Report # 24 SHAKING THE MONEY TREE!

SHAKING THE MONEY TREE - DAY TRADING!


Well it's 3:32 p.m. and I'm finally back at my computer. The sky is blue, low puffy white clouds and the atmosphere is clear after a morning shower of short duration. You can see the cloud shadows moving across the green of the Yalbac Hills some 8 miles away across the Belize River Valley. Very pretty picture to the eye.

Back to puzzling what the big guys are doing in Spread Trading? I trade small, right now as a beginner, only 5 contracts and my margin required is $2500 a trade. Yesterday I found out that my margin requirements are $500 for each point apart between strike prices, times the number of contracts. I hope to get up to 20 contracts sometime this year, if not too far away. That would be $10,000 margin for each trade. Currently in my beginning trials I am buying Spreads that run between .20 cents and .30 cents. Sometimes .25 cents. A spread is where you sell some contracts and buy some contracts at a different price.
There are guys on the brokerage that are trading 300 or 400 or 500 contracts at a time. Which would require you to put up and lock in $150,000 cash margin for the duration of the trade. I'm new at this and trying to figure out the relationships of what happens, in the WHAT IF scenarios.
I look at the quote machine and I am wondering what are they doing? Spreads normally run through until EXPIRATION. There are two kinds of markets, European style, which you must hold until expiration and American style, which you can close out anytime. From what I can surmise from watching the bid - ask quote board, the big guys are at least some of them trading for .5 cents. Meaning that if the market moves a point in either direction, the spread might widen by .05 cents and you close it out. There are 100 options in a contract, so if you are trading 300 contracts and you manage to buy a spread at say .20 cents and sell it at .25 cents,- you gain .05 cents. Times this by 300 x 100 = 30,000 times .05 cents. ( I'm thinking with my fingertips here! ) which should net you $1500 and you can do this in an hour, if you pick a time when there is market volatility. Hmmmmn! I'm not sure of the brokerage fees on 300 contracts, but on 5 contracts, it comes to $50 for opening and closing, or $25 each. Will go check on the fees and see how that works? I haven't found anything in the literature on spread trading on the web that explains this short term strategy. So maybe there is something wrong with my thinking? On 5 contracts that would not be worthwhile I think. Let's see? $2500 margin, .05 cents x 500 = $25. No! that wouldn't work small scale. Let's see 20 contracts .05 cents x 2000 = $100. Less the $50 cost of entering and closing the spread, leaving you with $50. So 20 contracts is workable. Have to think about that for a bit.
The bigger the bet of course, the more the profit!