Hi all, Well it appears all of my positions will expire today. I hope it has been a good week for all of you. I transferred my brokerage at the start of the week so a little down time, but up and running now.
I have to admit after fighting it for years I now seem to be doing more and more spreads. These are only for weekly options and then limited to just a few stocks. The availability of weekly puts made more sense out of spreads than in the past. At this time I am using AAPL, AMZN, PCLN NFLX, GOOG, BIDU. The danger and temptation is to move the strike price too close for my comfort. I will wait until Monday or Tuesday before opening the next weekly spreads. When doing a vert put credit spread, the returns seem small but the lower maint makes up for it. If you are using a 5 pt difference between the two strikes you need 5 pts of maint for each put. If doing a weekly getting around 1 % per week is 4+% per month. So don't be piggish, just pick up the crumbs. They are there also while doing spreads.
As each Put returns less the temptation is to move the strike way too close. My advice is to be careful and avoid what could be a real trap if things go wrong.
The market keeps going up and it makes it easy to sell puts in any form. But one of these days it will turn and we don't want to be the one looking for a chair when the music stops. Make your money but don't get fooled thinking you are a genius in this market. Like the late 90's, a monkey and a dart board can make money selling puts in this market. All we need to burst our bobble is a couple of days of 200-400point drops and it will separate the better players from the would-be players. So do be careful.
The world is a mess with gasoline pushing 4 and problems all over the mid-east. Even though the market has been doing just fine, things are out there going bump in the night.
Good and safe trading
Jerry
84 comments:
Jerry, thanks for reemphasizing caution! Yes, the market is up, but I'd rather be safe than sorry in the end. Good trading everyone! =)
Jerry,
You have a great way of explaining things to us. Thank you for that. Normally I remain quiet on the blog and just read. I do enjoy your trade picks and have profited from them. I love trading spreads and this year and started to trade weeklys. Picking up the crumbs can add up when trading by the week. Normally I trade with 30 to 45 day from expiration and try to get 8 to 10% ROI. Trading by the week I can scale the percentage down and still add up to more gains in a 30 to 45 day period.
What brokerage are you using now? And what happened with using Trade King?
Chris
Jerry,
My first spread today for April 16 Exp.
AMZN 155/165 +0.35
I don't know if this is too close, fingers crossed.
Kenny
Hi Ken, a little risky for me. Some evidence is that you are getting 3.8% in two weeks, which of course could be 7.6% a month. That is a big number so a red flag. Also the 10 pt spread negates the somewhat protection of the bought put. the 165 put could go up quite a bit and the 155 put hardly move? But AMZN is a good stock and no earns until 4-22. Another possible problem is that earnings are going to start coming and if many miss then it drags down other stocks even the good ones. I love puts and make my living from them but I have learned to give them lots of respect. Crumbs...
Jerry
I sold a bunch of AAPL 310 APR2 Weeklys - good cushion with good premium for one week of action -- if AAPL dips, go for the 305.
Currently APR2 310 is around .33 -- that's 1% ROI and 34 pts of cushion for 1 week. Or the 305 is around .26 -- that's still .84% for 1 week with 39 pts of cushion.
Jerry,
Thanks for the input!
I should have tried 5 pt spread, and lower strike price.
By the way if the stock price goes south,how do you hedge the vertical put spread? do you buy additional puts? or just close the sold put and bought put ?
-Kenny
From the 2011 Stock Traders Almanac:
April is the best Dow month (average 2.0%) since 1950. In pre-presidential election years since 1951, average gain is more than double, (Dow 4.3%, S&P 3.7%, Nasdaq 3.7%). Rarely a dangerous month, recent exceptions 2002, 2004, 2005. Prone to weakness after mid-month tax deadline.
1st trading day of OE week: S&P 19up/12dwn (1980-2010)
OE week; 23up/8dwn (1980-2010).
All the April exceptions are within the past 9 years....hmmm....
Hi,
Re:Kenny's 10 point spread
One advantage of the wider spread is that he can reposition his short option if the market gets too close. Just rollover from the 165 to the 160. The extra 5 can salvage a position and minimize loss.
New to the blog but lots of great information.
dbernard52
Hello Jerry
I am in Hong kong and I have read your book. Absolutely fantastic and I am VERY grateful to you !! For the past six months, i have been collecting crumbs - thanks to you. I used to rely on fund managers before, with often disastrous results !!
Just one quick question: when you sell naked puts on weeklies, do you apply all 8 filters, including the one of the 20% "cushion"?
Hi dbernard52,
Thanks for the tip! I'll try it if the market goes down. I feel 165 is a bit risky.
Hi Etienne, welcome aboard and glad you enjoyed the book. I am still evolving my risk rules for weeklys. I do not use the 20% rule usually but often do not trade until late Tuesday or on Wednesday. Also it must be figured in, what is the stock price. A stock trading at 30 and 10% is 3 points- a stock like aapl trading around 345 and 10% give you 34 points of safety. So i do get a little closer to the stock but try to control that risk by controlling the time. The weeklys along with spreads are a 'works in progress' evolution.
As Dbenard said, there are many ways to trade options and if done with discipline and some guidelines (rules) you can be successful. Allowing 10 points should work on a spread as you can roll down as mentioned. But my advice would be to combine that with a strike that is not too close to the stock price. That should allow you enough room to mitigate an unexpected drop of the stock price. Also it must be figured in if the higher maint of 10 point overcomes the bigger prem you receive. Also as I mentioned in one of the above post, a bought strike of only 5 pts difference will/might rise with a the sold put rising allowing you to recoup some loss.
great ideas and post by all
Jerry
Hey Jerry,
With only 10 trading days left this OE, do any monthly straight puts, not spreads, look interesting to you.
Ed
Hi all,
I know I'm a board rookie, but I found something this weekend that looks great. You all may already know about this, but for those that don't.
Its a virtual trading platform. You can sell puts, vert-put-spreads, and many other trades. You start out with 25k and it shows buying power, etc. Really good for learning!! (easy to setup an account, and its FREE!!)
Here is the link:
http://www.cboe.com/tradtool/virtualtrade.aspx
Hope this helps someone (It's helping me).
Good trading!!
DR3Z
Some trades I'm looking at are as follows. I will adjust my strike choices up or down depending on mkt, stocks and world events tomorrow. For reg puts i like
AAPL 315 FOR A 2% ROI
NFLX 210 FOR 2% ROI
PCLN 450-455-460 ALL NEAR 2% ROI. I am not locked into these but today they look pretty good. I might wait until Tuesday to open?
--------------
For spread possibles, again depending on normal factor and these are for weeklys.
AAPL 305/310 1+% roi
PCLN 455/460--460/465 All over !% roi
AMZN 150/155 .06 ROI
GOOG 535/540 - 540/545 BOTH BETTER THAN 1%
All of my spreads i want to get at least .06 for my net.
Good trading all.
Jerry
Hi Jerry,
I am a necomer to your blog. Read your book and found it very helpful. I am trying to figure out how a fire chief writes so well.
I am coming to the selling of puts from a different direction. For a few years I have been selling covered calls and trading credit spreads. The calls are a consistent winner but credit spreads have been very troublesome. Everyone that I know who has traded credit spreads has had similar experiences. They win for several months or longer and then they get caught and have to start over again. Two years ago I lost over 60K in one day. I know others who have lost 7 figure sums in a very short time. The only consistent winner that know of will not trade put spreads, only call spreads and he still loses lots of sleep over his trades. Trading spreads is essentially timing the market and everyone gets into trouble with timing eventually.
Which brings me back to your system. It is elegant and safe and doesn't rely on market timing. The worst that can happen is that you are put the stock at a bargain basement price. I think of this as forced discipline because you are buying low every time. BTW, my version of selling puts is to only use index derived ETF's(SSO,QLD,UWM etc.) which saves lots of research time and reduces risk considerably.
I guess I would summarize by saying "stay with the short puts and be very, very careful with spreads"
Thanks for a great service.
Hi dber and other traders. Regarding losing on spreads. The main problem I see is the temptation to move strikes to close. With a sold put sort of backing you up, the temptation to crowd the strike is an easy trap to fall into. Especially when i compare your review of the friends past experience. It is a trap i know all to well. You have several months of great returns and unconsciously you slip into the 'bullet proof mode'. This is one thing I am constantly warning others about. The continual need to be on-guard for traps. I Have made a good living for years selling just naked puts without using spreads. I am liking them more as a tool to use in conjunction with weekly options, But when you combine a close strike with a long month...Trouble is lurking out there!!!
The whole premise of my book and style is 'Picking Up Crumbs'. We, and I, continually talk of 2 - 4% gains a month. In the real world those are pretty outrageous numbers. We must keep that in mind when we see ways to make 8-10% etc. Sooner or later it will bite you and those are not teeth, those are fangs...
So don't be in a hurry to get rich, just plod along and it will take care of itself..
Good trading and the mkt looks up this morn.
Jerry
Jerry,
I'm not sure I understand why you trade spreads on the weeklies, the margin is too low for naked puts?
Hi Nic, the other way around. When doing weeklys with reg naked puts, the prem's are lower forcing you to move closer to the stock price. That results in the maintenance eating up a lot of account $$. I do trade reg puts on weeklys but if doing a spread, I only use weeklys. That way I can use a strike a tad closer (maybe 5-10 points) and let the evaporating time factor eat up the prem. Also when doing a spread the maintenance is quite a bit lower but you do have to do more puts so.. Generally speaking spreads use about 40% of the normal maint needed for a naked put that makes the same money. There are many ways to make money with options, all have a place and time. Just being careful and fighting the urge to get more returns is the key.
Jerry
Just that......I didn't/don't like the spread - having opened the account atTradeKing 3 business days ago only to find that I could only do spread. So I was moving back to TDA to my happy old way of mostly naked put or at times naked calls... But a TradeKing officer stopped the process and said he is going to approve level 4 naked put option trading.
If I sell $310 at $0.36 and buy 305 at $0.22. I'd rather just sell $305 (half of the # of the vertical spread) and be happy. Just my kind of thing.
I like start of the month with all naked puts giving me somewhere from 3-5% ROI. As the premiums shrink down to nothing I start to free up my maintenance for weeklys or spreads.
As more of my maintenance is freeing up for the month..
I opened some spreads yesterday
AAPL 310/315 PBS weekly
NFLX 205/210 PBS April 15 expiry
I'm trying not to get greedy this month but my positions have all worked out well so far
Jerry,
A question on rolling up. Am I getting too greedy? with 9 trading days left and a 95 put sold on WLT it now has an ask price of .08.
The 115 is23 points below the current price of 138 and is bid .13 ask .18. The 120 is about 15% below the current price and is bid .25 ask .28.
It would require a little more maintenance but there would be another percent as it goes to expiration. Any thoughts?
George
Hi Kite, I've done a million of these roll ups. If I were doing it I would do the 120's at maybe .25 tomorrow. But even though you then get around 2% you have to subtract the cost of closing the 95's. Maybe .05? if so then you net around .18 after the commish of the new trade. .18 with maint of around 12.7 = 1.4% ROI. not bad...
I like it. I didn't check the filters on WLT but if all were right in the world I would do it...
Nolan, I like 'em. I have the aapl's also.
Hannah, some different ideas for you. I'm not advocating these but want to make sure you see both sides.
Regarding aapl spreads and reg naked puts.
Sell the 4-8 305 put, get .05 maint of 31.5 ea for a ROI pf .003 = yuck
Do a spread of the 305 and the 310 and the maint is 5 and you get .06 net for a ROI of 1.2 quite a difference
Or if you go out to the April 16th and do a naked put of 305 at .40 an ROI of 1.2
but if you do the 300-305 spread and receive .09 With maintenance of 5 your net it is a return of 1.8%. Again a big difference with the same strike. so don't write off the spread. Use it as another weapon in your arsenal.
Jerry
Hannah,
Each person has their own style. I like spreads, I feel safe doing them. They have a bit of a safety net if the stock gets a run, then you can buy back your sold end and gain some money on the bought side. I do not have enough money in my account yet to do naked puts. I do like the crumb method and can't wait to do it.
Over the weekend I looked at my spread trades both winners and losers. I have really thoguht about scaling down my agressivness on my spread trades, going to try going with a lower ROI and use only front month trades. So far this year has been a great year with my trades, I would like to keep it that way.
Chris
I know I have a hard time getting my head around some of the intricacies of options but one think bothers me with the crumb method and the naked puts.
We're above about a profit of .22 (right now) net on 315 AAPL for April. Depending on commission deal I take it that a cent is lost to the broker. So in order to make $2,100 you need 100 (x100) contracts or 10,000 options, right? If disaster strikes this would mean you would be put stocks at a value of $3,150,000, which would probably kill most of us. What would happen in practÃce if this would play out? Would I owe the broker the difference of this amount and my available funds? Would I be banned for life? Or perhaps the broker would immediate sell the shares again and invoice me the potential loss?
This is hopefully very rare if you are careful, but surely it could happen if there is some form of event similar to the flash crash in May last year or God forbid something happens to Steve Jobs. Jerry, in 14 years, you've never come close to or been in such a position?
As an addon to my own question above, what would be the practical difference in selling calls with a 20% buffer? Now again, I don't have the experience here so maybe that doesn't make sense from a premium point of view, but it seems as if a sudden rocketing of stocks is less likely than some sort of event that causes a drastic drop? Since most here primarily talks about selling puts I take it there has to be some disadvantage in nakes calls compared to puts.
HI all, Nic, I have lost lots of money with puts! Mainly as said in the book, trading without rules or guidelines. But I can not remember ever being put to. I have had stocks drop below the strike (never again if possible) but even then I closed before expiration and took the loss on the option. Generally, as said in the book "there is always more money in the option than in the stock' EX; if the stock drops 5 below the strike the premium might be 6 on the option. Not to say it can't or won't happen but not to me in many hundred of thousands of positions. Regarding what if a major thing happened and you could not afford the loss? I'm not sure what happens if you just walk away? They can't get blood out of a turnip..lol
The flash crash gets mentioned often. I did not suffer any losses with it! Mainly because of cushion. If I was in aapl and had 40 pts of cush the stock dropped about 15? no big deal. Especially with that even as all knew it was a fluke and computer/manipulation deal not the value of the stocks per-say.
Also Nic I do sell naked calls in a bear mkt. It is a similar strategy to naked puts. One difference is that I might consider buying the stock and turning the position into a covered call if the stock rises fast. But, yes a super rise is a lot more rare that a super drop. Again, I avoid the bigger drops (ones that reach my strike) by using quality stocks with good value /business plans/ history etc. Not a flash in the pan stock with a one product item (like croc's in the beginning) Quality, cushion and reasonable expectation will go a long ways to protect you.
Jerry
Nic,
I like your question. I definitely panicked over the weekend of the Japan Tsunami. So to add to this question.... Jerry how did it go in 2007/ 2008 when things were blowing up? How many months of income did you lose in getting out at the turn before you started selling calls.
Nic, Jerry describes a good way of selling naked calls where you have a standing order to buy the 100 shares .25 below the strike price so that at a minimum you gain the premium plus .25. You just have to be comfortable holding the cash to buy the stock if needed.
George
Jerry,
Do you ever sell a put on a stock/etf that you wouldn't mind owning? I am not sure but it seems to me that faced with a falling market price the lesser of two evils might be to be put the stock/etf and then manage with covered calls. That's what I have been doing. Would I have been better off BTC at twice the premium for example?
Second question;Do you ever use the trade calculators in the brokerage software to explore probabilities? If so what kind of probabilities would you be looking for?
Thank you
Nic,
I also like your question. I did use TOS to backtest APPL and several other stocks through the flash crash and in all cases you had time to exit once your sold premium doubled. It made me a believer in having those standing orders out there because if you weren't around to monitor, the premium sold for a 1.40 or so went to $14 + by the end of that crash. IV increased so much as well that bid ask spreads were huge ($2) or so.
My biggest concern is if a dirty bomb or something goes off in the US over a weekend and all stocks no matter how financialy sound drop 50% on the next market open based on fear and uncertanity. There you will have no chance to get out. Hopefully that never happens but would love to know what the broker does when you can't pay more than what was in your account.
Bryan
Some great advice here, and like Jerry said the real strategy has to be to buy the puts back before expiry if it all goes sour. I guess I knew that, but it is always good to hear how others reason.
What I don't quite follow though is the buy the stock before the naked call strikes as a stop. I can't buy 10,000 shares even if I just hold them for .25, right? To me the crumb method means you can't ever get awarded the stock as your whole strategy is based on leverage. Calculating with the possibility of owning the stock is another game, I think someone called it 'Wheel of Fortune' above where you bounce back and forth between beeing awarded calls and then selling puts until you loose them again. Kind of interesting if you have a long term goal for a certain amount of your favorite stock.
Bryan, about the flash crash. I watched it in real time and it sure felt faster than that. AAPL was at something like 260 I think and took a very fast dive down to 200, and before I even could get my market order in and processed it was back at 230. A lot of people were stopped out in the process but I think very few managed to get back in. Even worse, since it happened so fast some stops were executed 20-30 points below what they were set to.
This comes from a newbie so if it is a stupid question then please be nice.....
How are you calculating % ROI on your option trades?
I'm not an expert so others will chime in, but as a quick reply you divide the premium, say .41 with 10% of the stock price (the so called maintenance that you have to have in funds), let's say 315, plus the premium. So the return is .41/(31.5+0.21)=1.3%
Nic,
True, once the flash crash started you would of had a very hard time getting filled on an exit order. I remember having trouble getting out of my options on the RUT at the time. With APPL in my testing you would of gotten out about an hour or so before the crash since the market was trending down sharply before the actual crash. During that time your stop would of been hit and should of had no trouble exiting.
Bryan
1. dber; I never really want to own any stocks. especially one that fall all the way to my strike. Many do the 'wheel of fortune' drill but when doing that type most traders will use a close strike. You know me and cushion...
2. No i have never used the trade calculators. They only go on the 'what if' and probability factor etc. I use my filters and common sense and it seems to work for me. I know many use them all the time and love 'em? Just not for me.
Bryan, Yes the dirty bomb scenario is a chilling thought. Not only for our losses but for America.
Nick; regarding the buying stock rising when you have sold a naked call... It is in the book but a short version..If you sold the naked call on ZZZ stock at the 50 strike and the stock was at 40 but started moving up, I will have a buy order for the sock if it gets to 49.75. If the fill order for the stock goes through then my previous naked call is now a covered call. that simple. But as Kite says you have to have the buying power to purchase the stock. So that is money just sitting around doing nothing. You could have other positions with the money but be prepared to close them to bring up your cash level.
I was golfing during the flash and when I came into the clubhouse some one said the mkt was down 600 or some such deal...YIKES... So I was unable (lucky) to respond or I would have been closing and losing money...So I tell my wife that golf is really saving us money!! lol
Nic & Hornet; That is correct except the maint
isn't always 10%. A better way to say it is to find out what you maintenance is and divide the premium you receive by that amount. For a spread that is 5 points apart, it is always prem you net div by 5. EX if you net .06 for the spread the ROI is .06 div by 5 = 1.2%
Some great questions and ideas by all. A good blog to share ideas, questions and answers.
Jerry
Nothing of importance. Someone just bought AAPL at $332.00 at 4:21pm.
None of my AAPL order got executed today....
Hanna, I got AAPL at 338.54 AH, 332 is scary low. Perhaps it was one of those late corrections I sometime see on my screen as well?
Jerry, but the part about the naked call only works if you have as many options as you can afford to be awarded, right? If you have let's say 100 contracts you would have to come up with over $3M if you wanted to buy it a quarter from strike, or am I missing something? Can you give a (crumb) example?
I'm looking at the 320's right now at .86 with 10 days to go. Risky?
Another thing just so my thick head can check it off; when you're doing weekly spreads you're doing it because of the lower maintenance and not really to lower risk, right? You wrote above that the lower premium of weeklies forces you closer, but a spread obviously lowers the premium further?
Hi Nic, regarding the naked call, yes for protection it would be nice to have the cash to buy but you can do the same as you would do with naked puts. I'e; roll up, roll out or roll up and out etc. Or just close if it doubles ala puts style.
For me the 320 for 4-16-11 is to close. OK for this weeks in my style
regarding spreads. Yes and no, the lower maint is the main reason but a side benny is the somewhat lowered risk. Yes a spread lowers the actual premium but that is again counter balanced by the locked in maintenance. So if you can find a spread that gives you .07 and the maint is 5 then it is 1.4% Also another plus with spread is the maint stays the same. It doesn't fluctuate as it is locked in at 5 (if doing a 5pt spread.) Yes usually you will have to do a strike or two closer to the current stock price. Part of the risk and why I limit it to weeklys. If you search around there are opportunities that present themselves with spreads at time where you can get .05 or .06 at lower strikes..it happens. Sometimes you can get the .06 (my general starting point) at a lower strike(s) than you would need to use for a decent normal put. I hope I didn't muddy the water to much.
Jerry
Nic and Jerry,
The other 'sleep at night' part about a spread is that the bought put at the lower strike is the limit of your possible loss. So you have zzz at 100 and you sell the 90 and buy the 85 put. Tomorrow something really bad happens before the open and the stock opens at 65. You are on the hook for 5.00 less the premium. Compare it to selling a naked 85 put. You wake up with the stock at 65 and you now own 1,000 shares so 65,000.00 and it is still dropping. The .24 premium is not going to be of much help.
You can close the postion for a loss of 20,000.00. Not so good. That is an argument for indexes, or for selling covered calls with protective puts for a stock like Apple.
Jerry, I like the idea of naked puts to start the month and moving to spreads as the remaining value has mostly evaporated because the stock continued to rise.
George
@Kiteman51, Right on! The reason spreads (weekly) are so intriguing to me is two fold. One I don't have the big bucks (yet, lol) to go out and buy the big money stocks naked. Plus my brokerage would never let me do that as I don't have the money on hand or in margin. So spreads work for me on that regard.
Second, I like the "sleep at night" concept also. Its good to know what your max profit and loss would be going in that way you can adjust accordingly. Using the crumb method + spreads is a good way to get your feet wet without having tons of starting capital in the bank. It allows me to trade using almost all of Jerry's concepts with as little as 6-7k of capital.
- DR3Z
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Yes Dr3z probably the biggest advantage for spreads is ...
1. It can be done with a lower level of approval
2. It allows traders that are just getting started to trade with less funds. This is especially true if you use a stock that has $1 dollar increments with the strikes
Jerry.
DR3Z,
Yes you know your max profit with spreads but you are underestimating your max loss, I think. Kiteman is oversimplifying what happens when the market moves toward your short position. Try paper trading spreads for a while before you trade for real. Paper trade close to the market price to simulate "emergency" conditions and see if you can close your positins without losing your shirt. If you can then go to real money.
dbernard
What does this mean?
"see if you can close your positins without losing your shirt"
I'm studying on spreads these days, how do you hedge your short positions without just simply closing them when the delta is more than 30?
Dr3z, I'm not sure I understand your premise. In the worst case scenario, the most you can lose is the difference between the strikes that are used. Also that amount is reduced by the income from the opening of the spread. ex; If you opened a spread with 10 options with a difference between strikes of 5 points the max you can loss is 5000 and that is reduced by how much you took in when opening the trade. If you netted 250 then the max loss is 4750. (not counting comm)
The proof is, lets say the position was opened at the 95 strike and the 100 strike. the stock drops to 50.. You will be forced to buy the stock at 100 but you can put it to someone for 95. A loss of 5 points. There are ways to try and mitigate that loss by legging out and opening other positions etc but the worst in the above example is a five point loss per option.
Jerry
Speaking of trades, anyone found any good crumbs for this Friday?
Earnings season kicks off next week. Has anyone begin looking for crumbs next month? The stocks I tend to use don't qualify since they announce earnings in the front month.
@Jerry,
I understand. The spread 5 x number of shares (100 per contract). So the max loss is $500 per contract (on a 5 point spread).
That's why someone like me with minimal capital likes spreads. There is no way I could afford 4 naked put options of google (400 shares @ $574 per = 229,600.00) but 4 spreads (4x500=2000 max loss) I can do.
Thanks again.
DR3Z,
There are lots of cheaper, solid companies that you oan probably afford. Many solid companies are selling for less that $30 per share. Also, don't overlook ETF's such as QLD, SSO. UWM, DDM, BGU and the volatile TNA. Companies like AA are lower priced and very solid. They are less volatile than the big high-techs and it is possible to get fairly accurate probablilites for short positions.
On Think or Swim the maintenance seems to be 3 times as much for ETF's(qld,sso,uyg) than for stock. Has anyone else notice this? This pretty much negates any advantage of using a ETF
ETF's usually carry higher risks than regular stocks as some of them are leveraged 200-300%. ..not sure about the non-leveraged ones.
I think when deciding between puts and spreads one has to consider the difference in cushion mixed in with the number of contracts taken on. I think selling naked puts is a lot simpler than doing spreads for many reasons, especially exiting a losing trade. On the other hand I realize spreads advantage with lower margin requirements and the limited loss as well.
Stay within your comfort zone and aim for the crumbs. If your making over 5% a month..ask yourself if that is sustainable and are you taking on too much risk.
Nolan
@ShoNuff,
TradeKing's margin requirement for naked put is about 3 times more than TDA - 10 contracts on $315 AAPL required $99,750. Sounds almost like your ETF....
The huge advantage of etf's is that you can all but forget about rules like PE ratio, analyst rec's, earnings reports. IF you use the index etf's u can get by with a 10% cushion because they are less volatile. One bad scandal/health issue of a CEO or earnings report will not effect the whole etf all that much. I have found them mucch easier to use for covered calls and naked puts. I believe that the notion that the leveraged etf's are dangerous is wrong. Just look at the charts of the etf's and the leveraged etf's and you will see that they are very similar. One etf like UWM which is leveraged carries far less investment risk than any one stock.
I agree with the person who said that naked puts are simpler and easier than spreads(also safer in my humble opinion). As I have said before, I know very sophisticated investors who have lost lots of money with spreads. Months of success followed by one big loss that wipes out the gains.
Margin is a very dangerous thing if mishandled. I would suggest avoiding margin and patiently trading according to Jerry's book to build a portfolio. With very few exceptions there is no such thing as a free lunch.
For my money the ultimate "no brainer" is selling a put that is about 10% out of the money on an etf. When the VIX is low you will see 2% per month. When the Vix is higher you will see 3 or even 3.5%. Good enough to build a portfolio.
@dbernard52
Bought some ETF books almost a year ago lol, I haven't taken time to read them yet. How does fund expense affect your P&L? Do you mind if I ask which ETF you used lately. Thanks.
2%/month =24% annually is very good. I aim only 10%- 15% for IRA.
No reason to read books unless they interest you. You just buy and sell them like stocks. The fund expense doesn't concern me. I just want to see a profit when the day is done.
The basic index etf's are dia, qqq, iwm and spy. These pay small premiums. The Powershares versions are leveraged 200% and are DDM, QLD, UWM and SSO. These will pay 2% per month with a 10% cushion as Jerry calls it.
If you want to add a little spice BGU and TNA are leveraged 300% and pay higher premiums. Lots of people trade BGU and TNA and they are very liquid. Good trading.
Thanks a lot dbernard52.
Crumb traders, I am looking at selling more puts on the OIH. I just started selling puts on this ETF last month. I sold the 125's for 52 cents (still waiting on buying these back for .01). I started selling puts on this ETF because I was looking for some energy related ETF to sell puts on to pay for this expensive gas that I am pumping into my car. I was trading the USO, but I no longer want to trade ETF's that are based on rolling futures contracts from one month to the next (USO, UNG, VXX). So, I had to choose between the XLE and the OIH. I chose the OIH. I just filled up my car for $40 @ 3.69/gallon. The April sold puts in OIH more than paid for that gas. I can normally go 4 months on a tank of gas. By the time I need to top the tank again, gas could very well be over $4/gallon. I have 4 months of put selling in the OIH to get ready for that. Yes, I am going to let them OIH put buyers pay for my gas as I am more than willing to sell puts to them. Bottom line is, I am not going to pay for this expensive gas...OIH crumb trading to the rescue! OIH is meeting some pretty tough resistance up in the 165ish area. I feel pretty good about selling the 125's, but would like to see more of a pullback in the OIH to give them a nice pay raise before pulling the trigger on this trade. I am also looking at the 120's - smaller crumbs, but safer trade. I heard last night on Fast Money that they think there might be some sector rotation by the big boys out of energy and tech and into the financials. That coupled with earning season just around the corner (I have never traded this ETF during an earning season before, so I do not know if earnings are a concern with this ETF or not) and the fact that it is at an area in the charts where it has had trouble before has me holding off on the trade for now. But, I will eventually pull the trigger on the 125 or 120 strikes to pay for my next tank of gas. Anybody have any expertise or thoughts on trading (put selling) this ETF?
Dave G
Hey All,
There are alot of posts about spreads and I just wanted to clairify a couple of things.
From a position of having a low total maintenance the spreads really helps because of 2 reasons.
1. it will only cost a set amount of maintenance for someone like me to play the option. ie - $1000 or $5000 using the spread.
2. Most platforms will not allow individuals like myself the ability to do naked anythings with the low experience (time the account has been active with live money) and the amount of maintenance required to complete a naked transaction is not in our account.
This is why I use spreads. I would love to not have to pay the commissions for the spreads and use the nakeds but i can not. With such low profit taking (as far as cash is concerned) for each trade compared to the big boys the commissions really plays a big factor for us small timers, and so nakeds would be ideal.
Just my input as a small time traders (for now :):) )
Love to read what you all have to say - thanks.
DaveG thanks for sharing. Hmm I am very interested to read more about OIH...
Fulgore I totally agree...
Thought the stock market is over-stretched lately.
Looking at selling AAPL 315P for next week, right now at .48 for 1.5%. AAPL has been struggling a bit these last weeks and are trading sideways with earnings coming up after the expiry. (Is that a no-no, or only if expiry is during the period?), and the big issue is whether supply has been hurt by Japan. Some people (more clever than me) says that they see 300 in the charts, but all dips so far have been bought. What do you all think?
Nic, I have also been trying to sell AAPL puts today. I have been trying to sell (unsuccessfully) the 295'3 @ .16 and the 290's @ .12 (it does not look like either will be filled today at those prices). I do not feel comfortable selling AAPL puts too much over 300. The chart for AAPL does not look very good (lower lows, lower highs since its high on 02/16). It picks up good support @ 300 and looking at the run it had from its low on 08/27/10 (235.56) to its high on 02/16/11 (364.90), the 50% Fib retracement is right @ 300 (300.23 to be exact). Also its 200 MA is around 305. So, until it can break out of this downtrend that it has been in since 02/16, I want to sell puts right at or preferably below 300 for the reasons stated above. My intent is to sell the puts without being put the stock and I feel 300 provides a very good support level with which to sell puts against (at least for now). I am not worried about AAPL earnings as the normal APR monthly options will expire before AAPL reports earnings on the 21st. I will definitely not be selling any AAPL puts that week (I never play earnings...too much of a wildcard, in my opinion).
Dave G,
I have traded puts on OIH but not recently. The charting doesn't look all that terrific. The shorter moving averages have moved down and institutional money is moving out of OIH. The candles have turned red recently. If I were selling puts on OIH I would want a 95% probability that the market will not touch the short. That would mean a short strike price of 149. If you buy the 145 you will have 1.7% return. If you just do the short put you will get 17 cents which hardly seems profitable.
Dave G.
Just one question...how in the world does a tank of gas last you 4 months?? ;-)
I don't understand the question. What are you getting at, please?
A few posts ago Dave G said he only fills up his gas tank every four months.
Dave
that means he walks, rides a bike or takes public transporation everywhere. Or, he has an incredibly fuel efficient vehicle. Or he just escaped from the asylum. He probably walks....
Nic:
I believe yesterday the Nasdaq told apple {which is 20% of the Nasdaq}that it was reducing their percent to 12% from 20% therefor a lot of apple shares have to be sold. Five other companies will be adding more to their % of shares. This is probably why apple is selling off. This was on Yahoo.
dbernard52,
Thanks for the feedback. I heard the same thing you did about the institutional $$$ leaving to go elsewhere. I was looking more at playing the May options as I could go further out of the money that way. I want to show a minimum of around $50 per OIH trade (enough for a tank of gas @ today's prices), so as per your example that would be 3 contracts @ 17/contract. I have no ticket price and pay .80/contract for commissions, so that would still be ~50 after commissions for 6 days of trading. I never thought about going that route because I was mainly focused on the May options, but will consider it. For the May monthly options, I see multiple levels of support between where its price is now and the 120/125 strikes that I am looking at selling in May. Also, the August-April run that the OIH had has a 50% fib retracement @ ~131. I always like to sell puts below a 50 fib retracement level. The 200 MA is ~128. All more reasons for choosing the 120/125 strikes. As long as these markets stay bullish and oil stays at these elevated levels (over 110 now as I look at the WTI futures), I do not see the OIH dropping below the 50 fib level mentioned above. Of course, if the markets head south, then all bets are off. I would like to see a pullback to the lower 150's before pulling the trigger on a trade. Even better would be a pullback to 150, piercing the lower Bollinger band by > 1% and lining up with support @ 150 - we call that an ASE (All-Star Entry) MRT (Mean Reversion Trade) and I would pull the trigger on 120 or 125 strikes in a trade that I would feel very, very good about. Even with some institutional $$$ rotating out, I don't know if it can get that low.
Steve,
To be blunt and honest with you, the main reason a tank of gas lasts me 4 months is because I'm a really, really good driver. Also, another (not-so related) reason, is when I get up in the morning, I only have to walk about 15 feet and I'm at work (in my computer room) and another (not-so related) reason is, I'm not the best, but probably better than average at bum'n rides. So, of the 3 reasons given, I'm sure you'll agree with me that being a really, really good driver is probably the reason why.
One quick question for credit spread vs iron condor:
I understand Iron Condor can generate profits from both put and call spreads at the same time with the same amount of maintenance as one vertical spread,so better ROI. However I see some folks here stick to vertical put spread... anyone can explain why?
Hey on apple it is the QQQQ ETF that is reducing the weighting. and adding to microsoft and Cisco and some others. This should last about a month or two. It is not about supply chain from Japan. Consider selling covered or naked calls.
George
Sorry, it might be the Nasdaq 100 index, not sure of the differences right now
Kenny, I have some input on your question. I have traded iron condors extensively and yes, you can better leverage your capital since the maint is the same for both spreads as for a single vertical. But I've had more unprofitable trades because I'm exposed on the up and downside. The loss on the bad side far outweighs the gain on the side ending OTM. Markets tend to be directional in the short term and this bull market uptrend is relentless. So I am doing naked puts and put spreads until I start seeing real weakness. Plus premiums are generally richer on the put side for the same probability, especially as the VIX ticks up, which it has of late.
Thanks Glenn for the explanation!
Glenn,
I'm eaten what you’re cook'n...I like what you're saying. Although, I have to respectfully disagree with you on the VIX. I watch the VIX every day, all day, on a 5 minute time span and it seems every time it spikes up a little, it comes right back down again. I want to see a higher VIX to provide more upside to the put premiums, but in this market, getting any upside momentum to the VIX is really hard to do and the times when it does happen are few and far between. The iron condor, even though it is considered a neutral trade, has a bearish leg to it in the form of the short call. Yes, there is a higher upside long call leg that does cover the lower short strike, but until price gets up to or past that long upper strike call, that lower short strike call is uncovered (what I mean by that is there is no stock to cover it or no even lower long strike call to cover it as in a bull-call spread). So, the only way to cover it is with cash and that can be very painful when the stock keeps going higher and higher and the only way out of it is to buy your way out (with cash). In these unseemingly, unstoppable bullish markets, I have seen SO MANY traders, both professional and retail get their faces ripped off doing iron condors or bear-call spreads. Even in a roaring bull market, like this one, stocks do go down from time to time, but as I see it, to make money, in this market, doing iron condors or bearish trades, you have to be either 1. damn good or 2. damn lucky and usually it's probably #2. So, the problem with doing iron condors in these markets is that short call leg and unless you are experienced at doing them in both bull and bear markets, I would stay away from them, unless you fall into #1 or #2 mentioned above. If you don't fall into #1 or #2 and you still do iron condors or bearish trades, in these markets, I suggest you 1. cross your fingers and whatever else you can cross, 2. do a lot of praying and 3. smoke a lot of hope-ium when the trade starts going against you (i.e. the stock goes up and up and up).
Dave G.
Ok OK OK. You convinced me. It is a bull market and stay away from Iron Condors!
George
iron condors are for neutral positions/market preferably high volatility markat that is decreasing in volatility so you can spread your legs apart with low delta short options(wide profit tent) but low volatility the profit tent sags ..you will lose money on iron condors if vix spikes so they dont really make sense....in a strong trend market you will get hit (i got nailed on index iron condors last fall when it was in good range for a while and broke out.....range bound markets are best for iron condors.
Brian, you're "spot on" dude...well said.
I beg to differ on iron condors and using them in a bull market. If you use them correctly you can make a nice sum. Any time you use them you have to give yourself enough room in case of a run up. First thing, I do not trade an iron condor using an EFT. I have got nailed one too many times with an EFT. TNA as one example, that EFT can run up or run down quickly. I tend to stay with stocks which you can read the charts rather easily. Take the Bollinger Bands (90 day or long) and then add 5 to 10 percent to them as safety to set your spreads. Or use 52 week highs and lows as your indicator of where to set your spreads as well. In either case you can get 5 to 10% on an iron condor 30 to 45 days out from expiration. I always have my stops set in case of a run up or down. If you do right and keep to your trading style it will work.
Chris
This thread got away from me and have not read it all. So sorry if this was covered.
Earning kick off Monday be sure to check you dates big ones this week JPM and GOOG.
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