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HowardCohodas Index Options Credit Spread Trading Journal
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Howard
I don´t know anything much about the Day Trader rule as it was described on the internet. But you can look it up. I was under the impression it was an Exchange Rule. But don´t know for sure. It is certainly effecting my trading style. My understanding from reading blurbs on the internet is you get locked down if you exceed 4 trades in 5 days, for lockdown of 3 months.
So I´m thinking of trading SPY if my experiment works out ( 20 winning trades in a row ) scalping. But since I have to reserve 1 trade for a possible OEX move, then that leaves me with only 2 extra trades available.
I don´t know anything much about the Day Trader rule as it was described on the internet. But you can look it up. I was under the impression it was an Exchange Rule. But don´t know for sure. It is certainly effecting my trading style. My understanding from reading blurbs on the internet is you get locked down if you exceed 4 trades in 5 days, for lockdown of 3 months.
So I´m thinking of trading SPY if my experiment works out ( 20 winning trades in a row ) scalping. But since I have to reserve 1 trade for a possible OEX move, then that leaves me with only 2 extra trades available.
It would seem that using a different option for each trade would avoid the rule. OTOH, perhaps I don't understand the concept of scalping.
Howard the concept of scalping is when you choose to take just a small move in the underlying. I´m trying it on the SPY because the SPY usually has 1 cent differential spread from the market maker, as it is a big volume index. Whereas the OEX has 50 cents to 80 cents differential depending on the circumstances, which market maker spread you have to have your index move make, before you even start profiting. The OEX is for more longer trades.
SCALPING the SPY is basically a directional play.
For a bet of $7380, you end up with a net profit of .028% In round numbers you are trading for a 2% return, ( ROI ) versus your credit spreads 3% return for a similar bet. The edge is your ability to forecast enough direction, to take a piece out of a daily move. It works well in BULL MARKETS, when you have small price daily moves. ATR. Or a VIX between 12 and 18.
My return the other day on $7380 ( funny money ) was $390 gross, with a $180 commissions, for 30 contracts. The commissions alone were .024%. Leaving net profit of $210, or .028% for the bet. The GROSS return on the scalping trade is .0528% Same return as your credit spread.
You can alter your return by turning a quickie small short move with greater odds of being filled, by turning it into a longer term trade and letting it run as in a trend. This alters the RISK - REWARD ratio. A scalp is a shorter trade intending that you raise the odds of success, by getting in and out more quickly for a smaller amount of index move.
I´m looking at this number of contracts. ( I´m learning ) I started with 10 and jumped to 30 contracts. The premiums of same month options are higher at the beginning of the month, so they are more expensive. I learn by doing; so experimented a bit in trying to switch from a $1.50 premium to a $5 premium with less contracts more In The Money, it turned out that I learned that your reward is based on the number of contracts, not on the value of the premium. I had thought I would use less contracts, to minimize my commission costs, but that didn´t work, as the reward, or SCALP amount I wanted reduced along with the number of contracts. So I´ve learned as an amateur that it is the number of contracts that dictate profit on a scalp trade. Not the premium.
Now I´m rethinking my way of doing this scalping based on the Day Trader Rule, which only allows me two SPY Scalp trades per 5 day period, if I want to trade the more rewarding OEX in a longer trend. If I have $10,000 in the account, then it looks like I will be able to trade 30 contracts per scalp bet, as the $180 commission would still be under my available $10,000 cash. The presumption is that if you lose, you lose part of your option bet, but if you lost it ALL, plus the commission costs, you are still within the cash I have available in the account. I´m thinking of trading half the cash available, which in turn will depend on the time of the month, as premiums tend to shrink as the option month progresses. I haven´t thought that far ahead enough yet, but suppose I could gradually each of the four weeks in the month, increase the number of contracts, as premiums shrink?
While a scalp trade is not a sure thing, it has certainly got bigger odds of being successful, if your timing is right.
Depending on the time of the month, it looks like you need 25 wins for every loss. Or one loss will wipe out 25 wins thereabouts.
I got into playing with this, because trading the OEX once a month is rather dull. So for something to do, I started diddling with the SPY which has 1 to 3 cent market maker spreads and is thus conducive to such a thing. It gives me something to do.
In comparison trading between the OEX and the SPY with trades done on both indexes at the same time on the same signal, the OEX makes more money on a longer trend. By longer I am talking 3 hours to a day and a half. The SPY scalping trades are usually over in less than an hour, as you are going for small moves.
SCALPING the SPY is basically a directional play.
For a bet of $7380, you end up with a net profit of .028% In round numbers you are trading for a 2% return, ( ROI ) versus your credit spreads 3% return for a similar bet. The edge is your ability to forecast enough direction, to take a piece out of a daily move. It works well in BULL MARKETS, when you have small price daily moves. ATR. Or a VIX between 12 and 18.
My return the other day on $7380 ( funny money ) was $390 gross, with a $180 commissions, for 30 contracts. The commissions alone were .024%. Leaving net profit of $210, or .028% for the bet. The GROSS return on the scalping trade is .0528% Same return as your credit spread.
You can alter your return by turning a quickie small short move with greater odds of being filled, by turning it into a longer term trade and letting it run as in a trend. This alters the RISK - REWARD ratio. A scalp is a shorter trade intending that you raise the odds of success, by getting in and out more quickly for a smaller amount of index move.
I´m looking at this number of contracts. ( I´m learning ) I started with 10 and jumped to 30 contracts. The premiums of same month options are higher at the beginning of the month, so they are more expensive. I learn by doing; so experimented a bit in trying to switch from a $1.50 premium to a $5 premium with less contracts more In The Money, it turned out that I learned that your reward is based on the number of contracts, not on the value of the premium. I had thought I would use less contracts, to minimize my commission costs, but that didn´t work, as the reward, or SCALP amount I wanted reduced along with the number of contracts. So I´ve learned as an amateur that it is the number of contracts that dictate profit on a scalp trade. Not the premium.
Now I´m rethinking my way of doing this scalping based on the Day Trader Rule, which only allows me two SPY Scalp trades per 5 day period, if I want to trade the more rewarding OEX in a longer trend. If I have $10,000 in the account, then it looks like I will be able to trade 30 contracts per scalp bet, as the $180 commission would still be under my available $10,000 cash. The presumption is that if you lose, you lose part of your option bet, but if you lost it ALL, plus the commission costs, you are still within the cash I have available in the account. I´m thinking of trading half the cash available, which in turn will depend on the time of the month, as premiums tend to shrink as the option month progresses. I haven´t thought that far ahead enough yet, but suppose I could gradually each of the four weeks in the month, increase the number of contracts, as premiums shrink?
While a scalp trade is not a sure thing, it has certainly got bigger odds of being successful, if your timing is right.
Depending on the time of the month, it looks like you need 25 wins for every loss. Or one loss will wipe out 25 wins thereabouts.
I got into playing with this, because trading the OEX once a month is rather dull. So for something to do, I started diddling with the SPY which has 1 to 3 cent market maker spreads and is thus conducive to such a thing. It gives me something to do.
In comparison trading between the OEX and the SPY with trades done on both indexes at the same time on the same signal, the OEX makes more money on a longer trend. By longer I am talking 3 hours to a day and a half. The SPY scalping trades are usually over in less than an hour, as you are going for small moves.
Quote from falconview:
Howard
I don´t know anything much about the Day Trader rule as it was described on the internet. But you can look it up. I was under the impression it was an Exchange Rule. But don´t know for sure. It is certainly effecting my trading style. My understanding from reading blurbs on the internet is you get locked down if you exceed 4 trades in 5 days, for lockdown of 3 months.
So I´m thinking of trading SPY if my experiment works out ( 20 winning trades in a row ) scalping. But since I have to reserve 1 trade for a possible OEX move, then that leaves me with only 2 extra trades available.
FV...the "daytrader" rule applies ONLY to equities..NOT to options/futures...... so scalp away!
Eudamon
This is Tuesday morning and I did a paper money fade move on the SPY. An hour into the play am down in the money. However, will sit and watch it go and went into 50 contracts as I got OTM and it was possible to go more. My partner is in for 75 contracts on the fade the crowd trick. One hour into the market open, we are sitting and watching. Had some trouble between using desk top and web based and the delay kind of let us miss the quick rebound, so now we sit it out and wait for the day to progress. We both bought late in the game.
As to trading, have a CASH ACCOUNT as of April 1st, but that is only for OEX trading. So far have had no signal to use it yet. This SPY stuff is pure practise and learning in funny money. Trial and error learning.
This is Tuesday morning and I did a paper money fade move on the SPY. An hour into the play am down in the money. However, will sit and watch it go and went into 50 contracts as I got OTM and it was possible to go more. My partner is in for 75 contracts on the fade the crowd trick. One hour into the market open, we are sitting and watching. Had some trouble between using desk top and web based and the delay kind of let us miss the quick rebound, so now we sit it out and wait for the day to progress. We both bought late in the game.
As to trading, have a CASH ACCOUNT as of April 1st, but that is only for OEX trading. So far have had no signal to use it yet. This SPY stuff is pure practise and learning in funny money. Trial and error learning.
Richard Rimes
I´m not at all clear on the difference between an equity and trading options on indexes? Care to explain more? I get the drift, that trading options on indexes is not subject to the day trader rule that you said. I would just like to make sure what you said is FACT. Certainly would not want to be locked out for 3 months.
I´m not at all clear on the difference between an equity and trading options on indexes? Care to explain more? I get the drift, that trading options on indexes is not subject to the day trader rule that you said. I would just like to make sure what you said is FACT. Certainly would not want to be locked out for 3 months.
obviously the best way is to check with your broker...SPX options don't count so I assume that would include most index options..as mentioned Future options such as ES NQ YM CL also don't count...neither do the futures for that matter. I know for a fact because I have traded them in an account which was under 25K.
IIRC I did have to be careful when trading the SSO combined with options...but I would get a warning so never had a problem. However in that account I quit because of it. I didn't like being hamstrung....switched to ES options.
IIRC I did have to be careful when trading the SSO combined with options...but I would get a warning so never had a problem. However in that account I quit because of it. I didn't like being hamstrung....switched to ES options.
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