Trevor's website can be found at: www.BookingAlpha.com

Tim Bourquin: Hello everybody and welcome back. Thanks very much for joining me for another interview. Today, we're going to be speaking with Trevor Vernon and he has run a hedge fund in the past. As a trader, we're going to talk to him about his strategies and the ways that he approaches the markets and finds good opportunities. So, Trevor, thanks very much for joining me on the phone today.

Trevor Vernon: Hey, Tim. Thanks so much for having me. It's a pleasure.

Tim Bourquin: All right. So, let's talk about the type of trader you are. Are you a day trader or a swing trader and then what markets do you like to trade?

Trevor Vernon: You know, I'm a short-term trader. Over the past, I've traded everything. I've done day trading. I've traded currency. I've traded commodities and everything. What I trade now is short term, usually 5 to 20 days options on the index ETFs and usually large-cap tech. That's pretty much the sweet spot that I work in.

Tim Bourquin: All right. And why options? What made you settle there?

Trevor Vernon: You know, I think I just kind of found my core competency. I really like options a lot. I love the options markets, the derivative market. Again, I've traded currencies, I've traded commodities, I've day traded, I've traded stocks. I just -- I really like options better than anything else. Yes, there's a lot of leverage and a lot of people think it's kind of the deep end of the pool. But if you use the leverage properly, you can use it to a small portion of your trading capital and the gains on that small portion can outweigh allocating let's say all of that capital into a stock strategy.

Tim Bourquin: Right. All right, so let's talk about how you then find opportunities. I imagine that you probably look at the index or the ETF first and then find the option that would help you best take advantage of what your theory is for that moment?

Trevor Vernon: That's exactly right. I'm always watching, you know, kind of my watch list of indexes and stocks and the index ETFs obviously. And so then what I'm doing is depending on what's going on, I'm taking that approach into the options and trying to find the opportunities there.

Tim Bourquin: Well, give us an idea of what you're looking at. Is it a chart technical setup that you look for? What is it?

Trevor Vernon: I would have to say I probably am, you know, 60% or 70% technical. I don't really use fundamentals or I don't think they necessarily apply especially when you're talking about indexes because indexes don't have fundamentals, but the stocks within them do. For instance, you know, when you look at the NASDAQ, I mean Apple is, you know, 20% or more of the NASDAQ so you can apply… You know, Apple's fundamentals do have a large weighing on how the NASDAQ is going to move. But getting back to your question, I'm looking at more technicals because again, you know, I'm a shorter term trader so I'm looking for those overbought and oversold signals.

Tim Bourquin: Let's talk about what those look like on a chart. If something is overbought or oversold, what specifically are you looking for?

Trevor Vernon: You know, I'm always looking at volume, looking at volatilities. I use moving averages, Bollinger Bands. I use RSIs, William's Percent R for the very short term moves. You know, I try not to get too many things going because as anybody has learned with indicators, you know, you can use enough of them and stack the deck any way you want. If you employ too many of them then you get too many mixed signals. So I try to keep it fairly simple.

Tim Bourquin: The moving averages, which ones do you like to use?

Trevor Vernon: I use the 20, 50, 100, and 200 and I typically use the simples. I don't use much of the exponentials.

Tim Bourquin: Okay. So, is it as simple as coming down -- if something is coming down to a moving average are you looking for a crossover? What are you looking for?

Trevor Vernon: I'm looking to see how the underlying is, the reaction when it intersects that moving average. For instance, I've got Apple on my screen right now, and it has not been below the 50-day. The 50-day has been in really good support for the last 6 months. So for instance, you know, if I see Apple pulling back on this 50-day, I'm going to start looking to take a bullish strategy there because that's been a really good level of support.

Tim Bourquin: Especially with Apple, it's so news-driven a lot of times with announcements and things like that. Do you pay attention to the news?

Trevor Vernon: Absolutely I do, especially… You know, on the index side, I'm looking at more what's going on in the world or earnings if it's earning season or something like that with the single stock stories. And I don't play a lot of those 'cause honestly I really don't like to expose myself to a lot of single stock risk because, you know, nobody knows what tomorrow's news can be sometimes with an insider trading scandal or something crazy like that. So, you know, I am looking. But when I've got a strategy on a specific stock, I'm definitely keeping with it.

Tim Bourquin: On those options, are you doing some spreads and straddles or are you just about buying puts and calls?

Trevor Vernon: I do spreads exclusively and then I will hedge that with buying calls and puts, but all of my trades are spread for sure.

Tim Bourquin: Okay talk --

Trevor Vernon: -- credit spreads.

Tim Bourquin: Oh, credit spreads. Give us an example of one that you like to do.

Trevor Vernon: Yeah, I prefer credit spreads, excuse me, by and large. Debit spreads are probably 25% of my overall trading just to give you an idea of the makeup.

Tim Bourquin: For someone who doesn't know what a credit spread is or a debit spread, give us an example say either on Apple or even just a theoretical stock.

Trevor Vernon: Sure. I'll even give today as an example. I use a lot of weekly options and I need to mention that. First since today is Friday so it's weekly exploration and I am currently -- I've got Apple's trading at about 358 at the time of our call. I've got a 360, 365 call spread on. So, what that means is I'm short the 360 call and I'm long the 365 call. That defines my risk. So, what I'm looking for is Apple to close below 360 today to boil it down. And what that means is I will keep the entire credit that I receive when I opened the spread, I'll keep that entire credit today at exploration both options will expire or worthless and I keep that entire credit. And that's my profit.

Tim Bourquin: Did you put that trade on earlier in the week?

Trevor Vernon: I actually put this trade on last Thursday. Weekly options come out every Thursday and so this one went on at that point. So, I'm basically eight calendar days into the spread, and today is the last day of it.

Tim Bourquin: So you've defined your risk because you've got – well, you defined your risk as to the downside I guess, but you've also maximized it or limited it on the upside too, right?

Trevor Vernon: Absolutely. With current spreads, you definitely define that risk, but you also define your profit. I can't make any more than the original credit that I received when I opened in the trade without adjusting it obviously, doing something with it. So, the credit I received was about an 8% or a 9% credit to my risk and so I would receive that. I would keep that and that would be my profit for the last eight days, it would basically be an 8% or 9%.

Tim Bourquin: And I know weekly options are relatively new, but they've gained in popularity this last year. Did you start trading those from the beginning?

Trevor Vernon: Yeah. I jumped into weeklies, you know, probably within a couple of months after they came onboard. I wasn't sure how they were going to be received. Of course, I'm not sure how I was going to like them either. And the more I use them, the more I like them. So, yeah, I've been in basically since the beginning. I still do use, you know, normal exploration monthly options, but I definitely am trading more weeklies.

Tim Bourquin: And then you also mentioned you hedged with calls. How do you do that?

Trevor Vernon: Yeah. What I'll do -- and I should mention, if I have a position that's getting into trouble, I will usually adjust the spread upwards or downwards. But if I can't find an adjustment that I really like then I'll just go in and buy an in-the-money call. And for instance, Apple earlier this week, the iPad 2 was released and there was a really strong reaction the day after. It was released on Wednesday. There was a really strong reaction on Thursday, yesterday. And it started approaching my short 360 strike so, I didn't in this case, but what I would do is go in and buy an in-the-money call say, you know, maybe a 340 or 350 to participate. If Apple continues to the upside and my call spread starts getting threatened, I can either take it off or adjust it up, but I've got a hedge working on the long calls.

Tim Bourquin: And, of course, if you don't need that then you've spent that money, but basically you're buying insurance.

Trevor Vernon: That's exactly right. And that's one of the reasons I use the in-the-money calls because they will not decay near as quick as an out-of the-money call.

Tim Bourquin: How often are you getting the profit and then just letting everything expire versus taking off profits and closing the other position before that happens?

Trevor Vernon: Well, I try to let everything expire. You know, call me cheap, but I like to keep that extra commission, right? 'Cause if they expire, you don't have to pay the closing commission. But, you know, if you've got a good profit and trade and I think we all have to remind ourselves of this a lot of times. You know, you can't go broke, you can't lose money taking a profit. So, you know, if I've got a really strong profit, you know, maybe 70% or 80% of what I expected, halfway into the life of the trade, I'm going to take it off and move on to the next one. You can't be a pig. Pigs get slaughtered.[Laughs] We've all done that and we've all gotten bit.

Tim Bourquin: Are you trading full time right now?

Trevor Vernon: I am.

Tim Bourquin: How long have you been doing that?

Trevor Vernon: Oh gosh, I've traded full time for I guess about eight years now. I've been in the market for about twelve.

Tim Bourquin: Did you start out with options or did you start out doing something else?

Trevor Vernon: I didn't. I moved to options probably about five years ago I would say. I started learning about options about seven years ago and there's a lot of information, there's a lure in the options so as I've built my knowledge, I started, you know, kind of dipping my toes in the water. But I've been in options exclusively for about five years.

Tim Bourquin: Now, I know that you've made your percentages of gain public, but do you have a goal in mind each year or each week or even each day for how much money you want to make in your account?

Trevor Vernon: Yeah. You know, I used to do that and I find myself chasing it, especially if you're trying to use like a day or a weekly goal. I mean I really -- I look for a 30% to 40% return a year. Now, as you mentioned, I make my returns public to the world and I've surpassed that, you know, every year, but that's kind of my benchmark that I'm shooting for.

Tim Bourquin: Do you have a trading plan that you have written out or anything like that?

Trevor Vernon: You know, nothing I think that I've written out. I definitely have my plan that I have kind of derived over the years that I stick to. And I would find when I violate my trading rules ,I get reminded of why they're rules in the first place.

Tim Bourquin: How many trades a day do you take?

Trevor Vernon: You know, I am not an active trader by any means. To answer that question, I'll answer it like this. I usually put on anywhere from two to ten positions a week. So, I will go two or three or four days with no trade and just managing my open positions.

Tim Bourquin: Will you have ten on at any one time or most of those you're closing out and opening new ones? How does that work?

Trevor Vernon: You know, I won't have more than ten on at any given time. And I should mention that, you know, a lot of times what I will do is I have a ladder of spreads. Let's say on the S&P 500, I may put on a 1350, you know, 1370 spread let's say. A couple of days later, I may add another one at 1360, 1380. So, of those ten positions there may only be two or three or four different underlyings.

Tim Bourquin: And why do you do that? Why do you do the laddering?

Trevor Vernon: You know, as days go by and things change in the market, new opportunities come about. I definitely try not to overtrade. And that's why, you know, I'll definitely try to limit the positions and the amount of underlyings. I just find that I can't keep up with 50 different stocks and 25 different positions. I guess I'm just not that smart. But, you know, as things change and maybe new resistance is evident or a new support, then if I see an opportunity in the options, I'll definitely take it on. But at the same time, I'm not going to force a trade. I mean there's a lot of weeks that I have no position or one or two positions.

Tim Bourquin: What's your typical size of options that you put on for each trade?

Trevor Vernon: Well, you know, I do trading for myself as well as my friend so if it's -- it's different depending on what's happening. But I usually -- I want to answer the question this way, I usually allocate about 20% of my capital to each position. And there's one thing to mention I trade a lot -- because I trade credit spreads, I trade a lot of iron condors. And an iron condor is basically just the combination of two credit spreads on the same underlying. So, that would be let's say on the S&P 500, you would have a call credit spread, you have a put credit spread. The reason I trade a lot of iron condors is because when you put on a credit spread, you have a margin requirement and so if you placed a call spread let's say and you have the margin requirement there, you can trade an alternate put spread, you can add a put spread for no additional margin requirement. So it's kind of like you get two trades for the price of one. So, you know, a lot of times, I'll have maybe two or three trades on or positions that will really have six total trades, three credit spreads and three put spreads. So, I can allocate a very small amount of my capital, but not only use the leverage of options, but use the leverage of iron condors. Does that make sense?

Tim Bourquin: Yup, I got you. And how about risk? Do you have a set amount of risk you want on each trade or how do you decide what that is?

Trevor Vernon: You know, with every trade being different, I mean you know how that goes. I mean, I'm looking for approximately 10% out of the trade. If I can make a 10% return on the trade -- and now it may take -- you know, my timeframe maybe a week, my timeframe maybe a month, but that's what I'm looking for as I enter each trade, is I look for a new trade.

Tim Bourquin: And if you -- are you willing to lose the entire amount, the maximum amount on your spreads or will you take those positions off before that happens? At what point do you decide you're wrong and I'm looking for the next trade, I'm going to close this out with a loss.

Trevor Vernon: Yeah, absolutely. You know, I try to -- obviously, I try not to lose all the position. I've had a couple of those and it just made sense to actually -- you know, at some point you've lost so much with the position that it's not even worth getting out of for a couple of extra cents. But, you know, typically I won't go beyond about a 50% loss or at a 50% loss, I'm looking to definitely do something different. You know, but it also needs to be said that with options and this is actually one of the reasons that I use spreads so that the values are not as volatile, but they're still volatile even with spreads. Say you have a position, that I still feel very comfortable in, I'm very confident in its profitability, but it may be showing a 30% or 40% loss right now just because, you know, it's a big up day or a down day and skews the pricing for that day. So you kind of have to watch, you know, the sticker shock sometimes if you look at your positions and go, "Oh my gosh, what am I going to do?" And you have to consider all the circumstances of what's going on.

Tim Bourquin: Well, by the time listeners hear this it might be a couple of weeks after we've recorded that, but as we stand now, oil over $100 and seems to keep rising. What's this trading environment been like for you?

Trevor Vernon: You know, things have been pretty good for us. You know, I'm doing good this year. You know, I don't play the oil markets or any commodity markets anymore. Gold is going straight up, oil is going straight up and the market is going straight up. So if you're long and strong, you're doing great. But, you know, that's not really the game that I play and so we've just been kind of walking up this rise since, I guess, early December and I just keep throwing on my spreads every week or two and I've had a great year so far. So I'm doing well in Texas.

Tim Bourquin: And I was going to say with the market going up all the time, are you ever tempted to not put on the short side and just go long to keep and have that extra gain?

Trevor Vernon: Absolutely. And a couple of weeks ago, I actually was doing that only. I was just using credit spreads. I had no shorts on at all because I just felt like we were so overbought and we can stay overbought for so long, but I just felt that if a pullback came, it was going to quick. And it did and we went from about 1350 to 1300 on the S&P in a matter of a week or so. And at that point, I actually started deploying some of the put spreads 'cause I felt like it comes down so far so fast that there would a footing at 1300 and lo and behold there was.

Tim Bourquin: All right. Well, you've been patient with my questions. You've got a website called bookingalpha.com, we should talk about that.

Trevor Vernon: Yeah. Booking Alpha really it started out at -- the goal of Booking Alpha really is to just bring hedge fund trading and specifically options trading strategies to the masses. Our subscription is probably the lowest on the planet. It's $9.95 a month and we open ourselves to everything. We share all of our winning trades, all of our losing trades. We offer options education as well and it's been a really great experience. Our growth has just been phenomenal.

Tim Bourquin: All right. Well, we'll link to that in the notes for today's interview. Trevor, thanks very much for spending some time on the phone with me and talking about your strategies, I appredciate it!

Trevor's website can be found at: www.BookingAlpha.com