I trade through Interactive Brokers where I can sell one out-of-the-money put option for $5, hold it until expiration, and net $4. A profit of $4 does not seem worth the effort until you multiply it by 10 or 20 so that a position represents $40 or $80. Then multiply that number by 100 or 150 positions so that you are talking about $4000 to $12,000 each month. In addition, commission costs fall with volume and you can sell puts for more than $5 apiece, much more.
Interactive Brokers is a professional grade tool that intimidated me when I first moved over from Ameritrade. However, I could not trade profitably the way I do or monitor the number of positions I hold without the low commission costs and spreadsheet style of the Interactive Brokers trading platform.
I consult Morningstar.com to identify companies with too much debt, questionable accounting practices, complicated corporate structures, or other business issues that make them especially risky. I avoid taking positions in these companies, even when I can enter with a large margin of safety. On the other hand, I sometimes enter positions with a narrow margin of safety when I think companies are trading at bargain levels. Morningstar.com is again the resource I consult to identify these bargains.
Morningstar maintains a list of 5-star stocks – companies trading at bargain levels – that is one of my favorite hunting grounds. On a busy trading day I may scan 50 stock analyst reports on Morningstar.com. The Morningstar analysts are awful market timers and, like most analysts, tend to extrapolate existing trends, but I frequently consider their Fair Value assessments in choosing the levels where I want to enter positions.
My constant companion in analysis and trading is a Microsoft Excel Workbook. I record stock trades, option buys, option sales, spreads, fees, and dividends on separate pages.
I have a “strike” page that calculates levels out-of-the-money in one-percent increments by entering the current price. Standard operating procedure for me is to enter 15 percent or more out-of-the-money with 4-5 weeks until expiration and 20-30 percent out-out-of-the-money with 2 months until expiration. On a busy trading day I may calculate levels out-of-the-money for 100 different stocks, each one taking just a few seconds.
Also on the “strike” page, I keep a table that lists in $250 increments the cost of holding a position for 30 days on margin assuming a rate of 0.02 percent, which is well above the current margin loan rate of Interactive Brokers. I can see at a glance, for example, that holding a position of $3750.00 for 30 days would cost $6.25. That tells me that I need to make more than $6.25 when I enter the trade if I want to cover costs without capturing a dividend during the holding period.
Genesis Trade Navigator Platinum
I consult charts before entering any position and Genesis Trade Navigator is my charting software. I like to enter positions below previous bottoms and under important support levels. I focus on weekly charts during bearish market trends. I focus on daily charts during bullish market trends.
I label charts with position details as I enter them. For example, I might label the VZ chart “+5 Jul24 Calls -5 Jul25 Calls” to indicate that I own 5 July calls at 24 and am short 5 July calls at 25. When I enter the position, I also enter a note in my trading diary to exercise the calls three days before any ex-dividend date.
I consult a few other resources from time to time, but these are the main tools I use in my work.