Hi all, While waiting for my new account to open i have done some trading in accounts that i manage for others. These are weekly vert-put-spread trades as the other accounts do not have clearance for full naked puts.
Some more aapl 330/335 = +.16
some NFLX 210/220 = + .13
PCLN 460/465 = + .20
These have averaged around 2+% So not bad at all for the week.
47 comments:
Nice work, Jerry. Look like pretty good trades.
I don't know how far NFLX will go, but it is in a channel right now, looking to end the week between 45 and 30. I still find it interesting that the CEO keeps selling all of his shares as soon as he gets them. I think he expects NFLX to crash down at some point. Maybe after next earnings?
Henngiss
Hi Jerry,
I've just started my journey to "option trading", and I happened to read your book, it is very well written and informative. I really enjoyed reading it.
Just wanted to say "hi" and "thanks"
Kenny
I BTC my LULU at .05 and also BTC my OPEN at .05. Those stocks shot straight out of the gates as soon as I bought them last week. LULU really popping yesterday wow!
I'm looking to enter a few new positions over the next few days. A pull back would be a nice opportunity for that ;)
I'm going to have a look at some vertical spreads tonight..these trades look interesting as well.
Happy crumbling!
Jerry,
I have a question regarding the vert put spreads. Isn't 2.4% ROI and only 5.7% cushion way too greedy/dangerous on your aapl trade? If you were to drop down to the 320-315 that would still give you 1.2% ROI and 8.5% cushion with only 3days remaining.
I've never done a vert put spread before but the 330-325 feels a bit dangerous to me as I look over the numbers here. Making 2.4% a week is 125% a year which is insane!!..could you explain? Either way I'm sure your trade will work out and I do understand that your loss is limited even if it was to drop.
Thanks
'greedy' isn't maybe the best word when asking a question about somebody's trades. . but that's always how I feel when I get too close to the money in my options. I also have a sign above my computer saying "Greed Kills" and "Control is power"
appreciate the input
Hi Nolan and all, Greed is a correct description of the above plays. While making the higher ROI (2+%) certainly breaks some rules but the rules I have used for years do not totally apply to spreads. The bought puts do somewhat mitigate the risk. If I am put into a situation where I want to close the position due to a loss on the sold put, I do recoup some of the loss by selling the also rising bought put. The options that is closer to the existing stock price will react more to a stock move than the one farther away but they both will move somewhat the same. If forced to close the position, what I will do is to close the sold put and hope that the stock continues to drop and then the bought put will rise some more before I close it. All of these decision are and will be based on the remaining time factor.
The one thing that makes this a play worth considering is the time factor. A lot has to happen within three or four days. Today I see AAPL is not cooperating with my game plan...lol. That certainly brings the danger to the front and center of this trade. I will keep and eye on it and make a decision if necessary. I certainly do not recommend for many to follow my lead with these closer spread positions. AAPL is now down just a $1.5 and PCLN & NFLX are going in the right direction.
I would certainly NEVER make a play such as above with more than 5 days to go.
Going back to prior posts:
The way TK calculates my margin is like this:
- If I sell 35 330 aapl puts and buy 35 325 aapl puts then I recieve a net credit of say $500.
- The maintenance required is 5*3500=17,500
- However, the $500 credit is added to my cash balance, and can be used to trade.
- Therefore, the net maintenance used is $17,500-500=17,000
Is this not the way other brokers calculate this?
Thanks,
Dave
In other words,
the maximum possible loss is $17,500 - 500 = 17,000. So this is the net maintenance used.
I'm new to trading puts and credit spreads, so this might be a dumb question. In the AAPL spread, if AAPL stock drops to 335 wouldn't the option be assigned. What protection does the bought 330 put offer? Thanks
ShoNuff,
If AAPL drops to 330 or below, the loss would be the same, as both options would increase in value at the same rate. That is why the loss is limited to the diffence between the strike price times 100 times the number of options sold.
Dave
Sno-Nuff, the 330 put would give you nothing if the stock ends above 330. The only protection is for the severe drop past the 330. But if the stock was dropping towards your two strikes then by closing the sold put you can let the bought put 'maybe' continue to appreciate. I don't think in 14 years that I have ever been put-to. I always close long before that happens. If the stock is dropping both the bought and sold put will be going up in value. by closing you will get back 'some' of your capital. I am not a big fan of spread puts but if an account is not avail for naked puts then vert-put-credit-spreads for me is the way to go.
They also work better at the end of an option month or for weeklys. One major drawback is that generally you need to use closer strike and that raises an important flag. The only way for me to mitigate that danger is by using the time factor and good stocks. Opening these with no more that 5 days to go and the less is better.
I now have my account open at another brokerage so back to real trading.
Jerry
Thanks, Jerry and Dave. Just to clarify the 330 bought put offers no protection from being assigned if the AAPL reaches 335. But if the premium on the 335 doubles(before AAPL stock reaches 335) you can buy to close the 335 and sell the 330 option. Your loss would be limited to the difference. Is that correct?
That's correct, although when the 335 doubled, the 330 also increased in value. So if you closed your positions when 335 doubled, your loss would be less than your original credit.
Dave
Thanks.
I know I'm a newbie here but I was interested in spreads and came across this article. It helped a bit.
http://www.moneyshow.com/trading/article/40/OptionsIdea-22065/Trade-Review:-Netflix-Short-Vertical-Put-Spread
Hope it helps someone else.
Also crossing my fingers on my first ever CHBT option! Looks good so far!
Thank you all!!!
And Jerry I will be contacting you about buying your book. I don't have a kindle :(
DR3Z
DR3Z,
You can get the kindle for PC version for free at amazon. This will let you read any kindle book on your computer.
Dave
Dr3z, write me at putman3232@yahoo.com and I can email you a PDF version word format if you use pay-pal
Glad to see the mkt come back nice today.
Jerry
Very nice discussion on spreads. This is the way that I trade options, due to a lack of funds available for selling puts. The way that I trade spread is usually with an iron condor set up. If you have a put spread in place you already have put up the maintenance (difference between the credit on the spread and difference in strike prices), you can do a call spread with no additional maintenance. I trade these pretty far out of the money with an average of 5 to 10% ROI, and usually set them up with 45 day or closer to expiration. I will say, I use the ideas in the blog for my weekly spread setups. As Jerry started the nice the about spreads, is if the stock turns and gets a head of steam you can buy back your sold option of the spread and hope the underlying stock price will run higher and through your bought option. I had this happen to me on a weekly NFLX in February. I bought back the one side of the spread and kept the bought option and watched the stock run right through it and more.
Chris
Jerry, I ended up doing the 325/320 yesterday for (.08) for 1.6% for 3days lol .. That is huge!! I felt greedy, but with 7.4% cushion and the limited downside justified it ;)
I like the idea of spreads more for selling calls as that is where I have felt nervous in the past and also requires a larger maintenance margin when selling naked.
I'm going to look at farther out of the money for next weeks spreads....just collecting crumbs right!
IBD changed the market outlook from "market in correction" to "market in uptrend". Hopefully they're right, I like to get my sleep haha.
I am not saying that AAPL will go below 335 by this Friday, but for conversation, here is why I don't like AAPL long this week. The 5 day RSI is high, AAPL has been following this indicator lately. AAPL is up against a resistance line as well. Just my thoughts, AAPL is likely to trend sideways for a couple of days as well.
Dave
I have no position in AAPL, but some food for thought: watch Jobs' health. If he kicks the bucket AAPL will drop big. If there is news he is going to live longer than expected, that could send the stock higher. Just a thought and something to watch for those playing AAPL.
Mark,
I agree, although I was impressed a month or so ago when Jobs reported some health issues, but the stock kept going up. I'm trying to find a way to post stock chart pictures here for anybody who might be interested, not very computer savy.
Dave
With reference to Steve Jobs, AAPL will take a hit (who knows how much) if he does pass away, but I cannot see trading or not trading a particular stock (AAPL in this case) based on a fear of someone passing away. I am always short puts in AAPL (monthlies in my IRA and weeklys in my regular trading account). They have been winning trades for me for some time now. AAPL will bounce back (I think rather quickly) if Jobs passes away (hope he does not). I am currently short the weekly 325's in my trading account and the 280's monthlies in my IRA account. And if he does pass away, I will deal with that issue then. Go Steve, get healthy!!!
Some great advice here. A question on spreads, when do you exit a spread that is going sour? Before it hits the upper strike or do you still calculate when the premium doubles?
@Nic
Here is what i do. I do not use the spread permium to make the decision (these can have at times weird bid/ask gaps). I use the sold put as the trigger.
IF i place a stop: I monitor when the Sold put ask doubles (like Jerry's rule). So when i sold the put if the ask was .50, then when the ask gets to > 0.99 I trigger a closing of the spread (ie BTC the sold put and STC the bought put).
Alternatively i may just monitor the trade (with no stop in place) and if its less then 8 trading days left may ride it out or close the sold put but hold on to the bought put to see if it goes up.
regards
Jerry,
You wrote:
"These are weekly vert-put-spread trades as the other accounts do not have clearance for full naked puts"
I too do not have clearance for naked puts. Plus I'm a total noob so I want to get my feet wet first.
What would you recommend to someone with limited capital and experience.
Reading the book, great stuff! And this blog is a great compliment to it!
Thank you!!
DR, a lot of trades by me and other are posted here. You might piggy back on our research. If you have clearance for vert puts then keep the time short as you generally need close strike prices. Use quality stocks that are not dependent on a one horse show. Don't rush into them. You can wait until Tuesday or Wednesday. Do your homework such as outlined in the book. To begin with don't overload yourself, pick three or four stocks and get to know them well until you have a feel for each one. Next and last is to hire someone you trust to help you fold your money. lol.
Good trading and welcome aboard.
Jerry
Does anyone follow the VIX much? I notice that when the VIX crosses below the 50 day MA, a period of relative calm tend to occur. Then when the VIX crosses back over the 50 day MA a period of relatively high volatility occurs until it crosses back again. The VIX crossed below the 50 last Thursday I believe. You can expect IVs to be dropping, but prices will be more predictable in the near term.
Dave
Interestingly, the VIX crossed over the 50 before 9/11/01, and before the 5/7/10 flash crash. Maybe just a coincidence.
Dave
This comment refers to an old issue and Dave G.
I thought that vertical spreads were used in IRAs because naked puts were usually not allowed.
Is that not true? Dave you mention weeklys in a normal account but naked monthlys in an ira?
George
All brokers have different rules, but I don't know of any that will allow the use of margin in a retirement account. While the IRS doesn't specifically ban margin, a retirement account is not to be used for "speculation". Most or maybe all brokers feel the is too much legal liability in allowing margin in a retirement plan. Some brokers won't let you trade options in a retirement plan, at least that was true in the past.
Dave (not Dave G, I'll let him write for himself)
I follow the VIX, it's a good indicator of fear in the marketplace. I like to use debit spreads when the VIX is below 19, you can get a solid 25-40% return within a week or two when things are clam.
Hi everyone.. great blog here.
Thought I'd post something that helped me boost returns a bit.
I started a position Monday on PCLN with 10 puts at the 410 strike and collected 1.11 for about a 2.5% gain with 3 weeks to go. Margin for this was around 40k.
With the stock running up and extended I decided to sell some calls with 2 weeks to go here. I sold 10 of the 580's (15% cushion) for .45 cents. I found that this only works because I had the puts in place so with TOS my margin was only 1k per contract instead of 5k.
So though the crumb was small at .45 cents on a percentage basis it came to 4.5% for a 2 week and a day hold. Not bad.
Bryan
Henry,
Is there an advantage to a debit spread over a credit spread?
Thanks,
Dave
George,
Regards to your comment about vertical spreads and naked puts in an IRA account: it is the other way around for me - I can sell naked puts, but I cannot do vertical spreads. My IRA account is with TD Ameritrade and they have a 3 tier system for option level approval in an IRA account. Tier 1 - allows covered call and cash secured put capability, Tier 2 - gives you the capability to buy calls/puts and something new that they just started is Tier 2 IRA Margin which allows you to do spread trades in an IRA account. I have not applied for this new Tier 2 IRA Margin approval yet. So, Tier 1 approval gives me the capability to sell (100% cash secured) puts in my IRA account. In that account I do what we refer to as the "Wheel of Fortune" - sell puts till the stock is put to you and then sell calls against that put stock until it is called away and then sell puts again till stock is put to you etc. (i.e. "Wheel of Fortune"). The strike prices I choose for put selling in my IRA account are at prices that I am willing to be put the stock and then turn around and sell calls against that stock. I also only sell monthly options in my IRA account because I can go further out of the money and still bring in a pretty good premium as opposed to trading the weeklys. In my non-qualified trading account (where commissions are much lower), the put selling that I do on the weeklys are just trades. I do not want to take possession of the stock (no Wheel of Fortune on those). I just want to collect the put premium and will buy them back at a loss (if I have to) to keep from being put the stock. My goal is for them puts to expire worthless (not every trade works that way, but most do). So, I do the “Wheel of Fortune" using the monthly options in my IRA account and in my regular trading account the put selling of weeklys are just trades to collect the crumb premiums. I hope that answers your question George.
Dave G
Dave G
Thank you very much, that is very clearly put.
I like the wheel of fortune idea, just have not tried it yet. I have accounts at Schwab and Trade Monster. Spreads are allowed at Schwab in and IRA as are selling covered calls and buying puts and calls, not selling naked. So you are selling cash secured naked puts so that you have enough cash to buy the stock if it is put to you, correct?
Bryan H. I like the way you are working both sides of the street there.
Particulary the reduction of the margin by selling calls when you have sold puts as well. I also like the cushion that you added to reduce the chance that it will reach the strike. Do you have to close the two trades in a particular order?
George
Hello Henngiss,
The advantages with debit spread are the higher returns and lower capital cost. But the major downsize is you have to be right on the direction. With credit spreads, you can be right or wrong (to an extent) and still make money.
Since we're selling puts and stocks are in an uptrend, I'm taking advantage of the momentum and buying debit spreads. For example, I bought 100/110 call debit spread on CMI for $432.29 (with commission) on 3/23 and on 3/30 sold it for $629.70. This netted a profit of $197.41, for a return of 45.67%. As long as the VIX isn't going wild like it did during the middle east crisis (spiking up to 30), then the market isn't going to be so volatile. If the VIX is up, I guess you can do buy put debit spreads to take advantage of the downtrend. But I'm bull so I don't like betting that a stock is going to drop big.
I still prefer credit over debit spreads because they allow room for error. So cheers!
Henry,
Thanks for the information. I'm also playing around with volatility on individual stocks. I look at the IV and HV charts, but I also like to look at the Average True Range to look at shorter term changes in volatility.
Thanks again,
Dave
Henn,
I want to learn more about IV and HV. I never really understood the concept, only that higher volatility correlates to increase option premiums.
I use P/E as a measure of volatility for stocks. I prefer stocks with P/E lower than 30 since they're easier to predict. Higher P/E stocks such as NFLX, AMZN, OPEN, etc. tend to behave sporadically and have huge price swings. With debit spreads, I'm placing a cap on potential profits and if the stock moves up dramatically (such as 8+% increase) then the trade can go sour.
Come to think of it, increase volatility works best for selling options. Being a buyer kind of sucks *laughs*.
Another question, is it alright to sell puts when a stock is trading below its 50 day moving average line? During the Libya crisis, many stocks traded below this line. So I'm just curious.
George,
That is correct...all put selling trades in my IRA account have to be secured 100% with cash. TD Ameritrade calls that money "segregated funds" and locks that money up until either you exit the trade manually or normal option expiration terminates the trade.
Dave G
I opened an account with TradeKing this week.
I initiated this credit(just 12 cents) of $5 put spread 40 contracts. It was rejected saying I don't have enough equity if they are exercised.
$20,000 - $450 is all it requires-way below what the account has) Anyone has the same problem?
Hello, what am I missing here :(
May be I should just stick with Ameritrade.
Hannah,
I would call them, 877-495-5464, their customer service is quite helpful.
Dave
Did you try the live chat?
Hi Henry,
When possible it is best to sell options when the IV is high. Not only do you get a higher premium, but you also have a greater likelyhood the IV will drop after your purchase and the price of the option will drop faster. I use the IV charts from TK, they get the charts from Ivolatility.com. The chart shows you both the IV and the HV for the prior year. I believe the chart is the 30day IV and HV. Also, if the IV is above the HV, the options may be priced high, and it is a good time to sell.
As far as the 50 day MA goes (for the stock price), I look more at where the 50 day in relation to the 200 day MA. If the 50 day crosses below the 200 day (the death cross), then the bears may have taken over.
I am currently studying the 50 day moving average of the IV. If the IV crosses above the 50 day MA (of the IV) then the stock is becoming more volatile.
Of course, you can't look at all this in a vacuum. You do have to consider other factors that are affecting the stock or the market in general.
I hope this is helpful,
Dave
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