Since the market is closed on Monday, I would not rush into positions for the coming week. A three day weekend with the world still in turmoil, too many things can happen! My advice is to wait until Tuesday or even Wednesday.
I am liking the usual suspect with weeklys. NFLX, AMZN, AAPL, SPX, PCLN. There are more but those are the ones I check first.
The simple secret to options (from my point of view) is leave lots of cushion, limit your goals to reasonable ROI, Don't put all your maintenance into one position, control time as best as you can (weeklys).
The game plan for option trading is to stay in the game. When you break some of the above guidelines you put yourself in jeopardy. It only take one of two positions to turn against you and you will be one of the statistics that are used to demonstrate the danger of options. With the leverage options offer, it works both ways.. Just plod along with boring crumbs and you will get wealthy and you will sleep better.
Good trading all
43 comments:
Jerry - Thanks for the excellent advice here.
Have a question for anyone using the TOS platform.
When I place a sell on puts it shows that my options buying power reduces by 5K (for 10 puts with 5 point diff in spread). I placed a SPX call spread for 1380/1385 now for the first time and it doesn't show any decrease in my options buying power. I would have expected it to decrease my options buying power by 5K. Any idea why this is not the case?
Good morning Jerry. I like this plodding idea. If you do some compounding interest math, you could achieve some pretty astounding results with a 1% roi. One nagging question bothers me. In an event such as the "flash crash" what happens when the market moves quickly thru your strikes before you can get out? Does all your maintenance and hard work get wiped out? Were you in the market when the "crash" happened? Just wondering and asking the hard questions...
@avid_kris - When you put your call spread on, did you happen to already have a put spread for the same expiration (basically legging into an Iron Condor)? That's about the only reason I know of that would not affect your buying power, and it's do to the fact the brokerage looks at it as though price can only settle in one or the other (up or down), so they only require a single margin amount for a two sided, IC trade. If that's not the case, I'm really not sure why your buying power didn't move. I use ToS as well, and haven't seen that.
Jim - Yes. I have a put spread pending at 1240/1245 when I placed the call spread at 1380/1385 which is also pending. I haven't checked the iron condor yet :) But I guess created one manually. Thanks, that explains it.
Wow, so an iron condor with one spread 20% under and one 20% above doesn't require any maintenance? I don't get that, because even though only one can hit you, you can still get burned pretty hard on the one that does, right? It would be great if it is the case though!
Ah, after reading your mail a little more carefully I get it, you only get one maintenance in an iron condore. Still great though!
@Nic - It DOES requires maintenance/margin. but NOT a separate margin amount for each side of the IC. A single margin amount covers for both sides. And this is due to the fact that price can only settle at expiration on one side or the other, but not both.
Safe& S, yes I was in the mkt when that happened. Actually I was out golfing and when I got to a computer I was shocked. But the mkt was closed and nothing I could do about it. When I got home to check my positions, many stocks had gone down and premiums had gone up a bunch, but none had crossed over the ITM (in-the -money) The mkt came right back as traders learned/knew that this was an anomaly. I’m not sure what I would have done, or could have done if I were watching when it happened. The dow and other indices dropped but not all stocks all that much. This is another reason to leave lots of cushion. Not only in case of a flash crash but any unexpected news. You have to be an investor to be in this business but you HAVE TO BE A SMART INVESTOR to survive in the mkt.
Regarding another flash crash, I think investors would be more prepared and not react as fast. It is computer trading that worries me. Many are set to react without human intervention. If I had to say a fear, it would be a major terrorist thing.
But you can’t live with constant worry.
Jerry
I like trading SPX spreads. If the market is up next week, I'll sell some puts and vice versa. =)
First foray into weeklys looks to be a success as FAS is trading at $27.45 looks like the $26s I sold will expire worthless, .52 premium for a 4 day trade, weeklys might be my new thing.
@ nicky
Same here, I'm giving weeklys a try. I like how the time decay kicks in almost instantaneously.
Same here...1st weekys with great success. Next time I'll be a little less aggressive as per Jerry's opening comment today but I really liked the 3%.
With FAS being a triple leveraged ETF, and the ability to buy back commission free on TK, I bought to close since the ask was only 0.01, why take a chance?
Hello all - been away from the blog for a couple of weeks; have some catching up to do this long weekend.
I'll post my May expiration results later this weekend.
Today, I STO the SOHU 60 June puts; 25% cushion, 3.1% RIO for 3 weeks.
Love the crumbs.
Placed many limit orders today which didn't go through. Sold 10 puts of SPX 1250/1240 weekly at 15 cents.
Jerry - Thanks for the chapter on Spread Options and the Word document of "Selling Put Options My Way".
My first weekly put spread expired worthless. On the 25th I bought PCLN 485 for $1.08 and sold the 490 for $1.49.
Looking to go further out next week.
Thanks from me as well, Jerry. I enjoyed the reading and there are obviously some important differences to consider.
One thing the chapter didn't touch upon though was a suitable exit. On nakeds I follow your advice with exiting when the premium doubles, but how does that work with spreads?
My May expirations (I know, late late late).
2.45% ROI for the month.
FCX made up 54% of the return
AAPL 17%
POT 13%
NFLX 13%
CMG 3%
The FCX was a covered call I wrote so I could capture the special dividend. Un-perfect timing; the copper market decided to tank the next day and I ended up keeping the ITM CC premium (nice premium though); luckily copper has rallied back and I will be getting out of it when my CC is assigned this weekend.
Looking forward, sector rotation looks to be leaving the basic materials area so I may stop looking at FCX & POT and start looking closer at consumer staples and service sectors. Just a thought.
welcome back newport. It seemed to be a good month for all of us.
Good comments all. Plenty of good trades coming next week.
I will post my possible trades on Monday. Lets make some money!!!
Avid,
In regards to your earlier post and why you option buying power did not move, the reason for this is as follows. You will see a difference in your buying power for the first spread only (maintainence minus credit from spread). Later, when you open the opposite spread, you will only see a difference in your buying power once the spread has been placed into action, not while it is pending. The only way to see both sides affect your buying power is to use an Iron Condor. Because both sides are being bought at the same time.
I only use Condors if I am doing a monthly spread. Weeklies I leg in on both sides giving me more set up time.
Chris
Ok, as the resident noob on this forum. I've been selling puts, in particular bull put spreads (vertical put spreads) for about 7 weeks. I'm doing well using Jerry's methods with some of my own sprinkled in. My question is a noob one that I really should grasp.
What protection am I afforded if the underlying closes in the middle of my spread. Basically what happens? If anyone can walk me through this it would be great! To use an example (with out commissions).
Underlying: 100
Vertical Put spread: 80/75
Spread: 5
Premium: .08 ($8)
I sell 10 of these. My maintenance would be 5x500 ($2500) and my premium would be $40 (minus comm).
What happens if the underlying drops to $77?
Will I be "put" to? And have to buy 500 shares of a $100 stock? Since the price never fell below the bought put ($75), there is no safety net.
Am I correct with this scenario?
Thanks!!
Sorry maintenance would be $5000 not $2500 for 10 (10x500).
Drz it will cost you 3000'to close the position. If it goes to 75 or any price below that, including zero, you will have to pay 5000 to close the position or get assigned. If you get assigned you have to pay 80 per share for 1000 shares that are worth 77. On Monday you can sell them if the price goes up you lose less, if it continues to drop you lose more... Until you close the position.
GsSound - Thanks for the details above.
In DR3Z's scenario I would think, if the buy part of the put is never exercised because we were away on the last trading day or didn't get a chance to exercise, losses could continue to mount if the stock falls further on Monday.
If this is not near expiration, we can attempt to close the spread entirely, if we are not yet assigned.
Jerry,can you explain your rules for rolling a short call spread.Do you roll to the closest time and strike price? eg. nflx 10 june 265/270 call spread and stock hits 265, if you roll to july 270/275 {as of to-day}, the premium is -.10 debit but the 270/280 is a credit of 1.67,is the idea to get out asap,& as safe as possible and put another trade on? The 270/280 spread would require a lot more margin though. Thanks
Thanks Kiteman,
On to my next question...
What if you don't have 80k in your account when you are assigned?
Thanks!!!
dr3z - in the past I just closed the whole spread right before expiration; no need to bother with buying the stock and selling it again on Monday; you might lose out a couple of pennies but if you don't have the margin it's the next best thing.
Investor Carl Icahn has sold 5 million shares of video-game publisher Take-Two Interactive, reducing his stake in the company to 8.43% from 13.7%.
Icahn sold the shares yesterday at $16.36 each, according to an SEC filing. He now controls about 7.3 million shares of the company’s shares.
Under a previous agreement with management, Icahn controls 3 of the company’s 8 board seats: his representatives on the board include his son Brett Icahn, portfolio manager SungHwan Cho, and investment exec James L. Nelson. Icahn will lose control of those seats if his stake drops below 5%.
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Don't like this at all, why would he sell 5 million shares when the company is doing great?
Granted he still holds 7.3 million shares.
DR3Z - Closing the position earlier is the best. But I had this question myself and asked a TOS rep a few days back. He in turn consulted his manager and gave the answer below. Let me mention this before I quote the TOS guys -
In some circumstances that could be unavoidable you may not even be able to close the position. Let us say you own the same vertical 80/75spread and you don't close it on Friday evening (of expiration) because the underlying for just OTM. Now let us say the stock closed at 81 or 82 at 4 pm, but due to an after market news the stock drops to 75 at 4.30 p.m. The buyer of the put has an additional hour to exercise his put and may choose to do so. If he did this, then you will not have any other option but to own the stock on Monday morning possibly at price of 75 or lower. Also your buy portion of the put would have gone unexercised as the market closed on Friday.
What TOS told me was that, when I don't have money in account to buy the stock on Monday morning (75K) in this case, the stock will still be assigned to me and I will have 24 hours before I liquidate my position though I don't have money to pay for it. So in this way, assuming the stock is still at 75, you will have to immediately sell the position and take a loss of 5k. We hope in this situation that the stock doesn't drop a whole lot and cause a havoc! Obviously if the stock went up again you are at an advantage. If your don't voluntarily close the position within 24 hours, TOS will liquidate the position.
Based on this, one important criteria for selling of puts would be not to sell puts for those stocks which have earnings that are announced close of market on Friday (expiration date). Also if the stock is very close to the upper strike on a sell spread like 81 or 82 in the above case, I would rather close the spread to prevent any unwanted surprises.
Hope this helps!
DR3Z,
First off prior to the stock hitting any part of your spread you should be watching it and then buy back your sold part of the spread. NFLX did this to me in one day in February, I bought back the sold side of the spread and the stock keep running up another 7 bucks in one day. That was a nice gain. However, this doesn't always happen the right way.
Being assigned on a spread has never happened to me, however from what I was told you should not be assigned in a spread. This is because of the protection a spread offers you. Lets just say you were at $77 on that spread you would pay 200 per contract once the contract settles. The reason is because you have a negative side and a positive side in a spread, the positive side is a protection for you. I am going to double check this again.
To answer this the correct way within the style of our trading here on the blog. Close it out prior to your strike price getting hit. Protect your money, and don't put all you eggs in one basket either. Just think if you had all your money in a spread, and it ran through the strikes of the spread... see ya to your money!
Here is another bad senario of not closing you spread (this has happened to me). The stock price is coming close to your sold side of the spread, you buy that back (for a loss) thinking that the stock will continue to run and carry your bought part of the spread. Instead the stock reverses course and then you scramble to sell the bought side of the spread, for a bigger loss! This happen on a TNA spread (Im still bitter). So be safe and just close it out, take your licks and move on.
Everyone is different as far as aggressiveness, but it is a matter of protection of your money.
Chris
Hi all, Gssound, I agree with your answer to the final solution. One way is to close the sold side and hope the buy side strike is passed. If this happens you can actually make money on a bad position. As traders, we must monitor our positions and have plans if the stock is going against us. In the few positions that have turned out to be heading the wrong direction, I have found that closing both (the sold and bought) works for me. If you close just one side and the stock price never reaches the bought side, you lose whatever money could be recouped by selling the bought one.
As I mentioned in the book, you have to run this as a business. We are not like mutual fund buyers who look at the results on Sunday morning. Monitor and have a plan.
One important positive point with weekly positions is that you can find positions that are separated by a nickel, far enough from the current stock price to offer enough cushion that safety is maximized and you still get a great return.
Jerry
Jerry, this brings us back to a question that I haven't seen an answer to. With nakeds it is wise to close when the premium doubles, but what about spreads?
Newport, Avid, Gssound, Thank you!!
Again this has not happened to me (and hopefully will not), but its good to have the knowledge beforehand. I hope this also helped others that had the same question(s). From reading about spreads online it says that the "risk" is the difference between the sold and bought put (in my case $5 points). But you still have the risk of being assigned and that is not mentioned.
This is one reason why I like trading later in the week. Time decay and anytime after Thurs. allows me to roll to the next week if needed.
Again thanks for the scenario tutorial!!
Since many on this blog are trading credit spreads, anyone can shed some lights on how to reduce loss when the market is against your position using other risk managemant techniques than just closing your sold spreads such as buying long puts or calls?
Hello everyone,
Okay...obviously nobody can watch their positions every second the markets is open. So how many are using stoploss triggers at 2x or 3x the purchase premium??
In addition, is anybody trading on Fidelity??
GP,
I set alerts and triggers for my spreads. The alerts just tell me where the stock price is (usually set them 5,7,10 points from spread price), and the trigger will sell me out of the spread if the spread price is hit. However, as you read through the blog, if you set your spread far out from the stock price then you shouldn't have a worry.
Chris
Some talk on this thread about how to close out a trade that has moved against you.
No one has brought up rolling?? If your short a weekly and their is more than two week left in the normal monthly cycle most times you can move to the same strike for a credit. If theirs three weeks most times you can move up or down a strike for a credit.
If lets say you got caught with your pants down on a large SPX put short and the market tanks you can roll to a leap for a HUGE credit and wait for the market to bounce.
This week I'm naked short on 5-26 SPX 1200 .55 and 1225 .35 pretty sure I won't need to think about it but it's there if needed.
Ether of these will create short or long term dead money (margin) and one must decide
if taking the loss or rolling is in there best interest.
Hi Kenny, Gp, and all. When and how to close a position that is turning against you is a case by case decision. There is no right or wrong way. Probably what most experienced traders do is judge each one by the potential. If it double and you have only one or two days left but 20 points of safety. Most would let it ride. If it doubles on the last day with only a cushion of a point or two, most would just close. If it really turns against you in a major movement, maybe rolling out to the next week or even month. So the point is that there is no 'correct way'. There are exotic ways of buying two of this and selling three of that etc but when it all boils down, you have to decide for yourself. You should educate yourself on the possible moves and then decide. It seems that newer investors want a 'fix-all' approach. There is none, or if there were, there would be no danger in options.
My 'fix-all' is preventive. Leave lots of cushion. Leave little time. And make money. It is that simple. Leave lots of cushion and little time. Go for smaller returns
and sleep better. I have had hundreds of nights, tossing and turning. No more, One month I would make 10% then next I would lose 15%. Now I just crumb my way to good returns and sleep better.
I am gong to start a new Post with my possible play for next week.
Again I want to say how nice it is to trade ideas with you guys and dolls. No profanity, no belittle other traders. Just traders trying to tell what is working for them and how other can use the information
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