I think market is ready to pop - which directions is anyone's guess. Fundamentals suggest that it will break on upside. Better than expected economic data like Initial Claim today can fuel the move. Interesting strategy but it's hard to believe that it will work in volatile market. Following can be inferred from the strategy. (1) Your max loss on one side is equal to the cost of position. Do you adjust in such a case or will take the loss considering good risk-reward. (2) On the other side, you can make up to 1000 depending upon how much in the money your naked hedge is. You have breathing room of 10 pts for the cycle. How do you adjust in case your naked hedge goes in the money more than 10 pts.
Thanks for the great questions as looking at the market right now I'm facing the delimmas you've mentioned in your two questions. So far volatility has not been too nasty on how well this strategy has worked because typically what you get is giant moves up and down but usually end up in the middle. By this I mean we had days where RUT is down 30 pts and then up 50 pts then down 30 and then down another 30 and then up 10 lets say. So whats actually occurred is lets say to start from RUT 400 you had the following: down to 370, up to 420, down to 390, down to 360, and up to 370. So you had 5 trading days where the market appeared to be volatile and going nuts with all the CNBC people panicing but if you step back and look, the end result was a tiny 30 pt drop for the week from 400 to 370. Now the past 3 months were real nasty and did generate a sizeable loss as the market just kept falling but the good thing is that since these positions are put on with about 1.5 to 2 months before expiration so usually you do end up getting a nice bounce back. As I mentioned before the paper trading option expirations in October and November generated a total loss of 17% as the market was plunging. But the good thing is that at the sametime I was picking up cheap call positions so that when the market did bounce up the december expiration positions generated a whopping 20% return in one month. So again this was all on paper, now I am trading with real money so there are other factors associated with trading with a live account. Now to get bact to your questions, I'll use an example of the current dillema I am facing. Lets take a look at the following two positions: bot jan 460/450 put/short jan 45 iwm put@ cost of $47 bot jan 400/410 call/short jan 41 iwm call@ cost of $117.34 Right now it seems like market is going to go above 500 and most likely the 460/450 put spread is going to expire worthless, so what I can do is right now go ahead and just sell the 460/450 put spread which right now is trading for about $200 and leave the 45 iwm put open or for extra protection I can choose to turn this into a credit spread. For instance, I can buy the 39 jan iwm put so we would have the following: Original cost = $47 sell jan 460/450 put = $200 buy jan 39 iwm put = $10 Result would be a 45/39 iwm credit spread with a max gain of (200-10-47) = $143. So if the market never comes back to 45 then fine I make a $143 on a losing position. IF the market comes back down to 45 then great because all my other positions will be in AWESOME shape. Now for bot jan 400/410 call/short jan 41 iwm call@ cost of $117.34 I have a few choices on what to do with this. - If I decide to close the position today, as of right now I would get about $115 with commissions taken out so it would be a small loss. - On the other hand I can simply sell my 400/410 rut call for about $950 right now and then go out and purchase the 500/510 call spread which would result in the following: Original cost = 117.34 sell 400/410 = 950 buy 500/510 = 450 resulting in the following: bot 500/510 jan call/short jan iwm 41 call @cost of -382.66 (meaning I received money for this) so if the RUT closes at 500 for instance I would lose $900 on the short IWM and my 500/510 would expire worthless so I'd have a net loss of 900-382.66 = 517.34 which sucks BUT again I have other call positions that would benefit from RUT closing at 500 and which would make more money than the loss on this. On the other hand if it keeps going higher then the 500/510 position gives you some added protection. Finally the third option is to do the following: sell the 400/410 call and buy another in the money spread, for instance 450/460. Here I'm basically moving up my call spread and locking in a small gain. Here I could sell the 400/410 for about 950 and buy the 450/460 for about $800 and pocket the $150 which gives me a little bit more protection to the upside. Sorry about the long response, I'm literally trying to decide which of these three to do. The wrinkle here is that this trading looks like smoke and mirrors to me because of the low volume so if we get another small pullback to the 460-470 range next week I could close out everything for a nice gain, but unfortunately the market has a nasty habit of not doing what I want! So I've got to base my decision on what I'm seeing and right now what I am seeing is a short term support level at 460 and resistance at 493 (50 day EMA). The EMA is falling and the support trend line is increasing which means the market will breakout of one of these levels fairly soon and it seems like the break will be to the upside so I've got to base my decision on the upside break.....
Thanks for the explanation. Looks like you have it all figured out. It it helps....think that what would you do if you are on the opposite side of the trade...and decide accordingly. Additional comment....the methodology you posted here is not anyone's cup of tea since adjustment and return relies on other positions and no one can do the exact same as you do.
Well there it is, we printed 503 and change on the RUT today. Of course I'm still not convinced but who cares about what I think Now is when things get a little more interesting if we do indeed keep going higher. For now I did go and adjust the following position: bot jan 400/410 call/short jan 41 iwm call@ cost of $117.34. I decided to trade up to a 490/500 RUT spread after selling the 400/410 call. The reason I chose the 490/500 strike is because with RUT at 499 this spread will benefit from time decay in case we end up consolidating slightly above 500. This also gives me a little bit more breathing room in case the RUT does keep going higher. If the RUT does fall under 490 to where this spread goes worthless then its fine because I will still make a decent return. Here is a breakdown of the adjustment: Original cost = $117.34 sold 400/410 call = $957.64 bought 490/500 call = $582.36 The outcome of this adjustment is: 117.34 - 957.64 + 582.36 = -$257.94 This results in the following position: bot jan 490/500 call/short jan 41 iwm call@ credit of $257.94 I also added another feb put position today. bot jan 460/450 put/short jan 45 iwm put@ cost of $47 bot jan 470/460 put/short jan 46 iwm put@ cost of $52.06 bot jan 480/470 put/short jan 47 iwm put@ cost of $68.51 bot jan 500/490 put/short jan 49 iwm put@ cost of $53.82 bot jan 490/500 call/short jan 41 iwm call@ credit of $257.94 bot jan 440/450 call/short jan 45 iwm call@ cost of $208.54 bot jan 420/430 call/short jan 43 iwm call@ cost of $177.06 bot feb 450/460 call/short feb 46 iwm call@ cost of $77.06 bot feb 520/510 put/short feb 51 iwm put@ cost of $42.06 bot feb 450/460 call/short feb 46 iwm call@ cost of $148.06 bot feb 440/450 call/short feb 45 iwm call@ cost of $137.06 bot feb 500/490 put/short feb 50 iwm put@ cost of $112.06 bot feb 440/450 call/short feb 45 iwm call@ cost of $163.54 bot feb 510/500 put/short feb 50 iwm put@ cost of $128.06 bot feb 520/510 put/short feb 51 iwm put@ cost of $147.06
"bot jan 490/500 call/short jan 41 iwm call@ credit of $257.94" You opened this position only because of the fact that your other positions will benefit if RUT close below 465 (which seems like your break even right now for this position) otherwise such an adjustment would have not been advisable.
Yes that is correct. Typically I trade all the small positions within the month as one giant position so all these smaller spreads are just small pieces where some will fail and others will pick up the slack. The 490/500 was based on the following assumption: If RUT closes at 490 on the nose then the following will happen in my jan portfolio: bot jan 460/450 put/short jan 45 iwm put@ cost of $47 bot jan 470/460 put/short jan 46 iwm put@ cost of $52.06 bot jan 480/470 put/short jan 47 iwm put@ cost of $68.51 bot jan 500/490 put/short jan 49 iwm put@ cost of $53.82 bot jan 490/500 call/short jan 41 iwm call@ credit of $257.94 bot jan 440/450 call/short jan 45 iwm call@ cost of $208.54 bot jan 420/430 call/short jan 43 iwm call@ cost of $177.06 bot jan 460/450 put/short jan 45 - expire worthless (loss $47) bot jan 470/460 put/short jan 46 - expire worthless (loss $52.06) bot jan 480/470 put/short jan 47 - expire worthless (loss $68.51) bot jan 500/490 put/short jan 49 - profit (1000-53.82 = $946.18) bot jan 490/500 call/short jan 41 - (loss of $800 from iwm) bot jan 440/450 call/short jan 45 - profit (1000-208.54-400 = $391.46) bot jan 420/430 call/short jan 43 - profit (1000-177.06-600= $222.94) So the result is a total profit of -47- 52.06 - 68.51 +946.18 - 800 +391.46+222.94 = $593.01 which means if we close at RUT 490 then I would make a profit of $593.01 which isn't great but sufficient for a bad position. My upside target in case 500 broke was around 540 - 550 so if we get to that level in the next two weeks then I'll go ahead and pull the cord and close out everything for a small loss.
And the rally continues, its slightly more convincing because now all the major indexes Dow, S&P, and Nasdaq joined the RUT in closing above the 50 day EMA's which is bullish, now we just need the final piece is follow through next week on good volume to really neuter some bears. I might get neutered too but we'll see. In the meantime I made an adjustment on my jan 460/450 put position: bot jan 460/450 put/short jan 45 iwm put@ cost of $47 Original cost = $47 sold 460/450 = $107.64 bought jan 41 iwm put = $9.70 This results in the following position: short jan 45/41 put spread@ credit of $50.94 Also added another feb put position. short jan 45/41 put vertical@ credit of $50.94 bot jan 470/460 put/short jan 46 iwm put@ cost of $52.06 bot jan 480/470 put/short jan 47 iwm put@ cost of $68.51 bot jan 500/490 put/short jan 49 iwm put@ cost of $53.82 bot jan 490/500 call/short jan 41 iwm call@ credit of $257.94 bot jan 440/450 call/short jan 45 iwm call@ cost of $208.54 bot jan 420/430 call/short jan 43 iwm call@ cost of $177.06 bot feb 450/460 call/short feb 46 iwm call@ cost of $77.06 bot feb 520/510 put/short feb 51 iwm put@ cost of $42.06 bot feb 450/460 call/short feb 46 iwm call@ cost of $148.06 bot feb 440/450 call/short feb 45 iwm call@ cost of $137.06 bot feb 500/490 put/short feb 50 iwm put@ cost of $112.06 bot feb 440/450 call/short feb 45 iwm call@ cost of $163.54 bot feb 510/500 put/short feb 50 iwm put@ cost of $128.06 bot feb 520/510 put/short feb 51 iwm put@ cost of $147.06 bot feb 530/520 put/short feb 52 iwm put@ cost of $172.06
This is getting more interesting. As long as there are no big moves, you should be able to pull the cord if it hits your stop point. I am curiously following your adjustments since it seems like a good learning experience.
Nice consolidation day today. Bears tried to take it down but failed miserably and the bulls failed miserably as well....but the bulls managed to hold the market above support so this is still pretty bullish. I decided to go ahead and close the following 2 positions today: bot jan 470/460 put/short jan 46 iwm put@ cost of $52.06 bot jan 420/430 call/short jan 43 iwm call@ cost of $177.06 I received $95.94 for closing out the put position and I received $236.94 for closing out the call position. These two positions seemed to be losers so I went ahead and cut the losers. I'm not sure if we are going to see the market in the 470/460 range in the next 9 trading days and if we do get that low then I still have the 480/470 put that will benefit from the drop if I'm wrong so thats fine. I see minor resistance around the 515-520 level on RUT so if we were to break that then a move to 540-550 is pretty probable within the next 9 days in which case the 420/430 call position would become a pain. So instead I'm going to just cut the fat with a small profit. I also added another feb put position. Closed positions: bot jan 470/460 put/short jan 46 iwm put with profit $43.88 bot jan 420/430 call/short jan 43 iwm call with profit $59.88 Open positions short jan 45/41 put vertical@ credit of $50.94 bot jan 480/470 put/short jan 47 iwm put@ cost of $68.51 bot jan 500/490 put/short jan 49 iwm put@ cost of $53.82 bot jan 490/500 call/short jan 41 iwm call@ credit of $257.94 bot jan 440/450 call/short jan 45 iwm call@ cost of $208.54 bot feb 450/460 call/short feb 46 iwm call@ cost of $77.06 bot feb 520/510 put/short feb 51 iwm put@ cost of $42.06 bot feb 450/460 call/short feb 46 iwm call@ cost of $148.06 bot feb 440/450 call/short feb 45 iwm call@ cost of $137.06 bot feb 500/490 put/short feb 50 iwm put@ cost of $112.06 bot feb 440/450 call/short feb 45 iwm call@ cost of $163.54 bot feb 510/500 put/short feb 50 iwm put@ cost of $128.06 bot feb 520/510 put/short feb 51 iwm put@ cost of $147.06 bot feb 530/520 put/short feb 52 iwm put@ cost of $172.06 bot feb 540/530 put/short feb 53 iwm put@ cost of $118.06
Still not a bear to be found on wall street right now. We entered that 515 - 520 resistance area today and sold off it. I'm not too convinced that this level will do more than maybe hold the market in check for a couple of days. The key might be the reaction to the jobs report that determines whether this level breaks or not. I mentioned a couple weeks ago that I wanted to be out of my jan positions before the jobs report on friday, so right now I'm looking to see if we can get a pullback to the 500-505 range again over the next two days. If we do then I may go ahead and close up jan positions but again its gonna depend on pricing. I have also added another feb put position today. Closed positions: bot jan 470/460 put/short jan 46 iwm put with profit $43.88 bot jan 420/430 call/short jan 43 iwm call with profit $59.88 Open positions short jan 45/41 put vertical@ credit of $50.94 bot jan 480/470 put/short jan 47 iwm put@ cost of $68.51 bot jan 500/490 put/short jan 49 iwm put@ cost of $53.82 bot jan 490/500 call/short jan 41 iwm call@ credit of $257.94 bot jan 440/450 call/short jan 45 iwm call@ cost of $208.54 bot feb 450/460 call/short feb 46 iwm call@ cost of $77.06 bot feb 520/510 put/short feb 51 iwm put@ cost of $42.06 bot feb 450/460 call/short feb 46 iwm call@ cost of $148.06 bot feb 440/450 call/short feb 45 iwm call@ cost of $137.06 bot feb 500/490 put/short feb 50 iwm put@ cost of $112.06 bot feb 440/450 call/short feb 45 iwm call@ cost of $163.54 bot feb 510/500 put/short feb 50 iwm put@ cost of $128.06 bot feb 520/510 put/short feb 51 iwm put@ cost of $147.06 bot feb 530/520 put/short feb 52 iwm put@ cost of $172.06 bot feb 540/530 put/short feb 53 iwm put@ cost of $118.06 bot feb 540/530 put/short feb 53 iwm put@ cost of $197.06