This entry was posted on Friday, February 20th, 2009 at 9:21 pm and is filed under how to trade options, option trading strategies. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
In my post on How To Trade Options On Paper, I provided you with an update on my trading activity. That was about 10 days ago. Well, February expiries were today, so I thought to update you on what has been happening over this last few days.
Let me say from the outset that I have an overall loss for the month of $113. Quite a far cry from where I was just a few days back. Now, there are a number of reasons why the loss has arisen, some because of placings I had not thought through properly, but in the last three or four days because of deliberate strategy on my part. When I started to see the tide turning rather than attempt to correct at such a late stage, or close out with some indexes (where then I would have profited), I changed strategy to deliberately break all of the ‘do not’ rules to see what might happen with my own eyes. And .. at the end of it although a loss and despite total abandonment of all positions in that last week, it was not really significant – or something that would cause me a lot of distress! Before I move on – these were the results. IBM up $228 (who’d have believed such a swing!), EEM up $71, IWM down $332 (again who’d have believed such a swing!) and the SPY down $90 – with me $30 in profit on a DIA position I had put on for March.
So .. what were some of these things I deliberately did, so as to see for myself, whether what had been taught bore substance?
Firstly, I held off on closing out any positions at all. I wanted to see where everything ended up. Predictably, in that last five to seven days share prices were all over the place. For example the IWM had moved from 45.5 down to as low as 40.25, rallying a bit at closure today to around 41.0; the SPY from a high of 84.0 (it was 87.50 three days earlier) down to 75.5, closing out at around 77.00.
RULE 1: Do not wait it out till expiry day .. if you are in profit, do not hang around into the last week of expiry. Things can drastically change to affect your profit position.
Secondly, I put on more positions than was recommended. On one of the indices I had as many as six on. That does not make it easier when it comes to making corrections with adjustments, as I was to find out.
RULE 2: When starting out – limit yourself to a max of 2 positions on each stock. This will make it a whole lot easier for you to make adjustments when and if you feel under some pressure.
Thirdly, I did not have wide break even points on a couple of my indices. This meant that if price moved against me it could fast butt up against my breakeven points and give me limited room to make effective adjustments. Along with this I would add that I contented myself with less than perfect graphs where although my opening position was fine, I’d left myself with too little room to move. (With the two double calendar spreads, I had real difficulty with coming up with the two tent peaks which enable one to profit in two places. I kept getting just the one peak).
RULE 3: Ensure you have wide break-evens. Better this and a little less potential profit, than greater profit potential in a narrower range. Also .. really get to understand your spreads. You may find yourself more comfortable with just the one type on starting out. It is perhaps best to stick with this, until you develop a better understanding of another spread type.
Next, if price runs up against you very quickly in the first few days, as happened to me with the DIA for March .. and you have a small profit or even a small loss, better to get out and start out with a fresh position than try and adjust. I did this and managed to break even.
RULE 4: If price moves against you quickly in the first few days, get out. Why? Something out of the ordinary is happening in the market that you perhaps are not aware of.
I would also recommend you revisit points 1 to 6 which I have brought out in the How To Trade Options On Paper post.
For the month of March, I will probably stick with the indexes and IBM again .. but will be: documenting all placements very carefully, revisiting the videos, especially those on adjustments and closing out positions, taking a closer look at double calendars to ascertain where I may have been going wrong, and tiding up my charts .. they are starting to look a bit of a mess. Oh .. and I will also be further familiarizing myself with a number of the terms up on the Think Or Swim platform.
All in all I am very happy with this outcome. Given the bumbling that has occurred it is quite remarkable that I have not been hurt more badly, the more so, given that some of my latter ‘strategies’ were deliberately put in place, just to see how much I might get hurt. I am now more confident than ever that I need to know what I have to do, if I am to learn how to trade options profitably and I know with absolute certainty that anyone can set themselves up with a regular monthly income, if they just obey the rules.