Update June, 2011, on OPTION TRADING.

LAST YEAR 2010 WE GAVE UP ON CREDIT SPREADS

Last year we gave up on paper money, trading credit spreads. We got wiped out twice on steep corrections. Credit Spreads depend on compounding, but when you get wiped out by an excessive market movement of 2% to 5%, the compounding of your capital suddenly means you get mostly wiped out.

From December through March into 2011, I went to paper trading, a compounding system using the OPENING GAP, on a once a month trade and had a return of 297% in four months. With that I talked my brother in law, in putting in $5000 and I put in $5000 for a CASH ACCOUNT of $10,000. Then I went into trading the method with CASH MONEY in real time. Turned into a disaster.
Won the first trade, then lost three trades. I went from up 5% in the account, to a loss of 30% in the account, where I sit right now. My brother-in-law has since withdrawn his money and taken his loss. I´m still in the game.
The reason it didn´t work from switching from paper money trading, to real money trading was the FILLS. In trading with real money, the opening move was to place a PRE CALCULATED MARKET ORDER, BASED on using a standard FREE OPTION CALCULATOR. While in paper money trading, the fills were mid point, and over generous, in REAL MONEY trading, the market makers turned out ruthless. They would take a MARKET ORDER and run it up, way past. Since I would be compounding, I would bet the maximum possible. It might work still, by using a LIMIT ORDER, to ENTER, the OPENING GAP TRADE, and the worst that can happen I figure is to be jumped over and have to cancell the order. Unfortunately, I am down 30% of my CASH ACCOUNT and cannot at this time take that risk anymore.

So I´ve switched to paper money testing some other trading ideas and am currently paper trading SWING TRADING based on the HIGH and LOW of the weekly bar. Trying to make one trade per week for maximum gain. Due to the restriction on under capitalized accounts and the EXCHANGE RULES controlling the number of trades you can make. Day trading not allowed. It is early days yet, but this first week of a SWING LOW system for the weekly bar, seems to be working. I´ll run it experimentally paper trading, to the end of June, 2011 before deciding to try it in my CASH ACCOUNT. This time around, I´m using ONLY LIMIT ORDERS. I´ve also limited my bets to just two option contracts between $2 and $3 for the premiums.
I´ve also switched to the SPY index, because of the narrower spread and even so, I´m entering my LIMIT ORDERS around 5 cents under the quoted BID price and waiting for it to get filled.