My dream is to trade SPX weekly options and generate weekly income, which I can invest into dividend paying stocks. I believe and hope that with dividends and options income I can boost my portfolio and grow it faster than when just investing into dividend stocks only. I believe, that it is actually my only chance to get up to speed with my retirement savings.

But to trade options, one must do it right. And this is proving to be the hard part of option trading.

Last year was very good although the end of the year ended as a disaster to me, this year seems to be worse. Not in terms of losses, because I, fortunately, created no losses so far, but from the volatility perspective.

Yes, 2015 proved to be the most volatile year to me. For experienced traders this is a great environment for trading. At least this is what traders claim. They say that this falling and rising market is the best for them.

I admire it at one hand, but struggle to follow it up. How they deal with those sudden reversals like we saw a few days ago? I have a hard time to believe it. But the reason of this post is not to expose those traders, dishonest them or envy them. I just say this to say that I admire it and I wish to get there. “There”, meaning to a state of trading that I will be able to see those changes coming on time and react to it properly.

The purpose of this post is to share a trade I recently took against SPX and what SPX did to me and how I reacted. Now, at the time of retrospective I can see my mistakes. But when the trade was happening I didn’t see those mistakes coming.

What is most important however, is that no matter how terrible the trade was, it actually ended well. I didn’t make any money, but I didn’t lose as well. In other words, I was able to turn a sure loss into a break even trade.

What happened?

On March 3rd I did my market review and I got a bearish outlook. I expected the market to fall further down. But on Monday, the next day, the market rallied strong up and I saw this as trend continuation. I saw the first green large candle as an invalidation of my previous bearish outlook. So I opened a bullish trade against SPX – a bull put spread with the following strikes: 2080/2085. If the market remained above 2085, it would expire worthless for a sure profit. At 2116 level, this wasn’t a problem. Below you can see what I was doing:

As you can see, my thinking was proved to be wrong. On Tuesday the market continued falling. I was thinking that this was just a temporary pullback and that we will bounce off of the 2093 level. Unfortunately it didn’t happen and on Friday, the market basically crashed. And that forced me to react.

Should I have taken a loss by closing the trade or do something to salvage it?

Defending the trade

I decided to salvage the trade and roll it away in time. I still believed in the trend. I expected the market to shake this selling off, reverse and continue back up. So I moved those options away by two weeks from March 6 expiration into a March 27th expiration. I decided to keep the strikes same as I was bullish:

The chart above shows where I took action and moved the expiration into a further away time. But the market continued heavily in selling the next week. Monday was green again, but Tuesday hit us again with heavy selling.

I must say, I became nervous. Should I have acted or left the trade alone? If I have left it alone and the market continued in more selling, I would not be able to save this trade at all and it would be a sure loss. I thought that I needed a cushion. I needed to move the trade in case more selling was coming. Now I see this as panicking and being dragged into action by the market and not by a rational thinking.

Stay calm, everything is OK, panic!

After another set of heavy selling I decided to reverse the trade into a bear call spread with the same expiration of March 27th and the 2025/2030 strikes. If the market fell lower and remained below 2025 at expiration, the trade would expire for a nice profit, see the chart below:

The market continued in heavy selling that day and the following day. But the selling in the following day became weak and stopped at 2040 support created by a lower Bollinger Band and a trend line. I started smelling trouble again. Then the market rallied hard and although after that there was selling again, it started to become apparent, that selling was over.

Is it right this time?

I decided to reverse the trade again from a bear call spread into a bull put spread with 2095/2100 strikes. This time the market had to grow up above 2100 and stay there by expiration. See the chart below:

I must admit, that at this point I was totally driven by the market and trades were already based on emotions. Although the entire trade was still profitable, I had big doubts whether it could ever end up with a profit. But what was worse was that I was running out of margin buying power. The worst enemy of the trader. Once you get extended on margin, it can kill you without hesitation. I was risking $1,500 to make $285 and that was beyond my comfort zone.

But the trade was still showing a loss. Should I have ended it or continue the struggle? I felt like a hare running zig-zag in front of a wolf trying to save his life.

Soon the market grew above 2100 and was about to stay there. It even started attacking its previous all-time high at 2119 level. I now felt good about the trade that I was able to manage it even at a high cost of margin power. I was completely unaware of what was coming at me.

The market reached 2115 level and started reversing again into a big selling which was coming. Fortunately this time I was able to spot this on time and decided to act once again. I couldn’t roll the trade anymore as I had no margin buying power to do that, but I decided to try reversing the trade into a bear put spread. It is a debit spread and I knew that by doing so, I would lose all gains I made so far, but I would lose nothing.

No matter what I did it was wrong

To reverse the trade I did the following swap. I had a long 2095 put and a short 2100 put. I decided to buy back the 2100 put and sell a new 2090 put. So the original 2095/2100 credit put spread became a 2090/2095 debit spread. For this transaction I paid $5.20 or $520 per contract. This was a losing trade from the beginning because with a debit spread all you can ever make is the spread width, or $500 per contract. I paid more for it than I could ever make. But I had previous credits collected!

My reaction proved to be correct and right on spot at the right time. I am grateful for this because this saved my trade. As you can see, that same day when I reversed the trade and the very following day the market crashed again.

This could set our trade to expire in-the-money next week. It could end the trade with a nice profit at about 11%, but because I will be traveling next week and I will not be able to watch any of my trades until Wednesday next week, I decided to close the trade earlier. It could be still profitable trade, we actually made $60 on this trade, but commissions ate it all up, se we ended with a small loss of $17.50 (-1.22%). Better than a full loss, right?

Below see a screen shot of my trade book recording to see the entire trade and all steps I just tried to describe above.

It was a difficult trade full of emotions. I admit that. But I am glad I was able to manage it to end it with a small loss rather than a big one. It was also a very stressful trade but I learned a new strategy on salvaging a trade. Hope I will be able to use it correctly in the future to make money instead of losing them. It also proved one important thing – when trading options, you must stay small, do not overtrade. Once you overtrade and run out of available cash you are doomed to losses. You will be forced to close a trade in the worst time with a loss.

SPX is a canibal ready to eat you alive

SPX is a nice vehicle to trade, but it can be a very dangerous, evil savage, who can eat you alive. Don’t let it happen to you and don’t let it fool you like I got fooled before. This lesson ended well with a very little loss, but it could turn into a huge loss. With a knowledge of how to trade options and how to eliminate risk involved in them, you can win this battle even when it turns against you.

What was my lesson from this trade?

So once again – learn a lot about options, learn a lot about technical analysis, be patient and stay small to succeed. I say this again not just to be bossy, I say this again mainly for myself. It is the most important rule ever.

I wish you a great trading next week and I’ll see you the following one.

Happy trading!