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

Current Market Conditions

There seems to be a bias to the downside in the current market because of the bottoming oil price fear mongers.  I personally (and apparently many others) think low oil prices are a good thing because the general consumer has more money to spend.  Many pundits on the other hand think failing oil companies will cause loan defaults that will bring down the banks and that will somehow reach other markets.  

I don't think low oil prices are going to be a problem but the market has it's own reason for moving which may or may not coincide with my belief.  Because my current strategy is bullish I am going to proceed with caution and look to time my trades after pullbacks.

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.

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.

Win in Any Market … Play the Opposite Side

I know a lot of people have been hit with the market sell off over the past week or so.  I started my options strategy at this time and got hammered on a bio tech stock that had bad results on a failed trial.  This got me focused on really tightening up my strategy to make it work with a higher percentage of success.

At my level of trading I’m looking at ETFs that trade around $40 a share that preferably have weekly options with a high premium.  I am trying to sell puts for the premium on Thursday and use the time decay to make my buy back price lower thus netting me a profit.

With the whole market on a downward tailspin right now the only ETF that fits this criteria is VXX.  The VXX is an ETF that follows the volatility of the market and it moves in contrary motion to the S&P 500. 

I got into a position on Monday and closed today making a decent profit.  I just got into another position and hopefully with all of this volatility I can get out today with another profit.