or
whatever your brokerage calls it, look very, very carefully at the maximum risk. Look at how much
marginal cash this trade is going to eat up and look at what percentage of your portfolio does that fit
in with your overall risk strategy and with the maximum percentages, as you wish to put in a particular
trade. Super important to look at that. Sometimes I look at something and go, "That's such a great
trade," and I'm happy a bit and I look at the max down side and I think, "Uhmm..." Sometimes it is
important to look at that because it means you take your exuberance, your excitement back a step
and therefore you reduce your risk. It's all about downside and risk management.

Number six; be prepared. What does that mean? Well, ideally, before you make a trade or before you
set up a strategy, you already understand how you can hedge this if it goes against you. If you have
made a trade, that's definitely the point where you should be doing that research and do those paper
trades and go through some of my adjustment lectures and understand, "Hey, I am bullish on this, but
what if it goes south? What if the market turns bearish? What can I do to reduce and mitigate that
maximum loss?" There are usually things you can do and it's important to understand what they are,
and also it makes you sleep better.

I think that's always an underestimated quality of a trade.
If you think, "Well, if it does go against me, I can just buy this. I can buy that. I can sell this and then I'll
be fine. I'll lose $50." If you understand that and you're confident in your ability to do that, then you are
going to be much, much calmer. The life lesson a number six is paper trade, paper trade, paper trade
until you are confident. Set up that broken wing butterfly and wait for one that goes against you, and
then make that adjustment. It's much, much better to be in that actual paper position and learn how to
do it there than be panicked when it happens to you with real cash.

Here's my quick checklist, guys. If you have any questions, always message me on the Discord. If
there's anything you think it should be added to this, I'd love to hear from you and see you on the next
one.

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  1. Felix! I've been watching your videos for about 4 months and I would like to thank you, you've helped me begin to understand what is possible. I look forward to learning more from you. I hope you have a splendid birthday!

  2. Hi Felix, thank you for interesting emails, I am on holiday at sea now, I will be more detailed reading your emails concerning options when I return to Prague, anyway interesting. I only use writing put option or wheels strategy yet, because it is the most safety strategy for me. Have a nice week, Pavel.

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