Hi traders. there has been some good discussion and points in the comment sections regarding when some traders like to close their positions. I thought I would add my thoughts.
I won't get into when to close a losing position, other than to say my rule is if the premium doubles (usually the ask) , I usually immediately close.
So, when to close a winning position.
One of my basic guidelines is when the remaining amount left is not earning me more than 1% on my maintenance used. I generally close it.
But, when closing a winning position I have several other guidelines.
1. I only close if I have already found a better use for my maintenance. I don't want to have closed it and then go looking for a new position. Have a plan before making a move.
2. If there is only a few days left, unless you are going into the next weekly or moving into the nest month, it usually pays to let it just expire. This comes under the heading of 'You don't want to jeopardize a wining position for a more risky one that probably doesn't pay all that much more.
Some of these are of course not written in stone but basic guidelines. They fall under the adage of - let your winners run and cut your losses.
17 comments:
Interesting put action today:
Leading today's option volume for AA are the January 16 puts, as more than 11,500 have traded against open interest of 3,214. This morning's activity kicked off with one print of 5,000 sold for $0.99. The rest of the volume traded in smaller blocks in the next minute, starting at $1.01 and going down to $0.98.
This put selling isn't tied to any stock trading that we see, so it appears to be simple in-the-money put selling. This indicates that the trader is very willing to buy the stock, which will occur if assigned, but would effectively get it at a discount with the additional premium of the short puts.
So the stock is trading in the 15's and there is heavy selling of 16 puts, risky, someone must know something.
Very interesting Nicky, thanks
I see that earnings are to be reported on Jan 10..Hmmm like you said...does someone know something. It has now traded over 13K of the 16 put strike. That is more volume than people guessing. But how to play it? I usually avoid these plays as I would just be guessing and usually on the wrong side..lol It will be interesting to see how it plays out over the next couple of weeks.
Hi Jerry,
Great book and love the blog. Many informative posts.
Fidelity charges 15% strike + premium for margin maintenance. ROI suffers. I've been with them a while but may need to switch brokers. Is it common for these rates to be negotiated?
CSTR looks like a potential canidate. Others RIO, BHP, and CTXS.
Thanks, Jay
Hi Jay, thanks for the words on the book.
Yes, most brokerages will negotiate some. The last time I went to Ameritrade with a competing bid they did lower it some.
Ameritrade charges the normal maintenance rates of either 20% of stock price minus the diff or 10% of strike also plus the prem. It is pretty standard throughout the business?
I was once at Fidelity also schwab and a few others. I have no special ties to Ameritrade but they do treat me pretty good and until i can beat their prices i will stay.
I will check out your suggestions on the stocks. I'm always interested in new additions to my list.
Thanks
Jerry
A Daily Useful Exercise in Trade Discipline: Updating Stop Orders (a.k.a. "Drop The Stop")
At the end of each day, I've been comparing the closing "mark" premium prices in my Put positions to my queued Stop Orders. And if the premium price dropped (which it will over time in most cases), I've been replacing my Stop Order with a lower Stop Order price.
What I really like about this process is that this forces me to run a daily check and re-adjust my "get out of dodge plan" as needed. Here's a great example using CMG:
On 12/16, I sold CMG JAN 175 Puts for .80 and then initiated a Stop Order at 1.60.
As the premium has dropped, I've also been dropping the Stop Order price.
Today, CMG JAN 175 closed at mark .375 so I replaced my Stop Order to .75, which is now interestingly below where I originally sold the Put less than two weeks ago. It's also interesting that CMG was around 233 on 12/16 and now is at 221, 12 points lower --- however, the time value premium still dropped by half (...as Jerry discussed in an earlier post about the power of using deep OTM Puts in the Crumbs method...)
While I still feel *great* about CMG -- if for whatever silly reason it tanks, then I'm out without a loss.
My greatest concern in this process is that I drive the Stop Order too low too quickly and then get stopped out on a short-term price swing. So even when I "drop the stop" I try to always keep it at least double the current option mark value.
Thanks for the info John I will keep that in mind.
Weekly's are coming to a close, Currently I don't see anyway to look into the next weeks weekly's, is there a way to do this? also anyone want to list which stocks they are looking at for weekly's this week?
I think that next week's weeklys should be out tomorrow.
For awhile I was doing lots of weeklys but I am not finding that I am comfortable with the low amount of cushion you can get. I have reverted back to wanting to sleep better. lol.
I am more into using monthlys with the much bigger cushion and playing them somewhat like weeklys. i.e. rolling up etc. I don't want to be holding the bag if there is another 'flash crash' etc
For weeklys...
There are some good one out there but a lot of searching. AMZN, BIDU, NFLX,GS, PCLN.
Jerry
John, would it be easier to just use trailing stops and tweek it if necessary!
Fulgore, weekly,s are out Thursday morning,take a look at spy or iwm.
Hockeyguy,
I've considered a trailing stop but I prefer to have more direct control of the specific stop price. I'm not sure I would be comfortable with the market automatically controlling my stop price.
I am enjoying the peace of mind the stop order provides...a form of insurance. It's become an important part of the process for me.
Thanks hockeyguy I had a look. I am mainly focusing on monthly's right now and researching weekly's. I am finding that with weekly's because I am so much closer to the underlying that the maintenece costs are much higher. With that said finding a return of around 4% with a decent cushion is difficult. I will continue researching, but if i don't feel comfortable I will stick with monthly's.
FDX FEB 80 worth a look:
While not quite at 20% below the current price of 93, this is an S&P "5-Star" Stock. Thus, Fedex is a more conservative play, so less volatility and ROI is a little lower...but safer than most, too.
Stats:
FDX FEB 80 is 14% cushion (13 pts)
Bid Price = .43 (spread is only .04)
ROI = 5.1% (but exp is 50-days away)
Equivalent to 3% pro-rated monthly return over 50-day period
ToS Prob Exp = 89.5%
Strong Analyst Ratings with a consensus target of 105.5
Chart looks good - above 50-day MA (last time below 80 was 9/1)
Earnings is 3/17
While not 100% "yes" to all interview questions, mainly due to only 14% OTM, this seems to be a high quality company with a great outlook, especially with the continuous growth of online retail market.
Sold a couple of NFLX 155 JAN PUTS.....again I am breaking some rules for sure....but I like the 6 percent return and that earnings come out the Monday after expiration Friday for NFLX. Sure, NFLX could trade lower in January, but I still have a roughly 15 percent cushion....
John, Thanks for the detailed information it really helps me when looking at FDX and others. I figured out the ToS probablity list and I found it is just a click away. It actually lists the % you will lose money but easy enough to understand. You just confirmed that I am looking at the correct number thanks again!
John: Where do you look for a company,s analyst rating and target prices? Is there a web site you can just plug in a stock symbol and it will give you this information?
Thanks.
Hockeyguy,
I get the analysts consensus ratings and target price at:
http://www.nasdaq.com
For Example, FSLR:
http://www.nasdaq.com/earnings/analyst_summary.asp?symbol=FSLR&selected=FSLR
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