The key to consistent profits in trading options is to reduce the cost basis of your trade while maintaining your profit zone and using getting the best possible pricing in your option spreads. Here are 3 tips that has helped me more profitable in options trading with some example trades

Tip #1: Structure your trade such that you lose as little money as possible when you are wrong

Before thinking about how much money you can make on a trade, it's always best to think about what can go wrong and how much money you can lose and minimizing the loss. Let's take for example a bullish position that I wanted to put on in Bitcoin on July 16th

I wanted to a medium term position bullish trade on BTC. Normally I would do shares but due to the volatility on BTC, I decided to get an at the money call option 2 months out for $1.76 per contract. With a 6 lot, I had a little over $1000 of risk on the trade, which is much better than holding 600 shares of BITO. In addition, I immediately began selling closer dated calls at the 23 and 24 strike every opportunity to reduce the cost basis. You can find all of the trades on this position here. I can sell the calls and if they do end up going into the money I can always roll them up and out. At the time of writing, I have worked my debit down from over $1000 to about $500 and I plan on working it down to around $300. If BTC doesn't move in my direction, I would only have $300 of risk instead of the thousands I would if I purchased shares

Tip #2: Be on the right side of skew

Implied volatility skew is the change in implied volatility as you go up and down the option chain on both the call and put side. You can learn more about it here. Today we're going to look at how dramatically skew impacts pricing on spreads.

Let's examine the option chain at the end of day on 8/1/2024, looking at SPY options expiring in 15 days.

You'll notice that on the call side, IV decreases as you go out of the money whereas on the put side, IV increases as you go out of the money. This is very typical of an index option chain as the market prices in the fact that it takes longer for a stock to go up than down, and there are other institutional players hedging by selling calls and purchasing puts. The skew that gets created dramatically impacts the pricing of spreads. Take for example an at the money 1 dollar wide call vertical vs a put vertical. You would expect the pricing for both to be the same at 0.50 for the spread, but it is significantly more expensive (0.56 vs 0.48) to purchase a call vertical than a put vertical.

This is because when you buy a call vertical, the long call has more IV than the short call, meaning you are buying something that is theoretically more expensive than what you are selling. It is the opposite with the put vertical. This is more pronounced if you have a structure that has more short options in it like a butterfly. It is significantly more expensive purchasing a 10 dollar wide call butterfly than a 10 dollar wide put butterfly.

The best way to use skew to your advantage is to use put ratios or butterflys to lower the cost of a closer to the money put. In general the way out of the money puts have a lot of premium that you can use to offset the cost of the long puts.

Tip #3: Learn how to find credit to adjust positions

A truism of options is that if a call has a higher strike than a put with the same expiration date, only one of the two can be in the money. If you have risk on one side of the trade, you can find a strike on the other side of resistance or support and sell enough options to balance your risk in the trade. Let's walk through an example

In the morning on 8/1/2024 after a monster 4% rally in QQQ the day before, I saw it break down from the overnight range and decided to get some cheap put exposure on the other side of the range

This 15 lot of QQQ is basically free but has 3 dollars of risk on the put side. After an hour or so, the selling really started to accelerate and I wanted to remove some of the downside risk in this trade so I found some 0DTE 475 QQQ calls that were priced the exact same as the debit it would take to balance the butterfly. I first decided to only buy 6 out of the 15 lots

So now I have risk on both sides of the trade but I know that I only need to manage one side because if it goes against me on the put side, the calls will expire for free and vice versa. It turns out that the market decided to make another 4% move, this time to the downside. The calls expired worthless and I was more than happy to spend some money and balance out the rest of the butterflies so I don't have any overnight risk for earnings and the payroll number in the morning.

That free credit received on the call side drastically reduced the amount of risk in the trade. This is an example of how you can move risk around when you are net short options.

In conclusion, with options, there are many ways to take risk out of a trade, by starting off with the right options structure, or managing the risk as the market shows its hand. Taking 30-50% of the loss on losing positions will make a material impact in your end of year P&L