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!