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 2nd 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 2nd 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
