Friday, December 30, 2011
Vacation time (sort-of)
You guys will be flying pretty much without me after Monday night. My wife and I are going to the Caribbean for 25 days. 10 days in ARUBA 7 in Curacao and 7 more in Bonaire. Some diving, snorkeling and fishing. Options bought this vacation for us so I want to thank all the traders on the other side.. I will have my lap-top to do some trading and checking on the blog. Take care and leave cushion…
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85 comments:
Happy New Year and enjoy your vacation, I use to think money was everything, no, the only thing, but I have come to see it's not, what you have - loving wife, family, that's real happiness.
Thanks Jerry and a great, well deserved vacation to you and yours, And a Happy and prosperous New Year to all.
Happy New Year everyone! Thanks for the education. Thinking about Jerry's Iron Condor, making 4% per week...staggering.
Nicky has it right. From a sign I saw in a trinket shop recently: "the best things in life aren't things".
So I got assigned on MSFT, but not on all the contracts I wrote, only on 7, not bad, Tuesday I'll write covered calls + calls against the Leaps, double the income, I might go monthly as it will only be 13 trading days till expiration.
Happy New Year to all!!
Cheers Jerry. Have a great time there.
Thanks all for the good wishes.
I want to thank all of you for contributing to the blog and making the year both fun, informative and profitable.
Happy New Year all
Happy New Year to all!!!!
Happy new year to all. Jerry thanks for the blog and and stimulating the Dutch economy by going to the Dutch islands Aruba, Curacao and Bonaire. We can really use the money to pay off the Greek debt ;-) lol.
Anybody familiar with this article: http://bullishcross.com/apple-fiscal-q1-the-biggest-earnings-blowout-in-the-history/
Bullish Cross projects blowout earnings report 1/23/2012, sending AAPL up $50 to $450. Sounds too good to be true.
I'm new at all of this, so I'm hoping for some feedback. I'm looking at the 385/380 Jan12 vert put spread for a credit of $.85. 17% for 18 days sounds like I'm missing something huge.
Help!
@Dave
Haven't read the article but I would not want to be in a short term AAPL trade over earnings. AAPL
missed earnings Q3 and got killed. Channel reports are saying AAPL had a great Holiday season and Q4 could be a blowout. AAPL could move 30-35 points over earnings anouncement. Just MHO.
@Jerry
Don't know if you left for Aruba yet but the wife and I were there mid Oct and had a great time.(our
2nd time). Stayed at the Divi Golf Resort. If I may strongly suggest a few restaurants. Ruinas del Mar at the Hyatt. The Hyatt is miraculous just to walk the grounds. Papiamento is ouside in a courtyard under a tree canopy. Whatever you do do not miss Passions on the Beach. Your table is set up on the beach right next to the water and you have dinner watching the sun set. Can't ask for much better than that. Have a great time.
Think you mean Jan 21. Looked at the article and it seems perhaps a little optimistic but genrally right on with consensus. The problem is as confirmed last quarter that if they miss even little, the market is unmerciful. They made $28 billion (with a 'b') last quarter only to disappoint the market. But basically I think you would be on pretty solid ground. Looks like a gap up this am so you might not quite get your expected premium.
Thanks Tax.Leave for the airport in an hour or so. Will be sure to go to those. I'm there areound 10 days and then on to curacao for a week and then Bonaire of another week.
Dave, don't ever bet on anything over earnings. I agree aapl should have great earns but sometimes blow-out earnings when super blow were expected and the stock drops..It doesn't have to make sense (or cents) it just is what it is and never let a 'guess' break your heart or bank.
Hey all! I've just finished reading the book, and have a little experience with options. Love this forum - has made me do some NEW thinking, which is always good...
2 weeks ago I sold some CREE puts after the drop/upgrade, and buying them back today for some good return
Thinking of doing a calendar vertical spread on CREE. Is currently trading at $22.62, Can buy the Jan'13 $20 Call for $6.95, then sell the Jan21'12 $25 for .53 = 7.5% in 2 weeks. Good trade?
What do you think of CREE?
THANKS all!
Happy new year! STO: MSFT Jan 21 2012 27.50 Call for .28, great start to the new year, earnings come out 1 day before expiration, but rolling from $27.50 should be easy.
Thought I would introduce myself, I've just finished reading the blog from the first post in Oct 2010 up till today, including all comments. I want to thank Jerry for his book and the blog, also want to thank all the contributors to the blog, there is so much awesome info here – well worth taking the time to read it all!
Interesting to see the change in trading over the year, from naked puts through credit spreads to calendar/diagonal spreads. At this stage most of my trades are naked puts with a few small credit spreads, I prefer naked puts as I feel I can get more cushion and have better control over the losses then I can with credit spreads, I'll talk about this a little more in a future post if there is anyone still trading naked puts and interested in discussing. Anyone out there still skinny-dipping?
I'm an Australian currently living in New Zealand, is there any other Ozzie or Kiwi traders here?
Hope everyone has a great and profitable new year!
Damo
Welcome, Damo. I, too, am interested mainly in naked puts and am open to all ideas, learning to research deals and developing my "gut."
@Taxman and @Ihaveoptions and Jerry, thanks for your thoughts regarding AAPL. I'm not sure what I'm going to do yet.
I'm not getting any fills on my limit orders--only thing down is utilities, so trying to short EXC.
I'm still selling naked puts, I sold TTWO $14 Jan put for .75 when the stock was @ $13.41, today the stock hit a high of $14.05, usually I don't sell in the money puts, but I believe this stock is trading lower than it should be trading.
I am also selling naked puts. I had read Jerry's old posts on Trade King where he really discussed his naked put strategy over the course of 2010. I just discovered this blog so I haven't read all the way through yet to find out why he has gone in a different direction. I am going to order the book as I fully want to become familiar with his guidelines. What stocks are folks trading far OTM puts on that seem to work well week in and week out? Thanks
Welcome Damo
Pascal is from Holand,I think,and I'm interested in knowing how you guys trade on the US exchanges. I wouldn't begin to know how to trade on foreign exchanges. I trade mostly credit spreads on the PUT side and calendar spreads. Been dipping into naked puts a little. Like them alot. Get far enough away and if assigned, just sell covered calls until they get called away. Make lots more money on the nakeds also. Don't have to purchase that covering option.
Dave
I have lots of AAPl positions. I have what I call safe "beat the bank" credit spreads of Jan, Apr & Jul 220/210 bull put spreads. I also trade AAPl weekly put spreads and dip once in a while on the call side. When this Jan 220/210 expire, I will roll them out to Oct. I try to keep about 150 points of cushion and get a nice "safe"(if anything can be safe) ROR. I WON'T trade AAPL weeklies around earnings release because AAPL can move 30-35 points depending on a miss or a hit.
Thanks for the welcome guys.
@Taxman – I use Interactive Brokers to trade, you can trade most markets with them and they allow you to use the base currency of your choice, I currently trade with OZ dollars as my base currency. I can deposit and withdraw funds in any base currency and at the local banks in that currency, so I can ad funds from my NZ bank and withdraw funds to my OZ bank or vice versa.
As far as actually trading, market close is at 10am NZ time, so I usually get up at 6am and catch the last 4 hours. I always have stop orders on my naked puts just incase of something drastic happening while I'm asleep – one of the reasons I prefer naked puts overs spreads.
Damo
Damo,
How much cushion do you allow on your naked puts? Also are you trading the naked puts on weeklies or monthlies? Lastly where do you put your stops? Thanks, BC
As I mentioned earlier, at the moment I prefer naked puts, I'm going to talk about my reasons why, if anyone can see anything wrong with my thinking please point it out!
That's the main reason I'm putting it out there, also others might be able to get something out of it.
Sorry this might be a bit long.
@BCG, all your questions should be answered in the following but I recommend you get Jerrys book, all the info is in there, he gives you a complete trading plan and he's practically giving it away.
I've been trading naked puts for almost 2 years, but not Jerry's method. Using longer time frames and no stop loss rules, just trade and hope. Would do OK for a while then loose all the gains. Only 2 months with Jerry's method.
My goal is 0.5% per week return so 2 - 2.5% per month depending on if it's a 4 week or 5 week month. I'm not comfortable aiming for more then this at the moment, it's psychological –" way smarter then me don't get anywhere near these returns, how can I expect to?" that's the internal voice talking! When I get constant returns at this level, maybe a year, I'll look at pushing for 1% per week.
I trade monthly nakeds with some very small weekly spreads.
So first thing is I only use 80% of my available funds for Margin. Interactive Brokers (IB) don't do margin calls, they just close positions, so I like to have a buffer.
My rules are as per Jerry's rules with a few small tweaks – Cushion 20%+ (will reduce with less time). Stock selection is Jerry's rules. Stop Loss is double the premium received, I actually us double the ask price at time of sale. So if it had a bid of 0.23 / ask 0.25 and I sold for 0.23 my SL would be 0.50. If underlying price hits strike price, exit.
The maximum I'm willing to risk on any one trade is 1% of my total trading account, so on a $50,000 account it would be $500. This now tells me what my position size will be.
Example: NOV is trading at 67.30, the 52.50 put has a bid 0.23 / ask 0.25 if I want to sell this my SL would be at 0.50 so if I get stopped out I will lose 0.25 or $25 per contract. So I divide $500 (Max I'm willing to lose) by 25 (what I'll lose if I get stopped out) and this tells me I can sell 20 contracts. Obviously there is slippage to think about, so you might end up getting stopped out a bit higher but it gives some sort of control over losses. This is a worst case loss also, as Jerry says, if it looks like shit, wipe it. Maybe not in those exact words : )
I like to have 4 open positions a month so I also divide my account into 4 parts. As I only use 80% of my account for margin if I had a $50,000 account I would only use $40,000 as margin, so $10,000 per position. If the above position size calculation put me over the $10k margin I would reduce the number of contracts until the margin was at $10k. With IB as soon as I put in an order it tells me my margin requirements so it's easy to see if I'm over.
I close all positions when I get 80% of the profit, no questions. Will always put that margin to use again but not necessarily on the same underlying, if I can get better return/more cushion elsewhere I'll take it.
TBC
As far as spreads go I don't feel I can get the same control over stop loss exits due to the wider spreads, also because the margin is reduced you end up with more contracts so the overall dollar loss is more. They just seem to be really hard to handle when they go bad! At least that's how I see it but I'm happy to be educated otherwise.
There is the chance of the large gap which a spread protects from but you can still lose more with a spread over a naked as you will generally have more contracts on a spread and more cushion with a naked. I think if you use good stocks (Jerry's selection rules) and have SL in place the risk of huge damage is limited.
In saying that I am still trading some spreads, If I have some margin left over out of the 80% I'll do a weekly spread, try to enter Wednesday or Thursday and keep a close eye on it, they are small positions due to not much margin left to play with but a good way to get a feel for them without risking to much. I've traded apple and SPX over the last few weeks.
My positions for this month are:
HANS Jan 75 .25 3.1% Current price 92.50
SPG Jan 94.8 .31 3.1% Current price 129.38
NOV Jan 52.50 .22 4% Current price 70.87
PCP Jan 130 .30 2.2% Current price 168.86
So all except HANS are over 20% cushion with about 2 ½ weeks to go. I had an order to close NOV at 0.04 on friday that didn't get filled, didn't realise it was a day order and didn't put it back on today, would have been out otherwise :(
I feel that I'm limiting the risks as much as possible but would love to here if I'm missing anything from those more experienced.
Damo
@Damo,
Hi, I trade also moslty naked Puts. I read Jerry's book in Nov 2010. I was selling only covered calls on stocks I owned before reading the book and started selling Puts according to Jerry's methods in Jan 2011.
After 1 year of selling monthly Puts (and a few vert. Put spreads) I am very happy to say that I averaged 23.5% cummulative return on the Puts and 9.11% cummulative return on the vert. Put Spreads over the whole year (I could have done more on the vert put spreads but didn't trade every months).
This is without a doubt my best ever investment perfomance and it was done on one of the toughest years in the stock market.
I have to say I like your strategy of cashing out when you hit 80% of planned profit. A few times during last year (especially in August and October) I was gaining well then the market turned sharply and I had to close some positions at a loss. If I had used your 80% strategy I would have saved much more.
Anyhow, overall I am very happy with naked puts but I sleep better when I have vert Put spreads for the security they offer as I use a lot of margin. if I were to get assigned on my naked Put position I would be in booboo. I am looking at calendar spreads but I have a little trouble understanding the mechanics, furthermore, as I live in Hong Kong, trading with the US means it starts at 10:30 pm and closes at 4 am. I do not want to do so much maintenance of my positions in the middle of the night.
take care,
Fran
Hi Fran, awesome results! I'd be rapt if I can get those returns my first year trading crumbs.
Interesting that you say you sleep better with spreads, I'm going to do a comparison of losses for nakeds and spreads in a worse case scenario over the next couple of days, I'll post the results when done.
Cheers,
Damo
Nicky, Wish I had been nimble ie smart enough to do that with the Msft 26. This stock seems to be running and I have to go out to Mar at 27 to get enough premium to buy my sold 26's for 1/21. This spread has treated us so well. What to do?
@Ihaveoptions
I also have the MSFT short 1/21 26 calls. I'm waitng until we get closer to 1/21 to see what MSFT will do, but will probably just roll over the 26's to a Jan week 4
26. I think the market is a bite overbought and am hoping for a selloff by then. Time will tell
Market is down, MSFT is up, earnings out Jan 19th, the market already knows earnings report will be good, Windows 8 is due out in 2012, I'm set to roll my 27.50s up.
AAPL earnings on the 24th Jan 2pm PT
Go AAPL. Shouldn't admit this on this 'conservative' blog but I've got a bunch of 420/425 Jan 21 call spreads which look pretty good with AAPL above 425. Net cost 78 cents. Hope to be out before earnings on the usual runup pre earnings. Wish me luck. And I promise never to do this sort of thing again!
@options
We won't tell Jerry. Good luck on AAPL. But I hope AAPl doesn't move above 420 until next Mon, because I have a bear call spread short 420
long 425.
Has anyone ever rolled a vertical spread to the next week? How do you do it? I'm with IB and was wondering if I simply need to enter a custom trade with four legs (the first two would buy back this week's spread and the latter two would open the one for next week)?
I opened yesterday a 80-85 call spread on NFLX and it never stops going up since then!
Patrick
@taxman-Its a deal.
Just close my NOV Jan for 0.04 3.2% for 2 ½ weeks, I'm happy with that.
Damo
Just did some quick numbers comparing a naked put and a credit spread on AAPL
AAPL trading at $413, I'm comparing the Feb 330 naked put v 330/325 credit spread using $10k of margin. The prices are live prices at around 3pm today 04 Jan.
330 put bid 0.86 ask 0.92
325 put bid 0.73 ask 0.76
IB was showing the spread at bid 0.10 ask 0.20 so lets split the difference and say we sold the spread at 0.15
So with $10k margin we can sell 20 contracts of the spread at 0.15 for $300 total
IB margin required for naked was $3,274 so using $10k margin we can sell 3 contracts at 0.86 for $258 total
Because of the higher commissions on the spread the total dollars you take in will be almost the same.
Now if on the last day AAPL is at $325, we have a loss of $5 on the spread for a total loss of 2000 * 5 = $10,000 – our maximum loss.
With the naked there will be at least $5 of intrinsic value in the 330 plus some time value, lets say $1, so $6. Total loss of 300 * 6 = $1800.
So as you can see, for same margin, same income, massive difference in loss.
Apple could be at $300 and our loss would be 31 * 300 = $9,300 – still less then the spread.
I have just done these numbers quickly so maybe I've missed something? If not I don't see the advantage of using spreads for more protection.
You could also say that if AAPL hit $325 with 3 weeks left till expiry that the time value in the 330 would be much higher so your loss on the naked would be more but I still don't think it would be as much as the spread and you can just wait till the last day for all the time value to diminish. Although you should have been out long ago based on your rules!
Damo
Damo,
Thanks for the comprehensive rundown of your strategy. I definitely am going to get Jerry's book, I had e-mailed him last week before I discovered this blog and now understand why he hadn't gotten back. At any rate, I have written many naked puts in the past but really with the strategy of either creating cash flow or buying a stock I wanted to own at a discount. As such, my position sizes were sizes that I knew I could purchase and hold in my portfolio. I read Jerry's philosophy on the TradeKing website where he used to post. It really fits well with what I am trying to accomplish and I am going to adapt it for a portion of my equity trading. I have been trading the VXX/XIV using a covered call strategy (w/weekly options)for the last 6 months and done well but long term it is just too unpredictable. I also have an IB account but use it mostly for shorting as they can borrow shares of virtually anything.
One other question....with your stop loss being double the ask, I assume you never allow a position to result in assignment of shares correct?
I am especially intrigued by trying to do naked puts on a stocks that have weeklies but I am not sure what rules to apply in terms of cushion. I think the 80% rule is good for monthly's and not sure how much needs to be allowed on a weekly.
Anyhow thanks again, BC
@BC
That's right, the aim is to never be assigned. If I was assigned on all current positions I would need to buy around $250k worth of stock, I'm only trading with $40k at the moment so not possible.
Once you've read Jerry's book send him an email and ask for the extra chapter, it covers doing spreads with weeklys but you could adapt it to nakeds.
Damo
@Damo
I crunched your numbers on APPL and they are spot on. I write mostly credit spreads and thought naked puts didn't make as much profit as spreads. Your analysis debunks that since you can make the same profit using fewer contracts hence less risk???. And IF PUT the stock you get it cheap and can write covered calls until called away. I guess the talking heads keep harping that naked puts have UNLIMITED downside in case of a black swan event. But if you watch the account and use your stop parameter its hard to get into too much trouble. That is why this venue is so great. Lots of traders with differing methods and everyone having input.
@ Damo,
Thanks for going through the trouble of comparing live examples of Naked Puts versus Credit Spreads on AAPL. Very interesting analysis.
I think the main advantage of a Spread is the maximum downside risk in the event of a sudden and total collapse of a stock (ie. in your example if APPL dropped to 0 then you would owe 97'500 with Naked Puts).
However it is true that in normal market conditions, the Naked Puts are much easier to roll-down or trade then spreads which ask more research and efforts to close and re-open.
With naked Puts, you have to watch them like a hawk and although its tempting, its best to stay away from volatile stocks (I had a few suprises last year with SINA and BIDU).
But of course when trading Spreads, you can apply the same rules as in Jerry's book, meaning as soon as your premium doubles you buy back and look for another position to re-enter. In any case, you should not wait until the underlying reaches the strike price whether trading spreads or naked puts..
Thanks again for your comparison.
Francois
Taxman, So a stupid question: I should already know this but am unsure. You say 'And IF PUT the stock you get it cheap and can write covered calls until called away.' You are forced to buy the stock at the strike, not necessarily a bad thing. Selling calls against I get, but wht about the 'called away' part? Clarify if you would be so kind. I've done only calendars and spreads up til now but of there's a better way....
By called away, he means, you sell calls until the stock gets called away, meaning the reverse of getting put on, you are "forced" to sell at the strike price of the sold call.
Thot we were talking 'naked" here. ??
Yes, he is saying:
"IF PUT the stock you get it cheap and can write covered calls until called away."
So you start off with naked puts, and if you get assigned then turn it into a covered call, that's an option, but for some, it's not, most people here don't want to get assigned, I personally don't mind it.
You're right Nicky, getting assigned really is a matter of preference but also it depends on how leverage one is. Most of the positions I open are leveraged about 10 X so if I were assigned I would not be able to purchase the stock.
Basically you are not completely naked if you have enough cash in your account to cover your position. I usually bare it all :-)
But then again its maybe my French side !!
Francois
You're right Francois, you're not completely naked if you have enough cash, what I do is I start off with cash secured type trades, then if they go my way, I write additional puts without closing the previous ones, thus going naked, for example, early on I wrote MSFT $25 Jan puts, when MSFT went up, I knew it would take something real drastic to have MSFT come down to $25, so I started to write puts on TTWO, without closing out the MSFT puts.
@Taxman
You can always reduce your cushion with spreads to increase your return, this also increases the chances of it going against you though.
Agree that this blog is a great rescource, thanks Jerry and everyone who contributes!
@Francois
No doubt spreads offer better protection if a stock was to go to 0, but if you stick with good quility companies with proven track records what are the chances of this happening? Owning shares outright has the same risk also if it goes to zero, but this is considered the safe option, compared to options. Though with options you will generally be leveraged.
I think that's what it comes down to, leverage. With spreads you are more leveraged then with naked puts. With naked puts you are more leveraged then with straight shares.
Anyway good discussion, still interested in hearing other people's views also.
Anyone think there is going to be a sell off over the next couple of days?
Damo
@haveoptions
Nicky had a good explanation. If AAPL were 400 you go naked at 350 and AAPL has a miss on earnings and goes to 340. You get assigned at 350, so now you start a covered call program at 350 or 355 until AAPl recovers above the call strike and it gets called away. Of course I would have closed the naked put BEFORE AAPL got that low.
@optionsense
Until I found Jerry, I traded spreads with less cushion to get those 5% weekly ROI's and during the Aug/Sept debacle got killed. I am now very happy to make 1% per week. Heck thats 52% per year and 2011 was a 0% ROI year if you look at the indexes. Heck if you look where S&P started in 2001, I think its a LOST decade. I personally think the US will follow the EU and China back into a slowdown or recession in 2012. With unemployment "officially" LOL at 8.5%, I don't know how families keep spending. The US economy is 70% driven by personal consumption and I don't know how they keep it up. I'm looking for a flat to down year.
Bloggers, remember there is no such thing as a stupid question. We are all playing with our money and learning/sharing thoughts together.
MSFT continues to go up, TTWO trading @ $14.55 on an upgrade, wow, jumped over a dollar since I sold to open the Jan $14 puts.weird day today, Dow, S&P down, Nasdaq up, financials up, BAC up almost 5%, big institutional buying of the $7 calls, might be a good trade to follow, but instead of buying calls, sell puts.
I think it is a very interesting to hear all of your views of spreads vs naked puts. Personally I think as long as you have a good rule of thumb like Damo has (stop on naked puts of 2x the premium) and you are buying around 20% OTM then you never have to worry about how low the stock goes because you would be stopped out before the stock even approaches the strike price. Even though I am Irish maybe I have a little French in me because like Francois I utilize most of my leverage and would have margin calls and would be automatically stopped out by my broker before the stock could get that low (on my naked puts).
No takers on CREE?
Mike, had a quick look at CREE, I wouldn't trade it. It's been in a down trend since the start of 2011 and a few analysts have sell recommendations on it. Shouldn't be hard to find better picks.
What do you like about it?
Hi guys, I'm curious why Jerry and several others seem to prefer to use Calendar spreads over something like a double calendar. It seems to me that with a Calendar, the goal is to pick the sweet-spot (i.e. the center of the calendar graph) where you think the price would be - in order to maximize returns.
Using a double-calendar is much like an Iron Condor where you have a much larger range of sweet-spots, not to mention larger break-even ranges. Clearly the ROI can be greater with calendars, but it seems more tied to your price-prediction ability (of which I have none).
Have I missed anything?
Thanks
Hi all,
I am considering to change my broker. I currently use Charles Schwab which I have become very accustomed to and with who I am very happy. They are helpful also when you have a problem.
However a friend told me that IB brokers are much more versatile and more of a "professional" type platform. I checked it briefly and I liek the fact that you can in one account invest in gold, trade forex, do Options etc... Charles Schwab is only US markets and only US$.
Do any of you have any comments on both or either ?
Thanks in advance,
Francois
I only have had great experience with Schwab, mainly due to their great execution of trades. This, combined with their low fees in equity and option trades, gives me what I need. However, I only currently trade US equities and options.
@Francois
I use IB and overall I'm happy with them. The things I like are:
1. Being able to have my account in the base currency of choice and change it at any time. Also being able to deposit and withdraw funds in any currency. I have NZ and Australian bank accounts so this comes in handy. If you're US based it's probably irrelevant.
2. Depositing and withdrawing funds is fast, if I deposit funds today via Internet banking they are in my account tomorrow and I can use them for trading. Same with withdrawals, cash usually shows in my bank account the next day, the longest I've had to wait is 2 days.
3. The trading platform is definitely professional, and like you said you can trade Forex, options, futures, CFD's, shares on most of the world markets. This could also be a negative as the platform has a steep learning curve. They do hold regular webinars and you can accsess past webinars on their site.
4. Their commissions are reasonable.
5. I still earn interst on my funds while they are being used as margin. No sure if other brokers do this?
Things I don't like:
1. No margin calls, they will just liquidate positions.
2. They charge a cancelation fee on orders, not sure if other brokers do this?
3. I've never had to deal with the US customer service but I've heard they're pretty bad.
Hope this helps.
Damo
Cancellation fee? That's a deal breaker, I cancel orders left and right, I place an order above the ask price and let the order come to me, if I see it's not going to I cancel, come lower, then cancel come lower, cancel and so on.. I can't imagine paying every time I do this.
What a great resource this is. On the naked puts and a stop loss at 2x, the issue I see is that option prices move dramatically and very fast in the event of a sell-off. So you end up buying back your .20 puts for a dollar with no sellers anywhere near .40. That was my experience on May 6, 2010. An unusual event but it will happen again, someday (EU meltdown, another US debt downgrade, spike in US borrowing costs, etc, etc). I have much more cushion now and settle for less income. But I sleep much better.
Regarding trading platforms, I use brokersXpress. Low fee per trade, no cancellation fee (Nicky, I'm with you--that would be a deal-breaker), great customer service.
Somewhere in these comments and in previous posts people say they can BTC a position that is .05 or less and have the commission waived. I called brokersXpress yesterday to ask about it and they said they don't and don't have plans to waive BTC commissions in the future.
@ Glenn
I guess that's one of the risks we take, in May 2010 did you have stops orders in the market or did you enter them once the sell off was happening?
Also, what sort of cushion are you using now?
Damo
So, my broker is not the only one charging a cancellation fee. I complained about it and their response was basically along the lines of "too bad...that's the way it is and that's the way it's going to stay". If you trade only stocks, then there is no cancellation fee for that. But, if you're like me, and only trade options, then they may charge a cancellation fee for option trade cancellations. If you cancel more option contracts then you get filled on (for that trading day), then you will be charged $1/contract for each canceled contract above the fill number. Most of my trades are 10 lot trades, if I submit a 10 lot trade and cancel it, I will be flagged for 10 contracts, if I later submit another 10 lot trade and it gets filled, the 10-lot flag goes away and there is no charge for the cancellation (10 filled and 10 cancelled = no charge). But, if I submit a 10 lot trade and cancel it, submit another 10 lot trade and cancel that also (now I'm flagged for canceling 20 contracts). If I later submit another 10 lot trade and get filled, and that's all the trading I do for that day, I will be charged a $10 cancellation fee for that day (cancelled 20, filled on 10 = $10 fee). I use to trade like you Nicky until I switched to my current broker and their cancellation fee policy for option trading put the "kabash" on trading that way.
What are folks doing with MSFT? It pretty much had a melt up, my calls are up nicely but heavy paper losses on the $25/26 calls I sold.
@ihaveoptions
Looks like you will have a very profitable AAPL 420/425 spread. I just took gas closing my 10 contract 420/425 BEAR call spread. Guess it wasn't so bearish after all. Good luck on your run into earnings.
DMK I'm going to smoke "hopium" and hope MSFT corrects in price before my short 26 calls expire
Jan21. Otherwise, I will probably close the whole calendar spread and start over.
Based on DMK's earlier comment on the MSFT cal spread, I went back to review my own position. I entered the spread on Oct 24 when MSFT was trading at 27.22 and if I were to close it today, I would lose money on the deal, not much but still a loss. That was the first cal spread I entered and may be the last unless MSFT corrects by Jan expirey which is when my short 26 expires. I would break even on my 26 LEAP, but having to close my current short Jan 26 would wipe out ALL my previous short profits. Not good. Did I miss something here????
MSFT above $28 and climbing, I haven't crunched my numbers, I only bought back calls for a loss once, so I know I'm ahead.
TK no cancelation fee.
@Taxman- My MSFTs opened 10/6 at 25 strike. I've bounced around on the STO from 26 to 27 at last earnings back to 26 for the Jan 21's Taking into account all the sold calls, and the net from closing the entire position, I would have about a 19% gain. In another account, running essentially thru the same time period, I made similar but slightly different decisions about rolling, ie going out further, slightly different premiums because I didn't roll at the exact same time etc. and am now showing a 6.5% gain if liquidated today.
Can't tell you the exact differences yet (I'm gonna look harder) but conclude that the variance in trades, expirations, premiums etc make a huge difference in outcome. I can see that if I could somehow get to zero basis ie recovered all of initial premium, which still looks possible if I keep decreasing basis at the same rate as the last tree months, then the return becomes infinite.
'Til then it looks like a small but acceptable return or even a slight loss as in your case. Not sure how Jerry sees the premium, I think he sees it like cash flow from a rental property, without considering the end sale price/liquidation. I'd have to get all the way thru a couple of these before I cold think of it in that way. I'd say in my case the jury is still out...
RE: CREE
When I sold the puts a few weeks ago, it had hit ~30 RSI, analysts beginning upgrades, and announced a new patent.
Was a nice quick weekly gain x2 on the short puts, but I'm rethinking the calendar spread, after seeing all the action above on MSFT (its bounced almost 10% since that low signal)
Sorry, in checking the math I realse I missd a number. The outcome of both accounts, 25 contracts each is basically the same, 6.5 to 8%. As for the AAPL, not there yet but looking pretty good. Not a believer til it happens.
RE: CREE
One of my rules is don't trade against the trend so no naked puts on downtrending stock.
I don't trade calendar/diagonals but it seems you need a sideways moving stock for them to work.
I'm not sold on calendar/diagonals yet!
Yes a stock that goes nowhere which was MSFT until last week would be perfect, if you could find one. Also, ideally, one that didn't pay dividends so you don't get caught up in the divy trap.
Regarding cancelation fees, IB also gives execution credits so most of the time no fees apply.
Link to their cancelation fees for anyone interested: http://individuals.interactivebrokers.com/en/p.php?f=otherFees
Damo
@ optionsense you are right about diagonals they work best with a sideways market, of course that's not the way Mr. market works so we need to have some protection.One thing that helps is sell less shorts than your long positions, say you have 5 long sell 3-4, if the stock takes off then some of the longs retain all of the gain.Another thing i have noticed is when the trade is working in your favor it will usually get to a 20-30% profit in a few weeks,it is usually best to close it out as i have found out the hard way many times that is about as good as you can do. Besides a 20-30% gain in a month or two is pretty darn good.
After trading options entire last year I have decided not to trade them actively. As much as I like trading them, I am not here to lose money or sleep. I had some big losses, good incremental gains and some very close calls. Taking losses were disheartening and pushed me back at least couple of months, lucky enough not to lose entire capital. What I found was that even if you are very disciplined and abide by all the rules, trading vertical credit put spreads or naked puts every week/month will put you at increased risk. No matter how much cushion or stops you use, there will be a instance where you will be forced out of the position (even before it goes below your short strike price) and thus taking extensive losses. For example, usually you get 20% cushion on stocks that are very volatile. When it starts going against you fast, would you want to gamble and hope that it won't go below your short strike. Hell, I am not risking so much money on hope. Secondly, stops do not work well at all when you have vertical spreads. Moreover, your stops would not work if there is a gap down. Things like Greece defaulting, a major bank going under, flash crash, tsunamis, etc. are very real possibilities. Knowing that if I am caught in one of those can wipe out my capital, I am not comfortable anymore. In addition, this is not my full-time job. The active option trading requires non-stop monitoring, something that was burning me out. Unlike big money, I don't have resources and bandwidth to monitor this non-stop. Another thing is, when you are put to a stock, it is not as simple as turning around, writing a call and getting called away. This all assumes the stock stayed at the short strike price. On the other hand, buying short-term calls or call spreads is just plain gamble. As a retail investor I have found out that I cannot sustain trading options actively.
So, am I going to stop investing? No. I plan to revert to traditional investing - buying beaten down stocks/LEAPs of quality companies and be patient. Easier said than done though!!!
I wish good luck to people here. Lots of good information and lot to learn from here.
I guess this will flush my system out, hopefully just in time.
@SKA
Sorry to hear you've not had much luck trading options, hope your investing goes your way in the future.
So what trades gave you the most stress verticles or naked puts?
There's no doubt about it, options involve risk and you need to monitor closely. I actually love that side of it! I guess there is a side to me that enjoys risk and excitement, I've been skydiving for 20 years and doing it as my full time job for the last 12 years.
It's interesting to see different perspectives, from you not wanting to trade options anymore to others having their best year ever trading options with 30+% returns.
Thanks for your post.
Damo
@Optionsense, trading options do give me a kick as well and I love the adrenaline rush. But, as I said I am not here to lose money. This conclusion I did not reach overnight; it took me one good year. One mistake takes you down considerably and could take months just to break even. Not to mention the stress it comes with. Above all, I cannot comprehend the fact that no matter how disciplined I am at some point I can lose a significant amount of my capital. Things like Greece defaulting, a major bank going under, flash crash, etc. can wipe out a significant portion of your capital before giving you a chance to bail out gracefully. These things have happened and will happen again. I don't want to be caught in them.
If one thing I have to avoid I will avoid WEEKLIES (i.e., avoid selling either vertical put spreads or naked puts) on a single stock. A single stock can be very volatile, prone to MM manipulation, subject to government/SEC probe, prone to company fraud, etc. 9/10 times you will be ok. But, one time when it moves against you, WEEKLIES do not give you enough cushion such that it stablizes and perhaps goes up.
Weeklies are good for indexes, but this gives you proper cushion only if VIX is high.
One thing is for sure that I learned a lot and hopefully it will make me a better trader/investor in future.
Hi ska,
I am one of the "oldies" here since Jerry started the blog in October 2009...Besides Gary, where are the others?
Agreed with what you shared. Looking back 2010, most of us were doing really well with both vertical spread and naked put until the volatility spiked. Like in Aug2011 with the downgrade of US debt, it wiped out most of my gain with SPX verticals. Though I recovered most, it reduced my handsome gain to a single digit gain for the year. Last two months I have been just siting back and reevaluate all strategies...
Jerry, enjoy your sunshine and sun tan? Can you believe it was about 60F here in DC areas? Like never before.
All my best to everyone for the year 2012.
@Hannah, @Ska,
Your remarks are well taken. Clearly even if a market is flat on the year, inevitably there were likely 30% or more swings both ways over the course of that year.
What I attempt to accomplish is that even if I get crushed in any given month and sustain 300-400% losses on your positions for that month, hopefully this came after having 6,7,8, or 9 months of collecting premiums of options that expired worthless (in my case of selling naked puts). In other words as long as you are successful in most months you can handle a month that wipes out the gains of even 3 or 4. This is all predicated on never allowing yourself to be assigned a position in which case your losses are potentially devastating (again based on selling naked puts). Allowing a 20% cushion on a maximum month time frame and setting a reasonable stop would result in you getting stopped out even on large gap downs prior to reaching strike price. Assume you set stop at 1.5x premium received. Depending on the time remaining on the option even if the premium triples or quadruples before your stop order fills, it is still in above the stock reaching the strike. The end result is a horrible month but at the end of the day as long as you win 70% of the months you will still end up far ahead.
Also, I only use about 1/5 of my total portfolio for trading options. I use another 10% trading the VIX and then 70% is traditionally invested in long term holdings.
Good luck in 2012 whatever strategy you all follow!
Hi all. Like many of you i also have a ton of the msft's. The good side is that my leap side has closer to even. There is a full year for them to continue to climb if msft goes up. But of course the stock can drop back to 25 or so in the last few days and all that growth will evaporate. The decision.. I can continue to sell weeklies for only pennies or go out a month and get a little more. With the stock around 28 i am 2 behind the curve with the 26's. msft has a history of dropping back towards the 25's but history doesn't help if it continues upward..lol. Looking over the history of my position i am going to evaluate if it might be better to close and break about even or continue with the spread.
Today (Sunday) i am leaning towards closing and moving into different positions that pay as well or probably better without as much stress. Often, even with over 15 years of trading daily options I still find it hard to give up on positions. Many times the answer is obvious but not always.
Seeing some of the post above from SKA and others reminds me of a question i am always asked. 'If this works so well why doesn't everybody do it'. Options are just not for all traders! Nothing wrong with that or with trying it and then finding out it isn't for you. A bad position now and then is to be expected and absorbed into the business. As Hannah and others know, i stress cushion and more cushion. Cutting losses and trying to recognize bad positions before they turn terrible. Just guessing from scanning over my positions from last year I made around 40% last year. Many losses were included. Losses are part of the deal, they just can't be avoided it you trade much. I have been though melt up's, melt down's, bubble burst and flash crashes. But I have not found a better way to make money. I want to repeat to all of you traders that this is earnings season. Care in stock selection and fund allocation is very important.
As this list is getting long I will post this as a new post also.
ps; the weather has been great and the diving also. I have seen where the east coast of the U.S.has been quite warm? Weird to have the market open at 10:30 am instead of 6:30..
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