Since I am now no longer real time connected I am feeling like old times, for me, when I had to press the refresh tab to get up to date quotes and not see the charts and the orders and executions flowing. It is quite a step back.
Having said that, this change will force me into an end of day mentality which should be better for the trading style I am looking at shifting towards in future.
Today I placed a couple of orders based on yesterday's closing prices plus a little bit of breathing room and was filled within the first few minutes. Straight stock plays. Nice in one sense as there is no real time constraint due to time decay at least. Small priced stocks, both less than $5 to let me buy a larger position and see breakeven earlier (commission consideration here)
I am expecting the market to rally somewhat over the next short term as the S&P is bouncing around the old gap levels from August of 2008...August 6th to be precise. The entire time since September 18th, 2009, when this old gap range was re-touched, has seen the gap range as a bit of resistance initially, almost not worth noting. Since November 12th it turned support as it has been regularly tested 4 times since.
Last week saw the S&P drop right into the range again and now the upper end is resistance and the lower is support as it trades in this really tight range between about 1070 and 1105.
While I am far from being bullish on the market I do believe that we will see a return to the mid January level of 1150 at least once more time before it turns south for a longer drop.
If I am wrong I may have to close the put sides of some of my iron condor trades, as previously mentioned. If I am right I only need to be right until February expiration and even then I can still be wrong as long as the market does not sell off too strongly over the next few weeks.
Jeff.
Questrade, My direct access discount broker.
Friday, January 29, 2010
Wednesday, January 27, 2010
Cutting back...and withdrawal
Well, do to the much reduced trading activity my Questrade Pro platform is going to cost me $20 a month...or is it $30? No matter, my trading volume is next to nothing right now so it hardly justifies keeping the nicer platform. I liked being able to easily click between accounts and set trades on the fly while watching the real time data stream along, pre and post-market as well.
Now I suffer the withdrawal of not having real time information to work with... although my current trade plan does not need it it was very addicting to have and will be missed.
Having said that, most of what I am looking at trading going forward has more to do with indices than stocks and seemingly I can get free access to realtime S&P500 charts and some other indices.
BPI charts are EOD anyway, I was using trade entries based on previous day numbers, even P&F charts are all EOD. All of my trades are going to be in the 30 day range for now so I really don't need the up to the second information.
Well, due to my needing access to my trading account I wandered over to the QuestraderWeb and the Webtrader browser based trading platforms. The Webtrader is almost unusable for me now as it is just far too restricting. QuestraderWeb is OK. I forgot how much information is available through that platform...tons of company stats, ETF listings, sector lists and news feeds. Quite a bit looks to be realtime as well.
This platform should look after my newer trading needs nicely. With the new options format it will be easier as I can check options without having to try to decipher which option I am looking at anymore.
So, I am down to paying for a monthly subscription to Esignal with an EOD delayed data connection...and that is it for my playing. I could count the Optioneer fees but they haven't kicked in as of yet. I will make liberal use of the stockcharts.com for BPI and P&F when needed.
I will ride out January and see where I go for my play trading next in February.
Jeff.
Now I suffer the withdrawal of not having real time information to work with... although my current trade plan does not need it it was very addicting to have and will be missed.
Having said that, most of what I am looking at trading going forward has more to do with indices than stocks and seemingly I can get free access to realtime S&P500 charts and some other indices.
BPI charts are EOD anyway, I was using trade entries based on previous day numbers, even P&F charts are all EOD. All of my trades are going to be in the 30 day range for now so I really don't need the up to the second information.
Well, due to my needing access to my trading account I wandered over to the QuestraderWeb and the Webtrader browser based trading platforms. The Webtrader is almost unusable for me now as it is just far too restricting. QuestraderWeb is OK. I forgot how much information is available through that platform...tons of company stats, ETF listings, sector lists and news feeds. Quite a bit looks to be realtime as well.
This platform should look after my newer trading needs nicely. With the new options format it will be easier as I can check options without having to try to decipher which option I am looking at anymore.
So, I am down to paying for a monthly subscription to Esignal with an EOD delayed data connection...and that is it for my playing. I could count the Optioneer fees but they haven't kicked in as of yet. I will make liberal use of the stockcharts.com for BPI and P&F when needed.
I will ride out January and see where I go for my play trading next in February.
Jeff.
More details on "All In"
I was lamenting the fact that I had no additional cash to plunk down on the new condor trades with the new lower S&P500 levels when I recalled that I have last months profits to play with, not just the base cash. Now I happen to be switching accounting companies for my US trading so it has been split between the new and old while trades settle so I don't have it all as one lump sum.
Seeing as I have access to the typical futures contracts and a condor needs up to $5,000 spare cash ($250 per point with 20 point spreads) I am limited to trades in that neighbourhood normally. I also have access to the E-mini contracts as well which have $50 points. The same 20 point spread will tie up only $1,000. As long as my 6% trade rule holds there is no reason why I cannot use these to "top off" my trading while I am in between $5k increments.
Today I placed an Emini for February EOM to top off my trades.
This little gem of a move will generally increase the profit potential of my entire account as I can now make all of my money and more of my profits work for me sooner.
Figuring that I can place $1000, $2000, $3000 or $4000 trades will serve to top off my profits in the neighbourhood of an additional $1800 assuming an on average trade size of $2500. This is a trade volume of $30,000 over the year at my 6% target for each month.
Nice bonus.
On the outstanding trade front, I am considering closing the put sides of my trades and letting the call side run. The broker deems the call risk so minimal that I can leave those call spreads active to get full profit from that side of the trade. This allows me to use my full capital buying power to open new trades at the new levels. I would like to see them closed today or tomorrow to cut risk and be able to put new trades on to still expire in February. This cuts losses now as well as creates a small compensation with the existing call spreads and lets me see full capital applied to other trades in February. I think that I can aim for either a break even or a small profit. I need to run some numbers to see how lose I am though.
Jeff.
Seeing as I have access to the typical futures contracts and a condor needs up to $5,000 spare cash ($250 per point with 20 point spreads) I am limited to trades in that neighbourhood normally. I also have access to the E-mini contracts as well which have $50 points. The same 20 point spread will tie up only $1,000. As long as my 6% trade rule holds there is no reason why I cannot use these to "top off" my trading while I am in between $5k increments.
Today I placed an Emini for February EOM to top off my trades.
This little gem of a move will generally increase the profit potential of my entire account as I can now make all of my money and more of my profits work for me sooner.
Figuring that I can place $1000, $2000, $3000 or $4000 trades will serve to top off my profits in the neighbourhood of an additional $1800 assuming an on average trade size of $2500. This is a trade volume of $30,000 over the year at my 6% target for each month.
Nice bonus.
On the outstanding trade front, I am considering closing the put sides of my trades and letting the call side run. The broker deems the call risk so minimal that I can leave those call spreads active to get full profit from that side of the trade. This allows me to use my full capital buying power to open new trades at the new levels. I would like to see them closed today or tomorrow to cut risk and be able to put new trades on to still expire in February. This cuts losses now as well as creates a small compensation with the existing call spreads and lets me see full capital applied to other trades in February. I think that I can aim for either a break even or a small profit. I need to run some numbers to see how lose I am though.
Jeff.
Saturday, January 23, 2010
So much for sitting back.
Well, the market fell off pretty steep in the last two days. My idea of playing a daytrade off the gap would not have worked as, even though there was a gap, it was small. The pre-market basically started where Thursday's post market ended and headed down from there so the gap was only due tot he regular market hours start. The drop and rally were only indicators that it was going to head south, which it did.
But I am not daytrading right now.
My latest condors are giving me some high risk indications as the worst thing that can happen in an iron condor is for the underlying to have a large move right off the bat. Up is not so bad as it is usually coupled with a lowering of the VIX so the put premiums follow a depreciation pattern that makes up for call premiums increase, sort of. in the case of a large drop the VIX jumps, the puts get overly inflated and the calls cannot hope to make up for that loss in premium credit so a larger off the gun drop in profits is in order.
And I had two solid days of large drops putting my positions deep out of the money over all. While this could be a setback it is not catastrophic, just poor timing with me putting so much into the trades. I still hope to have my next cash deposit in in time to place two more February EOM trades, at this point to help make up for a potential loss if I have to close out the current trades. Those trades, due to the higher volatility, will have a wider margin and allow for a greater potential market move. I was attempting to set trades that were favouring a larger profit on the call side but was finding that execution was not going in my favour due to being a the odd trade out...so I stopped. I should have pursued that course longer as it would have been the better option.
I may consider placing call only trades next as well...at least it is worth investigating.
About closing the trades... I would only close the put side of the trade as that is the losing side. Even at that I would only close out the short put first as that is the primary source of the loss. If I feel that the market is still going to head down then I can leave the long put in place and hope to regain some profits as a result while it appreciates. The downside of that plan is that closing the short put only to have the market rally would force me to close the long put as it then starts to become a losing position as well... thus compounding my losses.
I went back and checked to see when we have had a similar patter, two large drops following longish consolidation. In the last 11 months anything remotely similar has bounced back and continued up afterwards. In the 6 months prior to that there were a number of cases that were during the downtrend market move and prior to that there were a large number that were much larger single day moves.
All in all looking back is inconclusive to provide any light on a next move as the market can, and has, done all sorts of variations that are both positive and negative under the current circumstances.
So, sitting back and not watching is not working out like I thought. It is all in the timing. Had I done larger trades prior to this I would be sitting pretty and working soley off of profits rather than having to consider that my closing losing trades might actuall eat into my original capital base.
Here's to a possible rally or further consolidation over the coming weeks.
Jeff.
But I am not daytrading right now.
My latest condors are giving me some high risk indications as the worst thing that can happen in an iron condor is for the underlying to have a large move right off the bat. Up is not so bad as it is usually coupled with a lowering of the VIX so the put premiums follow a depreciation pattern that makes up for call premiums increase, sort of. in the case of a large drop the VIX jumps, the puts get overly inflated and the calls cannot hope to make up for that loss in premium credit so a larger off the gun drop in profits is in order.
And I had two solid days of large drops putting my positions deep out of the money over all. While this could be a setback it is not catastrophic, just poor timing with me putting so much into the trades. I still hope to have my next cash deposit in in time to place two more February EOM trades, at this point to help make up for a potential loss if I have to close out the current trades. Those trades, due to the higher volatility, will have a wider margin and allow for a greater potential market move. I was attempting to set trades that were favouring a larger profit on the call side but was finding that execution was not going in my favour due to being a the odd trade out...so I stopped. I should have pursued that course longer as it would have been the better option.
I may consider placing call only trades next as well...at least it is worth investigating.
About closing the trades... I would only close the put side of the trade as that is the losing side. Even at that I would only close out the short put first as that is the primary source of the loss. If I feel that the market is still going to head down then I can leave the long put in place and hope to regain some profits as a result while it appreciates. The downside of that plan is that closing the short put only to have the market rally would force me to close the long put as it then starts to become a losing position as well... thus compounding my losses.
I went back and checked to see when we have had a similar patter, two large drops following longish consolidation. In the last 11 months anything remotely similar has bounced back and continued up afterwards. In the 6 months prior to that there were a number of cases that were during the downtrend market move and prior to that there were a large number that were much larger single day moves.
All in all looking back is inconclusive to provide any light on a next move as the market can, and has, done all sorts of variations that are both positive and negative under the current circumstances.
So, sitting back and not watching is not working out like I thought. It is all in the timing. Had I done larger trades prior to this I would be sitting pretty and working soley off of profits rather than having to consider that my closing losing trades might actuall eat into my original capital base.
Here's to a possible rally or further consolidation over the coming weeks.
Jeff.
Friday, January 22, 2010
This is what it is all about....
Yep. Today I sit back and don't have to even think about the markets as I have as much capital in play as I can at this point...all in. My targets for the active trades are all over 6% ROR.
Now I will keep an eye on the S&P500 levels but only out of curiosity. Today I expect a sideways day after yesterday's steep drop or even a small rally to re-coupe some of the losses. There was lots of volume to give the down move some credence and even though it could keep going down I expect that it is unlikely. Even if it does I have the bottom side of my trades fairly far down...under 1100 anyway. Worst case I may close out the puts and leave the calls to run...I would add more calls to the mix should I end up doing that though.
So, it probably will open with a small gap down, watch for the gap to close and the rest is up in the air. If I were daytrading SPY I would go long if the gap is an appreciable size.
Having said all that I have had a bearish outlook for the last while and this sort of justifies it. Even so I really don't have a real bias one way or the other as the price will tell all and that can only happen in hindsight anyway. Wide spreads, both sides... best possible setup.
Jeff.
Now I will keep an eye on the S&P500 levels but only out of curiosity. Today I expect a sideways day after yesterday's steep drop or even a small rally to re-coupe some of the losses. There was lots of volume to give the down move some credence and even though it could keep going down I expect that it is unlikely. Even if it does I have the bottom side of my trades fairly far down...under 1100 anyway. Worst case I may close out the puts and leave the calls to run...I would add more calls to the mix should I end up doing that though.
So, it probably will open with a small gap down, watch for the gap to close and the rest is up in the air. If I were daytrading SPY I would go long if the gap is an appreciable size.
Having said all that I have had a bearish outlook for the last while and this sort of justifies it. Even so I really don't have a real bias one way or the other as the price will tell all and that can only happen in hindsight anyway. Wide spreads, both sides... best possible setup.
Jeff.
Thursday, January 21, 2010
All Out to All In
Well, back to all in now. I split my capital into two setups. The first was yesterday's third Friday expiry. I entered today into the EOM and put another small amount onto another trade for the third Friday.
That makes next month's target 6.82% ROR or slightly less ROI as this is all but a small bit of my current balance. I would like to see more trades for the EOM but I don't think that my next cheque will make it there in time to clear for more trades... I'll hold them for March expiry's I guess.
It is relieving to not have to be concerned about getting trades filled now...although the large drop in the market may give thought to other issues as I also have put side trades on all of these trades. We'll see how it shakes down in the coming days. I suspect support around the 1100 level.
At least it does not have to bounce for me to make money, just slow down enough to keep the S&P level from hitting my short put strike level.
Jeff.
That makes next month's target 6.82% ROR or slightly less ROI as this is all but a small bit of my current balance. I would like to see more trades for the EOM but I don't think that my next cheque will make it there in time to clear for more trades... I'll hold them for March expiry's I guess.
It is relieving to not have to be concerned about getting trades filled now...although the large drop in the market may give thought to other issues as I also have put side trades on all of these trades. We'll see how it shakes down in the coming days. I suspect support around the 1100 level.
At least it does not have to bounce for me to make money, just slow down enough to keep the S&P level from hitting my short put strike level.
Jeff.
Wednesday, January 20, 2010
Change in tone...new definition of risk
I took advantage of yesterday's lull in the market to trade some currency in order to fund my US trading account. Friday's CDN to USD was low and I like buying US when it is cheap.
My plan, which I keep saying is cashflow over return, needs to be solidified and I took the weekend past to do some thinking along these lines... which led me to today's decision.
RISK is putting on the line that which I am willing to lose in favour of the chance to make a gain. This is what trading is all about... speculative or otherwise.
ABSOLUTE RISK is the total dollar amount that is at risk at any given time on a per trade or account basis, I always called this the Maximum Loss Allowance (MLA).
REWARD TO RISK RATIO is the ratio of possible reward over absolute risk. I used to like 3:1, possible win of 3 times the amount risked. I turned this on it's head lately though...and then some.
RISK LEVEL is the chance of a trade creating a loss. Tough one to determine
WIN RATE, this is the toughest part of the whole thing, nailing down what the win rate might look like. Classic rates are in the 60% minimum range for typical trading in order to make profits.
Classic trading uses risk optimization based on the account and individual style to minimize the absolute risk (MLA) at times when it appears the risk to reward is 3:1 or better and the odds of using that MLA are smaller. Larger individual wins can skew the risk needed for future trades. Quite a dance, lots of fun though.
I have turned this over and created a whole other profile.
ABSOLUTE RISK remains similar in it's definition, that cannot be changed as dollars risked are dollars risked no matter how it is spun. Now the amount of risk per trade is much larger though.
REWARD TO RISK Going form a classic 3:1 ratio I now am in the 1:12 to 1:19 range, quite a change in numbers, but it is the rest of the risk profile that determines the real factors at work here.
RISK LEVEL. I feel that these trades as a close to risk free as can be had and still garner a decent return on risk or on investment.
WIN RATE...the real clincher here. I have run strategies that have had very good win rates and a few that have had poor win rates. This current strategy has it's very nature in sync with the idea of a high win rate due to two factors.... opening a trade puts cash in the account immediately...it's easier to keep than to make... and 75% of options expire worthless which is a 100 % profit target achievement for sellers. I expect just under the 100% win rate mark.
Tie this all together and I end up with a very different looking profile of what risk means to me.
Rather than a risk of losing capital I am now at risk of not having capital in the game, this is a higher risk then the old school absolute risk. Shorter timelines let me roll trades over quickly while maximizing the time that the cash is active. Placing a 30 day trades for 1.3 points profit (about $250) compared to placing a 45 day trades for 2.0 points ($372) works out to the same long term result. 15.8 net points at year's end or $3950.
45 day trades don't work anyway as when a 45 day trade expires it will not be an even 45 days for the next trade. using a 100% "in the game" approach can be on 30 day trades or 60 day trades...some sort of rolling forward method aiming for longer term trades will force me to be skipping weeks at a time while aiming for the short game.
So, given the high expectation win rate, the reversed and skewed return ratio and the idea that risk is more a missed opportunity risk than a capital risk, generally, my trading plan has shifted substantially from where I thought I would have been after 2 years.
Jeff.
My plan, which I keep saying is cashflow over return, needs to be solidified and I took the weekend past to do some thinking along these lines... which led me to today's decision.
RISK is putting on the line that which I am willing to lose in favour of the chance to make a gain. This is what trading is all about... speculative or otherwise.
ABSOLUTE RISK is the total dollar amount that is at risk at any given time on a per trade or account basis, I always called this the Maximum Loss Allowance (MLA).
REWARD TO RISK RATIO is the ratio of possible reward over absolute risk. I used to like 3:1, possible win of 3 times the amount risked. I turned this on it's head lately though...and then some.
RISK LEVEL is the chance of a trade creating a loss. Tough one to determine
WIN RATE, this is the toughest part of the whole thing, nailing down what the win rate might look like. Classic rates are in the 60% minimum range for typical trading in order to make profits.
Classic trading uses risk optimization based on the account and individual style to minimize the absolute risk (MLA) at times when it appears the risk to reward is 3:1 or better and the odds of using that MLA are smaller. Larger individual wins can skew the risk needed for future trades. Quite a dance, lots of fun though.
I have turned this over and created a whole other profile.
ABSOLUTE RISK remains similar in it's definition, that cannot be changed as dollars risked are dollars risked no matter how it is spun. Now the amount of risk per trade is much larger though.
REWARD TO RISK Going form a classic 3:1 ratio I now am in the 1:12 to 1:19 range, quite a change in numbers, but it is the rest of the risk profile that determines the real factors at work here.
RISK LEVEL. I feel that these trades as a close to risk free as can be had and still garner a decent return on risk or on investment.
WIN RATE...the real clincher here. I have run strategies that have had very good win rates and a few that have had poor win rates. This current strategy has it's very nature in sync with the idea of a high win rate due to two factors.... opening a trade puts cash in the account immediately...it's easier to keep than to make... and 75% of options expire worthless which is a 100 % profit target achievement for sellers. I expect just under the 100% win rate mark.
Tie this all together and I end up with a very different looking profile of what risk means to me.
Rather than a risk of losing capital I am now at risk of not having capital in the game, this is a higher risk then the old school absolute risk. Shorter timelines let me roll trades over quickly while maximizing the time that the cash is active. Placing a 30 day trades for 1.3 points profit (about $250) compared to placing a 45 day trades for 2.0 points ($372) works out to the same long term result. 15.8 net points at year's end or $3950.
45 day trades don't work anyway as when a 45 day trade expires it will not be an even 45 days for the next trade. using a 100% "in the game" approach can be on 30 day trades or 60 day trades...some sort of rolling forward method aiming for longer term trades will force me to be skipping weeks at a time while aiming for the short game.
So, given the high expectation win rate, the reversed and skewed return ratio and the idea that risk is more a missed opportunity risk than a capital risk, generally, my trading plan has shifted substantially from where I thought I would have been after 2 years.
Jeff.
Sunday, January 17, 2010
All out
I updated my stats this weekend and I am all out of the market...other than a small stock position in my margin account.
I am 11 for 11 winning trades, which is what I expected to see with the exception of the two close calls. I plan not to set trades with as much of a risk factor in the near future as I want to establish a regular cashflow before getting into more risky trades.
Tomorrow the US market is closed so no trades to set. I will likely try to take advantage of the US dollar drop and convert a bunch of cash to send to Optioneer.
Jeff
I am 11 for 11 winning trades, which is what I expected to see with the exception of the two close calls. I plan not to set trades with as much of a risk factor in the near future as I want to establish a regular cashflow before getting into more risky trades.
Tomorrow the US market is closed so no trades to set. I will likely try to take advantage of the US dollar drop and convert a bunch of cash to send to Optioneer.
Jeff
Friday, January 15, 2010
Day of reckoning.
Today my spreads are close to my short strikes on SPY and BYY but I feel confident that they will hold until EOD and remain 100% profitable... the market will decide. Both are about $1.20 from strikes... not too bad for BYY as it is under $40 but not so good for SPY as it is around $115.
Those trades aside, the reckoning comes down to my thinking about the spread trade cash requirements between Questrade and Strikepoint/Optioneer.
The method and underlying index create a similar, if not quite comparable playing environment. The only issue is the handling of the iron condor as a single trade for the purposes of total exposure as opposed to separate call and put spreads with aggregate exposure. The ease of Strikepoint trading as single orders using software for order entry and spreads that are already mixed compared to doing all my own math at Questrade and position management that is far more hands on might be a consideration. but I LIKE doing all the math, so it doesn't count.
At this point I will be transferring the majority of my cash over to Strikepoint to maximize the trading power in that account and leaving a minimum amount of cash in my Questrade account to use with one of my other plans. I have not decided how much yet, nor have I decided if it will be a straight option trade setup but it will definitely not be spread trading for a while. I expect that I will pickup the Bullish Percent Index charting and go with the BPI triggered sector ETF rotation idea and see how that works in real life as I never got the time to do much more tha play test it in hindsight. Perhaps I will add an S&P500 moderating factor or a currency hedge or maybe tie in the Dow Jones and Russell with some consideration for small, medium and large cap performance...lots to consider.
BYY is heading slowly down but neither made a move off the bell...although SPY opened down and is heading down a bit which is in my favour at least. I should close BYY so it does not go near loss territory but I will ride it until noon and see where it may go.
My other two spreads have gotten very little or no screen time here so I should mention them...that's what happens when they do pretty much what I expect when it comes to spread trades...no news is good news.
XLE (Energy Sector ETF) has remained high and as this is a put spread, remained profitable for me.
APOL, some stock or other, that's bad when I doen't even recall the real name, has done the same. Strangely it is priced simialrly to XLE and has followed very simialr patterns so it must be a large energy related stock... in hindsight I would have been better off putting both positions together into XLE and saved some commissions and the possible risk of having a stock option take a hike due to some company issue that may be unrelated tot he energy market in general.
I'll update my performance page after today closes to be sure I don'e jump the gun by entering my numbers ahead of the close... not that I am terribly superstitious but the market does some weird things often enough.
Jeff.
Those trades aside, the reckoning comes down to my thinking about the spread trade cash requirements between Questrade and Strikepoint/Optioneer.
The method and underlying index create a similar, if not quite comparable playing environment. The only issue is the handling of the iron condor as a single trade for the purposes of total exposure as opposed to separate call and put spreads with aggregate exposure. The ease of Strikepoint trading as single orders using software for order entry and spreads that are already mixed compared to doing all my own math at Questrade and position management that is far more hands on might be a consideration. but I LIKE doing all the math, so it doesn't count.
At this point I will be transferring the majority of my cash over to Strikepoint to maximize the trading power in that account and leaving a minimum amount of cash in my Questrade account to use with one of my other plans. I have not decided how much yet, nor have I decided if it will be a straight option trade setup but it will definitely not be spread trading for a while. I expect that I will pickup the Bullish Percent Index charting and go with the BPI triggered sector ETF rotation idea and see how that works in real life as I never got the time to do much more tha play test it in hindsight. Perhaps I will add an S&P500 moderating factor or a currency hedge or maybe tie in the Dow Jones and Russell with some consideration for small, medium and large cap performance...lots to consider.
BYY is heading slowly down but neither made a move off the bell...although SPY opened down and is heading down a bit which is in my favour at least. I should close BYY so it does not go near loss territory but I will ride it until noon and see where it may go.
My other two spreads have gotten very little or no screen time here so I should mention them...that's what happens when they do pretty much what I expect when it comes to spread trades...no news is good news.
XLE (Energy Sector ETF) has remained high and as this is a put spread, remained profitable for me.
APOL, some stock or other, that's bad when I doen't even recall the real name, has done the same. Strangely it is priced simialrly to XLE and has followed very simialr patterns so it must be a large energy related stock... in hindsight I would have been better off putting both positions together into XLE and saved some commissions and the possible risk of having a stock option take a hike due to some company issue that may be unrelated tot he energy market in general.
I'll update my performance page after today closes to be sure I don'e jump the gun by entering my numbers ahead of the close... not that I am terribly superstitious but the market does some weird things often enough.
Jeff.
Thursday, January 14, 2010
Comparing risk and margin policies...sort of.
As a result of my "edge of seat" spread trades in BBY and SPY I am getting to know the market activity based on various reports a lot better than I did. Although the market does not necessarily do what I might expect, or anyone else for that matter, but it certainly points to possible days of volatility.
I am not sure how much value there is in this information. Had I entered the trades that I was planning to I would not be presented with this issue at all.
I will be looking at changing my opening spreads in SPY in future. I want to get minimum risk by putting the short strike option as far as possible from the price. I have revamped my price targets to get away from the idea of the $10 day, as I may have mentioned before.
Due to my spreadsheet forecasting I figure that a $300 return on an iron condor spread with up to $5000 risked is a good return as it amounts to about 6% ROR, as long as the trade is in the range of a 30 day timeline. This is really the reason for leaving the $10 per day alone as it pushes me toward the edge between low and high risk trades. I figure if I can squeeze $300 for every $5000 trade each month I can turn a decent cashflow.
While this will work well in the Optioneer futures contract setup I will still run the numbers on the Questrade SPY trades and see where I get. The major difference between the two is how risk is calculated and therefore how cash allocation is figured.
Questrade.
A 25 contract call spread on SPY can be placed with a $5000 risk (less the sold call credit, but I will ignore that for this example)
A corresponding 25 contract put spread can also be placed with a $5000 risk.
As it stands I might be hard pressed to see $300 from each of these trades but definitely could by combining them.
These two trades combined create an iron condor with a total risk of $10,000 with Questrade's separate spread trade method... the call spread is completely separate from the put spread.
Optioneer/Strikepoint
The trades are a bit different here as futures contracts use $250 points unlike the SPY $1 points. The result is the important issue.
A call spread based on the S&P500 futures placed with a $5000 risk.
A corresponding put spread placed also with $5000 risk
Like the above example a low risk call or put spread alone may not generate $300 very often, combining them will.
With Optioneer/Strikepoint the combined trade is taken as one trade and, seeing as the price can only be at one point at a time, only one side is ever at risk on any trade. Therefore they consider the two $5000 risk trades as one trade risking the same $5000.
This allows me to basically produce double the cashflow based on capital in the account.
If I could talk Questrade into letting me use their margin account in a similar manner when trading options on the same underlying security I could produce at least the same results and I would definitely continue to use their account for these spread trades... for some reason I don't see that happening though.
Although I wil try.
Jeff.
I am not sure how much value there is in this information. Had I entered the trades that I was planning to I would not be presented with this issue at all.
I will be looking at changing my opening spreads in SPY in future. I want to get minimum risk by putting the short strike option as far as possible from the price. I have revamped my price targets to get away from the idea of the $10 day, as I may have mentioned before.
Due to my spreadsheet forecasting I figure that a $300 return on an iron condor spread with up to $5000 risked is a good return as it amounts to about 6% ROR, as long as the trade is in the range of a 30 day timeline. This is really the reason for leaving the $10 per day alone as it pushes me toward the edge between low and high risk trades. I figure if I can squeeze $300 for every $5000 trade each month I can turn a decent cashflow.
While this will work well in the Optioneer futures contract setup I will still run the numbers on the Questrade SPY trades and see where I get. The major difference between the two is how risk is calculated and therefore how cash allocation is figured.
Questrade.
A 25 contract call spread on SPY can be placed with a $5000 risk (less the sold call credit, but I will ignore that for this example)
A corresponding 25 contract put spread can also be placed with a $5000 risk.
As it stands I might be hard pressed to see $300 from each of these trades but definitely could by combining them.
These two trades combined create an iron condor with a total risk of $10,000 with Questrade's separate spread trade method... the call spread is completely separate from the put spread.
Optioneer/Strikepoint
The trades are a bit different here as futures contracts use $250 points unlike the SPY $1 points. The result is the important issue.
A call spread based on the S&P500 futures placed with a $5000 risk.
A corresponding put spread placed also with $5000 risk
Like the above example a low risk call or put spread alone may not generate $300 very often, combining them will.
With Optioneer/Strikepoint the combined trade is taken as one trade and, seeing as the price can only be at one point at a time, only one side is ever at risk on any trade. Therefore they consider the two $5000 risk trades as one trade risking the same $5000.
This allows me to basically produce double the cashflow based on capital in the account.
If I could talk Questrade into letting me use their margin account in a similar manner when trading options on the same underlying security I could produce at least the same results and I would definitely continue to use their account for these spread trades... for some reason I don't see that happening though.
Although I wil try.
Jeff.
Tuesday, January 12, 2010
Close or hold the trades?
Friday is expiration day for this month and I have two spread trades that are getting close tot he strike prices. SPY, which is now back to $2 down... I feel pretty good about that one now compared to where I was with it on the weekend.
The other is BBY. This one was placed as a put spread under the suggested support levels around $39... I am at $38 with my short puts and the price has been fairly deep into the $38 level today.
The question is do I close one or both of these trades now while I can break even or make a bit of money for my trouble or just let them ride and close only if they get closer?
Here is where the Theta comes into play. Today Theta is at 0.051, 5.1 cents per day loss. Every day that I wait and the price does not move too much against me puts the profits up by 5.1 cents.
SPY short 116 calls would cost me 15 cents to buy back and they made 25 cents initially. Long calls are worth 2 cents from my 8 cents purchase...not even worth looking at now except I have 19 contracts ($38 worth). Total profit to close now of about $50 net. Holding through expiry at SPY under $116 is close to $260.
BBY is in a similar state but with a much smaller position of 3 contracts. Either way if I close the trades the commissions will cost me profits whereas letting them expire costs me no extra...as long as they are OTM.
Then there is the issue of Friday and expiry day volatility. I have seen large runups and drawdowns at the day's end as everyone scrambles to take advantage of the EOD mayhem...specifically the black box trading driving the volume up.
My gut tells me to sit on these trades while my mind tells me to close them for breakeven.
I'm going with the gut and just keeping my broker's numbers handy in case I need to close quickly.
Jeff.
The other is BBY. This one was placed as a put spread under the suggested support levels around $39... I am at $38 with my short puts and the price has been fairly deep into the $38 level today.
The question is do I close one or both of these trades now while I can break even or make a bit of money for my trouble or just let them ride and close only if they get closer?
Here is where the Theta comes into play. Today Theta is at 0.051, 5.1 cents per day loss. Every day that I wait and the price does not move too much against me puts the profits up by 5.1 cents.
SPY short 116 calls would cost me 15 cents to buy back and they made 25 cents initially. Long calls are worth 2 cents from my 8 cents purchase...not even worth looking at now except I have 19 contracts ($38 worth). Total profit to close now of about $50 net. Holding through expiry at SPY under $116 is close to $260.
BBY is in a similar state but with a much smaller position of 3 contracts. Either way if I close the trades the commissions will cost me profits whereas letting them expire costs me no extra...as long as they are OTM.
Then there is the issue of Friday and expiry day volatility. I have seen large runups and drawdowns at the day's end as everyone scrambles to take advantage of the EOD mayhem...specifically the black box trading driving the volume up.
My gut tells me to sit on these trades while my mind tells me to close them for breakeven.
I'm going with the gut and just keeping my broker's numbers handy in case I need to close quickly.
Jeff.
Monday, January 11, 2010
Rambling on SPY spreads
Theta on my short SPY leg is up to $0.084 now, nice. I am not really concerned about that as long as the SPY closes under $116 on Friday it makes no difference. Seeing as it is hovering about $115 right now I am running it VERY close as the 10 day ATR is just over $1. In theory, I should be OK. The ATR is narrowing over successive timeframes, the five day (last week basically) is just under $1.
I don't think there are any stock affecting reports to come out today either, unless some get a headstart on earnings and they are good for Q4 last year. A gap up today should also fill at least...that will give me a little headspace.
I am not liking being this close so I will adjust my trade entry plan accordingly. Part of the issue is that the volatility is so darned low the premiums reflect this by not leaving enough value in the farther OTM strikes right now. Rather than trade tight I would be better to hold cash and wait for the cherry pinking setups.
I consider looking at stocks again but I don't like the uncertain variability in the pricing and larger possibility for gaps based on news that can really affect the stock more than an overall index. This, of course, is why they sometimes have better premiums though. Perhaps some smaller $1 spreads might be appropriate AFTER I get the SPY spreads working.
Back to the futures. There at least I can get a higher (and lower for puts) strike to work with even down to the 30 day trades. I will give this plan until the end of the February expiry to see how I feel about these first.... or at least see if the VIX picks up how much room I get in my trades.
I don't think there are any stock affecting reports to come out today either, unless some get a headstart on earnings and they are good for Q4 last year. A gap up today should also fill at least...that will give me a little headspace.
I am not liking being this close so I will adjust my trade entry plan accordingly. Part of the issue is that the volatility is so darned low the premiums reflect this by not leaving enough value in the farther OTM strikes right now. Rather than trade tight I would be better to hold cash and wait for the cherry pinking setups.
I consider looking at stocks again but I don't like the uncertain variability in the pricing and larger possibility for gaps based on news that can really affect the stock more than an overall index. This, of course, is why they sometimes have better premiums though. Perhaps some smaller $1 spreads might be appropriate AFTER I get the SPY spreads working.
Back to the futures. There at least I can get a higher (and lower for puts) strike to work with even down to the 30 day trades. I will give this plan until the end of the February expiry to see how I feel about these first.... or at least see if the VIX picks up how much room I get in my trades.
Friday, January 8, 2010
The SPY Bear Call Spread
I find it interesting to watch the dance that my spread trade is doing while the market tries to figure out where it is going next.
I am at 116-118 and right now SPY is hovering just over $114. That only leaves me a $2 margin before I start losing profits at $116 and start losing money at $116.16.
Each morning the Theta number gets updated and the quotes are lowered by roughly the previous day's Theta. Right now it is about 0.045 so each day the short 116 call loses 4.5 cents per day, which equates to me making 4.5 cents per day. The market inches up and the option regains that loss...like I said before, the I need the Theta to outstrip the Delta. Even better is to just have SPY close on next Friday anywhere under $116.
The short option was worth an average of 25 cents. It is now trading at 27-28 cents and has been for the last few days even while SPY has climbed. Delta fighting Theta.
This leads me to consider using some sort of formula to calculate the risk factor associated with a particular spread trade using the Delta and Theta variables. More math but perhaps it can be of some help. I figure that most of this is already in when looking at the Average True Range and forecasting the future possibilities based on the time to expiry already...maybe it would be redundant... but maybe not.
Jeff.
I am at 116-118 and right now SPY is hovering just over $114. That only leaves me a $2 margin before I start losing profits at $116 and start losing money at $116.16.
Each morning the Theta number gets updated and the quotes are lowered by roughly the previous day's Theta. Right now it is about 0.045 so each day the short 116 call loses 4.5 cents per day, which equates to me making 4.5 cents per day. The market inches up and the option regains that loss...like I said before, the I need the Theta to outstrip the Delta. Even better is to just have SPY close on next Friday anywhere under $116.
The short option was worth an average of 25 cents. It is now trading at 27-28 cents and has been for the last few days even while SPY has climbed. Delta fighting Theta.
This leads me to consider using some sort of formula to calculate the risk factor associated with a particular spread trade using the Delta and Theta variables. More math but perhaps it can be of some help. I figure that most of this is already in when looking at the Average True Range and forecasting the future possibilities based on the time to expiry already...maybe it would be redundant... but maybe not.
Jeff.
...and it slips through my fingers.
I made some headway on the zero risk trade idea and figured that I had better tear it down and start from a different angle. I was drawing risk charts and had setup a spreadsheet to calculate the final profit using the various quotes at various strikes. Something wasn't adding up and I couldn't put my finger on it.
So, here is a breakdown of my start from scratch with some basic spread premises.
A bear call spread sells premium on the lower strike call while buying protection with the higher cheaper strike call, both OTM. If the price goes down it retains full value, if the price rises through the spread it loses value up to the credit amount above the lower short strike then creates loss right up to the higher strike.
The Bull put spread sells premium on the higher strike put while buying protection with the lower cheaper strike put. If the price goes up it retains full value, if the price drops through the spread it loses up to the credit amount below the higher short strike then creates a loss right down to the lower strike.
Both retain value as long as the price remains contained below or above the respective strike values and the profit and loss is fixed in both cases. Tie them together and they raise the profits as long as the price remains contained within the bracketed short strikes. The iron condor.
A debit call spread (bullish) that straddles the price buys long opportunity with a lower ITM strike and sells premium with a higher OTM strike. The short strike serves to reduce the total cost of the trade and remains profitable as long as the price does not cross this higher strike. The long option has Intrinsic Value off the start and gains value as the price rises. This spread trade serves to reduce the up front cost while limiting profit to the difference between the short strike and the long strike less the cost of the initial long strike plus the short premium.
A debit put spread (bearish) that straddles the price buys short opportunity with a higher ITM strike and sells premium with a lower OTM strike. The short strike serves to reduce the total cost of the trade and remains profitable as long as the price does not cross the lower strike. The long option has IV off the start and gains value as the price rises. This spread trade serves to reduce the up front cost while limiting profit to the difference between the short strike and the long strike less the cost of the initial long strike plus the short premium.
In these debit spreads the profits increase as the price moves up for the call spread and as the price moves down for the put spread and when taken individually they are not capped with regard to profits but are capped for losses.
Assume that the price of the security is in the middle of an arbitrary range, say 110 to 120 and the price is 115. Assume no commissions and no Extrinsic Value for the moment, this is not reality but serves a conceptual purpose.
Buying the 110 strike call which is $5 ITM and selling the 120 strike call for $0 (OK, pretend for now)
Buying this debit call spread cost $5 overall.
Buying the 120 strike put which is $5 ITM and selling the 110 strike put for $0
Buying this debit call spread cost $5 overall.
Buying both spreads cost $10 overall.
Again, with no EV if the price moved down to $112 the call spread would be worth $2 and the put spread would be worth $8. Take this to expiry and both spreads are worth combined $10
Price moves to $110 the calls are worth $0 and the puts are worth $10
Price moves to $105 the calls are worth $0 and the puts are worth $15...but there is a short put at $110 limiting the profit to $10 as it will be executed for that strike. The same thing happens as the price moves up to and past the short call strike.
OK, with no commissions and no EV we have a zero sum game and no matter where the price goes it is ALWAYS a zero profit and zero loss. The only factor then becomes premiums sold to create profits while using the opposing spread trades to cancel each other out in the case of a sharp move against one side of the trade.
Using the same numbers we can ignore the IV completely as it cancels out.
Now, using only the EV we can concoct a trade that creates premium selling opportunity by taking advantage of the disparity between premium on OTM option against the premium on ITM options.
Sell high and buy low takes on new meaning as this is done simultaneously.
Buying the 110 strike call which has $0.50 EV and selling the 120 strike call for $1 EV
Buying this debit call spread created a credit of $0.50 overall.
Buying the 120 strike put which has $0.50 EV and selling the 110 strike put for $10
Buying this debit call spread created a credit of $0.50 overall.
Buying both spreads created a credit of $1 overall. Seeing as no matter what the price does from start to finish this credit will remain intact as long as the trade is left to expire. The trouble is that the long options will be exercised as they are ITM and I would have no intention of letting that happen as I would not want to own the underlying stock so I will have to close the trade incurring more commission costs.
So, double commissions.
Checking the actual pricing of options to do this turns out that creating a net credit is very tough to do. I would need to have cheaper commissions, and they are already cheap for the retail market. I would also have to have access to better bid/ask spreads as this slippage will kill any profits.
Basically, while the trade has a fixed known profit/risk potential no matter the underlying price activity just the execution and costs are enough to both chew up profits and create losses right up front.
Sadly, this trade has no value without finding some large pricing discrepancies... which I do not have data access to try to even start to find.
Oh, well.
Jeff.
So, here is a breakdown of my start from scratch with some basic spread premises.
A bear call spread sells premium on the lower strike call while buying protection with the higher cheaper strike call, both OTM. If the price goes down it retains full value, if the price rises through the spread it loses value up to the credit amount above the lower short strike then creates loss right up to the higher strike.
The Bull put spread sells premium on the higher strike put while buying protection with the lower cheaper strike put. If the price goes up it retains full value, if the price drops through the spread it loses up to the credit amount below the higher short strike then creates a loss right down to the lower strike.
Both retain value as long as the price remains contained below or above the respective strike values and the profit and loss is fixed in both cases. Tie them together and they raise the profits as long as the price remains contained within the bracketed short strikes. The iron condor.
A debit call spread (bullish) that straddles the price buys long opportunity with a lower ITM strike and sells premium with a higher OTM strike. The short strike serves to reduce the total cost of the trade and remains profitable as long as the price does not cross this higher strike. The long option has Intrinsic Value off the start and gains value as the price rises. This spread trade serves to reduce the up front cost while limiting profit to the difference between the short strike and the long strike less the cost of the initial long strike plus the short premium.
A debit put spread (bearish) that straddles the price buys short opportunity with a higher ITM strike and sells premium with a lower OTM strike. The short strike serves to reduce the total cost of the trade and remains profitable as long as the price does not cross the lower strike. The long option has IV off the start and gains value as the price rises. This spread trade serves to reduce the up front cost while limiting profit to the difference between the short strike and the long strike less the cost of the initial long strike plus the short premium.
In these debit spreads the profits increase as the price moves up for the call spread and as the price moves down for the put spread and when taken individually they are not capped with regard to profits but are capped for losses.
Assume that the price of the security is in the middle of an arbitrary range, say 110 to 120 and the price is 115. Assume no commissions and no Extrinsic Value for the moment, this is not reality but serves a conceptual purpose.
Buying the 110 strike call which is $5 ITM and selling the 120 strike call for $0 (OK, pretend for now)
Buying this debit call spread cost $5 overall.
Buying the 120 strike put which is $5 ITM and selling the 110 strike put for $0
Buying this debit call spread cost $5 overall.
Buying both spreads cost $10 overall.
Again, with no EV if the price moved down to $112 the call spread would be worth $2 and the put spread would be worth $8. Take this to expiry and both spreads are worth combined $10
Price moves to $110 the calls are worth $0 and the puts are worth $10
Price moves to $105 the calls are worth $0 and the puts are worth $15...but there is a short put at $110 limiting the profit to $10 as it will be executed for that strike. The same thing happens as the price moves up to and past the short call strike.
OK, with no commissions and no EV we have a zero sum game and no matter where the price goes it is ALWAYS a zero profit and zero loss. The only factor then becomes premiums sold to create profits while using the opposing spread trades to cancel each other out in the case of a sharp move against one side of the trade.
Using the same numbers we can ignore the IV completely as it cancels out.
Now, using only the EV we can concoct a trade that creates premium selling opportunity by taking advantage of the disparity between premium on OTM option against the premium on ITM options.
Sell high and buy low takes on new meaning as this is done simultaneously.
Buying the 110 strike call which has $0.50 EV and selling the 120 strike call for $1 EV
Buying this debit call spread created a credit of $0.50 overall.
Buying the 120 strike put which has $0.50 EV and selling the 110 strike put for $10
Buying this debit call spread created a credit of $0.50 overall.
Buying both spreads created a credit of $1 overall. Seeing as no matter what the price does from start to finish this credit will remain intact as long as the trade is left to expire. The trouble is that the long options will be exercised as they are ITM and I would have no intention of letting that happen as I would not want to own the underlying stock so I will have to close the trade incurring more commission costs.
So, double commissions.
Checking the actual pricing of options to do this turns out that creating a net credit is very tough to do. I would need to have cheaper commissions, and they are already cheap for the retail market. I would also have to have access to better bid/ask spreads as this slippage will kill any profits.
Basically, while the trade has a fixed known profit/risk potential no matter the underlying price activity just the execution and costs are enough to both chew up profits and create losses right up front.
Sadly, this trade has no value without finding some large pricing discrepancies... which I do not have data access to try to even start to find.
Oh, well.
Jeff.
Wednesday, January 6, 2010
The Holy Grail of Trading
Seeing as I have tried many of the decent (seemingly) services on the go and had next to no good news to report I decided to take a closer look at the idea of a Holy Grail in trading and investing.
At some point any reputable source has mentioned that there is no such grail and anyone claiming that they have found a fool proof method for making lots of money are just marketing their latest gimmick.
So, first is to define what the Holy Grail of trading would look like.
Fast easy money?
Low risk high yield?
High risk with low drawdowns?
Double in 1, 2 or 3 years?
How about guaranteed profits...zero chance for losses but not spectacular gains?
That last one I can live with as it is not overblown or make outrageous promises. The last one is mine and is my next pet project.
While I like the low risk of a spread I am not fond of the absolute risk involved. A $2 credit spread invariably risks $200 per contract less the premium collected for the short side. In order to show a decent profit given the commissions 5 contracts is about the minimum that will work efficiently so there is somewhat less than $1000 risked...even though it is not a high risk factor due to the strike distance from the starting underlying price it is still risked.
Keeping to my $10 per day per $5,000 target might be tough so I will throw that out the window and see what I can get...without any risk.
After my discussion with my daughter the other day and my tweaking of the annual returns and long term account growth I decided that a no risk strategy should aim for a minimum of 15% annual returns in order to be worthwhile. 15% over ten years results in a 344% simple return or $50,000 becoming $222,000. Respectable.
It should not be difficult even if it is a bit complicated to setup. Timeframes for trades could be longer, in the 6 month range perhaps, which makes the nuisance of complication easier to bear.
Upfront costs should not be huge so it can be worked in a smaller account.
Taxation is the only real hurdle here as anything I think of will most likely not work in a registered account. So I will need to determine how large a factor taxes will be... trades should be able to make use of the capital gains method of taxation at least. I believe that these are taxed as 1/2 of the gain at my marginal rate so it effectively cuts the taxes, more or less, in half.
Off to apply pencil to paper and see what I can come up with.
Jeff.
At some point any reputable source has mentioned that there is no such grail and anyone claiming that they have found a fool proof method for making lots of money are just marketing their latest gimmick.
So, first is to define what the Holy Grail of trading would look like.
Fast easy money?
Low risk high yield?
High risk with low drawdowns?
Double in 1, 2 or 3 years?
How about guaranteed profits...zero chance for losses but not spectacular gains?
That last one I can live with as it is not overblown or make outrageous promises. The last one is mine and is my next pet project.
While I like the low risk of a spread I am not fond of the absolute risk involved. A $2 credit spread invariably risks $200 per contract less the premium collected for the short side. In order to show a decent profit given the commissions 5 contracts is about the minimum that will work efficiently so there is somewhat less than $1000 risked...even though it is not a high risk factor due to the strike distance from the starting underlying price it is still risked.
Keeping to my $10 per day per $5,000 target might be tough so I will throw that out the window and see what I can get...without any risk.
After my discussion with my daughter the other day and my tweaking of the annual returns and long term account growth I decided that a no risk strategy should aim for a minimum of 15% annual returns in order to be worthwhile. 15% over ten years results in a 344% simple return or $50,000 becoming $222,000. Respectable.
It should not be difficult even if it is a bit complicated to setup. Timeframes for trades could be longer, in the 6 month range perhaps, which makes the nuisance of complication easier to bear.
Upfront costs should not be huge so it can be worked in a smaller account.
Taxation is the only real hurdle here as anything I think of will most likely not work in a registered account. So I will need to determine how large a factor taxes will be... trades should be able to make use of the capital gains method of taxation at least. I believe that these are taxed as 1/2 of the gain at my marginal rate so it effectively cuts the taxes, more or less, in half.
Off to apply pencil to paper and see what I can come up with.
Jeff.
Tuesday, January 5, 2010
Option Strategies, Collars and Ladders.
I was thinking about the maximum loss with spreads and that I need to monitor them, loosely, to be sure they do not go negative on me. Particularly the current 116-118 bear call spread seeing as SPY (the S&P 500) is climbing smartly into the new year.
If I let a 10 contract $2 spread trade go and it hits the bought call price I will lose close to $2000. If it passes the bought call there are no further losses as the trades cancel each other out at that maximum loss at expiration as they exercise and the long call covers the short call.
I got thinking about a method to fix this trade by adding another option to it should it look like it is going to start losing. Buying another set of call contracts will allow the entire trade to profit if the price continues up.
So the trade would be this:
Sell 116 calls
Buy 118 calls
Buy 120 calls
This creates a maximum loss point at the 118 strike. Ideally I would want a longer term trade to allow some intrinsic value to be left in the calls near expiry if the price was heading up...close the trade one month out. Should the price take off I might choose to close part of the trade by buying back the short 116 calls or tying them to the 120 long calls and let the better priced ITM 118 ride.
If the price headed down I make whatever credit was gained from the 116-118 spread less the cost of the cheap 120 call by just letting the trade expire.
Checking in my options book I find that this is called a bear call ladder and my idea is very close except that this is a longer term trade that is best setup completely together...but my idea of a fix is also workable, it just costs more to execute later.
The other one that I found in the book was the collar. I thought I knew what a collar was, or I had one version of it in mind. The collar is a long stock position with a covered call sold for premium gain and a long put bought for protection.
Profits are gained when the stock price plummets and the put becomes valuable due to being ITM and some extrinsic value is added due to volatility, the sold call premiums are kept as well adding to the profits. The stock is a loss but can be kept after expiration in order to resell calls and repurchase puts if desired.
Profits are also gained if the stock climbs to or past the call strike. The upside is capped at this point as the profit is the difference between the original stock price and the call strike, plus the call premium from the sale less the cost of the put that expires worthless.
Again, upside and downside profits. The best part about the collar is that it can be made to be a guaranteed profit or very small loss if the right options are traded for the stock.
The worst part is it is a longer term trade 6 months and up and the cost of the stock must be carried the whole time. Having said that, using a dividend paying stock can add more profits and this strategy can be used in a TFSA as it is really just a covered call and a long put.
I now know what I am likely to do with that account now...or perhaps the RRSP as it has an added advantage of US dividends not subject to the US with holding tax.
Jeff.
If I let a 10 contract $2 spread trade go and it hits the bought call price I will lose close to $2000. If it passes the bought call there are no further losses as the trades cancel each other out at that maximum loss at expiration as they exercise and the long call covers the short call.
I got thinking about a method to fix this trade by adding another option to it should it look like it is going to start losing. Buying another set of call contracts will allow the entire trade to profit if the price continues up.
So the trade would be this:
Sell 116 calls
Buy 118 calls
Buy 120 calls
This creates a maximum loss point at the 118 strike. Ideally I would want a longer term trade to allow some intrinsic value to be left in the calls near expiry if the price was heading up...close the trade one month out. Should the price take off I might choose to close part of the trade by buying back the short 116 calls or tying them to the 120 long calls and let the better priced ITM 118 ride.
If the price headed down I make whatever credit was gained from the 116-118 spread less the cost of the cheap 120 call by just letting the trade expire.
Checking in my options book I find that this is called a bear call ladder and my idea is very close except that this is a longer term trade that is best setup completely together...but my idea of a fix is also workable, it just costs more to execute later.
The other one that I found in the book was the collar. I thought I knew what a collar was, or I had one version of it in mind. The collar is a long stock position with a covered call sold for premium gain and a long put bought for protection.
Profits are gained when the stock price plummets and the put becomes valuable due to being ITM and some extrinsic value is added due to volatility, the sold call premiums are kept as well adding to the profits. The stock is a loss but can be kept after expiration in order to resell calls and repurchase puts if desired.
Profits are also gained if the stock climbs to or past the call strike. The upside is capped at this point as the profit is the difference between the original stock price and the call strike, plus the call premium from the sale less the cost of the put that expires worthless.
Again, upside and downside profits. The best part about the collar is that it can be made to be a guaranteed profit or very small loss if the right options are traded for the stock.
The worst part is it is a longer term trade 6 months and up and the cost of the stock must be carried the whole time. Having said that, using a dividend paying stock can add more profits and this strategy can be used in a TFSA as it is really just a covered call and a long put.
I now know what I am likely to do with that account now...or perhaps the RRSP as it has an added advantage of US dividends not subject to the US with holding tax.
Jeff.
Risk checking for spreads
In light of my small boffo yesterday I thought I might take a closer look as a sheet that I had setup a while back to try to determine risk and ideal spread strikes.
It involved using various Average True Range (ATR) periods with a weighting towards the more recent values to come up with a daily ATR value. This value is then just multiplied by the days to expiry for the potential trade to come up with a possible range to give me a target to look for.
I put in an adjustment for position from the current median value of the 80 day Linear Regression. This indicates a call spread strike higher when the price is near the top of the channel and a put strike lower when it is near the bottom.
The last item is a risk factor that widens the spread strikes depending on which spread (Call or Put) I am looking at based on the LR position again. Values are 1, 2 and 3. Call or Put spreads with the SPY price at the median use a 2, general risk. I might use these for an iron condor under certain circumstances. Call spreads with the price at the top of the channel get a 1 and at the bottom of the channel get a 3. Puts are reversed.
Puts are skewed farther with a built in factor as they are higher risk spreads in general.
Based on these numbers from today's chart I get a call strike to sell at 116.38. I would round up or down depending upon market conditions, it's only one dollar either way so it's not a big deal. The put comes up to 108.23.
Using my target pricing I get a decent call spread at 117-118...which was where I was trying to go yesterday around noon and goofed with another 116-118.
Where I was going with this was to look at the ATR for past 10 trading day periods to get a feel for what might happen over the next 10 days to the expiration of my spreads. I am almost $3 away now and the ATR for hte past 10 days is 1.09. Tha largest 10 day ATR I see in the past was around the $3 mark as SPY was coming off of the March lows... it has been higher but those were due to large drawdowns earlier than that...ATR for uptrends are more relevant right now as ATR peaks on down moves with a few exceptions.
Jeff.
It involved using various Average True Range (ATR) periods with a weighting towards the more recent values to come up with a daily ATR value. This value is then just multiplied by the days to expiry for the potential trade to come up with a possible range to give me a target to look for.
I put in an adjustment for position from the current median value of the 80 day Linear Regression. This indicates a call spread strike higher when the price is near the top of the channel and a put strike lower when it is near the bottom.
The last item is a risk factor that widens the spread strikes depending on which spread (Call or Put) I am looking at based on the LR position again. Values are 1, 2 and 3. Call or Put spreads with the SPY price at the median use a 2, general risk. I might use these for an iron condor under certain circumstances. Call spreads with the price at the top of the channel get a 1 and at the bottom of the channel get a 3. Puts are reversed.
Puts are skewed farther with a built in factor as they are higher risk spreads in general.
Based on these numbers from today's chart I get a call strike to sell at 116.38. I would round up or down depending upon market conditions, it's only one dollar either way so it's not a big deal. The put comes up to 108.23.
Using my target pricing I get a decent call spread at 117-118...which was where I was trying to go yesterday around noon and goofed with another 116-118.
Where I was going with this was to look at the ATR for past 10 trading day periods to get a feel for what might happen over the next 10 days to the expiration of my spreads. I am almost $3 away now and the ATR for hte past 10 days is 1.09. Tha largest 10 day ATR I see in the past was around the $3 mark as SPY was coming off of the March lows... it has been higher but those were due to large drawdowns earlier than that...ATR for uptrends are more relevant right now as ATR peaks on down moves with a few exceptions.
Jeff.
Monday, January 4, 2010
Today's spreads
Well, I placed a trade over at Optioneer, I doubt it will get filled but I put it in just in case.
My Questrade account had more activity. Seeing as I place call and put spreads separately one or the other will get filled if the price moves a bit in the direction of the spread. I placed a 116-118 call spread and it was filled pretty early as SPY jumped right off the bat. The put spread didn't go anywhere.
I later called and cancelled my put spread to free up buying power and decided to place another call spread, 117-118 for a smallish premium gain in line with the first 116-118 spread seeing as SPY had moved up $1 that would be about right. SPY peaked and was starting to head down a bit so I changed my mind while on the phone with the order desk...I should have just called back.
I goofed.
I wanted to take advantage of the jump in SPY by placing a 116-117 spread as the premium was setting up really nice as the discrepancy between premiums was large...too large. I ended up placing another 116-118 for an 13 cent credit...the credit for the 116-117... and ended up with 19 cents on the 116-118 instead...
I am not exactly sure how I managed that but I got in a hurry and was looking at the wrong column. For the exact same exposure the 116-117 with 20 contracts was $230 compared to the 116-118 at 10 contracts $160....DUH!
Because I got the net credit wrong the order executed right away so I didn't even get a chance to call back to cancel it and place the correct order. I now have two identical spreads one at 11 cents and one at 19 cents that will be combined somehow into one. Dollar cost averaging spread trades anyone? My spreadsheets do not accommodate this trade.
Advantage, if I have to close the 116 strike options they can be closed in one transaction instead of two I suppose.
Live and learn.
Jeff.
My Questrade account had more activity. Seeing as I place call and put spreads separately one or the other will get filled if the price moves a bit in the direction of the spread. I placed a 116-118 call spread and it was filled pretty early as SPY jumped right off the bat. The put spread didn't go anywhere.
I later called and cancelled my put spread to free up buying power and decided to place another call spread, 117-118 for a smallish premium gain in line with the first 116-118 spread seeing as SPY had moved up $1 that would be about right. SPY peaked and was starting to head down a bit so I changed my mind while on the phone with the order desk...I should have just called back.
I goofed.
I wanted to take advantage of the jump in SPY by placing a 116-117 spread as the premium was setting up really nice as the discrepancy between premiums was large...too large. I ended up placing another 116-118 for an 13 cent credit...the credit for the 116-117... and ended up with 19 cents on the 116-118 instead...
I am not exactly sure how I managed that but I got in a hurry and was looking at the wrong column. For the exact same exposure the 116-117 with 20 contracts was $230 compared to the 116-118 at 10 contracts $160....DUH!
Because I got the net credit wrong the order executed right away so I didn't even get a chance to call back to cancel it and place the correct order. I now have two identical spreads one at 11 cents and one at 19 cents that will be combined somehow into one. Dollar cost averaging spread trades anyone? My spreadsheets do not accommodate this trade.
Advantage, if I have to close the 116 strike options they can be closed in one transaction instead of two I suppose.
Live and learn.
Jeff.
Sunday, January 3, 2010
"...but I digress"
I was talking to my youngest daughter today, she is 11 years old now. Often she will ask me about something, it could be anything, and the inevitable part of the question comes down to "why?". She never wants the superficial why but the real deep down reason why. All too often the real deep down reason is money whenever the question pertains to human interaction.
Today we were talking winning a million dollars and what would we do with it. There was an ad on the radio which brought the subject up. She chuckled after I gave my answer and she noted that it was the same answer the last time we talked about this.
I figured it was a good time to talk about the importance of a savings plan with a loose investment twist... seeing as we all of a sudden had a million to deal with.
I told her that if she could make a deal with herself that she will save $200 a month once she has started working, even if it is part time student jobs, that she will be better off in the long run and wouldn't ever really need a million dollar lottery win. If she misses a month because she really has to then track it and pay it back later but always, whenever possible, put that money aside first, before buying the extraneous stuff. We did some quick math to get an idea of how much we might have after a few years, fun discussion.
I am sure that I read about some that have done this, and were lucky enough to have been taught to do this early on. I told her that I wished someone had told me this when I was a kid. All I ever remember is the marketing for RRSPs through the bank that went on about saving for retirement... I did not put this in a retirement savings light as that is too far away for a kid to conceptualize.
I figure that if she really does this, when it comes time for some of these expenses she will have figured it out for herself that leaving it to grow is more important than spending it and that she will have taken it far beyond the initial kid savings plan when that time comes anyway.
This prompted me to do a quick calculation based on a $200 per month contribution with a variable rate of annual return. I figured that a 7% annual ROI with monthly compounding would be easy enough and started with that.
10 years after inception the balance is just over $35,000 with just under $11,000 being gains.
I played around with the numbers a bit and came up with the following results after 10 years:
(always the same contributions, $24,000 over the ten years)
10% Annual ROI : Balance = $41,510 : ROI = 71.53%
15% Annual ROI : Balance = $55,931 : ROI = 131%
20% Annual ROI : Balance = $76,672 : ROI = 216%
25% Annual ROI : Balance = $106,760 : ROI = 341%
30% Annual ROI : Balance = $150,736 : ROI = 523%
35% Annual ROI : Balance = $215.429 : ROI = 790%
40% Annual ROI : Balance = $311,135 : ROI = 1186%
45% Annual ROI : Balance = $453,399 : ROI = 1774%
50% Annual ROI : Balance = $665,735 : ROI = 2651%
The trick is consistent contributions and consistent gains, even if small.
Jeff.
Today we were talking winning a million dollars and what would we do with it. There was an ad on the radio which brought the subject up. She chuckled after I gave my answer and she noted that it was the same answer the last time we talked about this.
I figured it was a good time to talk about the importance of a savings plan with a loose investment twist... seeing as we all of a sudden had a million to deal with.
I told her that if she could make a deal with herself that she will save $200 a month once she has started working, even if it is part time student jobs, that she will be better off in the long run and wouldn't ever really need a million dollar lottery win. If she misses a month because she really has to then track it and pay it back later but always, whenever possible, put that money aside first, before buying the extraneous stuff. We did some quick math to get an idea of how much we might have after a few years, fun discussion.
I am sure that I read about some that have done this, and were lucky enough to have been taught to do this early on. I told her that I wished someone had told me this when I was a kid. All I ever remember is the marketing for RRSPs through the bank that went on about saving for retirement... I did not put this in a retirement savings light as that is too far away for a kid to conceptualize.
I figure that if she really does this, when it comes time for some of these expenses she will have figured it out for herself that leaving it to grow is more important than spending it and that she will have taken it far beyond the initial kid savings plan when that time comes anyway.
This prompted me to do a quick calculation based on a $200 per month contribution with a variable rate of annual return. I figured that a 7% annual ROI with monthly compounding would be easy enough and started with that.
10 years after inception the balance is just over $35,000 with just under $11,000 being gains.
I played around with the numbers a bit and came up with the following results after 10 years:
(always the same contributions, $24,000 over the ten years)
10% Annual ROI : Balance = $41,510 : ROI = 71.53%
15% Annual ROI : Balance = $55,931 : ROI = 131%
20% Annual ROI : Balance = $76,672 : ROI = 216%
25% Annual ROI : Balance = $106,760 : ROI = 341%
30% Annual ROI : Balance = $150,736 : ROI = 523%
35% Annual ROI : Balance = $215.429 : ROI = 790%
40% Annual ROI : Balance = $311,135 : ROI = 1186%
45% Annual ROI : Balance = $453,399 : ROI = 1774%
50% Annual ROI : Balance = $665,735 : ROI = 2651%
The trick is consistent contributions and consistent gains, even if small.
Jeff.
Shifting fom Linear Regression entries.
Given my thoughts on timeframes and cashflow issues I may have inadvertently shifted my idea from Linear Regression spread entries to the wider margin iron condors placed as cash becomes available. Seeing as the LR optimized trades are to boost yield and reduce risk they will be time sensitive in that not always will they line up when I have freshly freed up cash to trade with.
Looking back on LR setups I can have cash in place all the time but can I have maximum cash in play constantly?
What is the reduction in cashflow as I average the daily trading over the entire capital base and total time period and include those days or weeks that I have some or all of my cash sitting idle?
What is the effect of applied savings to the account balance to enable larger positions in my trading rather than relying strictly on account growth? This is something that I completely overlook when I study returns and something that I should not overlook.
Re-visiting the cashflow vs yield issue...beating a dead horse yet?
There are a myriad of other issues and ideas that I could look at to apply toward my trading in future. I figure that, seeing as I am cashflow targeted now, I should consider at least these fresher ideas.
Applied savings is probably larger than I anticipate. I can easily setup automatic transfers to my Questrade trading account in what ever denomination I feel that I can manage. Use it in place of a savings account in the sense that I can also withdraw as easily...seeing as my trading is no longer registered account based.
Is this safe? Given the wider margin and lower accepted daily yield I believe that it is safe enough. I will need to apply some exit strategy rules to allow safety margins over and above the strike from price spacing. Also this savings is usually used to buy "extras" other than groceries, paying bills and the like so if I all of a sudden I lost it all it would not be sorely missed. Besides, the likelihood of that happening is really small.
Applying this additional capital on a regular basis allows me to up the trading base by a few contracts at a time with each transfer thus increasing the cashflow regularly. I have not done any forecasting to include this at all so I am unsure of the final effect overall, but it may offset the effect of using linear regression entries somewhat if that is not already offset by keeping total cash in play all the time.
Using sort timeframes, under 30 days, means that I could break my capital in two chunks and use half for the put side and half for the call side... riskier than I might like. For now I will remain with the idea of applying about $2000 per side and using the balance to apply as LR entries until I am more comfortable with the plan.
Back to cashflow again. Assuming that I apply savings, use wider margins with lower yields, keep all cash in play in one form or another and concentrate strictly on cashflow I can produce a different type of trading game. The larger base, using full capital on these trades, increases the yield due to lowering of the commission relative rate (increasing the size costs $1 per contract as opposed to another $9.95 plus $1 per contract for a new trade). Seeing at these small position sizes it makes a difference, enough that bumping up to maximum right now changes some for the strikes by $1 thus decreasing the risk factor.
This turns into a similar game as investing for dividends. "Slow and steady wins the race" as the saying goes. I still like the idea of hitting larger returns overall but I will be satisfied to see the cashflow progressively increase at a greater than the typical expectation for a dividend plan rate. That was a 30 year plan IF my timing and the stock market timing worked out perfectly... along with the company dividend plans continuing on track.
I still have three spreads tying up some capital now but they all expire on Jan 15th. Even with placing the January trade tomorrow it will expire at the same time freeing up all of my account...except for a small stock position. At that point I will review my ideas and goals and see what my next step might be.
Off to ceck out the Optioneer trade setups for tomorrow now.
Jeff.
Looking back on LR setups I can have cash in place all the time but can I have maximum cash in play constantly?
What is the reduction in cashflow as I average the daily trading over the entire capital base and total time period and include those days or weeks that I have some or all of my cash sitting idle?
What is the effect of applied savings to the account balance to enable larger positions in my trading rather than relying strictly on account growth? This is something that I completely overlook when I study returns and something that I should not overlook.
Re-visiting the cashflow vs yield issue...beating a dead horse yet?
There are a myriad of other issues and ideas that I could look at to apply toward my trading in future. I figure that, seeing as I am cashflow targeted now, I should consider at least these fresher ideas.
Applied savings is probably larger than I anticipate. I can easily setup automatic transfers to my Questrade trading account in what ever denomination I feel that I can manage. Use it in place of a savings account in the sense that I can also withdraw as easily...seeing as my trading is no longer registered account based.
Is this safe? Given the wider margin and lower accepted daily yield I believe that it is safe enough. I will need to apply some exit strategy rules to allow safety margins over and above the strike from price spacing. Also this savings is usually used to buy "extras" other than groceries, paying bills and the like so if I all of a sudden I lost it all it would not be sorely missed. Besides, the likelihood of that happening is really small.
Applying this additional capital on a regular basis allows me to up the trading base by a few contracts at a time with each transfer thus increasing the cashflow regularly. I have not done any forecasting to include this at all so I am unsure of the final effect overall, but it may offset the effect of using linear regression entries somewhat if that is not already offset by keeping total cash in play all the time.
Using sort timeframes, under 30 days, means that I could break my capital in two chunks and use half for the put side and half for the call side... riskier than I might like. For now I will remain with the idea of applying about $2000 per side and using the balance to apply as LR entries until I am more comfortable with the plan.
Back to cashflow again. Assuming that I apply savings, use wider margins with lower yields, keep all cash in play in one form or another and concentrate strictly on cashflow I can produce a different type of trading game. The larger base, using full capital on these trades, increases the yield due to lowering of the commission relative rate (increasing the size costs $1 per contract as opposed to another $9.95 plus $1 per contract for a new trade). Seeing at these small position sizes it makes a difference, enough that bumping up to maximum right now changes some for the strikes by $1 thus decreasing the risk factor.
This turns into a similar game as investing for dividends. "Slow and steady wins the race" as the saying goes. I still like the idea of hitting larger returns overall but I will be satisfied to see the cashflow progressively increase at a greater than the typical expectation for a dividend plan rate. That was a 30 year plan IF my timing and the stock market timing worked out perfectly... along with the company dividend plans continuing on track.
I still have three spreads tying up some capital now but they all expire on Jan 15th. Even with placing the January trade tomorrow it will expire at the same time freeing up all of my account...except for a small stock position. At that point I will review my ideas and goals and see what my next step might be.
Off to ceck out the Optioneer trade setups for tomorrow now.
Jeff.
Target Yield Adjustment?
The big question running about in my head right now is can I lower my target yield and still make money? While the short answer is yes, the long answer becomes am I willing to do so?
Due to the market circumstances and the end of year seeming top out the premiums are very low for SPY and sector ETF options right now. Even over in the futures arena I saw one of the lowest value trades in all of my research into the Optioneer setup last week.
I considered lowering my target yield, among some other ideas for option strategies, but found that I cannot do so in any but the SPY chain. SPY is liquid enough, and large enough that there is enough premium value to go outside of my target if only to keep money in play. Dropping from 0.2% per day to 0.1% per day drops the ROR from 10% to 5%, roughly.
Once again, I need to remind myself that ROR is not king, cashflow is.
In keeping with the theme I figured a mix might be in order and came up with these iron condor style trades for tomorrow. I compared the January 0.2% call and 0.1% put against the February versions. This gives me higher premiums for the call side, which is less likely to get hit in my mind and wider margins for the put side which is always in jeopardy. While I don't like the idea of being in a trade for 46 days I want to compare the ideas as my gut tells me to stay short... let's see if the numbers justify my feeling.
January expiry iron condor
Buy 10 Jan 118 calls and sell 10 Jan 116 calls for a credit of 11 cents
Buy 5 Jan 100 puts and sell 5 Jan 104 puts for a credit of 9 cents
Combined daily cashflow for the 11 day duration is $9.56 with a risk of less than $4000
That is just over the 0.2% per day with a total $105.10 return or 2.6% ROR.
Not that big but based on the timeframe not too shabby either...2.6% for two weeks.
February expiry iron condor
Buy 20 Feb 120 calls and sell 20 Feb 119 calls for a credit of 13 cents
Buy 7 Feb 97 puts and sell 7 Feb 100 puts for a credit of 19 cents
Combined daily cashflow for the 46 day duration is $6.94 with a risk of just more than $4000
That is just under the 0.2% per day with a total $319.10 return or 7.97% ROR.
The total numbers look better but in reality they are not. This trade is much longer, more can happen and the premiums are not as good on a pro-rated basis.
Comparing the same timeframes shows that the second trade returns 2.27% in the same timeframe as the first trade returning 2.6%. My best bet is to take the first trade tomorrow for January even with a small lenience and plan to place the February trade as it expires. This keeps my money in play while keeping to the shorter timeframes where the premium erodes faster and the risk is less.
I should note why the discrepancy between the two expiry trades exists. The call spread for January is yielding a 0.38% daily return. The next strike call spread is under 0.1% so there is a steep drop off in premiums. If I change the credit on the trade to be in line with the February daily return the cashflow is more comparable. This is the idea in trading options is sometimes to find the better prices where they are over and under priced. I set my spreadsheets up to take advantage of these as I check a $12 strike range for spreads of $1 to $4 and use the best single spread combo. That is also why my position sizing is all over the place as I try to compare similar risks. A $2000 risk will take between 5 and 20 contracts to match depending upon the spread.
What I am getting at here is not so much that the Shorter term is a higher yielding trade all the time, just that is is similar enough that it have better numbers due to the shorter timeframe involved while optimizing the spread ranges.
Now, if this trade can be filled with tomorrow's trading is another issue altogether.
Am I willing to take the shorter trade while reducing the yield from my original plan? You bet.
The other side of the coin is to only place the call side trades. Doing that and boosting my initial January trade to a full $4000 risk would yield a much higher cashflow of around $18 per day or 0.38% ...well over my 0.2% target.
Strategy for tomorrow will be to watch the pre-market and see what the sentiment is likely to be off of the bell. If everything is going to hold the drop of Thursday the the call side only might be in order. If it looks as though a surge and higher open then close is likely then use the full iron condor trade.
Jeff.
Due to the market circumstances and the end of year seeming top out the premiums are very low for SPY and sector ETF options right now. Even over in the futures arena I saw one of the lowest value trades in all of my research into the Optioneer setup last week.
I considered lowering my target yield, among some other ideas for option strategies, but found that I cannot do so in any but the SPY chain. SPY is liquid enough, and large enough that there is enough premium value to go outside of my target if only to keep money in play. Dropping from 0.2% per day to 0.1% per day drops the ROR from 10% to 5%, roughly.
Once again, I need to remind myself that ROR is not king, cashflow is.
In keeping with the theme I figured a mix might be in order and came up with these iron condor style trades for tomorrow. I compared the January 0.2% call and 0.1% put against the February versions. This gives me higher premiums for the call side, which is less likely to get hit in my mind and wider margins for the put side which is always in jeopardy. While I don't like the idea of being in a trade for 46 days I want to compare the ideas as my gut tells me to stay short... let's see if the numbers justify my feeling.
January expiry iron condor
Buy 10 Jan 118 calls and sell 10 Jan 116 calls for a credit of 11 cents
Buy 5 Jan 100 puts and sell 5 Jan 104 puts for a credit of 9 cents
Combined daily cashflow for the 11 day duration is $9.56 with a risk of less than $4000
That is just over the 0.2% per day with a total $105.10 return or 2.6% ROR.
Not that big but based on the timeframe not too shabby either...2.6% for two weeks.
February expiry iron condor
Buy 20 Feb 120 calls and sell 20 Feb 119 calls for a credit of 13 cents
Buy 7 Feb 97 puts and sell 7 Feb 100 puts for a credit of 19 cents
Combined daily cashflow for the 46 day duration is $6.94 with a risk of just more than $4000
That is just under the 0.2% per day with a total $319.10 return or 7.97% ROR.
The total numbers look better but in reality they are not. This trade is much longer, more can happen and the premiums are not as good on a pro-rated basis.
Comparing the same timeframes shows that the second trade returns 2.27% in the same timeframe as the first trade returning 2.6%. My best bet is to take the first trade tomorrow for January even with a small lenience and plan to place the February trade as it expires. This keeps my money in play while keeping to the shorter timeframes where the premium erodes faster and the risk is less.
I should note why the discrepancy between the two expiry trades exists. The call spread for January is yielding a 0.38% daily return. The next strike call spread is under 0.1% so there is a steep drop off in premiums. If I change the credit on the trade to be in line with the February daily return the cashflow is more comparable. This is the idea in trading options is sometimes to find the better prices where they are over and under priced. I set my spreadsheets up to take advantage of these as I check a $12 strike range for spreads of $1 to $4 and use the best single spread combo. That is also why my position sizing is all over the place as I try to compare similar risks. A $2000 risk will take between 5 and 20 contracts to match depending upon the spread.
What I am getting at here is not so much that the Shorter term is a higher yielding trade all the time, just that is is similar enough that it have better numbers due to the shorter timeframe involved while optimizing the spread ranges.
Now, if this trade can be filled with tomorrow's trading is another issue altogether.
Am I willing to take the shorter trade while reducing the yield from my original plan? You bet.
The other side of the coin is to only place the call side trades. Doing that and boosting my initial January trade to a full $4000 risk would yield a much higher cashflow of around $18 per day or 0.38% ...well over my 0.2% target.
Strategy for tomorrow will be to watch the pre-market and see what the sentiment is likely to be off of the bell. If everything is going to hold the drop of Thursday the the call side only might be in order. If it looks as though a surge and higher open then close is likely then use the full iron condor trade.
Jeff.
Saturday, January 2, 2010
Playing in the traffic
I have been doing a fair amount of thinking over the issue of yield and target profits for my trading plan for the new year. The only reason this is mentioned as if it were a new year thing is due to the coincidental timing. I don't believe in new year's resolutions, only changes that need to be initiated and initiated when they ought.
My thoughts keep going back to general guidelines mentioned by a few sources when it comes to determining where to sell calls or puts and what yield to aim for. They all miss the mark in that timelines are loose, most mention the shorter the better and less than anywhere from 30 to 45 days is the common. Yield expectations are between 5% and 10% and strikes are to be 10% away from the current price.
This is like telling someone to look both ways before crossing the road. What is missed is that this does not work to cross a 4 lane highway nor does it address what to do should you get out there and the situation changes.
Everyone from option services to ETF and stock information services all say to go play in the traffic but fail to give the information necessary to negotiate the highway when all the other cars are larger and are going much faster than me.
Of course this has never stopped me in the past.
0.2% has been tossed around often in my posts as it equals 0.2% Return On Risk on a daily basis. Based on a $5000 capital base that equates to a $10 per day (7 day week, not trading days) for the duration of the trade.
I will be sticking to this. For every small trade put on that meets this target when added to the combined trading account the yield of $10 per day per $5000 risked shall be achieved.
As I mentioned recently, I have reworked my spreadsheets to reflect this target and have ran some samples for the current market levels, spreads are of very low yield so far. I have noticed that I cannot meet this target and get the strike comfortably away from the price when trading SPY right now. Playing with the call side of the spectrum I can meet my target at 0.26% for a 5 contract January call spread of $2 at strike of 116... that is only 4.37% away from SPY at $111.14.
Going for February gives 0.24% for a 10 contract February call spread of $1 at strike 119 which is only 7.07% away from $11.14.
Both spreads are risking just under $1000 but have a tight margin for movement given the respective timeframes.
This is why the index futures contracts are better, even if much more expensive to trade. Todays' numbers have the current Optioneer call spread 9.8% away from the closing level for the February expiry. The downside is that the daily yield is 0.16% or about $7.10 per day.
That would be the equivalent of trading the 122 strike in SPY, 9.77% away with a profit of 0.07%. I could match the target of 0.16% by selling 120 strikes but they are a full 2% tighter.
This leads me to reconsider using Questrade spread trades at all, as much as I like playing with them I cannot create at least as low a risk trade as I can with futures... easily. Perhaps the added risk is not as large a factor as I imagine if I only keep on the correct side of the trend and use the regression channels strickly. Optioneer takes both sides of the iron condor every trade regardless where the market levels are, I will only be taking both sides based on the linear regression lower risk entries by legging into them on a staggered timeline as I did last time.
Jeff.
My thoughts keep going back to general guidelines mentioned by a few sources when it comes to determining where to sell calls or puts and what yield to aim for. They all miss the mark in that timelines are loose, most mention the shorter the better and less than anywhere from 30 to 45 days is the common. Yield expectations are between 5% and 10% and strikes are to be 10% away from the current price.
This is like telling someone to look both ways before crossing the road. What is missed is that this does not work to cross a 4 lane highway nor does it address what to do should you get out there and the situation changes.
Everyone from option services to ETF and stock information services all say to go play in the traffic but fail to give the information necessary to negotiate the highway when all the other cars are larger and are going much faster than me.
Of course this has never stopped me in the past.
0.2% has been tossed around often in my posts as it equals 0.2% Return On Risk on a daily basis. Based on a $5000 capital base that equates to a $10 per day (7 day week, not trading days) for the duration of the trade.
I will be sticking to this. For every small trade put on that meets this target when added to the combined trading account the yield of $10 per day per $5000 risked shall be achieved.
As I mentioned recently, I have reworked my spreadsheets to reflect this target and have ran some samples for the current market levels, spreads are of very low yield so far. I have noticed that I cannot meet this target and get the strike comfortably away from the price when trading SPY right now. Playing with the call side of the spectrum I can meet my target at 0.26% for a 5 contract January call spread of $2 at strike of 116... that is only 4.37% away from SPY at $111.14.
Going for February gives 0.24% for a 10 contract February call spread of $1 at strike 119 which is only 7.07% away from $11.14.
Both spreads are risking just under $1000 but have a tight margin for movement given the respective timeframes.
This is why the index futures contracts are better, even if much more expensive to trade. Todays' numbers have the current Optioneer call spread 9.8% away from the closing level for the February expiry. The downside is that the daily yield is 0.16% or about $7.10 per day.
That would be the equivalent of trading the 122 strike in SPY, 9.77% away with a profit of 0.07%. I could match the target of 0.16% by selling 120 strikes but they are a full 2% tighter.
This leads me to reconsider using Questrade spread trades at all, as much as I like playing with them I cannot create at least as low a risk trade as I can with futures... easily. Perhaps the added risk is not as large a factor as I imagine if I only keep on the correct side of the trend and use the regression channels strickly. Optioneer takes both sides of the iron condor every trade regardless where the market levels are, I will only be taking both sides based on the linear regression lower risk entries by legging into them on a staggered timeline as I did last time.
Jeff.
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