Picks for Week of 01/27/2012

Hey folks, here are my picks.  Sorry for the aftermarketness of them, but I have been waylayed by yet another cold.  Just got over one and here I am on the beginning of another.  This has been one bad winter so far for me and colds!

RUT 755-765 Put Credit Spread;  ROI = 4.80%

SPX 1290-1300 Put Credit Spread; ROI = 3.73%

Weighted Average Return = 4.25%

I am looking to put the other legs on the RUT spread for a condor early tomorrow AM.  Possibly will try the same on the SPX Friday morning.  REMEMBER when we do this we are getting a quick cash grab if it is there.  Still need to be careful and not get burned.  use your probability calculators and SD markers and other indicators you use to get this in your favor as much as possible.

Happy trading and hope you all don't get what I have!!

TTFN

Ash

A Good Trading Rule Sheet

Hey guys,

Here is a link to a revamped site that looks promising.  Andrew Keene has been a trader for years.  He has put together a site that is part subscription and part free.  The free part has some good tools and a blog, but you will need to have Chrome or IE9 or Firefox to use them.

Anyway I was looking at his site via a Twitter feed and he had put up his trading rules.  They are a little different from mine, but I want to post them anyway because we do have some key similarities.  We both say to:

1.  Have a set of rules
2.  Live by those rules
3.  Never stray from those rules
4.  Have a plan
5.  Have a trading strategy

Here is the link to his site: http://keeneonthemarket.com/trading-tools/28-kotm-trading-rules

If you just want the link to Mr. Keene's site:  http://keeneonthemarket.com/

Happy Trading!

Ash

Results for Week ending January 20, 2012

Well, this week is another lesson on how to manage trades.  This time there is a happy ending.  We made money this week and we didn’t lose anything.  We stayed on our rules and they kept us safe.

Here are the particulars:  Wednesday while looking for spreads to trade I found one really quickly.  That trade was:  SPX 1275-1285 Jan 12 Put Credit Spread ROI = 5.3%.  The issue was that I just couldn’t find another spread to trade.  It was very tempting to try and force a trade through and see what happens.  BUT that is not what our rules state.  The rules state that if we cannot find a trade suitable we do not put a trade solely to put a trade on.  Try as I might just couldn’t get one to be over 2.8%.  My lower limit is 3% so I didn’t put one on. 

Luckily I didn’t because all the trades either would have lost money or cost more than they would have made me.  This is why we have our trading rules.  These are rules that have been forged over time and trial and error.  Everybody’s rules are different, but they work for them and their trading style.  The rules you establish are there for a reason.  Listen to them!!!

Now on to this week’s trade analysis:

The Trade:

SPX        1285       Put         $1.19

SPX        1275       Put         $(0.66)                  ROI = 5.30%

The two solid lines are the parameters of the trade.  A couple of things to look for:

1.       The price hovered around the 20 day Simple Moving Average (SMA) and mostly stayed above it.  This is a BIG technical indicator to go with the put credit spread.

2.       The overall trend for the week was slightly up.  Again another big technical indicator to go with the put credit spread.

3.       The spread we entered into was 1.5 Standard Deviations (SD) from the current price (Wednesday’s) when we entered the trade.

4.       We did not commit all our resources to this trade.  I split my resources and put half into this trade.

5.       Trading was very thin on ROI going lower on the option chain:  1265-1275 Put Spread ROI = 2.8%, 1260-1270 Put Spread ROI = 2.0% and the results just got lower, so the 1275-1285 was the “Tipping Point” spread we look for to trade.  Going lower on the option chain for put spreads lowers the risk, but as you can see also lowers the reward.  If we were going with a Call Credit Spread we would go up the option chain to get the same result.

6.       This would have been a good week to enter into an Iron Condor as the price action was fairly steady throughout the week.  I thought about it, but the lingering cold did me in & I didn’t get to that trade.

7.       By following my personal rules, archived on this site by the way, I was able to come out of this week with a good profit.  The old athletic phrases of “Staying within yourself”, and using the system” showed again why they are tried and true.

I have started some more questions, but this past week and a half I have been really put down with a lingering chest cold, so those answers will have to wait until next time.  Sorry.  Keep the questions coming; I like the interaction and ideas.  There are some pretty smart people reading this blog.  Stay with me!!

Reach me @:

Email:  hashleycm@yahoo.com

Twitter: @awagel01

Or leave a comment on the blog

TTFN

Ash

Results for week ending January 6, 2012

Well, hopefully all y’all had a great holiday time.  I did!!  Starting off the first week of the New Year was a mixed outing.   The trades I actually wanted to place did me well.  But I did a boo-boo that I haven’t done ever before and hopefully will NEVER do again.  This error pushed my slightly negative for the week.

First off, the trades I actually placed correctly:

SPX    1255    Put                $1.19    

SPX    1245    Put                $(0.66)  This generated a 5.30% ROI

SPX    1275    Put                $0.44

SPX    1265    Put                $(0.06)  This generated a 3.80% ROI

Now the trade I wanted to do and the actual trade I put in:

The trade I wanted to put on:

RUT   710     Put                  $1.65

RUT   700     Put                  $(1.05)  This was to generate a 6.00% ROI

BUT I zoned out and for whatever reason, I put the trade on the call side 5 and seven strikes away from the current market price.  This gave me:

     The trade I actually put on:

RUT   750     Call                  $0.69

RUT   760     Call                  $(0.16)  This would have generated a 5.30% ROI

This mistake was put on Thursday morning.  Shortly after I put it on RUT started its run up.  I noticed that I had made the mistake almost immediately, and tried to unwind the trade.  Since RUT started its run up that would stay above the 750 price up till expiration, I had a problem.  Eventually I was able to unwind the trade but it cost me.  I was unable to unwind this for a net loss of 1.05 a contract.  This was not the way I wanted to start the New Year.

TAKEAWAYS:

1.        BE CAREFUL ON YOUR TRADING!!!! I just spaced out and for reasons still unknown to me was not careful in looking at what I was doing.

2.       Stick to your trading rules.  This kinda goes along with #1.  When I put on a trade using put options I think the market is going up for the week.  And it did.  So that should have been my clue when I was on the call side of the option chain. 

3.       If you see a great trade – go with that trend.  I had the SPX trade located and it passed all my criteria.  I should have kept with it going further down the option chain with my spreads.  But I didn’t.  I went to the RUT

4.       Be Careful!!!

Silver Lining:  We started off this run with a loss the first week.  Then ran off a string of 22-4 W-L weeks through the rest of the year and doubled the capital pool.  Now the goal in 2012 is to repeat the performance of 2011.  Not the way I had planned but this week was in line with that goal.

Question that came in over the holidays:

What is a spread trade?  I see you say that all the time but really don’t understand the term.

Yes you do see me saying spread trades a lot because that is what I trade probably 98% of the time.   A spread trade is a trade where you are buying and selling different strike prices of the same option at the same time.   Here are examples on both the call and put sides:

CALL SPREAD

RUT     750  Call     $0.69

RUT     760  Call     $(0.16)

The 1st line I am selling the Russell 2000 call option at the $750.00 strike price for a premium (credit) of $0.69.

The 2^nd line I am buying the Russell 2000 call option at the $760.00 strike price for a cost (debit) of $0.16.

This gives me a net credit, or cash in my account, of $53 per spread contract I do ((.69-.16)*100shares/contract  = 53).  I commit $1,000 of my capital pool for each contract I enter, hence the 5.3% ROI you saw earlier was the potential payoff in this trade.    

This type of spread also is known as a Bear Call Spread because a rational person entering into this trade is expecting the price of the underlying security (in this case the Russell 2000 Index) stay below $750. 

As you can see this is the trade that went bad on me.  The price of the underlying index did not stay below the $750 strike so I lost money on that trade.

PUT SPREAD

SPX    1255    Put                $1.19    

SPX    1245    Put                $(0.66)

The 1st line I am selling the S&P 500 call option at the $1,255.00 strike price for a premium (credit) of $1.19.

The 2^nd line I am buying the S&P 500 call option at the $760.00 strike price for a cost (debit) of $0.66.

This gives me a net credit, or cash in my account, of $53 per spread contract I do ((1.19-.66)*100shares/contract  = 53).  I commit $1,000 of my capital pool for each contract I enter, hence the 5.3% ROI you saw earlier was the potential payoff in this trade.    

This type of spread also is known as a Bull Put Spread because a rational person entering into this trade is expecting the price of the underlying security (in this case the S&P 500 Index) stay above $1,255.00 which it did so this trade was a winner.

These are the two types of trades I do most often, except that usually I make money on all my trades for a given week!!

TTFN

Ash