Mea Culpa

OK, in my last post I said I was going to experiment with waiting for expiration.

But then the market volatility, as measured by the VIX, dropped way back down again. Falling volatility lowers option premiums. So I was able to close the trade after only a couple weeks for $2.45.

In effect, I got the same annualized return in one-third the time.

And I’m always happy to take my money off the table.

Market Troubles Mean More Profits for April Condor

With the markets dropping off their all time highs over the past few weeks and the talking heads saying it’s the end of the world, I figured today would be a good day to open the April Correct Condor.

Using my usual rules, I opened a trade on the RUT at 910/940/1230/1260 for 3.90. The relatively high VIX of 17.40 made the premiums a bit better than they have been in recent months.

For this trade, I am going to experiment with going to expiration. This increases the risk a bit, but we’ll see how it works out.

Analyzing Weekly Spread Trades

In this video I am running through the analysis of several different stocks to initiate a weekly spread trade.

This came from a new subscriber named Richard, who asked me about selling puts on a weekly basis. If you’ve been following selling puts for income very long, then you know that over the past year or so, I have focused much more on monthly trades rather than weekly trades.

And as you go through the video, you will see how some the issues come up with weekly trades that really give an edge to the monthlies. Basically it comes down to the fact that in a weekly option you have very little time value to sell. As a result of that, you have to get much closer to the current market price in order to generate any kind of you.

On top of that, you have to take into account that the lower yields you’ll get on a weekly trade means you have to trade in larger volume, and thus have higher commissions.

All of these factors are arguments against selling weekly options.

However, there are definitely benefits. If you pick your options correctly, you can make much higher returns. If you are a successful weekly trader, you can easily expect to make 50% per year on your working capital. Compared to my monthly Condor trades, I only make about 30 to 35% on my working capital.

But the trade-off is the amount of work you’ve put into it, and how much time and energy to spend monitoring the positions. I love the monthly Condor trades because I only glance at them once or twice a week. And that fits better with my personality.

Regardless, it is good to know both sides of any issue, so go ahead and watch the video to see all the steps involved with selecting the right trade. Leave a comment on the YouTube video so that everybody can engage in the conversation.

December Condor Closed

Yesterday, my GTC order to close my December RUT condor executed at $0.65.

So another month down, another 8.5% profit without any work.

If you’re not careful, you might get used to making 32% a year while trading a couple minutes a month.

It’s time to start looking for a Feb condor, so stay tuned…

What to Do When There is Nothing to Buy

So I was looking at the Russell 2000 options chain today, looking to open a Correct Condor.

I like opening positions on down days because the volatility on down days is higher. Higher volatility means higher options prices, and that means more profits in my pocket faster.

So imagine my surprise that when I was looking at the Jan 14 options and could not find a suitably OTM call spread! The first option that was acceptable according to my trading guidelines was the 1190 call. That would mean, of course, that I would need a 1220 call to cover and complete the call side of the condor.

But the highest option on the market right now is 1200!

So I couldn’t open my position and still be following my rules.

So I did what all good traders do in this situation: I waited.

Here’s one of the key characteristics that separates a professional trader from an amateur trader, regardless of whose money is being traded. A professional will wait for the conditions to be right before entering a trade. An amateur has an emotional need to trade all the time.

This one difference can explain the majority of the reasons why professionals make money and amateurs lose money.

Let’s face facts. All trading is based on probability. Knowing the history of the markets, we can predict with a fair degree of accuracy what will happen in a given circumstance. But that prediction has a confidence interval. In order to be a trader who makes money consistently, you need to be entering trades that have a very wide confidence interval.

In other words, you need to put the odds in your favor.

With options, we can create a position that slices and dices the market any which way we want. So there is no reason to ever be entering a trade that has a low probability of success. Most options trading platforms even have probability calculators built in so that you can view how certain your trade is.

So I will continue to wait until the market gives me the opportunity that I want. I will follow my rules that have been tested against the market and work for me and my trading style.

Are you doing the same?

Trading Rules to the Rescue Once Again!

In case you haven’t heard by now, the Congress and the president are talking about make a deal on the budget in order to avoid the technical default on government bonds.

As I write this right now, the market is up about 235 points. And it shows again why you have to have four entries and exits into positions.

Back in 2003, when I was daytrading for living, my rules were just what felt right and what the chart look like at any particular second. Not surprisingly, I lost a lot of money that year. But over the years I’ve learned my lessons, and I now have very strict criteria for when I open a trade in when I close the trade.

With the choosing correct condors methodology, I close losing positions when I’m at -100%. In other words, if I got three dollars in credit, I will sell the position if it reaches six dollars. On the other hand I close winning positions at positive 70% to 80%. So that same three dollar credit I will close out at $.60 to $.90.

So is my current position on the December options, I open the position at $2.44 and then the government shutdown. The market has been sliding ever since.

Fortunately, because of my rules I did not panic I simply watch the position. It got as high as $3.78. So no were near my -100% rule. This is an additional advantage of the choosing correct condors approach because you’re selling so far out of the money that even relatively large moves like we’ve had do not affect the position too much. We are selling theta or time value rather than Delta or gamma.

And today with the announcement of the proposed deal, the markets up huge and my position is back to approximately breakeven. Now we still have fun other two months ago, so breakeven is about what you’d expect.

Let’s all have to report right now, let’s get back to lazy trading.

Down Market Days are a Gift!

As I am writing this right now, the Dow is down about 90 points, and the other indices are in a similar position.

It’s my favorite kind of day for selling options!

Why, you ask? Because in the low-volatility environment we find ourselves in, down days are the only times we see spikes in volatility. And spikes in volatility lead to spikes in options prices. So down days are the perfect days to enter into new selling positions.

Today, the Russell 2000 is at 1052. Following our -8% and +12% rules for Choosing Correct Condors, we can sell the October 910 put and the 1140 call. That gives us 230 points of spread.

To set up the Correct Condor position, I am using a 30 point spread for the wings, which makes each contract require $3,000 of margin. So the strikes are 880/910/1140/1170.

I was able to get filled for $3.20 on this spread, which works out to $307 per contract after commissions. This is a 10.2% trade if I let it go to expiration. Of course, I like to close my spreads at either -100% or +75%, so if you are following along, be sure to keep tabs on your stops.

And I’m Back… Almost!

Hey everyone! I’m back to posting after being away for a few months.

I decided to set up a new account with OptionsXpress so that you can follow along with every trade and see how things go. Every trade will be shown, beginning and end. We will see how the account grows over time, and the occasional times it doesn’t.

The only hangup right now is that I am waiting on the brokerage to approve my options trading level. It’s been a week and I’ve submitted 2 requests. Hopefully the approval will come through any day now.

Once that is done, I will update the site with more trades. Because after all, making money is why we are all here.

A Funny Thing Happened on My Way to the Market…

So by now you probably know that I like to close out credit positions when they have reached 70-80% of their maximum potential profit. I figure it is almost always better to take money when it is on the table rather than risk the last few pennies and have the whole trade blow up in my face.

But sometimes funny things happen. I checked on my April Correct Condor position, and with all the choppiness in the markets over the last few days, the ask on my options has dropped to zero.

In other words, there are on sellers for me to buy from and I can’t close the position. So I am being forced to keep 100% of the potential profit!

I guess worse things could happen ;).

More on the Importance of Trading Rules

My iron condor positions were getting pretty close to the 100% down point, where I would have to roll the positions to higher strikes. Then came the news out of Cyprus. Markets are down, and my positions are back into safe territory.

Trading rules are important because they take the fear and greed out of making decisions. If the positions had gone a little higher (which they still might in the future), I would roll them. If not, then I will take my profits as planned.