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!

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.