CTP revisited, CTP-M or CTP-O?

Counter Trend Positioning, (CTP)

This was one of my better well thought out plans that I did not continue with once I saw the possibilities, it was time to try something else so it was left by the wayside to mellow.

I see a similarity in the trade ideas between CTP and the new Plan - M. While the execution is vastly different, the charting is very, very similar.

Here is one of my early CTP chart studies, it is not as clear but the over all idea is what I am looking for here. The idea that I was trying to play trades at the outer boundaries of a trend channel using a form of linear regression to place the trades at extremes before the intra-trend changed. I had trouble in that I would not allow wide enough stops to let the stock price do what it was going to do.

Here is the same stock in the same period with my current chart setup on board

Not a whole lot has changed. My linear regression forms the same trend channel, the red 20 week envelope confirms the down trend nicely, the W%R gives good validation to any trade entries....oh, but I am not entering stock trades.

In CTP I would use those boundaries as entries into long ans short trades. With spread trading I will be using the exact same idea but with the plan that I will sell premium into the change in intra-trend changes. Basically bet that the stock will continue it's trend and remain, roughly, within the same trend channel boundaries.

The main difference is that instead of having a stop out where I don't expect the price to go I will have my spread trade even farther out which allows two things:

1) the price is less likely hit a target that far out

2)even if it heads that way the trade is of short enough duration that it will expire BEFORE it gets there allowing me to still keep all premium collected.

This might represent a current chart with trades plotted. Now I don't know what is available for options on this but if I make the assumption that there are $1 strike options and they are penny priced and liquid AND I use a $2 strike spread....

There are 14 spread trades indicated by the blue lines. Those are the really rough start and stop periods as well as the sold option strike level. Assume that I was aiming for the 10% Return On Risk and I only use about $1000 as risk allowance. The real return would be $100 per trade based on 6 contracts providing just over $3 per day per trade in play. That is $1400 overall in the six month period.

There is a fair amount of overlap and some are EOM as well as 3rd Friday expirations, (another assumption... depends on the security), so the daily overall average is about $7.75. Slightly lower than my Optioneer goal but there I am aiming for $10 days per trade based on $4600 risk. Those trades are going to be longer on average and include a put leg as well every time.

A note about the W%R indicators on the bottom. They are 5 and 20 day periods and only serve to confirm that a move is a continuation and not likely a reversal. I could always choose to make a trade of the stock using the spreads to subsidize the trade... sort of a double dipping method. Placing a protective put in there as well would make this a four legged trade, sell a call, buy a call, buy or short the stock then buy a put for stock drop protection... maybe.

More tought for another day.

Jeff.

ETF and the Sector Rotation Spread Plan

I was toying around with the idea of trading spreads based on the sectors and just using ETF options. I checked a couple of them and find that the option chain is not very robust or they are strikes at $5 increments. So I will put my sector rotation plan on hold until I take the time to find some sector representative securities that have good option chains to trade.

I could just buy long ETF options depending upon where the sectors are in relation to the S&P in terms of trending but I am finding that I am liking both the idea and the execution of the spreads as I am starting out.

I did buy another book the other day, "The Bible of Option Strategies". It outlines the 60 or so main methods of setting up options in conjunction with stocks, in place of stocks combined and singularly. Not too in depth in the practical application but all the pertinent details that go into determining which ones to use. It is up to me to determine when and exactly how, but that is what I like to do best.

Jeff.

The trade I want vs the trade I can get...

Today I placed a trade with Optioneer and it was filled. My fill / not filled ratio is pretty poor overall but I think I have it figured out.

When I did the back testing I was not particular with which trades I took but I also did not account for not getting trades filled. This is what has led me to my credit method of determining the trades. I still aim for only the trades that I want but I have an attainable target once the trades come into the shorter time frames. So I just don't want the high dollar long term trades as they are not the same return as a smaller short term trade. I will see how much cash I can keep in place using this method, it does make the turn around tight once the trades complete though.

For today I had bumped the call side protection up by 5 points creating more profit in the trade by lowering my costs and also allowing me to provide greater leniency to the broker. Essentially I ended up with more additional than I had to give up in potential leniency with the standard trade.

Leave it to me to start off without using the typical setup.

The numbers were:

The standard trade = 1.9 points (1.9 x $250 - $78 commission = $397)
Minimum target for this trade for me is 1.65 points or $334.50 given the 32 days to expiry
My adjustment = + 0.15 points (0.15 x $250 = $37.50)
Total target = $434.50 or 2.05 points
The original trade would have been for 1.9 points with 0.25 leniency so the new trade is 2.05 with 0.4 points leniency...lots of room.

Filled at 1.85 or $384.50.

Using my credit setup this trade is a 1.2 credit where my goal is 1.0. Between the two trades I am at 2.44, so I am ahead by 22% if all goes as planned.

The best part, I did all this and sent in the trade on Saturday.

Jeff.

Puts are expensive.

I was looking at placing a bull put spread under my bear call spread to finish the iron condor setup and see that the put side is very pricey to setup. Basically in order to get a decent credit I need to really have some space between the put sold and the put bought which drives the risk up very quickly.

I set my call spread at $3 and the yield is over 12% for the trade based on $1000 risked over 4 contracts.

A put spread of $5 today would yield just over 4% for the trade based on $2000 risked over 4 contracts.

In order to bring the absolute dollar return near my idea of a good time I would need to run 6 contracts for a total risk of $2,900 but still with a 4.3% yield. But, seeing as I am looking for low risk trades I like 10% or better yield with a small spread.

So, I will concentrate on the call side. While setting up an iron condor I now see why some look at a ratio rather than a straight 1:1 calls vs puts in order to keep the absolute return even. I also see why Optioneer gets antsy over the put margin as opposed to the call margin, besides being a faster move when a price breaks down it is a larger overall risk.

Oh, well. At least this makes setting up trades easier.

Jeff.

Williams %R, uptrend and bear call spreads

Option spread trading involves determining where a price for a stock may NOT be in a particular time. There are strategies and spread structures that involve aiming for a particular price point upon expiry or at least a particular move in a set time...but those are for another time.

Considering that I need to place a spread where the price will not be seems odd, but easier than forecasting amplitude, direction and timing .

Building on my previous post regarding W%R (using stacked 5 and 20 day periods) and the state of trends leads to some very interesting trade ideas.

UPTREND

W%R can indicate nice entries for long trades in an uptrend which leads to a nice support levels developed along the 50 sma line.

Here is the chart for the S&P500 (SPX). I placed a linear regression tool that started near the bottom of the uptrend with a standard deviation of 1. The upper and lower deviation lines have remained on the same slope for most of this trend so they have been good channel indicators.

The red arrows above the price would indicate points to place a bear call spread and the red arrows below would be points to place a bull put spread.

For anyone who has happened to have followed anything I've done in the past this looks exactly like my old Counter Trend Positioning strategy...except I was trying to buy and short sell stocks to capture the actual moves. This method lets me just bracket the expected moves instead.

The bear call spreads are placed based on the idea that the price is extended (over bought) and would be expected to top out near the deviation line.

Following the first trade set May 8th or 9th for the May expiration, (3rd Friday or EOM), as the SPX is around the 920-930 level. Setting a spread above this at about 5 or 10% puts the short call at 975 to 1020. I do not know what the value of that trade was as historical options pricing is tough to get and tough to use without a paid service. I expect that at 5% I might see a 5% Return on Risk or at 5% above maybe 10% ROR. The closer to the price the short call is the higher the ROR.

The SPX never reached those levels until late July so the trades were profitable. In fact, every trade indicated was profitable and these are basically trading against the trend.

The lower arrows could be placed the same way or using the W%R as if a long stock trade was taken. Rather than tying the puts to the calls and forming an iron condor I would choose to just set put spreads on their own.

For risk management I could choose to increase the size of the position or decrease the proximity to the level to increase either the ROR or increase the absolute dollar return respectively. I could also run different expiries by entering a short term trade very close and a long term trade farther out but still keeping trades no longer than 30 days. I could also add trades as the expiry approached if it looked like the volatility was up at the time...volatility is a whole other topic but was a prime consideration when I placed the spread trade on Friday.

PERFORMANCE

12 trades, possible 5 to 10% ROR so I use a 7.5%. Only two trades concurrent so splitting my S&P allotment (another topic) would be in order. I would have trades on either side about 75% of the time or better...about 5 of 7 months. Simple returns are in the 45% neighbourhood. From a cashflow perspective this is $3 per day, on average, for every $1000 I invest in the plan. Interestingly this is an annual money doubling rate.

Seeing as this is an uptrend I might ratio my trade to favour the put side by 2 to 1 and keep the trades at the farther distance from the price levels. This idea keeps the risk low but bumps up the absolute profits rather than raising the risk to raise the profits. More to play with in future.

VOLATILITY

A VERY brief comment on volatility. Friday the volatility index (VIX) jumped 5 points as there was a gap down in price of SPY (SPX index being the S&P 500) and the price headed up to close some of the gap. This spike in volatility from about 20 to 25 drove the price of options up a bit making the selling of options more profitable. As the volatility drops off the option premium also drops off which secures more of the profit from the spreads. Sell when volatility is high and buy when it is low. I specifically liked the trade due to this setup as I doubt that the VIX will stay high.

Of interest to note my Optioneer trade lost some value (slight reduction in profit, not a loss created) as a result of this spike in VIX. The Monday trade is a higher value trade as a result as well so if the VIX drops right off that trade may not fill.

Jeff.

Williams %R and the trend shift

I was checking the validity of the Williams %R (W%R) over the life of a stock trend this morning in order to determine if it was of any value in setting up spread trades. I couldn't help but look at it in the stock trading light though... which makes perfect sense.

I set a 5 day and 20 day W%R and placed them stacked under an ETF, XLE (Energy), but any would produce the same result.

UPTREND

While the trends are very obvious after the fact I used a 100 day sma to determine a firm trend in place. if the price remains above or below this line (with a 2% envelope) then I consider it trending.

Placing trades based on the 20 day while the ETF was in the latest uptrend worked well to capture the overall trend move. Using the 20 day as an initial guide and the 5 day as a trigger for long only trades resulted in entries at the pullbacks to the zone between the 30 and 50 day sma...it could easily be argued in favour of only doing that, using the smas as triggers, but that is not my goal, I am validating the W%R only.

DOWNTREND

Well, it worked as well in the downtrend in favour of shorting the stock and capturing the overall trend and the shorter swing trades as well. Again the 30/50 sma was a decent trigger zone. This could be used to help validate the trend trading using the W%R as just one more check.

NO TREND

This is where any plan needs to be really worked when trading stocks as it is the transition between up and down trending or while the price hovers undecided for a period...even though it may be under or over the 100 day sma. The trendless period is truly when it hovers over and under this line while in a sort of horizontal range. This is the period when a lot of traders loose money as their great plan stopped working for some "strange reason" and they have no contingency to modify there strategy on the fly.

The W%R flails about with no good trigger as the 5 day reaches highs and lows while the 20 day slowly wallows about. Once the trend is re-established the 5 and 20 take off in the same direction. The beginning of the current trend was so momentum driven that the indicators never really gave a good combined entry signal until the trend settled into a groove. Once recognized it would be easy to trade for anyone.

Jeff.

Odds are....

I had a longish dissertation on my impression of the general odds of trading spreads over trading stocks. Not only did it get long and tedious, it started getting complicated. So rather than going on and on about any seeming edge, here is a synopsis of the whole mess.

Buying or selling stocks based on support and resistance, indicators and oscillators is well grounded and a statistically sound methodology but is prone to subjective analysis and losses while one method stops working due to a shift in the trend.

Around 75% of options expire worthless (various sources), this puts the odds in favour of the option seller by the very nature of the options market.


Selecting and diligently applying risk strategies, position sizing and money management to any plan will enhance returns and keep losses at bay.

Goal setting in a broad sense is important to have an overall impression of the long term expectation. These goals must be realistic, quantitative and achievable. Short term goals are needed to be set and tracked in order to remain on track. Checkups are critical along the way.

Selling credit spreads to generate premium income puts the cash in my account immediately and the trick is to manage the trade in such a way as to keep as much of this cash as possible. I feel that having the cash up front creates an edge all of it's own. It is easier to work to keep than it is to work to make. Besides, getting paid in advance to work the trade just sounds better.

Adjusting the plan to accommodate varied price activity should prove far easier as the price action is being bracketed with credit spreads income strategies so price direction may not necessarily important. Amplitude of the next move is though.


Odds are that I have a much better edge in working toward keeping the premiums paid to me to place the trade than putting up a bunch of capital in order to try to generate profits. This has become my goal, smaller more secure gains made consistently.

I look at this as a front end load strategy rather than a back end load stock strategy, that is how the mutual funds work so why not me? Odds are this little paradigm shift is for the better in the long term.

Jeff.

OOPS...EOM options error

I was not paying close enough attention to my information.

The options that I opened the trade with yesterday were the RDQ series which expire at the end of the month rather than the typical 3rd Friday of the month. While this does not change my absolute return it does change my daily target from $6.38 to $3.94 and extends the time I am in the trade by 13 days to 34.

The only real reason I used RDQ instead of SPY options was due to the better price available between the strikes. It certainly didn't hurt that the price to sell was just a higher number.

So now I need to alter my spreadsheets a bit to accommodate the EOM options when they are available or just pay closer attention and enter the correct expiry when entering my data.

Jeff.

Spread Trade Commissions at Questrade.

OK, it came to me why the commission for my spread trade today was only $17.95 instead of the expected $26.

An option trade is $9.95 plus $1 per additional contract

I figured my trade was two calls and 3 additional contracts per call. That would be 2 x $10 plus 2 x $3 = $26

When I talked to the order desk about how the spread was handled, they said that it was handled as one trade and that I could not tie a bull put spread to it (makes it an iron condor).

So one option spread is one trade at $9.95 plus $1 for each additional contract. They are charging $1 for every contract, at 8 contracts that is $17.95.

This makes trading spreads and other multiple leg strategies even more cost effective than I thought.

Jeff.

Interesting Gap Play with a Spread...continued...SPY

Well, that was easy enough.

So, I got to walk through the trade with the Questrade order desk. I goofed in that I wrote the option name down wrong and I was buying the wrong side of the spread...and selling the wrong side but all my numbers were right.

Once I got that down I was good to go.

The order is placed, I selected my net credit allowance as opposed to ordering the calls individually by price, which makes the ordering process quicker. Next time I will have the order written down exactly as it needs to be to save the confusion.

Oh, the order is filled. They tell me the commission and to expect the trade to appear in my account tomorrow, options settlement is the next morning I think.

My order:

Underlying security is the ETF SPY
Buy to open 4 Dec 118 Calls RDQLN
Sell to open 4 Dec 115 Calls RDQLK
for a net credit of 35 cents or better
Commissions are $17.95 (less than I calculated as I figured $26??)

The order filled at 1149h. Due to the slow activity today my fills show up and I can see the 4 contracts in each of the charts for the respective options. The fill prices were 24 cents for the long call and 62 cents for the short call for a net credit of 38 cents. These were the bid and ask for the options so I lost the spread right away, which my 35 cent credit allowed. Seeing as I use the spread quotes as my basis I cannot complain about that.

That gets confusing when talking about the spread in the quote while placing a spread trade order.

I could have alternately placed the order as a market order and it would have been filled the same in this case.

As long as the trade expires while SPY is under $115 I keep the full $134.50. 21 days to expiry and Christmas looming I think I will be OK...even though I am only 4.3% off the current price. Not a large margin.
The total risk is $1074
The Return On Risk is 12.5%
The daily return is $6.38

My criteria may be as follows:
Spread = $3 ( The minimum anyway)
The credit needs to be 32 cents or better yo yield 10% for the trade given the current time line and SPY price. This produces about $5.25 per day. Perhaps if I aim for a minimum of $5 per day based on a 4 contract spread I might be in good shape overall.

This will vary based on a number of factors so I think that I should just concentrate on the 10% overall ROR and the $5 per day per trade to start. Most trades should be at least two contracts (four if you count them all).

Given a $5,000 capital base I could make four such trades for a $20 per day return which works out to about $600 per month. Obviously I am not going to get rich quick on this but that is not my goal, cashflow is and this is a great start at a cashflow strategy.

I am going to look at the sector ETFs next and see where their prices are. I think that a $20 to $60 security would be a better place to be buying options as I can pick up more contracts while allowing a larger margin between the strike and real price of the ETF. Perhaps 8 contracts with the same risk profile or 16 cheaper contracts out near the 10% area.

Off to lunch now.

Jeff.

Interesting gap play with a spread.

If I were to plan on placing a spread trade with SPY perhaps, only due to looking at those options of late, this morning's action got me to thinking. I checked the FTSE yesterday and this morning so I knew there was going to be a gap down in the S&P500 index and with the wallowing of late I would also expect at least a small move up into the gap.

Seeing as a spread (a Bear Call Spread as I find these are called) has two legs, the sold call and the higher bought call there should be no reason why I cannot "leg into" the spread. Actually, I might not be able to tie the sold call tot he long call after the fact with Questrade, I need to either try it or ask.

This morning the expected gap occurs, I already have a plan to enter a spread trade anyway so I look at the numbers.

The SPYLM 117 call traded as low as 13 cents. Perhaps I would have placed a limit order for this option through my trading platform at 15 cents...so I'll use that number.

Now I am long SPY at 117 strike. Time to wait to see what the morning brings.

Seeing as SPY has returned to $110 from $108.30ish the entire option chain has appreciated. My call would be up to 16 and 17 cents. A single contract would cost me $2 or $3 more now. No big deal.

Looking at my call to sell, 114 strike, it has gone from 36/37 cents to 57/58. Selling now, or even later if I chose) would put about $20 more in my pocket. That covers the commissions at least.

Obviously the protection is not going to move as much with the underlying prices due to the distance OTM so this may not be worth the effort but waiting for the direction following the gap certainly is. This serves to drive the short call price higher faster and make the trade more profitable.

Looking at the gap mechanics for a moment I would expect that the closing price last trading day would provide resistance...how much is unclear, except that there is a corresponding gap in October of last year that is just now looking at being filled. This makes this a great area of resistance and a great place to set a spread. The expiry is 21 days for December options so the trade is also very short duration, ideal.

So why I am sitting here writing about it and not doing it is unclear to me. The market is only open until 1300h so I will take a moment and run the numbers through my spreadsheets and see what I will trade today.

Jeff.

Currency Conversion and the Cost of Convenience.

I have been watching the US/CDN dollar bouncing about and have been itching to take advantage of the decent rate, without going through the horribly expensive bank to do so. This means a 45 minute drive to make the transaction in person. With the US dollar being reversely correlated to the S&P 500 lately I just watched as the market peaked and hovered this week. I figured my best bet was for a Wednesday conversion (pre US holiday activity) so I set up some appointments to make better use of the trip last week.

On Wednesday I managed to catch one of the lowest US dollar prices this year other than the mid October slump which I missed due to the bank account setup delays. I was even lucky enough to catch the low for the day and saved another 1.5 cents over what the morning quotes were at. It was nice to have the rep read me the price at the time and get a pleasant surprise that it was lower than I anticipated. As a result I saved over $550 compared to doing the transaction through the bank 's online conversion system due to timing and extra charges.

I ended up trading a bit more than I needed as I figured I should start to build up a small US dollar base to use for a planned holiday in the spring. Hopefully in January the dollar will still be at a decent rate so I can convert some more.

The cost of convenience is just not worth it.

Jeff.

The rubber hits the road...

Except that it is Thanks Giving Day in the states and I am not about to switch my cash over to Canadian to start trading Canadian markets for one day...then tomorrow is a half day in the markets. I guess I will take the weekend to mull this over and do something active on Monday or Tuesday.

I funded my Questrade account in order to be able to trade spreads, which includes iron condors even though they are only really two spreads combined Questrade will not treat them as one trade, and I understand why as I may decide to close one side of the trade and that splits them.

I used an EFT to fund the account, I think I placed the order on Tuesday and the cash is there today... that is quick.

Interesting question I did not ask the CSR or the broker the other day. They treat a spread as one trade for the purposes of using a long call to cover a short call to ensure limited risk to them...I expect that I may not be able to close one side of the spread...buy back the short call to reduce some exposure while letting the long call potentially gain value if the stock price is heading higher. The odds of this are unlikely though as a strike difference of 3 or 4 dollars is a substantial move for any index based ETF...which I am likely to be using.

Plan - M

I should have called it Plan - O as it looks like it is turning into a strictly options plan. I honestly don't see buying typical stocks for some time as I concentrate on an income producing cashflow strategy using only options. This puts my chart reading into a new light as I start looking for signs of rangebound stock activity rather than pending strength or weakness.

The biggest gains in a spread trade strategy are when the spread is placed ahead of a move in that direction as the options become more expensive due to the higher probability that the price will go through any particular strike. This also makes the protection more expensive and in order to keep the target reasonably high (greedy?) the spread has to be larger incurring a higher absolute risk value.

This is not an issue on it's own as long as the trade is monitored and closed before losses start to mount.

I need to investigate the mechanics of the spread trade and how Questrade handles and allows certain things.

Next up is to check the liquidity and price structure for the various sector ETFs. I think that diversification might be best accomplished by trading on various sectors with same sized trades in each or only place call spreads on the sectors that are looking like they are weakening while using SPY as an overall main vehicle. I may be able to come up with a scaled method that incorporates the performance relative to each other to weight position sizing appropriate tot he risk of volatility in each sector.

Did someone say "BACK TESTING?". I am glad I decided on Esignal when I wanted to get a chart service back into the mix...much easier to track multiple charts at the same time, especially with dual or wide screens.

Jeff.

Credit spread and cash required.

I signed back up for Esignal on the weekend, copied all my formulas back onto my new computer and took a look over some of the stuff I was working on in the summer.

A medium term trading plan was on the agenda and I was working on a 20 week SMA envelope idea to allow medium term trend trading both long and short.I think I will re-incorporate this into my newer plan.

I was considering setting credit spread trades based on SPY and I decided to check into the credit requirements for this. My gut said just be sure to have cash for the difference in strikes less the proceeds from the sale of the short call. The online CSR couldn't help other than to give me the link to the margin page that I came from. So I placed an example to tell me how much cash I needed...this all due to needing to know how little I need to fund the account with to get rolling.

So I ended up calling the order desk to get the information I needed. With a headspace in the possible complicated zone I had to shut up while the fellow explained exactly what I expected...DUH!

My example was selling the DEC 114 strike ($0.73) and buying the Dec 117 strike ($0.22)

Base cash is difference in the strike times the 100 shares per contract times the number of contracts traded.

$3 X 100 shares X 1 contracts = $300

Subtract the credit generated from the sale, in this case $0.51 X 100 shares and the cash needed is $249, this becomes my Maximum Loss Allowance. Of course the idea is to not need the MLA and to just pocket the $50 do do it over again. In theory I should be able to add another contract to the trading pool after every 6 single contract trades of this level...oh, less commissions. Make that 8 trades

Now, the cash needed is the MLA should the price go beyond the bought strike of $117 as it will cover the short strike at $114. If I close the trade prior to the expiration when it looks like it might cross over then I can reduce my loss accordingly.

Consider that I have $5,000 in the account, only as that is the minimum account value needed to trade options, not necessarily all cash.

Take any trade that has a $3 strike difference and figure that any credit from any trade is going to be in the 20% range of the MLA. I think I can pick far better spreads but this is a start.

Using these numbers:

$250 MLA per contract traded
$50 target profit per contract traded
$10 commission if carried to expiry, $20 if closed early
$1 per additional contract to expiry, $2 if closed early.

I could run 19 trades either single contract or any number up to the 19 contract maximum.

An interesting plan might be to start with the farther out trade, 30 days plus, as singles and add a contract per trade for each day until the maximum trades are reached.

I expect that I can get the better prices farther out given the right circumstances. In fact I bet that I could use the same MLA with the right strike and expiry to gain a larger upfront profit.

Optioneer essential does this but with a fancy proprietary indicator to decide the sold option to start with and the outside protection option is always a certain spread away.

The downside is that this plan is completed taxable. Why is all the fun stuff taxable?

Jeff.

Options expiration

Today is November option expiration day and I have one option that is expiring. This is a first for me but looks like it won't be the last as I have some in December that may go the same way.

The thing about an option that is at zero value is that it takes quite a jump in the stock price in order to get into the money or even just break even. I see that I have six that are at zero and four of them are December options, one is today's and one is January.

Obviously letting the time value of the option run it's course is not beneficial so I will be looking at other options as they near their various expiry's to gauge what the stock may yet to. Because I have been using a service to make these picks I have been relying on their selection method and exit timing for these. Over all in the last two years they have done well enough that I might figure that I can trust their decisions.

The key is "overall".

If I choose to bail right now I risk missing the opportunity of placing trades to make the gains that will at least pull my small portfolio back up. I have a number of newer positions that are at not bad pricing now. I'll give it a bit more yet. If this were a full money back guarantee AND I had not seen good results from their historical trades AND I had not committed most of my small account I might have already dropped the service in favour of going back to my own thing.

I had hoped that they would have had a better plan when the market was stalled but, not being able to sell options in my TFSA account has tied my hands on a few of the trade suggestions.

I will continue to track these trades and see where it goes though while still placing new trades

I will likely be sending some cash over to Questrade to set up for spreads and strangles next week.

No movement on the Optioneer / Strikepoint front as the numbers from yesterday were not good enough to place a new trade. The market was right back where it was when I placed the first trade so I will wait for a bit more movement in either direction or a shorter time to expiry.

Jeff.

S&P 500 and the Call Spread

I placed a spread trade with Optioneer this morning, I don't know if it will get filled unless the market kicks up at least to the morning open levels again, we'll see if it can gain back those 5 points.

Meanwhile I have decided to fund my margin account in order to give my own spreads and strangles a try. I could cheat and try to emulate the Optioneer but I doubt that would work given the different vehicle I will use for this.

First up is to look at SPY as a substitute for the S&P500 index. Right now the index is at 1105 or slightly less and SPY is at $110.70 or slightly less. I could choose other funds that track various markets if I wanted to, even give a run at the Canadian markets I suppose.

So. A call spread is the first thing to look at given the market situation as it stands, which is why I placed a spread call trade already.

SPY being at $110.70 I want to look at the call option chain to see where the best price differences in call strike lies based on my loss allowance. In order to calculate this I will choose $200 for a loss allowance for now, it may change.

A call at $116 strike is worth $0.59 to sell and the $118 strike is worth $0.30 to buy as
protection. This creates $59 in cash and $30 in cost for a single position, less the $20 commissions. The maximum loss is equal to the difference in strike prices 118-116=$2 (times 100 as the contract is for 100 shares) or $200 for the trade less the difference between the sold and protection calls, $59-$30=$29.

Total MLA is $200-$29=$171.

All I have to do is call up Questrade and tell the order desk to sell 1 December 116 Call contract for SPY and buy 1 December 118 Call for SPY. I am not certain about the limit order part as I haven't done this yet but I expect I can instruct the best price to accept...for example :

Sell 1 December 116 Call contract for SPY at 55 cents or better
Buy 1 December 118 Call contract for SPY at 35 cents or better

With this trade I would have to be willing to only make $20 if the prices only get met and not exceeded. Because these have to be placed together as one order they will not fill only one side but giving some allowance or lenience in the limit price gives them a better chance of filling the complete order. I am sure that it could be placed as a market and it would fill at whatever price but I am not sure how their timing will work out. I have, in the past, used the order desk and they have placed and executed trades immediately but they have been buying or selling a stock at market. Perhaps they will give me a quote on the spot and I can go with those numbers and decide to fill or not. I'll try this out once I am properly funded.

Obviously I need to look a little closer at the spread trade in order to get better prices for the spread or just figure on actively managing the trade once it is in place.

The MLA method is great BUT it assumes that my only plan is to let the trade expire in every single case, which is easiest and cheapest. If the chance of a loss grows I can always just close the trade for a small loss or a small profit based on the numbers at that time which would allow me to run a larger position or a larger spread.

The above example yields $29 less the $20 commission (two trades at $10) or $9. Hardly worth the effort. Using four contracts the return increases as the commissions only go up $1 per contract. Total commissions ($10+$3)x2 = $26. Total return $29x4 = $116. Net return = $90.

The MLA of this trade would be the spread value of $2 x 400 shares = $400 less the return of the trade $90 = $310.

The return vs risk seems skewed but the odds are in favour of the option seller so a higher risk is worth the effort...maybe in this particular example the risk is a little too high but that is where option selection is important. Trying to sell high value options and buy lower value increases the return but can increase the risk if widening the spread is how this is accomplished.

I think that if an index ETF is going to be used then just watching for the best price discrepancies is the best bet and buying when the quote spread is smaller.

Jeff.

Credits, points and trades.

My TFSA account is up another $150 or more as the market surges ahead some more. I have AEM sitting at zero as the option expires this week. I doubt that it can surge enough to bring this back to reduce the loss at all... a $1.70 option is a bit more than I would allow normally...now ... but this was a legacy from another service that I cancelled but I will still count it in my tally.


My first Optioneer trade was executed today. It filled at the settlement price so the target is on line with 1.9 points even though I allowed 0.3 points for it to fill I didn't need it this time. So my daily target return is $12.41 over 31 days.

Now, I am aiming for $10 days... I had used DDD to describe this target (DecaDollar Days) but the easiest way to view this is as points or credits (saves getting confused with points in the market). I don't know why but dropping a zero seems to make the whole thing feel more like a game but it certainly makes the math less onerous though.

Bear with me on this one as I ramble one using a credit and trade system rather than using dollars.

Right now the gains are in points which are worth $250 per point. I like 1.9 as it creates, after commissions, $397. For a 30 day trade this makes a 0.063 point daily gain or $13.23 daily gain. These are not round numbers. The trades are worth $4500-$4700 per trade, returns are in the 8.6% range which is 0.286% per day...again, not nice round numbers. As much as I like to play with numbers I also like to simplify things greatly.

In the name of over simplification let's break this all down.

Every trade cost between $4500 and $4700 to execute and usually have similar targets for gains, so let's just call them all "trades" as they are mostly identical. I figure that my capital can be broken into the number of trades I can manage with it so at $4600 per trade $13,800 would yield three trades. This allows a little leeway for trades that require a bit more as I actually have $14,000 in the account.

For every trade my minimum target is a realized $10 per day. Like the trades this makes every single day for every single trade the same. Take it farther and $10 is equal to 1 "credit".

Every trade yields one credit per day that it is active. A 45 day trade will yield 45 credits or more, a 30 day trade will yield 30 credits or more. If I close a trade early it will only be if it has seen 1 credit per day unless I am closing to reduce a loss.

I have 3 trades in my account at any given time and I have a goal of 1 credit per day per trade and I want to have these trades in play for as much of the time as possible. Ideally this would have three trades active each month yielding 30 credits per trade per month, or 90 credits per month. The credits per month are not as important as just having each trade produce a credit for as many days as possible.

Keep in mind that a trade is on average $4600 and a credit is $10 so each trade's value is actually 460 credits. In order to place one more trade in play I need to have 460 credits in profit.

At 90 per month that is 5.1 months.

Add that new trade into the mix the monthly becomes 120 credits which lets me add another trade in 3.8 months.

At 5 trades and 150 per month I can add another trade in 3.1 months.

Considering this is a minimum target (we'll see what reality brings) that equal going from a three trade capacity to a six trade capacity in (5.1+3.8+3) 12 months is the very same as doubling my money in that period.... to the part month, and I didn't plan it that way.

I see a few decimal values in there and trades expire only at two times each month, third Friday's and EOM but I can close a trade at any point as long as it meets the realized 1 point per day minimum so I can actually close a trade early and reuse the trade for another trade that is ready to enter. As long as the trades are active and producing 1 credit per day it does not matter if I close a trade early or let it ride, it will always be producing credits.

I checked with the broker on this last point. If I close a trade today the cash is available to me to trade with on the same day. If I am letting a trade expire on a Friday and I want to catch a 30 or 31 day trade on a Thursday they will allow me the margin use for the one day overlap. I need to go over a calendar to see the day of the weeks on some of the EOM expirys and where the minimum 30 days would fall with regular expirys. I did work out a schedule that allows me to keep trades in play constantly, missing only a day or two here and there, but it needs some work and is rather complicated. I'll try to put it in a format that works here and also try to keep it simple. In reality I doubt that I need the calendar as I can just be sure to roll the trades over quickly and use the possible one day overlap to ensure this happens.

The real issue becomes placing trades to keep some sort of diversity as three trades expiring at the same time means entering three trades close together and the market may not have moved enough to really do this safely. AS much as the number of loosing trades should be very small it would not do to have three all in a losing position at the same time. This gives more emphasis on exiting early to take advantage of market moves as they happen. Again, just observing the credit rule is important here.

Still a work in progress and perhaps not exactly what the Optioneer guys had in mind when it comes to using their system for trading.

Jeff.

The List, Goals, Tools, Strategies, Rules and Services

Goals

1.5% per week compounding monthly on average (1.37% will double the account annually)

1.5% weekly is 0.214% per day, 1.37 is 0.195% per day

Current goal is

1% daily return based on trading days only (0.714% based on 7 day weeks = 970% per year)

Keep intraday chart watching to a minimum

Keep the working plan simple, relatively speaking



Indicators and Tools

Pivot points

Support and resistance

Trendlines

100 sma bands

Point and Figure charts (P&F)

Volume Weighted Moving Average (VWAP)

Williams %R or some oscillator that is similar

Strategies

Counter Trend Positioning (CTP), play the up and downside of a trend pattern

CTP breakout strategy

Multiple timeframe charting

Sector diversity



Rules

Maximum Loss Allowance (MLA), calculate and use stops or set option loss trades

Target setting and profit taking with stops for move allowance or market for strength moves


Services

Stockcharts.com or Esignal.com for general charting (paid)

Finviz.com for news and quick trend lines and any virtual portfolio tracking (free)

CBOE.com for option chain quotes when not in Questrade (free)

Questrade for general trading (broker)

Strikepoint for Optioneer futures contract strangle trades (broker)

Plan M

I decided to pick various good things out of each of the strategies that I had come up with and tried out in the past...which means a bit of review of all my old posts and charts.

The final version is going to be based on one of the oscillators that were among the most promising, half of the Counter Trend Positioning strategy, a sprinkling of Point and Figure charting and a heavy dose of option picking.

In the past I tried to make oscillators work for every situation, but they don't. Most work well during certain phases of the stock price trend and the trick was to know when they stopped working and change the strategy or move to a stock that is following the pattern. While it could be said that it is "curve fitting" to make a system work for a particular stock but I feel that curve fitting is exactly what is needed. I don't feel that it is a bad practise as long as it is used in the correct context. Fit the system to the trend and watch for the trend to setup that the particular system works with. Uptrends are the easiest to play as things are easy, buy long stocks or options and let them ride to catch various percentages of the wave as it tracks along a trendline.

Then the trick is to find the next trend system, the one that fits the next profile as the stock transitions. Perhaps this is the horizontal consolidation pattern that stymies the typical trader as there is no up or down trend in place. This is a good time to use a good swinging oscillator to trade long AND short or calls and puts. a better plan might be to use an option strategy, call or put spreads or even a strangle... the iron condor seems to be the easiest to setup.

Playing the downside can be tough as the downside is typically fast and furious and the main move is easy to miss and is, very often, not forecastable.

Ultimately a single stock could be used to trade successfully, I believe. Daytrading is often based about one stock or index or even just a select handful. They get to be familiar and often easier to spot when a change in trend is occurring because of this. Having said that I do not plan to only trade one stock as trends are easy to track.

Next up: review and idea selection... rules, strategies, indicators etc.

Jeff.

Spread trades and Questrade

Now I am ready to start placing spreads and strangles through my Questrade account...except for one factor, I need cash to bring my account up to $5,000 minimum to allow these style of trades...still a far cry from $25,000.

The setup is easy enough. Select a sideways moving stock and pick a range that it looks like it will not break through on the upside OR the downside.

So a stock at $50 I might select the Dec 55 call to sell and the Dec 60 call to buy for protection then run over to the put side and sell the Dec 45 and buy Dec 40. I picked a sample out of the blue and found that the combo would fall something like this:

Protective call: $0.15
Short call: $1.10
Credit the difference as potential profit: $0.95

Short put: $1.60
Protective put: $0.40
Credit the difference as potential profit: $1.20

For a single trade (four option trades) the take home at expiration, December 18th, would be $2.15. Subtract the commissions for the four trades of $10 each, so $40, leaves $175 profit. The commissions are only $10 each as the options are left to expire whereas they would be $20 if the trade were closed by selling/buying the options to close the deal.

The breakdown for varied position sizing would be as follows:

1 contract per leg: $175 net
2 contract per leg: $386 net
3 contract per leg: $597 net
4 contract per leg: $808 net

I checked with Questrade and I need to place the call spread and the put spread as two separate trades. I couldn't see how to do this with the software... I need to do this with the trade desk over the phone, there is no other way at this point. At least the $25 phone order charge does not apply. I did not check to see if limit orders are set, credit/debit targets are used or what... perhaps they only use market orders which would work OK as I can see the quotes live as they place my order and that would be OK, a bit cumbersome though.

Optioneer makes it so easy as they are providing the proprietary software to select and place the strangle orders as one order so it is nice. That may spoil me for using any other broker setup. I do need to fund the Strikepoint account so perhaps I will syphon off some funds that I was going to direct there towards my Questrade margin account as well and get it rolling along.

(a comment about Strikepoint and Optioneer... the commissions are per trade and each trade is a group of 1 each of the calls and puts, 4 trades in total, so placing multiple trades is more expensive on a dollar for dollar return...and the futures contracts tie up $4600 or so per trade. The scale is different and almost not comparable as with Questrade as they charge the commission and only $1 per contract to increase the position size...while the result is not as fancy it is a better return when scaled up to be comparable if the trades are left to expire and not closed early)

While the Optioneer/Strikepoint setup has a performance guarantee my method does not so I will have to seriously consider if I want to do that or not before committing to it. I need to work out the worst case scenario if the Questrade strangle goes awry and determine how bad I want to manage my very own strangles.

Jeff.

Man Hours = Dollar Days... a novel twist on cashflow

In service industries the idea of man hours is well known and used all the time in billing and calculating costs. One man for the day is 8 man hours...two guys for the same day is 16 man hours. Seeing as this relates to cashflow in the industry, charging based on man hours is an efficient method of billing, I figure that I can apply something similar in my trading to use to figure out cashflow.

A normal trade with Optioneer, the strangle, creates a certain target dollar return for the trade which can be divided into daily returns... although the actual return does not work that way until the trade expires. So for trades a 2.00 point target is common. The cash return is 2 points X $250 or $500 less $78 commission or $422. I was aiming for no less than 1.9 points or $397 net, for an average trade this results in a $10.72 return per day in the trade.

Consider that I was happy with a minimum $10 per day return at that point then I should be equally happy with any trade that produces a $10 or more return per day no matter the target or the duration.

Back to the Dollar Days. If I consider $10 as the standard daily cashflow unit, as cashflow is more important than ROI even if one sort of goes hand in hand with the other, then I can treat the "cashflow unit" as "1".

The DecaDollar Day is the new unit... DDD.

In order to keep at or greater than the new DDD on all trades I have a nice colourful chart that I do not have time to figure out how to post here right now. Suffice it to say that there is a nice linear relationship that creates a nice easy target and lenience combination to always produce a trade that can generate a $10 per day return. The minimum point target for each duration is as follows:


Days / points

30 / 1.55
31 / 1.60
32 / 1.60
33 / 1.65
34 / 1.70
35 / 1.75
36 / 1.80
37 / 1.80
etc...

So if the trade is 35 days to expiry and the current target is 1.9 I can place the trade and set a lenience of 0.15, or accept a 1.75 point fill.


Using a DDD in a similar manner as a Man / Hour I would just have to figure out how much cashflow I want to see for a typical period. If I were to aim for a $10,000 year I would divide by 10 to determine how many DDDs I would need...1,000 DDD. divide by 12 for the monthly requirement, 84 (I round up). Considering that there are about 30 days in a month I would need (84/30) 3 concurrent trades each providing 30 DDD in that 30 day window.

Seeing as that would only take $14,000 to trade the potential here is good and steady income with relatively little outlay. Of course for each 460 DDD I can add another trade to the mix. 460/37 (average trade duration) is every 13 trades.

Some trades will fill higher and there may be a few losing trades so I might expect those to cancel each other out. As none will fill lower I may be short by a trade here and there. Also I may exit trades earlier when the over all target is close to being met which may drive the DDD unit value for that trade higher than the typical $10 and allow me to put the money in the next shortest trade right away. Keep it rolling.

I know, all this can just be done with dollars, but I had fun playing with the idea. It boils down to $10 per day for every trade as a minimum, adding trades when possible and sticking to the shorter term trades of 45 days or less as the market will allow.

I have now run out of stuff to talk about with regards to Optioneer, I have set a new trade for tomorrow and will plan on another next week if the market moves enough to warrant a new position at a new level.

Meanwhile, lots of work to clean up tomorrow and perhaps on to setting up Plan M next week.

Jeff.

Strangle targets

I did some serious spreadsheet work tonight and revamped my Optioneer strategy as far as entry levels are concerned.

I had been figuring on aiming for the 1.9 point minimum target, or $397, and anything over that I would allow the difference to add lenience to the trade (the amount that I let the broker use to meet the bid during the day if needed to fill the trade). A 2.2 point target could get filled at 1.9 or higher which is a 0.3 point lenience. Anything over the 1.9 would be considered a bonus.

I have not been getting orders filled using this so far, even when I had a 2.2 point target once, so I decided I had better rethink how I view the targets. This is going to creep over into my options trading in the TFSA I am sure as well.

My goal, or ultimate plan, is to be able to replace my income allowing me to choose what I may want to do for "work" but not necessarily just do nothing. Nice thought but retirement to me is not just out playing golf and trying to manage a fixed income getting chewed away by inflation.

Cashflow is the key. I determined my daily cashflow target, conservatively, and figured out how much capital I would need in the Optioneer strategy in order to allow enough concurrent trades to produce an average daily before tax profit and came up with about $51,000. Of course I would want to figure some overhead in there for a few losing trades and perhaps a bad run of not getting fills, so add $10,000. This is based on $10 per day per trade with each trade averaging a 37 day duration (trades are between 30 and 45 days long)

$60,000 would provide enough cash to fund 12 trades, or 6 double lot trades. How the market is moving will determine how many trades I will need to double or triple up on in order to remain diversified and still keep most of my capital in play.

Things that I have not figured into this, which amounts to my fudge factor against me would include tax claims of interest on debt (figuring I can pull a Smith maneuver or something similar) and any other items that I can claim against my income tax. It also does not count compounding and increasing the trade size, as if I were drawing the cash off the account and keeping only the $60,000 to work with.

My plan would have me continue to build the capital base in addition to working the TFSA with options, funding my DRIPs that I previously setup, perhaps dropping some cash into the RRSP to get some immediate tax sheltering on some profits. Basically working many angles at the same time to produce a varied source cashflow.

So, my spreadsheets have me moving my target quite substantially to my surprise.

A 30 day trade could target as low as 1.55 points or $300 over 30 days
A 45 day trade target would be targeting 2.15 points or $450 over 45 days
Roughly each day under 45 the target can drop by $12.50 and I can still provide a $10 minimum daily average return. There will be times when cash cannot be immediately reinvested as well as times when the target is higher than my minimum and these two factors should cancel each other out.

I placed a trade for tomorrow with a target of 1.9 points. With my new calculations, and the trade being at 36 days I could accept 1.80. Friday I could accept 1.75 and on Monday as low as 1.60 points.

I could also add a trade doubling factor in here. Once the expiry is less than 37 days (the average expectation) I could double the trade if the expected target is higher than my minimum. This allows for the capital to work quicker for me... I will not consider this until I have enough to manage 5 or 6 concurrent trades though. With my lower entry targets these trades would be almost sure to fill and I would not need to, but could, tweak the call protection to add the 0.15 points as well.

Jeff.

More pruning

I dropped another oversized position today...a loser as I bought at 90 cents and sold at 20. According to my current plan I would have only bought one contract and I would have just held it but seeing as I was leaving $80 on the table and not just $20 (I bought four contracts) I decided best to cut and run this one. It was the February option so I had some more time and I would have left it go for that. I still have a few larger ones left to deal with...each in their own time.

I missed a profit point yesterday on one trade as the option doubled on a spike. Had I set a limit order for $1.50 I may have nabbed the 100%. I missed the quick spike and could have exited with 45 cents but I hesitated even as I saw the stock price action setup for a drop...the option dropped 15 cents in VERY short order. The move looks as if it will continue so I will sit on this one, it is a March expiry so there is lots of time left yet and it is currently on a gap and run past an older important resistance level.

Entering the data in my spreadsheet has my positions, overall, hovering.

In my Optioneer side I tried something a bit different by adjusting the spreads on the strangle to increase the target price. I still did not get the order filled though so I will try the same thing tomorrow. Had I just placed a typical order and allowed some lenience I probably would have been in a trade...but the target was lower than I want.

I am considering lowering my entry target by 0.1 point...I am wanting to get two trades set for the December expiry and another for the December End Of Month trade. Adjusting the spreads results in the cash allocated to the trade dropping a bit and the exposure (potential maximum loss) increasing quite a bit. I never plan on letting a trade hit the protection levels , or even the inside option levels, so the additional 5 point spread really only results in my cost to buy the protection lowering some.

Still no Plan M stuff to talk about. I haven't even setup my charting subscription yet...either renewing Stockcharts.com or starting an Esignal EOD account. I will need at least one of those to plan that next strategy.

Pretty boring stuff lately.

Jeff.

Stats and tomorrow's trades

I found a moment to update my stats. Seeing as I realized a few losses I wanted to get things up to date. While I still have a few languishing trades I still feel pretty upbeat about the whole exercise. I am getting good feedback from the service I am using as they are analyzing their approach and modifying the trades accordingly. Right now they are taking a slower approach to putting on new trades and taking small profits while there is strong moves to take advantage off., which is good as I was running out of money to keep up with them even though I was using minimum sizing rules. I now have some free capital to use as trades become available.

Should the market turn down again I am curious to see how they approach the trades. I suspect that another form of short option combinations may be used in which I will once again have to decide which trades to take in order to only go long.

With today's large gain in the S&P I have a hard time envisioning a sharp downturn in the immediate future. I might suspect that a sideways move may be more likely, perhaps meet the most recent high and use that along with the recent low as a trading range for a few weeks. That would suite me fine as it would put the Optioneer trading in very good position to make solid low risk trades.

Speaking of Optioneer. I had decided on a target entry point of 1.9 points or higher (at $250 per point that is $397 after commissions). I have placed trades for that target and higher and have come away empty handed. the shortest trade term is about 30 days and we are at 38 for the current offerings and the targets just went lower due to today's surge. I am hoping to see a more moderate gain tomorrow in order to drive the target for Wednesday a little higher. I can tweak it up by 0.15 by adjusting my trade entries (increasing the call spread of the strangle by 5 points) but that is about it.

So, basically I am in a holding pattern for a while. Ideally this would be a prime time for me to get back to work on "Plan-M" but I have a busy week planned at my real work. Perhaps next week.

Jeff.

Short on time

I don't have time to update the performance page but I closed a small gainer today and see that most of my positions moved up on the stock price side of things...that does not always equate to gains in the paper profits of the options though...due to some of the very small delta values. All in all I see the portfolio bounced back another $155 though. Every little bit helps, but paper numbers can change quickly.

That puts me at 17 winners in 23 trades so far and my paper loss is eroding as I take these small gains.

Oh, I checked a currency exchange service today and I am now kicking myself for not using them the first time around. I get a whole 4% reduction in conversion when compared to the bank rate.

Today, late this afternoon I got a quote of 1.063 compared to the bank at 1.104. That is $410 difference on a $10,000 purchase. Definitely worth the 45 minute drive to me. Right, transactions need to be in person, considering that I usually have to schedule this drive once a month anyway I can work it into my cash conversion schedule.

Downside, they hold quotes for 30 minutes only so I need to buy USD with whatever my CDN balance is rather than choosing how many USD I want and just writing a cheque for the necessary amount as I need to bring a bank draft in. I get a better rate for transactions larger than $10,000... so I need to save my pennies to save more pennies.

Jeff.

Long Call and Short Put...Debit / Credit trades

I am still slowly weeding my positions and taking small gains where I can and holding the rest. When I first bought some of the options I did so based on suggested call / put spreads. These are positions that involved buying a call then selling a lower strike put to fund the trade. Seeing as I cannot sell naked puts, which these would be as the call does not in any way cover the put, I must decide if I want to buy the long call on it's own. This is not necessarily in my interest as sometimes the position will be closed based solely on the money generated but the sold put when the call does not gain. Not all of the trades are of this type, most are a combination of long calls and some larger debit spreads.

So, I decided to not place any call only trades when the combination produces a credit or a very small debit right off the bat. The downside is that the performance recorded for this service is somewhat based on these trades. buying a 90 cent call, selling an 85 cent put yields a 5 cent debit so if the call gains anything I would expect the put to drop in value.

For example the call goes to 95 and the put drops to 80. This drives the profit quickly and a 5 cent move in each produces a 200% gain should the position be closed. For me that would mean I sell the call for a 5 cent gain or 5.5% gain. Given my current rules about position sizing I would only buy one contract at 90 cents so the commission would cost more than the profit.

I had that happen today, although I made a few dollars the call rose only 35 cents. The call was purchased for 85 cents and sold for 1.20.

For me I made a gross profit of 41%, or net of about 17% yet the full position as suggested made at least 300% as it was based on a 15 cent net cost and turned 65 cents...433% actually.

The most interesting return numbers occur when the put sold is worth more than the call bought. The trade gives us money at the open then produces more profits as time progresses and the call appreciates while the put depreciates. How do you calculate the return when there is no money used to put up the trade in the first place?

While I would love to be able to make these trades the risk inherent in selling a naked put is more than a little daunting. I would want to be OK being put the stock and either holding the stock for a future gain or just turning it over to clear up the losing position.

So until I amass enough capital to fund short puts I will keep plugging away and selecting some of these trades for my long call only portfolio.

Jeff.

Cleaning house

Today I did a little house cleaning in the option position department. I had a few oversized positions that I wanted to pare but they were languishing in the "Gee, look how much I will lose" zone. One $4 option was down near $1 for a while, today it made it just over $3. Seeing as I take a wait and see approach to judging where the market may head next I decided to drop a few while the dropping was not so painful. Some of the expirations were nearing as well, December and January...one November but it has zeroed and I MAY actually see a jump, although I really doubt it. It was a leftover from a previous service trial but I will count it in with my general trading numbers.

I did close another for a small profit as well.

Now, I cannot take full credit for these as the service I am using also pegged them for house cleaning but they were ripe regardless. I have been watching them closely and aiming for a small bounce. The winners I took out yesterday I did before the advisory and for more than they suggested I could get. That just reminds me that nothing is completely brainless...or cannot be improved upon by thinking things through and monitoring the situation.

My spreadsheet certainly helps in this department as I have the expiry count down colour coded by number of days left so the near term options get flagged as they hit 90, then again at 60 and once more at 30 days out. Under 30 days they are in serious need of some hands on monitoring and should already have been exited if they were in a profit position. The only reason to hold a position in the last thirty days is if I sold the option, not if I bought it.

I still have a few that have zeroed out but they are not the largish ones, thankfully.

My realized loss today was $175 including commission costs. The main point of getting rid of these, other than to cut some losers loose is to free up some capital as I was all in up to yesterday and had to use some of my margin account to add a couple of positions lately...that is not a problem but does mean possible taxation, something I am trying to not have to deal with in this trade setup. That loss was for four losers and one small winner.

Meanwhile, over at Optioneer, no trade set for today, the target was under my minimum but I learned a few things while emailing back and forth with my broker...something that is hard to accomplish with a discount online broker.

Plan M is still in the back of my mind...my Stockcharts.com subscription had expired so I need to sign back up for that before I can do any substantial work on that plan. I might look at switching my charting back over to Esignal for delayed information as they have some better tools to work with that might be advantageous for me...even if the charts are not wuite as nice looking. Scaling the chart to allow head room is a bonus as that has always been a bit of an issue for me.

Jeff.

EOD numbers

Well I closed two trades for some nice gains today ahead of the service recommendation. In both cases I already had my stop orders in place before getting the email to close the positions for profits.

One was closed for a 126% profit and the other was 89%, net. Even in the downturn there is profit to be had...although the day was pretty good as the S&P took a nice jump.

My other positions regained another $227... although that is after removing the winners from the calculations so the number would be over $300 if the gains in the closed trades were considered.

Oh, the service recommends limit orders at particular prices but I like to use stops once I reach a certain point then move them up tight to the bid if the price moves up any more. In one case I gained and additional 5 cents and the other 15 cents. Considering that I may have missed out if the limit did not fill and the price dropped I preferred the stop method. Had I just placed market to get out at the time I decided to consider closing I would have still received good returns as well.

I will update my stat page today I expect now that I have some closed positions to note.

Jeff.

Funny day today.

I started the day with a mixed open followed by most of my positions heading up...the stock prices anyway as the option prices don't move that fast when they are way out of the money.

As of this moment every single stock, with one exception, that represents the options I have positions for has started moving up, from yesterday's close anyway. DPS was the worst as it had dropped $2 off the start and is now back in the 50 cent under area...not a bad recovery. The worst about that is it is a new trade...BAH!

The S&P is up overall and has surpassed yesterday's high...so we have a higher high and a higher low... perhaps this is the re-assertion of the uptrend for this year as the S&P comes off of the low trading range and crosses above the 50sma...yesterday's resistance and today's support.

Whatever.

I now have 7 option positions that are either at breakeven or positive which is better than them all being in the red. I'll run the numbers after the market closes today and see how I am making out.

I placed an Optioneer trade last night for today's trading, I doubt the order will get filled.

When placing a trade I choose the market, the style of trade and the size of the order. Then I decide how much I am willing to bend in order to have the trade filled. I am aiming for 1.9 points as a minimum and, as a full point is worth $250, that makes a trade target of $397 after commissions. If I allow 0.1 points I may give up $25 in profits to give the broker more room to move, basically it is a limit order and I allow more limit room, or a lower profit target.

At 1.9 points I will allow no room, or leniency as they call it, but as the point target goes up I will allow more room according to the difference in my target.

1.9 = none
2.0 = 0.1 or none depending on the market and my desire to make the trade
2.1 = 0.1
2.2 = 0.2
2.3 = 0.3
2.4 = 0.4

The largest I have seen is 2.4, which is $522 target. Sometimes the orders are filled at the target or higher, sometimes lower and sometimes not at all due to being too far out from the allowed leniency.

In my testing I saw the average target was $414 so the tendency is toward the smaller side. Depending on how often I get filled with this method I may have to lower my minimum target. The interesting thing about that is that I can also lower the timeframe that I am willing to be in a trade.

For example, today's target puts me at $397 over the next 45 days....$8.82 per day. I could choose to take the same target but not until the time to expiry is down to 35 days or $11.34 per day. That increases the time return on my money and keeps me in a shorter trade, which is actually safer as the market would have to move faster and harder in order to cause me to lose any of the target profit.

The other difference in the time trades is the annualized return. the 45 day trade vs the 35 day trade would be 70% vs 90%. So if I always traded in the 35 day range I could force my cash to work harder for me as I could turn it around quicker. I suspect that I will have to allow a greater leniency as the time to expiry shortens in order to accommodate the greater volatility as the expiry approaches. This may offset the advantage. Having said that, I will always take the largest return and the shortest timeframe.

All this is nothing proprietary, this is just the nature of options and strangle strategies, time is very important.

Jeff.

Cherry picking to sell a serivce...some ramblings about Plan M

I get lots of emails from people trying to sell their service, that comes from doing tons of investigating of a variety of services while scoping out their plan and method and, as it turns out, even try some on for size.

I am down to one advisory service now...I will wait until after this pullback is complete to give a final comment on it.

Suffice it to say that I have not stuck with any other service that I tried and I checked out far more than I tried.

Today I received an email from one that chattered on and on about a pick that is currently at the 27% return mark. Now I must admit that the dividend yield, due to the purchase price, was something like 21%...but high yielding stocks are easy to find right now I suppose. I have not been looking as I do not have the capital to buy and hold a stock for a good yield.

I usually skipped the emails altogether that made claims of success based on a single position, usually, but not always, an un-named one. In order to find out what the trade was I would have to sign up or at least click on their link... oh, do they mention that they get some sort of payback even for that?

If I were to decide to sell a service, newsletter...or whatever I could very easily cherry pick some of my picks and come up with some decent winners. Of course I could ignore the losers and really paint it nice but I don't really want to do that.

Since I have been playing and trying to stay within my cash allowances while picking trades and strategies I have necessarily restricted myself to trades that work for me in my situation, otherwise I would have been wasting my time.... of course if I chose to sell information I could virtually do the trades and pass them about and just draw in cash for the information. No restrictions on valuations, position size, loss allowances... I would be willing to bet that almost any of my more tested strategies would have been profitable in a virtual situation. I know they mostly all backtested very well.

That is not my thing though. Due to playing with options now I can widen my scope so some of the nicer picks are available where they were not previously. Loss allowances can be built into the option trade easier than with a $60 or $70 stock trade.

This, of course, leads me back to my latest "Plan M"... which is in the works... but then even that leads me in another direction again.

Focus, simplicity and repetition will be the new keys.
Small position sizing and tight loss allowances the regulations.
Trend channeling and predetermined targets the triggers.
Put and call options the medium.

Even though my TFSA is committed in full I plan on aiming this at a $5000 account size anyway and providing for at least a 15 to 25 position portfolio... even with only 32 stocks (or so) options allow for multiple time frame trading, rolling positions and profit crystallization...some things not possible with a stock trade. The "headroom" allows for an initial drawdown without affecting the number of positions possible as $5000 could hold as many as 35 active $120 positions and allow for commission costs

Well, enough babbling for today. Hopefully I can post some trades by early next week, or at least some ideas applied to some older picks that I did not follow through previously....or maybe even get some charts back in here. I do like playing with charts.

Jeff.

Plan C...or maybe I'm on M by now...

Without going into detail I started trading with one plan in mind, plan A, and have since changed plans a number of times. In some cases one plan merged into another so there was no real delineation, just a progression of changes that resulted in something different enough that it could be called plan B.

There have been some parts of each plan that tended to stick, particularly the money management rules and loss allowances. Today I am looking at where I am at overall and I am satisfied with my progress except that I am not using my own system or plan in selection and execution of my trades. While that is disappointing, perhaps it was inevitable.

I mentioned yesterday that my portfolio of options had returned some of the paper losses, today, so far, it has returned another $120. Once again, taken as a dollar amount it does not sound like much but the percentage is a reasonable re-gain.of about 2.5% or 8% depending on how I choose to spin it. My zero value options are still zero but the others that had some value left are returning here and there. I did not place an Optioneer trade as the target was just a hair too low for my liking.

I have entered a few more trades as I would hate to be at the bottom of a pullback and not be there when some nice new positions rally. Trading someone else's plan does involve making every trade... if I stopped right now I could very easily rack up some losses and not take advantage of new positions making good gains from this low point.

So all in all I like the place that I am at in my trading right now.

Having said all that I am pining for my own trading plan. I am hoping that a break from playing with my own plans will give me a slightly different perspective...or return one of my previous perspectives that I had for a while. I still like the idea of using a handful of familiar stocks and keeping the trade entry trigger or indicators extremely simple. Seeing as most of my cash is allocated now, I may try some paper trading or do some curve fitting to select a method for my next foray into formulating a trading plan.... I must be on plan M by now.

I figure that I should do dome targeting... four high volume stocks from each main sector...that makes 32 depending on how many sectors I choose. I will stick with the eight main ones. Set up each sector separately, do a bit of loose backtesting to get a feel for the S&P correlations and temperments. Then apply one decent indicator (not MACD, it never really did it for me) and stick primarily to trend lines again. Maybe go back to P&F charts as they were dead simple to work with.

So, Plan M it is.

Jeff.

Nail biting...if i were the nervous type

I read the opinions of all the talking heads, economists and experts and their take on the market now....NOT!

No, Every time I read a report from one source it is refuted by another. The market is going up, the market is going down and a few that say it is going sideways. My take is always that the market is going to do whatever it is going to do regardless of what anyone says about it...to a point.

Some government announcements, large corporation reports and sector specific activity can obviously affect the market, or the corner that the information release may have bearing upon, but it is very difficult to determine what will actually happen.

Now, I see that there is evidence that the market has reached an intermediate peak and may head down due to a lack of buying enthusiasm to continue to pay the asking prices quoted.... or perhaps it is just taking a breather and will consolidate for a while before deciding to head back up. The current uptrend line has been broken, the last support level may now be resistance and the full moon has peaked and is now waning... who knows.

If I were the nervous type I would be biting my nails. I have a vary large portion of my small accounts tied up in option positions right now, in the neighbourhood of 25 or more, and almost all of them are down, a few are actually at zero. I decided last week that I would continue to hold these positions as many have long expiry dates, one is over a year and many are February and March...plenty of time for a rally in those positions. My one November and a few December positions do not hold much hope, but that is the nature of the game.

What I am nervous about is not having more cash to allocate to really good buys as they become available in the coming days. My overall account total, even though deep in the red, has come back $300 today alone. That is a good sign.

Hmmm... consider that an option near it's bottom has a very low delta. A small move in stock price has little bearing on the option price until the stock returns nearer the strike. All of my current positions are OTM so a return of $300 is considerable and could be treated as a gain of somewhere around 5% based on my total original cash. Based on the current value of the account due to the large drawdown (unrealized yet) that same number might yield a 15% return.

It's all about how I play with the numbers. My overall performance has not changed, my daily average is down due to the fact that I have not cashed any winners but my real gain is still intact. Given the drop in the market and the likelihood of a rally, at least in some sectors or stocks, is reasonable I may yet improve my numbers while mitigating the possible losses.

There is a certain amount of satisfaction in having already accepted a plan regardless as to whether it will profit or not.

On the Optioneer front I placed my first trade on Wednesday for November End Of Month contracts and did not get the order filled. Another placed on Friday for Monday's open also did not get filled. I thought that being able to place my order for the next trading day right after the market closes (soon after anyway) is very interesting but was disappointed that I have no open position yet. Now I will have to wait for a good December expiry trade to materialize.

I have forwarded another cheque in order to allow up to three concurrent trades... I determined that I may require up to five in order to take full advantage of the trade opportunities based on my backtesting results. Once I get things rolling along I will probably fund this up to the level that I feel necessary to take full advantage of the plan.

This is not my typical trial run with a few hundred dollars on the line though as each trade is usually just over $4,500 in value... Put another way, that is the cash required to place the strangle position given the margin allowed. In theory I could lose the entire amount and have seen, in my backtesting, where the loss can go from smallish to absolute in one day... mind you that is near the end of the trade period and the position would have been closed before that point...but the possibility is always there, just not nearly as likely as the regular gains.

I have also seen the trade go from a large loss to full target gains in the last day of the trade...so it does go both ways.

Right now I expect to see today's end of day numbers soon to determine if I will be placing a trade for tomorrow morning's open. As soon as those numbers are in I can take the full 5 minutes it takes to determine that the trade has a large enough target, a short enough time frame, and far enough from my other trades (in S&P points, when I have other trades on the go anyway) for me to take it.

I have set some rules to allow for a certain target for each trade. I did not use them in my backtesting, nor did I account for trades not being able to be filled when desired. I figured that if the trades did not get filled, occasionally, that would be offset by the fact that I couldn't take every setup due to lack of huge funding. I did allow for lower fills and used some smaller targets figuring that would give me the needed "fudge against me" factor.

Jeff.