Trading in this market is extremely difficult.  I’ve been fortunate enough to make a nice return so far, however I’ve made more mistakes than I care to admit.

For example, just this morning I committed a super blunder… Over the weekend, Citigroup received a huge bailout package and the market responded this morning.  I figured this was a situation that could be scalped, and decided to go ahead and do that. 

To scalp this move, I did two things… 1 purchase a bunch of Calls on the DJX, and a bunch of Calls on C.  First move, smart, second move stupid.

Why was buying calls on the DJX smart… Well, because I trade indexes… I tend to have a MUCH better feel for the overall market disposition, and I do much better when trading indexes or larger sectors.  I tend to lose lots of money when playing a single stock.  So, back to C… I bought those calls at about the high of C for the day, so I’m long a ton of C 7.5 Dec Calls that will be worth next to nothing soon enough…

Now, for the stupid part of the DJX trade.  Rather than setup a contingent stop on the trade and allow it to ride the market movement up, I simply set the trade to close out as soon as the SPY hit a daily retracement level.  This was just silly.  If the market retraces, fine, that is what a stop order is for.  Instead of properly using a stop to close it out, I simply put in an automatic order based on the price action of SPY and closed it out WAY early.  If I’d have simply kept it open, there was another 1.5 on EACH contract during the day.  This wasn’t exactly a small position, so $150 X a bunch = a lot of money left on the table.

Now, to get really, really stupid.  I’m still long a truck load of C calls, and now a bunch of DJX PUTS! So, I’m betting against myself…. you might make a case for hedged, but it seems like a bet against myself to me… And better yet, I’M ON A PLANE ALL DAY TOMORROW!

So, what to do… Well, I’m going to properly set up some Contigent Stops on each of these positions before the open tomorrow.  I will set these up as One Cancel’s Other orders on the TOS platform.  The Stop will be contingent on the price action of the underlying equities, they will drop in based on price action.  Then, I’ll have contigent Trailing Stops that will drop in based upon price action as well.  If the prices move in my favor, the trailing stop will drop in to protect my earnings, while the initial stop will protect my downside exposure.

If things work out nicely, I’ll capture quite a bit of premium… However, it all depends on the price action.

So, let’s take a look at the current RUT(831.11 +0.00) trade.   Below is a snapshot that I took from the Analyze page in the thinkorswim platform for my current papermoney Russell 2000 position.

Here is what you are looking at.  The white line is Jan 10th 2008 theoretical value of the current position, the green is the 11th, blue the 12th and so on.  On the X axis is the price of the RUT index, on the Y axis is the profit or loss of the position, should it be sold on that day at that price.

What does all of this mean… Well, this is basically saying that as it stands right now, this position could be closed out for somewhere around $2,000 in profits, less commissions.  If the RUT index doesn’t move at all the position could be closed for approx $4,750 in profits on Monday (the dotted red vertical line).

What is interesting to look at is the decay from Friday to Monday.  You can see that we will be above the break-even point anywhere above 700 on Monday, but today we have to be above about 712 or so.  That is the time decay of options at work!

What I’m doing by looking at this chart is simply looking to see what the risk vs. reward pattern is for this trade.  If the RUT shows continued strength on Friday and shoots up towards the 725 range, does it make sense to cancel my buy order for $0.15 and simply let it ride over the weekend knowing that time is really working in my favor…

Looking at the chart, I would say it makes complete sense.  Why on earth would I want to leave profits on the table?  Time value is going to erode away over the weekend and I should be able to absorb a 15 or so point gap down in the morning and still get out on Monday for the closing value on Friday…

These charts will be watched during the day tomorrow to make my final decision.  Given the number of days to expiration and the rapid decay in the position, I may modify my closing order to be a buy back for $0.10 or so.  I do not think that I will let this position ride into expiration Friday.   I still haven’t made a final decision on this and may change my mind if it the position is still open and the market shows lots of strength in the coming week.

Anyhow, just some more food for thought.  Good luck, trade smart!

Here we go…

Bank of America BAC(7.84 +0.39) might buy Coutrywide CFC(0.00 +0.00) – here is the link to the yahoo finance story.

Big Ben wants to lower rates – here is another link, again yahoo finance

However… American Express is warning that 2008 looks a little bleak – yahoo finance.

What does it all mean!??

Well, I think it means that the mortgage industry, specifically Countrywide is about to get shored up.  This, coupled with Ben’s commentary I think has slowed down the fears that we are doing to fall apart.  With Bank of America thinking about purchasing Countrywide, that speaks to the fact that this might be the worst of the worst as far as subprime and mortgages go.

Anyhow, the American Express comes as no big surprise, the consumer is slowing down a bit, and rightfully so.

Anyhow, now that the markets have closed, I’ll sit down this evening and do some work in the analysis page of thinkorswim, I’ll post a few screen shots and give you my thoughts and plan on the current RUT(831.11 +0.00) position.

Good luck, and trade smart!

Thanks Ben!  So the fed chairmen had a quick chat today.  In his speech he indicated that there are risks to the marketplace and economy, however he said that the fed is prepared to take “substantive additional action.”  I read that as a nice big fat rate cut at the end of this month.

I’m really hoping that this is something along the lines of 50 basis points or more.  It is quite possible that they will only do 25 basis points; however, I think that would be a big, big mistake.  They are still concerned about rising commodity prices and inflation – both perfectly reasonable concerns.

This movement has sent the markets up, at the RUT(831.11 +0.00) has been moving right along with the other major indexes.  It is very, very possible that over the next two days or so I will get a fill on my $0.15 buy back.  If the markets continue to move higher today I will re-evaluate this order.

Given the extreme rate of time decay right now, there may be an opportunity to hedge against market movement in this position as a result of favorable decay.  Basically, this means that each and every day the position it in the market, it loses value.  Given that I am short that means that I am making move each day it sits out there.

Depending on market movements, I’ll open up my trusty tools from thinkorswim and head over to the analyze page.  From there, I’ll put in a little bit of special magic and be able to see the theoretical value  for each day as we move forward.  I’ll put up a little post about it so that you understand a pretty neat way to use these tools.

Anyhow, good luck and trade smart!

This is not a trade I am putting into either account. Papermoney, or my real account. This is simply an idea that I’m looking at.

I was looking through some of the older thinkorswim chats and they had a discussion about covered calls. Now I don’t typically trade covered calls. Not that there is anything wrong with them, they just are not my typical type of trade.

However…

Here is an interesting little play, a little on the riskier side, but I like it… Not a covered call, a synthetic covered call – a naked put.

• Sell 50 CFC January 2008 $7.5 Puts @ $0.25
• Credit: $1,250.00
• Commissions: $84.95
• Total Credit: $1,165.05
• Risk: 28.67%
• Commission required: $5,125.00
• Percentage profit (of required margin): 22.7%
• Maximum Risk:$37,500

Hmmm… Why on earth would I want to do this? It’s Countrywide Financial!

This stock has been beaten down left right backwards and forwards. There is still some talk of countrywide going bankrupt and well it’s just generally a questionable company right now. The reason that I’m looking at it is because the implied volatility of CFC is still so high, there appears to be money on the table here. In this situation, I don’t mind playing insurance company. For $0.25 per contract (insurance premium), I’m happy to ensure Countrywide for 15 days at $7.50 – I don’t think they are about to announce bankruptcy, at least not before their earnings call around the 28th of Jan – after my theoretical options expire worthless.

Just a few other things to look at here… The Open Interest in CFC Jan 2008 7.5 Puts is 67,932 contracts, so there is plenty of room here for me to get in and sell a few contracts, implied volatility is at 119.13% with only 15 days left until expiration, and 2,346 contracts traded on Jan 2nd… again, plenty of room to make a bet. The theoretical price (according to my trusty tools from thinkorswim) is about $0.28, so a theoretical fill at $0.25 doesn’t seem to be way out there.

Let’s pretend to put it on and see what happens… I’m not even comfortable yet putting this into the papermoney account, so – if you read this and think it is a great idea. Let me know, I’d love to hear how it turns out for you and about your actual fills.

This month I tried something that seemed like it would be a good idea at first. While talking with a fellow options trader the idea of trying to scalp some profits using an Iron Condor came up. What if you could sell a 5-point spread Iron Condor for more than $5.00. In theory you would be guaranteed to make some money. Now, remember theory and the real world are not the same thing.

If you were to put on a trade like this on a European style index then this would be a perfect trade – but you probably wouldn’t get filled. So I decided that before going big, I’d try a small lot (5 contract) position on the OEX, an American settled index.

Not the greatest idea… So here is the story. On Monday May 8th I sold 5 contracts of a 600/605 605/600 OEX Iron Condor for $5.10. The idea here is that after paying commissions I’d make a few bux with no risk. If you look at the chart for a trade like this, you are basically always going to make $50.00 profit. However, that is not the case if you get exercised before expiration. The reality is that the market makers are not idiots and they don’t just give us money – they have families to feed too! What is happening here is the market makers are will to give me my $50.00 so that they can exercise the short options when the market moves.

I knew ahead of time that this was likely the case, but I thought that the exercised would happen and my position would cover itself – what I didn’t know (I haven’t been exercised in the past) is that the exercise happens overnight and I can’t react until the market opens… That is not a good thing, and that is were the enormous value of a good broker comes into play.

After putting on the first trade, I realized that I was actually going to loose money on expiration Friday to exercise fees. So I figured it would be a great idea to simply up the contract sizes and cover the fees. So today I tried to sell an additional 40 contracts of my 600/605 605/600 Condor. Doing this would have opened me up to additional losses and problems. As a result of these orders hitting the system, I immediately got a phone call from the team at thinkorswim and we had a quick chat. They informed me of the overnight settlement risk, and we decided that it was best to cancel the orders and work to unwind any trades that had been filled.

I was able to successfully unwind my position from the 8th for a $5.20 debit (a loss) and the folks at thinkorswim were able to help me unwind the rest. The reality is that my broker possibly saved me from a large loss. There is no guarantee that I would have lost money here, but its possible – very possible. Using the numbers on the OEX as I write this, I would have been exercised the short 605 puts and been forced to over the 10 point spread between the OEX at 595 and my puts at 605, I could have tried to unwind and cover using the rest of my position – if the market didn’t move. If the market made a big movement I would have been out dollar for dollar the OEX movements.

Given that all of this was unwound before anything bad happened, I can only assume what the losses could have been, especially if I was filled out for the additional 40 contracts. With a full 45 contracts, I would be out $4,500 for each $1.00 difference in the OEX. If I had to cover a single day move of $5.00, that would have been a smooth $22,500 loss in one day. That would hurt a bit Instead, I was able to unwind for a total cost of about $130 dollars, including commissions. That didn’t hurt nearly as much! My normal condors from May will more than cover this loss, so the net effect is no big deal from a cash perspective, but a huge deal from a learning and broker value perspective!

So never underestimate the power of a good broker. I have been very happy with the folks at thinkorswim. They are fast, smart, they possibly just saved me over twenty grand and on top of that their software is amazing. I can’t say enough. If your thinking about trading options, or your currently trading options, take a look at thinkorswim… And don’t try to take money from the market makers on American style options – it might hurt!

After spending the weekend looking around for a couple of good candidate positions I was able to find a good one and get filled in the OEX

• April 2006 565/570 Bull Put Spread
• Sell 570 Put & Buy 565 Put
• Filled for $0.35

• April 620/625 Bear Call Spread
• Sell 620 Call & Buy 625 Call
• Filled for $0.20

• April 2006 565/570 620/625 OEX Iron Condor
• Total Credit of $0.55

• Margin requirement is $500 per contract
• Total credit is $55 per contract
• Return of 11% if all goes well

• Probability 80.17% chance that the OEX will close between 570 and 620

I’m pretty confident in the position. 20 points is big for the OEX, it will take a major move upward to challenge the Call side of this condor. I’m not so confident in the recent market rally, so this looks good. It is important to note that the April expiration cycle is a long one, so this money is on the table for 33 days! However, 11% in 33 days isn’t too bad!

I’ve also setup alerts in my trading software for the OEX, if something goes wrong my cell phone will start paging me like crazy! It’s nice to be able to place a trade and somewhat walk away for a few weeks

Well, its back to the races! Expiration Friday is behind us and last month was a good one. I only had one trade on, but it was a very successful one I’m out looking for new candidates for the march cycle and think I might have found a good one. I’m looking at a position like this Here are the details:

• Mar 2006 RUT 660/670 Bull Put Spread
• Bought 660 Put & Sold 670 Put
• Opened: Sold on 2/21/2006 for $0.40 Credit

• I will leg into a full Iron Condor later this week if the markets permit

• Mar 2006 RUT 660/670 780/790 Iron Condor
• I’m trying to get about $0.55 for the Condor. The ROI will only be 5.5%; but then again my money will only be on the table for 23 days

• The order for the put spread is out for a $0.40 credit. We’ll see

Original Notes

I’m going to try and leg into this by selling the 660/670 Put Spread first. If this gets filled, then I will put in the sell order for the 780/790 Call Spread. My thoughts here are as follows:

• 1. The bulk of the profits for this trade will come from the 660/670 Spread.
• 2. Using thinkorswim’s awesome trade analysis software, I was able to calculate an approximate risk of about 3.68% on the Put Spread. The Call Spread is a bit higher at about 5.63% but that’s still pretty good!
• 3. If I don’t get a fill on the Put side of this, then I’ll start looking for an April position that has a higher ROI. Typically I am looking for something in the 8-9% range or higher!!.

I’ll post updates as the trade progresses

Update
I got the fill for the 660/670 Put Spread. I’ve placed an order for the Call Spread and am waiting for a fill.

Update
Well, the market closed and I still didn’t get a fill for the RUT Condor.  I’m going to modify my order to be GTC for a few days and see if I can catch a fill on a market swing. I’ll have to keep an eye out to make sure that I don’t loose potential premium if the market moves up quickly.

I’m also updating the initial trade information to reflect what happened.