The options trading method that Dan Sheridan utilizes calls to mind the famous J. M. Keynes quote: “The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.”
It may be boring, for some, but one man’s boring can be another man’s profitability
While methodical, Sheridan is not a slave to routine; he adjusts his approach according to what the market puts in front of him, not unlike a clear-eyed and clear-minded surgeon who has one objective in mind before the first scalpel touches the patient, but has expected and unexpected hurdles to overcome along the way.
Here are some of the bedrock concepts underlying the Sheridan method.
THE UNDERLYING
Sheridan recommends choosing one diversified vehicle, such as an index (RUT (Russell 2000), SPY (SP500), SPX (SP500), and NDX (NASDAQ 100) are favorites), learning its idiosyncrasies, and trading it every month. Trading indices removes company specific risk, and removes the zigs and zags of earnings, announcements, etc., although Sheridan students can employ market-representative stocks like IBM, or AAPL as well, should they choose.
THE STRATEGY
Similarly, Sheridan recommends sticking with the same strategy, month in and month out. Whether it’s iron condors, calendars, diagonals or butterflies. Win or lose. It’s the consistency over time that will earn the profits, not the outcome of one month. “Most retail traders say, ‘I’ll give it one try, if I lose, I’m out,’” Sheridan says. “This has nothing to do with successful trading.” In the example to the left, a typical calendar trade might aim for a 10% profit. By definition then, losses must be cut at 10% — or less. The loss will be made up in time, by being in the market every month, Sheridan says.
THE RISK MANAGEMENT PLAN
Risk management is the key to the entire process. Sheridan does not lose more in any given month than the method seeks to earn in an average month. If you are seeking 10% per month profits in an iron condor program, that’s the maximum loss for a bad month, he says. Whenever possible, have contingent orders in the market to remove “wishing and hoping” from the equation.
THE MODEL IS ADJUSTED TO MARKET CONDITIONS
In an iron condor program, if volatilities are low (see Figure 2 above), as they are now, instead of making a first adjustment by rolling down his put credit spreads, he may buy puts instead, a stronger medicine. (“Adjustments” are changes in the overall options position undertaken when the position moves against you, in order to try to reduce risk and preserve profits; these might include buying or selling puts and/or calls, in any number of combinations, from rather simple to rather complex.) Another way to achieve this: forego short vega vehicles like iron condors, in favor of long vega vehicles like calendars. No “one size fits all” here. Takes education, experience and judgment to be a consistently profitable options trader, and that is what Sheridan imparts to his students.
CONSISTENCY
Any given month may produce a profit or loss, but the thing is to be in the market, month after month, and accrue profits over time, Sheridan says. It is a marathon, he says, not a sprint. Not many retail traders with $ signs in their eyes are prepared to run the metaphorical 26 miles, Sheridan says, which is why so few succeed.
THE LEARNING NEVER STOPS: LIFETIME EDUCATION
Markets change, methods change, and the need to keep current never goes away. This is why doctors attend professional meetings, and why active members of the Sheridan community attend webinars and classes regularly. Calls to mind the pithy aphorism: “if you think education is expensive, try ignorance.”
While this trade was a winner, there are losers, too, Sheridan cautions. Success is about being consistently in the market, and consistently managing risk. “Real and successful trading is more like winning nine times, losing two times, and scratching once, over 12 calendar months,” Sheridan concludes. “It’s a craft, it’s a business, it’s a discipline.”
