Earnings Season

Earnings season is here again so this is the time to cue up the volatility plays.  Premium will be richer during earnings season because of the potential for big moves.

For a complete calendar listing of earnings you can check here:

http://www.bloomberg.com/markets/earnings-calendar/us

Current Trading Plan 6-7-16

It’s important to realize when your current plan may not be working and you need to change tactics.  Your overall assumption may still be correct but the market is notorious for defying logic.

I've been getting beat up with my short play on the SPY and all common sense would say short the market because it's at its highest. The trader’s manifesto is to buy low and sell high but this market seems to want to go higher even when there's bad news.

Since the trend is moving up and this trend has bucked several attempts against it, I got out of my bear call spread and bought an August 19 call at 218 strike price and now I'm finally making money instead of losing money. It's hard to time the market and the other trader maxim is appropriate here, the trend is your friend.

I figured the market is going to go up at least to 214 and I'm still in keeping with my buy low/sell high philosophy because I'm buying low premium.  Maybe that’s the lesson , buy low premium and sell high premium. 

ETFs Versus Individual Stocks

After analyzing my past trades alongside the S&P and their corresponding ETFs I have come to conclusion that from here on out I will be trading the ETFs.  Although AAPL has the highest return I could have made a comparable return by trading the highly liquid ETFs that have similar or higher premium.

I can also use other contrarian ETFs to hedge my trade and make my overall portfolio delta neutral.  

 

SPY, YHOO, AAPL 52 week comparison

 

QQQ, SPY, YHOO, AAPL 52 week comparison

 

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.