Newbie's XEO trading journal

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skanan

My name is Nick. I just started out trading option seriously this year. I want to document my trade for learning purpose and for other experience trader to give comments and/or suggestions.

I'll also document my emotion, fear, and greed related to the trades too.

I learned a lot about trading SPX/OEX from Coach Phil's journal.
http://www.elitetrader.com/vb/showthread.php?s=&threadid=49586&perpage=6&pagenumber=1

and Yahoo optionclub.

http://finance.groups.yahoo.com/group/OptionClub

especially on discussions between Micahel Catolico and Andy Smith.

http://finance.groups.yahoo.com/group/OptionClub/message/3566

At yahoo optionclub, Michael Catolico suggests to take higer reward for higher risk and use proper position sizing.

For higher reward/risk, suppose we are looking or Iron Condor position, Michael's suggest to start out with ATM butterfly and adjust it later depends on the market condition.

He also emphasize on negative expectancy nature of any option trade due to commissions and slippage and how to control the risk and turn negative expectancy into positive expectancy.

Another good posts at optionclub related to OEX came from Stephan.

According to my positionsizing calculation, I do not want to loose more than $800 on a single trade. This will probably limit my start of the trade to be one contract.

Beside benchmarking myself with profit/loss, I'll benchmark my expectancy by comparing the profit I have built into the trade versus fair value. For example, if I make profit due to adjustment and my vertical credit spread results in $1.3 credit compare to $1.0 credit when opening new position, I'd consider myself having $0.3 advantage.

If there are better products to trade such as mini spx, mnx, I might switch from OEX.

I don't expect to make profits but I want to see with proper risk management and emphasizing on getting positive expectancy, how long I will last.

-Nick
 
I started trading OEX for September expiration month.

Here is what I did:

8/16

Started with 555/565 put spread : BTO 555 $3.4 STO 565 $6 for $2.6 credit

reason: market was low and probably bounce back. My max risk was $740
which was in my comfortable zone.

I made a mistake by using OEX instead of XEO.

8/20

My view of OEX change. I think it might be ranged bound.

BTC 565 put for $5.2 : gain $0.8
BTO 575 call for $3.7

Max lost is $3.7-0.8+$3.4 = $630

I had strangle 555/575 looked to create Iron Butterfly.

8/22 - 8/31

I did 6 more trades and ended up with 2 IC 555/565/575 for credit of $16.5 and max risk $350.

At this point, I was ahead in term of expectancy and I grew my positions to 2 contracts and less risk than original.

9/6/05

Buy 565 put back for $2.15
expect OEX to drop back near 565/570

9/12/05

Option expiring week.

OEX was about 573. I was afraid of getting assigned, so I rolled out 565/575 call to 575/585 call for $13.7 debit. Now, I give up a lot of my early profit. If I had XEO, I can afford to wait.

Now my plan was to let everything expire and make small profit.

9/14/05 Thursday

OEX was about to 567. I wanted to be on the safe side so I bought 555/565 put spread back for $0.5 debit

Total profit $105 less $59 commissions from $2000 margin and initial $740 max risk.

If I was not afraid of getting assigned, I could have make more profit when the index move back to 567-570 in expiration week.

So far, I survived the first month.

-N
 
09/19/05

I was waiting impatiently and finally decided to pull a trigger when OEX dropped around 569.

I started with XEO 555/570 credit put spread for
$3.8 credit. My max risk is still around $800. I am biased a bit on bullish side; otherwise, I'd start out with 560/570 to limit my max risk.

Within next week, if the index drop to 555 (around 1.5SD) and IV change 10%, Think or swim software simulated my next worst case scenario to lost $618. I plan to roll out the index in that case. If I reach max lost $800 before next week, I'd close out the trade.

For this calculation, of max lost and position sizing, you can read Michael's post here.

http://finance.groups.yahoo.com/group/OptionClub/message/3574

Summary

09/19/05
Sell vertical put spread 555/570 October for $3.8 credit

-Nick
 
09/26/05

OEX closed at 562. My paper loss is about $220.

It appears that I did nothing after putting on the
position last week. I actually did many things to do nothing. I kept telling myself not to do anything when the index dropped to 560 at one point.

I was thinking about adding one more spread at 550/560 to average down my position.

That would go against my trading plan. I planned to pyramid only when my expectancy is better than fair value. Right now, I'm below that level.

Last week, I was biased on bullish side and planned to add vertical credit spread only when the index move up to previous resistance level around 574. However, that dit not happend. Had I done that, I would have less paper loss than what have right now.
 
09/27/05 13:33 EST

OEX was around 560.8

bought 555/570 back for $11-$3.7 = $7.3
I got paid on this spread for $3.8 so now I'm lock in lost for $7.3-$3.8 = $350 for this one.

My view of the market changes. The good news on Monday about Rita did not seem to help the market. Today, the Consumer Confidence Index number was not so good either.

My next move is probably putting on Iron Butterfly at 545/560/575.
 
09/27/05 12:30 EST

OEX was around 562.7.

I decided to take on IC 545/560 565/580.
I legged in selling 545/560 put spread and bought 580 call and will wait tomorrow to see if OEX bounce up for me to sell 565 or not.

Summary for today trade

Bought 555/570 back debit of $7.3

Sell 545/560 put spread credit $4.3-1.55=$2.75

Bought 585 call debit $0.5

Current position
1x545 -1x560 +1x585

The debit on 565 call I plan to sell tomorrow is probably between 4.3-5.3
depends on XEO.

After putting on IC, my worse case next week calculation based on raising 20% of volatility together with index movement to to 540 or 580 will put me in lost about $500. This is my maximum lost I can take.
 
09/28/05

I sold 565 call on XEO this morning for $5. Now I have IC 545/560/565/580.

The credit I collected so far is

$5 - 0.5 + $2.75 - $7.3 + $3.8 = $3.65.

This is my maximum profit if don't do anything else and everything expire worthless. This is unlikely though.

If I were to put on a new 545/560/565/580 right now, I'd have got credit around $7.1 so my expectancy benchmark is not so good right now ($3.65 vs $7.1).
 
10/14/05

Buy back 565/580 call 0.15. I sold it for 4.5 credit so I make 4.35 on this one. However, the 560/545 put did not do so good. The index was around 546.
 
10/18/05

The index was around 550.
Sold OCT IB 535/550/565 for credit $4.2. I'm not so sure if this is the right thing to do since 10/21/05 will be the expiration date.

If you think that I was crazy to do this, please let me know.
 
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