Hi all, Well the mid-east - N. Africa is sure effecting our markets. I hope this brings home the practice of leaving lots of cushion for the unknown. Many traders focus on the specifics of their stock. When I recommend such large cushion, it is to help build into the position an allowances for the unknown which can be out of control of the individual stock.
For me I will wait a few days for the current events to settle down and show a direction. There is never a time to jump into positions when there is this much unknown.
23 comments:
Despite AAPL's wild ride and down day today, because of my large cushion to my Weeklys Feb(4) 325 and 320 Puts, these options still depreciated today. Jerry, it's loud and clear - CUSHION IS KEY!
With all the crazy world news and AAPL news, I closed some of my AAPL position this morning, and will probably close more (or possible all of it) later today.
You are right Jerry, cushion is the key to your method. The Mid-East is always in turmoil, (what's new) and everyday a report or some economic news comes out that could push the market higher or lower. It is all about volatility, that is how speculators make money. The market always over-reacts to the unknown. Just my 2cents
Hi John,Yes to me cushion is the way to survive in the option world. I hear quite often traders say "I am selling a close strike because if the stock drops I won't mind owning it at the reduced price." It is true and that works for many but the problem I see is when saying that, their thought seems to be that the stock will drop a little. When the stock is trading around 47 and they sell the 45, yes with a stock drop, it is true they will get the stock at a discount but that is little consolation if the stock goes to 35 etc. But we all trade a little different and with different goals. My way certainly isn't the only way to trade, it is the way that lets me sleep at night.
Jerry, I read your last post. It seems I will have to add that small rule to my list. I opened OPEN on Friday to take advantage of the 3 day time decay this past weekend. BUT it opened today low and is roller coasting due to world events. I may do what you said and wait till the first weekend is done.
Hi
Just an update for a lesson learned to share. If people recall i opened put spreads on PLCN and CRM on Friday. Update
1) Lesson - Double check. I looked at my notes of the 40+ stocks i looked at. I made an error in marking these as "ok" with respect to earnings. - ERROR
2) Today I decided rather than "hope" i get away with my error, I would close these. The good news is it was a spread so any move down was mirrored somewhat by the further OTM put. Also whereas i pretty mucn never set a trade before open i did this time hoping to catch someone elses trade they set on the weekend. I was "lucky" in that the PCLN spread i opened for 0.6 i closed for 0.85, and the CRM spread i opened for 0.4 i closed for 0.35. So since i usually trade in sizes of 10 contracts (for now) that was a $300 loss.
Error 1: Sloppy data entry
Error 2: Placed trade on Friday (impatient)
Fulgore my error 2 is similar to your comment.
Regards
Hi,
Is there a way to subscribe to all posts and comments on the blog? I have only been able to subscribe to individual posts so far.
Thanks,
Dave
Scroll down to the bottom of this page. You'll see Jerry Lee's picture :) beneath which you can find all the comments in the Blog Archive....
Hope that helps.
Thanks Hannah,
I was also hoping to get all comments sent directly to my email. It appears I need to subcribe to each of Jerry's posts.
I opened weekly spreads on the dip:
AAPL 320/315 .10
BIDU 110/105 .10
POT 160/155 .10
CAT 100/95 .10
That is a 2% return if they expire worthless (1.5% after commissions)
Dave
with a big down day after such a run....and finishing with no bounce. why not wait til tomorrow when people put in their panic sells and see if mkt holds...i mean HPQ bad #'s tonight dont help mkt either so looks to go lower. (when I see HPQ chart having been strong in this market and all the sudden they miss and gapping down below 50dma and 200dma then that tells me Market has priced that in yet even with todays gap....kind of a crap shoot right now especially if VIX spikes higher. tomorrow will be interesting
hasnt priced in i mean...i guess on weekly trade above if could work but for 10cents per spread ?
Yes, perhaps I jumped in too early. I wanted to get in on the weeklys though. I had to get down to a 2% return to leave some cushion. To be clear, I got $10 per spread (.10 * 100 shares). I sold 20 spreads on each position. CAT is in trouble right now. I'll let it go down to the strike price though. I think it is likely to take a breather tomorrow. CAT hasn't gone down that fast for at least six months I believe. Thanks for the input.
Dave
boy, this morning's action sure did spook me--i had to close some of the closer strike puts to prevent further losses. Jerry, you could see through me when you made that statement last week. The mistake i made was opening too many positions at too close a strike price (GREED) on multiple stocks for a quick return (IMPATIENCE). I have been a little slower in the past with choosing lower strike, limited positions. The latter methodology guarantees good sleep and money too!
WAtch out: greed and impatience are the monsters which we need to stamp out on our roads to profits,
hey everybody - good luck today - side note - I'm trading over at TradeKing and they recently allowed 'cash secured' put selling for level 2; unfortunately for me because of the increased risk to TK they have changed the option margin requirements to 25% of the underlying market price plus the premium minus the out-of-the-money amount versus 10% of the underlying STRIKE price plus the premium - which has now cut my "buying power" over 50% - GRR
henngiss,
your spreads seem hi risk for the return of 2% (.10/5=2%) with about 5-8% otm (cush).
and max risk of $10k per spread? (5x100x20=$10k) am i doing the math right?
just trying to get a feel for how others are trading weekly spreads.
newport, with a cash cecured put though arent you setting aside the amount equivalent to entire value of underlying stock ? so selling a 60strike put would require $6000 capital for 1 contract....the % return on capital would be too low with this strategy then ?
Lux,
The risk is seeming awfully high right now! I stopped out of CAT. I'm using a strictly statistical based model right now. In four days the risk of moving 5-10% is often the same as moving 20% in 30 days. If you disagree with my logic please let me know.
Dave
brian - you are correct with cash secured puts----actually i was being a ding-dong ------ i misread the margin requirements at TK - they hit you whichever is larger of the two formulas used
Regarding risk, I don't mean to put anyone on the defensive but consider this:
If I sell 5 naked March 170 NFLX puts for $470 total. My margin requirement is $8,500. Technically my risk is $85,000 though, if the stock dropped to $0. I'm not saying this is remotely likely, I'm just thinking.
My point is, I put stops in with my spreads to reduce my risk lower than the technical risk. Is this any different?
Again, just let me know if my reasoning is flawed.
Thanks,
Dave
henngiss,
i can appreciate the statistical approach and the risk of movement seems inviting, but the potential loss just seems too big. i have done some similar close to atm weekly spreads lately. some went well, others started to go bad from left field incidents, and it is not all ways possible to get out without a big hit. and then after taking a loss on a spread the underly comes back and it would have been ok to hold on. gets nerve racking.
Thanks for the input. I will certainly take that into consideration.
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TraderL. glad to see you are cutting your losses when needed. I have a sign on my monitor that says "Discipline Trumps Conviction" As you said, 'if i would have held on to the position it came back.' But better to look at a reasonable loss and think I could have held on and been a winner.. Than to look at a situation where the losses mount and mount and becomes an account wrecker.
I had days where I would have maybe 100 puts on a position and it would start south and I would hold on and on and on until the maintenance was impossible to match. Losses would get in 30-40 thousand plus at times. I would just keep telling myself...the stock can not go any lower.. it usually did..lol
Good discipline will save you, being stubborn can put you on welfare.
Jerry,
I put the same note on my monitor. Which is one reason I immediately open a contigent stop order after selling a spread.
Dave
i always remind myself too that today's leaders will eventually become tomorrows losers so dont get attached to a stock....i still remember owning Nortel(was ticker NT?) thinking it was the safer telecom play back in the heyday and market leader in 3G play.....oops
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