I see that Scotia Bank has absorbed itrade and is up and running, not sure how long they have been. I am a BNS client for mortgage, credit and a couple of accounts including my US dollar account so I thought I might take a look at their trading platform and fees. Perhaps there is an advantage in having everything in one location...perhaps not.
I like Questrade as they are cheap, $4.95 trades (a penny per share with a cap of $9.95), the pro platform needs 25 trades to be "free" and is reasonably flexible and the active account minimum is $250 with no additional fees or tiered commissions.
So looking at the Scotia offering, I was surprised that it did not really compare as I though that it might.
A quick glance shows the tiered commissions. $6.99 per trade looked good but I would have to have 150 trades per quarter. Sounds big, at 50 per month it is substantial. Their is no mention of trade size that I saw but there were a few restrictions based on share pricing and minimum trade size, it was not terribly clear exactly what that entailed though.
Comparing my activity levels I may qualify for the $6.99 trades in some months but I transact 30 plus trades per month, not always 50. Due to my small startup account being less than $50,000 I would typically get nailed for the $19.99 trade commission (2 cents per share after 1000) as I would need to have between 30 and 150 trades per quarter AND $50,000 to qualify for tier two.
Options trades follow the same pricing structure plus $1.25 per contract compared to the $9.99 plus $1 at Questrade. My current volume and account size puts me in the $19.99 plus $1.75 per contract though...and I consider myself pretty active... the second tier is close but, again, no $50,000 or I would see $9.99 plus $1.25, a little pricier yet but not enough to make a real difference.
Now, the real kicker comes in with the platform. The pro level software IS THE SAME SOFTWARE as Questrade uses. I should not be surprised though as this is a common theme with onine trading.
Pricing is a little different though:
For 150 trades per quarter it is free (50 trades per month), 30-149 per quarter it is $99 or greater than $250,000 in assets. The base price is $200 otherwise.
This compares to Questrade's pricing for Pro at 20 trades per month or $30 per month.
I like Questrade's simple commission and platform pricing structure and the fact that it is just plain cheaper overall. I have not had an opportunity to try out Scotia's itrade for customer service as I will not open an account just to test run it...I considered it though but it just didn't make sense to through the money away to satisfy my curiosity.
So, the bare bones comparison for my monthly fees given my account size and activity now is:
Questrade: $4.95 stock and $9.95 options commissions, zero account fees, zero platform fees...zero any other fees except ECN, margin rates and other probably comparable fees. $300 or more due to commissions. Nice.
itrade: $19.99 stock and $19.99 options commissions, $99 platform fee, other fees seem the same. $700 or more due to commissions and platform fees.
So, I will continue to use the $400 advantage of Questrade.
I must mention the one advantage in favour of itrade... which I likely wouldn't use at all anyway... Virtual Trailing Stop Orders. They track the VTSO actively them selves and execute the market order on my behalf. Questrade only uses the orders that are available through the market they are trading in. This may mean that a true stop loss order is also available through itrade as well. This begs the question about execution of these trades though. They explicitly outline that they are not responsible for losses due to failure of software and whatnot. I know that a VTSO or stop loss placed with a market will be honoured and executed, what happens in the case of a volume load and platform problem where the itrade VTSO cannot get through...I am not as comfortable having an order another "step" away from the market.
Having said that I am trading US markets that do support the VTSO and stop loss and I am not using stops, generally, for my option orders so the whole issue may be a moot anyway.
For any interested I have links on this blog for Questrade and the Scotia stuff can be found by just entering "itrade" in the search browser, it will show up near the top of the search.
Jeff.
Questrade, My direct access discount broker.
Saturday, October 31, 2009
Friday, October 30, 2009
Options Strategy, the Strangle. (Iron Condor)
Here is the chart to show the typical strangle style trade using the S&P 500 index as an example. The numbers are just arbitrary and, while may actually work they are not based on anything other than convenience.
This could be applied to any stock that has a deep enough option chain. It involves selling a call option (1130 green)above the current level (1010 orange dashed) and buying protection to cover the short call above the short (1140 red). Then doing the same with the puts in the other direction.
The dashed orange line represents the level on the day of the trade...blue vertical line. The green box is the time window to be able to place orders for the options expiring on September 18th and 30th.
This could be applied to any stock that has a deep enough option chain. It involves selling a call option (1130 green)above the current level (1010 orange dashed) and buying protection to cover the short call above the short (1140 red). Then doing the same with the puts in the other direction.
The dashed orange line represents the level on the day of the trade...blue vertical line. The green box is the time window to be able to place orders for the options expiring on September 18th and 30th.
As long as the S&P 500 remains within the brackets (or not too close to one side at least) then the options expire and I keep the profits. The key is to allow the short options to expire as closing the trade involves buying them back, which drives down the profit.
Trades 2 and 3 are just at different levels which would move the whole trade (call and put strike levels) up and down according to the market move, approximately 25 points in either direction. This allows the price more leeway in those directions as well as providing trades that have very short expiry times...this serves to reduce the likelihood of a move being large enough to hit the protection and create quicker returns which allows the money to be put back into play sooner...that drives the annual rate of return up.
It is worth noting that the large moves earlier in the year could have produced some losing trades as the move was fast enough to tag the bracketing options before expiry. I didn't clock any losers in that period in my back testing though. That is a good win rate as that was 28 trades to date in 2009.
I am looking forward to seeing how this works out in 2010.
The trades in the backtesting were placed on August the 4th, 18th and 24th and netted $1066 in total at the end of September without really optimizing the target profits on the trades
BTW, I am not revealing any propriety methodology here as the Optioneer system provides a variety of information in order to monitor these trades and the software allows easy setups, order placing and risk monitoring.
Jeff.
Update, the good and the bad...or the bad and the good....
It's been a few days since I've blogged anything as I have been busy. Between a conference last week, ULC inspections this week and other personal stuff going on in the middle I just have not had time.
AS far as my trading is concerned there is no real movement to talk about. With the pullback in the market I expect to realize a few losses soon as one position expires in November and it likely will not move fast enough to recoup me much. A bunch of others are way down but have longer to go so there may be some promise there. I have a few that are in the green after spending some time in the red and one or two that the stock gapped down dragging the option price with it.
Having said that, if I had been in these stock positions instead of options I would be losing my shirt in most cases. The downside to the options is the expiry though. At least with the stocks I could choose to hold them if they looked like they were going to come back, some are not going to fast enough for me though.
Even though many are down it is a comforting feeling to know that, in the few cases that the option has hit zero...it cannot go any lower.
I should mention my overall strategy mistake.
I had decided that $120 is my loss allowance and that dictates the position size of the trade. I will take positions of a single contract that are higher than $1.20, as high as $2 but I will not take multiple contract positions that are any higher than the $1.20 or maybe $1.30. The issue is not that decision, the issue is that I still had a few positions that were far larger than this and I have let them go rather than placing a stop loss. So I have some $400 plus trades that I should have pared down at least or just stopped at worst.
Also, a few of these are from service advisories that I no longer subscribe to, even though I can chart and track them easy enough to determine where they are going (the cancelled services really only used some basic technical studies and a bunch of guesswork afterall) I had gotten lazy about them.
Perhaps I should have just cleaned house and brought everything in line. Hindsight is wonderful. At least I had a decent profit to also work with on this.
So my strategy is to hold out for the expected rally, if it does not materialize I will close some losing positions, let a few expire to save the commissions as they are not worth trading now, regroup and keep on slugging.
On the Optioneer/Strikepoint side I placed a trade yesterday that did not get filled...due to market conditions. It was nice to choose the setup and just send the request to my broker and get the email at the end of the day telling me what had happened with the trade...no watching the screen and making trades to setup the strangle...nice.
Today the numbers are not so good so I will wait until Monday to place another for a better profit target. Yesterday's was about $420 profit to expire on November 30th, today the trade was only worth $309, same expiry. I am going to aim for $400 targets or higher mainly as this gets my return per trade up near 10% and my annualized return close to 100%.
The goals are going to start at making the first $4000 to cover all my fees for the year, then the next $5000 is going to cover adding another trade to the concurrent trade number OR start doubling one trade in the mix. Based on some backtesting goal one is possible in the first 3 or 4 months unless I maximize my trade quantity. My testing was using up to five concurrent trades and I could place up to seven.
The idea is to be able to diversify the trades so that I spread my risk of a major market move over many trades. A strangle takes advantage of selling options for profit and buying options for protection so the net profit results from the sales being worth more than the protection. Seeing as these are based on the S&P500 the call spread is set much higher than the current level and the puts are much lower. As long as the S&P remains within those boundaries there is profit to be had. Placing trades as the market moves every 20 to 30 points allows the strangles to stagger and "bracket" the market at varying levels, this amounts to diversification. As the market goes up the next trade will bracket higher and as it moves down it will bracket lower. This has my trades moving with the market and a sharp up move may only affect a trade that was placed at, a much lower level but not the three or four others at a higher level. Most trades are, at most 45 days in duration.
I'll set up a chart to show this another time.
Jeff.
AS far as my trading is concerned there is no real movement to talk about. With the pullback in the market I expect to realize a few losses soon as one position expires in November and it likely will not move fast enough to recoup me much. A bunch of others are way down but have longer to go so there may be some promise there. I have a few that are in the green after spending some time in the red and one or two that the stock gapped down dragging the option price with it.
Having said that, if I had been in these stock positions instead of options I would be losing my shirt in most cases. The downside to the options is the expiry though. At least with the stocks I could choose to hold them if they looked like they were going to come back, some are not going to fast enough for me though.
Even though many are down it is a comforting feeling to know that, in the few cases that the option has hit zero...it cannot go any lower.
I should mention my overall strategy mistake.
I had decided that $120 is my loss allowance and that dictates the position size of the trade. I will take positions of a single contract that are higher than $1.20, as high as $2 but I will not take multiple contract positions that are any higher than the $1.20 or maybe $1.30. The issue is not that decision, the issue is that I still had a few positions that were far larger than this and I have let them go rather than placing a stop loss. So I have some $400 plus trades that I should have pared down at least or just stopped at worst.
Also, a few of these are from service advisories that I no longer subscribe to, even though I can chart and track them easy enough to determine where they are going (the cancelled services really only used some basic technical studies and a bunch of guesswork afterall) I had gotten lazy about them.
Perhaps I should have just cleaned house and brought everything in line. Hindsight is wonderful. At least I had a decent profit to also work with on this.
So my strategy is to hold out for the expected rally, if it does not materialize I will close some losing positions, let a few expire to save the commissions as they are not worth trading now, regroup and keep on slugging.
On the Optioneer/Strikepoint side I placed a trade yesterday that did not get filled...due to market conditions. It was nice to choose the setup and just send the request to my broker and get the email at the end of the day telling me what had happened with the trade...no watching the screen and making trades to setup the strangle...nice.
Today the numbers are not so good so I will wait until Monday to place another for a better profit target. Yesterday's was about $420 profit to expire on November 30th, today the trade was only worth $309, same expiry. I am going to aim for $400 targets or higher mainly as this gets my return per trade up near 10% and my annualized return close to 100%.
The goals are going to start at making the first $4000 to cover all my fees for the year, then the next $5000 is going to cover adding another trade to the concurrent trade number OR start doubling one trade in the mix. Based on some backtesting goal one is possible in the first 3 or 4 months unless I maximize my trade quantity. My testing was using up to five concurrent trades and I could place up to seven.
The idea is to be able to diversify the trades so that I spread my risk of a major market move over many trades. A strangle takes advantage of selling options for profit and buying options for protection so the net profit results from the sales being worth more than the protection. Seeing as these are based on the S&P500 the call spread is set much higher than the current level and the puts are much lower. As long as the S&P remains within those boundaries there is profit to be had. Placing trades as the market moves every 20 to 30 points allows the strangles to stagger and "bracket" the market at varying levels, this amounts to diversification. As the market goes up the next trade will bracket higher and as it moves down it will bracket lower. This has my trades moving with the market and a sharp up move may only affect a trade that was placed at, a much lower level but not the three or four others at a higher level. Most trades are, at most 45 days in duration.
I'll set up a chart to show this another time.
Jeff.
Wednesday, October 21, 2009
Optioneer on the way
I sent the first cheque to Strikepoint Trading today so I will be trading some time next week. I didn't get the great USD drop last Wednesday but I made out OK with a $1.085 conversion including fees.
I am looking forward to trading these different strategies that will be available to me through the broker.
Jeff.
I am looking forward to trading these different strategies that will be available to me through the broker.
Jeff.
Big news day, mixed markets.
I am out of town for a few days but I am checking in to see what is up.
I see there was a pullback which should allow me to get into a couple of trades that were setup today but I could not be there to make them live.
I see a position took a large hit, Triquint Semiconductor took a large hit (20%) aftermarket due to a slight miss, this was a position with a service that I have already cancelled...I think that this miss was unexpected so I don't begrudge the call... I am not looking forward to the drop in the option price in the morning,
Overall today has more news bits on the positions that I have open by a long shot. There was an entire page of headlines compared to a normal traffic of at most a third of a page.
I updated my performance page as I had a loss logged this week, I still was ahead of my target but this TQNT will likely nail me but I have the February option so I will give it some time to come back before bailing. I will lose the intrinsic value of 50 cents and some level of extrinsic value. The option is valued at $1.40 at the close and cost me $1.30 when the option was slightly in the money. So maybe it will be around 80 cents.
I have my orders in for tomorrow based on today's activity.
Jeff.
I see there was a pullback which should allow me to get into a couple of trades that were setup today but I could not be there to make them live.
I see a position took a large hit, Triquint Semiconductor took a large hit (20%) aftermarket due to a slight miss, this was a position with a service that I have already cancelled...I think that this miss was unexpected so I don't begrudge the call... I am not looking forward to the drop in the option price in the morning,
Overall today has more news bits on the positions that I have open by a long shot. There was an entire page of headlines compared to a normal traffic of at most a third of a page.
I updated my performance page as I had a loss logged this week, I still was ahead of my target but this TQNT will likely nail me but I have the February option so I will give it some time to come back before bailing. I will lose the intrinsic value of 50 cents and some level of extrinsic value. The option is valued at $1.40 at the close and cost me $1.30 when the option was slightly in the money. So maybe it will be around 80 cents.
I have my orders in for tomorrow based on today's activity.
Jeff.
Monday, October 19, 2009
Closer to expectations
My so far favourite service trial...I'll name all these another time.
Same basic criteria as last time, different service.
Total trades = 83, 46 winning trades, 20 greater than a 100% return, some over 200%
$5000 account MLA = $120 (not including commissions)
Position size = maximum $120 trade value (many 15, 25 cent range, single contract is silly)
today's balance = $5,265
MLA = suggested exits
today's balance = $4,343
Tinkering with MLA and reducing it to $120 commission included yields $5,669
$10,000 account MLA = $120 (not including commissions)
Position size = maximum $120 trade value (many 15, 25 cent range, single contract is silly)
today's balance = $5,265 (no position size change so no real change expected here)
MLA = suggested exits
today's balance = $9,343 (no position size change so no real change expected here)
$10,000 account
MLA = $120 (not including commissions)
Position size = double position size (the win rate goes up to 47)
today's balance = $12,092
MLA = suggested exits
today's balance = $10,248
Tinkering with MLA and reducing it to $120 commission included yields $12,900
$20,000 account MLA = $120 (not including commissions)
Position size = quadruple sizing
today's balance = $25,746
MLA = suggested exits
today's balance = $22,058
Tinkering with MLA and reducing it to $120 commission included yields $27,362
The claim to fame is a little over what I see produced but this is only part of the service as I was unable to use any of the selling features (naked puts and spreads) which netted more gains yet, it also is only the basic service that they provide, I signed up for the pro service as well and they are operated independently, for the most part. In my actual trading so far each portion has returned the same actual cash amount and, seeing as cashflow is my target, they both serve the purpose.
I could reduce commission costs by only trading one side and just doubling my sizing but I like really active accounts, so for now I will stick with both services through the trial.
When I tinkered with the MLA and reduced it by $30 per trade the profit margin went up, substantially. I may have been knocked out of a trade or two due to whipsaws and this may reduce the effectiveness somewhat but it give s a good indication of what could be achieved with a little trade management. As it is I have bought lower and sold higher than the recommendations frequently enough to be worth the effort. Today I closed a trade for $30 more on a single contract than the recommendation suggested...I placed a limit then changed it to a market when the limit was not reached but while the price was at it's apparent peak for the morning.
Jeff.
Same basic criteria as last time, different service.
Total trades = 83, 46 winning trades, 20 greater than a 100% return, some over 200%
$5000 account MLA = $120 (not including commissions)
Position size = maximum $120 trade value (many 15, 25 cent range, single contract is silly)
today's balance = $5,265
MLA = suggested exits
today's balance = $4,343
Tinkering with MLA and reducing it to $120 commission included yields $5,669
$10,000 account MLA = $120 (not including commissions)
Position size = maximum $120 trade value (many 15, 25 cent range, single contract is silly)
today's balance = $5,265 (no position size change so no real change expected here)
MLA = suggested exits
today's balance = $9,343 (no position size change so no real change expected here)
$10,000 account
MLA = $120 (not including commissions)
Position size = double position size (the win rate goes up to 47)
today's balance = $12,092
MLA = suggested exits
today's balance = $10,248
Tinkering with MLA and reducing it to $120 commission included yields $12,900
$20,000 account MLA = $120 (not including commissions)
Position size = quadruple sizing
today's balance = $25,746
MLA = suggested exits
today's balance = $22,058
Tinkering with MLA and reducing it to $120 commission included yields $27,362
The claim to fame is a little over what I see produced but this is only part of the service as I was unable to use any of the selling features (naked puts and spreads) which netted more gains yet, it also is only the basic service that they provide, I signed up for the pro service as well and they are operated independently, for the most part. In my actual trading so far each portion has returned the same actual cash amount and, seeing as cashflow is my target, they both serve the purpose.
I could reduce commission costs by only trading one side and just doubling my sizing but I like really active accounts, so for now I will stick with both services through the trial.
When I tinkered with the MLA and reduced it by $30 per trade the profit margin went up, substantially. I may have been knocked out of a trade or two due to whipsaws and this may reduce the effectiveness somewhat but it give s a good indication of what could be achieved with a little trade management. As it is I have bought lower and sold higher than the recommendations frequently enough to be worth the effort. Today I closed a trade for $30 more on a single contract than the recommendation suggested...I placed a limit then changed it to a market when the limit was not reached but while the price was at it's apparent peak for the morning.
Jeff.
Overblown claims or what
I finally got around to running one of the trial services through it's paces with regard to their historical trades...these are not backtesting trades but the actual trade numbers from the website
I was amazed and astounded!
I did not go back to the beginning of the service but I used 2009 data to date. I ran the opening price and the closing price then created a column to be able to adjust the position sizing had a winning trade count column as well as one column for the account balance based on my loss allowance and another based on the service advisory to sell.
For the purposes of the test I made a few assumptions, which are not valid in real life but serve the purpose for the spreadsheet and save me a lot of data entry time. Chances are these fudge in favour of the service trades except #4.... actually, if I did not adjust for commissions then this would have given more winners but would not change the bottom line net profits...or losses as the case is likely to be.
1) The trades may not have occurred concurrently...my smaller account may not have been able to carry all of the trades that may have been running at the same time...then again it may have been able to. I just didn't check.
2) I did not stop the sheet when my account hit zero, I traded into the negative numbers.
3) All the trades were executed at the prices given.
4) I only counted a trade as a winner if the after commission profit was greater than zero.
Putting this altogether leaves me with a not so warm fuzzy feeling.
Total trades = 111, 56 winning trades, 12 greater than a 100% return.
$5000 account
MLA = $120 (not including commissions)
Position size = 1 contract
today's balance = $4,009
MLA = suggested exits
today's balance = account closed after 62 trades
$10,000 account
MLA = $120 (not including commissions)
Position size = 1 contract
today's balance = $9,009
MLA = suggested exits
today's balance = $3,521
$10,000 account
MLA = $120 (not including commissions)
Position size = 2 contract (the win rate goes up to 62 once two or more contracts are traded)
today's balance = $10,196
MLA = suggested exits
today's balance = account hits zero at trade 110
$20,000 account
MLA = $120 (not including commissions)
Position size = 4 contract
today's balance = $22,570
MLA = suggested exits
today's balance = $618
The claim to fame was, on average, 1 money doubling trade every 9 days. We should have seen 20 doubles not 12. That gets better. The number was changed recently to every 6 days which should produce 30 doublers.
????
If the win rate for 2009 was worse than 2008 then how could this average go up?
Sometimes I just have to shake my head.
The worst of it was there are two guarantees, one is for 90 days for a full refund if I paid the annual membership fee. The other was a pro-rated credit based on a quarterly subscription. I thought it was full money back or I would have anted up for the one year to secure a money back guarantee... at least they goofed and had to extend my membership so that now when I cancel I am dealing with 4 months, not three.
As far as the service is concerned, all of what is proposed is not much different than I was doing myself as it involves mostly technical analysis based on a certain group of pre-selected stocks. I was not paying attention to news but this one tends to do a bit of speculative guess work and news front running.
Jeff.
I was amazed and astounded!
I did not go back to the beginning of the service but I used 2009 data to date. I ran the opening price and the closing price then created a column to be able to adjust the position sizing had a winning trade count column as well as one column for the account balance based on my loss allowance and another based on the service advisory to sell.
For the purposes of the test I made a few assumptions, which are not valid in real life but serve the purpose for the spreadsheet and save me a lot of data entry time. Chances are these fudge in favour of the service trades except #4.... actually, if I did not adjust for commissions then this would have given more winners but would not change the bottom line net profits...or losses as the case is likely to be.
1) The trades may not have occurred concurrently...my smaller account may not have been able to carry all of the trades that may have been running at the same time...then again it may have been able to. I just didn't check.
2) I did not stop the sheet when my account hit zero, I traded into the negative numbers.
3) All the trades were executed at the prices given.
4) I only counted a trade as a winner if the after commission profit was greater than zero.
Putting this altogether leaves me with a not so warm fuzzy feeling.
Total trades = 111, 56 winning trades, 12 greater than a 100% return.
$5000 account
MLA = $120 (not including commissions)
Position size = 1 contract
today's balance = $4,009
MLA = suggested exits
today's balance = account closed after 62 trades
$10,000 account
MLA = $120 (not including commissions)
Position size = 1 contract
today's balance = $9,009
MLA = suggested exits
today's balance = $3,521
$10,000 account
MLA = $120 (not including commissions)
Position size = 2 contract (the win rate goes up to 62 once two or more contracts are traded)
today's balance = $10,196
MLA = suggested exits
today's balance = account hits zero at trade 110
$20,000 account
MLA = $120 (not including commissions)
Position size = 4 contract
today's balance = $22,570
MLA = suggested exits
today's balance = $618
The claim to fame was, on average, 1 money doubling trade every 9 days. We should have seen 20 doubles not 12. That gets better. The number was changed recently to every 6 days which should produce 30 doublers.
????
If the win rate for 2009 was worse than 2008 then how could this average go up?
Sometimes I just have to shake my head.
The worst of it was there are two guarantees, one is for 90 days for a full refund if I paid the annual membership fee. The other was a pro-rated credit based on a quarterly subscription. I thought it was full money back or I would have anted up for the one year to secure a money back guarantee... at least they goofed and had to extend my membership so that now when I cancel I am dealing with 4 months, not three.
As far as the service is concerned, all of what is proposed is not much different than I was doing myself as it involves mostly technical analysis based on a certain group of pre-selected stocks. I was not paying attention to news but this one tends to do a bit of speculative guess work and news front running.
Jeff.
Saturday, October 17, 2009
Minimum Capital Requirement
Over the past two years I have tackled, or tried to, the idea of how much is just enough startup capital to be able to trade successfully. I ended up deciding that $5000 is pretty much as small as one can start and only there if using a discount online broker. In Canada I found that Questrade was about the cheapest and I have been impressed with the trading capabilities...the customer service leaves a little to be desired so they are best for self motivated traders and investors. I would recommend them...they are the only broker that I put a banner on here for after all... with certain exceptions. I am opening a US broker account, just sending a cheque next week to get trading going so I will see how that goes, looks good to start but they are for commodity and index futures, not stocks.
Well, the issue is not so much how much is needed it's how much of a stomach do I have to weather the losses until the trading becomes consistent enough to book regular gains. Picking a real crappy plan or having no plan will decimate any account no matter the size. Strict money management, sticking to a simple proven plan and keeping trade size reasonable are all part of a good trading strategy required to trade a smaller account, more so than a larger account even though they should all be observed for any account.
In my case I like to play and that can be the downfall of any account. Even now that I have hit upon a working system, which I must admit involves using dedicated data and advisory services, I still have a desire to tinker. I was initially headed in the direction of paying only for services to enable me to manage my own trading. The line starts to blur once you get into some of the services that help to interpret the data as to how far into advisory the service gets.
So, I will work with what I am working with now while I consider the question of startup capital.
The trades that I am taking are Out Of the Money or close to the money options, straight calls and puts (mostly calls right now). These are proving to be the cheapest trade vehicle as the trades are almost all $1.20 or less per contract. I tinkered with deep In The Money options for a bit but found that they were pricey and still prone to quick stock price moves... some of these were profitable though.
With the current service I can trade every single option that is recommended with the exception of some of the spreads involving naked option writing as long as I keep my sizing small. This also lets me take advantage of every trade that comes up. The authors (for lack of a better term) consider that most people pick and choose which trades suites them. I am taking a shot gun approach and trading, or at least ordering, every single trade. This is due to my checking the past trades and seeing a pattern of overall profits... I'll chart that later.
I am currently taking every single trade I can in my TFSA account, which started this trial in the mid $3500 CAD range. I am now sitting around the $4800 mark counting the purchase prices of the positions. If I count the paper position now it is closer to $4100...but they don't count until they are closed. I have a couple outside of this account due to the age of the trades, I just was not using my TFSA to start.
Using the roughly $120 per trade risked (I count the full value of the option trade to be risked) I can run 41 concurrent trades. The service I am using, once I settle on just the one I expect to use, puts out between 20 and 40 trades per month. As the month progresses some of these trades are closed. The worst case for number of trades is if they suggest longer term holdings and those trades ride for months rather than days or weeks. The typical holding average is shy of 30 days...less if I only go by my trades to date. So average 30 trades taken and held on average 30 days I can expect that an 11 trade buffer is enough to accommodate the slush.
Hmmmm....having said that those 20-40 trades also include some trades that I will not take due to the nature of the spread used for the trade...so maybe drop 5 - 10 trades off that total.
OK, so $5K looks like a good starting point, although it does not have to be a minimum as single contracts could be used for every trade rather than a combined $120. The issue is that many of the smaller trades will be 100% gainers... the commission is going to be $22, a 35 cent trade NEEDS to hit 100% to make any money...better with 3 or 4 contracts to cover the commission easier.
Keep in mind that my primary trade idea here, considering the entire trade as risk, means that effectively I am risking my entire account if I use all my capital for active trades. Now my entire account is considered losable so that fits my plan.
The secondary idea is that the trades will rotate. The older trade will be closed and a newer trade will be opened so, like rotating stock on a shelf to keep it fresh, the trades will rotate to provide rolling profits. I already am seeing that as I am taking profits every day or two and adding new trades almost daily as well.
Even though the market could turn nasty and drop taking all of my trades with it, it is unlikely as not all stocks are going to follow the market in that manner...diversity gives me some breathing room as various sectors are trending on there own and each stock trends within the sector.
If I were to choose a minimum for stock trading I would choose to start higher BUT using the $120 risk still works if the stocks are in the $5 to $30 range. Choosing fewer trades and applying tight stop losses are in order though.
Jeff.
Well, the issue is not so much how much is needed it's how much of a stomach do I have to weather the losses until the trading becomes consistent enough to book regular gains. Picking a real crappy plan or having no plan will decimate any account no matter the size. Strict money management, sticking to a simple proven plan and keeping trade size reasonable are all part of a good trading strategy required to trade a smaller account, more so than a larger account even though they should all be observed for any account.
In my case I like to play and that can be the downfall of any account. Even now that I have hit upon a working system, which I must admit involves using dedicated data and advisory services, I still have a desire to tinker. I was initially headed in the direction of paying only for services to enable me to manage my own trading. The line starts to blur once you get into some of the services that help to interpret the data as to how far into advisory the service gets.
So, I will work with what I am working with now while I consider the question of startup capital.
The trades that I am taking are Out Of the Money or close to the money options, straight calls and puts (mostly calls right now). These are proving to be the cheapest trade vehicle as the trades are almost all $1.20 or less per contract. I tinkered with deep In The Money options for a bit but found that they were pricey and still prone to quick stock price moves... some of these were profitable though.
With the current service I can trade every single option that is recommended with the exception of some of the spreads involving naked option writing as long as I keep my sizing small. This also lets me take advantage of every trade that comes up. The authors (for lack of a better term) consider that most people pick and choose which trades suites them. I am taking a shot gun approach and trading, or at least ordering, every single trade. This is due to my checking the past trades and seeing a pattern of overall profits... I'll chart that later.
I am currently taking every single trade I can in my TFSA account, which started this trial in the mid $3500 CAD range. I am now sitting around the $4800 mark counting the purchase prices of the positions. If I count the paper position now it is closer to $4100...but they don't count until they are closed. I have a couple outside of this account due to the age of the trades, I just was not using my TFSA to start.
Using the roughly $120 per trade risked (I count the full value of the option trade to be risked) I can run 41 concurrent trades. The service I am using, once I settle on just the one I expect to use, puts out between 20 and 40 trades per month. As the month progresses some of these trades are closed. The worst case for number of trades is if they suggest longer term holdings and those trades ride for months rather than days or weeks. The typical holding average is shy of 30 days...less if I only go by my trades to date. So average 30 trades taken and held on average 30 days I can expect that an 11 trade buffer is enough to accommodate the slush.
Hmmmm....having said that those 20-40 trades also include some trades that I will not take due to the nature of the spread used for the trade...so maybe drop 5 - 10 trades off that total.
OK, so $5K looks like a good starting point, although it does not have to be a minimum as single contracts could be used for every trade rather than a combined $120. The issue is that many of the smaller trades will be 100% gainers... the commission is going to be $22, a 35 cent trade NEEDS to hit 100% to make any money...better with 3 or 4 contracts to cover the commission easier.
Keep in mind that my primary trade idea here, considering the entire trade as risk, means that effectively I am risking my entire account if I use all my capital for active trades. Now my entire account is considered losable so that fits my plan.
The secondary idea is that the trades will rotate. The older trade will be closed and a newer trade will be opened so, like rotating stock on a shelf to keep it fresh, the trades will rotate to provide rolling profits. I already am seeing that as I am taking profits every day or two and adding new trades almost daily as well.
Even though the market could turn nasty and drop taking all of my trades with it, it is unlikely as not all stocks are going to follow the market in that manner...diversity gives me some breathing room as various sectors are trending on there own and each stock trends within the sector.
If I were to choose a minimum for stock trading I would choose to start higher BUT using the $120 risk still works if the stocks are in the $5 to $30 range. Choosing fewer trades and applying tight stop losses are in order though.
Jeff.
TFSA changes, expected changes anyway
It was brought to my attention this morning that the government has made a change to the TFSA rules regarding over contributions.
The official Government of Canada release.
The juicy bits:
"...some TFSA holders are attempting to generate a rate of return on deliberate overcontributions over a short period of time sufficient to outweigh the cost of the 1% tax. On its introduction, it was not anticipated that the TFSA would be subject to this type of deliberate overcontribution."
DUH!... why would they not expect that? Anyone with half a brain and a plan probably thought of this already.
Originally the overcontribution was subject to a 1% per month tax on the overcontribution amount. I figured that I could easily beat that and create a positive return with that considered and I could stand to gain quicker due to a larger capital base to work from. As I was playing and could not guarantee a return I did not pursue the idea. The best part was the the return was not taxable as ONLY the overcontribution was taxable.
"Under the proposed amendments, any income reasonably attributable to deliberate overcontributions will be made subject to the existing advantage rules (as described above) and taxed accordingly. Pursuant to the advantage rules, the tax payable on the income will be 100%."
This means that only the applicable income tax will be levied on the profits in addition to the 1%, not that the entire amount will be confiscated. I could see this being waived where a particular position required more than the $5,000, but not by too much more, and the expectation of return was not short term nor that much greater then the 1%...but I have no intention of testing this.
Now that I am getting decent results it wouldn't be an advantage with the the new ruling especially as my positions are all less then $400 (most are currently less than $120) so adding even a few hundred dollars and being taxed on the full profit would end up costing my 1% per month more than if I just used my margin account AND making my tax return more complicated.
I have $5K of room in the new year, which is fast approaching now anyway.
As it is I was concerned about the government taking a dim view of active trading producing larger results and perhaps changing the rules due to that alone. I am surprised it took this long for them to close this loophole.
I wonder how large these overcontributions were that triggered the red flag in the first place and why the institution managing the account would not disallow those excessive deposits, they could have... but I suppose the current legislation did not give them the authority to do so.
Jeff.
The official Government of Canada release.
The juicy bits:
"...some TFSA holders are attempting to generate a rate of return on deliberate overcontributions over a short period of time sufficient to outweigh the cost of the 1% tax. On its introduction, it was not anticipated that the TFSA would be subject to this type of deliberate overcontribution."
DUH!... why would they not expect that? Anyone with half a brain and a plan probably thought of this already.
Originally the overcontribution was subject to a 1% per month tax on the overcontribution amount. I figured that I could easily beat that and create a positive return with that considered and I could stand to gain quicker due to a larger capital base to work from. As I was playing and could not guarantee a return I did not pursue the idea. The best part was the the return was not taxable as ONLY the overcontribution was taxable.
"Under the proposed amendments, any income reasonably attributable to deliberate overcontributions will be made subject to the existing advantage rules (as described above) and taxed accordingly. Pursuant to the advantage rules, the tax payable on the income will be 100%."
This means that only the applicable income tax will be levied on the profits in addition to the 1%, not that the entire amount will be confiscated. I could see this being waived where a particular position required more than the $5,000, but not by too much more, and the expectation of return was not short term nor that much greater then the 1%...but I have no intention of testing this.
Now that I am getting decent results it wouldn't be an advantage with the the new ruling especially as my positions are all less then $400 (most are currently less than $120) so adding even a few hundred dollars and being taxed on the full profit would end up costing my 1% per month more than if I just used my margin account AND making my tax return more complicated.
I have $5K of room in the new year, which is fast approaching now anyway.
As it is I was concerned about the government taking a dim view of active trading producing larger results and perhaps changing the rules due to that alone. I am surprised it took this long for them to close this loophole.
I wonder how large these overcontributions were that triggered the red flag in the first place and why the institution managing the account would not disallow those excessive deposits, they could have... but I suppose the current legislation did not give them the authority to do so.
Jeff.
Friday, October 16, 2009
To trial or not to trial...
I was considering starting to play with the Williams %R charts with some live money, as is my way, then decided that I had best try something different.
While I know that trading with "virtual" money is not the same, I feel that I know the execution and pitfalls associated with using real money that I should be able to easily duplicate the same effect. Unlike day trading where the pulling of the trigger is so subjective and based on live data feeds these tests are based on next day opening numbers. I don't have to sit in front of the computer to see what I would have got as I either place a market order and get my fill or I place a limit order and see if I get filled. Checking the EOD data or watching the data live makes no appreciable difference as I am deciding ahead of time what the strategy is going to be.
I set these trades up in a free portfolio page on a free data site to track. I'll keep adding to it and see where it goes. The thing about the number of possible trades is that I may end up needing the higher quantity to keep both diversification and win/loss rate manageable. Trying to cherry pick the stocks can very easily backfire.
If I were trying to use options I think my results would be different but I need the stock results to prove the theory then I can apply it to the options afterwards.
I ran a scan for stocks between $10 and $50 with volume over $1M shares per day and have mid 500's to choose from. Running a separate scan on just those stocks looking for %R on the 6 and 18 day period resulted in a dozen or so, most of which were short or multiple short ETFs. I ended up with only four that closed yesterday at the right point and have decent "at a glance" chart characteristics. One was a stock that I bought the option for on Wednesday past, interesting.
So, I can only trade so many at once, and if I traded these stocks I could only do two, so how to choose and what happens tomorrow when I may have four more to choose from. Obviously I have to pare these down from the original 500 to a few that follow the %R pattern well which should leave me with a handful that I can rotate through at any given time.
This is the benefit of the option service that I am currently playing with... but that is another topic, just the fact that I am playing with options is enough as a $50 stock may only cost $1 to $3 for the option, depending upon strike and volatility at the time.
Jeff.
While I know that trading with "virtual" money is not the same, I feel that I know the execution and pitfalls associated with using real money that I should be able to easily duplicate the same effect. Unlike day trading where the pulling of the trigger is so subjective and based on live data feeds these tests are based on next day opening numbers. I don't have to sit in front of the computer to see what I would have got as I either place a market order and get my fill or I place a limit order and see if I get filled. Checking the EOD data or watching the data live makes no appreciable difference as I am deciding ahead of time what the strategy is going to be.
I set these trades up in a free portfolio page on a free data site to track. I'll keep adding to it and see where it goes. The thing about the number of possible trades is that I may end up needing the higher quantity to keep both diversification and win/loss rate manageable. Trying to cherry pick the stocks can very easily backfire.
If I were trying to use options I think my results would be different but I need the stock results to prove the theory then I can apply it to the options afterwards.
I ran a scan for stocks between $10 and $50 with volume over $1M shares per day and have mid 500's to choose from. Running a separate scan on just those stocks looking for %R on the 6 and 18 day period resulted in a dozen or so, most of which were short or multiple short ETFs. I ended up with only four that closed yesterday at the right point and have decent "at a glance" chart characteristics. One was a stock that I bought the option for on Wednesday past, interesting.
So, I can only trade so many at once, and if I traded these stocks I could only do two, so how to choose and what happens tomorrow when I may have four more to choose from. Obviously I have to pare these down from the original 500 to a few that follow the %R pattern well which should leave me with a handful that I can rotate through at any given time.
This is the benefit of the option service that I am currently playing with... but that is another topic, just the fact that I am playing with options is enough as a $50 stock may only cost $1 to $3 for the option, depending upon strike and volatility at the time.
Jeff.
Profits and the illusion
I closed another trade today, 100% gain, I like those numbers. It keeps my daily average above my goal and adds to my TFSA account base. The illusion that seems to be developing is that I have some losing option trades that I will have to eventually close and possibly for a loss, they are just hanging there so are not counted into my results. If they were a stock and I wanted to artificially keep my numbers up (for whatever reason) I could just hold the stock indefinitely and even then they may rebound and end on a winning note. The options, on the other hand, are time sensitive and I cannot hold them forever.
One is down to 5 cents on a 80 cent trade, another is down something similar. The good thing is that I cannot really lose anymore on that sort of trade. The bad thing is that I will have to close it and realize the loss at some point and that will adversely affect my numbers...especially if I let it expire and realize a 100% loss. Given the commission of $10 to just sell a losing trade it doesn't make any sense for a 5 cent 2 contract trade to take the hit...I lose more by closing it than letting it go.
I may add a 100% loss or two just to see how badly it affects the numbers, I know it is certainly nice to have a number of winners under my belt before having to realize the losses, makes the pill easier to swallow.
Jeff.
One is down to 5 cents on a 80 cent trade, another is down something similar. The good thing is that I cannot really lose anymore on that sort of trade. The bad thing is that I will have to close it and realize the loss at some point and that will adversely affect my numbers...especially if I let it expire and realize a 100% loss. Given the commission of $10 to just sell a losing trade it doesn't make any sense for a 5 cent 2 contract trade to take the hit...I lose more by closing it than letting it go.
I may add a 100% loss or two just to see how badly it affects the numbers, I know it is certainly nice to have a number of winners under my belt before having to realize the losses, makes the pill easier to swallow.
Jeff.
Thursday, October 15, 2009
Trade the plan dummy...
It never fails to kick me in the butt when I deviate...or perhaps while I am establishing a new plan and had not accommodated for an eventuality. In this particular case I cannot complain too loudly though.
The setup was a recommended trade that was a combo trade, buying a call and selling a put in order to create a net credit. I cannot sell the put and I don't know if I would anyway, too risky, but I entered the long call side. Recently I decided that I would not enter trades that were setup this way as the put made money right away so the long call was a lottery ticket...it was less likely to be counted upon to move up, or so I found out.
I had a nice trade in SWY as I got it for 50 cents. I bought four calls, March expiration as the plan was long termish. I sold them on October 13th following the runup, sell on strength I was thinking. Get out of this trade as I would not likely have entered it in the first place knowing what I know now.
Having said that I had a 100% gain clocked in as I sold it for $1. What my plan has been was to sell half of a position to lock in a break even and let the rest ride. In this particular case I made a note to follow the recommendation lead, which I could have done with the second half.
So, fast forward to today. Within moments of the open the price of the stock jumped over $1.50 and the price of the option jumped to $2 bid. I had a triple gain had I held for just a couple more days.
So, not entering the trade was the first rule, exiting half at 100% when there was no defined sell trigger yet to let the rest ride, but using my bias against net credit trade setups skewed my thinking.
Like I said though, I turned 100% on the trade anyway, so I may kick my butt a bit, I really have no need to lament about a trade missed completely.
Another trade that I didn't take closed today, after 3 days. It was a small net credit and today the calls alone are up 100%. Maybe I will re-consider my entry into these credit trades and perhaps just use very small positions to play them, 1/2 size. That change is TBA. Meanwhile I am doing well as I have closed a number of trades for profits and my daily average return ratcheted up a bit.
Jeff.
The setup was a recommended trade that was a combo trade, buying a call and selling a put in order to create a net credit. I cannot sell the put and I don't know if I would anyway, too risky, but I entered the long call side. Recently I decided that I would not enter trades that were setup this way as the put made money right away so the long call was a lottery ticket...it was less likely to be counted upon to move up, or so I found out.
I had a nice trade in SWY as I got it for 50 cents. I bought four calls, March expiration as the plan was long termish. I sold them on October 13th following the runup, sell on strength I was thinking. Get out of this trade as I would not likely have entered it in the first place knowing what I know now.
Having said that I had a 100% gain clocked in as I sold it for $1. What my plan has been was to sell half of a position to lock in a break even and let the rest ride. In this particular case I made a note to follow the recommendation lead, which I could have done with the second half.
So, fast forward to today. Within moments of the open the price of the stock jumped over $1.50 and the price of the option jumped to $2 bid. I had a triple gain had I held for just a couple more days.
So, not entering the trade was the first rule, exiting half at 100% when there was no defined sell trigger yet to let the rest ride, but using my bias against net credit trade setups skewed my thinking.
Like I said though, I turned 100% on the trade anyway, so I may kick my butt a bit, I really have no need to lament about a trade missed completely.
Another trade that I didn't take closed today, after 3 days. It was a small net credit and today the calls alone are up 100%. Maybe I will re-consider my entry into these credit trades and perhaps just use very small positions to play them, 1/2 size. That change is TBA. Meanwhile I am doing well as I have closed a number of trades for profits and my daily average return ratcheted up a bit.
Jeff.
Wednesday, October 14, 2009
XBI %R chart essentials
Last post I noted the trades for XBI based on the Williams %R. While they worked out very well there were other things going on in the chart worth noting:
Working along from left to right the previous high of near $70 is just off the chart in August of 2008 and the 100 DMA breaks into a downtrend on October 1st. The price is not really trending but tending down a bit. This is where the %R shines while the price is not going anywhere in particular in the medium term.
There is a triple bottom formed between November 2008 and May 2009. The price starts it's uptrend here after and the 100 DMA breaks up in July triple confirming the new trend. This may have broken now as well except that the price has bounced off of the 200SMA which seems to be acting as decent support.
The red circled area is odd as this is where the %R breaks down. The multiple spikes through the overbought line with no substantial drop toward the oversold AND no confirming price move. Coming off of a likely triple bottom I would be hard pressed to take the short trades here so I would tend toward the long side BUT would wait until the first long signal. That signal showed up and preceded the steep move up.
There was a short indicated in September that I missed noting but see now. Seeing as the previous August high did not surpass the July high a short would be in order here. Even if stopped at $2 up (which would likely be the case for a short) I would not have been stopped out. Entry at $55.15, peak at $56.92 then the drop to the exit indicator at $51.20 for the reversal to the current long position.
Slowly I am coming up with a set of rules to go with the %R style trades.
I know many people go on about cherry picking stocks that fit certain indicators but I find that it is about making the indicator fit the stock or ETF price trends. I've done a lot of "mechanical" testing in the past and it always looks good on paper but the execution was lacking. A lot of that was the subjectivity factor.
Now that I am Trading the US markets and I can place proper stop orders and execute odd lot limit and other orders I think that I will give this one a shot on a small scale. Given the average trade profit of $3.59 with this one ETF I could easily trade 25 shares ($1500 peak cost) as I only need a 40 cent move to break even from commissions. I may give this a try with stock instead of options first. Prove the theory and track corresponding option trades to prove that side of the theory as well.
I will pick a slightly cheaper ETF to try first I think, might as well keep the cost to an absolute minimum.
Jeff.
Working along from left to right the previous high of near $70 is just off the chart in August of 2008 and the 100 DMA breaks into a downtrend on October 1st. The price is not really trending but tending down a bit. This is where the %R shines while the price is not going anywhere in particular in the medium term.
There is a triple bottom formed between November 2008 and May 2009. The price starts it's uptrend here after and the 100 DMA breaks up in July triple confirming the new trend. This may have broken now as well except that the price has bounced off of the 200SMA which seems to be acting as decent support.
The red circled area is odd as this is where the %R breaks down. The multiple spikes through the overbought line with no substantial drop toward the oversold AND no confirming price move. Coming off of a likely triple bottom I would be hard pressed to take the short trades here so I would tend toward the long side BUT would wait until the first long signal. That signal showed up and preceded the steep move up.
There was a short indicated in September that I missed noting but see now. Seeing as the previous August high did not surpass the July high a short would be in order here. Even if stopped at $2 up (which would likely be the case for a short) I would not have been stopped out. Entry at $55.15, peak at $56.92 then the drop to the exit indicator at $51.20 for the reversal to the current long position.
Slowly I am coming up with a set of rules to go with the %R style trades.
I know many people go on about cherry picking stocks that fit certain indicators but I find that it is about making the indicator fit the stock or ETF price trends. I've done a lot of "mechanical" testing in the past and it always looks good on paper but the execution was lacking. A lot of that was the subjectivity factor.
Now that I am Trading the US markets and I can place proper stop orders and execute odd lot limit and other orders I think that I will give this one a shot on a small scale. Given the average trade profit of $3.59 with this one ETF I could easily trade 25 shares ($1500 peak cost) as I only need a 40 cent move to break even from commissions. I may give this a try with stock instead of options first. Prove the theory and track corresponding option trades to prove that side of the theory as well.
I will pick a slightly cheaper ETF to try first I think, might as well keep the cost to an absolute minimum.
Jeff.
Williams %R application to ETFs
I considered running this on a few stocks to see what would happen but decided to try it out on some ETFs first. I feel that the ETF better reflect the sector and are less prone to gaps and SEVERE adverse moves based on news or a single company's "issues".
So here is a chart of XBI - SPDR S&P Biotech Index for the past year.
The %R indicators are the 6 and 18 day period. The chart is setup for 1600 X 660 which was good for me to work with and shows up nice when expanded.
So here is a chart of XBI - SPDR S&P Biotech Index for the past year.
The %R indicators are the 6 and 18 day period. The chart is setup for 1600 X 660 which was good for me to work with and shows up nice when expanded.
Here is a rough table of the trades as noted on the chart.
DATE IN Price DATE OUT Price Profit Target
2008-10-28 $47.30 L 2008-11-04 $55.90 $8.60 $3.00
2008-11-04 $55.90 S 2008-11-21 $46.15 $9.75 $3.00
2008-11-21 $46.15 L 2008-12-17 $52.60 $6.45 $3.00
2008-12-17 $52.60 S 2009-01-15 $51.00 $1.60 $1.60
2009-01-15 $51.00 L 2009-02-04 $54.90 $3.90 $3.00
2009-02-04 $54.90 S 2009-02-20 $51.40 $3.50 $3.00
2009-02-20 $51.40 L 2009-02-27 $48.00 -$3.40 -$3.40
2009-03-27 $50.00 S 2009-04-08 $45.20 $4.80 $3.00
2009-04-08 $45.20 L 2009-05-11 $46.55 $1.35 $1.35
2009-05-11 $46.55 S 2009-05-26 $45.00 $1.55 $1.55
2009-05-26 $45.00 L 2009-06-03 $48.00 $3.00 $3.00
2009-06-03 $48.00 S 2009-07-08 $48.00 $0.00 $0.00
2009-07-08 $48.00 L 2009-08-04 $54.00 $6.00 $3.00
2009-08-19 $51.80 L 2009-08-28 $55.00 $3.20 $3.00
Total per share profit was $50.30 taking the full move and without placing any stops other than to secure some profits on the last few positions. All trades were placed based on the %R indicators and the trades were mostly exited, and just reversed, also based on the indicator. also all trades were executed on the next morning's opening price for sake of simplicity. Using a real time chart to time entries and exits could easily be done in order to secure a better fill price, but this just shows that is not really necessary.
The last column is based on closing every trade based on a $3 per share profit target and still gains $28.10 per share. With the reversal trades this would be silly to do as it gives away lots of profits.
I need to investigate the use of options for these same instruments now as a means of eliminating the need to be concerned with stops and enabling me to hold the short and long (puts and calls) positions while transitioning between reversal trades.
Jeff.
Tuesday, October 13, 2009
A little cleaning house
I reviewed my positions over the weekend and decided to start cleaning some of the trades out that are not in synch with my current plan.
I am targeting trades that are not in my TFSA primarily and trades that are not specifically recommendations.
I decided to play the trades as recommended by the services that I am trying and not to play trades that involve only placing half of the strategy they are using. A number of the trades involve selling naked options to fund the underlying long option purchase for the actual price move. Nice idea but naked options are very risky if not covered by a stock or long corresponding option. So buying just the regular option puts me at a disadvantage as I am not taking advantage of the credit from the premium sold to fund the purchase of the long option. If they have suggested a net debit trade combo then I will consider it as there is open risk at the outset...other than the naked option that is.
I also will stop buying longer term options to try to take advantage of cheap time premium in order to have less EV degradation as the expiry approaches...some trades are the inside month. While the time premium may be cheap, it drives the price of the trade up and therefore the risk is greater and it also reduces the position size that I can take which will drive total profits down. So I will stick with the recommendations.
I see that they have been closing trades and all are in profit, which is nice to note.
I did a check on one service, the active one that I may keep, that has a track record and find that, over all, they make a healthy profit. Picking trades here and there could reduce the profits should I pick the wrong trades, so I will try not to attempt cherry picking.
Today I closed a trade for a loss, about 13% and closed another for a 100% win. Both were outside of my parameters and the winner I should have closed yesterday when it was at 140%.
I adjusted my stats accordingly.
In order to save a little calculation time I setup a daily return formula on my spreadsheet that uses my dates to calculate the numbers. The average is a straight average of all the trades which does not reflect a return on capital, only a return on the capital used in the trade. I would like to see that number up to 100%, which I think is possible. I will put an average trade capital in some time and that number may mean more when relative to this average.
I did some more work on the Williams %R strategy, mostly thinking, and came up with a method that may work quite well. The trouble that I did notice is that it seems to not work well in a transitioning stock. It is great for established trends, up and down as well has horizontals, just not as the stock switches from one to the other. I think that tracking the performance regularly and placing trades frequently will give a good result overall. I am going to check this against a sector rotation scheme using sector ETFs and come up with a balancing plan to weight the trade sizes according to the performance results. I am going to guess that the horizontal pattern will be the best as it allows taking both side of the trade while up and down trends are best only trading with the trend.
Jeff.
Jeff.
I am targeting trades that are not in my TFSA primarily and trades that are not specifically recommendations.
I decided to play the trades as recommended by the services that I am trying and not to play trades that involve only placing half of the strategy they are using. A number of the trades involve selling naked options to fund the underlying long option purchase for the actual price move. Nice idea but naked options are very risky if not covered by a stock or long corresponding option. So buying just the regular option puts me at a disadvantage as I am not taking advantage of the credit from the premium sold to fund the purchase of the long option. If they have suggested a net debit trade combo then I will consider it as there is open risk at the outset...other than the naked option that is.
I also will stop buying longer term options to try to take advantage of cheap time premium in order to have less EV degradation as the expiry approaches...some trades are the inside month. While the time premium may be cheap, it drives the price of the trade up and therefore the risk is greater and it also reduces the position size that I can take which will drive total profits down. So I will stick with the recommendations.
I see that they have been closing trades and all are in profit, which is nice to note.
I did a check on one service, the active one that I may keep, that has a track record and find that, over all, they make a healthy profit. Picking trades here and there could reduce the profits should I pick the wrong trades, so I will try not to attempt cherry picking.
Today I closed a trade for a loss, about 13% and closed another for a 100% win. Both were outside of my parameters and the winner I should have closed yesterday when it was at 140%.
I adjusted my stats accordingly.
In order to save a little calculation time I setup a daily return formula on my spreadsheet that uses my dates to calculate the numbers. The average is a straight average of all the trades which does not reflect a return on capital, only a return on the capital used in the trade. I would like to see that number up to 100%, which I think is possible. I will put an average trade capital in some time and that number may mean more when relative to this average.
I did some more work on the Williams %R strategy, mostly thinking, and came up with a method that may work quite well. The trouble that I did notice is that it seems to not work well in a transitioning stock. It is great for established trends, up and down as well has horizontals, just not as the stock switches from one to the other. I think that tracking the performance regularly and placing trades frequently will give a good result overall. I am going to check this against a sector rotation scheme using sector ETFs and come up with a balancing plan to weight the trade sizes according to the performance results. I am going to guess that the horizontal pattern will be the best as it allows taking both side of the trade while up and down trends are best only trading with the trend.
Jeff.
Jeff.
Sunday, October 11, 2009
Combining Strategies... Part II
My last post used long and short stock trades as well as seeing the compounding effect of using options instead while using Williams %R on a horizontally trending stock.
BK - Bank Of New York Mellon Corp
OK, I yanked all the extra stuff off of this chart to show where I have been heading with my option trading, this is classic iron condor trade setup.
The green lines represent the profit making side of the trade as they are options sold to generate cash while the red are the safety options purchased to limit the loss in that direction should the price break out of the bracket.
As the prices stand right now I can sell a call for BK (November 32 call) for 35 cents and buy the November 33 call for 30 cents creating a net credit of 10 cents.
On the other side I can sell a November 26 put for 65 cents and buy the protection of a November 25 put for 50 cents for a credit of 15 cents.
If I want to make more profit I would have to buy calls and puts farther away but I would incur additional risk to do so, not in proportion with the possible gains though. The win rate of this strategy is higher if setup correctly and with the right stock or index. For example, changing to a November 34 call instead of the 33 would cost 20 cents, is the 10 cent credit worth the additional $1 risk?
The idea behind this is that the cash created by the credit is immediately deposited into the account as the sale is immediate along with the purchase. Seeing as somewhere near 75% of options expire worthless the entire strategy hinges on the fact that the options traded here all expire worthless but the more expensive ones made us some cash in the process.
In this example placing a 1 contract trade involves placing four separate trades to open the position. the net credit per position is 25 cents, for 100 shares that is $25. So at the November expiry that is the realized gain.
I know this example is not the most cost effective as the position will cost, through Questrade, more than $80. Not worth the $25. Adding size, perhaps 10 contracts, puts the cost up $36 due to Questrade's commission structure and bumps the profits up to $250. Better but the roughly $120 in commissions eats this up quickly. A stock with a larger price, and therefore a deeper option chain, would be a better choice for this style of trade as it justifies the commission costs due to larger credit creation with smaller positions... even though the option costs themselves are higher the payback is worth it. With the Optioneer system and Strikepoint trade broker the trades that I am likely to take will be in the $4500 range with $200-$400 profit (net) per trade. There are smaller, just under $1000 trades but even at that point the commissions are a larger consideration.
This strategy is not as speculative as straight option buying is and is more aimed at creating a regular cashflow as these trades are setup perhaps twice per month every month.
Jeff.
BK - Bank Of New York Mellon Corp
OK, I yanked all the extra stuff off of this chart to show where I have been heading with my option trading, this is classic iron condor trade setup.
The green lines represent the profit making side of the trade as they are options sold to generate cash while the red are the safety options purchased to limit the loss in that direction should the price break out of the bracket.
As the prices stand right now I can sell a call for BK (November 32 call) for 35 cents and buy the November 33 call for 30 cents creating a net credit of 10 cents.
On the other side I can sell a November 26 put for 65 cents and buy the protection of a November 25 put for 50 cents for a credit of 15 cents.
If I want to make more profit I would have to buy calls and puts farther away but I would incur additional risk to do so, not in proportion with the possible gains though. The win rate of this strategy is higher if setup correctly and with the right stock or index. For example, changing to a November 34 call instead of the 33 would cost 20 cents, is the 10 cent credit worth the additional $1 risk?
The idea behind this is that the cash created by the credit is immediately deposited into the account as the sale is immediate along with the purchase. Seeing as somewhere near 75% of options expire worthless the entire strategy hinges on the fact that the options traded here all expire worthless but the more expensive ones made us some cash in the process.
In this example placing a 1 contract trade involves placing four separate trades to open the position. the net credit per position is 25 cents, for 100 shares that is $25. So at the November expiry that is the realized gain.
I know this example is not the most cost effective as the position will cost, through Questrade, more than $80. Not worth the $25. Adding size, perhaps 10 contracts, puts the cost up $36 due to Questrade's commission structure and bumps the profits up to $250. Better but the roughly $120 in commissions eats this up quickly. A stock with a larger price, and therefore a deeper option chain, would be a better choice for this style of trade as it justifies the commission costs due to larger credit creation with smaller positions... even though the option costs themselves are higher the payback is worth it. With the Optioneer system and Strikepoint trade broker the trades that I am likely to take will be in the $4500 range with $200-$400 profit (net) per trade. There are smaller, just under $1000 trades but even at that point the commissions are a larger consideration.
This strategy is not as speculative as straight option buying is and is more aimed at creating a regular cashflow as these trades are setup perhaps twice per month every month.
Jeff.
Combining a few strategies...Part I
OK, this chart is a bit more complicated than I intended and the final post got longer as well, bear with me on this one and I will break it into two parts.
My last post had an example of using Williams %R on an up trending stock to play the long side. Buying and selling the stock or the call options could be interchanged easily enough.
This time the stock is BK - Bank Of New York Mellon Corp
I added a mean reversion plot (red, slight up trending), 20 day price channels (orange dashed). The blue arrow indicate trade and direction, the blue vertical lines are the indicator triggers and the blue trend lines are just to mark the general price move between trades. I did not number the trades but they are counted left to right sequentially for reference.
This stock is going nowhere in a hurry so I would play both directions on this one. Using the Williams %R 5 and 14 day oscillator as an over bought and oversold and placing trades the day following both crossing the -80 (oversold) and -20 (over bought). Instead of just closing the trade I would just reverse the trade at the same time. There may be some slippage with this plan but if it is run consistent profits are still regular enough to not really have to worry about it.
If trading the stock, just buy at the bottom and sell at the top then immediately short, cover and buy at the bottom. I think there is an easy way to do this... on the first trade on the chart just buy the 100 shares, market order is fine, so filled at perhaps $25.50. On May 6th the indicator is overbought on both periods, place a short the next morning for 200 shares which should close the initial trade and open a new short for 100 shares. This saves on one commission charge as it closes the first trade and opens another in one trade. I have a feeling that this will not be allowed in Questrade as it is specifically a "short" order...technical issue but it garners them additional commissions.
Next trade on May 21 would be to buy 200 shares covering 100 shorts and opening 100 long. Again, one commission.
Trading every single indicated trade on this stock over this period would result in 14 trades, one still being active. The gross profit for the 5 month period would be $33 (rounding down in most cases for easier math). That's a little more than doubling my money on the trade and $3300 for a bunch of 100 share trades. Maximum capital in play at any one time was the triple trade in June for $8850 or so.
Playing the options for the same stock would be about the same method, although I cannot think of an easy way to reduce commissions as long is buying a call and short is buying a put. They can be executed at the same time but I cannot open a new trade while closing another in one step... not without selling naked options...but I won't go there.
So buy the call to play long and buy the put to play the short game. No need for stops and no need to buy long term expiry's as most of the moves have been a month or less...so maybe always buy two or three months out.
Unlike the stock prices these option prices are a little sketchy as they are not tracked as well, nor do they necessarily trade every day so actual tracking of value is difficult at best.
BK calls and puts right now are around $1 and the spread is 5 or 10 cents. Assume that all things remain equal, and due to the lack of trending they have been mostly. Buying a call $1.50 OTM costs $1 (one month to expiry). The price moves $3 (our "target" even though the price swing has been averaging a bit higher than that) so the Intrinsic Value goes up $1.50 and the Extrinsic Value (the purchase price) holds it own (after all the price is still $1.50 away from the strike). Net increase is the $1.50. As the option gets closer to expiry I might expect to lose most of the EV so "holding it's own" is not the case with regards to time flow.
If I go one month farther out the cost of the options only goes up 40 cents but the degradation in EV is slower at this point... I might only lose the 40 cents instead of much more due to the non-linear drop in EV in the last month.
Making some broad assumptions based on current option prices, $1.40 for a two month option that is $1.50 OTM and adding the price move that puts it ITM and deducting 40 cents of the premium paid due to time value decreasing yields a total gross profit of $13.00. Puts and calls seem to be priced about the same due to the lack of a trend of the stock price.
That is $1300 compared to the stock trading $3650 for the equivalent of 100 share trades...when considering the ROI it is a different matter. The stock trades were, on average $2800 per trade whereas the option trades were $140 on average. That is 130% compared to 928% ROI. With the stocks I would not be able to change my position sizing along the way, or just once near the end of the period if I chose. With the options I could, if I wanted to risk only gains, increase my contract size by one contract a few times along the way in addition to using the unused capital for other trades.
Compounding my option trades while not risking anything beyond the first $140 would result in a different outcome altogether as the very first trade more than doubled my money (I already have trades doubling my money so it is not unusual in options).
The first trade nets $460 on one contract so I tuck away $280 (double my initial investment and continue to work only with profits, but with all the profits used to compound my money). I end with $10,325 or a nice 7475% gain. This is the power of options combined with compounding as they compound much quicker. It is sort of like the question about which would you rather, $1,000,000 now or 1 cent now but doubled every day for a month, which equals $5,368,708 and change.
I would expect that I might just increase my position size by one contract each trade which would see $3823 in profits, still a 2730% profit.
Jeff.
My last post had an example of using Williams %R on an up trending stock to play the long side. Buying and selling the stock or the call options could be interchanged easily enough.
This time the stock is BK - Bank Of New York Mellon Corp
I added a mean reversion plot (red, slight up trending), 20 day price channels (orange dashed). The blue arrow indicate trade and direction, the blue vertical lines are the indicator triggers and the blue trend lines are just to mark the general price move between trades. I did not number the trades but they are counted left to right sequentially for reference.
This stock is going nowhere in a hurry so I would play both directions on this one. Using the Williams %R 5 and 14 day oscillator as an over bought and oversold and placing trades the day following both crossing the -80 (oversold) and -20 (over bought). Instead of just closing the trade I would just reverse the trade at the same time. There may be some slippage with this plan but if it is run consistent profits are still regular enough to not really have to worry about it.
If trading the stock, just buy at the bottom and sell at the top then immediately short, cover and buy at the bottom. I think there is an easy way to do this... on the first trade on the chart just buy the 100 shares, market order is fine, so filled at perhaps $25.50. On May 6th the indicator is overbought on both periods, place a short the next morning for 200 shares which should close the initial trade and open a new short for 100 shares. This saves on one commission charge as it closes the first trade and opens another in one trade. I have a feeling that this will not be allowed in Questrade as it is specifically a "short" order...technical issue but it garners them additional commissions.
Next trade on May 21 would be to buy 200 shares covering 100 shorts and opening 100 long. Again, one commission.
Trading every single indicated trade on this stock over this period would result in 14 trades, one still being active. The gross profit for the 5 month period would be $33 (rounding down in most cases for easier math). That's a little more than doubling my money on the trade and $3300 for a bunch of 100 share trades. Maximum capital in play at any one time was the triple trade in June for $8850 or so.
Playing the options for the same stock would be about the same method, although I cannot think of an easy way to reduce commissions as long is buying a call and short is buying a put. They can be executed at the same time but I cannot open a new trade while closing another in one step... not without selling naked options...but I won't go there.
So buy the call to play long and buy the put to play the short game. No need for stops and no need to buy long term expiry's as most of the moves have been a month or less...so maybe always buy two or three months out.
Unlike the stock prices these option prices are a little sketchy as they are not tracked as well, nor do they necessarily trade every day so actual tracking of value is difficult at best.
BK calls and puts right now are around $1 and the spread is 5 or 10 cents. Assume that all things remain equal, and due to the lack of trending they have been mostly. Buying a call $1.50 OTM costs $1 (one month to expiry). The price moves $3 (our "target" even though the price swing has been averaging a bit higher than that) so the Intrinsic Value goes up $1.50 and the Extrinsic Value (the purchase price) holds it own (after all the price is still $1.50 away from the strike). Net increase is the $1.50. As the option gets closer to expiry I might expect to lose most of the EV so "holding it's own" is not the case with regards to time flow.
If I go one month farther out the cost of the options only goes up 40 cents but the degradation in EV is slower at this point... I might only lose the 40 cents instead of much more due to the non-linear drop in EV in the last month.
Making some broad assumptions based on current option prices, $1.40 for a two month option that is $1.50 OTM and adding the price move that puts it ITM and deducting 40 cents of the premium paid due to time value decreasing yields a total gross profit of $13.00. Puts and calls seem to be priced about the same due to the lack of a trend of the stock price.
That is $1300 compared to the stock trading $3650 for the equivalent of 100 share trades...when considering the ROI it is a different matter. The stock trades were, on average $2800 per trade whereas the option trades were $140 on average. That is 130% compared to 928% ROI. With the stocks I would not be able to change my position sizing along the way, or just once near the end of the period if I chose. With the options I could, if I wanted to risk only gains, increase my contract size by one contract a few times along the way in addition to using the unused capital for other trades.
Compounding my option trades while not risking anything beyond the first $140 would result in a different outcome altogether as the very first trade more than doubled my money (I already have trades doubling my money so it is not unusual in options).
The first trade nets $460 on one contract so I tuck away $280 (double my initial investment and continue to work only with profits, but with all the profits used to compound my money). I end with $10,325 or a nice 7475% gain. This is the power of options combined with compounding as they compound much quicker. It is sort of like the question about which would you rather, $1,000,000 now or 1 cent now but doubled every day for a month, which equals $5,368,708 and change.
I would expect that I might just increase my position size by one contract each trade which would see $3823 in profits, still a 2730% profit.
Jeff.
New attempt at oscillation trading
Leave it to me to try something else when what I am doing is working fine. This time I will leave well enough alone and NOT change what I am doing with regards to the option strategy involving using the services that I am currently testing. Also I am still funding for the Optioneer strategy, no change there either.
So, on to my next endeavour.
I don't know what to call this but it involves trend trading, sort of seeing trading with a slight twist.
I am plotting a few indicators and overlays that I have been comfortable with for the last while. On the chart below I left the legends on so just click on it for a larger view.
The solid lines are the typical simple moving averages. The dotted lines are 100 day simple moving average envelopes which I was using a while ago to determine entry and stops for trades. I never really used them but they certainly help visualize stops while the price is in the channel.
The oscillators are both Williams %R which is just an over sold and over bought oscillator similar to Stochastics. I am using the 14 and 5 day for comparing two timeframes without plotting two charts.
The bottom indicator is the Bollinger Band,a volatility indicator. I was going to use a standard deviation but it is identical to this.
Here is a stock that I am currently trading using options. It was a trade based on the service that I just recently cancelled as they were providing one trade per week and I didn't feel that they did much more than watch for chart activity. It is worth noting that I bought long options on September 14th...according to this chart it was the wrong time to go long but I still have some time to go before expiry so I will see where it heads next.
ININ - Interactive Intelligence Inc.
So, on to my next endeavour.
I don't know what to call this but it involves trend trading, sort of seeing trading with a slight twist.
I am plotting a few indicators and overlays that I have been comfortable with for the last while. On the chart below I left the legends on so just click on it for a larger view.
The solid lines are the typical simple moving averages. The dotted lines are 100 day simple moving average envelopes which I was using a while ago to determine entry and stops for trades. I never really used them but they certainly help visualize stops while the price is in the channel.
The oscillators are both Williams %R which is just an over sold and over bought oscillator similar to Stochastics. I am using the 14 and 5 day for comparing two timeframes without plotting two charts.
The bottom indicator is the Bollinger Band,a volatility indicator. I was going to use a standard deviation but it is identical to this.
Here is a stock that I am currently trading using options. It was a trade based on the service that I just recently cancelled as they were providing one trade per week and I didn't feel that they did much more than watch for chart activity. It is worth noting that I bought long options on September 14th...according to this chart it was the wrong time to go long but I still have some time to go before expiry so I will see where it heads next.
ININ - Interactive Intelligence Inc.
I plotted green and red vertical lines to represent buy and sell indications. As the %R in both the 5 and 14 day period dip to -80 the next day the stock is bought at the opening price, that makes it simple but lower limit orders could be used. Seeing as the stock is trending nicely I could have easily just bought when the price came within a certain range of the 50 SMA, a typical swing trade move. I will plot this over other stocks in varying trends to see how it holds later.
The exit is as important, or even more important, than the entry. Seeing as I am using options I plan on buying options with strikes close to the stock price at the time, estimate the timeframe to determine expiry dates for the price move and not use stops. The total trade cost will not exceed my maximum loss allowance at the time. If I were using stop loss orders instead I would use one of the 100 SMA envelope lines or the 50 sma.
The key is when to take profits and this is where this strategy helps as it takes the subjectivity out of the process.
Initial stops are easy enough, use the SMA that closely corresponds to the Maximum Loss Allowance or an unbroken SMA that forms a trendline and move them with the SMA chosen. The stop will move up slowly. As long as the price does not move too far off the lower trend line (no straight lines here, just the SMAS) there is no need to do anything other than adjust the stop every day or two.
Once the price moves then there are two methods of exit:
1)$3 target (or any price of choice)
a) with stop loss exit
b) with limit order exit
2) %R short term dip
The first is easy enough. Using the entry method I believe that a tighter stop than the profit target can be used. In the ININ example a $1 stop could be used initially and a $3 profit target provides a 3:1 profit to loss ratio, acceptable. Once the price moves in my favour I continue to move the stop loss with the SMA.
Option a) has me move the stop loss up to the $3 target as soon as, or very soon after the stock price passes this price. Exit will be by market order once the price touches the stop. The advantage to this is that the stop can be moved up tight with the price in order to secure greater profits should the price move higher. The disadvantage would be the possibility of the price gapping down through the stop.
Option b) has me placing a limit order and getting the $3 profit, or better if the price is higher at the time of the order placement. The advantage is that once the price is above $3 I am pretty much guaranteed that profit. The disadvantage is if the price continues to move up I miss some additional profits.
Option 2) has the exit order place the day following a dip below -80 on the 5 day %R.
There is a third exit, if the price moves slowly up then the SMA stop keeps moving and either gets hit along the way or just keeps following the trend. The loss slowly reduces along the way and may turn into a small paper profit position.
ININ
Three trades plotted in the last six months profit using:
1)$3 target (or any price of choice)
a) with stop loss exit = $12 (trailing by $1 raised in 50 cent increments)
b) with limit order exit = $9 or slightly better
2) %R short term dip = $9.15
No matter the method there were profits to be had, and that is the important part.
I won't go into the possible option strategies here but suffice it to say that options for this stock could be had for a fraction of the cost of the stock.
One thing that I see mentioned about trading with any type of automatic or mechanical style is that they are prone to curve fitting. I think that the problem with washing any strategy as curve fitted, making the indicators work due to the stock price activity, is that it works historically for a stock and that pattern can be used to identify other stocks that are in similar early stages of the fitted strategy. So why not use the fitted strategy and in turn fit the stock by pattern fitting? I have a successful short list of stocks for my P & F strategy using this idea. Therein lies the key, stock selection to match the strategy employed and not trying to make a strategy that works for a few stocks work for every stock or even ones that I may like to trade.
I think that almost any strategy, if proven for some stocks, can be made work in this way. The second key is in recognizing when the fit is no longer good. This is accomplished by keeping records and tracking performance in order to see when the overall strategy no longer works for a particular stock or group of stocks.
Jeff.
Friday, October 9, 2009
Plan update...nothing really new.
I closed a position today for a loss, in the $50 range so my win rate is 8 of 10 trades...80%. The only reason that the option lost was due to me getting in 5 cents higher than I wanted to and setting a limit order that did not get filled to exit...had I just placed a market and took the spread (only 10 cents) I would have at least broke even or made a couple of bucks.
I am gaining back what was a paper loss earlier in the week and still placing more trades. I am up to 22 active trades with two outstanding orders. The outstanding orders are only open due to the price jumping ahead and not pulling back. I figured that I would be best not to chase them at all as the Friday rush seems to have driven prices up at the end and these two stocks were already in a bit of an intraday uptrend. I might expect to see them drop back a bit on Monday and perhaps see my limit orders hit and filled.
This week has been slow. I got used to the flurry of opening and closing trades two weeks ago so this nibbling here and there is odd. I would like to see some of these move BUT quite a few are now January through March expiry so there is lots of time to let them move.
I have decided to not place any call only trades when the alerts indicate a credit spread trade. The trouble is that a credit spread already made some money so closing it while the call is still down can still yield a profit...for those entering the entire trade...perhaps not for me with only the call. I didn't really realize this problem until now. I have to review my trades to weed out those ones placed under the premise that the call was going to appreciate more than it has, maybe just set some stop losses to let them close themselves and cut my loses.
The upside of doing this will mean more capital in my account to get into the long options. I am running out of cash as positions are open and orders are placed. Part of the issue here is getting into slightly too large of positions. I am paring them down now to keep all trades no larger then the $1.20 option cost, as I mentioned in a previous post. The exception will be when a good looking trade is worth up to $1.50 leading to $150 for a single contract or slightly above $120 for two or three. $1.20 is just a close guide for me and this is only to keep the number of trades up while allowing no stop losses to be necessary.
Oh, the reason I want to keep the number of trades up is to allow the full diversification using the service that it looks like I am going to settle upon. The classic "trade the plan" means that picking a few of the lot MAY also mean that I pick the wrong ones. That would suck.
I am gaining back what was a paper loss earlier in the week and still placing more trades. I am up to 22 active trades with two outstanding orders. The outstanding orders are only open due to the price jumping ahead and not pulling back. I figured that I would be best not to chase them at all as the Friday rush seems to have driven prices up at the end and these two stocks were already in a bit of an intraday uptrend. I might expect to see them drop back a bit on Monday and perhaps see my limit orders hit and filled.
This week has been slow. I got used to the flurry of opening and closing trades two weeks ago so this nibbling here and there is odd. I would like to see some of these move BUT quite a few are now January through March expiry so there is lots of time to let them move.
I have decided to not place any call only trades when the alerts indicate a credit spread trade. The trouble is that a credit spread already made some money so closing it while the call is still down can still yield a profit...for those entering the entire trade...perhaps not for me with only the call. I didn't really realize this problem until now. I have to review my trades to weed out those ones placed under the premise that the call was going to appreciate more than it has, maybe just set some stop losses to let them close themselves and cut my loses.
The upside of doing this will mean more capital in my account to get into the long options. I am running out of cash as positions are open and orders are placed. Part of the issue here is getting into slightly too large of positions. I am paring them down now to keep all trades no larger then the $1.20 option cost, as I mentioned in a previous post. The exception will be when a good looking trade is worth up to $1.50 leading to $150 for a single contract or slightly above $120 for two or three. $1.20 is just a close guide for me and this is only to keep the number of trades up while allowing no stop losses to be necessary.
Oh, the reason I want to keep the number of trades up is to allow the full diversification using the service that it looks like I am going to settle upon. The classic "trade the plan" means that picking a few of the lot MAY also mean that I pick the wrong ones. That would suck.
Thursday, October 8, 2009
Profit taking...not for me...yet.
I am receiving profit taking alerts from the main active trading service ... but the alerts are for positions that I am not in. Either they are positions entered before I was on or are spreads that I did not take or even one or two that I just didn't chase the price on as it ran away too quick for me to get into.
So far almost all the profit alerts are just that, profit alerts, not loss takings. A few notes about positions that may expire worthless but too few to be of concern.
BTW, I decided that I am willing to start at 5 cents higher than the recommended price of the option depending on a few variables which I decide upon at the time...like how close to the market close, activity and strength or weakness of the stock. I need to test the limit order to see if I place an order with a limit above the ask price will I only pay the ask or will I get nailed for my offer? I know I am best, in most cases, to set the limit at or even under the bid and wait for a spike. Although with low deltas (0.5 or less) it takes a larger price change to initiate a drop in the option price to make this strategy work out.
I must admit to being a little over zealous in my need to get active in this trading and my need to make a trade. I placed a few trades based on spread recommendations by only buying the underlying call and not selling the corresponding call... my account is not funded enough to do that right now. In my haste I didn't quite realize the implications of the trade in it's entirety. The sold call, in a few cases, may have been the basis for the profit.
Yesterday a trade was just that. Buy a call for 14 cents or less and sell a put for 16 cents or more.
Net 2 cent credit off the bat...not a bad proposition.
I had decided to leave all alerts alone unless I could execute the entire trade. This one was a good place to start sticking to that rule.
Today the trade was closed. Sell the calls for 9 cents or more (a loss on the initial call only position) and buy back the put for 3 cents or less. A total of 6 cents credit.
I would have lost 5 cents on the call had I bought them. The put, being a naked put (the call does not cover a short put), would require $25,000 account balance. Not something I am prepared to fund right now so the trade was not possible anyway. That and a naked put is a VERY risky trade as I would be obligated to buy the stock at the strike price at expiration should I keep it. At the very least I could buy back the put to close the trade for a loss based on the option price but it still amounts to a loss by at least the difference in the strike and the price when I eventually bought back the put.
I would want more faith in the trade alerts than I have right now to risk selling naked options based on a service.
So far almost all the profit alerts are just that, profit alerts, not loss takings. A few notes about positions that may expire worthless but too few to be of concern.
BTW, I decided that I am willing to start at 5 cents higher than the recommended price of the option depending on a few variables which I decide upon at the time...like how close to the market close, activity and strength or weakness of the stock. I need to test the limit order to see if I place an order with a limit above the ask price will I only pay the ask or will I get nailed for my offer? I know I am best, in most cases, to set the limit at or even under the bid and wait for a spike. Although with low deltas (0.5 or less) it takes a larger price change to initiate a drop in the option price to make this strategy work out.
I must admit to being a little over zealous in my need to get active in this trading and my need to make a trade. I placed a few trades based on spread recommendations by only buying the underlying call and not selling the corresponding call... my account is not funded enough to do that right now. In my haste I didn't quite realize the implications of the trade in it's entirety. The sold call, in a few cases, may have been the basis for the profit.
Yesterday a trade was just that. Buy a call for 14 cents or less and sell a put for 16 cents or more.
Net 2 cent credit off the bat...not a bad proposition.
I had decided to leave all alerts alone unless I could execute the entire trade. This one was a good place to start sticking to that rule.
Today the trade was closed. Sell the calls for 9 cents or more (a loss on the initial call only position) and buy back the put for 3 cents or less. A total of 6 cents credit.
I would have lost 5 cents on the call had I bought them. The put, being a naked put (the call does not cover a short put), would require $25,000 account balance. Not something I am prepared to fund right now so the trade was not possible anyway. That and a naked put is a VERY risky trade as I would be obligated to buy the stock at the strike price at expiration should I keep it. At the very least I could buy back the put to close the trade for a loss based on the option price but it still amounts to a loss by at least the difference in the strike and the price when I eventually bought back the put.
I would want more faith in the trade alerts than I have right now to risk selling naked options based on a service.
Tuesday, October 6, 2009
Reduced loss with options: example
Today a position that I have dropped a few cents off the start due to a downgrade by some company or other. The stock was ARRS (Arris Group).
The interesting bit is that the stock gapped down from about $12.70 yesterday to $12.10 at the open then proceeded to head down to hit $11.40. It seems to have stabilized at about $11.70 now. Considering that the stock dropped $1 overnight to now, the option I hold is down 35 cents. I bought the $15 strike call when the price was near $12.75 so the delta was in the 0.35 or 0.40 neighbourhood... right now it sits at 0.29.
Paper loss had I bought 200 shares of ARRS would be $200, so far my option paper loss is $75. What looks a little worse is the return as a $1 loss would represent 7.8% on the trade compared to the $75 loss being 50% of the trade.
The upside is that the positive returns, had the price moved the other way would be equally varied, if not more pronounced as the delta increases and the option price goes up in a non-linear fashion.
I will be updating my paper tracking later today to see how much ground I have recovered.
Jeff.
The interesting bit is that the stock gapped down from about $12.70 yesterday to $12.10 at the open then proceeded to head down to hit $11.40. It seems to have stabilized at about $11.70 now. Considering that the stock dropped $1 overnight to now, the option I hold is down 35 cents. I bought the $15 strike call when the price was near $12.75 so the delta was in the 0.35 or 0.40 neighbourhood... right now it sits at 0.29.
Paper loss had I bought 200 shares of ARRS would be $200, so far my option paper loss is $75. What looks a little worse is the return as a $1 loss would represent 7.8% on the trade compared to the $75 loss being 50% of the trade.
The upside is that the positive returns, had the price moved the other way would be equally varied, if not more pronounced as the delta increases and the option price goes up in a non-linear fashion.
I will be updating my paper tracking later today to see how much ground I have recovered.
Jeff.
Market uptrend re-enforced
I see that today the market is coming off of the resistance at the blue 50 SMA, a nice setup for a continuation of the current uptrend and welcome news to my mostly long positions.
I debated whether to cut some losers of follow the plan of the trade services to the "T" and hold the positions. The ideal plan, as I have always said when using someone else's strategy, is to be able to trade the plan the way they envision it. With the options trades that I am following now the strategy is not so much to treat the entire capital as a possible loss but to allow for the possibility that it may be if the trade does not go in my favour.
I think I mentioned that I will be downsizing my trades again in order to allow a smaller loss while following these plans. My new Maximum Loss Allowance will be in the $120 range and this will be the maximum capital in the option trades...so position sizing as follows:
$0.15 - 8 contracts
$0.20 - 6 contracts
$0.25 - $0.30 - 4 contracts
$0.35 - $0.40 - 3 contracts
$0.45 - $0.60 - 2 contracts
$0.65 - $1.20 - 1 contract
The first week of gains when I cleared $1000 net I was using many positions in the one or two contract size. I may yet make some profits from these positions (two accounts are at breakeven and the third has one third of the trades in the green...all were in the red last week.
The drop in position values made me take another look at the track record of the services I am using right now. In one case the old record is actually pretty good. They are, right now, closing trades that were opened before I started and many are in the 300% and greater return. Three today were like that even though I know that other trades are languishing.
I will be setting up one margin account this week to take advantage of trading spreads as some of the strategies used are of that style. As well I am transferring most of my RRSP over to the Optioneer account this week as well.
All in all I feel fairly confident that my plan, going forward, is going to work out nicely and I expect to see some gains in the near future to justify my time spent getting into the trading in the manner that I have. While I don't anticipate replacing my income this year, or even next year, I will be able to gauge a timeframe when that might be possible.
Jeff.
I debated whether to cut some losers of follow the plan of the trade services to the "T" and hold the positions. The ideal plan, as I have always said when using someone else's strategy, is to be able to trade the plan the way they envision it. With the options trades that I am following now the strategy is not so much to treat the entire capital as a possible loss but to allow for the possibility that it may be if the trade does not go in my favour.
I think I mentioned that I will be downsizing my trades again in order to allow a smaller loss while following these plans. My new Maximum Loss Allowance will be in the $120 range and this will be the maximum capital in the option trades...so position sizing as follows:
$0.15 - 8 contracts
$0.20 - 6 contracts
$0.25 - $0.30 - 4 contracts
$0.35 - $0.40 - 3 contracts
$0.45 - $0.60 - 2 contracts
$0.65 - $1.20 - 1 contract
The first week of gains when I cleared $1000 net I was using many positions in the one or two contract size. I may yet make some profits from these positions (two accounts are at breakeven and the third has one third of the trades in the green...all were in the red last week.
The drop in position values made me take another look at the track record of the services I am using right now. In one case the old record is actually pretty good. They are, right now, closing trades that were opened before I started and many are in the 300% and greater return. Three today were like that even though I know that other trades are languishing.
I will be setting up one margin account this week to take advantage of trading spreads as some of the strategies used are of that style. As well I am transferring most of my RRSP over to the Optioneer account this week as well.
All in all I feel fairly confident that my plan, going forward, is going to work out nicely and I expect to see some gains in the near future to justify my time spent getting into the trading in the manner that I have. While I don't anticipate replacing my income this year, or even next year, I will be able to gauge a timeframe when that might be possible.
Jeff.
Friday, October 2, 2009
Trust or foolishness
I recall posting about the "pain" of holding a position through a period of loss in order to ride the planned rally on the other side.
Today is one of those days, as was yesterday. So I need to consider if this is pain or foolishness.
I am running only with trade service trades right now and all but one are long positions. This is not a move that I would have wanted to be long in most of my trades, but things happen.
As far as the market is concerned I feel (I know, not the best word to start a statement about trading) that with all the bad news the market should have sold off more than it did. In that light the positions that I hold are not doing too bad. Some are up since the last time I did a "price check" to see where I would be with regards to my total portfolio.
My trade in progress numbers show me giving back all of my gains PLUS a healthy bit on top should I close the trades now. The one thing that is tough about holding options instead of stock is also the thing that is good about it, if anything good can be gleaned from a losing position, the price scale of the option is so different from a stock. A 40 cent trade that is at 5 cents looks pretty bad... but if it is based on a stock that has gone from $12 to $8, it doesn't look so bad.
Option people say to buy intrinsic value, I have said so myself but found a problem or two with the plan. The thing is that if I call the move wrong I can lose the intrinsic value penny for penny when compared to the stock in addition to the extrinsic value. Buying an option that is wholly EV but has a strike very close to the stock price allows an increase in the price of the stock to drive the IV up almost right away while not losing too much EV. The downside, which is also the upside, is that the EV should be considered the total loss allowed on the trade and this one factor gives a sense of freedom to the trade as, if I am wrong, I have lost either way. If I am right I could stand to gain more on a return on capital basis.
I am re-considering my current position sizing as I was buying 2 and 4 contracts per trade. I should have kept it to 1 and 2 for now. I think I lost sight of the fact that a service is susceptible to the same losing streaks as anyone else, especially when going long while a market is undecided. I know that some other services I tried had abysmal results so even though these ones seem more in the profit. I am glad I was not trying to stick it out with one of the previous services.
This then ties into trading some else's plan. The trade services are recommending holding everything through. I note that they are not averse to holding a losing position through expiry, neither am I... given the right option price scale. So, how long to I hold them? That is the big question.
I am setting up my Optioneer account as I type. I sent in all the paperwork today and I am awaiting funding instructions. I have to liquidate the RRSP amount that I wish to start with and get it prepared to transfer. I dislike taking the tax hit on that but I am choosing to take it now in light of future plans to recoupe those tax loses.
Jeff.
Today is one of those days, as was yesterday. So I need to consider if this is pain or foolishness.
I am running only with trade service trades right now and all but one are long positions. This is not a move that I would have wanted to be long in most of my trades, but things happen.
As far as the market is concerned I feel (I know, not the best word to start a statement about trading) that with all the bad news the market should have sold off more than it did. In that light the positions that I hold are not doing too bad. Some are up since the last time I did a "price check" to see where I would be with regards to my total portfolio.
My trade in progress numbers show me giving back all of my gains PLUS a healthy bit on top should I close the trades now. The one thing that is tough about holding options instead of stock is also the thing that is good about it, if anything good can be gleaned from a losing position, the price scale of the option is so different from a stock. A 40 cent trade that is at 5 cents looks pretty bad... but if it is based on a stock that has gone from $12 to $8, it doesn't look so bad.
Option people say to buy intrinsic value, I have said so myself but found a problem or two with the plan. The thing is that if I call the move wrong I can lose the intrinsic value penny for penny when compared to the stock in addition to the extrinsic value. Buying an option that is wholly EV but has a strike very close to the stock price allows an increase in the price of the stock to drive the IV up almost right away while not losing too much EV. The downside, which is also the upside, is that the EV should be considered the total loss allowed on the trade and this one factor gives a sense of freedom to the trade as, if I am wrong, I have lost either way. If I am right I could stand to gain more on a return on capital basis.
I am re-considering my current position sizing as I was buying 2 and 4 contracts per trade. I should have kept it to 1 and 2 for now. I think I lost sight of the fact that a service is susceptible to the same losing streaks as anyone else, especially when going long while a market is undecided. I know that some other services I tried had abysmal results so even though these ones seem more in the profit. I am glad I was not trying to stick it out with one of the previous services.
This then ties into trading some else's plan. The trade services are recommending holding everything through. I note that they are not averse to holding a losing position through expiry, neither am I... given the right option price scale. So, how long to I hold them? That is the big question.
I am setting up my Optioneer account as I type. I sent in all the paperwork today and I am awaiting funding instructions. I have to liquidate the RRSP amount that I wish to start with and get it prepared to transfer. I dislike taking the tax hit on that but I am choosing to take it now in light of future plans to recoupe those tax loses.
Jeff.
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