November Monthly Review

I have been reading a book. The complete guide to option selling. Great so far, and the main topic of this post and the parts in the book I am reading are spreads. 

October I played with naked options, now this month I am taking it to the next level through spreads. 

 Experimenting with Vertical Spreads

Trouble with stat keeping

    -Questions that need answers to.

        -How do I record an opening spread?

            -Both bought and sold?

            -Separate tab for bot?

        -What does exit price look like?

        -If I decide to take off bot/hedge, how does that affect mae/mfe/exit?

        -Is it simple subtract the bot from the sold?

NOW we are talking about expiration

    -These kinds of trades dont have the same p/l movements as naked options do. If I get a crazy trend move then the bought runs to 0 as does that sold, but everything in between does nothing special.

    -Expiration matters, unless I decide to take off the hedge. 

    -Or does it matter at all?

        -If price goes greatly in favor, 0s can be hit pretty quick.

          -There must be some conditions met in order for me to take the hedge off.

                -Hedge off on pullbacks only makes sense. 

    -Using data from oct, if X trades reach X MFE, then X chance the expire worthless AND X chance they are winners. 

        -Therefore there is some MFE on the sold side that tells me its safe to remove hedge.

SIZE

    -This is where I can get big selling options.     

    -Account size will only allow me to be short 4 SPY options or 5 Q options at a time. 

        -Spread difference (Ratio) Can only be 4 or less. 

        -If I have 10 on, Trade triggers the favorable win point, I can only take off 4. 

            -Leaving me 10 short, and 6 long. 

Management

    -Risk can still be the same as well. 

EXPERIMENT LOG

    -I have noticed that when I only am 1 strike away on buy side, I can be up quite a bit on the sell side, but because prem is so close, im relatively breakeven throughout the duration of any pullbacks.

        -This means expiration matters most, which as of last months post, is NOT where I want my                     focus to be.

        -This means I am sacrificing that buffer I get from being straight naked on pullbacks. 

            -This means I am still in a losing position when trades start acting against me.

-I believe I have 2 solutions

    -1 is to go out another strike on buy side

        -This means less prem to take away from sell side, leading to bigger winners.

        -This means less protection on adverse moves

            -That doesnt matter much because I am cutting my trades on moves -33% against me.

                -A move like that against me will still see some prem gain on buy side, while sell side still                     normal loss.

                -So it will mean larger losers, but not so much that it takes away from gains. 

    -2 is ratio spreads.

           -Get long 1, get 2 short. 

        -Im thinking this will be my way to go. 

        -The whole reason I am doing this in the first place is so I can trade larger.

        -Ratio allows me to still have the margin protection to put size on, but not so much protection I             have to change the way I trade. 

            -Percentage wise, each naked option nets me roughly .75cents, each spread would next me an                 extra .20

                -The added spread adds another potential 20%-33% to my position.   

            -If I cut for a loser, the spread will be very minimal loss, where as the naked will be normal                     -25%/-33% loss.        

-Protection is the cherry on top, Its not the cake. The cake is the naked side. The protection is the cherries. The added bonus of if im wrong right here and now, I reduce loss.

    -If I am right here and now. I can bail on protection on an pullbacks.

       -If I am right later on, I can add the cherries to make up for the theta decay on the protection. As many as I want

        -This means expiration is a factor.

TRADE EXAMPLES

    -First ratio spread entered.

    -QQQ reversal, Nov 2

    -Super strong day, all day trend higher, super over ext, diverging, reversal setup.

    -Got in 2 short 363C, 1 long 364C

        -Added on pb fail

        -Added on pb turn lower

        -Added on big flush

    -In total -8 363, +4 364

        -Sum of sellside Max profit $664

            -Minus exp at 0 protection means Max profit $512

        -Avg in .83 short side

            -33% risk puts me out at 1.10

                -We hit .97 a few times, but internals would have kept me in still for fake outs. 

                -That means ~$215 at risk

                    -Minus protection, which based on Delta, At exit, would be a gain of ~$50

                    -Means Risk drops to ~$155-$185.

                -PT for $450 (90%)

                - ~3R trade

        -Avg in .38 long side

        -At MAE I was down $110 on the trade.

                -Not including gain from protection

    -Trade has not been favorable whole time, thats a problem but internals and chart tell me to hold for         fakeouts still so I remain.

    -Made attempt at new HOD, came near stop spot but never triggered. 

        -Flushed shortly after again, back to breakeven despite down ~.15-.20 cents on underlying.

    -Internals new trend HH and HLs, needed to bail on break higher and I did.        

        -MFE +$56

                   -+26$ including protection

        -MAE  -$120

                    -$84 including protection at MFE.            

        -Total Loss -$100

            -Protection was +$4 at exit.

    -Thoughts

        -I can exit the short side for a loss and keep the long on until it breaks to cover up some losses still.

        -Protection isnt much protection. Theta decay happening fast and breakeven on the long calls is             slowly losing its moneyness. 

            -Buy ITM call protection instead of OTM?

        -Protection wasn't protection at all, only +$4 on exit. 

    -Potential to make $500 on $150 of risk is good. 

    -If I didnt use protection at all

        -Max Profit $330 ($300 90% PT)

        -Max Loss of $108 (33% stop)

    -There is ALSO the added benefit of taking off the protection when market confirms I am right.             Which increase max gain.

        -I couldnt in this case as I was maxed BP, but I can always add 1:1 on the way down for ~$35-40             more each spread.

    -Protection means RR increases. 

    -Adding more protection later in the trade also means its smaller premium, therefore less $ taken away from max gain. 

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Took another ratio

Pullback reversal trade. In 2 short 1 long. Added right away.

Short in .58, stop .80

    -Max Profit $232

    -Risk $88

    -3:1 RR

Long in .22

    -Max loss $44

    -Max gain at exit

    -$20

-Total

    -Risk $70

    -Reward $190

Trade worked asap and internals confirmed even more. I cut the protection off at 1st pb and turn lower for a loss of $20

Now I am short 4 at .58 for MFE of $212

    -Risk on trade is breakeven.

-Trade is at vwap with internals still trend lower, a pop higher is not enough to get out of trade yet.

-Needed to bail earlier on internals and trend break at vwap, but besides the point.

-At point of exit, which was breakeven on underlying, took off trade at .49

-Protection at point of exit was .20, so a loss still.

-It was right call to eliminate protection so gains had the biggest chance to remain big. 

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-QQQ short 11/21

-Market major over ext, I want to be short 

    -Big flush started que, decent prem ways away otm a few points. in .23 letting go to EXP.

       -Kept adding 1:1 as it kept working, every pb that failed kept adding.

        -Prem not that big but with 1x1 credit spreads I can get huge. 

            -Commission only doubles if I sell at any point.

    

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What have we learned

    -Protection is only valid near the start of the trade, the longer it goes on, the more it becomes an added loss than protection. 

    -On this trade, bottom line

    -With Ratio Spread

        -Max Profit of $512

        -Max Loss of $216

            -Not including Protection

            -With Protection, BEST case scenario, max Loss $150

        -$512/$216

            -2.4R

        -$512/$150

            -3.4R

        -Safe to say it is on average a 

            -3R Trade

    -Without Ratio Spread, just naked sold calls. 

        -Max Profit $332

        -Max Loss $108

            -3R Trade

-Protection cut at some 'obvious' point is good. 

So while I can make more return on investment, the risk on the trade is still relatively the same in terms of R. 

Which considering risk on ratio side can be improved by the protection gains, the naked side has no potential for such a thing. 

But protection can also turn against me, and not be protection at all. 

There is a trade off here. I think edge goes to ratio side, spread side. 

I can get bigger. If im going to keep growing, I need to trade big. Trade like I mean it. At that rate im going itll take me another year before I can afford a single extra contract to sell naked on SPY for a max of 5. 

Or I can trade up to 435 spreads now. 

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Created a Queries spreadsheet.

Anytime I want an answer to SPY did X today, what are stats on tomorrows close? % Green? % Red? 

If 5day ratio is 5, was is performance a week later, a month later? 

Twitter traders call them studies, I have the data, I needed to get to work on creating this to be available and automated.

The trouble now is going to be answering questions like

If SPY was up 1% today and the 5day ratio is at 5, and the 52W new highs ratio was at 10, does next weeks close avg up or down. Lots of variables, lots of combinations, not sure how to do it. 

As of 11/20 this has exploded into quote the fun project. Searching for data has become an interesting dig. For the most part I have 15 years of data I can use over 50 different data points. 

I have gathered as much as I could from websites, but there are a few data points I am going to have to manually type in from Stockbees Market Monitor. From there I multiply by a coefficient to get a near estimate of what my number would have been on that day.

So while not all my data is 100% accurate, I would say im at a minimum of 95% accurate. 

And on the downside, there are some data points im just never going to have.

My sentiment tracker is all based on finviz, filtered by Midcap+ (2Bil) and up. There is no way to backtest and get a history on what those numbers looked like for instance on 12/21/2011

So if anyone out there reading this can help, I need the following

-All based on Midcap+ stocks

    -Year Up

    -Year Down

    -YTD Up

    -YTD Down

    -20day Hi/Lo

    -50day Hi/Lo

    -52wk Lo

If I could ever get those my data would be fairly robust dating back to late 2007. But without, im basically at 85% efficiency overall which I am ok with.  

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MONTH END

Did not do much trading this month. It was an unreal strong month that I did not catch much of on the day trading side of things. My swings/investments are strong but daytrading did not happen much.

I rarely got a morning that I could be 100% ready to day trade at the bell, and if I dont get that, its very unlikely I do anything that day other than look for a SPY or Q trade. 

Overall a flat month.

Options sold down $200 and Stock bought up $200. Minus commissions im a bit under, but nothing a single green day wouldn't wipe out.

It was an experimental month. Still building my foundation with sheets and morning process. Playing with credit spreads and ratio spreads. Kind of molding my process still.

I also told work I plan on leaving in a couple months. So there really was a lot happening. 

Tough to stay focused with work and housing renovations so a lot of good missed opportunities. This was clearly a month to step on the gas. And another reminder that if I want this, I have to give it my all. 

SUMMARY

    -Ratio Spreads

        -Are preferable

    -Protection

        -Is not really protection in such short term trades.

        -It allows me to get larger but should not expect protection to ever be positive. 

    -Query Sheet

    -Added more to morning process. 

    -Added more to Watchlist

    -Created a My Setups Blog post that still working on.