Vertical Spreads for Aggressive Growth

[rallymode]

Quote from ryank:

That's what I have learned from some of my recent CTM positions. It is a probability play, I put them on with good probability that they would work out so I will let it go and see what happens (probability cuts both ways though ). Still lots of time before expiration so jumping out now would most likely be a mistake.

ryan,

here is how i bail out of a spread. Just my two cents.

1) Positive PnL. Once the risk/reward no longer favors being in the position. Example, 70% gains in 30% of the time, unless a reversal is very unlikely. I think cache calls this "think at the margin" lol

2) Neutral/Negative PnL. When something has dramatically changed about your underlying opinion and/or you are showing losses, it is important that you time the exit properly. Dont bail out for the sake of bailing out or cutting losses short, remember, you are not naked premium here and your risk is bounded. You already traded off alot of return when you bounded the risk, so dont shoot yourself here and apply a naked option mentality. Enjoy the benefits of the bounded risk, you already paid for it. Use it. It might help to completely detach yourself from the risked margin the moment you open the position. Then only execute according to price action with complete disregard to losses. If you do that, i am quite sure you will bail at much much better times and it will show in your PnL over a number of runs.

 

[Cache Landing]

Today's Action

BTC 3 KBH OCT 45/50 c @ 1.30
BTC 6 BRCM OCT 30/32.50 c @ 0.40

Year to Date P/L

Account Value: $16,233.00

YTD Gross P/L: 6,995.00

YTD Commiss: 762.00

YTD Net P/L: 6,233.00

YTD % P/L: 62.3%


Closed KBH because unless there is a good drop in the market to drag it down, it will likely just bounce around $44 for a bit and I believe I can use the money elsewhere. Almost captured 50% of the max profit in few days. Good enough.

Addmittedly, closed BRCM because it hit a profit objective (50% of max profit) and I wanted to balance out my deltas a bit. I don't think we can expect a rally from BRCM anytime soon though. It is weak in a strengthening sector.

 

[Cache Landing]

Quote from Cache Landing:

Today's Action

STC 2 AMGN OCT 67.5 c @ 3.50


Got out of the AMGN calls at B/E. Unfortunately they didn't do their job, so I decided to close out the position.

Of course, now AMGN kicks it in the butt. Looks like I was a bit early on this one. OCT 67.5 calls topped at $5.60 today, but there was no way I was going to hold those long calls during the last 3 weeks before expiry.

 

[manojkagrawal]

Quote from Cache Landing:

Well, in a quick response;

I don't trade completely scientifically. I believe that systematically selling credit spreads has a neg expectancy. If you are good at risk management then you can probably make a bit of money, but nothing like 5% a month for three years. Of course that implies that I am more artistic with my trading. But I can give you some of my preferences.

I don't subscribe to most of the useless TA. My opinions that involve TA are based mostly on demonstrated s/r. IOW, upward/downward sloping channels aren't nearly as reliable as good ol' fashioned horizontal ones.

I don't use any indicators with red/green arrows even though one of my family members sells such software for a living.

I do look at fast stochastics. Like Rallymode I use the 5,5,3 more than any other parameters.

I do use the simple moving averages. On a daily chart I have the 20, 50, and 200-day permanently there.

I pay some attention to relative strength.

The rest comes from experience and confidence. I believe in a balanced portfolio and that there will always be weak companies in a strong market, and strong companies in a weak market. This brings up the importance of sector analysis. Don't ignore the business cycle and how certain sectors react to things like interest rate hikes, rising oil prices, etc...

Anyway, from there it is all about execution. I will only refer to verticals since that is what this thread is focused on. You might use this as a guideline, but there are many different styles that work, but this might give you a place to start.

1) develop a forecast for the market. Then ask yourself WHY.

If you think we are going up from here, why do you think that? Are oil prices going to continue dropping? Are semiconductors going to continue to recover? Did housing bottom out?

2) Find the sector that is the main factor in your forecast. If oil prices are going to continue dropping, then chips are likely to keep rising. You might consider a balanced position like an OIH bear call and an AMD bull put.

3) After you've chosen a setup that you like within the sectors that you highlighted, do a volatility analysis. You want to know if you are going to be +- vega. Don't ignore IV!!

4) Determine how confident you are in your forecast. If you are quite confident, increase your exposure. If you are unsure, then decrease your exposure. With verticals this can be accomplished by moving closer ATM or farther OTM.

The rest will be all about timing in the sense that you don't want to pick what is obviously a horrible time to open a position, because that will likely lead to the most horrible close you could choose. Trading is like golfing... if you have a little bit of experience, the backswing sets up the entire shot. In trading, the open determines the success of the position. A good open with give you much more room for error on the close.

I've got to go, but if you have more questions, or if I didn't get at what you were looking for, then feel free to ask more questions.

Cache


BTW, many people wonder if I do any intraday trading. I do, but I'm very selective. There are 1 or 2 people on here that have gotten a real-time sneak peek at some intraday analysis according to Cache Landing. I would suggest to anyone that adopts a trading style like mine that you start getting comfortable with intraday analysis. It will prove invaluable in the future.

Thank you cachelanding.

 

[jychiu]

Congrutulation to your win.

In both cases, the net credit that you have collected is awesome. In the KBH case it is 50% of the strike price wide. You seem to demand more than 40% net credit from the strike price wide. My question is how often do you need to go ITM to get this awesome net credit.

The other situation that we could get this kind of net credit is when the IV of the stock is high, ie implying impending move is going to take place. Do you check the IV before taking a trade entry ?

You have an objective of 50% profit return, do you take the stop loss at 50% or you could usually fight all the way ?

Quote from Cache Landing:
Today's Action
BTC 3 KBH OCT 45/50 c @ 1.30
BTC 6 BRCM OCT 30/32.50 c @ 0.40

 

[jychiu]

Thank you for sharing your insight into your trading style.

Is there some good sites that we could get ourselves updated on the sector information and chain of event ?

Quote from Cache Landing:

2) Find the sector that is the main factor in your forecast. If oil prices are going to continue dropping, then chips are likely to keep rising. You might consider a balanced position like an OIH bear call and an AMD bull put.

 

[Cache Landing]

Quote from jychiu:

Congrutulation to your win.

In both cases, the net credit that you have collected is awesome. In the KBH case it is 50% of the strike price wide. You seem to demand more than 40% net credit from the strike price wide. My question is how often do you need to go ITM to get this awesome net credit.

The other situation that we could get this kind of net credit is when the IV of the stock is high, ie implying impending move is going to take place. Do you check the IV before taking a trade entry ?

You have an objective of 50% profit return, do you take the stop loss at 50% or you could usually fight all the way ?

Yes, I always check the IV before opening the position. This is one of the big factors in determining whether I am going to sell the vertical, buy a vertical, or simply buy calls/puts.

I don't have a set requirement for how much credit I receive. I just want to get into a situation that I think has a positive expectancy given my forecasts. This allows me to be a bit more flexible on exiting hte position. I don't have a set stop loss either. I re-evaluate the underlying as if I had never opened the first position. If the underlying looks good for a new position then I will hold the original. If I wouldn't open a new position then I will close the original.

 

[rallymode]

Cache,

nice pullback, i guess it may be a lucrative month after all.

i am using this selloff to offset some short deltas here at 1313 so that i can breathe easier over the weekend

 

[Cache Landing]

Quote from jychiu:

Thank you for sharing your insight into your trading style.

Is there some good sites that we could get ourselves updated on the sector information and chain of event ?

I can't think of any good sites off the top of my head that will talk you through sector analysis. I follow a lot of information coming from briefing.com and other update services like that. Those will give you some hints on where to look during an intraday analysis.

First you really do need to become familiar with the business cycle. This is the cycle that describes which sectors do well while others do poorly. Most of it has to do with inflation/interest rates, but it also has to do with consumer spending.

I think there is about a 70% correlation in market trend vs. individual equities. That is, only about 70% of all tickers are following the intermediate/long term trend of the broader market. If you look at sectors however, that correlation is much higher. IOW, a huge majority of tickers within a sector will be following the sector trend. Your job is to determine how that particular sector relates to the market and find a leader/lagger within the sector to represent your opinion.

If you want a website to start with, I think that stockcharts.com has some cool tools. For sector analysis they have either their market summary or what they call "market carpet". It is an interesting little configuration that might help you in finding a market driver. But you will really need to take some time to learn the interrelations of the market. If you'd like, when I get some time, I will provide a small summary of the business cycle with a description of how it works.

 

[Cache Landing]

Quote from rallymode:

Cache,

nice pullback, i guess it may be a lucrative month after all.

i am using this selloff to offset some short deltas here at 1313 so that i can breathe easier over the weekend

I was thinking about it, but the debits to offset really sucked. Also considered opening the bull put side, but same deal. Market was so choppy this morning that I couldn't get a good credit.