Hi traders; what a week long ride...
I see many of you lost some, by rolling at the wrong time or not rolling at the right time…
I got lucky and all of my positions expired worthless. There were certainly some touchy moments. Lesson’s, I am going to take from this is to follow my own advice!! Do not trade but if you just have to.. trade later in the week and for little profits and lots of cushion. As mentioned in some other post, for me I will avoid SPX etc until things settle down around the world. The world is just a mess, as never before, one countries problems effects the whole world. For me I will continue to pick good stocks and at this time that is AAPL… I like my calendar spreads as I am treating them like covered calls. The difference is that I get full premium and only pay 1/10 the price for the use of the stock. As we have discussed there are some drawbacks, but my 390/395’s and 400-405’s all expired worthless and maybe Monday I will sell the appropriate calls for the week. I have some paper loss but by selling weekly calls, options are paying me better than 10% weekly to wait for the stock to come back. It is like dividends on steroids.
If opening new positions, try to wait until late Wednesday. By them you MIGHT have a feeling for the mkt. don’t start guessing if the mkt opens big Monday. The premiums will still be there later in the week. You will sleep better and have a better chance of making some money. These times, with Italy etc jumping all over the place, it is time for caution.
69 comments:
Thanks,Jerry!
Didn't you sell the AAPL 370/375 this week too? when did you roll?
But I keep coming back to the same old question on the diagonals, how do you handle a drop to 372 with your Jan 400's, Jerry? By your new post I take it you wait them out until they recover. However, if this ends up taking months I'm interested in understanding better where you roll, and how you minimize the time value lost?
I may have sounded negative to diagonals in some of my previous posts, but it is actually the opposite, I'm just playing the devil's advocate to learn more about them. In fact, I've been in trouble with vertical spreads too many times the last couple of weeks and am starting to wonder if they are worth it, given the heavy hits one potentially takes when it gets to close. I think in my case it also a question of a broker that for some reason seems to have about 5 cents disadvantage on their fills, which forces me way to close. This is accenturated by weeklies, which push me to be more agressive and getting even closer. The crumbs really suffer against one mistake, and months of work could be wasted and years if the mistake is severe.
As an alternative, I've continued doing simulations on diagonals using TOS, and what I've learned is that instead of looking at these as spreads, it may be better to look at them as long term investments where you hold the stock, and then of course sell calls against it. I know, same thing, but mentally I think it is different. If you treat your long calls, or leaps, as owning the stock for a year or two it isn't that critical if they drop ten or twenty percent, as long as you believe in the stock long term. In the mean time you write calls against it on a weekly or monthly basis. It basically comes down to picking the right company, and making sure you keep the value in the leaps. Since you can afford more stocks for the same investment, this leverage gives you a good ROI. If Appl continues to go up 25% a year you're looking at about 100% a year just in leaps, and if you truly believe in the company, it is actually more profitable than crumbs but a lot less work.
This is where it gets dicey, during my simulations, the time value drops off dramatically the last third of the period of the leaps, but relatively much even during the second third. I've therefore tested with 6 month leaps and rolled them after about two. During my simulation of AAPL the first seven months of 2011, the leaps increased 60%, (excluding the income from selling short calls, which I didn't bother to do since I just wanted to see the time decay in the leaps). However, even though I used deep in the money leaps, I was not entirely successful. While AAPL went up from 323 to 387 (64 bucks) my calls only increased by half, from about 49 to 76 (or 27). Can anybody explain why that is or what I'm missing? I was under the impression that DITM leaps would move more on a 1:1 basis with stock?
Time for little introspection for me. The way I have been trading is to use SPX way out of the money. Usually my SPX spreads are farthest out of the money I can get in the 25K spread with 10 or 15 cents. I had a 1150/1125 for this week, which I closed on wednesday afternoon when SPX hit about 1230. If I had held on to this, it would have still expired worthless giving me about 0.7% return for the week, but I didn't like the sway in the market on wednesday.
The mistake (not sure yet though) I did was to open a 1025/1000 SPX for this week for 0.25 when I went out yesterday evening. I was surprised to see the limit order filled when I got back. The last available spread in SPX was this one yesterday though they opened 975 and 950 today. At one time today, my losses went to about 2000 on the SPX spread which could have wiped out my 2 months of carefully chosen way OTM puts. This was when the market was around 1180. Fortunately
the market recovered a bit later and I chose to close the spread at 40 cents, taking my first loss in selling spreads in the last 2 months or so.
Even if we keep doing this put spreads forever, one stray incident down the line has the potential to wipe of months or
years of profit. Not sure how to avoid this.
@Jerry/All - Need your input on the strategy below -
Interestingly, I had opened AAPL diagonal Jan 12/Aug 11 - 390/405 for about 29.80. Along with this I had bought a Nov 11, 300 put for $350. I closed this early this week at break even (when market was volatile) not realizing the power of the long put that I had. I checked out of curiosity today and this combination seems to have withstood all this shock very well
the Nov put now around 7.80 adequately compensating for the loss on the diagonal. We give away some money with buying the
put, but it could just be one covered call premium that we may have to lose to protect against a major correction. The long
put has to be way OTM to make cost cheaper, so any minor correction or fall still has issues where we may not be able to write subsequent calls. But is this a trade off that we can make?
@Nic - I think I posted at the same time, didn't see your earlier post. I have been looking for an answer to your question as well. That is the reason, I bought a put along with the diagonal in my first test earlier this week. I had to buy a way OTM put to keep costs lower, so there is no answer if AAPL drops to say 340 in my case and we are not able to sell calls on it. But again the call/put (straddle ?) could compensate for this one way or other and we could break even in a worst case scenario? Not sure.
Anyone who has any put spreads, we are all doomed.
S&P lowered US rating to AA+
I have some put spreads I had to roll over, but looks like we'll have really really hard hit on Monday. Very bad news...
Hi all, some interesting ideas / questions.
Avid, when I opened the aapl positions, I do treat them like a stock purchase. Of course they have a disadvantage of losing the time val that is built in. If you open a cal spread and have a debit of say 30 points. I look at it as a question, can I make 30 points by selling weekly calls before the time val has expired. With aapl I feel I can. The options pay me to wait for the stock to rebound. Maybe 5 months of weekly prem’s. ka-ching.. One adjustment you might think about to your posed questions is that it is not necessary to sell calls at the same strike you did on the first or at other times. Ex; I opened these a week ago and used the 400 strike to sell. This week with aapl trading down I will use maybe the 390? Far enough away so that I have time to roll if necessary but close enough to the stock price to get a decent return. These numbers are just examples but I’m sure you get the idea.
Nic; I hope I explained my idea with holding the long (Jan) call. I sell calls each week and by adjusting the strike I can get between 1 and 5 points week after week. If necessary I can even roll the Jan long if I want. Eventually the initial debit of 30 will be gone and I can sell the Jan call. Of course the desired goal is for the stock to end right below the sold strike. And do it again with maybe a higher strike each week. But you have to be nimble and adjust your thoughts. Again the worst is for a stock to just drop and drop with no premiums of decent return. But that is the reason for using the best of breed aka, AAPL. I have some BIDU cal spreads that I am not happy with, but it is paying its way. When a decent profit shows up I will bail on the BIDU.
You can do this drill with stocks like JnJ and run the same plan. Prems are less but so is the Jan call.. there are plenty to choose from.
Kenny; the mkt probably has this factored somewhat into the possibility realm ahead of
time? There has been plenty talk that even with a budget deal a downgrade is possible?
Jerry
I was sitting on cash till yesterday...Today I was trying to close the spread at the open with profits. Nothing got filled. I cancelled a dozen times increasing spread price with max ask/bid spread, and even a quarter more during gap down. Nothing got filled until I threw in almost a dollar more. I Anyway I rolled it for $.10 credit with much lower strike. Point taken: during such high stress jam time, close the short put first and then worry about the long side. Today it would have made a killing on long put. BUT last time when I covered my short put first, the market recovered and my long put was worth nothing :( I was like, darned I did it this way, darned I did it that way. Well may be I keep doing it just the same one way perpetually, I'll hit the lottery one day :)
Breaking news : S&P Downgraded US credit rating. A lot more downside?
Is it already priced in? Does it even matter? Will we see another 500+ down day? Things were going so good.... whyyyyy????
Phew, what a week! I barely made it out alive, but my trades expired worthless. CNBC is going to have a special this sunday night, that should be interesting. I think I'm going to stay on the sidelines until things clam down. I'm taking Jerry's advice, "don't need to trade all the time".
Hi
The question from NIc was : "But I keep coming back to the same old question on the diagonals, how do you handle a drop to 372 with your Jan 400's"
Jerry answer: "This week with aapl trading down I will use maybe the 390? Far enough away so that I have time to roll if necessary but close enough to the stock price to get a decent return. These numbers are just examples but I’m sure you get the idea.
This works but note if you sell a call below the strike of your long call you start using maintenance. The idea that "there is no maintenance" is correct if the sold strike is equal or above the long strike
Bought JAN400, Sold AUGWK2 405 = No maintenance
Bought JAN400. Sold AUGWK2 390 = 10 pts maintenance (ie you have the right to own Apple at 400 but you sold the right for someone to own it at 390..you have to cover that difference in your account maintenance)
I have confirmed this with Option express two times. It is like any spread (diagonal, vertical etc) where the sold options is closer to ITM than the bought one.
So if you believe that Apple will eventually get to 400 before Jan then you can sell calls below 400 but keep in mind the maintenance grows everytime you tick down.
If you have limited maintenance and apple continues to tank at some point you have decide whether to keep doing it.
rhm
Cheers
@Jerry - Thanks for all the details. The strategy is good if we can get back the call premium as soon as possible by means of the short calls that we write.
I agree that we can continue to sell calls as we choose appropriate, but only thing is, the margin requirements may continue to grow if the stock keeps dropping, which was my concern. RHM's post confirms that. The strategy will work well if the stock is moderately bullish to slight down sides with no major drops.
Like many, I BTO AAPL 400 calls to sell short calls against it. My concern is with the big drop, selling 405's will not earn much. Rolling the 400 down to 380 will make the paper loss very real, but we can then sell 385's for a decent ROI.
What's the consensus on rolling down on the long calls??
rick
Futures down more than 2% now.
S&P down 30, Dow down 295.
Expect hard hit tomorrow..
@Bald Don't see where spending the money to roll down on the longs would be prudent. It seems like it would be roughly equivalent to the increased maintenance required to sell the near term against the currently held longs. Don't think it is dollar for dollar tho. Don't really see the harm in holding the 400's. I have some 365's (good) and some 385's (not so) but just plan to sell some calls after things settle down a little tomorrow (assuming it does).
Safe
I think you're right. My OCT and JAN long calls in AAPL and GOOG should come back to life before expiry.
For the carnage next week, I am reminded of a quote from Churchill. "When you get to the end of your rope, tie a knot and hang on."
rick
Thanks Jerry, I'm known to be a bit thick so you may have explained everything I ask about before, but if you can just bear with me a little bit more I think I'm getting to the point of where I understand enough.
It sounds to me that it may be worth the extra cost to buy them a little deeper into the money, 1) you have less risk that you will incur maintenance and, 2) the movemenent in the long call seems to correspond better to the stock price, and thereby act more as a stock substitute, which is an advantage if we expect it to go up or if we need to recover.
What still concerns me is the time value in the leaps. I'd like to find the optimum way of rolling these so that the end effect would be similar to owning the stock, i.e. I buy them for x money now and after 6-12 months I can sell them for x again.
And, while at the same time track the movement in the stock on a 1:1 basis.
Israeli Stock Market down 7%!
Hey All,
Well last week I had opened an SPX and closed it for some good profit. Then I opened another position and had to get out because of the drop. I made this trade out even with a loss of just comms.
I then opened another position on Thurs and that expired worthless.
This week I will wait till Wed or Thurs to open any positions. I will also be looking at AAPL.
Trying to pick up some Jan or even Apr AAPL calls on the cheap this AM but so far market hasn't fallen enough for great bargains. Would sell near terms after some market rebound later in week for weekly cash flow. Should probably wait for more 'market direction' before moving but seems like an opportunity .Don't think this shakeout is gonna last. But then, I'm usually wrong about market direction......
SPX at 1157 if it drops under 1150 a major support level then how far down? Before market open S&P said they may downgrade US again in November. Ugly!
World of pain, attempting to roll positions to Dec.
Anyone staying on the sidelines until this mess is over? I don't feel comfortable with opening any calls spreads, the market is too unpredictable.
@Henry I am tempted to open some long calls on AAPL, CAT and the prem. on SPX put spd 1025/1000 this week is about 1.00, BUT I am very leary of this market, too many things going on here and around the world. Our stupid politicians have done a lot of damage and i have little faith that they will do the right thing and cut this insane spending soon if ever, at this point I am just sitting here watching the carnage.
Dow getting set to dip below 10k, I wish I was on the sidelines, I wish I was earning 0% on my money, would be better than losing all this money.
Jerry knows all, he always warned against this, this is what I get for choosing higher premiums over safety.
@ Nicky I feel the pain also, i don't know how long you have been in the market but I have seen a lot of these corrections and every single one has not only recovered but went on to higher levels. That being said this time things may be different. If you can make adjustments and hang in there we should get a bounce here pretty soon.
Wow, are we seeing history in the making here? This is crazy! Everyone on CNBC is freaking out. I'm tempted to buy some quality dividend stocks for my long-term investments thought.
Don't do it, if you must trade, why not buy LEAPS?
@nicky
I want the dividends since they provide a decent source of income. The only trading I do is with crumbs. And that is kinda scary to do right now haha
I got filled on the last SPX spread on the chain of 950/925 for 0.35, at one point I could've got 0.50, but can't be greedy!
C'mon SPX, let's see you fall 17% by Friday!?
Keep a level head crumb traders, and we'll get through this!
@ Chelski. I did the same spread (I did get 0.50). SInce 1970 the SPX's largest weekly drop was 18% (Week of Oct 6 2008) and hit hit an intra week low of 23.6%. One time in 41 years. 950 was 21% below the Friday close so i decided ill take a risk on this being the FIRST time in 43 years the SPX closes down 20+% Monday-Friday.
Lets see.
RHM
@Henry, I'm on the side lines right now. All Cash
Not making any positions right now. But I would love this if I put an ATM trader for puts and calls intraday.
rhmoptions, my thinking too!
I even got some filled at .65
Good, but not good if the market makers start opening some lower strikes than this! LOL...sorry, i had to laugh.
Narrowly escaped the disaster. Always sitting on cash on weekends except this terrible weekend which I rolled down the spx to 1125/1100 and 1100/1075. Covered all shorts at open and my accounts were halved. As soon as I recovered all my losses with a moderate profit, I ran fast. Last I looked at the spx option price.. wow... they rose another $12.
Covered PCLN 430/425 breakeven.
Covered most of AAPL with 10 cents loss. Need a holiday. Good trading folks.
interesting side note: when the S and P was at the lowest point in 2008 it was 666. Today it was down 6.66%. hmmmm. It is probably just numbers but for some reason crap like that jumps out at me.
Hope everyone is staying clean. I've been pretty lucky...only down 17% in total. I feel as though that is easily recoverable in the long run. What sucks is the people who are ready to retire and are getting whipped again just like 3 yrs ago.
I'm pretty confident that AAPL will do well in the next 3 yrs. They are coming off of a stellar quarter and I like the business model. If AAPL were to get to the 310-320 level, I might take a larger stake in LEAPS Jan13's.....then sell calls diligently.
BIDU is another one that may be a target for LEAPS in my opinion.
Good luck trading! PROTECT YOUR CAPITAL! There are some really big fish out there and they will eat you alive.
RK
I've been thinking the same on AAPL, RK, and I've been tinkering along to find a model that could work for me.
An issue with buying leaps in AAPL is that even if you go 30-40 points ITM you'll still have a delta of .5-.6, i.e. for every buck AAPL goes up your leap will only go up 50-60 cent. Then there is the time decay.
Unless one can time this very well by rolling the leap regularly to keep away the time decay, all your proceeds from the weeklies goes just to cover that. But the killer is whatever you do, your ultimate success will depend on what happens to the value of the leap as it moves proportionally faster than what you can make on weeklies.
Having said that I do believe in this model if you have a stock you think will be long term successful, such as AAPL. The trick is just to figure out how to optimize the leap so that one:
- Rolls regularly to avoid paying to much time decay
- How much ITM the long call should be to get a higher delta and less maintenance risk
- How far away the long call should be (6-9 months probably as it gets very expensive after that)
The reason LEAP is such a crucial part of this is that one may have to hold on to it until in this case AAPL recovers if it should take a dive.
In Last week's posting Fulgore was selling Put spreads with the market down so much anyone selling call spreads?
Thanks
Ed,
Could see a dead cat bounce and your sold call spread could be in jeopardy. I really dislike these crash situations because you have to be on the right side of the trade or get run over. Huge moves like this are real money makers or disasters depending on where your are at. Timing the bottom of these things is another nasty proposition. I feel as though waiting it out to get a feel for things is better. We need more stability first....other than that.....gamble away if you like.
I have a feeling as though this selling has been from hedge funds. Has anyone of your friends or family liquidated their retirement accounts? Probably not.....at least not yet.
Hi all, I still have the aapl calls for Jan. I have not sold the calls for this week. I will hope there is a rebound sometime this week and if not I will sell Aug 20 calls. I will avoid going very much lower as it does pick up some maint. But selling the 8/20 is still worth .80 so if they will pay me .80 ea while holding for this storm to pass I am (sort of) happy. My advice is to hold off opening any positions until this passes. The whole world is on fire and we must not try to guess where the bottom is. Let it happen and then move. But be sure, don’t fall for the dead cat bounce… there is no hurry. If you are not in the market enjoy and relax. If in the market and with quality stocks, try to relax and wait for a rebound…it will come. Avoid index is my advice. If you make a move it will probably be on the wrong side of the whip-saw. Most smaller investors are always on the wrong side.
Hi
The SPX broke thru 1250, 1175 like a hot knife thru butter. The next support is the 2010 summer low of approx 1040-1050. I am assuming that will hold at least this week. After that there may be some brief resistance at 1000 then the next support is 878.
I feel my 950/925 will be okay but ill have to watch it closely.
For me i really want to own Apple stock (actual stock) at 250 (i know that may be dreaming but hey why not). I will wait until weeklies are offered at 250 (335 is current lowest) then start selling naked puts (hoping to get assigned eventually). Then sell calls against the stock.
The way things are going in 2 weeks i may get a chance.
Cheers
Rhm, why not do that with deep in the money leaps instead?
@Jerry, I am with you waiting. I will wait till Wed or Thurs like I mentioned.
Futures are up. SPX up 10 points pre market. I think your 900's positions will be ok ? but with this market nothing is for sure right now.
Watch out for the dead cat!
Down --- Up ---- Starting Back Down --- crazy .. still all cash and waiting for tomorrow or thurs.
Fulgore, I too do like waiting til Wed or Thurs, dut there are some weeks like this extremely volatile week, where the market could stabalize Wed/Thurs and the risk is you won't get the cushion you want and then the market tanks or shoots up by Friday....be careful!
My 950's should not give me trouble....
I got notice of a margin call from TK, it says it's due today, if I do an ACH transfer, won't it take 3 days?
Nicky, yes. They probably expect you to do a wire transfer.
But Jerry's book says, ignore the first or second margin call! :)
I did the ACH transfer, see what happens.
OH raised there margin requirement today. Did any other brokers do so as well?
Re OH Margin Calls
My acct slipped below 25k and I got a red flag for DAY TRADING margin call. But I have only bought and sold one time in 3 months. I'm gonna disregard.
What changes have they made?
Rick
They have raised the requirement by 50% to 30% of the underlying stock price minus any out-of-the-money amount plus option premium or 15% of the strike price plus option premium.
Can anyone recommend another broker? Tradeking?
I'm using Tradeking and Options House both now.
I would not recommend Tradeking.
Their trading system is not reliable, today, their system was down for more than 2 hours. I had to call them up.
Lots of bugs... I would avoid them.
I plan to reduce my balance in Tradeking.
Pre-Market is down right now. This means that premiums will be high for the puts. I will look at opening a position with AAPL or SPX when I see a small kick up.
Opened up some SPX 960/965 put spreads for .10. Got filled pretty quick, was maybe thinking .15 might have gone through.
165 points for 2.5 days. If i feel threatened i will exit as always.
sold 12Aug AAPL 330 puts and BTO jan12 400 calls AAPL
BTO GLD 172 OCT puts
gold going parabolic. Do not try this at home. RK
Hi Fulgore,
I like your spx 960/965 trade for .10. I do have one question;- when I look at the bid/ask price of 960 it is .05/.80 and the 965 is .05/.75 which means on the surface, there is nothing that will indicate to anyone that you can get a net credit of .10 premium since the natural for this trade is actually .05-.80=.75 debit. What give you a clue that this spread will give you .10 credit in the first place? Do you just ignore whatever the current bid/ask price for each strike price and just enter the credit spread that you want and hope that it will go through? or do you see a huge spread between the bid/ask of each strike and base on your experience in the past, the trade was executed?
Thanks,
TK
Does anyone use interactive brokers, and, if so, can you talk about the pros and cons of this platform. Given OH's increased margin requirement for naked put writing, I feel it's imperative for me to switch brokers.
DJ H, I have just opened an IB account. I wanted to paper trade options in commodity futures, but had to fund the real account with money. So far, I find the platform not user friendly and find it 10 times as difficult to do any simple task that I would do in OH.
Having said that, tomorrow in fact, I will be sitting down with a friend who only uses IB and has been using it for almost 2 years now. He will navigate me around the platform. Then I can let you know more of what I think. But to learn it just by myself, would be tedius.....
Eventually I want to use IB for options in commodity futures, but also down the road, I can have access and trade on behalf of family especially if they live abroad.
From Tradeking:
In appreciation of your business, this Friday we’ll be offering a special free trade day for all clients. Any trades placed throughout the day on August 12 will be absolutely free of commissions.
I forgot to mention one more thing about Tradeking. Their platform is web-based which means you have to hit "refresh" button to update the quote, which is very inconvenient.
I don't remember how many times I was so frustrated with their poor service. YOU GET WHAT YOU PAY FOR.
@TK, I do not look at the bid ask. I use Think or Swim and so I just choose a strike price and select "vertical" then "sell". When I do this ToS shows me a premium for this spread. It will show me a .00 or -.05 or .05 or .10 something like that. Since the bid / ask are skewed a bit the number may not be correct. I check 2 strikes above and below the one I am going to choose. Sometimes the one below it may be giving more premium. If this happends I know I can get more cushion and move my strike farther away from the stock price. Once I find a good price that gives .10, and I am comfortable that this is accurate i move down 1 or 2 strikes to .05. I will change this to .10 and see if it goes through in 1 hr. If not I will move 1 strike up and repeat.
I hope this explaination helped.
Looking for a good AAPL call to sell against my long calls. Market looks 'up' today, at least for awhile.
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