Another learning experience

Below is the risk profile of my SPY directional/hedge that was put on 6-22-10 for a debit of -420. I thought the range of SPX would be between 900-1040 and was just trying to devise a play to profit from that. I ended up buying the (10) 104 puts, selling (10) 95 puts, and then selling (6) 101 puts. I was trying to create something like a butterfly with little out of pocket expense in case I'm wrong, but a chance to win big if I'm right in that range. However, I was willing to give up a lot more on the back end in exchange for a little less of an initial debit as I would close the trade out early for a smaller gain rather than possible take large losses on the backside. So I just screwed around with the risk analysis and came up with the first image below.

Now look at the second image, using the same strikes and prices, a simple 104/95 back ratio would have been an initial debit of -550 instead of -420, but look at the possible reward scenario. Both plays have roughly the same breakeven points but the back ratio is potentially much more profitable at +8400 instead of $5000. Even using the expected average gain would be $5000 on the back ratio and $3000 on my trade. This is nothing more than my lack of education as I've never used a back spread before and therefore didn't have this risk/reward scenario already in  my head. But clearly an initial debit of -550 versus -420 was warranted in this case. It's great that I'm learning from mistakes, however, I'm probably a little ahead of myself and should probably lower my trading size for a while back to 5-10 contracts as this is really a rookie mistake in my opinion. I just have just yet to put in the time to learn some of the basics.

SPY Position update

Here is an updated risk profile/profit graph of what I have left of the SPY position that I started building and trading around 2 weeks ago.

So I am nicely positioned for this sell off and what I think will be a continued sell-off. We breached the all important 1040 level on the S&P 500. I have a target of 100 for the next stop lower. At expiration this is where I make my maximum profit of $2,000 unless we really sell off hard then I make that or more below $94. But I don't see that happening before July Expiration. I think that 100 is a reasonable target, and if I think it will take 2 weeks it will probably happen this week as the down moves just always seem to happen much faster than I anticipate.

This is basically all I have left on.

NOT IMPRESSIVE RALLY AT ALL -- My Four Tier Shorting Strategy

I think is is a little bearish, how about you? But I think it makes sense.

 

 

Sent to you by Dominic via Google Reader:

 

 

NOT IMPRESSIVE RALLY AT ALL -- My Four Tier Shorting Strategy

via T3Live Blog by Brandon Rowley on 6/28/10

By: Scott Redler  

This Head and Shoulders Pattern is almost complete. Question is how do you make money? What I recommend is a four tier approach if you have the pain tolerance, this is what I would do.

I shorted Tier one today by buying the July 105 and July 102 puts and the August 105 and August 102 puts-

Example- If you want to risk $100,000:

This is the tier one entry in the 1070-1075 area.
You buy July 105 and July 102 puts and August 105-102 puts tier one $25,000 (this gives you two months)

If the market does bounce back to 1090-1100 into the Job's Report or Quarter's end you buy Tier #2 Puts–
The July 105, 102, and August 105, 102 puts ($25,000).

Above is your "anticipation of the break" that is sometime risky. You're not waiting for Market Confirmation just putting money into the strategy.

If the market does not get back to the 1090-1100 area, then you add your second tier ($25,000) at the 1065 area.

If we do reach 1090 and you are able to add your second tier, then you will add your Third tier ($25,000) below 1065.

Last Tier would be when Neckline breaks and the day we close below 1040 to complete your investment into a Core Short!

This last tier will either be a single or double based on if the market was able to bounce to 1090-1100. You will add two tiers ($50,000) the day we close below 1040, if we never make it back to 1090-1100.

This will get you some prices as you sell a bounce, and then when the Pattern confirms and position into the momentum Down Move.

If you want to invest $20,000 in these puts you do same strategies but in $5,000 increments

If you have a lot of Buying power you can do the same strategy shorting the actual SPY.

Use this approach with the method you feel most confident with..

I'm using the July and August puts to get some more time. If we get this break in the market, it should happen during this time period.

IF we don't break the Neckline, you will only have half involved that you anticipated with the strategy, but never got fully involved because the market did not confirm the thesis.

I started with Tier one today in my swing accounts. I will also trade intraday based on the price action. By having this strategy the edge will be off, if this break down happens in a way that's not conducive for cash flow trading.

Banks almost gave back more than half of Friday's move. That shouldn't have happened. Also technical damage is adding up across the board.

I Give this Strategy 70% chance of working.

 

 

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Portfolio Mgmt

Here are some of the rough guidelines that I'm working off of right now. No more than 50% maintenance margin. This gives me plenty of room to manage around volatile moves in my positions and plenty of additional buying power. So obviously the goal is to make a decent return off the whole portfolio but only normally using 50% of the buying power. I don't exactly have a monthly or yearly percentage return target right now. I'm kind of just trying to focus on individual good trade set ups. For the time being I'm sticking with a risk limit of 1% of trading capital per position on defined risk trades. On undefined trades like naked calls I will have to have stated exit points that should correlate to a maximum loss of 1% of capital as well. I have set a total risk threshold of 5% loss of capital in any one month, and no more than 10 positions at a time. This means that should I have 10 positions that they can't all be the same direction as that would possibly allow for a 10% loss. A worse case scenario should be that all five of any one direction move so quickly that I can't exit, repair, roll, etc. And even this worse case scenario of a total 5% loss in 5 different names shouldn't happen as if this were to occur, the opposing directional plays should make some profit. Below are the quantity of my current directional positions. This is roughly the type of construction I'm going to seek out each month as I continue to learn overall portfolio mgmt skills and see what kind of adjustments I need to make. To be honest, right now with so many defined risk trades and the undefined ones having stated exit points, I'm not too concerned with greek mgmt.

Bearish (4)
Bullish (3)
Neutral (2)

New Position: BAC

I sold July $14 puts for .14. This is similar to my VZ play in that I'm willing to own this name at this price so there is no exit point, I will take possession and write covered calls. There are two possible resistance lines on this chart, but I am ok with ownership so I'll root for to expire worthless but not cry if it doesn't.

New Position: TLT

I bought the August 100/101 call spread for .395. This is in contrast to my July 101/102 short call spread. I am currently looking to walk that call spread out for a few pennies, or even close it out entirely for a small loss as I'm more bearish now than when I put that trade on. My general feeling is that as earnings roll in starting in July, that no matter what actual earnings are, the guidance will not be what current projections are and thus earnings need to be restated for equities going forward. I think bond yields will continue to go lower until we get reconfirmation that GDP growth actually exists. It's also possible that the correction in equities and run in bonds has already properly discounted this scenario. So, in case I'm wrong, I also sold August 93 puts for .45. So this is a small net credit trade that carries risk below 93. For this to occur earnings and guidance would have to be great in order to get stocks to rally and bonds to sell off. I just don't see this so I put my money where my mouth is. I'll have to manage my risk to the downside should this start to occur because I would not be interested in taking possession  of this instrument.

Here is the combined diagram with call spread and short puts. I've also included the IV screen shot. TLT actually sees an increase in IV as the underlying price increases, this is similar to how gold IV reacts for the obvious reasons. This is another reason why I wanted to own the call spread rather than be short it. You can match up the dates on the chart for spikes in TLT and the spikes in IV.

New Trade: VZ

I sold July $27 puts for .15. I am willing to take possession at this quantity and price and write covered calls and pick up dividends so there is no planned exit to this trade.