Posted by Martin June 01, 2017
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May 2017 options income


May 2017 is over and it is time to report how we did with our options trading.

My plan for April 2017 was to make $1,966.19 dollars of income.

This month we weren’t able to reach the goal as we received only $1,475.59 dollars of option income.

Overall, May 2017 showed us a stagnation in our trading account. We struggled to grow the account despite opening new trades as will be seen below. Our equity grew, our cash value grew, but our net-liq went down this month. Also our income lacked behind the plan.

 

 · Options Trading Strategy

 

Over time since I learned trading options I went from trading spreads, single naked puts, later added naked calls and landed on trading strangles. Many people are afraid trading strangles. They do not know how to protect themselves when having naked calls trades. I was afraid too until I found out that it is not as dangerous as others say.

I am not saying that there is no risk, but if you know how to handle the risk, you will be able to navigate through strangles with no fear.

Over time I developed my own rules and strategy. You can review it in this section.
 


 


 

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 · Options Trading Results

 

Our trading in May 2017 disappointed as we struggled to grow the account and made only $1,475.59 dollars which was only 6.12% monthly revenue on invested capital (ROC).

Last year we could achieve 10% ROC or more. Our account average is at 9.45% ROC (better than in April) but still lacking to maintain the original growth.

However, we increased our investments by adding more new trades (we invested approx. 8.17% more of available cash this month) and our equity grew by 3.53%, this had no impact on our net-liq as the net liquidation value actually dropped by 2.63%.

We have a few trades ending soon and if Mr. Market stays calm in the next two months we should be able to close a few significant trades for a profit, such as our Amazon earnings play trade. This should have a positive impact on our net liquidation value and we should start seeing some growth again.
 

Below you can see all data and progress in our trading account:
 

Month-to-moth trading results

Trading results
 

(The red dots on the chart indicate income estimate, blue bars actual earnings.)
 

In May 2017 we made: 27 trades
Total trades in 2017: 207 trades
May 2017 options trading income: $1,475.59 (43.07%)
2017 portfolio Net-Liq (net)*: $3,895.19 (-8.48%)
2017 portfolio Net-Liq (gross)*: $24,104.72 (-2.63%)
2017 portfolio Cash Value (net)*: $31,660.19 (7.34%)
2017 portfolio Cash Value (gross)*: $51,869.72 (3.75%)
2017 portfolio Equity (net)*: $35,913.19 (6.54%)
2017 portfolio Equity (gross)*: $56,122.72 (3.53%)
2017 Liability/Debt: $20,209.53 (-1.42%)
2017 overall trading account result: 18.46%

* The numbers marked as “net” and “gross” are results with loan (liability) included (gross) or excluded (net).
 

 

 

We are presenting you our month-to-month business performance review:

 

In May we traded only a few trades, mostly roll overs of trades which didn’t go well.

That was the main reason behind our net liquidation value stagnation. Many bad trades being moved and rolled and running out of available cash to trade. However, we opened and maintaind the following trades:
 


Amazon (AMZN) was our earnings play we opened originally in February 2017. The play didn’t go as expected and the stock basically crashed. We opened only a bull put spread and when the stock smashed below both of our puts I decided to roll the trades rather that closing them for a full loss.

And I do not complain. It was a great trade and I still believe, this trade will end as a great winner. The best trade in 2017, in fact.

After I rolled the put spreads, I added calls converting the trade to an Iron Condor. This could have been a mistake as the stock recovered sharply and since then continued higher. I had to roll the entire Condor several times to keep the call side out of the money. In the end, I converted one call spread into a put spread so I do not have to do anything with it anymore.

I still have a second call spread which will give me a bigger headache in the near future and if the stock continues this impressive rally, I might do the same conversion as I did with the first trade.
 
Here is the trade review:

 
AMZN earnings play – TRADE OPEN
 


In May we opened two new strangles against Teck Reasources (TECK). It is quite cheap to trade this stock as the entire strangle requires only around $200 buying power. As long as it continues offering an interesting premium (and volatility) I plan on trading this stock.

In fact, I plan on creating a ladder using this stock and open strangles with expiration in every week.

 
Here are the trade reviews:

 
TECK strangle trade – TRADE OPEN
TECK strangle trade #2 – TRADE OPEN
 

We also have trades against STX, X, ESV, BMY, WYNN,LULU, and MNK which I haven’t reported regularly in this blog and I plan on doing so later as these trades end or I open new ones.

 

 · Our Options Trading April 2017 rank

 

In April 2017 (last month) we ranked #1 in dividend/options income in Easy Dividend ranking chart run by Christopher (Chri) from Austria which was a great place to achieve and I am proud to reach such place.

It is because I do not expect ranking well for May.

I will be happy if we achieve a fifth or sixth place for May 2017. But the results for May are not yet available, so we have to wait.

You can review the Revenue Community chart in April 2017 – Community Edition results here.

 

 · Options Trading June 2017 outlook

 

We expect the stock market to go higher in the next month as the US economy keeps improving. It may be a choppy move though as there are many expectations on Trump delivering his promises on tax cuts, for example, which may not happen. That may send the stocks down.

But as we could see in the recent past every selloff got immediately bought back as could be seen in the following chart:

 
SPX trend
 

I expect this trend to continue and I also expect the market showing some decent swings. And that’s what I like to see as it is what will make you money. And investors know that the economy is growing and they will be ready to buy in every move down.

As Robert Shiller himself mentioned that this market can go even higher. More than 50% higher. If so, we may see S&P 500 reaching 3,500 level in the future.

You can continue reading my outlook for the next market move in my previous post about our dividend investing results.

 
What do you think about options trading? Do you trade options to generate income as a main trading strategy or just a dividend income supplement? Tell us about your trading and results!




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Posted by Martin May 30, 2017
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ESV – a trade which gives me a headache


Last year I opened a put trade against Ensco plc (ESV) stock. Back then, it looked like a no brainer trade.

The trade provided a good premium and it seemed I would be out quickly.

Since then the trade went south and I have a hard time to get out.

Originally, I sold 11 strike puts. After a few weeks the stock went down and I let the puts assign. Since then the stock traded below $11 and there was only a short time window when it reached $12 again and, fortunately, I got rid the shares selling them.

I should have closed my positions too.

But that is all in the land of coulda, woulda, shoulda. I didn’t do it but rather decided to play this trade until the very end.

And I kept rolling this trade and also adding calls.

 
As of today I own the following trades against ESV:
 

-2 ESV Dec15 9.00 put
-2 ESV Dec15 11.00 call
 

and

 
-6 ESV Jan19 8.00 put
-6 ESV Jan19 13.00 call
 

Today, the 13 strike calls closed for 0.05 debit. Since the stock continues down, I decided to roll the puts lower:

 
BTC 6 ESV Jan19 8.00 put
STO 6 ESV Jan19 7.00 put
STO 6 ESV Jan19 7.00 call
 
@ 0.10 credit limit
 

 
Ensco ESV
 

The credit received is nothing extra and the overall trade will most likely end with zeroes, but the main goal for this trade was to lower the puts down even if the credit will be insignificant. The other positive I see here is that I could keep the trade in January and we didn’t have to roll it into the next available expiration day which was January 2019 and that is something I didn’t want.

Now we have a straddle and if the stock goes down or up I will roll it gain be it either puts down or calls up.

We will see when we get there. Now it is a waiting time.
 




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May 2017 dividend income


May is over and it is time to once again review our dividend income in our ROTH IRA account.

It was again another successful month as our annualized dividend income increased. We haven’t received as many dividends as in April but it still was a successful month.

In our ROTH IRA we collect income from dividends as well as options trading.

Both incomes helped the account balance growth although this month our overall balance dropped slightly.

But if you follow my blog and remember my dividend growth philosophy you know that the account balance is not important to me. It is the income what’s the most important!

As long as my regular dividend or options income is stable, secure, and ever growing, I am happy and do not care what the balance is.

I am actually happier seeing my stocks dropping down as I can be reinvesting my dividends and buying cheaper shares.

So, how did we do this month?

This month, we received $89.48 dollars in dividends. It was $2.01 dollars less than in the previous month.

Our options income reached $108.00 dollars of received premiums. It was also less than in the previous month but we still exceeded 3% mark and achieved 3.18% monthly revenue on invested capital (ROC).

Our average annual options income is 2.65%.
 

Although our month-to-month dividend income was less than the record month of April, I am happy to see that our annual dividend income increased again to $1,083.88 from previous month of $1,074.87 (0.84% increase MoM). This is a great increase compared to $883.48 annual dividend income from 2016 (22.68% increase YoY).

 

 · ROTH IRA investing/trading strategy

 

If you are interested, here you can review our investing & trading strategy used in our ROTH IRA account.

 

 

 · ROTH IRA dividend income

 

Our May 2017 dividend income was 22.68% better than last year. This month we received $89.48 in dividends which is the second highest dividend income this year.

All dividends were reinvested back to the companies which generated them using DRIP program.

We use DRIP as long as our dividend income is small to use direct reinvesting by manual stock selection. Once our dividend income reaches at least $1,000 dollars or around this number, we will cancel our DRIP and start using selective reinvesting.

Selective reinvesting means that we will pick our own other stocks into which the dividends will be reinvested. It will no longer be an automated DRIP program buying the same stocks which produced the dividend.

But it still is a long way to go.

 
Here are some numbers:
 
Dividend Income = $89.48 (account value = $22,715.63 -0.71%)
The account is up 9.33% for the year.

 

 
Monthly dividend Income:

 

 
My dividend holdings:

Options Income
(Click to enlarge)
 

 

 · ROTH IRA options income

 

Our options income reached $108.00 dollars of received premiums.

We trade conservative trades to create income in this account which can be later used to buy more dividend growth stocks.

After our options income reaches $2,000 dollars, we will use 50% of the amount to buy dividend growth stock. Until then, we will just reinvest the options income back into options trading.

This is a great deal as I personally struggle depositing more money to our ROTH IRA account and dividends along with premiums help generating a good deal of money.

 
Here are the numbers I am looking at:
 

$50 monthly deposits (contributions)
$90 monthly average options income
$88 monthly average dividend income
$228 monthly average money available to invest
 
Compare it to just a simple contribution and the picture is no longer as pathetic as it would be. And I hope, these numbers will keep growing.
 

I also have a plan to reach a certain amount of cash available for options trading. The goal for 2017 is to reach $6,000 dollars cash buying power for options.

As of today, we only have approx. $3,397.94 dollars in ROTH IRA available for options trading (6.17% increase).

 
With that money available for trading, in April 2017, we generated $108.00 dollars income from options 3.18% return on invested capital.

 

 



This month we opened a few new trades generating options income (mostly Iron Condors). We also have a triple income play trade using ETE stock as underlying. Although ETE is dropping last few weeks, I am optimistic on the stock and used strategy. I hold 103.076 shares of the stock which generates nice 6.57% yield so I keep buying more shares as the stock goes lower.

 
I also keep selling covered calls against the position generating more income. Here you can review the details of the trade:
 

ETE triple play – dividend capture trade – TRADE OPEN
 

As soon as the trade above closes, our next trade will be a covered strangle (we will sell a new covered call and bull put spread against this stock) to generate more income.


We also own 170.949 shares of AGNC stock and sometime ago we decided to sell covered calls against these shares too.

Unfortunately, AGNC is not a very good optionable stock and when we reviewed premiums for the future trade I couldn’t see any good premiums to trade. We will keep an eye on this stock and try to sell a new covered call as soon as the old one ends but as of today, it is unlikely.
 

Here is the trade against ANGC shares:
 

AGNC covered call (ROTH) – TRADE OPEN
 

In May we opened a few Iron Condors using TECK Resources (TECK). A few investors from our Facebook Group have asked me why I was trading TECK.

As you know, I do not have reasons for trading certain stock. People want to have a reason, some love story, or prediction behind the stock. I do not have any of it. I do not believe in it. And I do not want to spend my time searching for a story or creating one.

All I want, is a knowledge that the company can produce and sustain its operation and some proof that it will be here in the next 20 years and that is enough for me to trade it.

But again, all this depends on the investing or trading strategy you use. As a dividend investor I would be looking for different signs of a company vitality than as an options trader.

And as an options trader I look for metrics such as buying power, premiums, volatility, etc. As long as the stock meets my criteria, I trade it. And if the stock goes up and down, I do not care. I actually make money when that happens.
 

Here are a few trades I opened, closed, or carried over this month:

Options Trade: TECK Iron Condor trade (ROTH IRA) – TRADE OPEN

New Iron Condor using TECK in ROTH IRA – TRADE OPEN

TECK Iron Condor trade (ROTH IRA) – TRADE OPEN

TECK Iron Condor (ROTH IRA) – TRADE CLOSED
 

Another stock I trade options against is Seagate Technology (STX). There are people bashing this stock and saying it will not survive, its dividend is not sustainable, etc. But they have been saying this for years.

In our trading account I have been trading STX for three years now. And although it is volatile, it survived all the predicted catastrophes. And in fact, by buying a SSD manufacturer they are well positioned to cover all segments of data storage market (clouds as well as physical storage disks).

Our goal is to increase cash in our ROTH IRA account enough that we can start trading a triple play trades against STX and allow stock assignment so we can start collecting dividends and buying shares of STX. As of now, we can only trade Iron Condors and prevent stock assignment and if it ever happen, we will have to liquidate the position immediately, although at a loss.
 

Here is the STX trade done in May:
 

New Iron Condor with STX in ROTH IRA – TRADE OPEN

 

 · Our dividend investing outlook

 

Many dividend investors I follow keep complaining about the stock market and selling their positions. Many use Robert Shiller’s CAPE metrics as an evidence of the overpriced stocks and predicting an imminent stock market crash.

It is sad to see so many people having it wrong and setting themselves to lose on the missed opportunity.

 
Many forget or refuse to believe that the US economy is growing and improving. Just follow the data and you will see it. Manufacturing index was better again than in the previous period of time.

 
Profits are accelerating as 479 S&P companies reported their aggregate year-over-year sales and profit growth of 8% and 14.9% respectively.

 
What is a great indicator of the US economy heating up (consumers are back and start spending money again)?

It is Technology (XLK) and Consumer Discretionary (XLY) indexes going up. And it is exactly what is happening today. Both sectors are leading the pack as S&P 500 is hitting all time highs.

 
Every sell off (blamed on Trump who whether you like him or not has nothing to do with it as we are still riding the Obama’s economic plan) was immediately bought back! Here is the most recent one:

 
SPX trend
 

Since Robert Shiller came up with his cyclically adjusted PE (CAPE) for the market all sorts of gurus started using this metric to predict the market.
For the last two to three years I have been hearing that the market is expensive and due to crash. I have seen dividend investors selling their stocks in expectation of a market crash because the “stocks were expensive”.
And today, Robert Schiller himself said that this bull market is not over at all and it may go up higher for the next 50% amid above average CAPE.
The lesson?
Do not predict the market, trade what you see and not what you think you see. Do not trade expectations, feelings, maybes, or your own predictions.
No chart, oscillator, metric, or a Nobel Prize winner has a predictive power. It may help you to set a trade up, find support or resistance, but after you enter a trade, it becomes invalid and everything can happen. So be ready to and know what you would do in that case and not what the market should do because of your oscillator said so.

 

 

As a dividend growth investor you invest for a long haul, not for a couple of years. As such, you can afford to be extremely aggressive.

You can afford to use an extreme leverage and start deleveraging as you are nearing to your retirement. If you invest for the next 20 or 30 years any market sell off will be an insignificant blip on the chart which you will not be able to spot on it anyway.

In the next 20, 25, or 30 years you will have a plenty of time to fix any errors or mistakes you make today, so don’t be afraid of the market volatility or even market’s sell offs when they happen and stay the course. Have a plan how you want to invest, into which stocks, and stick to the plan no matter what Mr. Market is throwing at you. And that beast will tempt you. It will tempt you a lot.

I recommend you a book Lifecycle Investing by Ayres and Nalebuff. It will open your eyes on leveraging your portfolio in early years when you are at the beginning of the journey. But do not get me wrong. By leveraging I do not advocate gambling! You must understand the strategy before you apply it or you would be doomed to ruing your portfolio instead of growing it.
 

What was your dividend income this month? Do you have a written investing plan? Or do you need help to create one?
 




TastyWorks

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Posted by Martin May 25, 2017
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Options Trade: TECK Iron Condor trade (ROTH IRA)


Opening another TECK Iron Condor in ROTH IRA:
 

BTO 1 TECK Jul7 14.00 put
STO 1 TECK Jul7 16.00 put
STO 1 TECK Jul7 21.00 call
BTO 1 TECK Jul7 23.00 call
 

@ 0.35 credit limit
 

TECK @ 18.64
 

Trade executed at 0.35 (or $35) credit.
 

IV of the trade: 44.87%
exp. move: $2.3
 




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ETE triple play – dividend capture trade


UPDATE: May 22, 2017
 

The trade executed today morning and we collected 0.35 or $35 dollars credit.

Now we will wait until expiration which is in June 23, 2017 for the call either expire worthless (if the stock stays below $19.50 strike) or ends in the money (ITM) in which case we will get assigned and sell our 100 shares of ETE.
 

 




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Posted by Martin May 22, 2017
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TECK Iron Condor trade (ROTH IRA)


UPDATE: May 22, 2017
 

The trade executed this morning. As the old Iron Condor closed, this new opened and we are in the trade. We collected 0.35 credit or $35 dollars. Now we will wait for this trade to develop.

We also placed buy back orders for both our short legs (to buy back our short 16.50 put and 21.00 call) for 0.05 debit.

 




TastyWorks

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Posted by Martin May 22, 2017
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TECK Iron Condor (ROTH IRA)


UPDATE: May 22, 2017 TRADE CLOSED
 

Today morning, our puts closed for 0.05 debit. This closes our Iron Condor with 13.20% profit in 32 days and 150.56% annualized return.
 




TastyWorks

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Posted by Martin May 15, 2017
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How much money to trade for a living?


I decided to take a second part time job to raise capital.

At first, I planned using loans (and I did it and took two business loans to use them for investing and trading) but the loans put a lot of pressure on my trading.

Our accounts do not have large enough capital to generate enough income, sustain loan payments, and grow the account.

The recent sell off of US Steel (X) basically put the account growth at a halt. I had to roll the trades and now all I can do is sit on it and wait.

And sitting and waiting brings no more cash which can be used to pay off the loan.

 

Because of this movement in our trades and waiting period we expect this month to be low in income. In previous months we could generate nice $2,000 to $3,000 monthly income but this month it will be way below this limit. As of now, we have made around $327 dollars only and I do not expect any significant improvement by the end of the month. I have simply no more cash available to trade and most of the open trades are sitting ducks.

This is a thing I was thinking about recently: “What it would look like when trading for a living”?

What if I get into a situation that our account will not be able to generate enough cash as a salary which would pay the bills? The current situation poses this issue as of now!

I asked this question to an experience trader from our group who trades for a living and he confirmed me what I began to suspect:

 
I am still too under financed to trade and generate sustainable income.
 

 

 · How much money do I need to trade for a living?

 

This is a question which bothers many people and I have seen it asked again and again. How much money a trader needs to trade for a living?

This all depends on every one’s individual needs but it can be calculated using the reverse process starting with what you really need.

 
So here is my way:
 

According to my needs, all bills, debt, mortgage, etc. I will need $7,000 dollars monthly income to live comfortably.

I have a 50% withdrawal rule. That means that I can withdraw only 50% of the entire monthly income. If I make $3,000 dollars, I can take out $1,500 only.

If I want to take out $7,000 dollars, thus I must make at least $14,000 dollars that month (or more).

Currently, our trading delivers average income which equals to 8.44% of the net liquidation value.

See below table indicating all account metrics such as Net-Liq growth, income growth, equity, and inventory growth:

 
Account metrics
(click to enlarge)
 

It is really great to make 8% to 10% monthly on net-liq amount but it is too aggressive and stretching the account. What if the next month I will not make it? What if I make only 1.5% as might be the case this month?

To be on the safe side I need to plan for the ultra low income!

If I make more, it is OK and I will be happy but if I make little I will have problems to pay the bills.

If we set our monthly income to an ultra-conservative 1.5% number I can be sure that that is a number I can make even when “doing nothing”. OK, not nothing but trading a little.

 
The rest of calculation is simple:
 

$7,000 dollars to take out (50% of monthly income)
$14,000 dollars needed (this would be 1.5% monthly income to net-liq)
14,000 / 1.5 x 100 = 934,000
 

This means, I will need $934,000 dollars in my account to trade for a living. It is a scary number and many people will disagree with me. But we are not done here. I plan on trading using margin. In this case a portfolio margin.

I also do not use nor advocate using all your margin. I typically trade 45% of the entire available buying power (margin).

Thus the number above, the $934,000 net-liq is only 45% of the entire buying power. Thus my account needs to be:

 
934,000 / 45 x 100 = 2,075,560 dollars
 

This looks even scarier than before, but bear with me, we are not done yet. A portfolio margin typically allows you to trade 6 times your own money (depends on the broker).

Taking this horrible number of $2,075,560 divide it by 6 and the result will be $345,926 dollars.

 
Here is my target number I need to have in my account to trade for a living comfortably! $345,926
 

 

 · Second job

 

You may get a different number. You may settle with a smaller number because you want to be more aggressive. But I want some security in my income too. I trade aggressively and I will be trading aggressive as long as my brain, overall health and mental conditions, and TIME allow it.

But if there will be time when our trades get busted or I will not have enough time to trade, I want to have reserves. I believe, this calculation and the resulted number will provide that.

If not, I will adjust this number accordingly.

As of now though, I decided to take a second, part time job.

It is killing me as now I work from 8:30 am until 10:00 pm every day (that means my full time + part time job) and I have little to no time to post on this blog.

But all additional money I make I pay off my debt and the rest is saved to our trading account. And that is what makes me happy because I am now getting even closer to my goal although it will take longer than I wished for.

 
What do you think? Is this realistic?
 
 




TastyWorks

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Posted by Martin May 11, 2017
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Saving deep in the money puts, jade lizards, or strangles


If you follow my posts you remember that I advocate that investors should not be predicting the market or stocks. Such behavior has no place in the stock market. If you base your trading on predictions, forecasts, or magic, you are definitely set for losing your money.

Many times I said here in this blog that you do not need to know what the stock or market will do next, but you need to know what you will do next.

If you are prepared before you enter a trade and know what to do in every outcome and every move Mr. Market throws at you then you really do not need to know what will happen in the market next. You do not need to predict the future. And all available crystal balls were sold out anyway.

This is the number #1 problem investors and traders get into. They know perfectly how to put up a trade but have no clue what to do next, how to manage the trade and how or when to get out. And when the trade goes against them and they lose money, they blame the market, Fed, high frequency trading, market makers, bad weather, or improper constellation of the stars.

Here are a few steps how you can fix deep in the money puts, jade lizards or strangles.

 

 · Step 1 – Opening an initial trade

 

Once I had a trader who asked me a question what do I do when I open a trade and the very next day the stock tanks. How do I predict this and prevent myself from entering the trade right before the stock collapses.

I told him: “You can’t”.

You cannot predict future. There is absolutely no way that you can predict what event sends the stock to abyss or shoots it into the sky. All you can do is get ready for all possible outcomes of the trade, have a plan for each event, and if any of that event happens, execute that plan.

So let’s review step by step what you can do when trading naked puts, jade lizards, or strangles and the trade turns sour the very next day. Remember, the steps described below can be used (in a proper modification) for almost any trade. You can use them with spreads, naked puts, naked calls, or jade lizards. In this post I will show it as if we traded a strangle.

A strangle is when you sell a naked put and a naked call at the same time. It is a high probability credit trade (you get paid for this trade). But sometimes it can turn bad.

 
Strangle defense
 

The picture above shows a typical strangle. Let’s say that a stock XYZ is trading at $100 a share. We decided to sell $90 strike put and $110 strike call (both legs with delta 20). For this trade we collected a premium $4.00 dollars, so our break even prices are $114 on call side and $86 on put side.

Remember, with strangle, you will never lose on both sides. Only one side can get into a danger at a time. If your put gets in danger, you calls will make you money. If your calls get into trouble, your puts will make you money.

Let’s say we weren’t much lucky and some usually unknown analyst you have never heard of before issues a warning that he thinks the company will not do well in the next quarter. Sometimes this is enough to send the stock down.

 
Strangle defense
 

Now, our puts are in danger. What would you do?

 

 · Step 2 – Choose the defense based on time

 

Sometimes it is difficult to choose the proper defense. If you have a plenty of time until expiration you may choose to wait and see if the stock recovers or choose to take action and adjust the trade.

Many times in the past I decided to wait and the stock tanked more making things worse. On other occasions I decided not to wait, make adjustment, but the stock recovered and the adjustment turned against me.

Can you prevent such situation? Again, you cannot. If we knew what the future was going to be, we would be billionaires.

Let’s say we no longer feel comfortable with the trade, take the analyst’s warning seriously and decide to take action and adjust the trade.

 
Strangle defense
 

If the stock tanks and the price goes and touches your naked put side or goes even lower but stays above your break even price, then you roll down your call side.

You buy back your almost worthless calls and sell new calls close to the current price or same delta (in our example it was delta 20). For this, you collect additional premium. That premium will further lower your break even price from the original $86 to $85 dollars.

But what if you do this adjustment and the stock recovers and continues higher? Your naked calls will now be in the money.

Many people and novice traders have a panic fear of naked calls in the money. They immediately see it as a huge danger to their portfolio. Many stay away from naked calls because they have no clue where the risk is.

What would you do then when your calls go in the money and your broker is telling you that now your risk is unlimited and you can lose everything and even what you do not have?

You can:

1) roll the calls up
2) buy stocks and make it a covered call
3) convert the calls into puts
4) or use an inverted strangle (see below)

 

 · Step 3 – How rolling calls saves my ITM puts?

 

It doesn’t make the ITM puts to go away. If you do the above described adjustment you still may end up with an ITM put and OTM call. So you may ask, what’s the point of such adjustment?

First of all, you collected more credit which may help you offset the price of the put should you buy it back at a loss. Or, if you are like me and do not want to take a loss, you may decide to roll the put lower into the next month (or week) get more credit and improve the outcome of the trade.

When you roll your put away and down, you collect a new small credit, make the puts OTM again and you may decide to sell a new OTM call against the new rolled puts making your trade a new strangle, collecting even more credit. The new strangle with lower strikes on a stock which went down has now a lot better chance to be bought back for 50% credit than the original one. Or even expire worthless. You will be out of the originally losing trade as a winner.

But if this doesn’t help and the stock continues giving you a hard time you may choose more defensive steps.

 

 · Step 4 – When all is lost invert the strangle

 

Sometimes you end up rolling the trade, making adjustments but it doesn’t help in the end. Sometimes the stock tanks and smashes through your puts side without a mercy and your puts end up in the money.

Now it is a time for an exciting adjustment – inverted strangle.

 
Strangle defense
 

Let’s assume the stock didn’t stop at $90 a share and the very next day after you adjusted your original trade it smashed down below your break even price. You now know that there is a very little chance that the stock would move back up above your original $90 strike put. For example, you only have two weeks to expiration and the stock would have to move a lot to get back up above $90 strike and such move is highly unlikely.

You have again a few steps you can choose:

1) roll the puts down and away in time (but this will need more margin and more time blocking your buying power)
2) accept assignment and buy the stock (this may lock your money in a stock for a very long time)
3) convert the puts into calls (you would have to go near the money, most likely at the money or in the money to make this adjustment)
4) or use an inverted strangle (this will cost you no time and no margin/buying power)

 
Strangle defense
 

How do you invert a strangle? You buy back a worthless $110 call and sell a new in the money (ITM) call at e.g. $78 strike. For this adjustment you collect another large credit. You now have in the money puts and in the money calls.

 

 · Step 5 – What now?

 

Now I can see many investors freaking out. In the money puts and calls? Are you crazy?

No, I am not crazy. It is not an end of the world and there is plenty of ways how you can further work with those options. Let’s review what outcomes can happen and how to deal with them.

First, your inverted strangle must always stay in the money in order to finish this trade as a winner.

 
1) Two days before expiration

Let’s says the stock stopped its selloff but it is staying down low right in between your in the money strikes. If we let it expire we will see the following to happen:

Our puts and calls will be assigned against each other. At expiration, we will buy 100 shares and sell 100 shares at the same time and realize either a loss or gain from the difference.

In our example, we will see this:

$9,000 ($90 strike put assigned) – $7,800 ($78 strike call assigned) = $1,200 loss

We collected the following credits:

1) initial trade = $400
2) first adjustment = $100
3) inversion of the strangle = $300
Total = $800 credit

Then the result will be $1,200 – $800 = $400 loss

This result will vary based on the trade and situation. I had a trade against LULU for example where I ended with $313 loss, but I had a trade against WYNN where I had only $65 dollars loss.

 
2) Roll inverted strangle

Two days before expiration you roll the entire strangle into the next week or month. You must roll the entire in the money strangle. Doing this you will collect another credit, e.g. $2.50 or $250 dollars. That would lower your $400 loss down to $150. You can choose to take the loss and move on or roll again and end the trade with a small gain of $50 for example. Or roll once more and end with a $300 gain (note the numbers are examples only).

You can also choose rolling to a lower put strike to improve a chance of getting a better outcome.

 
3) What if the stock continues falling?

This may of course happen. You make an adjustment two weeks prior to expiration and two days to expiration the stock slides to $68 a share. Now your puts are deep in the money ($90 strike) and your calls ($78 strike) are now OTM. What to do?

In this case we will let our out of the money calls expire worthless and we will roll our deep in the money putsinto the next period and down. At the same time we will sell new in the money calls, e.g. at $60 strike. For this we will collect premium. If the premium is large enough to offset the spread width loss, then in the next expiration we will let both options offset each other. If the spread is too large, we will have to roll again and try to get the options legs closer together and for credit (when rolling into the next month or week we attempt to roll calls higher and puts lower but still keep them in the money.

 
3) What if the stock recovers and goes up?

This is a similar situation as described above. Now our puts will be OTM and our calls deep ITM. You take the same approach as described above but reversed.

 
3) What if I get assigned?

First of all, remember that 90% of all options expire worthless and are used by traders. Only about 10% is used by investors as a hedge when they are actually interested in buying or selling stocks via options. So your chance of getting early assigned is low. But it can happen. We are in the money after all.

What happens if your puts get assigned?

Buy the stock, start collecting dividends, start selling covered calls, and sell a new in the money puts. This is not a big deal as we like selling puts against dividend stocks, so buying the stock is a part of our strategy anyway.

What happens if your calls get assigned?

This would be unfortunate as we end up with a short stock position while the stock is rising in price (when the stock is declining, no one will exercise your calls early). In this situation we have two options to do:

1) immediately buy the stock back with a minor loss and immediately sell new naked put (or strangle) to offset the loss
2) keep your in the money put to assign at expiration (if it is still in the money and you are close to expiration)

 

 · Conclusion

 

This is pretty much all about defending puts (or calls) using inverted strangles. As I mentioned above, you can use this strategy with any option structure.

If you only have naked puts and they get into trouble, add a naked call to your trade and then work with it as a strangle.

If you have a jade lizard (which usually consists of a call spread and naked put) then use your short options only, treat the entire structure as a strangle, and let your long call expire worthless (or buy it back if it still has some value in it). There are ton of possibilities of what you can do with your trade.

Just keep enough money (buying power) in your account, stay calm, evaluate all your options before taking a step. If you are not sure what to do and expiration is approaching, then just roll your trade as is into the next period (month or week) to gain some time to make a decision. It is not difficult to do.

Good luck!




TastyWorks

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10 Reasons Option Traders Lose Money in the Market


It is a well-known fact that almost 80% of the options traders lose money and only the remaining 20% are successful. There are various reasons why options traders lose money including lack of market knowledge and the right trading skills. Also most of the traders tend to get emotional and do not follow a disciplined approach in making their investments because of which they suffer huge losses. The top 10 reasons for options traders to lose money are listed below,

 

 · 1. Trading huge positions and investing too much on a single trade:

 

This is a problem with many of the newbie investors who are too emotional and lack good understanding of the trading strategies. An inexperienced gambler tends to stack all his chips on a single play and it never works. Similarly if you put all your money on a single trade and you lose that trade, you will not be able to invest anymore. In some cases even experienced traders give up their risk tolerance and invest too much on a single trade, hoping to make up for their past losses. This is one of the important reasons for options traders to lose money as they become too greedy and don’t follow a proper trading strategy.

 

 · 2. Lack of market knowledge:

 

The next important reason for options traders to lose money is lack of market knowledge and not being aware of what are the various financial events happening currently. If you don’t follow the market news regularly and are not aware of the trends in price movement of the underlying assets, you will not be able to place successful trades. As you know the market is always volatile and keeps fluctuating based on the investor sentiment, financial events like announcement of interest rate hikes, jobs report, quarterly earnings report of various companies and various geo-political factors. You should be aware of all these events happening in the market and follow it very closely. If you don’t have the market knowledge and are not able to predict the price movement of your underlying asset, you will always lose money in options trading.

 

 · 3. Lack of a proper trading plan:

 

A good trader should always have a clear trading plan which is formulated with well-defined entry and exit criteria, position size and the amount of investment. If you trade without devising a proper plan, the results will always be random and there is a great chance you might lose most of your trades. Along with proper trading plan, choosing a reliable broker and trading platform is also very important. anyoption trading is one of the reliable trading platforms through which you can minimize your losses and maximize your returns as a binary options trader.

 

 · 4. Lack of Understanding of the risks and rewards associated with each trade:

 

Some traders do not clearly understand the concept of risk/reward profile. The traders who suffer huge losses in the initial stages of their career will end up fearing risk and avoid investing in the right opportunities that may come up in later stage. In the same way people who witness success in the early stages tend to become greedy and start investing heavily leading to potentially huge losses. This is all due to lack of understanding of risks and rewards associated with options trading and lack of discipline.

 

 · 5. Not having a mentor or Guide:

 

It’s always good to have a mentor or coach who can help you make right decisions during difficult times. Many unsuccessful investors regret that they did not have the right mentor to guide them during tough situations and was not sure of their trading decisions. If you don’t have an experienced investor as your guide to warn you about unforeseen events or sudden twists in the market, you may end up losing more money in options trading.

 

 · 6. Lack of trading skills and consistency:

 

Traders who don’t develop the right trading skills are the ones who place losing trades. If you want to make more money in options trading, you should be consistent and make lot of trades with smaller investments. If you invest only during specific time period and remain dormant during rest of the time, you might miss the right opportunities and eventually lose money.

 

 · 7. Not using Signals and Technical indicators:

 

You should always make use of technical indicators and signals to get better understanding of the market trends, whether you are an experienced or novice investor. Only people who make use of technical indicators and trading charts will be able to predict the price movements of assets more accurately. Investors who are ignorant of such tools have a greater probability of losing money.

 

 · 8. Lack of reliable trading strategy:

 

Traders who don’t follow effective trading strategies always have a higher chance of losing money. There are various trading strategies like Hedging strategy, Trend trading strategy, MACD entry trading strategy, risk reversal strategy etc. Investors should know which trading strategy is suitable for them based on the type of trading and follow it effectively. Traders who fail to adopt a reliable trading strategy will end up in losses.

 

 · 9. Emotional Trading:

 

Human psychology plays an important role in trading decisions made by investors which is an important factor for success. Fear and Greed are two destructive emotions which can influence your trading decisions and result in failure. People who take trading decisions based on these emotions are the unsuccessful traders.

 

 · 10. Not following hedging or stop-loss techniques:

 

Some investors are greedy and make use of leveraging which is very risky and results in big losses. If you don’t follow stop-loss orders or limit your position size, you will not be able to restrict your losses. You should also learn to use hedging techniques to minimize your losses in each trade. Traders who fail to adopt these techniques are the ones who lose more money than others.
 




TastyWorks

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