The problem with first of month timing

One thing that came of my historical study of SPY while applying the trade levels was the realization, or perhaps the confirmation, that first of month trading is not necessarily the best approach.

With some strategies a dollar cost averaging approach works well in keeping regular investments applied without regard to trying to time the market to get the best price. Dividend Re-investment Plans for example, no commissions and timing should not be a concern. Even those nasty mutual funds work on the same principle. Due to the expiry dates on the options I sort of just used first of month as a default trade entry time.

Spread trades are, by their nature, a timing style trade, as most are that involve any technical analysis. Buy low and sell high. The same rule applies to spreads except it is sell high and let it expire. Selling high refers to the price of the options, not the stock as a bull put spread is best to sell when the stock price is low.

This is where the linear regression worked well. Using the spreadsheet calculations I can easily set a nice range for the call side but only when the stock price is near the top range of the regression channel. On the bottom side the same thing applies to the put side of the trading. This is where the best prices come into play for the options.

So it is not best to place the puts and calls at the same time nor is it best to just use a "day of the month" approach to trading.

I apply a trend factor to the call side that allows me to use a 1.0 for a typical downtrend, 1.5 if it is short term trending up and a 2.0 if it is long term trending up. This changes the spread "head room" from the stock price and lets me play bear call spreads in all markets. Bull Put spreads I would only trade in an uptrend due to the volatility of a down move being so much greater than that of an upmove. Just too risky.

This leads me to review my goals for trading. I have been trying not to look at ROI as much as cashflow in the account. If I look after the cashflow, ROI will look after itself. As a result I am not aiming for high ROI targets but targets that meet a certain daily average trade value. This is not something that is easy to do with typical stock trading as a stock move will determine my cashflow and the stock move is not a predictable thing, in the broader sense. Spread trading, due to selling premium can achieve daily average targets easier as the target profit is know up front.

In Optioneer my minimum target is $10 per day per trade, each trade is about $4600 risk capital which is between 5% and 10% overall ROR depending upon the term of the trade. 5 trades available. I will bump the risk up, and did recently in order to secure a higher return per day.

In Questrade my daily average seems to be coming up to $3 per day based on $1000 to $1200 risk capital with a 4 contract spread only. 4 concurrent trades possible at that level. That puts me into the same 5% to 10% ROR. Due to the commission advantage with Questrade I can make the trade more efficient by just upping the contract size to 17 so I could use the same risk and ROR as Optioneer to leverage my daily average up to $15 or more OR I could lower the risk to $3000 to hit the $10 mark instead with 11 contracts.

In order to keep diversity with Questrade I will stick with the smaller trades and set them at various points along the price curve. The trouble is that to pick the best price it will only cycle roughly once per month which means getting four separate trades per month is not likely. Three, one on the way up to the upper linear regression channel, one on the way down and perhaps a put spread at the bottom.

I need to work on a diversity method which may involve using other ETFs or even stocks to round out my portfolio of option trades.

These posts are never as short as I would like them to be.

Jeff.