Some stocks and levels from T3-Live.

These were as of Friday morning. Scott Redler who puts this together every morning, mostly watches the and plays the market stocks.

Thoughts on Email to SMB

As I review this email, I get bugged by my comment that stating "I had traded options in my own account with marginal success".

I have to sit back and ask myself what I mean by that. So let me share my thoughts. When I first started trading I started my account with about $18,000 in 2007 (Well I I actually had a smaller account with sharebuilder.com where I first nibbled in stocks, about $2,000). I had experienced some success in that sharebuilder account and had decided that I was ready to put some more money in and that I would need a better broker. This is when I found the discount broker Zecco.com. I funded my account with the $18,000 and never looked back. Let me remind you that this was still during the time that you could just about go long anything and make money. There really was no skill involved. So I did. I was so long that I had my $18,000 invested as well as the other $18,000 that the broker would let me borrow. In about 6 months I had made almost $10k, this was mostly just trading equities with the occasional covered call.

I had no system. I would buy stocks I heard on Fast money or Mad money. Or stocks I read about in some of the market books I was reading. But to be honest I was on cloud 9 because I could not lose money for the life of me or so I thought. I had been fooled by mother market and the big kids on the play ground that all the market did was go up...but gain some experience and the market will humble you.

I thought I was so sophisticated when I started trading covered calls. I stumbled across a website called optionsbuddy.com. Here you could find the highest yielding covered call plays. Now I know that a 50% premium for a two month covered call spells trouble. But at the time all I could think is "holy shit", I had found the holy grail. I remember it so clearly, the stock that did me in for a sizable loss. It was GTOP, it was some bio pharmaceutical company that was in phase 3 clinical studies of the only drug in its pipeline. I know now that with out this drug the company would go bust. But I did not understand or even care at the time. I was allured by the high premium that I could collect from the covered call. So I bought 2000 shares and sold 20 covered calls. I collected like $2 bucks on a $4.50 stock. I read up on the company and convinced myself that this drug had to be past and that this company could really have some real upside potential and started thinking about doubling my size going into their release of the results of the phase three in December of 2007. This is where I made my next mistake. The day it was going to release its results after the bell I decided to by my calls back at a slight gain and bought 2000 more shares for about $3.75.

I had to sell off some of my positions to do this as I did not have enough margin. Now I had $16,500 into this company. They reported after the bell and let me note that I did not have after hours trading ability so I would have to wait until the next day to make any move. The results were disappointing as they were not what were needed for the FDA to approve the drug. I watched it drop from about $3.75 to $3.50 then $2.75...Now I have some heart burn...Then $2.25 and then it look to stabilize around $1.75 or so I thought.I calculated and realized that I had just lost $9,500, all the gains that I had made since I opened my account.

But the bleeding was not over. I woke up extra early to watch the stock. Holy shit it was trading at $0.75. By the time the market opened I sold the entire position and collected an average of $0.72 a share for a total loss of about $14,500. I could not believe it, I had just lost all my gains and 25% of my account value.

I sold out of all of my positions and took a step back to re-evaluate. I asked myself if this is really something that I wanted to do? What did I do wrong? Was I just lucky before? And if I were going to be successful at this what did I have to do.

At this point that is when I put my nose to the grindstone. I decided that if I was going to be successful I was going to need to understand how the market worked and really understand the instruments I was playing with. I stayed in cash for most of 2008 as I educated myself in the market as a whole and more specifically in options. I still stayed up with the markets on a daily basis, but was not involved as I had decided that I did not possess the knowledge to play the market, especially during everything that was going on in 2008.

The loss was really a blessing in disguise, because it probably saved me from losing my entire account through 2008. I also got to see two market extremes and come to the realization that anything is possible for mother market. I did not start putting my money back in the markets until May of 2008. I was much more conservative with my size and positions I chose to put on. And was not about to use any borrowed money from the broker.

The problem is I still had no system. And from all the trades I spoke too, they all said that you have to have a system. I went through 2008 and half way through 2009 hitting lots of singles, just trying to slowly regain my account value. By may of 2009 I had finally got back to about break even. Which for 2009 showed a pretty decent return.

I continually learn everyday and know that there is still a ton to learn.

Anyways, I just wanted to share.

To SMB: what I have learned and applied

Hey Roy,

Long time no talk. How are things going? How is the new location working out?

I just thought I would check in and update you on my progress. I have been putting in many hours to develop my trading skills and hone in on the right time frame for me. As I had mentioned to you when we met in NY I had traded options in my own account with marginal success. Basically flat over the last few years. When I signed up for SMB's training course I had every intention of Day trading. But the more I did it the more I realized that I prefer not to watch every tick. So about 2 months in to trading with OVC capital I had to take a step back and re-evaluate what would be the ideal time frame and setup for me. That is when I decided to go back to trading options and apply the skills that I had learned from SMB, and this has been very successful. I still do make the occasional day trade if the trade is compelling enough, or sometimes I use options to make the day trade. Not that I have enough time to call out any trend, but I have been profitable 3 months in a row now. But this is not the most important piece of information I want to share.

I want to share with you the reasons I believe I have been profitable 3 months in a row. A lot has to do with the skill I acquired from SMB:

1) Proper preparation: I have spent many hours developing a routine for researching trade ideas, reviewing my trades, and preparing myself to compete against some of the most competitive people in the industry. As Bella says, I know there are many traders that are way better capitalized and probably smarter than I am, but I have made it a goal, even a necessity to better prepared then they are if I am to have any chance at succeeding at this in the long term.

2) Hard Work: I blow through tons of charts identifying levels and try to identify High probability trades that offer good risk/reward. And then once I get a good list of about 12 solid trades ideas I add them to a watch list and I go through them again and maybe 3/12 end up actually making it as an actual trade. I have created my own trade tracker and have developed my own metrics to measure my trades. My buddy and I have a private blog where we post our rational for getting into every trade. I blend technical analysis, fundamental analysis, and with options I have the probabilities to consider as well.

3) Patience: There are many trade ideas that I put on the back burner as they are good ideas, but they are not quite ready yet. For me switching from day trading to options with a little bit longer of a time frame I am better able to refrain myself from over trading (personal preference). This is not to say that I do not jump in and out, because sometimes I may think the trade is ready and the market tells me otherwise, so I have many ideas that end up in a few scratch trades that eventually turn out to be profitable when the time is right. One thing I have learned is to be mentally agile and I have learned to separate my bias (For the most part) from my trading and just play what the market is currently offering.

4) Detailed plan: As I mentioned before in the blog that I have set up I detail out every trade. I post charts where I identify important levels and targets. I set out a defined stop loss and go through what/if scenarios. I post the risk profile of my trades as well as the probabilities. And lastly fundamentally why I like the trade. Not all these have to align. But as SMB teaches you are looking for "checks" in you favor. And obviously the more checks in my favor the more confident I am about the trade and the more size I will put on, but size also depends on the stock that I am trading. Just like in day trading, trading 10 contracts of GE is much different than trading 10 contracts of GOOG.

5) Discipline: This is very important. Once I outline the detailed plan for my trades, I need to have the discipline to follow through with it. I need to respect my stop losses and when I hit my targets to exit the trade. This is not to say that I can't make adjustments as certain factors of the original analysis may have changed, but for the most part I find that my most successful trades are the ones in which I follow the plan and the what/ifs that I have outlined.

6) Sharing trade ideas: This is the purpose of the blog. It is not only a place of record that I can reflect back on and evaluate my trades. But it is also another source of idea generation. Sometimes I like some of the trades that my buddy posts. But the other purpose of the blog is constructive criticism and full transparency. We help each other see different angles to our trades that we may have not considered. We also have a regular schedule of posting our results and the metrics that we track to keep each other accountable. Like I mentioned earlier, I have developed my own trade tracker and come up with metrics that I think are important and measure my trading strengths and weakness (but it will also be a work in progress as my trading progresses). We both use a uniform format so that we are comparing apples to apples. And we both trade the same style. The only difference between him and I are the account values that we trade with (he has $250k, and I have $25k), but the metrics we have developed are independent of account value. As the trading results in my opinion are all scalable.

7) Review : I review every trade I have open as well as each trade I close. More often than not I review my trades on a daily basis, making sure the trade still makes sense. I also review each closed trade and add a recap to the original blog post with my results and the learned lessons. In addition to this I add the inputs that I track to my trade tracker.

Do these look familiar? These are the most important things I learned from SMB capital. Before I trained with you I thought I was putting in the work necessary to be successful but was confused as to why I wasn't really making any money. I was reading all the right books and I understood all the theory behind the option strategies I was employing. But I was missing the 7 fundamentals that SMB teaches. Everyday and every trade is a learning experience. I am continually adding plays to my play book. As you guys teach to be mentally agile this has been very important, especially as the complexion in the market has changed. The last 3-4 months for me longs made me money. But as the market has changed its tone I had to start making adjustments, hedge some of the longs I still had on and start looking for ways to make money on the downside. I do find it a bit difficult mentally to short the market but I am working through this as you need to be able to make money in up, down, and sideways markets.

So thank you for the mentoring and I think the program was more than worth the $5k that I paid. You have taught me skills that will pay dividends over a long trading career. I hope to make the transition to trading full time over the next 1-2 years. For now I will fit it in with my current job. But don't get me wrong I spend at least as many hours at trading as I do at my job if not more. The days get long but it never seems like work. I just can't wait until I am at a level where I can do this full time.

Regards,

Dominic

A must read from Bella at SMB Capital

The Failure Rate of a Proprietary Trader

Jan 29th, 2010 | By Bella | Category: General Comments

I remember the discussion like it was yesterday in our former 8×10 makeshift training room/office/conference room/lounge, with the first trader who ever failed at SMB Capital. JJ announced he was leaving to take a six figure job at a financial services company in NYC. But let’s be honest. JJ was leaving because he was not making money as a trader. And while he put on an off to better things face, JJ did not want to leave.

I did not sleep well for a month. I felt like his failure was my failure. And I am sure JJ did not sleep well for two months prior to our exit conversation. I still miss having him as a part of our firm. JJ was the most likable guy on our trading desk. But these scenes happen every quarter at even the best of proprietary trading desks, including the big banks.

My manuscript is done and in the hands of Wiley Publishing for One Good Trade: Inside the Highly Competitive World of Proprietary Trading and interestingly enough two chapters were devoted to why traders fail. The failure rate is too high in our industry. There I said it! And I wrote extensively about this in my book. It is so for a variety of reasons including:

1) some are not qualified
2) most are poorly trained
3) many do not have a passion for trading and cannot sustain the energy to improve daily
4) the learning curve is too difficult
5) they are not good enough

I agree with Charles Kirk from the awesome The Kirk Report that you can become a solid trader if you are willing to put in the time. But many believe their passion is trading, then sit on a trading desk, see the work required to succeed, and are not willing to do the work.

The market requires that you become an elite performer. Most people can “punch the clock” at their jobs, do average work, and be appreciated by their employers. Heck you might even get promoted. Try this as a trader and the market will swallow you like a shark does squid. The best trader on our desk grinds it out daily like a steam pipe fitter.

When someone interviews for our desk and asks how long it will take for them to become consistently profitable I answer directly. It depends on the person. But if you are not prepared to work and struggle (you do not learn if you do not struggle) for 6-8 months, honing your craft before you sustain profitability, then I suggest other work. Too many enter our profession without a realistic time frame for becoming profitable.

There is a learning curve in our arena, no one is beyond it, and trading is the ultimate challenge. We recruit many Division I athletes for our desk. And I share as a former athlete, “Even considering your past, you have no idea what it is like to be competitive until you trade professionally.”

Numbers abound about what the failure rate is. Some say 95 percent. Others claim 80. We had a college student fly across the country to visit us who was writing his college thesis on this very subject. He came in at 90 percent. At a big bank the whisper number is 55 percent. I had dinner last night with a close friend that relayed the head trader at a Tier I investment house was bemoaning the worst part of his job- letting failed traders go.

These numbers above include far too many people who should have never tried. There are too many bad acting firms who promise early riches preying on the monetarily ambitious, who have no passion for trading. These noobs are merely hunting for the next big game in our economy. And these pikers get included in the failure data. The market spits out these miscasts. And so the failure rate may be high, but really is not relevant to those who deserve an opportunity.

Most excellent prop firms screen their new traders carefully. At our firm 95 percent of all who apply never receive an interview. And let me say that there are some who make it inside our doors who after learning more about them, never had a chance to become a profitable trader. For even those who are accepted into our training program there will be those who fail. Some classes have 5/6 still trading, others 3/9 (though two quit early and one was fired the first week). The best we can offer to qualified candidates who receive an invitation to train with us is to give them the best chance to succeed. This is the most we can promise!

It is the obligation of a proprietary trading firm to offer the very best training possible for new traders. This is simply offering opportunities for traders to develop the intricate skills that will determine their success. The markets have changed substantially since when I began. The old school sit next to a successful trader and learn through osmosis teachings are outdated and must be replaced by modern training (I will write more about this for SFO Magazine in June). I have the privilege of receiving dozens of emails daily from new traders who detail the training they are receiving from other firms. Most talk of their struggles. Almost always their training is substandard. This is an unfortunately huge factor in why so many fail.

A firm must allow you to lose money if you are doing all the things necessary to succeed and improving. Down 50k but working hard and getting better every day is not a reason to cut a trader. Not doing the work demanded by the market and slightly positive or worse, then the firm owes it to all the other traders on the desk to get rid of that underperformer. These noobs hurt morale, drain firm resources, and do not deserve the privilege of trading professionally.

To become great at anything requires deliberate practice. If you want to get better at a consolidation play you must practice this trade hundreds of times until you have developed the skills to automatically trade this play in real time. How many three pointers do you think Kobe shoots everyday? Training that does not stress deep practice is unsatisfactory.

For the developing trader just learning simple charting set ups is not enough. This is the great myth held by too many who have never traded real money live. How hard could this trading be? All you have to do is get long when AMZN hits 116 and kick it out at 130. This has not been my experience with the market.

And it is great that you have learned a new technical set up. Now how do you trade the fifteen subsets of that trade which the market will demand you learn? Trading is not about learning a simple charting set up and then executing. If you do not agree then go and try it. One day you might crush it and leave the market a self-delusional future star. And then the next few trading sessions you will get stopped out (assuming you honor a daily stop out) and lose much more than that day you crushed it. Such thoughts are like the golfer (hacker?) who drains a fifty foot put and then believes he is a great putter.

If trading were that simple there would be no need for discretionary trading. All trading would be automated. And we all know that automated trading systems fail at a higher rate than discretionary traders. It is about the subsets, the nuances, mastering the different market variables that separates the veteran profitable trader from the noob looking to cash his first paycheck. Too many new traders gravitate towards the simple, which is an unappetizing recipe for failure.

Scalping after just learning how to Read the Tape is also insufficient. If you are at a firm and all they teach is to follow the order flow I offer this advice- RUN! Run from that firm as fast and as far as you can. Also, trading without a grasp of intraday fundamentals will be penalized by Mother Market. Look you must learn technical analysis, how to Read the Tape, and intraday fundamentals to succeed as an intraday trader. All of this takes concerted practice over time until you develop the skills necessary to consistently take money out of the market.

Trading is a performance based business. After the Close yesterday Steve and I reviewed our trading in QCOM on the Open and AMZN in the After Hours. I have traded my own money for twelve years. I missed a QCOM short for size and an easy multiple point downmove by a millisecond yesterday. This is not acceptable (though I eventually put together a decent day). It was my fault for missing that trade.

Too many new traders miss these trades and never obsess about not missing the next one. It is always someone else’s fault. If only I sat next to that trader. If I just had a better charting package. If only that girl I was seeing wasn’t so needy. That is all bull $hit. You determine your destiny as a trader. It is up to you to perform. I didn’t miss that trade in QCOM because I was patrolling our risk monitor (which I was) watching the work of a new trader. I missed that trade because I missed that trade! And too few ever develop this mentality to survive as a professional trader.

A group of college students from Texas A&M visited us recently and I will share what we discussed. I graduated from law school with a safe job awaiting. I just couldn’t do it. To me I felt like I would be selling out. If you have a passion for something, then go learn if you possess a talent for it as well. But have a Plan B. You will become great at that which you have a passion and engage in deliberate practice for and rewards your talents. This could very well be trading. But maybe not.

To me trading is the greatest job in the world. Every day is new. I sit around bright, talented, ambitious, well educated, market followers quick to crack a joke and smile. If you become successful your upside is unlimited. When I used to just trade, Steve and I vacationed and went wherever we wanted. There were very few boundaries to our world. Trading is stimulating. It requires you to find the best inside of you. The best decision I ever made was shunning a career not a fit for me to trade.

If trading is your passion, you possess the ability to survive the learning curve, are willing to engage in deliberate practice to develop trading skills, have a history of success, and a Plan B, then you should consider trading. And you need not be an Ivy League graduate to become a great trader. And the market does not care if you have family connections while executing trades. Nor must you work at a big bank or live in NYC. But please find a firm that will provide you with the tools and education necessary to succeed. And understand that those who make it have developed their trading skills through deliberate practice, work that many are unwilling to do.

If you have taken this path and wish to ask me a trading question, please feel free to reach out to me.

Best of luck with your trading!

IB Fees

The picture is this week's volume with commissions. With all the free trades I still ended up at roughly .75 per contract. Just for the hell of it I added on the $10 fee I wasn't aware of and it's still a good average price to pay per contract. However, this isn't a typical volume week for me. So I will monitor my volume and fees and make a change when/if it makes sense.

Rolling the dice on XOM

Another name that reports on Monday 2/1/10 is XOM. Does not look like the market is expecting much. But I decided to buy 20 Feb '10 $70 call contracts for .11. I am risking $220 dollars. Take a look at the price slices below. In the first screen shot I left vol alone and then I adjusted it down by 5%. Historical vol is currently at about 14% and this option is trading with a vol of 19% so an adjustment of 5% would put it in line with historical.

The options market is only pricing in about a 3.8% move based on the front month straddle. This gives XOM an expected range of 62.75-67.70. Like I said this is just a gamble, but if it hits I could win the option lottery so to speak. Every once in a while I like to take these small bets just for fun. Have to fullfill that gambler inside.

Summary of Trading Results (3 months)

Below are the metrics that I am tracking for my trading. This is a summary of Nov - Jan. I took a bit of a hit from that NFLX trade as you can see in the Un-realized Gain/Loss, which represents about $1200 of that loss.

NFLX learned lessons

So here are a few of the things that I learned from this trade:

1) When I initially did my analysis I only modeled the expected 11.6% move priced into the options. Based on that analysis I was only expecting a possible lost at most $250 on the 10 iron condors that I sold.

Take Away --> When performing analysis, I need to model moves outside of the expected range.

2) On the day after earnings I saw a news come across that Netflix had a short interest of 9 days to cover, which they considered high. At an average daily volume of 1.5 million shares on a float of 54.5 million shares that equates to about a 25% short interest working backwards.

Take Away --> The short interest should be considered because earnings surprises to the upside can cause a short covering. I actually expected NFLX to beat but I had no idea what the short interest was. Did not even consider it.

3) Position sizing. Well if I would had done my analysis right I most likely would had taken on smaller size as I never intended to take on a loss of more than $200. But hindsight is always 20/20.

Lastly I did the analysis on the position repair that I am attempting. I now have a total of 5 $65 calls. I sold $70 calls towards the end of the day to cap my risk on those calls. My total maximum loss is about $1700 with the short vertical spreads in combination with my long vertical spreads. The most I can make is also $1700, which if I achieve maximum profit meaning NFLX finishes above 70 I actually make $500. My break-even price in NFLX is $69. It is currently trading at $64.5.

SPY Bear Put Spread

Depending on how things open up on Friday I'm planning on buying the 106/105 SPY put spread for .29. Risk/Reward is .71/.29 = 2.4:1 I haven't decided how many contracts yet. This is just a small directional play as I think the risk is to the downside. It definitely feels like the mood has changed.

Strategy Repair (Iron Condor)

So Yesterday I decided to sell 10 Feb '10 55/57.5/47.5/45 Iron Condor on NFLX going into earnings. The move was double the move that was priced into earnings jumping over 20%. This put me at pretty substantial loss. This was one of those trades that went out of the 1 standard deviation range. But I have learned not to panic on moves like these and am trying to scalp some of my losses away.

So let me give you a few more details. I sold each Iron condor for $1.25 for a total premium collected of $1,250 and a maximum loss of -$1,250. A 1:1. The large move to the upside made the put spread I sold worth only $0.05 so I bought back all ten of those this morning for a total of $50. I locked in the gain of about $610. Then I went out and bought 3 Mar '10 $65 calls to give me some positive delta as I am now convinced that there is more room to the upside. I am holding the Call spread for now to see if we can get some kind of mean reversion before it continues higher, trying to limit my loss. Depending on the pull back I am willing to buy another 3 call contracts.

Now there is no guarantee that this will work, but I think that it is worth a shot. I may even end up losing more money then if I would have just taken my loss on the call spread.

I will keep you posted on how this turns out.

SPY vs SDS as a hedge

So this morning I paid $2.13 for 5 SPY Feb '10 put contracts. At around the same time, if instead, I wanted to hedge using the 2x inverse SDS ETF I could have got the $36 calls for $1.80.

In my analysis I looked at a 5% down move in the SPY, which would be about a 10% up move in SDS. This allowed me to see how many contracts I would have to buy of SDS to get the same protection that I got from the SPY puts.

What I found was that I would need to buy 6 of the SDS $36 calls to have about the same protection that the SPY was providing. This would cost about $1080. The SPY puts cost $1065. So the cost differential is not enough to choose SDS over SPY. Next if you look at the P&L analysis below you will notice that there is again not much of a differential. The only advantage that the SDS has over the SPY puts is that if price stays the same you lose about $40 less.

Note: When you look at the analysis below, remember that a 5% move in the SPY is 2x that in the SDS.



I then increased and decreased volatility by 10% to see what effect that would have on both positions. I chose these two scenarios as price and volatility have an inverse relationship. So as you increase volatility you see that the SPY acts much more favorable and there is a significant gap between the performance or effectiveness of the SPY vs the SDS as a hedge. Then when I decreased the volatility you see that SDS is a little more favorable with a move to the downside. But I almost want to ignore this scenario because in more cases than not as price declines volatility would rise. But the big difference that stands out between the SPY and SDS is if price stays the same you lose half as much with SDS.



Conclusion: From the analysis, the take away I got is that the SPY puts in my opinion are more effective in the actual hedging. Since you are buying the protection for downward movement you are going to want the option that delivers the most protection. So I would choose SPY puts over SDS.

Possible positions for next weeks earnings

Next weeks earnings for stocks on my watch list:

2/3/10 --> CSCO, STLD, V

CSCO - I am considering selling the July '10 $23 puts on CSCO into earnings, maybe buying some front month $23 calls

V - I am interested in buying some Feb '10 $85 calls into V earnings

STLD --> X reacted terrible to earnings. Not sure if the same fate is in store for STLD. Looking to buy the $16/$15 (Call/Put) strangle. I think it could have a decent move in either direction. I do not think it is going to be a non-event.

Delta Hedging analysis in TOS

See the below screenshot on Delta hedging and read my notes at the bottom of the screenshot. I only know how to complete this analysis in the TOS platform, as I have made this my tool for all my analytics.

Oh in my notes I forgot to mention that the Blue outline is the total negative delta exposure I got from the Long puts.

Market has continued to breakdown

There was a bear flag forming on the SPY and this morning it has broken that flag to the downside. In case of a further down move I bought 5 SPY 108 Puts @ $2.13. I will post my position summary and all that on Friday the last trading day of the month.

AMZN Analysis for Earnings Play

Re-post: Volatility has not dropped 10% this morning. Don't know what I was thinking when I wrote that. I mean to say the below.

So I looked at the 2/1 unbalanced straddle and played with price movement and volatility. But nonetheless I did the analysis based on a 10% drop from where the current is, See the results below:



So it looks like my max risk would be about $700 bucks and my max profit based on an expected move of 11.6% would be about $1000 on 1 of these ratio spreads. Not sure I like the prospects of this trade. I will continue to look for other ways to play this going into earnings.

AAPL Earnings Play Straddle vs Iron Condor in Depth analysis.

So below is the analysis comparing the Straddle vs the Iron Condor. Study it and read the notes that I placed on each. I do want to point out that I mis-spoke about the margin requirement. I was looking at the ATM straddle and 10 contracts. You will see from the BP effect column that the margin is reasonable.

Straddle:

Iron Condor:

Let me know your thoughts after you review the analysis.

AAPL Strangle vs Condor

So I just ran the numbers on AAPL as the current price is roughly where I put the condor trade on yesterday, about $205. Without giving buy and sell numbers for all four legs, here are the nets. At $205 the condor is a net credit of .82, the strangle is a net credit of 2.24. Even at the actual prices that I got out at, with the underlying at $209 (+5 away from where the trade was put on), the condor was a .10 credit and the strangle was a .71 credit. So from this I'm taking the following learning experience: If this is intended to be a one day trade to see if IV comes in, a condor doesn't make sense to me as you are long the wings and you are anticipating vol to come in. Why would you want to be long options for one day if you're expecting vol to decrease? Intuitively this makes no sense.

Let's look at this another way. My goal was to play an expected decrease in vol over a one day period. I was right and made .82, could have made 2.31. That's another (2.31-.82)/.82 = 181% profit that was left on the table in exchange for a defined risk. I would argue that giving up (2.31-.82)/2.31 = 64% of the actual reward in this case in exchange for defined risk does not make sense for me. Further more, had the underlying moved drastically over the earnings announcement (hence IV does not come in and possibly even increases), we would admit defeat and exit the position at a smaller loss than the maximum defined under the condor anyway. If this is the case, why go long the wings in the first place if you're not actually going to use them?

However, if your holding period is more than a day or even until expiration, then I understand buying the protection even though you anticipate vol coming down. In that case you have overnight risk. If you want to argue that being long the wings is protection in case you are wrong about IV coming in, I would counter with two things. First, is the protection really worth the expense? Second, why not just widen the range of your strike prices on the strangle instead? Sell them at strikes that make sense even if you are wrong the IV does spike.

What are you thoughts? I don't want either of us to make the mistake of thinking that since we made money on the trade that this idea as it was played makes sense and therefore we should do it again. After I've analyzed the trade I would have done it differently given my goal and time frame involved. Great learning experience for me though. This goes back to what I said about having to have at least 1 contract on to actually follow though. I doubt I would have run these numbers on a paper trade which means I wouldn't have learned anything. I'm happy with the way things worked out even though I only made $3 today.

AMZN could be another Earnings play

This one has a 22% spread between IV and HV. This could be a good candidate for an Iron Condor sale. Take a look at the chart below:

RIMM IV vs HV

RIMM has fore sure been an under performer as of late. But implied volatility is currently trading at a discount to historical volatility which may be indicating that Vol is a buy here. Take a look at the chart below.

SPX spreads

I had mentioned in an earlier post that the spreads on the SPX were huge and that it was very hard to get good fills. The market makers must be making some good money on these options. Below is a screen with the current Iron Condor that I have in the SPX. Look at the bid x ask spread to the right of each position.

Here is another view from TOS

So this morning I was playing with the analysis tool on the TOS platform. I used our AAPL earnings play as the test subject:



I isolated volatility as this play was on a volatility crush. You will see next to the Y axis 4 different steps in Volatility. From the top is current volatility moving in increments of -5 points lower. Next to each volatility step is the estimated profit. Will be interesting to see how this plays out during the open. Profit targets at the different volatility are at its current pre-market price of 205.7

AAPL on Wednesday

Their Wednesday announcement could be anything from a letdown, to just what the leaks have described, to a game-changer a la the iPhone. If vol isn't down on Tuesday from earnings that produces a profit on the condor, I'm thinking about just keeping it until after the announcement. Here is my thinking. If it moves big I'll just cash out the side of the condor in which the move occurred, and then have a very cheap play on for the next four week in the other direction should price revert after news is digested. It's only one friggin contract so probably thinking way to much.

Margin requirment by position

Just an FYI I logged into the account managment portion of IB on the website and found that you can run a report that will break down the margin requirment by position. It is located under Report Management-->Margin reports.

Today's Trades

I sold 1 Feb AAPL iron condor and 20 Feb $117 SPY calls. This sheet is just an IB export and then I made some asethic adjustments. I would like to add a $ risk/reward metric to this sheet. Let me know if you have any ideas on how to add that.

Monday

Since vol is up and I think the top is in, I'm looking at selling the SPY 115/116 call spread. Using closing prices it's only about a .19-.20 credit, so risking 4 to get 1. However, I don't care what the risk/reward or percentages are as much in this case simply because I believe the top is in. I'm also considering selling the 115 now and waiting to purchase the 116 after vol comes down or if the market moves down some more. My risk is that market rallies back up to the top. I'm willing to take that risk. Any thoughts?

Futures

Now is a time you can play futures instead of options if you're worried about volatility. If you buy puts today and volatility comes in, you can actually lose money even if the market moves down. There is no vol on futures.

I have been busy this morning...

So the market has for sure taken a beating with a third triple digit down day in a row. As I posted last week I came into this week with about 95% cash because I felt that the market needed a rest, it was one of those gut feelings. Needless to say it has come in handy, but I won't lie I have taken a bit of a beeting today for positions that I put on yesterday, but I am not that worried.

With the drastic move down the Vix has popped from a low set last week at 16.26 to a high of 27.59 today. I have never traded VIX options but I could not help myself today and I bought 10 Mar '10 20 puts @ 0.60. I messed around with the option pricing model and if the VIX pulls in to exactly 20 that I will be up about $3,000, which is what I am targeting. See the risk profile and price slices below:

If the VIX continues to rise I will most likely be buying more puts at higher strike prices. May even think about selling some call spreads...

This morning as Dell broke below $14 a share I sold 2 Jan '12 12.50 puts @ $2 a piece. I will sell more on a further decline. They report on 2/18/10.

I also added to vertical put spreads in FUQI from the screen list I posted yesterday. I sold 2 19/17 put spreads with Mar '10 expiry for $0.90. If these were to go against me I do not mind owning the stock, so before expiration I would sell the puts that were purchased and take delivery of the shares to sell covered calls.

Lastly I closed out the put spread protion of the Iron Condor that I sold on ISRG and captured about 90% of the gain. I am looking for a pull back after this thing gapped up $40 points after its earnings announcment. I will then look to offload the call spread piece of the Iron Condor.

Below is a Position Summary:

Stock screener results

So this afternoon I setup a stock screener with the following criteria:

1) Avg daily volume >1 million
2) Forward P/E <10

This gave me a manageable amount of results, 22 in all. Below is the results of the screen. I have highlighted in Green the names that I am familiar with and most likely the ones I will look into further for possible positions.

New position in FSLR

Today I sold 3 Feb '10 135/130/105/100 Iron Condor on FSLR for $1.65. See risk profile below:

I set the price slices to my break-even points which lie at $103.26 on the downside and $131.73 on the upside. As you can see the options market are pricing in a 100% probability of trading within this range between now and expiration. From what I can find I do not see any major news announcements on tap between now and when these expire.


Now lets look at the chart. To me $100 looks like a nice support level and I think that the 50 day MA (Yellow Line) will act as resistance on the upside at least in the short time frame of this trade. Next I want to draw your attention to the Historical volatility vs IV. There is about a 25% gap. So I am trying to sell vol on this play.



PE is around 16 on this name.

I am looking at a possible profit of $510 on a risk of $990 or 51% RoR.

Updated position Snap shot:





Remember I closed out V, GDX, and YGE for a small loss today. I think overall I took about $120 loss total closing these out. Detail will come at end of the month.

New Position (VZ)

I sold (5) Feb $30 puts for .51 and (5) Feb $29 puts for .23. My intent would be to roll these out to March should they move against me, but depending on what price we're at on expiration I might even take possession and then sell a March covered call.

Although PFE and MO have not held up today like in the recent past, I'm considering buying March calls on those names. I'm not sure how large my conviction is right now. If we sell off I expect everything to sell off. I still think we're in an environment where all correlations go close to 1.0 when things start to go south.

New Financial Regulation

http://www.cnbc.com/id/34975288

What will this new proposed financial regulation mean for the markets? It is hard for me to believe that GS would remain a bank holding company, especially since they derive most of their profits from proprietary trading activities. I think that becoming a bank holding company was convenient and necessary during the times, but if this goes through I can easily see GS give that up and what ever special privileges come with it.

Not really sure what JPM would do. But the guys in business are a lot smarter then the government is, and I am sure they will find a way around it.

What are your thoughts?

Berkshire Hathaway 50-1 split

I am interested in the BRK.B stock of Bershire Hathaway since its split yesterday of 50-1. Not sure when options will start trading on it but I am going to keep an eye out. Because it has the name Warren Buffet behind it I can see many retail investors trying to get in now that the price is at a more affordable level.

Thoughts?

Jason's Current Positions

So I added my actual IB printout as well. I would like to create a hybrid of these two. IB is easier because it has the marked-to-market numbers, and also incorporates your fees in to your cost basis. But I don't need the ticker symbols. Maybe we can export the current portfolio from IB into Excel, then add a column for "Strategy" and/or "Detail". I also like the separation of trades by colors in Excel as well because that is easier for the eye to block off multi-leg trades. So let me know how the export to Excel works.

Current Positions Snapshot

Here is a snapshot of what I currently have open.

New IWO positions

Last week IWO recommended buying 6 of the Mar 90 calls@ $2.30. I was interested in the play but was not ready to execute. Then this selloff came and I liked how V held up and bought 3 of those $90 calls at $2.04.

There was also a Reccomended trade today in GDX. I bought 3 of the Mar '$49 calls at $1.33 a piece.

See the IWO premium site for details, if you are interested.

GDX--> http://www.investingwithoptions.com/2010/01/new-gold-trade-2/


V--> http://www.investingwithoptions.com/2010/01/new-financials-trade-2/

Some names I am watching...

1) IBM--they just reported a great qtr and gave upside guidance going into FY2010. They are looking for earnings of at least $11 per share. They are currently trading at about $130 with a P/E close to 12 for FY2009. They have a forward P/E of 11. Will be watching how this thing acts as it pulls back to its 50 day MA at 128.91. Leaning towards selling Mar or Apr $125-$130 puts.

2) STEC--After making a run to $20, my initial target from previous trades, it is making a significant pullback. There is also chatter that IBM might be interested in buying STEC. Looks like it could retrace back to about $15 a share near its 50 day MA at 14.63. Not sure how I will play this yet, but I am interested.

3) RIMM--still watching this one. Would like to sell the Jan '12 puts that I bought back last week once I see a bottom in this name.

4) DRYS--Alread initiated a third of what I am willing to hold in this name. Still pulling back.

5) STLD--This made a run to a 52 week high above $20 and is now trading near 17.50.

DRYS is back on...

Please see my oringal analysis on the Dry Bulk shippers on this one.

I am still convinced that DRYS will make a substantial move once it can blow past $7-$8. I have set an initial target on this thing to $15. This does not mean however that I am expecting to hold onto the position to get here, but it at least shows there is room for my position to run and yield a decent gain.

Today I sold -5 of the Jan '12 7.50 puts for 2.85 and bought 10 Jun '10 7 Calls at 0.62 a piece. The total credit collected is $805. What is the rational. I was willing to buy 2 calls for every 1 put that I sold because this esentially gives me a 5.89 breakeven price or the price it would cost me to purchase the stock if I were exercised. As I have already stated I think that this name is undervaled but the area around $6 is where heavy support lies.

SPX Feb '10 Iron Condor

Today I am getting my feet wet with my first Iron condor. I have constructed the following Iron Condor: Sell -1 Feb '10 1190/1195 call spread and Sell -1 Feb '10 1100/1095 put spread @ -1.25. The most I can make on this trade is $125 on a risk of $375. This is about a 33% return on risk. I am playing with very small size because this is the first one that I have done like this.

With the choses strikes it gives the SPX a 90 point range that it can trade in between now and Feb '10 expiration. It is about +/- 45 points from its current price when the trade was initiated of 1145.

Looking at the risk profile and the probilities below. You will see that the option market is pricing in 100% chance that it finishes within the inside strikes of my Iron Condor which would yield the maximum profit (See Below).

New Positions 1/19/10

Today I initiated the following new positions:

1) DRYS: Ratio Spread --> Sell -5 Jan '12 7.5 Puts and Buy 10 Jun '10 7 calls @ -1.61

2) YGE : Naked Puts --> Sell -3 Feb '10 14 puts @ -0.70

3) ISRG: Iron Condor --> Sell -1 Feb '10 350/360/280/270 Iron Condor @ -3.25

4) SPX: Iron Condor --> Sell -1 Feb '10 1190/1195/1100/1095 Iron Condor @ -1.25

The ISRG and YGE trade are from IWO, to see notes navigate to the premium section of the blog.

DRYS is another attempt to play this name on a pull back close to support at $6. Further analysis to come later today on the DRYS and SPX trades.

This still leaves me in 73% cash.

January Recap and 3 month summary

So Above I have included a summary of my results for the last three months vs that of the three major indexes. As you can see I have a total gain of $4,464 and of that I have taken $2,784 in Income distributions, which leaves about $1,600 of the gains in the account.

Then below you can see my results through January expiration. As you can see I had a good month.

Current Market

If you think stocks look to be taking a breather or even headed for a dip. Maybe we should look at selling some far out strike price calls to capture that time premium. Definitely use a spread instead of naked to limit risk, maybe even use a ratio spread.

I have moved to 70% cash

It has been sometime since the market has had a healthy pullback. I have made some good gains and I think it is prudent to reduce exposure and be ready to buy the dips. I don't think the rally is over I just have that gut fill that it needs a rest. Over the past few weeks I have been shedding positions moving to a higher percentage of cash, currently at 70%. Could look to move to as much as 80-90% cash. I don't mind missing a move if I am wrong, but I don't want to be caught off-guard.

JPM reports Friday...

Any ideas for playing this name into earnings? I may look to buy some cheap calls or puts the day before the earnings. Not sure....

Looking at CSCO

CSCO has earnings coming up on 2/4/10. They have a history of running up into earnings and selling off after the release. I am looking at the APR $25/$23 risk reversal, buying 10 $25 calls and selling 10 $23 puts. I like the short $23 puts as this is a level of support on the daily chart. Based on past movements it could get to $26 before earnings.

Update with full analysis will come if I actually put on the position.

UPDATE:

So I ended up putting on a ratio trade. What I decided to do was Sell 5 July '10 $23 puts for $1.21 and buy 10 Feb '10 $25 calls. As I mentioned above I like the $23 puts as they offer a defined level of support on the daily chart:



Then in the next chart, I have plotted a 2 year weekly chart, as this is how far I needed to go back in order to find the next price target levels. I am looking for the first target of $25.5 and then $27 from there. I am banking on the hope that CSCO will act as it has historically trading up 2-3 points into their earnings release and then selling off.



I only plan to hold the Calls until the week of earnings. After which time I will re-evaluate my stance on the position and decide if I want to continue holding the Puts until expiration to possibly expire worthless, which currently have about a 70% chance according to the options market (not shown).

Below I have posted probability of CSCO touching certian prices by the day before earnings. I am obviously betting agianst the probabilities. I am making the bet that they are much higher and theirfore making this position more desirable. Take not of "Live" price slice of $24.16 or where CSCO is currently trading. If CSCO does nothing between now and the day before earnings my maximum risk based on the option pricing model is about $100. And you can take a look at where the P&L will be at various other prices that I have plotted.

New Position in (MO)

I had my position in MO exercised early last week. I have been looking for a way to get back in in some capacity. The options premiums are low enough at the moment that a covered call isn't attractive. I would like to sell an ITM April so I am on board for the next dividend and hopefully get exercised early again, but there isn't yet an Apr strike available, probably won't be until March because of their option cycle. So I bought some Feb $19 calls for $1.42 when the stock was at $20.30. That's only .12 time premium for six weeks. I'm real comfortable with that. I don't have a set exit point and might just carry them until expiration. I had looked at this as a possible play last week and just didn't pull the trigger. At that time the stock was at $20 and I would have paid $1.17. So I've already missed a 20% move. I was originally prepared to spend $5000, so since I missed a small move already and don't want to be a chaser, I only spent $1420 on 10 contracts and will buy some more if the stock hits $20 again soon.

VIX hits new Lows

Is it time to start thinking about buying some upside Calls in the VIX? Or at the very least selling some PUTS?

TRN: Rail about to rocket?

Here's another short squeeze candidate I'm looking at. The transports have been performing well especially with more people beginning to believe in a economic recovery. I've traded TRN last year and it really hasn't been a money maker but I think this may be an opportunity to catch some shorts getting caught. According to short squeeze it has over 14% short interest.

I'll buy a small stock position just to keep an eye on it and look at selling 4 Apr $20 puts for around $2.5 each.

Here's my game plan:

- Stop loss around $17.80 for a total loss of $86 (assuming 60 days left to expiration)
- Target price of $20 for a theoretical total max profit of $440 (assuming 60 days left to expiration)

P&L Calculator:



Probabilities aren't really showing me much but I really don't know how reliable this tool is:



Shortsqueeze.com:



Chart showing sideways consolidation in a uptrend:

WFMI: Short Squeeze coming soon?

I'm looking at selling some really short dated puts on my employer WFMI. From what I see the selling looks to be done and ready to pop (see the 50 SMA & 20 EMA converging like a platform to blast from). The stock has a relatively high short interest and I'm' looking for a move in the next 30 days. Earnings are 02/17/10.

I'm probably also buy a starter stock position of 50 shares just to keep it on my screen.

Here's what I'm looking at: Selling 4 May $30 puts for around $4 each.

- My stop loss is $27.20 for a loss of around $70 (using 90 days left til expiration)
- My exit is around $30 for a max profit of $564 (using 90 days left til expiration)

See analytics below:



Relatively high short interest:



See the wedging symmetrical triangle with the 50 SMA & 20 EMA converging:
*Stochastics are bouncing off oversold support

New bearish trade in AA into Earnings

Alcoa kicks off earnings season on Monday and has in the past few weeks made a run from about $12.75 to a recent 52wk high of $17.06, a staggering 32% gain (See chart below). I know there has been a lot of good news in the sector, but I think that investors are getting a little ahead of themselves. So I bought 10 Jan '10 puts at the $16 strike for $0.24. I actually got the idea from a trade idea posted by Onn.tv, only I am taking the opposite stance. To see the trade alert that went out click this link -->
http://www.onn.tv/articles/practical-options-trader/trading-alcoa-nyse-aa-earnings/




I know that expiration is next Friday, and that the decay on this will be exponential after earnings if nothing big happens. But it is a gamble that I am willing to take. I think that AA has the potential to fall back to at least $15. Lets look at the risk profile:

As you can see by the probabilities above. The options market is pricing in that AA has a 100% chance of finishing between $15 and $16.95 where it is currently trading. If it does nothing on Monday I lose about $100 bucks. If it trades down to $15 I make about $880, and if it shoots to $18 I lose $204 (almost all of the premium paid).

So lets see what Monday brings.

DELL Risk Reversal (Re-Post)

This morning I talked about putting on a new trade in DELL. The traded I decided to put on was a risk reversal. I sold the May $14 puts for $0.94 and bought the $15 calls for $1.27 for a net debit of $0.34 per spread. I have 10 of these and at the time DELL was trading at $14.85.

I chose this position over the synthetic as I believe that it offers me a bit more flexability to play different scenarios. So first lets take a look at the risk profile:






As you can see from the above risk profile that the options are pricing in a 60% chance that Dell will touch $16 by 2/18/09. Which is how long I intend to hold this position for, at least the call portion of the position. I also plotted what my breakeven point would be on this same day. You will notice that my break even is set at $15.34 and dell has a 81.5% chance of getting here. There are a lot of inputs that go into calculating this number so I will save you the explanation. But it has to do with all inputs that go into the option pricing model.

Next I want to disect each leg of the trade independently. So first lets look at the short puts. I like these as even if the call side of this position does not workout I am okay with selling the calls at a loss and holding the short puts to expiration. You can see below that these short puts have a 79% chance of expiring worthless by expiration. I like these odds. I also see support on the chart at the $14-$14.20 area. If this area were to be breached I would re-evaulate. But also notice that the break even for these puts is $13.07 well below where support is and well below where it is currently trading.




Next lets look at the long calls. You can see that the options market is pricing in a 75% chance that DELL hits $16 by expiration. I only need it to touch this level, then I will book the profit and manage the other half of the trade. Not that I intend to hold the portion of the position past 2/18/10 but I have a mathmatical edge as it stands now. Of course that can all change in a day.

BHS: The mother of all short squeezes

Found this one last night and bought 50 shares at $8. Right now it's popping around $8.8. According to shortsqueeze.com there is about 7.6% short float in this stock and it would take 42.5 days to cover! Now I seriously question the validity of these numbers but seems to be working now. Could be just the beginning of the move.

AAPL: Earnings Play?

I think Jason said he was speculating on Apple. Earnings on 1/25/10. Anyone going to be playing the earnings? I bought 20 shares this morning at $210 just to keep an eye on it with a stop around $208.90.

Let me know your thoughts and what you would do if you were to play the earnings.

Expected Value Of A Position

Let me run this past you. I want to try to find the expected dollar pay off of trades using the expected probabilities of expiring worthless. Let's take the IWO GOOG trade listed at the bottom of this post for example. The odds of expiring worthless and collecting the $510 are .7168 x $510 = +365. However, I need the odds of expiring at or below the long put to get that expected loss. The expected loss isn't (1 - .7168), that is just the odds of losing something more than $1. In my mind this is a somewhat simple game. If implied volatilities hold true to the bell curve over the long-term, all you have to do is enter trades that have a positive expected payout. We already know the bell curve works for random probabilities, the question is going to be, what is the historical correlation of 30-day implied volatility versus actual outcomes over this time. I think the guy I emailed at the CBOE will know this information. What are your thoughts?

I liken this to playing roulette. If there are 38 numbers on the wheel and they were paying 39:1, you take that bet all day long and just have a big enough bankroll to wait for the odds to play themselves out over time. Since implied vol isn't a discrete random variable like the numbers on a roulette wheel, I would like to know it's historical accuracy. What are your thoughts? Do you agree that as long as the implied vol is accurate over the long run that all you would have to do is find positive expected payouts and then play enough of them over time to spread out the risk?

IWO Trade Idea for GOOG

SELL -2 VERTICAL GOOG 100 FEB 10 570/560 PUT @2.55 LMT

Return: 510

Risk: 1490

Return on Risk: 34.22%

Prob of expiring: 71.68%

Prob of touching: 55%

Friday's job report: Catalyst for Lightoff or Selloff?

The market seems to be on-hold until tomorrow's Unemployment Report. Think the number is going to be better than expected and signal a reversal in the job market but the key question is how do you think the market may react? Thoughts? Either way will probably be explosive.

Watch Homebuilders: LEN announces strong earnings

Bought positions in KHB & BZH. The complex is up pre-market.

http://finance.yahoo.com/news/Homebuilder-Lennar-posts-apf-3660675778.html?x=0

AXP: Another bullish looking chart waiting to pop out

I own 100 shares of AXP at $41.36. I've held the position for a few days now and waiting for that pop. May look to enter a short call position too. Thoughts about options strategies to capture the move?

Cool Chart View in IB

This morning I was exploring the IB platform a little more. I was playing with the charts as was really impressed and happy with the information I was able to display. In the chart below you will see that I have been able to display option volume split by call vs option buying (top chart), next Volatility (Historical vs Implied), Open Interest (Call vs Put), Put/Call Ratio (on volume that day, and the open interest put/call ratio overall).

A lot of the information that I see here, in my opinion is exactly what the livevolpro.com is trying to sell you. I am in the process of trying to get with IB to see if there is a way to download this information to excel, because if this is possible I can create a lot of the same views that livevolpro.com has. I will keep you guys updated.

US OPTION SYMBOLOGY CONVERSION

http://ibkb.interactivebrokers.com/node/972

In case you guys didn't get the same email blast from IB.

Chart analysis on Current positions.

As you can see from the below charts, there are a lot of similiar breakout moves. The question is will they be able to conitinue to the upside? A lot of these names have been trading down to sideways for the longest time and are ripe for a move...

XOM


STLD

SOHU

RIMM

DELL

BX

EGLE

DRYS