I am new
- Thread starter JSHINV
- Start date
What I have been trying to do is evaluate what I did wrong. I am going to present one of the trades that I made and my after the fact analysis. This way you can critique the trade and more importantly you can provide comments as to what you think of my thought process as to where I made the mistake. I am only presenting one trade now. I can provide more examples later. But, its late here in AZ. I appreciate your offer to provide input.
OIH.
Price of underlying at trade. 151.70
Vertical credit spread
Bought 5 130 Oil Svc Hldr Puts on 7/5 at $1.45
Sold 5 140 Oil Svc Hldr Puts on 7/5 at 3.30
I relied too much on the model and did not take into account common sense. First, I paid too much for the options. I established a net credit the day before the market opened. If I waited until after it opened and established my net credit proceeds from the credit would have been $125 more. But, this wasn't damning. It was not a good trade to begin with. I just plugged in the numbers and looked at the probability of profit, which was stupid. If I had analyzed the chart, carefully I would have seen that the credit quickly begins to lose money after falling to 140. Looking at the price chart the underlying the price was at 135.60 as recently as 6/14. If it ended up at that price at expiration I would be looking at a loss of $1600. The low end of one standard deviation on the trade was $133.00 and a loss there would have been over $2600. I got out with a loss of $500 on 7/7. Also, there was no way to really make a profit until the expiration date closed in. It was possible to make some profit if the price rose substantially say by the July 22nd. But, no money was going to be made if it didn't within this time frame. I suppose there may have been a way to repair this trade by an adjustment. But, it wasn't a good trade to begin with.
"If I waited until after it opened and established my net credit proceeds from the credit would have been $125 more"
But you couldn't have known that in advance. The market could well have gone the other way and you would then have been in profit territory.
"Also, there was no way to really make a profit until the expiration date closed in"
Depends on the time to expiry, often a credit spread will lose value fast as time falls away (assuming only 1 to 2 weeks to expiry) and the underlying moves a little in your favour. Thus you could buy your spread back to close and make, say, 2/3 of max profit.
Looking at the chain for the july short put, it has a delta of 0.29 which means roughly a 71% probability of expiring otm and you keeping your credit, so the odds aren't too bad.
Hmm, looking at your numbers, you must have done the august spread. I generally avoid cr spreads that have more than 30 days to expiry for the reason you mentioned.
Exits I use are break of support/resistance or % loss, whichever is the lesser.
As for your t.a., well, I've got no idea - t.a. isn't my strong point.
daddy's boy
But you couldn't have known that in advance. The market could well have gone the other way and you would then have been in profit territory.
"Also, there was no way to really make a profit until the expiration date closed in"
Depends on the time to expiry, often a credit spread will lose value fast as time falls away (assuming only 1 to 2 weeks to expiry) and the underlying moves a little in your favour. Thus you could buy your spread back to close and make, say, 2/3 of max profit.
Looking at the chain for the july short put, it has a delta of 0.29 which means roughly a 71% probability of expiring otm and you keeping your credit, so the odds aren't too bad.
Hmm, looking at your numbers, you must have done the august spread. I generally avoid cr spreads that have more than 30 days to expiry for the reason you mentioned.
Exits I use are break of support/resistance or % loss, whichever is the lesser.
As for your t.a., well, I've got no idea - t.a. isn't my strong point.
daddy's boy
I dont see anything thats really wrong with your trade. I probably would've gone a different direction given your forecast for the underlying but that's not to say you were wrong but simply that you have a dfferent preference. The only thing that is of concern to me is that you sold a wide vertical into a (potentially) increasing IV.
It seems you opened the vertical with the analysis that it will stay OTM and it didnt. So from an options perspective i see nothing wrong in you closing the spread and limiting your losses. It was your directional forecast or timing that was wrong and not the options approach. You may want to look into ways to adjust such spreads in the future vs a simple offset but that has its own risks.
On a side note, if you are new to options i would avoid low r/r strategies like the one you used and focus on less riskier ones until you get a good understanding of how options move as the underlying moves accross time and price. Not because there is anything wrong with using low r/r strategies but simply because you most likely won't be able to close/adjust them the best way or at the right time.
If its credit spreads that interest you, you might want to take a look at two journals that discuss credit spreads at length.
http://elitetrader.com/vb/showthread.php?s=&postid=1126561#post1126561
http://elitetrader.com/vb/showthread.php?s=&postid=1124670#post1124670
Rallymode and Dadddy'sBoy,
Thank you very much for the input. I have read your comments with interest and they are informative. I am going to respond in depth. But, in the next week or so, I am going to be tied up mainly with work. I plan to get back to you probably in and around the end of next week - probably next weekend (7/22 - 7/23). I want to respond to your posts and tell you about one or two other trades I made.
Thanks again.
Thank you very much for the input. I have read your comments with interest and they are informative. I am going to respond in depth. But, in the next week or so, I am going to be tied up mainly with work. I plan to get back to you probably in and around the end of next week - probably next weekend (7/22 - 7/23). I want to respond to your posts and tell you about one or two other trades I made.
Thanks again.
OK. A few a couple of things have happened regarding my trading. I made a couple trades that I do not feel bad about. Iâd like to say it was because brilliance but a lot of it comes down to dumb luck. Secondly I have learned about myself in this area. I know there is a separate forum here on psychology, but this plays an important part.
I searched for stocks that had very high implied volatilities. Played around with some different scenarios on the software I am using and I found one â KCI July puts. I sold a July Short strangle. The stock was trading about 40. Specifically I sold 50 July 45 calls and 50 July 35 puts and bought 50 July 60 calls (My level trading does not allow complete uncovered calls). Now I know this is a risky trade. I would get maximum profit if of course if the price ended up in between 35 and 40, and breakeven about 2 to 3 points in each direction. They were overpriced. Looking at the recent prices they were flat and the model was showing a very low probability of the price falling even beyond the two strike prices.
But, I thought this is naked on both ends. There is no way or predicting if the underlying would exceed be above or below the respective strikes. Anything can happen and I shouldnât rely on a model alone regarding the prediction of future prices. It simply can happen, has happened and people have been wiped out. So, I made sure that my trade would not exceed my financial means to cover the short options with a respective buy or short sale of the underlying depending on which way the stock went. I didnât have the cash in the account I trade options in. But, I had it available and could move it immediately. I figured I had 5 point each way to make a transaction to cover if it looked like it stock would rocket or nose dive. So, I made the trade.
Then I got to thinking. The volatility chart on this stock is unlike anything I ever seen. Implied volatility was going through the roof. Even though I researched the underlying, somewhat there was nothing to show me that there was anything amiss. So I looked more carefully. There was. The company Kinetics Concepts is in a patent infringement lawsuit with another company. Merrill analysts think KCI will win. But win or lose, the stock is predicted to rise or fall substantially. Not only that, the Jury could come back with a verdict by the end of next week which is Friday 7/21, the day before expiration. A lot of people on the Yahoo boards are fretting over the verdict, hoping it would come before the options expire, hoping it wouldnât come until after, hoping the plaintiff would win, or hoping the defendant would win and so forth.
So, I started to fret. At that point the stock hadnât moved that much and I could have got out of it with a reasonable loss. I went to all the books, I had on Options and looked again â short strangle strategies. Most said, it was a bad strategy. They donât recommend it. It is especially stupid with high volatility with a short remaining life of the option. I knew that. All the alternatives they discussed when it went bad, was to limit substantial ruin instead of complete ruin. But, none of them mentioned, what if you covered when it was going headed toward the strike. But, I figured out that they were talking about stand alone strategies. If you cover a call or a put, you no longer have a strangle, you are in a different strategy. I calmed down and decided to stay in the trade.
Well starting Thursday the stock started to go up. So, I bought 1400 shares on Thursday. Then in was clear on Friday the market thought Kinetics was going to win this case, because it really started to move. I covered it all. I transferred a lot of money to my trading account and bought 3600 more shares for a total of 5000. The stock was really moving I sold the shares, I sold the 60 put, bought back the 45 put, then sold it again and finally made sure I bought back the shares before the end of the day to cover the calls. All in all I have realized about $13,000. At close on Friday KCI traded at $44.65. If it moves up above $45 and stays above, I will make $20,000 more. If it begins to nosedive, I will have to act accordingly. It is not over yet and a lot can change fast.
Now for the psychology. I donât think I am brilliant. I think I am lucky â so far. And it is not over yet. Five days yet to go.
I have been advised to start small. But, honestly, I felt more comfortable with this trade than the last one for a lot less money I described. That is why I did it. I just felt comfortable with it. Also, I have been advised to paper trade and make small trades to learn. That is simply to boring to me. It doesnât hold my interest.
Specifically about the psychology, I was never good in buying and holding. I never had the patience to wait. So, I would trade and trade and nickel and dime myself with very small losses.
Also, you may not believe this, my primary motive in doing this is not for the money. I am doing it because it interests me. Very few things interest me. This does. I am somewhat how do you say, attention deficit. I am not making this up, it has been clinically diagnosed. Donât get me wrong, I want to make money! But, it is not what go me started. For example, three years ago, I moved to another city, took a $20,000 a year pay cut to take a job with more authority and responsibility, because I was bored with my other job. My friends thought and coworkers thought I was nuts, because I was in a job in which I had it made to a job that was a lot more stressful for less money.
OK. For those of you who have followed this long post to the end, your critique and suggestions about the trade certainly would be appreciated.
I searched for stocks that had very high implied volatilities. Played around with some different scenarios on the software I am using and I found one â KCI July puts. I sold a July Short strangle. The stock was trading about 40. Specifically I sold 50 July 45 calls and 50 July 35 puts and bought 50 July 60 calls (My level trading does not allow complete uncovered calls). Now I know this is a risky trade. I would get maximum profit if of course if the price ended up in between 35 and 40, and breakeven about 2 to 3 points in each direction. They were overpriced. Looking at the recent prices they were flat and the model was showing a very low probability of the price falling even beyond the two strike prices.
But, I thought this is naked on both ends. There is no way or predicting if the underlying would exceed be above or below the respective strikes. Anything can happen and I shouldnât rely on a model alone regarding the prediction of future prices. It simply can happen, has happened and people have been wiped out. So, I made sure that my trade would not exceed my financial means to cover the short options with a respective buy or short sale of the underlying depending on which way the stock went. I didnât have the cash in the account I trade options in. But, I had it available and could move it immediately. I figured I had 5 point each way to make a transaction to cover if it looked like it stock would rocket or nose dive. So, I made the trade.
Then I got to thinking. The volatility chart on this stock is unlike anything I ever seen. Implied volatility was going through the roof. Even though I researched the underlying, somewhat there was nothing to show me that there was anything amiss. So I looked more carefully. There was. The company Kinetics Concepts is in a patent infringement lawsuit with another company. Merrill analysts think KCI will win. But win or lose, the stock is predicted to rise or fall substantially. Not only that, the Jury could come back with a verdict by the end of next week which is Friday 7/21, the day before expiration. A lot of people on the Yahoo boards are fretting over the verdict, hoping it would come before the options expire, hoping it wouldnât come until after, hoping the plaintiff would win, or hoping the defendant would win and so forth.
So, I started to fret. At that point the stock hadnât moved that much and I could have got out of it with a reasonable loss. I went to all the books, I had on Options and looked again â short strangle strategies. Most said, it was a bad strategy. They donât recommend it. It is especially stupid with high volatility with a short remaining life of the option. I knew that. All the alternatives they discussed when it went bad, was to limit substantial ruin instead of complete ruin. But, none of them mentioned, what if you covered when it was going headed toward the strike. But, I figured out that they were talking about stand alone strategies. If you cover a call or a put, you no longer have a strangle, you are in a different strategy. I calmed down and decided to stay in the trade.
Well starting Thursday the stock started to go up. So, I bought 1400 shares on Thursday. Then in was clear on Friday the market thought Kinetics was going to win this case, because it really started to move. I covered it all. I transferred a lot of money to my trading account and bought 3600 more shares for a total of 5000. The stock was really moving I sold the shares, I sold the 60 put, bought back the 45 put, then sold it again and finally made sure I bought back the shares before the end of the day to cover the calls. All in all I have realized about $13,000. At close on Friday KCI traded at $44.65. If it moves up above $45 and stays above, I will make $20,000 more. If it begins to nosedive, I will have to act accordingly. It is not over yet and a lot can change fast.
Now for the psychology. I donât think I am brilliant. I think I am lucky â so far. And it is not over yet. Five days yet to go.
I have been advised to start small. But, honestly, I felt more comfortable with this trade than the last one for a lot less money I described. That is why I did it. I just felt comfortable with it. Also, I have been advised to paper trade and make small trades to learn. That is simply to boring to me. It doesnât hold my interest.
Specifically about the psychology, I was never good in buying and holding. I never had the patience to wait. So, I would trade and trade and nickel and dime myself with very small losses.
Also, you may not believe this, my primary motive in doing this is not for the money. I am doing it because it interests me. Very few things interest me. This does. I am somewhat how do you say, attention deficit. I am not making this up, it has been clinically diagnosed. Donât get me wrong, I want to make money! But, it is not what go me started. For example, three years ago, I moved to another city, took a $20,000 a year pay cut to take a job with more authority and responsibility, because I was bored with my other job. My friends thought and coworkers thought I was nuts, because I was in a job in which I had it made to a job that was a lot more stressful for less money.
OK. For those of you who have followed this long post to the end, your critique and suggestions about the trade certainly would be appreciated.
How about this play, assuming the PPS doesn't gap up or down on Monday?
Buy the stock for about 44.65.
Sell a 40 covered call for 7.35 (halfway between current bid/ask).
Sell a 45/40 bull credit spread for 2.10.
Total premium collected is 9.45.
If the PPS stays between 40-45 the call and the put would both be exercised for a gain of 4.45 (9.45 - 5.00), plus you still have the stock.
If the PPS goes above 45 then the call is exercised. You effectively sell it for 49.45.
If the PPS goes below 40 you close the put spread for about -5.00, but you still got the original 9.45, plus you keep the stock.
I guess the danger is if the PPS drops below about 35.
Buy the stock for about 44.65.
Sell a 40 covered call for 7.35 (halfway between current bid/ask).
Sell a 45/40 bull credit spread for 2.10.
Total premium collected is 9.45.
If the PPS stays between 40-45 the call and the put would both be exercised for a gain of 4.45 (9.45 - 5.00), plus you still have the stock.
If the PPS goes above 45 then the call is exercised. You effectively sell it for 49.45.
If the PPS goes below 40 you close the put spread for about -5.00, but you still got the original 9.45, plus you keep the stock.
I guess the danger is if the PPS drops below about 35.
I'm sorry, but I can't follow your trade - there are too many contradictions.
"I sold 50 July 45 calls and 50 July 35 puts and bought 50 July 60 calls"
"I sold the 60 put, bought back the 45 put"
There is no 45 put to buy back, you are short the 35 put. Your stock transaction details are even more confusing and don't add up. I think you need to be very careful with this trade especially since you are having trouble describing what you actually did. I suggest you plug your trade into a model so you can see what is going on.
Best
daddy's boy
Hi...I did follow your post and of course you were lucky but you managed your luck very well. The only comment I would have is if you are playing volatility you should have sold the 40 straddle (ATM) or in your case the 40 put and the 40/50 call. (learned that from Riskarb) I don't know if you followed his "combo to fly conversion" Journal but that was something he did.
As far as OIH I picked up on that because I have a put calendar on it which has done quite well (opened late April as an OCT/APR 150 put cal rationed) then last week opened a 150 Aug/Jan Call Calendar. You might look at calendar's on OIH.
good luck...and its always a bit of luck in whether a trade goes in your direction but it is always skill that makes a lucky trade profitable.
As far as OIH I picked up on that because I have a put calendar on it which has done quite well (opened late April as an OCT/APR 150 put cal rationed) then last week opened a 150 Aug/Jan Call Calendar. You might look at calendar's on OIH.
good luck...and its always a bit of luck in whether a trade goes in your direction but it is always skill that makes a lucky trade profitable.