Ok ladies and gents, I am hopefully finally back from being sick and getting to do nothing but lay around and suck meds all day. For those of you who don’t know, I had been battling a recurring illness basically since the first of the year. Finally was able to get into the doc’s office and he said I had walking pneumonia and wanted to put me in the hospital. I convinced him to let me go home with some meds and a promise to rest. Sooooo, I spent the last two weeks and change literally just laying around. I was able to get some basic minimal things done, but not much more. But now I am all better and ready to go.
Now one of the few things I was able to get done during this time is setting up my trading business as a business instead of the loose individual account thing I have been doing as a sole proprietorship. By the end of this month (February) this blog will move from being my personal blog to being the blog for my new company – Hashley Capital Management, LLC. Now don’t worry, the blog will still be free. There is no plan to start charging for access to this blog. I just like sharing what I do and how I do it, and I am pretty successful at it. (Not to brag, but 86% weekly winners – 7 wins out of 8 weeks, 92% winners on # of trades and 15.49% increase in account balance since beginning of year)
Alright, now onto last week’s trades: All were in the $RUT – Russell 2000 index. Here is the breakdown of the trades:
RUT
RUT 795 Put ($0.58)
RUT 805 Put $1.11 This gives a Net Credit of $0.53 or 5.3% ROI
RUT 790 Put ($0.61)
RUT 800 Put $1.15 This gives a Net Credit of $0.54 or 5.4% ROI
ANALYSIS
The solid white lines are my Spread parameters. The blue line is the 20 SMA.
A couple of things to look for:
1. The price on Monday the 6th started above the 20 day Simple Moving Average (SMA) and held that all day even though at the end of the day we were closer to the moving average than when we started. This is a BIG technical indicator to go with the put credit spread.
2. The overall trend for the week was that the closing price was above the 20 day SMA. Even on Friday when there was a big decline in the price we still stayed above the 20 day SMA. This is a GREAT confirmation signal that our choice to go with the put credit spread was a good one.
3. The spread we entered into was just over 2.0 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 each trade after taking out a safety pool. BIG RULE = NEVER COMMIT ALL YOUR RESOURCES TO ONE TRADE & ALWAYS LEAVE YOURSELF SOME CAPITAL IN CASE YOU NEED TO MAKE A LAST MINUTE ADJUSTMENT.
5. I created a ladder on this trade. Each leg of my two combined trades acting likes rungs on a ladder. Usually this results in on trade having a much lower ROI than the other, but both trades being on the safe side if you have done your analysis. This was an exception where the ROI for both trades was basically the same. I like using ladders in my spread trades if I can get a situation like this. I ended up with trade #1 At 2.0 Std Dev away from the strike and trade #2 at almost 2.5 Std Dev away. BIG RULE = THE FURTHER IN STD. DEV. YOU GET AWAY FROM THE STRIKE PRICE THE SAFER THE TRADE.
6. I did look at the other index option – SPX and NDX. They did not have the ROI matched with the safety and trend line analysis that made me comfortable to enter into any trades.
7. Summation:
a. The closing price trend line was basically flat except for Friday.
b. The closing price stayed above the 20 SMA all week except for Friday
c. Being able to get an excellent ROI at 2+ Std Dev away from the strike price
d. All these added up to getting into the Put Credit Spreads. We pocket our 5+% and move on to the new week!!!
QUESTIONS
Why credit spreads on weekly options? Can’t you make just as much or more with the traditional options?
A very good question, I will answer the 2nd on first. No you can’t make as much money using credit spreads on traditional monthly options. Monthly options premiums for credit spreads at the beginning of each cycle (starting with the Monday after the 3rd Friday of the month) are nowhere near what you can get for a string of 4 weekly options for a month. Looking at the SPX Option chain the 1295-1305 Put Credit Spread expiring March 17, 2012 is yielding 9% pre commission as of 2/13/2012 at 10:00 PM. This spread is 2.0 Std Dev away from the strike price. The same put credit spread expiring this Friday February 18, 2012 is yielding 4% pre commission. 4*4=16, 16-9=7, 7% minimum more yield using the weeklies.
Now to the first part, I use credit spreads on weekly index options for several reasons:
1. Credit spreads mean cash to me each week.
2. Shorter time frame means less time for a trade to blow up on me.
3. I can churn my capital pool earning money on earned money sooner. So far this year I have one trading account up 21% and another up 17% so far this year. This beats the Dow, S&P, and Russell 2000 indexes.
4. As seen in the example above the weekly profit potential is greater than the traditional monthly options.
5. The cost is less on the weeklies than the traditional options.
6. If I do my homework and analysis correctly, the weekly options increase the odds of success in my favor. Not to say I don’t have losing weeks. I do, but the weeklies allow me to recover quicker and in most cases lessen the cost of adjustments than the traditional options.
No don’t get me wrong. Traditional options do have their place. There are many people with all kinds of systems that are making lots of money using the traditional options. There are people doing credit spreads on traditional options every day and making good money at it. You can go on Amazon.com or go to Barnes & Noble and find literally tons of books on option strategies focusing in on the traditional options. Trust me, I bought a bunch of them and checked out a bunch more from the local library in researching and developing my method. I have just developed a system using the weeklies that fits my risk tolerance level and affords me current income AND building my capital pool to make even more money in the future.
Reach me @:
Email: hashleycm@yahoo.com
Twitter: @awagel01
Or leave a comment on the blog
TTFN
Ash
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