This month was one of my best months so far. My options trading delivered the highest income in my relatively short options trading history. But I cannot have it yet.

The entire month was going well, all my accounts were growing nicely and my trading account was growing bigger every day. Until two days ago. On Thursday at the end of this month, markets suffered a big sell off. Dow lost more than 300 points that day and SPX lost 35 points.

Let’s take a look at the chart:

From the chart above you can clearly see how deep and dramatic the move was. Investors are panicking out there. That is typically a good opportunity to be buying stocks (and I may open a new dividend stock position or add to existing using some of my proceeds from options trading).

But when looking at the chart, there are two question coming to my mind. Is this a game changer and we start seeing the end of the bull trend? And the second question is, is this a good time to start buying depressed stocks?

It is too early to answer those question, so I will wait for now and see, how the market develops. I can always jump in when it reverses.

There is another interesting thing to look at. I like to watch the Fear & Greed index on CNN Money website. So lets take a look at a picture of that index:

I do not remember seeing this index that low. Note that last lower numbers occurred in 2011. Since then the depths were not that low and dramatic.

So this again brings up the question: Is this a game changer?

How these last days of market selloff affected my account?

Terribly.

My net-liq (net liquidation) value dropped badly. I lost almost $3000 within those two days. But it is unrealized loss. I closed a few trades with gains and rolled others to safer strikes. Yet increasing volatility keeps those trades in red numbers although they are safely away from strikes and OTM. Rising implied volatility increases the value of my options causing my net-liq going south hard.

Is this unrealized loss something I should be worried about? I believe not. Options are not stocks and when your stock position goes against you, I think you should close quickly as you may end up sitting on a losing position forever. Options on the other hand have expiration day and as long as your stock stays below or above strike (depends whether you are short puts or calls), it will potentially expire worthless and your net-liq value will go up again.

So far I only have one stock, which is giving me a hard time, and that is Amazon (AMZN) which is currently in the money. I was able to roll it down a bit and further away in time. My expectation is that as soon as the stock takes a break from selling, I should be able to get out break even or with a small profit. I just hope we will not see a huge sell off continuation next week, which would drag AMZN down with it.

The trade above reminds me the importance of trading options small and not overdo it. Also trading it against indexes rather than stocks. There is only one big reason why indexes are better: no earnings.

But small accounts and small traders have one big disadvantage. Trading options against indexes requires a lot of cash. Margin requirements in many cases exceed their account (and in many cases mine too). I still cannot afford trading indexes and have to stick with stocks and be vulnerable to earnings and craziness of the crowd who decides one day heavily buying a stock and heavily sell it the other day.

Like TASR, for example. Jumped up one day, sold off the other:

From the chart above, you can see I hold a short straddle. I have naked call at 14 strike and naked put at 10 strike. If the stock ends in between these two levels by expiration, both options expire worthless and I will keep a nice profit.

The next stock which almost killed me was Corning (GLW). After the stock reported earnings, it tanked huge.

Originally, I had 1 put contract at 21 strike. The selloff sent the price thru my strike and I had to act fast. I rolled the 21 strike put contract down and opened a new short call with 22 strike. I collected premium on the vertical roll and I collected premium on the naked call. Now I have a short straddle and again, the goal is that the stock price stays in between those two strikes.

If the stock moves either way attacking any of the straddle’s leg, I will simply roll that leg, let the other expire worthless (or buy it back), and open a new leg in its place.

I had this process in place already with another stock Cliffs Natural Resources (CLF).

The first arrow indicates where I sold my original naked calls with 17 strike. Then a new board selected by an activist investor Casablanca was elected. Investors took it as a great deal (I don’t, since fundamentals of the company didn’t change and the new board will not be able to change it), and the stock shot up thru the 17 strike.

So I rolled to 18 strike (and collected some cash). The second arrow then indicates when I decided to roll again to 19 strike to run away from the euphoria of retail investors cheering the new board. Then the stock started fading away and I believe, it will continue lower.

When the stock shot up I also opened a short put side at 14 strike creating a straddle of this trade and collected another premium. Now the stock needs to stay in between these two legs. I will be rolling any leg which will be attacked by a price action.

By doing this I collected a whopping $4,602.44 in premiums. Unfortunately I cannot use them or withdraw them, as they are now blocked by those same trades, which are losing value due to increasing volatility (the option is gaining value, I am losing value). All I can do now is wait when the panic ends and the options mature and time decay eats them all away.

Although my net-liq value got hammered hard this month, I didn’t close any trade with a loss and I am optimistic that I will be able to navigate remaining trades successfully towards the end. Then I will be able to call the premium mine.

Here are the month results:

You can see my dividend and options income on My Trades & Income page.

What about you? How was your July 2014 and the entire year so far? Post a link to your website or write down your results to encourage other investors!

Have a great August 2014!!