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

Yahoo and Alibaba are Climbing Higher

Alibaba and Yahoo have been steadily crankin' these past few weeks even when the rest of the market has been chopping up.  I've been trying my new strategy on YHOO options and have been doing well.  I also picked up some BABA too.  Technically they are both on a trend and the "trend is your friend." Fundamentally they both are sound companies and trading at low multiples,Yahoo especially. The P/E for the technology software service industry is 20-60 and YHOO is at a bargain rate of around 6.  With all that new 6-8 billion in cash from selling some BABA IPO shares, that is a serious discount. 

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.

Selling Covered Calls For Extra Income

As the saying goes, “When you know better, you do better.”  I have changed up my strategy after watching what was going on with ARR.  I was a champion for this stock for months because I felt that it was eventually going to go back up to its $7-$9 price range.  Well you can’t wish something to happen, there has to be concrete steps and data to follow it up.  ARR never improved its financials and consequently the value of the stock stayed stagnant even when comparable stocks were rising. 

After a conversation with a friend of mine I realized that a safer and possibly more lucrative strategy would be better.  If you buy a well-known blue chip stock with sound financials that has enough volume, you can sell covered calls each month for steady income, much like the dividends I was seeking with ARR.  My own personal requirement was to find a stock that was trading below $20 so I could load up on it to have enough to buy at least 200 shares.  As you know (if you have traded options before) you have to have at least 100 shares to buy or sell 1 options contract.  To make the minimal return that I want to make I need to sell at least 2 options contracts.  The stock I chose was Ford (F).

Here is some more information on covered calls.  Many of the people and sites I’ve come across go into a lot of detail about covered calls but just know it’s not as complex as a lot of people make it seem.

Investopedia – Covered Calls

Trade King – Covered Calls

Alan Ellman - The Blue Collar Investor

Monthly Income From Covered Calls

If you look at the Bid price, that’s what you will be selling your call at.  Just remember that the Ask price is what you will be buying your call back at if you choose to buy it back (you will do this if you want to keep holding your shares and don’t want to be assigned at expiration).  To make any money you want the Ask price to keep getting lower so you can buy the options back for a price cheaper than you sold them for (buy low, sell high).  Either way if you sell a call at a strike price higher than the price you bought the stock (out of the money), then you have already made your money so you can just sit back and wait for expiration (always factor in fees and commissions).

Always buy the next month’s option because you want enough movement to occur in the time value of the stock.  Some people trade the weekly options.  I haven’t tried that yet but I may.

If you are new to covered calls, after you watch some of the videos and read some of the information on the links I posted, all of what I just said will make more sense and hopefully will simplify what you have learned.

Let me know how your trading goes by leaving a comment and if you have any other ideas I would love to hear them.

OPTION TRADER makes $105MM PROFIT

This lady has uncanny skills in picking option trades.  Her basic approach is not too complex at all.  She started out just shorting stocks as they go up, making money on the corrections.  Seems like a very successful and efficient way of trading, no iron condors, butterfly spreads, etc. just a basic wait and pounce approach.

This approach actually makes a lot of sense.  You can almost always guarantee that any stock will go down at some point in time over a two month period.  There is enough drama happening to make all stocks sink down at some point during any given week.  So by placing a put on a volatile stock when it rockets up you can almost guarantee some sort of profit during a two month window.  All the successful traders I've researched recommend a two month window for options trades.  I tend to agree unless you are strictly trying to gamble as in the case of binary or weekly options.  No one knows what's going to happen in the short term but you can almost guarantee the market will go in either direction in the long term.  She's just playing the downside.