THE NUANCES OF VERTICAL CREDIT SPREADS ( ( report # 27 )

The NUANCES of CREDIT SPREAD VERTICALS Report #27

In studying the Vertical Credit Spread, there are some misleading stuff out there. It only takes ONE TRADE in which the market sweeps through your CREDIT SPREAD to maximum destruction, to wipe out the small accumulation of profits you gained for the whole year. In 2008 a lot of CREDIT SPREAD TRADERS got wiped out. COMPLETELY! They of course were pyramiding. They had to start back again from rock bottom. The 90% winners garbage quoted for CREDIT SPREADS is very misleading.
The best advice I read was a guy who said he closed his CREDIT SPREAD when he had gained 80% of the TIME DECAY and swallowed the cost of paying the extra commissions. I've tried this in practice. It works out, but the CREDIT SPREAD is a low earner at the best of times, versus the money you have in margin at risk. Closing out when you have only 80% of the value earned is not I feel the right answer.
On the other hand, I've experimented ( paper trading and virtual account trading ) and there are some rules you can apply. A bull market goes up more slowly than a BEAR down market. If you are going to be threatened, it is most likely a rapid DOWNWARD BEAR MARKET drop will wipe you out. You will not have the time to place the order, or get it executed, Particularly in short term weekly trading expirations. Maybe in Longer monthly expirations? Mostly the problem is GREED and the tendency to keep pyramiding profits. You should be taking money off the table, or out of the account regularly. Say every quarter?
In a BULL MARKET you can start entering your order, about 2 OEX points before your SOLD side is touched by the market action. In a BEAR MARKET plunge, you should be closing out your SPREAD at least 6 points away from your SOLD side being touched. Better to end up with nothing, or a minor plus couple of dollars than lose everything?
Narrow channels and weeklies are most dangerous. You don't have enough time! A Friday expiration that coincides with news reports can drop right out from under you and in such short term trading, will sweep through your bet so fast, all your profits for the year will be gone.
- Just something to think about! -

THINKORSWIM beats out OPTION HOUSE ! ( report #26 )

THINKORSWIM BEATS OUT OPTION HOUSE IN EXPERIMENTAL TRIALS Report #26

We've had a month or more to diddle with both Option House and ThinkorSwim brokerage online web platforms. In the process have decided to go with THINKORSWIM. They cost a little more in commissions, but the data and detail and complexity of their software is outstanding. Also the deciding criteria was that I was going through eliminating any LOSING TRADE IDEAS. This is narrowing down through trial and error, to SPREAD TRADING. One of the most successful trading ideas was the VERTICAL SPREAD and since this is a non directional trade, within parameters, channels or brackets, works fairly well. Took some learning though, and I'm not sure I've figured out all the nuances yet. The WEEKLY EXPIRATIONS in the OEX were the deciding factor for me. OPTION HOUSE do not offer them. THINKORSWIM do.
I had another problem with OPTION HOUSE, tried to do a long put the other day and it said my account was worth $3200 but refused my trade, saying I was only allowed option trades up to $547. The point in learning I was at, I just gave up, not wanting to fight with it anymore. I did not understand their figuring.
On the other hand, THINKORSWIM do not have good customer service. They are overloaded with cash traders, and do not have the time, to deal with the paper trading learners. So trying to figure out the complexity of their software - web based package is confusing and slow for me. Been at it around two weeks now. Picking up tricks as I go along, but a slow process. Still, they are giving me the trading information I need to make a decision on when to go into CASH TRADING with my life savings. Looks like about 6 to 8 weeks away, if I stay successful?
There is still a lot to learn for me. I've decided to drop all directional LONG trades, or singles and concentrate on non-directional SPREAD TRADING. I've actually only learned roughly one method so far, the VERTICAL SPREAD, or at least half of this method.
They also have DEBIT VERTICALS, CREDIT VERTICALS, SINGLES, BACK RATIO, CALENDAR, DIAGONAL, STRADDLE, STRANGLE, BUTTERFLY, CONDOR, IRON CONDOR, VERTICAL ROLL.
Right now I'm having trouble EXITING, or CLOSING the VERTICAL SPREAD on their web based platform, but did successfully close a long single PUT yesterday, entering the opposing trade. So I'm guessing it will be more or less the same for the SPREADS?

Trade results of spreads, April 12th to 16th, 2010 ( Report # 25 )

Report #25, end of monthly expiration week of April 16th. The BEAR MARKET or CHANGE OF TREND occurred.

Summary: Made five Vertical Spread Trades and one Iron Condor channel trade. All were winning trades!

I did one vertical with thinkorswim brokerage and this was more to test the ability to CLOSE out a Spread Trade. They were overwhelmed and unable to advise me, and I couldn't figure it out, so had them close the spread trade early for me.
5 Vertical PUTS 535/530 for a credit of +$150
The early closing cost me .10 cents, so end result was =$100
Two commissions were - $50. Net profit + $50 -- WIN
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Option House brokerage trade
5 sell 534/530 for .30 cents which was +$150
Less one commission of $25 ( went to expiration ) = $150 - $25 = $125 net profit --- WIN
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PAPER TRADING independently
5 April Puts 530/525 for .30 cents = +$150
Less commission of one due to going to expiration: $150 - $25 = + $125 net profit --- WIN
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Vertical CALL BEAR SPREAD on THURSDAY noon, 5 sell April Call 560/565 for +$125
Less -$25 commission = + $100 --- WIN
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Vertical Put BULL spread on THURSDAY noon, before next day expiration.
5 April Puts 535/530 for $150 ( went to expiration )
Less $25 commission = +$125 -- WIN
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IRON CONDOR TRADE ( bracketing channel ) Done on noon Thursday, day before Expiration Friday.

20 sell April PUTS 545/540 for .10 cents or + $200
This side of the Condor got threatened and had to be close early. We actually closed it 3 index points away and received .10 cents, so broke even on the cash, but lost $50 for the two commissions. Trade loss - $50
The other side of the Condor made money though and covered the loss.
20 sell April CALLS 560/565 or .20 cents x 2000 = + $400
Less commissions - $50 = $400 - $50 = $300. After deducting losing side of the IRON CONDOR we had a net profit for the CONDOR channel of + $300 --- WIN

**** This week was all CREDIT SPREADS using weeklies! The TREND changed on Friday and we will be going to a different strategy. Probably LONG PUTS and a shift to VIRTUAL BROKERAGE TRADING as we gain more confidence in our decision making.

+++++++++++++++++++++++++++++++++++++++++++++++

BALANCES IN DIFFERENT STRATEGIES TRIED UP UNTIL APRIL 16TH, 2010.

Virtual Account: OPTION HOUSE-
Option House balance: $3109 + $125 = $3234 (- 35% ) Made a slight gain to getting out of the hole here.

Paper trading in Quickie Trading: +6%(reduced from 12% to +6%) I'm planning to stop quickie trades. They lose too often.

Credit Spread singles: ( paper trading ) +10% last week. This week + 20% New Balance: $6025
I did five Vertical Spread trades. One on Option House brokerage for + $125 and one on sinkorswim brokerage. Haven't figure out how to close out trades in Sinkorswim brokerage yet and that will be the lesson for the coming week. Anyway, closed early, because of the panic with the help of the broker and cleared + $50.
All told for the FIVE Vertical Spreads I made + $525. In normal trading I would not have the capital beginning like this, to have the reserve margin, to put on so many trades at the same time. So the result is distorted.

Channel credit spreads called CONDORS (paper trading) + 18% Previous Balance was $5600 and new balance at end of this week is: $5,900. Because of the Sinkorswim large account, I was able to put the IRON CONDOR with 20 contracts, and the results reflected that improved earnings. Starting out with a $5000 account that would not be possible, only 5 contracts would have been possible and probably not worthwhile. I have mixed feelings about IRON CONDORS. Sort of thing to do, if the opportunity arises, but otherwise forget it, is my feeling. Anyway Condor trading is now + 18%, at $5900, but I'm probably going to drop doing them, except rarely.

Debit Spreads ( haven't started studying them yet ) (I'm also interested in eventually studying ratio spreads, diagonals and horizontals, and butterflies sometime. Got too much on my plate right now, trying to learn and absorb this stuff above.)

VIRTUAL ACCOUNT WITH "thinkorswim" brokerage VIRTUAL BULL CREDIT PUT SPREADS + 3.5 % WEEKLY EXPIRATION. I'm leaning toward concentrating on less risky, lower profit steady income flow from Vertical Spreads. Will know more after running this BEAR MARKET just started using some mix of Vertical spreads and long PUTS.

Trend longer trading (6 or 8 per yr)( hasn't started yet )zero neutral

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!

Report #23 Figuring Vertical Spread margin.

The learning experience continues!

I was puzzling out what the margin requirements are for credit spreads. I got really confused over it. Pete Stolcer a famous option guru with several websites on option trading, I occasionally check for reference and teaching, one of his sites. 1option.com
Anyway he responded to my query and with my subconcious over a couple of nights of calculating the thing, finally realized that my margin formula was:
$500 for a spaced one strike spread of five points x number of contracts I wish to trade. You can get a little picky here and subtract the CREDIT you receive from selling the TIME DECAY, which does not reduce it much. So for a 5 contract spread you need $2500 margin, less any miniscule credit you received, to be paid for by the TIME DECAY as the Spread runs out daily to EXPIRATION.
The way I'm trading is going out for SAFETY, which means I'm gambling $2500 margin against a profit credit of 2.5 % of that, should I do right. Huge potential loss, versus the profit. However, it is offset by the safety factor, if you figure it right. The only real threat I can see, is if the market makes a sudden BEAR PLUNGE very rapidly in one day and I cannot close out my spread quick enough, to catch it running through my bet. Haven't learned how to close out yet. That experience will come eventually I suppose? Which is why we do virtual paper trading first.

That's the new lesson for this week so far!
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If you leg in with another Vertical Spread forming a price channel, above and below, currently called an IRON CONDOR, the margin stays the same, as you only have to put margin on one side of the channel. Because only one side can get hit, if price action is volatile enough, or you put it in too close to the movement. I'm told that this usually wipes out both sides of the channel profit. The goal is to swallow an extra set of commissions and close out BEFORE you get hit, should the price go against you. That way if you had collected enough TIME DECAY already, you might even break even, or perhaps take a little cash home with you. It is very little, if you are lucky about +$15. Which is better than losing $300 by letting your threatened STRIKE PRICE get hit. Or even worse, by the price action going through your spread and consuming your margin at $500 a point. ( $2500 loss potential ) At least in a 5 contract spread, which I'm currently trading. The losses get bigger if you are hit, multiplied by the number of contracts you hold.
Some recommend closing out when you have 80% of the TIME DECAY, if you are close to the last day before EXPIRATION. Others say, you can do a ROLL OVER which means implementing ANOTHER Vertical Spread, another strike further away. Not faced those decisions or problems YET!
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SO YOU FIGURE YOU CAN GET RICH QUICK TRADING OPTIONS OR STOCKS? ( report #22 )

SO YOU FIGURE YOU CAN GET RICH QUICK - TRADING OPTIONS, OR STOCKS? Report #22


Can An Option Trader With A $100k Account Consistently Make $500 A Day?

Posted by Pete Stolcers on January 6
Option Trading Question

My question is simple, but best explained by telling what I want to do. I want to invest 100% of my money into stocks and make a net profit of .5% everyday. Buy, hold for 1 - 7 hours, sell and bank the .5%. Compounding everyday at .5% would be very profitable and I could retire in only a few years. Here is my thinking: stocks go up, down or sometimes do nothing. So all I need is to know is which stocks will move today, by at least .5%, and in which direction. It is true that most stocks move everyday! The expected return .5% is normal within most stocks daily range. The problem I have is pulling all the information together to say that there is a 95% chance that XYZ will drop today. The 0.5% is net after trading cost $10 + $1.50 per contract and the spread.
Option Trading Answer

In today’s option trading blog I’ll answer a question that makes it all sound easy. I’ve seen similar numbers used in infomercials. If I have $100k and I make $500 each day, that is 10k a month and $120k a year. All I would have to do is to make a half a point on a 1000 share stock trade each day to make it all work. If I compound that .5% daily, in the course of 10 years… I should be able to wipe out global starvation with my riches. I don’t want to sound demeaning in my response. The question is frequently asked and there are many “gurus” who claim it can be done.

First, let me bring you back down to earth and say that a 120% annual return is not achievable on a consistent basis. If a life-long trader does it once in his career, it is quite an accomplishment. I know that there are people who have turned $10k into $1 million but they were in the right place at the right time and luck played a huge role in their success. For every “rags to riches” example, there are 10,000 people who blew their account out. If these returns were easily attainable, one out of every five people you meet would be a stay-at-home trader. Stay at home, spend time with your kids, be your own boss, live the good life… these are the heart strings that are pulled by “snake oil” salesman who want to show you the path for a mere $3000. I’ve been in this business for over 17 years and you might have interest in reading about my experience of “going pro”. My story made the cover of Active Trader Magazine - September 2006.

Now, let me address some other parts of you question. Can a person trade in and out of positions, scalp the market and make profits - yes. Because of the short term nature of the trade, slippage and commissions take a huge bite out of profits. That means that options are out of the question. You have to trade stock and you need to find a company that caters to proprietary stock traders and offers a $.005 (half a penny) flat per share rate. Live data feeds, charting and advanced order entry features are a must. This is a very hard living and having done it, you’ll be tired at the end of the day. When you add up data feeds, health insurance, internet connections, software applications and computer hardware, you can expect the first $2k/month to go to overhead expenses. This type of trading is a grind and it is a very emotional experience. It can take 2-4 years just to get profitable. In the question you addressed the issue of being able to predict the direction of a stock. Bingo, that’s the whole problem! Expect to spend months reading about technical analysis and money management. Then expect to spend at least two years finding an edge and developing an approach. We’ve been in a major 4-year bull market and the trading has been fast and relatively predictable. When that ends, so will the careers of many scalpers (until the next major trend).

I believe the better way to trade is to form an opinion and to spend your time on research and analysis as opposed to reacting to every tick and blip on the screen. If you think about the richest traders in the world (George Soros and Warren Buffet) they did not scalp markets. They did extensive macro research and took long term positions. In day trading stock, you are not taking any overnight risk so you can’t expect to make large returns. If you form an opinion and take a directional stance for at least a week, your returns (and risk) go up dramatically.

As a professional trader, I expect to make 25% a year regardless of market conditions. This “tiny” return will drive many glory seekers away and that’s ok. There are many other people that will sell you a pipe-dream of riches. I have a systematic approach that has taken me years to develop and there are many years when I exceed my expectations. Day traders and option traders who have been around the block recognize the quality of my research and rely on it for trading ideas. Since I used your question, you can try a OneOption research report free for a month.

This is the easiest business to start and the hardest one to grow. Anyone with a wallet can pull up a chair.

Report # 21, End of April 9th weekly accounting.

Photo of Grandpa Ray, OEX Option trader, with wife Silvia on left and daughter Diane on the right. 2010.




GAINS OR LOSSES YEAR TO DATE ( March start )

EACH TYPE OF TRADING STARTED WITH A $5000 ACCOUNT, IN ORDER TO COMPARE THE RESULTS DURING THE LEARNING CURVE. The VIRTUAL ACCOUNT with the broker is supposed to evolve into a medly of the other three types of trading, depending on results and the learning process, of when to implement them in different market conditions. Since Option House does not offer weekly OEX option EXPIRATIONS, we will have to open an account with another broker for that part.

Virtual Account: OPTION HOUSE- no trading - remains at Balance of:( -37% )

Paper trading in Quickie Trading: +6%(reduced from 12% to +6%)

Credit Spread singles: ( paper trading ) +10%

Channel credit spreads called CONDORS (paper trading) +12%

Debit Spreads ( haven't started studying them yet ) (I'm also interested in eventually studying ratio spreads, diagonals and horizontals, and butterflies sometime. Got too much on my plate right now, trying to learn and absorb this stuff above.)

VIRTUAL ACCOUNT WITH "thinkorswim" brokerage VIRTUAL BULL CREDIT PUT SPREAD + 2.5 % WEEKLY EXPIRATION

Trend longer trading (6 or 8 per yr)( hasn't started yet )zero neutral
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This week trade was only; a VERTICAL CREDIT BULL PUT SPREAD. Was only able to leg into one side and unable to complete a CONDOR CHANNEL.
Sold Weekly ( 5 contracts - $2500 margin ) 530 PUT for credit of + $150
Bought Weekly 525 PUT for debit = difference + .30 cents in spread
Expired for credit of + $150 - $25 commission = profit + $125, or 2 1/2% on $5000
I'd kept $2500 of the $5000 account in reserve for the other side of a CONDOR, which didn't happen.
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LESSONS LEARNED THIS WEEK!
I was trying to confirm the CHANNELS for a CONDOR,also the parameters of safety, versus the spread allowable to give a decent return. One guy on the internet was saying; he bought on a Thursday to expire on Friday, using WEEKLIES. I tried that and it didn't work within my safety parameters and the decent return expected. In fact, it wasn't possible except at closer in - higher risk parameters. My accidental entry based on volatility seemed a good one. Will try it next week, on both sides of a CONDOR and see what happens?

For past trade details scroll down to Report # 12 of trade action.

http://oexoptiontradingexperience.blogspot.com ( history of learning experience )
http://westernbelizehappenings.blogspot.com ( photos and articles of living in Western Belize, foothills of the rural Belize Alps. )