I thought I would start a new page as the last one was getting long.
I sure don't like the oil price going up. Also the falling employment effects the market. Libya and the general world situation also concern me and effects my position choices. So do be careful. Any one of these could trigger a sell-off. Cushion and time factor is the only safety factors that we can control.
Trade safe.
21 comments:
Gary,
Thanks for sending the two screen captures. I do not understand the standard deviation stuff but I am more than happy to learn. Send me an email at kiteman51@gmail.com. With some suggestions for getting up to speed on that front. Good luck.
George
watching RIMM fall off a cliff; rule number 9; don't sell puts if strike is after earnings.
Love the rules, Jerry.
Hi I have a quick question about setting a stop.
Example: I sold a put for 0.50 (at the ask). I want to set the stop so that if the ask price is 1.00 I buy to cover (as per Jerry). Using Option express it can be set up as:
1- Set up a contingent order that is triggered when the ask is greater than 0.49
2- When that trigger happens then issue a market order to buy to close
Is that 2nd part correct or should i be setting some type of limit ?
Thanks in advance
rob
@rhmoptions, I am not an expert but i would think you would want #2. If the premium starts going up really fast and skips 0.49 then your order won't go through. I use #2 and put it at about 0.47 or 0.48 because by the time market puts it throug hit will be .50 .51 usually.
on another note i have monthly's
WLT Vertical 95 & 90 - 1.8% return
CLF Vertical 75 & 70 - 2.0% return
I am taking lower returns due to the market right now and the fact that i have to use verticals because of my low maintenance i am working with.
Hi Fulgore
1 and 2 are the same trade. Its a contingent trade that only is triggered if the ask is greater than 0.49 and then triggers a market order to BTC. You answered my question - the second part should be a market order rather than trying to but back at a limit. Thanks
ON your other note. Interesting that we have the same spreads but i went for the larger maintenance
WLT 95/85
CLF 75/65
cheers
Hi rhmoptions and Fulgore,
I have a question for both of you about your vertical spread:- when you listed WLT 95/85. Am I right in assuming that you are selling put at 95 and buying put at 85 with a net premium credit? And if the underlying stock moves up according to plan above 95, you get to keep the net premium credit (both puts expired worthless). If the stock go down, aren't you planning to bail out before it reached 95 anyway? so why would you need to buy the put at 85? Is the 85 put really for protection? or is it allows you to use more leverage in trading?
Is this something you do in your IRA account?
Thanks,
Went out to May to sell UYG $48 Puts for .25, UYG currently trading at $69.
Hi TK
For Kilgore i believe its because he said he has limited maintenance room available so it was less maintenance to do the 5 pt spreads than the naked puts.
For myself i do it mostly for "sleep at night" reasons. I use the spreads and always ensure that if some terrorist set off a suitcase nuclear bomb (ie gaps down over weekend and every position is 50%+ down)that the worst that could happen is my account is wiped out and i am not getting a call saying "well your account is wiped out and pease wire us 100k". I always trade such that when my spreads use up the cash in the account i stop (despite what my account says i have left in margin). I know it means less money to trade with and the liklihood of the disater is low but I have evaluated my personality and this suits me best at least for now.
Cheers
The main thing I like about credit spreads is that you identify your risk. Basically, the risk is the different between the two strike prices (i.e. 100/90 is $1000 risk). With naked puts, the margin can go up or down if the stock price fluctuates.
Thanks Rhmoptions and Henry, I appreciate your responses. Now, I can see why some people like this strategy.
Hi all. I'm home and looking forward to some trading and the blog activity. One drawback is this week I am changing my brokerage so there will be some downtime until i can trade in my new account. I changed strictly for better commissions.
I thought I would address some points regarding spreads, in particular, vertical put spreads. I manage some accounts that have somewhat limited account bal. so vert-put-spreads do have some advantages. With lower account balances you can get approval for spreads easier that total naked puts.
Some discussion on maintenance is needed. There are two parts to a vert spread. You need the funds to buy the lower put and usually you will have a maint of 1 point for each increment between the sold put and the bought put.
Ex On Fri I bought 35 of the aapl 325 put for 1645. These are the weeklys for AAPL.
I sold 35 of the aapl 330 put
So the maint is 5 points for the diff between the 330 & the 325, 5 x 3500 = 17,500 and also used was the 1645 so a total cost to the account is 19145. The amount realized between the buying and the selling was 525 - So 525 div by the maint and cost of 19145 = 2.7%
That is how i figure the trade results. So if you had an account bal of 20K you could do that trade.
I do not put a lot stock (excuse the pun) into the safety of having the bought put, but it certainly is a factor. To me the main advantage is the limiting of maintenance needed. If I were to do just straight 35 puts at the 330 strike the maint would be around 170,000.
When I do these I massage them as the time leaks out.
A disadvantage for the spread is that you need closer strike prices. That is why i only use them for weeklys.
---Nicky, I would be careful with the UYG puts. It looks like yours might be the only open interest. If things change, you might have a hard time unloading them. Also you make around 6% but give 2 months for CaCa to happen. I would rather make two 3% months and keep some control of the time factor. Better yet might be make .8% each week for more return and even better control fo the time factor.But we all trade them different. To end this long piece, I want to remind all to pay attention to earnings. A bunch will be coming in April.
"2 months CaCa to happen" :-) The CaCa part made me laugh. Good one, Jerry. :-)
Hi Nicky,
I seconded Jerry on his caution on your May-48 put option. Your 21 points cushion from today 69 stock price, works out to be 30% cushion on the surface which normally would be pretty good; however, UYG is an ETF that seeks to double the dow financial sector (IYF)which in itself is alreay volitile. So, your 30% cushion really is more like 15% cushion for 8 wks. Normally, Jerry's crumb method would call for 20% min. for 4 wks. to expiration. So,it probably won't make his list because it won't pass his safety filter test.
However, if you still want to do this trade, the positive side is that UYG has never gone down below 48 in the last 6 mo. The last time it touched 48 is on 8/31/10 and you have to go all the way back to April 2010 to find a drop of more than 20 points for a rolling 8 wks. period. Before reading Jerry's book, I would probably take a chance with this trade thinking that the financial is cheap and is due for a come-back. After reading his book, I am thinking why taking a chance, there are a lot of safer trades out there. Might make a little less, but sleep better. Those filters and rules that he set up make a lot of sense especially, it is from a real life lessons that he has learned. I am just grateful that he decided to share with us and continues to help us through this blog.
Hi Jerry, The actual bid/ask price for aapl at 325 strike is 0.47/0.53. AAPL at 330 strike bid/ask is 0.62/0.64. This bring your potential profit to around $315 (3500 shr.x $.09/shr) instead of $525 with the maintenace around $19355. Your example is still good. However, I was wondering if you would still do this trade with the return of 1.6% instead of 2.7%?
Also, can you elaborate more on "When I do these I massage them as the time leaks out"?
Thanks
Hi Tk, thanks for the nice words regarding the book. The check is in the mail...
I have to revise my actual numbers from above. I received another note asking about the numbers so I rechecked the actual bottom line and my returns were good but not quite 2.7.. I guess I was still on Mexico time and used paso's? lol
Regarding puts. Here is what i did on Friday and the in's and outs of it. The trade was at 20min before the close.
With aapl selling around 354. I sold 35 of the 330 put for 2249 income after commish (.65ea)
I bought the 325 put and it cost 1786.(.50ea)
So i made 463 (2249-1786=463)
The maintenance for this is 5 per option so 5 x 3500 = 17500 I also had the cost of buying the 325 put, so out of pocket cost is now at 19286 to set up the trade.
463 div by 19286 =2.4% for the week.
I have 24 points of cushion and only 5 days of trading.
So all in all a very good ROI for a quality stock and a short time.
You guys sure keep me on my toes..lol. Thanks
Jerry
TK & all, regarding the question on massaging the position. First I must say that when opening a vert put credit spread you will need to buy the put first and sell the put second.
To close you must buy the sold put first. Otherwise you will be in a total naked position.
The following are possible ways and reasons i might massage the above positions.
If AAPL goes to up by 5 pts or more on the close on Tuesday night i might on Wednesday morn-
buy to close the 330put and sell the 335 put. I would leave the 325 in place. If AAPL goes over 360 pts on Tuesday night, I would still do the above, but sell the 340. Of course I might go more or less if aapl really took off etc. But that is the general way i massage. I leave the bottom in place and move the sold put.
Jerry
Jerry,
Your ROI calculation on the vertical spread seems strange to me. Why would you include the cost of purchasing the lower strike put in both the maintenance and in the net premium?
On TD Ameritrade, I can do the vertical spread with a single order. I receive a net premium, in your example $463, with a maintenace of $17,500 (3500*5). 463/17500 is 2.65%.
463 /(17500+1786) just doesn't seem to accurately reflect the ROI becuas eit overstates what money is being held. Only $17500 is being held in reserve. The 1786 was taken out of the 2249 premium you received.
@Jerry, what new platform (if any) are you going to?
@Jerry & Jim, I use Think or Swim and I'm not sure it includes the buy costs also. I just use one click to get a vertical spread and the program does the rest. It tells me my net credit after commissions and everything so i don't have to do the calculation, unless it is lying to me haha
@Jerry, wheres John been ?
HI guys, Jim you are sort of correct. Yes, to open the sold put part of a trade there is only the one maintenance part for the position. But the part that is taken out of your account to set up the other 1/2 of the trade is part of the cost of setting up the trade. There are two parts and each takes either cash outlay or maintenance set aside. It is just my way of knowing the true cost of the position.
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