Options – Bobby's Trade Journal

Moving to Advanced Option Strategies

When traders start trading options, they learn as much as possible about calls and puts and rush out to buy some contracts hoping for a big move and a big profit. When that doesn’t happen, there’s two possible routes a trader will take. The first type of trader will rush out and buy another contract on something and hope that one is profitable. The second kind of trader will analyze his/her trades and try to determine why it didn’t work. These are the two main possbilities excluding the small variations on these scenarios.

When a trader buys a call or a put and the stock moves away from the intended direction or stays put the trader loses money. In some cases even if the stock moves in the correct direction, the options still loses premium and the trader can’t make profit. Meet Theta. The time decay. The time decay on an option will accelerate as the expiration draw near. Closer to expiration the time decay on an option can be so much as to negate any small move by the underlying in the correct direction. So a buyer is losing money unless the stock makes a good move.

On the other hand, the seller of the option is liking the time decay with each passing day. For a seller the time value of an option is on a one way road. It’s decreasing and never increasing. This means if the seller can sell the correct option and use the correct strike, he or she can be a happy trader at expiration.

This is where a trader must learn new strategies and advanced option strategies that are designed to benefit from certain scenarios. Butterflies, Iron Condors, Condors, Vertical Spreads, Calendar Spreads, etc.

I am moving towards learning about selling Vertical spreads and incorporating this strategy as part of my money making strategy. I will discuss some of the option strategies in the coming posts. I will post more about selling the option premium instead of buying it.

Market Analysis – Nov. 21st

So looking at the current situation of the market, it might not be such a bad idea to be long. The market is near its long time low.

RSI is making lows at the same level. MACD is making higher lows. CMF making higher lows. If we have a close above 80, it would nice. But a close over 86 would be higher than the previous two candles. It would be a very bullish signal. Might be more likely to see it closing above 80. I’d be thinking of possibly getting some calls. Dec 85 SPY calls would be decent. But also expensive. Can only afford Dec 90. Those are too far out of the money. SPY could certainly see 90 before the end of Dec. but it’s a long way to go and time decay would also start factoring in.

Today Was a Weird Day!

Today was truly crazy. I had bought some Nov 230 SRS Puts. They were supposed to go up all day. But they took a serious beating. A serious beating. The market kept falling all day. And so did the SRS puts. For those that don’t know what SRS is, it’s a ProShares ETF. Corresponds to the real estate sector and trades as the inverse of DOW. So when the DOW is up, SRS is down and vice versa. So Puts on the SRS will be profitable if SRS goes down. In other words the Puts would be profitable if DOW rises.

After many days of beating, the DOW was due for a rise. It was rising but kept falling. SRS kept rising and making higher highs. This meant the PUTs were at 0 at one point.

Then finally in the last 15 minutes the puts went from .1 to 11. That’s a 99% increase! Oh well! I had already sold my position at a loss after the first time the bid showed $0.

So I’ve decided to take this a little more seriously. I will try to trade more ProShares and more ETFs if possible. I have so far lost $1400 in the market. Hardly, the serious type of loss that many many traders have suffered. Hopefully, heeding the warning by other traders and using my practice accounts’ experience, I can try to do better.

I will be trading with a $100 that I have left in the account. May not mean much to anyone. But I’d rather try to see if I can make this go to $500. Until I either lose this or reach $500, I will try not to fund the account anymore. I have refined the rules more and will update them soon.

Market Analysis – Nov 3rd.

Seems it stayed quite alright until 1:00pm – 1:30pm. After that more of a selloff. Possible pre-election feelings? It sounds as if both parties will possibly have a positive effect on the market. Not like either has a really good plan. So it has to be either a downturn on either due to lack of a plan or that people slowly start getting back in the market and letting the winner take office and move on with running the office. Hopefully, it will be the latter. Otherwise, it will just whipsaw until next year and go nowhere as people wrestle with different emotions.

Keep in mind that as options traders, we don’t really care which way the market moves. Just that it moves. And possibly more important than that is that we possible the trade on the right side of the market.

Which reminds me that my next post will discuss my current portfolio.

Market Analysis – Oct 30th.

The market closed green today. Quite a fall in the first 3 hours. But then a steady rise until the very end. Last few days, the market does rally in the second half of the day but then does a sharp decline in the last 1 hour. Yesterday’s sharp decline didn’t turn around. Today’s decline turned around just fine, without any issues. This is the second close above the 9K mark in the last few days. Doesn’t mean much in and of itself. It will have to close above 9K mark consistently for it to be a good support point. For now it seems to be fine.

Most securities that I’ve been watching closed green today. Except, MSFT. Which is the one I hold some calls on. If the market continues, the uptrend, MSFT should rise as well. Without issue. However, hypothetically, if the markets were to decline, then those calls wouldn’t be worth much. Not betting on those to fall. So will continue to hold for now.

Let’s see the MSFT chart. It is still showing the CMF is indicating some sell off pressure.

MSFT - Oct. 30th. Although, it is pixel-splitting, the MACD line seems to be above the trigger line. There seems to be a little red dot visible below the blue line. But that’s not as much as technical thing as wishful. Lastly, the DOW did well. DOW - Oct. 30th. MACD shows some divergence.

Market Analysis – Oct 28th (A Rally!)

Interesting day! A 889 point rally. Dow was nicely up. So all you call holder who are profitting did good. Congratulations. My own MSFT options were bought at a high price at the time of the last rally small rally. The trade was opened on the 21st. However, the price kept going down and after many red days, now, the trade is down 88%. Very stupid move. Very careless. Here’s is how it happened.

I bought 10 at .53. It went down. So I bought 10 more and averaged at .50. Thinking that when 20 options are sold at .70 it will be better profit. This was done out of desperation. Not by looking at the charts. Never looked for confirmation on whether the market is headed up or whether the security is headed up. Then it went further down. Bought 6 more and averaged at .45. Then it went down and bought another call at averaged all at .44. So in total 27 Nov 27 calls. Current value is .10. At one point it was .02. Luckily, I never looked at it when it was lower than .05, I think. Maybe .04. Now, I’m looking at this and realizing that it will need multiple green days before the option price starts moving up. The option price is derived from the security. That’s why options are derivatives. However, it has many reasons for staying. If no one believes the MSFT will go up enough, then what’s the point in buying the option. So it doesn’t increase much. If it has the possibility of going at least close to 27, then the price will increase. Now, I’m praying that I will be able to get out of the trade profitable. These expire on Nov 22nd. Current gameplan is to pray and hold.

This mistake of going all in and averaging down has been eye-opening. You can’t trade without identifying your risk/reward ratios and without having rules that you will adhere to. Will this work? In the long run? I don’t know. It depend on my ability to follow the rules that are carefully made and to make good trades. God willing, I will be successful. My current goal is to go from $1,000 – $2,000. So far I am successfully somewhere around $200.00 in account value. So very much in the wrong direction.

Let’s see below the DOW chart. Notice the first rally was with the pink circle. RSI showed oversold and MACD showed no buy signal. Today’s rally showed RSI heading up but well out of oversold territory. The MACD was sort of sitting around. Now it’s shows the buy signal. These two signals alone don’t say anything matching. So further green days will show whether this down trend is temporarily gone or really slowing down to start trend reversing action.

Market Analysis – Oct 27th

So the last week was pretty red. It was a brutal week for securities. However, many option traders made out good money. Buying puts was a profitable tade strategy last week. Additionally, a more risky move would have been to write calls. Covered calls would be less risky while the naked would have been very risky. Looking back tho, it is easier to say that any call writing would have been profitable.

So that means after a lot of red days, there’s bound to be some slight rallies and green days. Many people project that Monday would be green. I was not expecting Monday (today) to be green. I was anticipating that Tuesday (tomorrow) will be green. Since today has closed red, that leave the rest of this week to show what the markets will do. As logged in my journal earlier, I’m all in on the MSFT Nov 27 calls at an average of .44. Currently, it is trading at .05. Today’s range was .05-.13. This trade is not doing well. It is down 88%. The only reason to hold now is to hope for the best and hope that before Nov 22 it will rise and profitable. If not, then depending on market strength it might still be ok, to get out at 40-50% loss with the lesson learnt and memorized. Going in to live trading, one of my rules was to never put all the money on one trade. However, the real life is very different. The lure of averaging down and making a quick buck is so strong that while watching myself break my rules I couldn’t stop it.

Now, the pressure is on to never repeat that same mistake again. However, I must first close this trade. I have till Nov second week to decide whether I”ll be getting out with profit, with partial, or with complete capital loss.

Day End Market Analysis

Today was a wierd day for the markets. In the morning the market headed up but then reversed directions late morning. This could be consistent with the normal market trend where it starts off in one direction and then late morning turns. However, it reversed again and headed up towards afternoon and formed a second top. Toward close, it just headed down like crazy. So it would appear to have just charted a double top. Hopefully, that fall won’t be that hard.

Normal conditions have been indicating that there might be small rallies in the market and then a longer term decline. However, if this starts the decline, that will be most inopportune time to have averaged downt to .50 on 20 Nov 27 MSFT calls.

Time will tell. There is a GTC order for limit of .70 set in my account ready to go and close out the position. However, it MSFT doesn’t hig 24.50 or during the day, the target of .70 might not be reached.

Form the morning’s close of yesterday position, the profit was $50.00. So the total account value before opening new trades was ~ $1187.00.

New trades are for 20 contracts (over exposed here) and should have been only for 10. But this is the emotional thing that got in the picture and said, it’s probably gonna fluctuate tomorrow and it’s better to buy more and average down and increase position size. Ideally, the first trade should not have been opened. The first position was at a price of .53 but without looking at the overall market direction or considering any technical indicators. The second position seems to be a little on the ok side. If the markets don’t fall thru the bottom of the screen tomorrow, the trade should be fine.

Closed Out The Position At .65.

For a profit of $50. That’s 8% profit for investment of $600.00. Not much!

I have become convinced that when the profits run, let them run. However, when the markets aren’t moving much, it’s better to make a small profit and close position. Better to have cash on hand ready for opening a new position than to sit and wait out the market and wait for it to make more profit. Nov 27 calls were at .70 at one point but that was before I got a chance to monitor the markets today. I had set a limit for $1.00 last nite, but wanted to move it to .70 last nite. Didn’t get to it due to being busy. However, set a .65 limit and it executed sometime before noon.

Reentered the position at .53 for 10 Nov 27 contracts. Not much movement either way. But hopefully it will have a nice $50-$100 payoff. I know I could wait for more, but since Oct. is free trades, it feels good to enter and exit positions as if playing Forex – trade without abandon on the commissions point.

Another benefit of holding overnite is that it won’t count as a daytrade for the PDT rule.

Options Expire Today

Options expiration date is something many day trader do not trade. This is to avoid volatility and unexpected trade turns. Since day traders are looking to make quit 1-5% gains depending on what their risk tolerance and target percentage profit is, they need quick action. Additionally, it needs to be a decisive trade.

On the other hand, for an options player, is the volatility a good things on expiration day. Obviously, you don’t really need to be buying something Friday morning that will be worthless, one way or another, by EOD. So what’s the plan in this type of market? It is good to clear your head and just take a break. It is also a good idea to still watch and learn the market, though. Yet, more options abound. Once can trade for scalps in the stocks, or switch to next month options. Example, the Nov 27 calls that I sold yesterday at .62 are worth 1.05 today. that means it would have been 100% profit if I had held. My profit was 13%. My understanding is that one should never consider profit worth any less than what it is – profit! A profit is better than an alternative whether that alternative is a loss or a breakeven.

MSFT is still underpriced and will be fun to buy. I just don’t want to buy today and see a bear Monday, because that will make me hold it longer. On the other hand, the same Nov 27 calls will be definitely worth more by Nov. since MSFT normally ranges 25-28 on a consistent basis. It’s always got it’s risks, but plays normally don’t offer such good rewards as when securities are undervalued and will shortly rebound.