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!

                                            

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!