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
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