Hey all you options traders out there!
Another successful trade is in the books. At the end of the first half of the year we had 2 losing weeks out of 26 weeks for a 92.8% winning percentage. I’ll take that percentage any day of the week.
Also our paper trade was successful for a three week run on this new idea!!
Now both trades were some cause for nervousness. Friday when the market took a swoon I was a little nervous, but I trusted my system and I walked away with another winning week.
Eldest daughter is through two weeks in basic training and doing well I hope (this is a case where no news is good news!!). Boy is doing well in his driving for Driver’s Ed, and youngest daughter is now back from camp and enjoying her summer in her friend’s pool.
We had my fiancée’s parents here over the 4th of July holiday. Some fireworks and many cookouts and crafts later we all had a great time. They are now on their way to other relatives. A nice visit that had some interesting items that can apply to us here as traders, more on that in a little bit down the page.
OK let us get on with the analysis:
ANALYSIS
Here is the trade put on this past week:
SPX 1345 Put $1.30
SPX 1345 Put ($0.78) This gave a Net Credit of $0.52 or 5.20% ROI
Let us look at this trade through the lens of the system:
1. Find the direction of the market. Through all the week up till Friday the general direction of the market was upward. Slightly upward but upward nonetheless. This slight upward trend made us look to the put side for our trade. Look at the graph. The price stayed above the 50 Day SMA until Friday and the 20 Day SMA was broken only briefly Thursday, but rose right back up until the drop Friday.
2. If the market direction is upward, use a put credit spread, if the market direction is downward use a call credit spread. We determined the direction as slightly upward in step #1 so we will go with the put credit spread.
3. Make sure there is no standard news event that will be coming out during the week that could affect your trade. In this case there was a piece of news that was due out at the end of the week. The June monthly jobs report. This report always comes out a week after the close of the month. Friday, July 6 was the date for the June report; this was also our expiration day. We had to take it into account as we made our trade. We will discuss this below.
4. Choose among the following indexes - RUT, NDX, and SPX; use these equities – GOOG, PCLN, AMZN, and APPL. After looking for the best return in the above, the SPX was the one this week that gave the best return. Well above our floor of 3.5%
5. Find a spread of at least 1.5 Standard Deviations away from the strike price with at least a 3.5% weekly ROI. The trade we found after looking at all the indexes and equities we regularly use the SPX was the one that fit the best. SPX was 2.5 Std Dev away and had an ROI of 5.2%
6. Use your online broker’s probability calculator to get at least an 85% probability of success on your trade. This trade had a 91.03% probability Wednesday afternoon when we put on the trade. This higher level of probable success is one of those places where we put some safety margin in for the jobs report impact.
7. If possible use the indexes of RUT or NDX where the settlement is Friday morning instead of the others that settle at Friday Close. In this case we could not use the RUT or NDX as the ROI was not there on these this week.
8. If your trade drops so that you are losing ½ of the money you expected to gain on the trade, then it is time to sell. We never got to that point, but it was close.
9. If the market drops to within 1 strike price of your spread and stays there for more than 5 minutes it is time to sell. We came close here, and briefly did breach the 1 strike but never did it for more than the 5 minutes.
10. Monitor your trades, but don’t obsess on them. This was hard to do Friday. The market dropped significantly. The drop kept pushing some sell triggers I had set up. I set up warnings at 2 strikes away from the spread. This was another “safety margin” thing I had set up this week. The triggers would get pushed then reset, then pushed then reset. This pattern happened throughout the afternoon and didn’t let up until the last hour of trading. Then we were out of danger. So I spent Friday from noon until 3:00PM keeping an eye on the price of SPX. How to monitor these close calls and look to set up potential trades will be a topic covered in a soon to be released blog.
PAPER TRADE
Here is the paper trade we did last Thursday when the latest batch of weekly options came out:
RUT 800 Call $7.45
RUT 810 Call ($4.95) This was to give a Net Credit of $2.50 or 25.0% ROI
On Monday afternoon we bought this back for a Net Debit of $1.25 as the trend we thought would develop didn’t. We still made money, here is the breakdown:
$2.50 – Credit received at inception of trade
($1.25) – Debit we paid to buy spread back
$1.25 - Net Credit left at end of transaction
We still made money, though not as much as we had hoped. But I will take a 12.5% ROI any day of the week! If this had been a real trade we would have freed up capital to go into another trade or we could have rolled this trade into a put credit spread. Since this was a paper trade I wanted to keep the process “pure” so I didn’t roll this into another trade.
Big takeaway from the paper trade is that we followed the system – especially where the selling is concerned. This allowed us to still keep some of the money we had gained on the trade. We used the trigger of when the price came within 1 strike we consider selling. We did sell and were able to make a good profit on this trade.
Remember Rules #1 - WE WANT TO KEEP THE MONEY WE MAKE INVESTING!
I have received some questions over the past week and am working on the answers. I will post them sometime this week. Keep a look out on Stocktwits and Facebook for when I post up the next blog.
DISCLAIMER: Hashley Capital Management, LLC; as well as I 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 and are the opinion of Hashley Capital Management only. 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, that is your decision and yours alone.
Reach me @:
Email: hashleycm@yahoo.com
Twitter: @awagel01
Stocktwits: awagel01
Or leave a comment on the blog
TTFN
Ash
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