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!

Follow this blog

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!

Why I Stopped Investing And Started Trading

 

As a kid growing up in suburban Maryland no one ever taught me about the wonders of the stock market. Both of my parents were federal government employee's and looked forward to generous pensions when they retired. Their financial future never depended on the stock market so that probably explains why they never shared its existence with me.

After high school I went to college and later to the U.S. Army. Even during that six year period the stock market and investing wasn't a part of my consciousness. It wasn't until I began working for the federal government that I was introduced to investing. For those not familiar with the federal system, government employees have a 401k like benefit plan called the Thrift Savings Plan or TSP. Within the TSP I found out I had the option to invest in five different "funds". The TSP opened my eyes to benchmarks like the S&P500 and the Russell 2000. When I learned about dollar cost averaging and compound interest I just knew it would be just a matter of time before I became a millionaire. At the time, my plan was to max out my TSP contributions and then with my extra savings mirror my TSP fund allocations in a regular brokerage account.

So how did things go? Well, for a while everything went great! For a few years it seemed like the market was headed for the stars. Everyone at work bragged about how fast their accounts were growing. The real estate market was also going bananas at the time. I should have known something was wrong when all my neighbors talked about how large their lines of credit were. The idea that it all (or at least a good chunk of it) could disappear almost overnight never even occurred to me. Well, as we all know the bottom fell out. And as I now know the market moves in cycles. No matter how smart you are or how much you've mastered technical analysis (and all that other fancy stuff) I'm convinced no one can time the market. All we know is that it will rise and it will fall. This cycle just repeats itself over and over again.

After experiencing my first crash I must admit I became shell shocked. I didn't know if I should stay the course, forget stocks and move to bonds, focus on REIT's and dividend paying stocks, buy gold or just bury my money in the back yard! During that period I tried EVERYTHING! And just like the market my brokerage account went up and down. I knew there had to be a better way. I just didn't know where to turn or who to trust. Luckily, one day in my local Barnes and Noble I came across a book about trading options. I'll explain in my next article how that book opened up a whole new world for me. That book was the beginning of my transformation from an investor to a trader!