Beginner Options Journal

T

trendisyourfriend

Hi all,

This is my first entry for my trading journal. I'm new to options trading.

I'm thinking of selling a bull put spread for NVDA.

I'm bullish on NVDA for fundamental and technical reasons. I believe the stock will rise 20-25% over the next few months.

NVDA just broke out of a cup with handle base on heavy volume on Friday August 20 2021. It's buy point is 207.43. It's also trading above its rising 21 day moving average. It's also above its 50 day moving average and 200 day moving average.

Investor's Business Daily's Big Picture says the general market is in a confirmed uptrend. 3/4 of all stocks on the S&P500 and Nasdaq follow the general market direction. So, in other words, it's safe to buy stocks right now that have good fundamentals that are breaking out of sound bases.

Fundamentally, I'm also bullish on NVDA. It has an EPS rating of 97, its RS line is trading at a new high, and it's RS rating is 93. Its composite rating is 98.

I'm more of a conservative options trader, so I like to see a bit of a buffer between the current stock price and the short put. I look for a 10% difference between the stock price and the short put strike and set a mental stop loss 5% below the stock price. I will buy back the spread to close the position at this stop loss level. The current price of NVDA is 208.16 (as of August 20 2021). I'm looking to sell the October 15-expiring 187.5 put and buy the Oct 15 expiring 182.5 put for protection. The stop loss will be placed at 198. The max profit for this trade is $90 and the max loss is $410.

I plan to hold the spread through expiration- I'm hoping both puts will expire worthless.

NVDA's earnings date is November 18 so there's little earnings risk for this trade.

NVDA has one of the most liquid options, according to Barchart's Most Liquid Options list. The spread between the bid and offer on the short put is .20 cents and the spread between the bid and offer on the long put is .10 cents.

In terms of implied volatility, it's better to be a net seller when volatility is high. The current IV of NVDA is 36%, which is much lower than what it was 12 months ago (~126%). This could be an issue but I still think this is a good trade though. $90 max profit really interests me.

What do you guys think?

October 15 is roughly 8 weeks away. Do you think that's too far away for a bull put spread trade? A fellow trader once told me that 5 weeks is the optimal duration for a credit spread? Do you agree with this?

Do you think $90 max profit is too little? I read a thread on this forum that said anything less than $100 is a waste of time. Do you agree?
 
I'm not a vol trader so just providing a pictorial of your trade. :-)
***I'm showing 1.05 credit for mid on your trade.

a.nvda.png
 
BKR88 said:
I'm not a vol trader so just providing a pictorial of your trade. :)
***I'm showing 1.05 credit for mid on your trade.
More...

Thank you for the heads up BKR88. I'm with Interactive Brokers and unfortunately it doesn't tell me the bid, ask and mid price is right now. I'm guessing it's because the market is closed. I will check tomorrow when the market opens.
 
trendisyourfriend said:
Hi all,

The current price of NVDA is 208.16 (as of August 20 2021). I'm looking to sell the October 15-expiring 187.5 put and buy the Oct 15 expiring 182.5 put for protection. The stop loss will be placed at 198. The max profit for this trade is $90 and the max loss is $410.

I plan to hold the spread through expiration- I'm hoping both puts will expire worthless.

Do you think $90 max profit is too little? I read a thread on this forum that said anything less than $100 is a waste of time. Do you agree?
More...

I don't like the ratio of your max loss to your max gain. The max loss is about four times your max gain. If you took this trade consistently, would that have a positive expectancy over a large number of trades? Your break even point is about 186.4 (not counting commissions).

Based on implied volatility, you have about a 74% chance of of NVDIA closing above 186.4 on October 15. Your expectancy is (.74)*($90) - (.26)*($410) = -$57.32. That's a negative expectancy.
 
I'm not sure if you're directional or not, or just playing probabilities.

TastyTrade has a TON of statistical analysis on when to open credit spreads and when to close them.
It's been well over a year since I've seen these. I don't trade options in this manner so my knowledge on this topic fell under "use it or lose it", so I forgot the details.

However, their statistics (if I remember right) showed that 21 day open was optimal, and your highest % if winners (not profit), was to always exit around 50% profit on the credit spread.

I remember the statistics showing that your profit was frequently higher if held till expiration, but when the trade goes against you, the losses are massive.

Statistically, entering a bunch of the trades, some will naturally lose, however, if you closed at 50% profit, over time, the statistics showed you'd have more winners and the loses wouldn't destroy you.

If you are just entering one trade, and judging your strategy just on 1 move, that's a bad idea.

You will never win all your trades.
Trading is about placing the trades where you statistically know, you have a higher probability of winning than losing.
There's ALWAYS a probability of losing.
 
Why follow Canslim/IBD and trade a 5 point put spread for .90?
If you are dead right,you will make 48 bps on strike.

I fully get your thinking,but all you are doing is maximising the likelihood of making money,not actually making money...

Let's,keep it simple.How many 5 point spreads would you sell??

Are you taking Delta into account. or will you sell the same number of spreads regardless of delta???

Either way,that is not the way to go





trendisyourfriend said:
Hi all,

This is my first entry for my trading journal. I'm new to options trading.

I'm thinking of selling a bull put spread for NVDA.

I'm bullish on NVDA for fundamental and technical reasons. I believe the stock will rise 20-25% over the next few months.

NVDA just broke out of a cup with handle base on heavy volume on Friday August 20 2021. It's buy point is 207.43. It's also trading above its rising 21 day moving average. It's also above its 50 day moving average and 200 day moving average.

Investor's Business Daily's Big Picture says the general market is in a confirmed uptrend. 3/4 of all stocks on the S&P500 and Nasdaq follow the general market direction. So, in other words, it's safe to buy stocks right now that have good fundamentals that are breaking out of sound bases.

Fundamentally, I'm also bullish on NVDA. It has an EPS rating of 97, its RS line is trading at a new high, and it's RS rating is 93. Its composite rating is 98.

I'm more of a conservative options trader, so I like to see a bit of a buffer between the current stock price and the short put. I look for a 10% difference between the stock price and the short put strike and set a mental stop loss 5% below the stock price. I will buy back the spread to close the position at this stop loss level. The current price of NVDA is 208.16 (as of August 20 2021). I'm looking to sell the October 15-expiring 187.5 put and buy the Oct 15 expiring 182.5 put for protection. The stop loss will be placed at 198. The max profit for this trade is $90 and the max loss is $410.

I plan to hold the spread through expiration- I'm hoping both puts will expire worthless.

NVDA's earnings date is November 18 so there's little earnings risk for this trade.

NVDA has one of the most liquid options, according to Barchart's Most Liquid Options list. The spread between the bid and offer on the short put is .20 cents and the spread between the bid and offer on the long put is .10 cents.

In terms of implied volatility, it's better to be a net seller when volatility is high. The current IV of NVDA is 36%, which is much lower than what it was 12 months ago (~126%). This could be an issue but I still think this is a good trade though. $90 max profit really interests me.

What do you guys think?

October 15 is roughly 8 weeks away. Do you think that's too far away for a bull put spread trade? A fellow trader once told me that 5 weeks is the optimal duration for a credit spread? Do you agree with this?

Do you think $90 max profit is too little? I read a thread on this forum that said anything less than $100 is a waste of time. Do you agree?
More...
 
taowave said:
Why follow Canslim/IBD and trade a 5 point put spread for .90?
If you are dead right,you will make 48 bps on strike.

I fully get your thinking,but all you are doing is maximising the likelihood of making money,not actually making money...

Let's,keep it simple.How many 5 point spreads would you sell??

Are you taking Delta into account. or will you sell the same number of spreads regardless of delta???

Either way,that is not the way to go
More...

Thanks for the reply taowave. I'm not taking delta into account. I will trade the same number of spreads regardless of delta. I've been studying Gavin McMaster's column on bull put spreads at Investor's Business Daily and he never mentions delta. He does talk about delta for poor man's covered calls (PMCC) but not for bull put spreads.

Can you please tell me how I should take delta into account for a bull put spread trade?

I'm only trading 1 bull put spread to start. If the price declines rapidly past my mental sl and the short put goes in the money, I will try to buy back the spread at a $100 loss. A $100 loss will represent an account risk of 1% for my trading account.
 
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