Investing into Stocks - Hello Suckers!

Posted by Martin May 30, 2017
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STX ETE dividend growth strategy options trading dividend income AGNC dividend investing TECK

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.

In our ROTH IRA account we primarily invest into high quality dividend growth stocks. However, we allow exceptions and invest to higher risk, non-growth dividend stocks.

We reinvest all dividends using DRIP program. We will be using DRIP as long as dividend income will be below $1,000 per months or dividend period.

Once our dividend income reaches the limit of $1,000 dollars per the period (quarter, dividend payout, etc.) we will cancel the DRIP program and start re-investing the dividends selectively into either new stock holding, or existing stocks.

In our ROTH IRA account we also use options trading strategy called “triple play”.

We sell cash secured puts as long as we are assigned and buy the stock. With this strategy, we do not roll the puts unless there is a great opportunity to do so or the stock dropped in price significantly.

Once we buy shares, we keep them, collect dividends, and start selling covered calls.

We sell covered calls at the money, slightly in the money, or above the money. We do this as long as we sell the stock.

During this cycle, our DRIP program ensures that we reinvest the dividends.

For example, we sell puts against stock XYZ, we get assigned and buy 100 shares of the stock. Later, we receive the dividend, which is automatically reinvested. We buy fractional shares of the stock, for example 2.468 shares. Now we own 102.468 shares of the stock. While we are selling covered calls, when we get assigned the calls, we sell 100 shares of the stock. At the end of the cycle, we are left with 2.468 shares which continue bearing new dividends. These dividends are then reinvested back into the same stock, so our position is slowly growing.

Now, you may ask, what if you buy a stock and it drops significantly down, so selling covered calls down low may result in selling the stock at a loss and what would we do in this situation?

This is a valid question and no stock, even dividend growth stocks are not protected against a violent price drop. It may happen. In this case, we may temporarily stop selling covered calls and simply wait, or we may be selling covered call down low, but we will strive avoiding assignment and rolling those calls higher as long as we get above our stock purchase price where we can let the calls assign.

Once we sell shares via covered calls, we start selling puts again.

This options strategy is slightly different than the one we use in our trading account.

You may ask why doing this and not just keeping the stock to avoid losing capital gains?

Many times, the options income from puts and covered calls is a lot larger than the dividend itself. Also bringing income from options every week or two weeks will exceed any capital gains of the stock.

And we want options income too. We want to capture dividends and we want income from options. Most of the stocks are quarterly dividend paying stocks. That means, if we keep the stock and we will not be selling options, money invested in the stock will be dead money. There may be a small capital gain, but overall, it will be dead money.

· 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:

(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:

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?

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Posted by Martin May 25, 2017
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TECK options trading iron condor ROTH IRA

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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Posted by Martin May 22, 2017
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ROTH IRA dividend investing options trading ETE triple play

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.

UPDATE: May 20, 2017

I am placing a new trade in my ROTH for Monday morning:

STO 1 ETE Jun23 19.50 call
@ 0.35 credit limit day

Own 100 shares @ $19.00
ETE @ $18.62

UPDATE: May 19, 2017

Today was expiration day for my covered call contract (see below). The stock ended trading at $18.62 making the covered calls expiring worthless. Tomorrow, the contract will be removed from our account and we keep the premium of 0.25 or $25 dollars.

Also, since we held the shares through the ex-dividend day, we will collect 0.285 dividend per share or $28.5 for this trade (100 shares). The dividend will be automatically re-invested using DRIP program and new shares will be purchased.

Last time we bought 1.504 fractional shares which now bear dividends (which also will be reinvested). Thus I expect addition of new 1.554 fractional shares to my holdings. In total I will now hold 103.05 shares.

I will keep selling covered calls and eventually I will be assigned and sell the shares. If not though, I will keep holding the stocks, collect dividends, and sell covered calls.

Here are updated results of this trade cycle (Note, that I consider a cycle a trade when you start selling puts as long as you get assigned, then buy the stock, collect dividends and start selling covered calls. The cycle ends when the covered calls are assigned and you sell the stock. You begin the new cycle by selling new puts again.).

Stock purchase price:	$19.00
Cost basis:	$18.43
Total premiums $$:	$57.00
Total dividends:	$28.50
Total revenue $:	$85.50
Total revenue %:	4.50%
Total revenue annualized:	45.63%
Days in trade:	36

UPDATE: May 01, 2017

As I mentioned below I got assigned to 100 of ETE as was planned for this trade (so this wasn’t an unwanted early assignment) last Saturday.

Today morning, I sold the first covered call contract against ETE. This time the goal is to retain the shares until the ex-dividend day. The ex-day was announced to be May 8th, 2017 (Monday). After that I can start selling covered calls with an intention of getting rid of the shares.

Here is the trade detail:

STO 1 ETE May19 19.50 call
@ 0.25 credit

Stock purchase price:	$19.00
Cost basis after puts assignment:	$18.68
Total premiums $$:	$57.00
Total dividends:	$0.00
Total revenue $:	$57.00
Total revenue %:	3.00%
Total revenue annualized:	49.77%
Days in trade:	22

UPDATE: Apr 28, 2017

The stock ended trading day today below $19.00 a share ($18.66 to be exact) making my puts ending in the money (ITM). Tomorrow I will be an owner of 100 shares of ETE.

Now, I will start selling covered calls again as long as I get assigned and sell the stock.

UPDATE: Apr 27, 2017

Tomorrow is expiration day for this trade. The stock (ETE) is hoovering around $19.00 a share (yesterday, it was at around $19.50 and as of now it is at $18.90 +/-).

If the stock stays above $19.00 a share, the put options will expire worthless and we will wait for ex-dividend date announcement (again, the expectation based on the previous season is May 5th to be the ex-date). If so, we will be buying 100 shares out right on Thursday May 4th. If the ex-date will be after May 5th (Friday), let’s say Monday, May 8th, I may attempt to sell new puts for Friday, May 8th expiration. otherwise, again, we will purchase shares outright.

If the stock ends below $19.00 a share we will get assigned and buy 100 shares of ETE tomorrow.

ORIGINAL TRADE: Apr 10, 2017

As my old triple play trade ended last week I am entering a new cycle against Energy Transfer Equity, L.P. (ETE).

I am selling a put option with April 28 expiration to collect premium and hopefully get assigned to the stock. If assigned, I will keep the stock, collect the dividend, and sell covered calls.

The expected ex-date for ETE is May 5th (not confirmed) so my April 28 puts must get assigned. If not, I let them expire worthless, wait until Wednesday or Thursday (based on the announced ex-date) and buy 100 shares directly (as there is no expiration available prior to ex-date except April 28).

Here is the trade:

STO 1 ETE Apr28 19.00 puts
@ 0.32 credit limit day

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Posted by Martin May 22, 2017
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ROTH IRA options trading iron condor

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.

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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.

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Posted by Martin May 15, 2017
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options trading trading for living

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:

(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?

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Posted by Martin May 11, 2017
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options trading jade lizard strangle how to

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.

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.

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.

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.

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)

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!

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Posted by Guest May 11, 2017
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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.

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Posted by Martin May 10, 2017
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money management margin options trading

How Many Options Positions Are Too Many?

In our group a trader asked me a question how many positions a trader can open when selling put or call options using margin.

Many investors and traders avoid trading on margin because they are afraid of it. Margin can be very helpful and boost your trading and results. It can also work against you. It can multiply your returns and it can ruin your account.

But with a proper money management, you can navigate your trading using margin and earn a lot more money.

In this post I will try to explain how margin works and what money management I use to make three times more money than if I traded cash secured.

Also this article applies to a Regulation T (or RegT) margin type and not portfolio margin.

I trade with TD Ameritrade and use TOS, so this post is tailored to TDA and TOS. If you use a different broker, you may want to verify terminology and requirements with your broker as these may differ.

· What Is Regulation T Margin?

I will not go into details describing this type of margin. You can google the term “Regulation T” and find tons of details.

In short, this type of margin is an extension of credit given to you by a broker. It is regulated by FED’s board and SEC. During crisis the board may increase margin requirements and thus decrease risk in the financial markets.

So if you get approved for margin trading, under RegT you will be allowed to trade 2:1 of your own money. It means that if you deposit $5,000 dollars of your own money then your broker will lend you the same amount and you will be able to trade $10,000 dollars in your account.

It is simple as that for stocks. But what about options?

Well, it differs.

· RegT Margin And Your Broker

When you look at your broker’s platform, in our case TOS you may see the following:

Account Info

On the picture above you can see that the Options buying power is $5,256.92 and the Stock buying power is $10,513.84.

The stock buying power is 2:1 but the options buying power is 1:1. Does it mean you cannot trade options on margin?

You can, but it is not that straight forward. Let’s review first the differences between cash secured and margin trading and get to the detail of how margin works with options.

· Margin Or Cash Secured?

Here is a difference between trading on margin and cash secured trading.

Cash secured

When you sell one contract of a cash secured put (CSP) with $38 strike price, you will be required to have the entire amount of money in your account in case you get assigned. If you get assigned, you will be forced to buy 100 shares of the stock at $38 a share no matter what it trades in open market. So you will need $3,800 in your account ($38 strike x 1 contract x 100 shares).

Margin

When you sell the same contract of naked put with $38 strike price and you will be assigned, you will be required to have only about 30% of the full requirement of $3,800 dollars. Therefore you will only need $1,140 dollars ($3,800 x 0.30 = $1,140).

With $10,000 dollars stock buying power you will be able to open 8 contracts! ($10,000 / $1,090 = 8.77 rounded down to 8).

If you collect 0.97 per contract or $97 dollars, with cash secured trading you make $97 dollars; with margin trading you make $776 dollars. Eight times more!

· Options Buying Power

From the trading platform picture above you could notice that the options buying power is the same as your original deposit. Are you then using margin? Yes, in some way you are.

To open the same contract as above you would need only about 16% to 20% of your options buying power. Here are the equations TDA uses to determine your margin requirement for options:

20% Rule

20% of the underlying, less the difference between the strike price and the stock price, plus the option value, multiplied by number of contracts.

Example:
We sell 1 put contract with 38 strike price and the stock is trading at 40 a share and collect 0.97 credit

20% x [$38.00 x (1×100)] = $760
($38-$40) x 100 = -$200
$0.97 x 100 = $97

Buying Power Requirement: $657 (760 – 200 + 97 = 657 x 1 contract)

10% Rule

10% of the exercise value plus premium value.

10% x [38 x (1×100)] = $380
$0.97 x 100 = $97

Buying Power Requirement: $477 (380 + 97) x 1 contract)

The broker then uses the equation which generates higher requirement. In this example, it will be the 20% rule and $657 margin requirement.

Most of the time the 20% rule will be used as in many cases it will generate a higher requirement. Also note that the calculations are estimates taken from the TDA options margin handbook and the actual results may differ. From my experience, the calculations above render higher numbers than what the broker will really use.

That is good for us though as it is safer for our trading.

· Let’s Put It All Together

Here is how our buying power will be changed if we use the above examples and we sell 1 put contract with 38 strike price and the stock is trading at 40 a share and collect 0.97 credit:

Original Options buying power: $5,256.92
Original Stock buying power: $10,513.84

Stock buying power requirements: $1,140 (approx. 30% of strike price x 30%)
Options buying power requirements: $657 (the higher requirement of the two equations)

New Options buying power: $4,599.92 ($5,256.92 – $657)
New Stock buying power: $9,373.84 ($10,513.84 – $1,140)

When trading in TOS the trading ticket will show you these numbers too, so you can verify what your buying power will be when you initiate a trade. Using the equations above in an Excel spreadsheet (or Google spreadsheet) you can watch your margin requirements during the entire life of your trade.

Note: our calculations returned a higher number than the broker’s one. Which is actually a good thing as in our money management strategy it will reduce our money available for trading more than if we use lower number and that is safer for us.

· Why Are People Afraid of Margin?

If it is so easy and you can make 8 times more money than if trading cash secured options why are some investors and traders afraid of using it? Why some do not touch margin even with a long stick?

Most of the time it is their ignorance and lack of management tailored for margin.

If, for example, you opened 8 contracts as we showed to you above to make $776 dollars instead of only $97 then I can 100% guarantee you that you will lose it and end up with a margin call.

Why? Because the margin requirements fluctuate.

If the stock goes against you, the margin requirements will be increasing, your buying power decreasing and once BP reaches zero, you have a margin call.

And once you have a margin call, you will be forced to add more money to your account or close your (now losing) positions to satisfy the call.

And that is what scares people the most.

But many people look at this margin call issue without understanding how the margin requirements react to the stock price.

If your initial margin requirement from our example above was $1,140 dollars, it will reach the cash secured level ($3,800) when the stock literally drops to zero. And how many times does this happen?

Understanding how many contracts a trader can open is crucial to keep your trading running and be safe.

I will show you now (finally, right?) my money management dealing with the margin to determine how many contracts I can open at one time and avoid margin call.

· Options Margin Money Management

Note that these rules should be flexible and you can bend them only if they improve your position and increase your security in regards to margin. If you bend these rules and dig a bigger hole under yourself, you will be punished by Mr. Market. That I can guarantee you. I have been there and done that.

And I must admit, I still make that mistake and over trade. Even recently. And I got punished for that arrogance of bending the rules.

The rule is actually very simple.

50% of the Options BP rule

If you follow my blog, you know I always advocated for trading no more than 50% of your available buying power. I usually settle for a smaller number of 40% or 45% of the options BP.

I adjust this number based on:

The overall market value and its trend.
Traded stock value and trend.
My overall trading situation such as number of symbols traded, duration of the trade, rolling of the trades, etc.

Here are the rules for adjusting the percentage according to the above rules:

If the overall market keeps running up strong and making all time new highs, I keep reducing the above percentage and go lower. I do the same with the stock and take it into account.

If the market runs up, but the stock dropped on fear and sudden but temporary sell off, then I do not reduce the percentage. I even increase it but not above 50% max number

If the market goes up strongly, the stock goes up strongly, then I start reducing the percentage all the way down to 25% of the option BP.

If the market goes down, the stock rallies strongly, I also start reducing the percentage all the way down to 25%

If the market drops down, the stock also drops down heavily, then I start increasing the BP percentage back up to 50% of overall options BP

For simplicity, let’s call this variable as “trade allowance ratio” (TAR).

Typical margin requirement of traded equity

The second part of the equation is your highest margin requirement you are about to be trading. For example, you decide to trade puts for three underlying shares STX, X, and ADM. I wouldn’t recommend more underlying at the same time than three to max four as they may overwhelm you. Again, speaking from my own experience. One symbol going viciously against you may derail you and you start making mistakes even with the other two or three symbols.

Then you check what the margin requirements for the three symbols would be. You can either calculate it as described above or use your trading platform.

Also you need to check the requirement for the expiration period you plan on trading. The shorter term you trade the higher margin requirement will be (although the equations above do not include the time value in it, but if you check your broker and for example STX stock, you will see that 10 DTE needs $684.30 margin but 30 DTE only 534.30 margin).

Checking the three stocks and 10 DTE (which currently I trade) I see the following requirements:

STX = $684.30
X = $555.50
ADM = $839.50

Now I take the largest number to insert into my equation. In this case, it would be $839.50; you can round it up to $850. Review this number regularly to make sure you still use the correct one.

Let’s call this variable a “trade allowance margin” (TAM).

Used margin + available margin

It is easy to calculate your available number of contracts if you are just starting, but what to do if you already have opened trades? Well, add together used margin and available margin.

Where do you find used margin?

In TOS it is easy. Go to your TOS Monitor and on the bottom right corner you will find your used margin for each stock and total:

Now we have the total number from the platform and we also have all we need to calculate how many contracts to sell.

Equation

(Available BP + Used BP) * TAR / TAM = number of shares (rounded down)

If our available BP is $5,256, our used margin is $32,766, our TAR ratio set to 45% and TAM margin ratio $850 then we can trade 20 shares total at one time only:

(5256 + 32,766) * 0.45 / 850 = 20.12 or 20 contracts when rounded down.

· What’s Next?

The last step is to monitor how many contracts you have opened and compare it with your allowed number of contracts. If you are over, do not open any new contracts until you reduce your current exposure.

Always treat trade rolls as a new trade counted towards the entire number.

Check your used margin regularly. I do it every week and sometimes daily.

When you consume your number of allowed trades (contracts) never open a new trade (contract) until the old one closes.

Always check your total assignment value and compare it towards your stock margin (for example, if you have 5,000 account with 10,000 stock buying power and you calculate that you can open 2 contracts at 38 strike price, you will need $2,280 margin to get assigned (38 strike x 100 x 2 contracts x 0.30 = 2,280). With 10,000 stock margin you are more than safe.

This is how I do it. You may find other information out there and maybe it will be better than this. But this way worked for me well so far. The only problem I ever had in the past was when I broke these rules and traded more than allowed.

If you have any questions, you can post them below or join our Facebook group and ask question.

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Posted by Guest May 09, 2017
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Not Ready For Retirement? Use These Tips To Save For Your Future

Too many people have found themselves in a position where they think that they simply do not have enough money to properly plan for their retirement. Sure, some people have more money than others. If you fall into the category of people who are not confident in their ability to save or invest money for their future because of current financial stresses, it is time to pay attention. There are many ways in which you can get the cash you need so you can retire when you are ready. You just have to know what steps you need to take.

· Cut Back on Your Basic Bills

If you take a careful look at your utility bills, you might find that you are paying a little more money than you need to be paying. Sure, you have to pay for the utilities that you use, but you should shop around exercising your power to choose in deregulated states because you need that little bit of extra money more than the large companies need it. The CEO’s of those companies have their retirement plans worked out. You need to save wherever you can in order to figure out yours.

· Sell, Sell, and Sell Some More

Start sorting through all of the rooms in your house for things that you no longer want or need. If you have not used it within the past year, it is unlikely that you are going to need it anytime in the near future so sell it. Also, go through your basement, attic, garage, and storage shed. You might not think that you have anything to sell, but once you dig in there and really start to de-clutter everything, you might be pleasantly surprised.
You can have an old-fashioned yard sale, post advertisements online, call in an auction house, or take everything to a large flea market. While you want to get the most money you can, you also do not want to keep your old stuff since you do not have a need for it. Therefore, if you have to negotiate with the price some – go ahead and pocket that cash. After all, it was money that you did not have yesterday and it is money that you can invest in your future retirement.

· Make Cash From Your Hobbies

Are you an expert when it comes to fishing? Maybe you could teach someone how to fish and let them in on some of your trade secrets. Maybe you make excellent creations with your sewing machine. You could create some unique clothing and sell those or offer to coach others on how to do the same things you can do with some fabric and thread.

· Make It Count

Now that you have had some time to start thinking about some of the various ways you can make some money, you need to consider how to invest it. You could simply store it away in a savings or retirement account. That’s a start, but since you will probably have the need to make your money make more money for you, you will want to invest it in something such as stocks or real estate.

If you feel as though you might need a little more guidance, you will want to find a specialist who can help you craft a detailed retirement savings plan. When you follow his or her advice, as well as continuing to look for ways to make more money, you should have no problem getting yourself into a financially stable position. This way, when you are finally ready to retire, you will be able to do so without having to worry about any struggles that you might face.

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· ROTH IRA investing/trading strategy

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

· Second job

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· Step 1 – Opening an initial trade

· Step 2 – Choose the defense based on time

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

· Step 4 – When all is lost invert the strangle

· Step 5 – What now?

· Conclusion

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

· 2. Lack of market knowledge:

· 3. Lack of a proper trading plan:

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

· 5. Not having a mentor or Guide:

· 6. Lack of trading skills and consistency:

· 7. Not using Signals and Technical indicators:

· 8. Lack of reliable trading strategy:

· 9. Emotional Trading:

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

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· What Is Regulation T Margin?

· RegT Margin And Your Broker

· Margin Or Cash Secured?

· Options Buying Power

· Let’s Put It All Together

· Why Are People Afraid of Margin?

· Options Margin Money Management

· What’s Next?

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· Cut Back on Your Basic Bills

· Sell, Sell, and Sell Some More

· Make Cash From Your Hobbies

· Make It Count

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