Heidi Heidi Hi!!
Yes, I am a little giddy! I just scored 10% weekly return last week! WOOT! NOW THIS IS REALLY OUT OF THE NORM!!!! The stars aligned just right on this one. So I got a little lucky with the ROI, but the research paid off and I had good trade numbers to work with so the odds were in my favor. This is one of the neat quirks of weekly options; occasionally there will be quirks that you can ride to make a nice buck. Ok, Ok, enough of the grandstanding.
Before we go and look at this past week’s trade I want to pass along a story of a guy I met at a friend’s birthday party for their 1 yr old baby boy. The man was a nice, elderly gentleman that lived next door. I was telling the birthday boy’s father of my new endeavor trading options and this man sided up to our conversation. We got to talking and he told me he trades exclusively in options as well. Only he sells puts, that is it, nothing else, just sells puts. He has been magnificently successful over the past 10 years of his retirement doing this. He didn’t read it in any magazine or subscribe to any service, he had a buddy in the same department he used to work in that showed him how to do it. We talked about are big hits AND our few mistakes. I am telling you this because I wanted to make a point. He has a different system than I do. He is successful in doing his system. He is comfortable with it and likes what he does. More power to him. I am not going to say my system is better than his, just different. I will say that you can work my system for a lot less capital than his, but they are both good systems. Here are the takeaways: (1) you need to be comfortable with your system; (2) you have to be ready to do some legwork or take on a mentor to show you the ropes; (3) you need to be ready to take some losses as learning experiences; (4) you need to be willing to share info with your friends, pals, and even strangers you meet at a birthday party.
Now let’s go and analyze this week’s trade to see how we put the odds in our favor.
TRADE FOR WEEK ENDING March 2, 2012:
This trade was another condor:
RUT
RUT 795 Put ($0.57)
RUT 805 Put $1.12
RUT 835 Call $0.74
RUT 845 Call ($0.29) This trade gave a Net Credit of $1.00 or 10.00% ROI
ANALYSIS
1. The RUT chart is leveling out. Right now it is in a channel between the 830 and 810 price points. We put the range for the condor just outside the channel path to give a slight margin of safety. We could have gone one more level out on the Put side to 790-800 range. That would have brought the ROI down but still would have been a good trade.
2. The 835 price level for the call side is just above the 6 month high price for the index. Also this is just above our channel. This shows that the call side of the trade was relatively safe – safer than the put side. A good measure of the riskier side of the trade is the side where the premium trail is longer, i.e. you are getting more premium farther down the chain.
3. The 805 price level is just outside our channel. This is above the 795 price level that is the 2nd tier support level (actual number is 793, but 795 strike price is the closest to the actual number). To make this trade much less risky but also much less profitable – ROI = 4.20% from 10.00% - the 795 or 800 price levels could have been used. The safest trade on this side would have been to go to the 795 strike price as the beginning of the put side (sell the 795 strike and buy the 785 strike). This, again, would have lowered the ROI, but would have been the safest trade.
4. My probability calculator put the odds at 85.01% of RUT ending up between the upper put and lower call. The farther the distance between our call spread and the put spread the probability of success would go up. The further the distance between the spreads the more “wiggle room” we are giving ourselves. Sorry I didn’t write any of the probabilities down as I had receive my 85% on the trade I did, so I knew that widening the distance between the spreads would only increase the probability of success.
5. The trend for the week so far has been slightly downward for the RUT index by about 4 points. This trade is right at the 1 Std. Dev. above AND below the strike price at time of trade. I shoot for a MINIMUM of 1.0 Std. Dev. away from the strike price at time of trade for my spreads. I try to get more if possible, but this is a game of weighing lowering ROI with increased safety. I went with my gut in thinking that I would be ok, and I was right.
6. I did look at the other index option – SPX and NDX. SPX had comparable ROI spreads, but the Friday AM settlement for the RUT pushed the RUT in front. The NDX just didn’t have the ROI needed. NDX is a hard index to get good ROI on unless it is traditional options expiration week.
7. Summation:
a. The boundary strikes for the condor were just outside the channel shown in the charts
b. The probability calculator gave a favorable percent of this trade ending up in my favor, although just barely at 85.01%
c. I was able to get good ROIs at 1.0 Std Dev away from the strike price
d. Now I must say that the details in this trade were crucial.
i. RUT is an AM settled index. This helped immensely as the bottom dropped out of the RUT after the settlement and went crashed through our put line. If this had been a PM settled index we would have had to make an adjustment right off the bat Friday morning.
ii. We were able to get maximum ROI mainly because I entered the trade right before the opening bell and it was put through just after the market opened. There was a spike from Tuesday’s activity that quickly melted away Wednesday not to return for the rest of the week.
iii. By going just outside the channel the index was ranging in we were able to get the most ROI. Trusting our homework and charting paid off big time this week.
iv. Planning our work and working our plan was the key to this week’s success. Whatever your trading method – if you follow mine or have a totally different one and just read my stuff for a good laugh before bed – having a good working plan and sticking with it is the key to long term success in options trading.
DISCLAIMER: Hashley Capital Management, LLC; as well as myself are not giving any trading advice. All data is historical in nature and is intended for use as an educational tool. Trading in options is risky and can result in loss of capital. There is no attempt to sell any brokerage services or act as a broker or dealer by Hashley Capital Management, LLC. Any forward looking comments on this blog are not attempts to solicit business for Hashley Capital Management, LLC. If you choose to follow the same path and invest in the strategies and trades used by Hashley Capital Management, LLC after doing your own due diligence than that is your decision and yours alone.
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Twitter: @awagel01 ( hashleycm I can’t get to work. I am working with the fine folks at Twitter so when I get it up and running I will let you know.)
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TTFN
Ash
