RESULTS FOR WEEK ENDING 12 23 2011

Ok folks, the short story is I made very little money this week ($50).  I had been set up for  quite a bit more.  And this is where the story gets interesting.

First the trades I had on:

RUT     750     Call               

RUT     760     Call                This was set up for a 4.8% ROI

SPX    1260    Call

SPX    1270    Call                This was set up for a 7.8% ROI

These trades were put on Wednesday.  All was ok until Friday morning.  The SPX had moved upward all Thursday and so Friday morning I was going to exit out of my position at breakeven.  So, I go to enter the trade, get the trade entered, and immediately after my wireless radio tuner goes out and disconnects me from the internet.  A few swear words later I go and get my sweet baboo’s computer and login to my account.  Much to my surprise when I logged back into my account the trade had been cancelled and I was starting to lose money.  So I was typing as fast as I could and managed to get in a trade.  But by that time (almost an hour had elapsed between trying to figure out what happened on my computer and then getting my honey’s computer) I was saying many GRRRRs to my computer and Optionshouse.  They maintain that I cancelled the order.  Only thing I can think of is that when my radio tuner went out it must have sent something along the wires that cancelled my order. 

So RUT trade did me well, but the SPX lost me some.  Between the two I made $50.  So good thing I was diversified in my trades so one baddie got some relief by a goodie. 

NEW ANALYSIS TOOL!!!!!!

I am adding some more analysis to my work.  I am starting to use the 20 day simple moving average as a part of my analysis.  If I would have used this analysis I would have seen that the price for SPX crossed over the 20 day SMA (Simple Moving Average) and would stay there the rest of the week.  My Wednesday look would have shown the SMA cross, telling me I should have gone with puts instead of calls.

As can be seen in the chart the blue line is the 20 Day SMA.  By the end of the day the price moved above the SMA line and stayed there all week.  This is a STRONG indicator to use puts for the  weekly options person.  But I didn’t know that until I started doing some reading the LinkedIn Options traders forum.  A guy there used 20 day SMA  as his lead indicator for trading weekly options.  Now he trades directionally – calls and puts only, he doesn’t do spreads like I do but the principle is the same.  If I had known this I would have probably been safe last week and not had to get into the mess of making a saving entry and then having hardware issues.  The put spread would have brought in slightly less premium, but it would have been much safer.  So, I am now adding the 20 Day SMA to my arsenal.

Be careful this week my friends, the trading will be light this week, so market volatility could be high!

TTFN

Ash

RECENTLY ASKED QUESTIONS

1.       Can you explain the difference between a call and a put?  Thanks.

Here is an option chain for Apple (AAPL).  An option chain shows the call and put options for a stock or index.  This option chain I will use to help you see the difference between calls and puts.  I use Optionshouse as my online broker.  Other online brokers like TD Ameritrade, or TradeKing or Fidelity will also have option chain screens, and they will look similar, although not the same, as this one.

First of all, calls and puts are basically the same thing.  What changes is the perspective of price.  Take a look at the option chain.  Calls are on the left and puts are on the right.  All the terms we will talk about next apply to both call and puts. Now for the definition of calls and puts:

A Call option gives the buyer the right, but not the obligation to buy 100 share blocks of stock (called the Underlying) at a specified time (called the expiration time) and a specified price (called the strike price)

A Put option gives the buyer the right, but not the obligation to sell 100 share blocks of stock at a specified time and a specified price.

In the option chain above look at the darkest blue highlighted line.  Let’s look at the call side first.  Just like stocks the ask price is what you pay when you buy an option.  So the December 23 $385 call option is selling for $244 (2.44/share x 100 shares).

Underlying Stock = AAPL – Apple Computer

Expiration Date = December 23, 2011 On our option chain this is in the gray area in the center, shown as Dec 23 - The (w) indicates that this is a weekly option

Strike Price = $385 – This is also in the gray area in the center of the option chain

The option we are looking at is called At The Money (or ATM) since it is the closest option to the closing price of AAPL.  If the market is open then the ATM option is the option that is closest to the current price of the underlying stock.

All of the options below the $385 option are called In The Money (or ITM).  They are called in the money because if the options are exercised you could then sell the 100 shares you bought for higher than you had to buy them  Notice that the price for ITM options go up greatly the farther away from the ATM option you get.

All of the options above the $385 option are called Out Of The Money (or OTM).  They are called out of the money because if you bought them they would not be automatically exercised like the ITM options.  They would expire worthless because it would cost you more than the market price to buy the option at contract expiration.

So, that is the difference between a call and a put, with some extra info thrown in.  Starting next week, I will start putting up a basic primer on options and how I trade the way I trade.  I will expand greatly on the call and put options concept then.

2.       Why do you almost always use index options in your trading?

Good question.  There are two main reasons I primarily use index options.  (1)  The credit I receive on my spreads is usually higher with less risk using index options over traditional stock options.  (2) They are cash settled.  Cash settled means that instead of having to take possession of or sell off 100 block shares of stock, I pay a cash amount if my spread is assigned.  This just makes my life easier if I get caught in a bad situation. 

For example:  last week I used a 1245-1255 Call spread as one of my trades.  This meant that I sold the 1245 SPX option and bought the 1255 SPX option.  This trade was profitable for me because the SPX closed below 1245.  BUT say the SPX closed at 1246 instead.  I would have been assigned a charge of $100 per 1245 contract I had ($1 x 100 shares). 

We do the technical analysis (charting), and the statistical analysis (use of probability calculator, and Std Deviation analysis) and some gut feeling so that we DON’T get into that situation.  Getting assigned is a good way to lose your profits in a BIG hurry! 

Again, I will be covering this topic in MUCH more detail in upcoming weeks when I outline how I trade the way I do.  Soo, keep checking back to get all this great info!!!

3.       Why do you trade option spreads?

There are literally thousands of methods to trade in the markets.  I have chosen to trade credit spreads because:

1.       I get paid immediately for my trade

2.      The returns are the best I have found in the markets

3.      It is an easily understood strategy, I don’t trip myself up trying to be too clever

4.      It fits my personality

5.      A business I can do from anywhere with VERY little startup money was needed

Let’s go through each of these points.  First, when trading credit spreads, money is actually deposited in my account when I make the trades.  Now of course the commissions are taken out before the deposit is made, but instead of paying for stocks or straight buying options, people pay me for these trades.

Second, I am averaging right at 5% return per week in my spread strategy.  That is over 200% a year.  When CDs are around 2% and savings accounts offer interest only for insanely high balances 5% a week is a number I love.  This type of return also allows this strategy to be a great source of income to the point where trading is now my occupation.

Third, the strategy is basically one that is easy to understand.  I will go into the specifics as I discuss the hows and whys of my trading philosophy starting next week.  But in a real small nutshell I trade opposite the market, called a contrarian strategy, if the market is trending up I go with put options, if the market is trending down, I go with call options.

Fourth, it fits my personality.  I am basically am risk averse person when it comes to my money.  This strategy makes it so I know how much I have to put up each week, and how much I can potentially lose each week.  It also tells me exactly what I will earn each week as I calculate the trade.  I like this certainty.

Lastly, it is a VERY easy business to get into.  Most online brokers require $2,500 to open an account.  If you already have a laptop and printer and a desk with a few pens and pencils, you are all set up.  That is the beauty of online trading!  I can do this work from anywhere – home, café down the street, anywhere I can get a wifi signal.

Ok, that is enough for now.  Thanks for waiting this out with me.  Internet outages are very annoying.

TTFN,

Ash

RESULTS FOR THE WEEK ENDED DECEMBER 16, 2011

This week again was a very nice week.  Both trades were profitable and had very good profit percentages.  The trend for both indices used this week was definitively downward with a great fall from Monday with little movement up and down for the rest of the week.  This dictated yet again the use of call options for the spreads. 

SPX

Here is the SPX PM Settled Chart for the week ended 12/16/2011.  The top line is the 1245 level where the lower end of our spread was.  The second line is the trend line for the week.  As you can see the overall trend is significantly negative or downward sloping.  That was our determinant to use call spreads.  Here is the process I went through for getting into the SPX Call Spread for the week:

1.       After checking my usual indices (SPX, RUT, NDX) I ruled out the RUT as didn’t have the ROI I like to get.

2.      After deciding on the SPX I start looking at the trend line.  When I was looking Wednesday the trend line was decidedly down, so that steered me to Call options.

3.      Next I look at least 1 – 1.5 Std. Deviations from the current strike price.

4.      The 1245-1255 Spread works as this was what I call the “tipping point” spread.  The spreads above this tipping point:  1255-1265 and higher the ROI drops dramatically.

5.      Using the probability calculator the 1245-1255 spread gave us an 88% probability that the underlying would not touch our lower spread value, so we went with it.

Here is the trade:

SPX   1245     Call     $1.09

SPX    1300    Call    $(0.46)   This gives a Net Credit of $0.63 or 6.3% ROI

NPX

A look at the chart will show that the NDX basically followed the pattern of the SPX chart with a significant downward trend for the week.  This is something I have seen in the chats for most of the year, especially around options expirations week, which last week was.  The horizontal line is the 2285 line which is the lower limit of our spread.  The other lines show the trend for the week.    Since I had a tipping point spread with the SPX I looked for one with the NDX, and I found one.    Here is a rundown of the trade:

1.       Ran through indices:  SPX, RUT, NDX

a.       Already made the SPX trade and ruled out RUT so NDX is the way to go

2.      Looked at technical on the chart and getting ourselves at least 1 – 1.5 Std. Deviations away from the underlying strike price

3.      2285-2295 Call Spread fits our bill.  This spread was the “tipping point” or the point between where the spreads have good value and where the spreads have very little value.

Here is the trade:

NDX     2285     Call     $2.72

NDX     2295     Call    $(1.99)                       This gives a Net Credit of $0.73 or 7.3% ROI

The SPX & NDX trades together gave me a blended 6.80% ROI this week on invested capital.  So for every $1,000 I invested this week I returned $68.00.  I will take this any day of the week.

I have some questions that I have answered that I will put up later tonight.  I am battling sporadic internet outages today and getting the pictures and images I want to put up just isn’t happening right now. 

If you have any questions or comments you can:

1.       Leave a comment below

2.      Send me an email at hashleycm@yahoo.com

3.      Tweet me on Twitter: @awagel01

Charts are courtesy of the FREE site freesctockcharts.com

TTFN

Ash

DISCLAIMER

The information I put up here is accurate and actual, but historical.  My point is to show the trades I do each week, both good and bad, and how I make my trading decisions.  If you choose to use the same credit spread strategy I do that is great!  But I am not recommending actual trades here or on my Twitter feed.  I am only putting up what I do for the information and education of the public.  If, after doing your own due diligence and research you think my trades will work for you, then great, but realize I am not recommending anything.  The choice is yours.

Essential Books Part I

Hey all:

Finally here are some of my favorite finance books.  Most of these deal more with stocks than options.  Why then are they essential?  Because these books outline methodologies of thinking and analysis. Don't worry I will have some options specific books soon.  I am culling the list of books I have and have read to get the creme de la creme of my personal stash.

I will add more to this list as I read them and/or hear of them.  If you have any comments or know of books to add reach out to me.

Here they are:

INFLUENTIAL BOOK LIST

General Investing and Philosophy Books:

Rich Dad, Poor Dad, Robert Kiyosaki.  This book gives a whole new way of looking at money and education and what you need to really succeed in this world.  Emphasis here is in taking your financial future into your own hands.  Wish I had read this long before I did!  I am more of a covered call and options spread person for cash flow, while the Rich Dad series is a little more into real estate than I prefer, but Cash Flow is king with Mr. K, we just have differing ways to get that.

Rule #1:  The Simple Strategy for Investing in Only 15 Minutes a Week,  Phil Town.  If you only get Rule #1 out of this book it is worth it.  Rule #1 is make money, Rule #2 is don’t lose that money.  Then Mr. Town goes through a methodology for making money in the stock market.  The book is detailed and very good when paired with some of the fundamental analysis books below.  I disagree with his concept of 15 minutes a day, but I do like that fact that he also says you don’t have to be a slave to your computer screen.  If you pair Mr. Town’s ideas with M. Kiyosaki’s MACD methodology you will have a very good stock trading strategy.

Fundamental Analysis Books:

Securities Analysis, 6^th Edition, Benjamin Graham and David Dodd.  This is the textbook Bible of Fundamental Analysis.  Warren Buffett was a student of Benjamin Graham at Columbia.  My MBA mentor earned his Ph.D. under Mr. Graham.  All you wanted to know about fundamental analysis is found in this book.  It is a textbook written for the college level but the info in here is priceless. 

The intelligent Investor, Benjamin Graham.  This is the book that started it all.  This is the root source for the textbook Securities Analysis written with Mr. Dodd.  This has methodology and philosophy and technique all rolled into one.  This is a must have book for stock investing.  When I dip into the occasional LEAP pool I use the fundamental analysis tools and techniques in here to decide what stocks I will LEAP.

Technical Analysis Books:

Getting Started in Chart Patterns & Trading Classic Chart Patterns, Thomas N. Bulkowski.  These two books are great primers on charting and pattern recognition.  It is very technical (sorry had to do the pun!!) in its language as the author works for the CBOE.  Trading weekly options spreads involves a lot of charting work.  Identifying the patterns that are shown in these books are crucial to weekly options spread trading success.

RESULTS FOR THE WEEK ENDED DECEMBER 9, 2011

This week my friends was a very nice week.  Both trades were profitable and had very good profit percentages.  The trend for the indices was slightly downward and almost all the price moves except for Friday were to the downside so we went with call options.  The super volatility we have seen recently made me go farther out on the strikes than the usual 1 – 1.5 Std. Deviations.

SPX

Here is the SPX PM Settled Chart for the week ended 12/09/2011.  The top line is the 1290 level where the lower end of our spread was.  The second line is the trend line for the week.  As you can see it is slightly negative or downward sloping.  That was our determinant to use call spreads.  Here is the process I went through for getting into the SPX Call Spread for the week:

1.       After checking my usual indices (SPX, RUT, NDX) I ruled out the NDX as didn’t have the ROI I like to get.  NDX ROI was only around 2% this week.

2.      After deciding on the SPX I start looking at the trend line.  When I was looking Wednesday the trend line was decidedly down, so that steered me to Call options.

3.      Next I look at least 1 – 1.5 Std. Deviations from the current strike price.

4.      The 1290-1300 Spread fit my bill as the 1295-1305 or 1300-1310 call spreads didn’t bring back the desired return objective.  Both were under 4%

5.      Using the probability calculator the 1290-1300 spread gave us a 90% probability that the underlying would not touch our lower spread value, so we went with it

Here is the trade:

SPX   1290     Call     $1.67

SPX    1300    Call    $(0.83)   This gives a Net Credit of $0.84 or 8.4% ROI

RUT

A look at the chart will show that the RUT price was slightly net positive for the week.  But looking at the chart showed the resistance on the upside at 765.  The daily positive or negative moves were enough to show that the 765 resistance was safe.  The technical were all lining up in my favor.  Here is a rundown of the trade:

1.       Ran through indices:  SPX, RUT, NDX

a.       Already made the SPX trade and ruled out NDX so RUT is the way to go

2.      Looked at technical on the chart and getting ourselves at least 1 – 1.5 Std. Deviations away from the underlying strike price

3.      765-775 Call Spread fits our bill.  This spread was the “tipping point” or the point between where the spreads have good value and where the spreads have very little value.

Here is the trade:

RUT     765     Call     $1.06

RUT     775     Call    $(0.38)              This gives a Net Credit of $0.68 or 6.8% ROI

The SPX & RUT trades together gave me a blended 7.71% ROI this week on invested capital.  So for every $1,000 I invested this week I returned $77.10.  I will take this any day of the week.

Starting next week I will be putting up a couple of questions I have received recently as well as some terms to get the newer people up to speed.

If you have any questions or comments you can:

1.       Leave a comment below

2.      Send me an email at hashleycm@yahoo.com

3.      Tweet me on Twitter: @awagel01

Charts are courtesy of the FREE site freesctockcharts.com

TTFN

Ash

DISCLAIMER

The information I put up here is accurate and actual, but historical.  My point is to show the trades I do each week, both good and bad, and how I make my trading decisions.  If you choose to use the same credit spread strategy I do that is great!  But I am not recommending actual trades here or on my Twitter feed.  I am only putting up what I do for the information and education of the public.  If, after doing your own due diligence and research you think my trades will work for you, then great, but realize I am not recommending anything.  The choice is yours.

Results for Week Ended 12 02 2011

This week was pretty interesting as we had a huge run up to bring the major indices up to marginal profitability for the year.  This run up was early in the week- Monday through Tuesday with Wednesday through Friday pretty much holding steady with even a little decline on Friday.  The top line in the SPX chart below shows the movement over the past month.  Basically we are where we started three weeks ago.  But look at the valley created.  This is how we make money.  We play the odds going down using credit spreads with calls.  Last week we used credit spreads with puts.  Both weeks we made money with an average 4.2% weekly gain. 

Here is a brief synopsis of my thought process in making my spread trades:

1.       I trade mostly index options – SPX, RUT, NDX

2.      Look for the trend and then go the other way.

a.       Week of Nov 21-25 the trend was down so we used Call Spreads

b.      Week of Nov 28- Dec 02 the trend was up so we used Put Spreads

3.      Use your trading platform’s tools like its probability calculator and/or its profit & loss calculator to make sure your trade has a high probability of success.

4.      Trade at least 1 Standard Deviation away from the Strike Price at time of trade

a.       Last week (week of 12/02/2011) I put out two trades on the SPX:

                                                              i.      1200-1190 Put Spread

1.      This trade was 1.5 SD away from the strike at time of trade

                                                            ii.      1205-1195 Put Spread

1.      This trade was 1.7 SD away from the strike at time of trade

5.      Put on trades at least on Wednesdays.  Stay away from Monday & Tuesday trades

a.       Both these trades were put on Wednesday afternoon.

6.      Monitor your trades occasionally, but don’t sweat over your computer like a day trader.

a.       It is important to look after your trades, every once in a while an adjustment will need to be made (see my case three weeks ago)

b.      But don’t sweat over your trades.  You do the research, look at the charts, do your calculations, and then have some confidence in your work.  I have alerts set up so that when the market price approaches my spread prices I can start looking at them.  Otherwise I just let them be. 

7.      At the end of each week take a look at what worked AND what didn’t.  I always learn more from my mistakes or near misses then when my trades work out.

Here are the trade specifics:

SPX

SPX   1200   Put   $1.20

SPX   1190   Put  $(0.72)        This gave a $0.48 Net Credit for a 4.8% ROI

SPX   1205   Put   $1.39

SPX   1195   Put  $(0.91)        This gives $0.48 Net Credit for a 4.8% ROI

SPX ended the week @ 1244.28

The bottom line on the above graph shows the 1205 line and how we used the trend as our friend to come away with profitable trades last week.

Chart above done using freestockcharts.com

RESULTS FOR WEEK ENDING NOVEMBER 25, 2011

Hope you all had a Happy Thanksgiving!  A great holiday for us foodies and those who just love to eat.  A mess of leftovers is in the fridge.  Another rule – make what you like for holiday meals so you have great leftovers!!  Now, here are the trades put on for the week, both were call spreads:

S&P 500 Index SPX

SPX     1200     Call     $1.19

SPX     1210     Call    $(0.61)        This gives a Net Credit of $0.58 for a 5.8% ROI

Russel 2000 Index RUT

RUT     710     Call     $0.84

RUT     720     Call    $(0.28)         This gives a Net Credit of $0.56 for a 5.6% ROI

Breakdown

SPX

I returned to my normal pattern of trading the indexes.  I have always liked the SPX for its high premiums, but sometimes the volatility of the index spooks me.  This week events in the world made it pretty easy to go the index route.  The failure of the Congressional Super-Committee to come to any agreement on the deficit issue (I refuse to call it a crisis – we have seen this coming since the end of Geoge W’s first term and have kicked it down the road ever since.  And yes for those of you who are wondering I am a card carrying Republican.  But I can criticize an unfunded mandate whether a Dem or a GOP puts it forth, same goes for an unfunded war in Iraq, but that is for another blog post.)  Then the Europeans got into the act with their bond sale issues.

As can be seen in the chart last week continued the trend from the previous week of heading down.  This movement led me to make the call spread for the week.  I entered the trade on Wednesday per usual.  With the benefit of hindsight I could have made a few extra bucks entering on Monday or Tuesday, but my rule is trade on Wednesday or Thursday.  Also with the short week due to the holiday the Wednesday trade helped us take even more risk off the table with regards to time. 

RUT

Many of the same things said for the SPX held true for the RUT.  Recently these have been moving very similarly, although the RUT has not swung as wildly.  Following another rule I like to diversify my spreads in different indices and/or stocks.  I also like to have both put and call spreads going at the same time, but this week that would have been a practical impossibility.  All indices and stocks I like to spread all were heading the same direction.  So, I picked two I was really familiar with and looked for returns that held to my rule list (For a complete rule list look in the archive, July 5, 2011 is the date I first put up the trading rules.) .

Giving up thanks to freestockcharts.com for the charts.  a very good free stock chart site that I use a lot.  I am still learning how to use this tool and as I do my charts here will hopefully get a little more sophisticated!!

I will be putting up a book list and some reviews of books that I have found useful soon. 

If you have any questions or comments please leave them below or contact me at the following:
email:  hashleycm@yahoo.com
Twitter:  @awagel01

L8r

Ash