My OPTION TRADES..... part 2
- Thread starter Put_Master
- Start date
What mine is, is not relevant to others.
Depends on how diversified the trader is.
Depends on how deep the otm safety cushion of current trades are.
Depends on date when most trades are expiring.
Depends on how volatile the traders stocks are, and what sector they are in.
Depends on how strong the stocks tech support is.
Depends on the "recovery potential" of the stocks, if they are put to you.
(That being price value, financial health of the company, ect....)
A reasonable amount of margin leverage for one group of stocks and strikes, might be an insane amount for another group of stocks and strikes.... depending on the variables I listed above, and some I have not listed, such as the strategy(s) being deployed, the investors level of experience, and so on....
I consider analyzing % returns on 1 - 2 week trades as meaningless, because they will almost always be high.
The main reason for evaluating a trades potential % return, before the trade is initiated, is to have a standardized "benchmark".
That being. a minimum % return "unit of standard".
That being, you want all your trades to earn OVER a certain minimum % return.
In my case 13% is my minimum trade benchmark.
I don't want to risk my capital in the market to earn just 5 - 8%.
Those 1 - 2 week trades will almost always earn at least 10% annualized..... unless you are using a ridiculously low credit).
What is the point in annualizing a trade that may earn 40 - 80%???
For example, lets use an average of 10 days for a trade:
Assume a $20 strike and a credit of just $0.06.
That's an 11% return annualized.
Assume a $33 strike and a credit of just $0.09
That's a 10% return annualized.
And those are rather puny credits, relative to their strikes.
If you are using non puny credits, your % returns will really be high.
Perhaps 100 - 300%. What's the point?
The other reason I consider annualizing 1 - 2 week trades as meaningless, is because it "assumes" the trader will be somewhat consistantly, be initiating trades an average of every 10 days throughout the year.
If you don't, then your % return at year end, will be a lot lower than all those 10 - 11% returns in the examples I used.
And if your super short trades are earning 40 - 80% annualized, because of higher credits, you will be somewhat surprised at year end, to find your earned nothing even close to those fantastic % returns.
Isn't the point in annualizing % returns on trades,... to have a minimum % benchmark per trade, and to have an idea of what your strategy(s) might be earning for you by year end?
That being, you want to have an idea through the year, if the risks taken are going to be worth the reward at year end.
The fact that the occasional trade may earn 40 - 80% annualized, is meaningless in the "context" of my overall strategy and anticipated year end results.... unless those are my usual % returns and not the exceptions.
I posted the trade yesterday after the close.
That is when it payed $2.05.
I don't recall where the stock was trading at the time, but it was closer to $41 than its current price.
Should be easy to look up if you are curious.
I'm actually curious myself, if you can find it.
I'll look up the time of the trade in a few minutes.
The trade was initiated on Dec 6 at either 12:45 pm or 12.54 pm, vegas time.
That being minutes before the close.
I'm assuming the earlier time was when I put the order in, and the later time when it was filled.
He is short a strangle @ strikes 41, 40 (with higher strike implemented
with put rather than call, and lower strike with call rather than put; put-call parity).
PM: very good detailed post!
Correct.
My 41 naked put expires in Dec.
My 40 naked call expires in Jan.
Thus, if the stock expires under 41 in Dec, I'll own the stock at $41 and already have a $40 covered call on it for Jan.
Covered call credit $2.05.
Except for all the "if's".... seems like a good plan to me.
It all hinges on NTES not rising above $41 over the next 2 weeks.
If NTES drifts down some more next week, I may consider closing the naked call for a profit.
Then waiting for the stock to bounce up, and then sell another Jan call..... perhaps at an even lower strike than $40.
Once a trade goes bad, my primary goal is to neutralize the trade.
At that point making a profit is merely a secondary goal.