Facebook Earnings Play

I just figured out why my Facebook trade is not working out as quickly as I wanted it to. I got into a put spread with the wrong expiration date.

I have a bull put spread with the 72 strike and 67 strike expiring the last week of January.  Facebook is announcing earnings at the end of that week.

I wanted to take advantage of volatility during earnings  but I did the wrong thing.  I should have sold my put spread a week before earnings and not the week of earnings.   This would allow the volatility and time decay of earnings week to eat up the premium  faster.

By selling the put spread during the week of expiration  I exposed myself to the volatility of expiration week.   As it looks now I may have to wait till the week of expiration to exit my trade for a profit.

Strategy Update

I successfully exited my bull put option spread on Facebook today.  It was a volatile week and I had hoped to have gotten out yesterday, but there was a lot of negative chatter about the effect of oil prices on the market.  That kept Facebook from bouncing up on the positive news from the Instagram announcement.  Instead the bounce came today which was helped me exit my trade.  

After a month and a half of successful trading and 7 consecutive wins, I can now confidently recommend my strategy.

Here it is again if you missed it:

YCTT Bull Put Spread Trading Strategy

Trading Large Numbers of Options Contracts

I’ve been experimenting with using larger numbers of contracts on my credit spreads for a larger gain and after executing a few trades I can say that I do not recommend this strategy for everyone but it has been very lucrative.  You have to be a lot more vigilant when executing these trades and there are some tighter rules you have to follow.

• Make sure you are only trading larger name stocks with a large amount of volume (liquidity). Names like AAPL, SPY, BABA, etc.
• Make sure the lower leg of your trade has some bids out there so you can close your position or roll your position, preferably no less than .05.
• Never let these trades go to expiration.  You never know what the stock is going to do and you don’t want to be exercised with high volume contracts especially if you don’t have the money to cover the transaction. 

This last reason is the precisely why I do not recommend these trades for everybody but if you can stomach the risk they can be highly lucrative.  Just be ready to deed your house over to your broker if it goes south on you.

Bull Put Spread and Cash Secured Put Strategy

Sorry I’ve been a little absent but I wanted to refine my new option strategy before I shared it. I made a couple of trades that went south on me and I didn’t want to share a strategy that didn’t work.

After some losses and then some wins after doing some tweaking I feel that this strategy is something that will have a high success rate.

As I started my strategy I originally only wanted to trade ETF’s because of their improbability of going under.  However I feel that you can successfully trade this strategy on reputable stocks that are trading at a discount.  

Here’s the strategy in a nutshell:

• Decide what you are willing to risk and then divide that by 100 for the 100 shares you may have to buy for on options contract. 
• That will give you the price of the underlying stock you are going to scan for.  So for instance if I am only willing to risk $4,000 then I need to look for stocks that trade around $40 a share.
• I only look for reputable companies or ETF’s and that’s about the lowest price range you will find.  A good range to trade at is around $60-$100 a share.
• For this cash-secured put strategy you need to have the money to buy 100 shares of the stock just in case you get assigned.  Our goal is to not get assigned but in case you need to save a trade that went bad you have another option of selling a call to make back some money.
• Make sure the stock is on an uptrend – the trend is your friend.
• Check the weekly options chain and look for a Bid price on the Put side of at least .60 (it can be .50)
• There should be less than a .30 difference between the Bid and Ask price.
• The strike price should be at least 2 strikes out of the money.
• Check probabilities to make sure that the probability of the option being in the money is less than 30% and the probability of it touching that price is less than 50%
• You want to execute your trade between Monday and Thursday before the next week’s option expiration to get the most premium and to take advantage of the accelerated time decay.
• Sell the put close to .60 and buy the closest put that costs .05 or less.  This is for insurance in case the trade moves against you but you don’t want to pay too much for insurance.  It makes this a bull put spread.
• Set your alerts on your trading software to notify you of 10% moves of the stock either way.  This way you can go about your day and not have to watch the stock until the end of the day. 
• If the stock starts moving against you, get out of the trade and find another stock.  But don't be too scared if the stock moves down to a technical line of support, let the trade play out especially if it's in an up trend.
• If the stock price moves in your favor be patient and wait for the next week Wednesday or Thursday before expiration and then close your positions to get as much profit as possible.