Woulda Coulda Shoulda

One of the biggest struggles a trader has is keeping his or her conviction. Two days ago I closed out 2 Jan 440/430 Short Put Verticals for a $15 loss when the RUT had bounced after several down days. I got scared that we were getting too close to my 440 short strike too fast. Earlier today I was patting myself on the back for having the "foresight" to close at a small loss given that we had crossed below my short 440 strike. If the RUT settlement opens below 430 I would've been out almost $2k. Now we see the market reversing from it's new low. We will see tommorow and the following week if it truly is a medium-term low, or simply a pause from all the selling. Here is a chart of the Russell 2000's price action. The dotted red vertical lines are expiration Fridays. I have drawn in support where the RUT bounced off its prior low at 440. Woulda Coulda Shoulda held onto my short position...


On the positive side, this is a good move for my February Options. I'm short 2 380/370 put verticals and they've really been feeling some heat. Hopefully we make a decent move up next week and I can top off the call side for an Iron Condor yielding and try to squeeze out 10-15% profit for the expiration...

Expiration Week Thoughts

Just wanted to document this so I can come back to it. Wondering if today's huge down move has anything to do with it being expiration week. January expirationon Friday, should I worry at all about the move regarding my Feb shorts? Probably, but perhaps these weeks are the better weeks to open up new positions for the next month's expiration...

Markets Down

Wednesday, January 14, Option expiration is this Friday and the markets have made their 6th straight day of declines. Several lines of support were taken out and the RUT gave up 21 pts today. I was very close to selling a 380/370 Put Spread on the RUT today but just didn't want to pull the trigger. Currently my only position is 2 RUT 380/370 short put spread. Sold these for average of .725, currently the spread is trading for 1.5, big loss on paper, due to delta and vega increase. I'm waiting to see what the rest of the week has as Citi and JP Morgan are releasing some results as well as some other important firms. I'm concerned that we could go and at least re-test the November lows (371 for the RUT). Futures are down a few points after hours, but I don't give those much weight until the morning before the open. Unfortunately I haven't had an market-short positions on for a while now, so I haven't been able to profit from this down-trending market. We will see what tommorrow brings, would like to sell another put vertical on these huge down days, but not sure I want to put on that much risk in front of what could be a steam-roller.

Re-Launch

I've been draggin' here. Started to trade, started a blog, stopped blogging, kept trading. Now I am going to continue on blogging. I have been real money now since September 2008's expiration and have been so far successful. I've lossed a few on some speculative trades (that I've promised I will refrain from going forward) and I've done well with my Credit Spread Selling Strategies. I will work on some seperate posts that show my performance as well talk about all each of the expiration cycles I have traded now and try to write out my thought process. As a recap, I have been primarily selling Veritcals. Vertical credit spreads often go by the names "Bull Put Spread" and "Bear Call Spread." A Bull Put Spread is when you sell a put option and then by a further-out put option to cover. Max risk is the difference between the strike prices less the credit received. Bear call spreads are the same, only with calls--sell a call, buy one a bit further OTM. When you combine these, by selling a Bull Put Spread and a Bear Call Spread, the position may be referred to as an Iron Condor. The great thing about an Iron Condor is that either your Bull Put Spread or your Bear Call Spread will be correct, so most options-friendly brokers only require the margin for one side. I'll try to provide some more information and educational pieces as I continue to blog, that's all for now.

Cheers

2 New Trades

Yesterday (Sept. 11) I sold a OCT 800/810 Bear Call Spread to top-off the upper end of a 630/640/800/810 Iron Condor on the RUT for 60 cents. Total credits received is now 2.1 for a return on $1,000 of 21% till October expiration. I had been trying to sell this for a larger credit throughout the week but eventually bit the bullet and decided if the RUT goes up any significant amount in the next week or so I will sell another one at a higher price. Currently my Theta is at 6.5, delta pretty much 0, and vega at -16. I'm not sure yet how I feel about having such a large (in my opinion) Vega exposure, and will be looking into balancing that when I have some time.

I also placed speculative trade today. Here's a chart of Citigroup over the last 5 years:

In my opinion, this is one of the "stronger" and more diversified banks. Although many would have said that about Bear and Lehman before they collapsed. That's why this is a speculative trade. I purchased a JAN 2010 LEAP 30/40 Vertical Bull Call spread (not sure what the proper name is...) for 90 cents ($90 - only 1 contract). This position will be worth zero if on January 2010 Expiration the stock is below 30. It's max profit potential, $910 (about a 1,000% return) will be reached if the Citigroup is above $40 per share on Jan 2010 Expiration. Currently the stock is at $17.85. I don't think it will more than double by then, but hopefully it will be over $30 by then.

Going Live

I have funded my brokerage account (thinkorswim.com) - let me know if you want discounted commissions of $1.50/contract w/ no ticket charge. Used the last couple of down days with the inflated IV to trade a great Bull Put Spread. Sold the Oct 08 640 Put and Bought the Oct 08 630 Put for a net credit of $150 on capital risked of $1000. Once we have a decent up move I will put on a Bear Call Spread to take advantage of the free margin and juice up my return. Looking for a max profit of 20-30%... Current P&L for the day is up $35. Net Delta is around 3, placed trade with RVX close to 29%

Crazy Down!

Yesterday the markets (since I'm currently exposed to the Russell 200 and S&P 500 a general reference to the markets means the RUT and SPX) were down 3-4%. That's huge. A huge move like that does not bode well for an Iron Condor as that trade profits when the underlying remains between the two short strikes.

Here's where I currently stand:
RUT: current price = 695, my short put is at 680 which gives me around 2.2% of a downward cushion.
SPX: current price = 1277, my short put is at 1245 which gives me around 2.5% of a downward cushion.

This may not sound like much, but given that we had such a big move yesterday, and a smaller continuation of that move today gives me some comfort. In my opinion, it would be rare for an index to move 4% and then another 2.5% in the same direction within a month. Can it happen? Sure, and if it does I will then likely purchase a put or roll the condor down, but given where the market currently is, I would expect a slight bounce next week which would put the underlying in a much more favorable position closer to the middle of my short options.