Some criticism please

M

mynd66

I'm in the process of getting my feet wet with options. Over the past year I have been trading very conservatively, more so watching and learning than actually trading.

Where I am at this point in time I don't feel comfortable specualting on stocks as much as I do the market in general. I figure there is more available information and less risk trading the SPY than a particular stock. Also it seems that most stocks mimic what the market does anyway. My account is 5k, I risk in the area of 6% of my account value on a trade. I usually just trade one contract at a time unless I am doing a spread. So far I base my trades more so from my analysis of the chart, no crazy indicators just major support and resistance and key moving averages and such. Less so based on the global economy and what is talked about on the radio (bloomberg).

So I just wanted some criticism of my position. 2 weeks ago right after that DOW -1,000 drop & rebound I bought a
+SPY Jun 18 109 PUT.

I did this thinking there was too much negativity, I felt we were do for a correction and since the VIX was up I felt it was good to be long volatility.

As of yesterday I was breaking even. Yesterday right before market close I had sold a

-Spy May 21 110 PUT

... I did this thinking that it was unlikely the market would sell off in two days and I can collect a premium and cut down on my loss if the market remained unchanged or rallied from here on out.

Right now I am -$233 on my short PUT and +$229 on my long PUT.

Of course in hindsight it wasn't a great trade as the market sank today and that PUT I sold depleted my gain from the long. I guess a better rationale (looking back of course) is that the market gets more volatile near expiration Friday and with all of this negativity it was biased to the downside. Not only did we proceed lower than the 200 day MA, I would think that the majority of players don't want to be long over the weekend given the level of uncertainty.

In your opinion is it unwise to try and collect premium near expiration? And being that my short PUT is ITM what will happen tomorrow if it remains there? If I am exercised upon what should I be aware of being that I won't be near a computer till after market close? Should I initiate a GTC order tonight to close out my position? Will I be short 100 shares of SPY if left untouched? Not sure what happens as I am used to selling/buying back a contract for a gain or loss PRIOR to expiration. Finally, do you think I have any basis to my method or am I just gambling? I'd like to build myself up to be a profitable trader one day. My challenge is finding good material and resources to learn from and get in as much experience as I can while NOT blowing my account.

Thanks in advance. -Ray
 
Hedging is a great idea for a bigger account but if you are so sure of a move ( I think for options you take only the best setups-takesanywhere from 2 months to 6 months to develop) then buy accordingly ( or sell accodingly). Since you have a pre defined risk why bother with hedging.

BTW volatility is good why not trade stocks?
 
Quote from mynd66:

2 weeks ago right after that DOW -1,000 drop & rebound I bought a
+SPY Jun 18 109 PUT.
.....I felt it was good to be long volatility.
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It is good to be long volatility when it goes up as you are long it - that doesn't necessarily mean it is good to go long after it has gone up. In other words, you paid a fairly expensive price relatively speaking for your Jun 109 put. My guess from reading your post is that you then became somewhat frustrated that you weren't seeing any profits despite a falling market and that made you act to do the sell. In general, I think the mistake was at first you wanted to go long and spend money to try make money on a drop, but then you wanted to bring in premium to offset some of the expense - that is OK in general, but you didn't seem to have a clear plan in this case.


Quote from mynd66:



In your opinion is it unwise to try and collect premium near expiration?
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Different people have different plans, but very short term trades are pretty much always somewhat risky by nature.

Quote from mynd66:


And being that my short PUT is ITM what will happen tomorrow if it remains there? If I am exercised upon what should I be aware of being that I won't be near a computer till after market close? Should I initiate a GTC order tonight to close out my position? Will I be short 100 shares of SPY if left untouched? Not sure what happens as I am used to selling/buying back a contract for a gain or loss PRIOR to expiration.
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Unless I am misunderstanding something, if SPY remains below 110 by expiration (tomorrow), you will get 100 shares added to your account (not short) - you are short a put, right? That gives the buyer the right to sell you (put to you) their shares for $110. Of course, you will have to pay the $11,000 for the 100 shares. In general, if you are not ready for that, it would be a wise idea to close it tomorrow (either with an order placed today or tomorrow, whatever you can do and is best for you).

Quote from mynd66:


Finally, do you think I have any basis to my method or am I just gambling? I'd like to build myself up to be a profitable trader one day. My challenge is finding good material and resources to learn from and get in as much experience as I can while NOT blowing my account.
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With this one example, it seems hard to tell - first you thought the market could go down and bought a put, then you thought it could bounce back somewhat and sold a put - I don't know what exact parameters you used to make those decisions. Sometimes with options, you just have to decide what you are planning to do and stick with the plan, of course with maximum losses being known, etc.

JJacksET4
 
If you have a 5k account, assignment may give you a problem if you're below 50% SMA (equity margin is 50%)

Premium decay is fastest as expiration approaches. You can get approx 1/2 the premium for a 1 week write that you can get from a 1 month write, all other things being equal. But the drawback is that those options can become 100 delta pretty quick and that's another problem for you (your short May delta is maybe 50% higher than your long Jun delta). IOW, any significant move away from the strike hurts you.

Selling the higher strike May 110 put was a more bullish decision. That's why it's eating up you June gains now. Nothing wrong with that as long as you understand what you''re doing and how you're going to manage it.

And no, you won't be short 100 shares. You'll be long 100 shares from assignment on the short May 110p.

If you can't monitor your position tomorrow, I'd consider placing a diagonal spread order to close both positions.
 
Quote from JJacksET4:

With this one example, it seems hard to tell - first you thought the market could go down and bought a put, then you thought it could bounce back somewhat and sold a put - I don't know what exact parameters you used to make those decisions. Sometimes with options, you just have to decide what you are planning to do and stick with the plan, of course with maximum losses being known, etc.
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And sometimes, you change your outlook :)
 
Quote from spindr0:

And sometimes, you change your outlook :)
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Of course that is true.

Also another thing for the OP to understand is that just because a trade didn't work doesn't mean it was wrong - if SPY had rebounded somewhat and the May 110s expired, of course, now he would own the June for a lower cost, maybe quite a bit lower.

The bad thing is that the OP seems to have done this without knowing the consequences of for example a short put ending ITM, etc.

With options, you often don't want to make spur of the moment type adjustments if you aren't quite sure what you are doing. If you know what you're doing, no problem of course.

JJacksET4
 
You guys are awsome thanks!

Sorry for the confusion, I meant LONG 100 shares tomorrow. Since I have not encountered this before I am a bit confused. As I've said I always close out my position before an exorcism (j/k).

If I have 5K in my account and the buyer of the PUT I have sold to exercises his right to sell me 100 shares, what happens being that I have insufficient equity to handle that? This could have happend today or any day that my short PUT was ITM, correct? Will IB liquidate my position automatically being that I can't cover it?

Of course I will put in an order to close it out tomorrow morning. Is there any sort of risk at getting filled at a bad price if I opt for a market order? I take it if I close out both positions with a market order I should'nt be in for any surprises. But then again like Spindr0 said the deltas arent in lockstep. If the SPY opens ten points lower tomorrow morning my short PUT will be nearly 10 points lower as opposed to the long PUT which will not gain as much in value as much as the other is losing me.

And right on JJacks, this wasn't part of my original plan. Honestly I felt like I had to make a move yesterday, I was more anxious to do something than frustrated. I had really thought about it and felt it was unlikely that the market move lower by week end. I figured I could offset the cost of my long PUT by collecting some premium. Being that it was within my risk tolerance I made the move.

I'm torn between closing out only my short PUT tomorrow and stick with the original plan or just closing everything out and re-evaluating my take on the market.

Thanks again
 
It just doesn't sit well with me to cash out for a loss on my short while holding on to a paper profit with my long.
 
Quote from mynd66:



If I have 5K in my account and the buyer of the PUT I have sold to exercises his right to sell me 100 shares, what happens being that I have insufficient equity to handle that? This could have happend today or any day that my short PUT was ITM, correct? Will IB liquidate my position automatically being that I can't cover it?
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I don't find myself in that position so that I would know exactly what IB or other brokers would do, but I would close the position and make sure that doesn't happen if it were me.

Quote from mynd66:
I'm torn between closing out only my short PUT tomorrow and stick with the original plan or just closing everything out and re-evaluating my take on the market.
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I think this is your basic choice without getting too complex - either close both down or just keep the long.

In either event, the entire trade doesn't appear it will be too much of a loss or a gain - nothing wrong with a few trades that aren't real big either way.

JJacksET4
 
Quote from mynd66:

If I have 5K in my account and the buyer of the PUT I have sold to exercises his right to sell me 100 shares, what happens being that I have insufficient equity to handle that? This could have happend today or any day that my short PUT was ITM, correct? Will IB liquidate my position automatically being that I can't cover it?

Having 5K of margin available is different than having an account worth 5K. Margin on being put at 110 is $5500. If you have insufficient funds, IB will liquidate your position if it's a margin violation. I don't recall if this triggers an account restriction but I'd find out before getting there.

Of course I will put in an order to close it out tomorrow morning. Is there any sort of risk at getting filled at a bad price if I opt for a market order? I take it if I close out both positions with a market order I should'nt be in for any surprises.

Market orders are an invitation to disaster. OTOH, placing a limit order while being unable to montitor the market is just as risky.

If I was in this position (the options not the inability to monitor), I'd calculate my net delta and use short SPY shares in the pre-market to protect myself if it's lower in the AM.

I'd look to get out at breakeven and call it a lesson learned. IMO, taking the realized loss and carrying the paper gain isn't a good idea because paper gains can disapper quickly. If you had the ability to figure that out (the timing), you wouldn't be in this position in the first place :)
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