Trading Notes From December 2014

I wasn't able to post as frequently over the holidays so I am putting my trading notes for December in one collective post.

Trading Notes 12-11-14

After pulling out of this Facebook trade I learned some valuable lessons . One key lesson is to always take profits when you can even if you think the stock is going higher if you set a stock price target stick to your game plan

Looking forward for the next couple weeks I want to see what the historical data is on certain stocks, are they usually up or down going into the new year.





Trading Notes 12-17-14

I felt good about my trade and I had done all the necessary research in Facebook I looked at the technical analysis as well as the fundamental analysis and there were great news stories that supported the stock going higher.

I held off on making a Monday trade because I remembered what had happened in the previous weeks.

So I placed my trade on Tuesday as I had planned I waited for the stock to go down after it had bounced and it was heading back to an area of support.

What I hadn't planned on were the global market conditions. With the declining price of oil along with the Russian currency collapse in the upcoming Federal Reserve meeting the market was very fearful. This caused Facebook stock to plummet despite all of the positive signs of growth and stability in the company. Even with the announcement of China allowing Facebook into the country the stock went down.

This made me nervous about staying in the trade but I wanted to see what the Federal Reserve was going to say. My management strategy was to roll over my credit spread into the next week's options. That would have given me some extra time for my trade to play out.

When the Federal Reserve at their conference call said that they were not going to raise rates, this caused the market to shoot up higher making my trade a profitable one.

Some of my takeaways from this experience are to always believe in yourself. I had done the research and new at what levels to enter and exit my trade.

I also knew that the probability of me winning was 78% and this was what I needed to believe in. Yes I could have made more money but I stuck to my plan and made what I wanted to make on this trade.

IMPORTANT NOTE ABOUT OPTIONS

If you are trading large numbers of contracts:

NEVER LET AN OPTIONS TRADE GO TO EXPIRATION

Let me say that again NEVER LET AN OPTIONS TRADE GO TO EXPIRATION

I don’t care if you are up and you can make more money if you let them expire.  It’s not worth the risk especially if you are trying to make more money by overleveraging your trade. 

Let’s say you sold 10 contracts on AAPL and bought 10 for a put spread.  Your high strike was 114 and your low was 110.  Your thinking the most I can lose is $4,000 because of the spread.  WRONG

When you get close to expiration the 110 contracts go down to zero value and there are no bids out there for you to close your trade if you really need to.  

Once your insurance trade has gone to zero you are essentially in a naked put and you are at the mercy of the market for whatever happens.

If your 114 contracts become “In the Money” you are now on the hook for $114,000 with no way of exiting the trade.  You can’t sell or roll over to the next week because there are no bids out there for your 110 contracts. 

SO I REITERATE… If you don’t have the margin to cover the trade NEVER LET AN OPTIONS TRADE GO TO EXPIRATION

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.

Trading Strategy – Cash Secured Puts

After setting up my new trade strategy over the past couple of weeks I realized that buying the stocks is like buying a car.  Why own the car and deal with all the headache of getting it fixed and replacing parts when you can lease for a cheaper price and get a nicer car.  The correlation is similar to stocks versus options.  If you can trade options and get better leverage, i.e. make more money, why buy the stock that has inherent risks of losing value?

I started out trading options but never really appreciated the seller’s side of the option chain.  If you become the seller you net your premium and then wait for the trade to play out.  I always like getting my money up front.  In any deal if you can get paid first before the actual transaction you are headed in the right direction. 

The trades I am making now are selling cash secured puts.  This is probably the safest option trade.  The only potential loss you have is by being assigned the stocks at a low price at expiration.  But if you traded on a decent stock, why wouldn’t you want that stock at a discount? Other than this you are net positive because you got your money up front as the seller of the put option.

As with any trade you have to make a smart decision about where and when to sell and where and when buy.  But if you are good at technical analysis then you should be OK if you keep your trades farther out of the money.  The key is to check the support and resistance lines to make sure your strike price is beyond that and then you will more than likely be OK.

More info on cash secured puts:

Options Industry Council - Cash Secured Puts

Selling Cash Covered Put Options

Here are some great videos that explain credit spreads which are the other safe play that I may be getting into soon.

Credit Spread Option Trading Strategies part 1

Credit Spread Option Trading Strategies part 2

Market Conditions 9-29-14

Today’s market was crazy and I hope everyone has survived with some dignity left.  I have been revamping my strategy over the past couple weeks and haven’t been posting as much.  I fortunately got out of my Ford trade last week to initiate my new trading strategy.  As providence would have it, I got out just in time. 

I started to advocate selling covered calls for safe extra income but after I started learning how to sell cash secured puts and credit spreads, I no longer feel that covered calls are the best option trade.  The problem with covered calls and especially in a market that has become volatile, is that your money is tied up in a security that may lose value while you wait for the expiration of the option.  If you sell a cash secured put you keep your money safe in your account while you wait for expiration.

What happened to Ford today was a confirmation of that fact.  I had initially planned to hold Ford until the October 18^th expiration of one of my covered calls.  After learning about selling cash secured puts I liquidated my Ford position and started selling a few out of the money puts on some volatile bio tech stocks.  If I get assigned the shares at the end of expiration I will have bought the stock at an extreme low which is not a bad situation because the stock will most likely rebound.  If I am able to wait till expiration then I will keep the entire premium.

This is my new strategy now and I will provide more details as my trade develops.  In the meantime it is important in this market with its new found volatility, to keep as much cash as possible and to enter options trades without owning the underlying stock.  Credit spreads are probably the best plays in this market.