Enjoying Life While You Have The Chance!

Hey everyone!  It's Friday and Special Agent Thomas has put his gear away and is looking forward to having a good weekend with the family!

Let's talk about this weeks option trade first. I placed a 167/169 bear call spread on the SPY on Monday.  I lost the trade and gave back some of the gains I've made the last few weeks.  I knew I should have bumped up to the 168 strike but there's no use crying over spilled milk now.  There's always next week right!  One thing I've come to realize is that no one wins every trade.  The market's just a beast!  I even read this week that only 8% of hedge fund managers actually beat the market!  These hedge fund gurus are supposed to be smarter than the rest of us and even they get humbled by the market. Whether you invest or trade its important to stick with your plan and just ride out the bumps in the road.

Now to the good stuff.  When I came home tonight there were a million things I could have occupied myself with.  But I decided I wanted to sacrifice my desires and give my time and energy to my wife and kids.  I played ball and wrestled with the kids and even helped my wife cook dinner.  It wasn't anything big, but this was one of the best evenings I've had in a long time.  So the message here is to take the time to enjoy the important things in life.  We only have so much time and when it's gone.......it's gone forever.

Have a good weekend everyone.  I'll be ready to trade on Monday!  If you're new to options be sure to read the first few blog posts to get up to speed fast.


                                                  

Expanding the Boundries

Hey everyone!  I'll get right to it!  To date, this blog has been all about trading options.  Specifically, Bear Call Credit Spreads.  For the two people that have read each post you should be up to speed on how to execute either monthly or weekly credit spreads.   But today I was thinking (uh oh)!  There are a ton of other things I would like (love) to write about!  Things that may be helpful to my readers.  I suppose I could start a second blog but I'm much to lazy for that.  So, as I continue Options Adventure I plan on sprinkling my posts with random Sean "ness".  I hope I don't lose my two readers!  Anyway, here goes....

Today I went to play basketball after work.  It was still about 90 degrees here in Florida.  The heat was killing me.  I shot jumpers for twenty minutes, ran suicides for ten minutes and then shot free throws.  Everything was cool (sorta) until I got to the free throws.  I was exhausted from the heat and all I wanted to do was hit seven out of ten and go home.  Five of ten.  Six of ten.  Five of ten.  The frustration was building by the time I got to the fourth set.  But I finally got myself together and hit six of seven.  Then I missed the next two.  Thank the Lord I hit the last shot to get my 70% average.

After I shot, I sat down to cool off and started thinking about what just happened. I've been having some "issues" lately and it appeared my free throw escapade was an opportunity to learn a life lesson.  Here's what I learned:

1. When you have mountains to climb in life there will inevitably be problems along the way.  My goal (mountain) was hitting seven out of ten free throws.

2. When dealing with problems you have to control your emotions and stay in control.  During the first three sets of free throws it took every ounce of strength to not curse out my ball and kick it into the woods.  Does anything good ever come out of you blowing your top?  Not in my experience.

3. You have to learn to persevere.  If you give up to early you are going to miss out on a lot of blessings in life.  Keep moving forward! I could have quit after the third set and went home, but I stuck with it.

4. Sometimes you have to learn to adjust from whats always worked for you in the past.  During the first three sets I shot the free throws all the same way.  In the final set I changed my shooting motion a tad and got the results I wanted.

5. Lastly, even when things are going good, expect the unexpected.  In my last set I hit my first six out of seven shots.  I was cruising and had only one more to hit. Then I stumbled and barely reached my 70% goal.    When I hit the first six shots I just knew it was all good.  That last shot was pressure filled!  Not what I expected.

Well that's it.  I can't say basketball can teach you everything you need to know about life but I believe there may be a little wisdom in my experience today.

By the way, I placed a SPY 167/169 Bear Call Spread today that expires on Friday.  Premium was sweet!

                                            

Weeklies Update

Wazzup people!  If anyone has been following my blog you'd know that I've adjusted my strategy to trading weekly credit spreads instead of monthly spreads.  So far things have worked out really well.  On Monday I placed a SPY 165/167 bear call spread and earned $11 per contract.  The SPY closed today under 163 so I was good to go.  It appears even when you calculate commissions weeklies can be more profitable than monthlies.  Plus if a weekly trade were to go bad there are more options to roll the trade out.

In the mean time I've tried a couple other services that provide trading signals but I just don't think they're for me.  If anyone uses a service that's made them some money let me know.  I'm willing to check out just about anything.

I hope you had a good holiday.  Fireworks in Jax, FL were pretty cool!  Later!


                                            
                                                                         My City!

Writer's Block!

Happy Friday and welcome back to Options Adventure!  This is actually the first time I have no idea what I want to talk about!  I was going to talk about some other types of option/stock orders but I'm really not feeling it, so I'm just gonna wing it!

First off, I have to give congratulations to the Miami Heat.  I'm a die hard Laker fan (shout out to the Mamba) but you have to give Lebron and those boys credit.  They beat a quality team in the Spurs and to my surprise showed great sportsmanship after the game.  Just check out the moment Lebron and Duncan had after the game.  And that shot by Ray Allen at the end of regulation in game six was just sick!

Next, it always amazes me how the entire financial world gets their panties all tied in knots whenever the Federal Reserve Chairman speaks.  The Chairman uses a negative word during his remarks and the entire markets tanks.  That my friend is what I call "gangsta"!  It really makes me wonder if the whole market is just a sham and controlled by the big institutional banks and other super rich powers that be.  Hmm....

Lastly, I can touch on my two trades this week.  I successfully closed out a SPY 168.50/170.50 Bear Call Spread (weekly).  I have Mr. Fed Chairman to thank for the SPY never getting close to 168 this week.  Unfortunately, I lost on a straight 159.50 SPY call that expired today.  I was expecting the SPY to bounce back after yesterdays drop, but I was definitely on the wrong side of that trade.  I still may experiment with some calls and puts in the future but the foundation will always be high probability Bear Call spreads on more than likely only the SPY.

Well, that's it for now.  Hopefully next week I'll have a little more inspiration.

When does football season start again?!  


                                              

What Types of Orders Are You Using?

Hey everyone and welcome back to Options Adventure!  It's been a couple weeks since I posted but not to fear.....I'm back.  I wanted to do a quick post today about the different types of option orders you'll come across when you trade.  With credit spreads the two basic types of orders are:

1. Sell To Open (the short strike)
2. Buy To Open (the long strike)

With these two orders we create our Bear Call Spread.  If for some reason you wanted to close out your spread the two basic orders to accomplish that are:

1. Sell to Close (the long strike)
2. Buy To Close (the short strike)

These are the basics.  But let me ask you a question.  When you go shopping don't you always try to get the best price for whatever you're buying?  Of course you do! Well, in "options world" things are no different.  When I sell an option I want to get the best price I can so I can make the most money I can.  The best way to do this is by placing "Limit Orders".  Lets say the Bid/Ask price for an at the money SPY call was 0.5 and 0.7.  I can always sell an option at the "Market Price".  This is normally going to be the worst price I can get into the trade with.  In our example, the Market Price would be 0.5.  So for every option I sold, I would get $50.  But let's say I want to try to get a better price!  No market maker is going to sell you a option at the most expensive price of 0.7, but you may be able to make a deal if you offer to sell the call at 0.6.  This price sits in the middle of the Bid/Ask spread.

How do you do this?  I'm glad you asked!  Instead of placing a Market Order, you need to place a Limit Order of lets say....0.6.  This order basically says I want to sell the call, but I will not accept anything lower than 0.6 per contract.  If my Limit Order gets filled than I'll have earned $60 per contract instead of $50.  That's a big difference!  You want to get as much money as you can for taking on the risk of the trade.  Sometimes you're Limit Order will fill quickly.  Sometimes it takes a few minutes.  Sometimes it never fills at all.  Worse case scenario, you can always change your Limit Order back to a Market Order.

This little pricing game reminds me a lot of the negotiating you do at the Straw Market in the Bahamas.  You want the best price you can get for that straw hat you'll never wear again once you get home and the local wants to rip you off the best they can.  Man, I loathe that place!

Anyway, in your trading you need to be placing Limit Orders period.  It's the best way to get the most out of your trades.  We'll talk about some other advanced order types next time.  Good night!
 


                                             

Can You Feel The Pain?

What's up my people!  Man, being a Super Dad is tough sometimes!  This morning I woke up at 4:00 AM to take my oldest daughter to a kids Triathlon.  The First Coast Kids Triathlon here in Jax, FL is the largest kids Tri in the country.  I am SUPER proud to say my daughter won first place for her age!  She worked really hard and deserved that big Dairy Queen Blizzard she destroyed after the race.  Well, lets talk options.

This week I scored another good spread on the S&P 500 ETF known as the SPY.  I entered a 171/174 Bear Call Spread on Monday that expired worthless on Friday.  The SPY closed somewhere in the 165 range for the week so my spread was never in any danger.  I think I'm really starting to like using weeklies instead of monthly spreads.  The time decay is really fast and over the course of the month it appears I can make a little more income than using a monthly spread.  Having a good low cost broker really helps with the weeklies.  I mentioned in a previous post I use E-Option.  They are the lowest no frill broker out there.  And no, I'm not getting paid to push E-Option in case you're wondering.

Anyway, I came across this theory called Maximum Pain.  If you've heard of this and use it to come up with trade ideas let me know.  In essence the theory goes like this..

1. There are market makers (the people that make the real dough) who trade lots of options.

2. There is always going to be a point, more specifically a particular option strike price, where the market makers would lose the least amount of money at option expiration.

3. Seeing that the market makers don't like losing money, they will execute trades to move a stocks price (aka manipulate it) to the point (strike) where they will have the lowest loss.  This magic strike price is called Maximum Pain.

There are a lot of free websites that allow you to calculate the Max Pain for a particular stock for each weekly option expiration.  The question is how can you use this to your advantage?  Here's what I did this week.  I determined that Max Pain for the SPY weekly option expiring on Friday was 165.  On Thursday afternoon the SPY was trading over the 166 price point.  Max Pain theory told me that the SPY should be moving down by the end of trading Friday, right?  So, what I did was buy 10 puts (at 166 strike).  If you've been keeping up you know that if you buy a put and the price drops you make money!

To make what's becoming a long story short, on Thursday I bought 10 puts at $39 a piece and sold them Friday for $70 a piece!  Not a bad profit for one little trade.  I risked $390 and made $700.  With an advanced order you can even automatically get out of a trade if the whole Max Pain thing doesn't work.

Next time I'll talk about the different types of advanced option orders.  I'll also talk a little more about this Max Pain thing.

Well, my kids want me to come watch Disney Channel with them!  I hope you have a good weekend!

Still waiting for my first comment!

Don't Call It A Comeback!

What's up y'all.  I never thought Friday would come!  I accomplished a lot a field work this week trying to break up a good ole boy network of local fraudsters!  Sometimes at my regular job I wonder if anyone actually becomes wealthy without lying, cheating and stealing.  Anyway, enough about federal agent world.  Lets talk about options!

I didn't have a post last week partly because I was dead tired and partly because I was still licking my wounds from getting slammed during the last option cycle.  But like the Six Million Dollar Man (Remember that show?) I'm coming back stronger and faster!  I really believe the adjustment I made from using stocks to sticking with large ETF's will eliminate what happened to me last month.

With that in mind I thought I'd try something a little different.  Instead of picking a spread with the normal monthly expiration, which in this case would have been on June 22nd, I decided to try a weekly option spread.  Yes, you can actually trade weekly options the same way you trade monthly options.  In terms of structuring a spread everything is pretty much the same.  The primary difference is that the time value of the option deteriorates much quicker with the weeklies than with a monthly option.  Weeklies are listed each Thursday and expire the following Friday unless that Friday happens to be the third Friday of the month.

On Monday this week I placed a 171/175 bear call spread on the SPY (S&P 500 ETF).  This spread expired today with SPY never getting close to 171.    After the option expired worthless I was able to come out with a 0.75% profit.  That may seem like a pittance but if I got the same return for four weeks that would be a 3% return for the month which is right where I want to be.

One thing I wanted to clear up is the point when a maximum loss occurs with a credit spread.  In this case my break even point would be 171 plus the amount of premium I received.  My max loss would occur if SPY reached 175.  In this example the max loss would be $400 per contract.

Prior to opening the position my trade simulator stated I had a 96% change of winning the bet.  Those were good odds to me!  That brings me to another point. I read this week that a trader should make sure he's using a trade simulator and not just a probability calculator.  The App Store has a great simulator you can download right to your IPhone.  That's the one I use!

Well that's it for tonight.  I did experiment with another type of options trade today.  I picked up the idea from the web.  To make a long story short I bought 10 SPY 164.5 options (expiring today) at about 10:00AM for $32 a piece and then sold them at 2:00 PM for $52 each!  Not a bad profit for a few  hours.  Before I get into the theory behind the trade I want to experiment a little more first.  Could just be beginners luck!

Enjoy the long weekend everyone!

The Smack Down Is Humbling!

Wow!  Like the title said, this week I've gotten the Rick Flair "Whooo" smack to the face from the market.  Last week was the 3G mistake and this week an unlikely probability actually happened with a BIDU trade I made.  Months of gains down the drain!  But I'm by no means ready to call it quits.  I want to learn from my mistakes and try to get better.

So like I mentioned, a week or so ago I placed a 95/100 spread on Baidu (BIDU).  BIDU is like Google of China. It had been trading in a tight range since about February of this year and the probability of it breaking 95 by May 18th was fairly low.  I followed all the general rules I've previously wrote about and everything looked good so I pulled the trigger.  Then out of nowhere this week BIDU announced its acquisition of a company called PPS Net TV.  Apparently the market liked the purchase because the stock reacted to the positive.  When I saw the quick movement I read the writing on the wall and exited my trade for a loss.  BIDU closed on Friday at 95.45.  This stock may be at 100 by the end of next week which would be a catastrophic loss for me if I held on the position.  I could have rolled the position over to a later month but that just didn't really seem to make sense.  Take you lumps and go home!

The real question is how can you avoid having months of gains only to lose a big chunk of it with one bad outcome?  I don't think you can EVER take all the risk out of playing the market but in the case of what I'm doing some adjustments can be made.  So after pondering about it the last few days I've decided to adjust my rules as such:

1. I will no longer write options on individual stocks.  I will only use major index tracking ETF's like SPY, IWM or QQQ.  This rule will hopefully avoid the sharp increase in volatility that comes with unanticipated news for an individual stock.

2. I will adjust my monthly income requirements to 1% per month to include commissions.  12% per year still isnt too bad.

3. I will only make trades where the short strike (95 in the case of the BIDU trade) is at least two standard deviations from the current price of the stock.  This should make the probability of losing only 1-2%. 

We'll see how things go!  Have a good weekend everyone.  I'm going out to work in the yard!

The 3G Mistake!

What's going on folks! Well, I have to say this is going to be the hardest blog post I've ever written.  Over the last week a couple things came to light that has caused me to not be profitable this options cycle.  But before I explain let me tell you a short story...

As I may have mentioned before during the day I'm employed as a federal agent.  As any agent will tell you the hardest part of our job (particularly white collar fraud investigators) is going to trial.  Most of the bad guys we go up against have the resources to hire large law firms full of associates, investigators and support staff to help defend a case.  The Government generally has one Assistant U.S. Attorney (AUSA) and me to do everything.  Several years ago I was part of a team of agents working on a trial. This case was so big three agents and two AUSA's were assigned to the case.  I was a young agent then and had never been part of anything this large. 

My part of the case had to deal with the travel expenses of a particular union official.  For several months prior to the trial I went through hundreds of travel vouchers documenting what travel was legitimate business and what was just a boon doggle as we call it.  By the end of the analysis I had this massive spread sheet with what seemed like an endless amount of data.  During the process I was asked to change the format several times and adjust what information should be included.  After a million redrafts it was finally my turn to take the stand to present the "evidence". 

Somewhere during all the cutting, pasting and redrafts something got mixed up.  I thought the final product was ready but little did I know it was all screwed up!  I vividly recall the smirk on the defense attorney's face when he prepared to question me on the stand.  Long story short, I got DESTROYED!  That #$!%^ attorney had me up there for hours making me look like an idiot and making it appear the government would do anything to convict his client.  I remember sitting alone on the courthouse steps when it was over. If it wasn't for my faith in God I really don't know how I could have recovered from such a public beating. 

So what's the moral of the story?  That experience caused me to ensure that I never, ever, ever make a mistake again at work.  Of course I'm not perfect, but from that day on I always ensure my work product is checked, checked, and rechecked.  Not to brag, but since then I've been pretty successful at my job.

This brings me to this months trade.  Being careless I made two mistakes.  First is that I intended to enter a Google 860/870 bear call spread.  I don't know what numbers I put into my probability calculator but whatever I did falsely led me to believe this was a high probability trade.  Well, it wasn't!  My next mistake was that when I entered the trade with my broker "somehow" I placed an 850/860 instead of the already bad 860/870!  When I realized this I was like dude WTF!  Anyway, instead of living on a prayer and hoping the trade works out (always a bad idea) I exited the trade for a loss and found a great BIDU 95/100 trade expiring on 5/24/13.  All in all I lost about 3G. 

So, just like I have become quite anal at work I will I now be just as anal with my side gig here.  There's really no excuse for these mistakes but I thought sharing them may be beneficial to someone out there.  Well, like I tell my beautiful wife all the time when I screw up... My bad!  I can't say I 'll never lose a trade, but I can say this type of mistake will never happen again.  My bad y'all!

Keeping Your Mind Right!

What's up my people!  It's Friday and I'm totally wasted!  I just came back from the firing range and it was hot here in Florida today.  Not to brag but this week I also received a nice reward from the U.S Attorney's Office for a job well done.  But you're here to talk about options and not crime fighting (my day job) so lets get to it.

After another successful credit spread last month I was primed and ready to look for a May trade.  Normally after Expiration Friday I chill over the weekend and don't even look at anything financial related.  It's just nice to to step away sometimes.  But last weekend was a different.  It seemed that as soon as I knew my April spread was a winner I was hard charging looking for next months trade.  After spending an hour or so trolling through possibilities I wasn't able to come up with anything that fit my criteria.  Instead of just chilling out and waiting until this week to look for a good trade I kinda freaked out!  I felt like I HAD to find something NOW!  As I look back at it, I was really stressing myself out.

Anyone who has ever traded for any period of time will tell you that trading is stressful.  I describe it as a mixture of fear and adrenaline.  However, getting all worked up like I did is totally unnecessary.  I have my rules in place to avoid all that.  If there aren't any trades to be made today, then wait until tomorrow or next week.  If you end up not trading for a month SO WHAT!  It's better to be on the sidelines for a month than to force a bad trade and regret it later.  I've found that you have to keep your mind right if you want to have a chance of being a successful trader.  That's my advice for the week.

Now, as for May's credit spread.  I entered an 860/870 Bear Call Spread on Google.  If' you've read my blog you would know that as long as Google stays below 860 between now and the third Friday of May  I'll get to keep all my premium.  So far the probabilities are looking pretty good.  We'll see how things progress during the month.  Have a good weekend everyone!

Where's The Proof!

Happy Friday again everyone!  I just got back last night from a long week working in Memphis, TN. I'm so glad to be back in the Sunshine State.  Well, if you've been keeping up with my Facebook or Twitter posts you would know that today is expiration friday for this months options.  That's great news for me because as it stands my BIDU credit spread is looking fantastic!  If you include this month, that's seven successful trades since I've started the system I've been sharing on my blog.  I wish I'd figured all this out ten years ago!  Oh well!

In my pleadings for folks to get more interested in this type of investing I received a Facebook message from my college roommate asking me what returns I've had since I got started.  I figured that was a fair question.  For the last two months I've been sounding off about how great this system is but what proof have I shown?  You got it!  Nothing!  So, in the spirit of full disclosure I have decided to post my returns and statements since I started the strategy in October 2012.  Man, it took me forever to figure out how to attach the statements!  Anyway, since I started last October I haven't added any funds to my account.  So all the gains have been only from the spreads I've traded.  In summary, I'm up over 30% from October 1st to today.  That's a little over 4% per month.  Remember, I'm only aiming for 2% per month so as you can see some trades REALLY worked out.

So there's the proof!  The numbers don't lie!  I hope you guys can see that the strategy works.  Please leave comments, hit me up on Facebook or follow me on Twitter @optionadventure.  Have a good weekend everyone!

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Why I Stick To The Rules!

What's up folks!  It's Friday!  Another week of crime fighting behind me.  I'm hoping to recharge (Yea right!) and get ready for another challenging week ahead.  So, lets talk about what happened to my BIDU 97.5/102.5 spread this week.  At the beginning of the week BIDU was trading right about $84.00.  Our spread was in great shape!  Tuesday was cool and then Wednesday came and things started to get interesting.  During a morning break at work I checked my phone and saw BIDU had jumped about $5 or right around 6%!  I was like what in the world is going on!  There was no great BIDU news.  It appeared the market in general was reacting to news from the Fed. 

When I researching my trade for the month I was tempted to pick a lower strike in order to grab some extra premium.  But then I thought......stick to the trading rules!  The rules are there for my own protection.  In trading sometimes you're biggest enemy is yourself!  So I'm glad to say I resisted that temptation and picked a strike with a much higher probability of success.  So instead of having to decide whether or not to exit a losing trade or roll my spread to the following month I rolled with the punches like a good boxer and survived.  In after hours trading tonight BIDU is still around the $90 mark so I still have a good cushion in place with one week left to go until expiration Friday. 

So what's the moral of the story?  Stick to the rules that made you successful!  Even if it means you make a little less money in the trade.  Make no mistake, trading options is a big boy game.  It's much better to make a little than lose a lot!  Have a good week guys!

 

Whew!  I'm glad that one missed!

Real World Trading!

Happy Friday everyone!  I can't tell you how happy I am to be home sitting next to my little one here!  I thought today I would go through a real world trade step by step. A couple weeks ago I opened the following trade:

Sell 72 BIDU 97.5 Calls
Buy 72 BIDU 102.5 Calls

Basically this means I sold 72 call option contracts of a stock named BIDU.  The strike price I sold the calls were was 97.5.  At the time of the trade, for every contract I sold I received $36.  To complete the spread I bought an identical number of BIDU calls at the 102.5 strike.  For every contract I bought I had to pay $11.  So my spread for this trade $25 per contract minus my broker commissions.

The million dollar question is how did I come up with this stock and these strike prices?  Well without spilling all the beans I used a "screener" to find a trade that fit all the criteria I've been talking about in my earlier posts.  BIDU isn't reporting any earnings this options cycle which ends on April 20th.  There was no crazy news about BIDU I could find on the web.  When I ran the numbers I figured out this spread had roughly an 80% chance of success.  Those are good odds to me!  As long as BIDU stays under 97.5 I get to keep all my "premium".  At the time I opened the trade BIDU was trading around $86.  As of the close today BIDU is at $85.16.  With two weeks to expiration everything looks pretty good!

Just in case things go crazy I have an alarm set to let me know if BIDU reaches $96.  If the stock price gets too close to 97.5 I can always decide whether to keep the trade open (not a good idea) or adjust it to give me some more cushion (much better idea).

Anyway, it's as simple as that.  I researched the trade for about 30 minutes.  I check the stock price each day at the close of the market.  And just in case, I have an alarm set to warn me if something drastic happens during the day.

Next week, I'll update this trade to see how things are going.  Have a good weekend my friends.

Getting Set Up Fast!

What's up everyone!  I just got back from a relaxing Spring Break with the family.  Tubing, zip-lining, ice skating etc...  It was a good time for all.  Now its time to get back to work!  If you've been keeping up with my blog you would know that my favorite investing strategy is trading Bear Call option spreads.  I look to earn between 2% to 4% per month using trades that have at least an 80% probability of success.  In this post I wanted to touch on getting your options brokerage account set up.

For several years I've had my primary financial accounts at a large bank.  The big banks are generally OK for checking and savings accounts but when it comes to brokerage accounts they are usually WAY more expensive to deal with.  When I started trading options I used Big Bank's brokerage arm because it was the easiest thing to do.  I later found that my profits were being eaten alive!  After a little research I found several "discount" brokerages online.  Some of these sites like Options Express and Trade King were much cheaper to use than Big Bank but I still wasn't satisfied.  After digging yet deeper on the web I found a company called E-Option.  To date, I haven't found a cheaper place to trade options.  Now I admit that E-Option's web interface isn't that pretty and lacks some of the bells and whistles of other sites but the price is right.  If you can find a cheaper place to trade options please leave a comment with their name!

I found that the application process at E-Option was also a breeze.  Another positive aspect of the site is that they've partnered with several companies that offer a service called "auto trading". Basically you sign up with a company and for a fee they will automatically send their trades to E-Option who will in turn execute the orders on your behalf.  It's a hands off approach to investing that takes the decision making out of your hands and places it with a "professional".  Auto trading is cool, but I would highly recommend you research the company you're dealing with first.  Some are better than others.

Next time I'm going to dig up some old account statements and give some examples of successful trades  I've made over the last several months.  As always please leave comments if you have any questions.  Good night ya'll!

Getting Ready To Trade

Good evening everyone!  It's a rainy night here in north Florida.  I meant to get this up yesterday but the J-O-B was occupying all my attention.  Anyway, I think I left off last time talking about the rules I use to trade credit spreads.  If I recall correctly I think the first two rules were to trade only Bear Call Spreads and to avoid volatility producing events like earnings reports, lawsuits, etc.

My next trading rule is to not be greedy!  Some websites promise 10% per month or 5% per week.  If those guys can do that consistently than more power to them. Make that money bro!  However, I've found that with big rewards come big risk.  It's my goal to limit risk as much as I can.  So each month I'm not looking to hit a home run I just want a base hit.  For me that translates to making no less than a 2% return (to include commissions) each month.  2% doesn't sound like a lot but that's over 20% a year!  I think that's a good goal to reach for.

My next rule has to do with math, statistics and probability.  I could spend an hour explaining how all the math works but that would be totally boring.  All you really need to know is that there are probability calculators available that can actually use a stocks historical price movement and some other factors to determine what the odds are that a stock will rise (or fall) to a predetermined price that you select.  With credit spreads the lower the probability of success the higher the potential reward.  In my travels on the Internet I've seen that some people are comfortable with probabilities of success at or around 70%.  I admit that's certainly better than Vegas, but when I have 50K on the line I want the odds really stacked in my favor.  So when I trade I like to have probabilities in the mid to high 80 range.  I've found that I can easily make my 2% per month with trades having at least an 80% chance of  winning.

The last rule I have has been the hardest for me to follow.  Always stick to the first four rules!  When you start having success you start believing you're the man and are smarter than the market.  You start telling yourself you can make 5% per month instead of sticking with safer trades in the 2-3% range.  You begin to see that there's more money to be made on the "put" side instead of the same old boring "call" trades.  Let me warn you! Don't go off the reservation out of greed!  The market WILL beat you up!  Here's a great clip about greed.  I can't say I agree though......

Anyway, it's Spring Break time.  We're headed to the mountains tomorrow.  Next time we'll talk about the best broker to open up a trading account with.  Good night!

The Rules of The Game!

What's up everybody!  I'm just sitting here doing my taxes and getting more depressed by the minute.  Nothing like a new blog post to cheer me up!  When I look back at my first five posts I "think" I've provided enough information to get most folks up and running with options.  As always, if anyone has questions please leave a comment.  Today, I want to go over what my trading rules are.  After much trial and error I've found that as long as I stick to these rules things should go pretty well.  I've had these rules in place for six months and my account is up over 30%!  Can you say the same about yours?  OK, here we go!

Rule#1: Only Trade Credit Spreads on The Call Side (Bear Call Spreads)

As I've mentioned before you can trade credit spreads with either calls or puts.  If you use calls, you're betting a stock won't rise to a certain level.  With puts, you're betting a stocks price won't drop to a certain level.  So why only trade the call side?  For my peace of mind I like to eliminate as much uncertainty as possible.  The last thing I want to do is wake up in the morning as find out that because of a terrorist attack or some other pending financial crisis that the entire market has dropped 500 points!  I could've had a put spread with a 90% chance of winning that is now a total loser because of one bad event.   To avoid that risk I only trade on the call side.  So when the next "To Big To Fail" crisis comes, I'm like "whatever"!

Rule# 2: Avoid Volatility Producing Events (Pick boring stocks)

As I'm sure you know there are thousands of stocks with trade-able (Is that a word?) options.  Some good.  Some not so good.  I've learned that the credit you can earn from options is always higher when there is a level of uncertainty in the short term stock price.  What can cause these uncertainties?  Well, things like court cases, FDA approval votes, earnings reports, changes in company leadership, etc...  All these events cause uncertainty.  And the more uncertainty, the more risks.  The more risk, the more sleepless nights and lost productivity at our day jobs.  What's great is that there are tons of good trades each month that avoid all that stuff.  I always (always) stick to those boring trades.  Boring trades equal money in the bank!

Those are my first two rules guys!  Next time I'll go over a few more.  This weekend I'll be trolling the net for opportunities next month.  IOC is looking interesting!  Connect with me during the week for live trade updates on Twitter @optionadventure.  Have a good week!

The Ultimate Options Strategy!

Hey everybody!  Man, it’s been a long week. Like most folks I have a day job.   Blogging and trading options is just something I do on the side for fun and profit.  I’m blessed to have been employed with the same company for sixteen years and hopefully I’ll be able to retire one day with a boat load of cash generated from years of compounded earnings from options trading.  With that in mind let’s get back to it!

So far we’ve talked about what options are, the different types of options (calls and puts), and how to read an options chart.  Let me say this before we continue.  There are thousands of books and websites you can check out that will expose you to more information about options than you can possibly imagine.  It’s quite overwhelming! But I’m of the belief that you really don’t need to know it all to get started and be successful.  

One of my duties at my day job is being a regional defensive tactics instructor.  With the experience I’ve gained I could teach you all types of exotic take downs, pressure points, and submission holds but when it’s all said and done if you, as they say, “Hit them back first!” you have a great chance of winning most physical confrontations.  I approach options trading with the same attitude.  I may not win every fight (or trade) but I will knock my share of bad guys out!   Now don’t get me wrong, I encourage you to read and learn as much as you can about option trading but my plan is to get you up and running as quickly as possible.

In this post I want to talk about the type of option trade I use exclusively.  The strategy has several different names but I just call it a basic “spread”.  Specifically, it’s called a “bear call spread”.  More about the bear call thing later.  Let’s break it down!

A spread is created when a trader “sells” an option at a strike price (aka short strike) that’s a good distance away from the current price of a stock.  Then at the same time you “buy” an option at a strike price (aka long strike) that’s even further away from the stocks current price.  The goal of entering this type of spread is to choose a short strike that the stock price will never touch. So let’s say stock ABC’s current market price is $60.  To create a spread we could sell an option at the $70 strike and simultaneously buy an option at the $75 strike.  When we sell the $70 strike let’s say we get paid 1.00 ($100), but the cost to buy the $75 strike is 0.60 ($60).  For every spread contract we obtain, your broker would deposit $40 into your account  ($100-$60).   As long as ABC’s stock price doesn’t touch or go past $70 we win and get to keep all our income.  In this example the total amount of risk would be $500.  The easiest way to calculate your risk is take the distance between the two strike prices (5 in our example) and multiply it by 100.  Most traders normally use either five or ten point spreads.  The reason why we buy the long strike is because it limits the amount of loss we would incur if the worse case scenario happens.  In our case the worst case scenario (max loss) would be when stock ABC touches or goes higher than $75 (long strike).

Well, that’s the strategy!  It’s nothing fancy but it works.  The key to making consistent monthly income with spreads is to have a firm set of rules to follow.  The rules determine which spreads to enter into and what to do in the rare occasion things go south.  Next time we’ll start talking about some of the  rules of the game.  See you guys next week!

Deciphering an Options Chart

What's going on everybody!  It's the end of another long week.  I barely survived it.  How about you?  Anyway, I'm glad you made it back.  I thought today I would decipher all the parts of an options chart (aka options chain).  If you're going to trade options this is the primary tool you'll be using to figure out which calls and puts you'll be buying and selling.  Most of the terms I'll be throwing around today were explained in my first three posts.

What you see above is an options chart you'll find on Yahoo! Finance.  This is the site I normally use to  see what's going on in the financial world and check my monthly positions.  So lets talk about all the moving parts here.  I'll start at the top and work my way down.  Lululemon is the name of the company  we're looking at.  No brainer right!  Below the company name and ticker is the price of the stock.  Next to the price is how much it's either risen or dropped during the current trading session.

Under the title Options you see "View by Expiration".  As I mentioned earlier all options have a specific day they expire.  Generally, options expire monthly.  The chart we're looking at is for options that expire during the March 2013 cycle.  Specifically, the third friday of March.  For some reason the people that made the options rules made monthly options always expire on the third friday of each month.

Next you can see that this chart is specifically for Call options.  If I had the entire chart you would see both the Call and Put options for LULU.

Beneath that are the actual option listings.  You can see the column for the Strike prices.  Remember these are the stock prices that the buyers and sellers are placing their trades against.  Next to the strike prices are the unique option symbols created for those particular options.  The next four columns all have to do with the price of the options.  "Last" is the most recent price the option sold for.  The "Chg" column tells you how much the price has increased or decreased since it last sold.  The "Bid" and "Ask" prices are pretty important.  The Bid price is the current market price you would get if you sold the listed option.   The Ask price is the current market price you would have to pay to purchase the  option.  The market makers that process option orders make their money on the spread between the option Bid and Ask prices.  For example, looking at the 35 Strike, I can buy one option for  33.90, which in real life would actually be $3390.00.  In options charting you always have to multiply all the prices by 100!  I know it's a little confusing but don't quit on me yet!

The last two columns are easy peasy!  The "Vol" or volume shows how many options contracts have been traded during the current market session.  And lastly the "Open Int' column shows the total amount of contracts traded for that particular option.

That's it!  If you can understand this chart and everything else we talked about so far you're about 75% ready to get started.  Next time I'll introduce the almighty credit spread.  It's the technique I use to make safe, steady income with options each month!

Welcome To Options World!

What’s up everyone!  It’s a rainy day here in North Florida but its 65 degrees so who’s complaining.  Well, lets get right to it shall we? 

In the last post we starting talking about Call and Puts.  Remember that buyers of call options are betting a stock price will go up and buyers of Puts are betting a stock price will go down. The next thing we need to cover is exactly what the rights and obligations are for both the buyers and sellers of options.  Let’s talk about the buyers first.

When a person buys an option they have purchased the right, but not the obligation to buy an agreed number of shares of a stock from the option seller at a certain time and at a certain price.  In order to obtain these rights from the seller the option buyer has to pay the seller a fee.  In Options World the “certain time period” I mentioned is called the expiration date.   The “certain price” is called the strike price. And lastly the “fee” is called premium. Did you notice the bold print there!

When a person sells an option he is obligated to sell an agreed number of shares at a certain price should the option buyer exercise the rights I explained above. 

So how does all this buying and selling play out in real life?  Good question!  In real life a person who buys a call profits if the price of the underlying stock rises above the strike price before the expiration date of the option.  The higher it rises above the strike price the more money the call buyer makes.

On the other hand the option seller is hoping for the opposite outcome.  The seller is betting that the stock will not rise above the strike price before expiration.  Remember the call buyer paid a sum of money (premium) to the seller at the beginning of the transaction.  The maximum profit a seller can make is just the premium he received from the buyer.

So for example, lets say a call buyer pays $200 in premium to a seller hoping that the price of stock ABC will be above $45 before March 16^th.   If the stock is below $45 at expiration he loses.  If the stock is $60 he wins big!  The maximum profit for the buyer is unlimited but the maximum loss is limited to the premium he paid for the option.  If the seller wins he gets to keep the $200 premium paid by the buyer. 

In my opinion, unless you have insider information or a crystal ball, investing is straight calls and puts is like riding a motorcycle without a helmet.  Very risky behavior my friend!

Does all this sound a little bit like gambling?  Well, it sorta kinda is.  However, the major difference between options and Vegas is that option traders can employ techniques to significantly increase their odds of winning!  You can be the House!

I think that’s enough for now.  Plus it’s time to put the kids to bed.  Next time we’ll dive into some basic option strategies and look at some real world trades.  I’m building this house one brick at time.  So far, so good!

What In The World Are Options?

Hey everyone!  In my last post I mentioned I picked up a book that changed the way I looked at the stock market.  I think the book was called "Make a Killing with Options" or "Get Rich With Options" or something along those lines.  It had a catchy title that made me pull it off the shelf and start reading.  What I found was very interesting.  Up until that point the only way I knew how to make money in the stock market was to buy something at one price and "hope" at some later date I can sell it for a profit.  You know the old saying, "Buy low...sell high."  As I was reading, I realized there were ways (lots of ways) to make money in the stock market using these things called options.

Did you know that with options you can make money if a stock rises, falls or doesn't move a penny?  Did you know that with options you can "insure" stock positions you own in case the bottom falls out? Did you know that you can actually calculate the probability of a having a winning trade before you put  any of your hard earned money on the line?  Believe it or not, all these statements are 100% true.  And that's just the tip of the iceberg my friends.

Now you're broker or financial advisor may have told you options are dangerous and too risky.  I would agree that if not done the right way you can lose your pants pretty fast.  But I'm here to share with you what I think the right way......or let me just say the safe way is to use options to reach your financial goals.

Before I go on I think the first thing I should do is explain just what an option is.  There are hundreds of books and thousands of web pages devoted to explaining options but I'm gonna try to break it down to the lowest common denominator.  Options are simply contracts made between a buyer and a seller on the open market.  A "buyer" of an option has the "right" to do something as it relates to..... let's use stock ABC for example.  A "seller" has an "obligation" to do something as it relates to stock ABC.  In options there is always a buyer and a seller.  It's important to understand the basics so I'll use the next few posts to get you up to speed one step at a time.

First things first.  There are two types of options.  The first type is called well....a "Call".  If a trader were to purchase a Call on stock ABC he would be betting that ABC's price was going to rise during a certain time period.  The second type of option is called a "Put".  When a trader purchases a "Put" he is betting that the price of a stock will go down in a certain time period.  Notice I mentioned with both calls and puts the movement of ABC has to take place within a certain time period.  One way to look at this is with real estate.  When you sign a contract to buy a home you normally promise that you will go to closing within a certain time period right?  It's the same with options.  A trader who "buys" either a call or put is betting the stock will move (one way or another) within a certain time period.  Some option periods last one week, others last a month and some can even last a year or longer.

Did any of you guys see the James Bond movie Casino Royale?  The movie gave a perfect example of how options work!  The bad guy (Lashiff or something) got all this money from the African guy to invest.  Well, remember Lashiff had a plan to blow up that plane right?  The reason he wanted to blow it up was because he bought a gazillion dollars worth of "Puts" against the company who manufactured the plane.  Lashiff knew that if he blew up the plane the shares of the company would crash and he would make a killing with the "Puts" he bought.  As it turned out James Bond thwarted his plan and Lashiff ended up having one mad African hunting him down.  Although entertaining, I wouldn't suggest using terrorism to make money with options!

I think this is a good place to call it quits for now.  Next time I'll explain more about the "rights" an options buyer has.  Stay with me guys!  I promise we're going somewhere with all this!