newbie's trade plan! your views pls

Hi there,

Am a newbie - trading credit spreads.

My trade plan revolves around selling ICs on NDX, with the short strikes outside the 2 std dev points. Approx return on margin is 4%. I plan on placing stop losses at the level where spread price = credit received + 10% of margin.

Based upon the above parameters and assuming bad trades in 2 months (added margin of safety), my trade expectancy is 4% X 10 - 10% X 2 = +20% return on margin, excluding commish, time value of money etc.

Seeking your opinion/feedback on this trade plan - its viability, holes in it, suggestions on how to improve it.

Rgds,

Newboyo

 

have you tested out your theory on past 5yrs' data? (that's only 60 trials. You can accomplished that on a Saturday.)

 

All I have been able to do is to look at the NDX chart with 2 sd bollinger bands. That seems to bear out the theory.

Any other suggestions would be most welcome.

Rgds,

Newboyo

 

Memorize this quote: "Eat like a bird, crap like an elephant"

 

What he meant to say was you're risking a lot in order to make a little.

 

God help newbie traders with a "what do you think about this great idea of mine? I paper traded it for 3 weeks, and..."

 

I thought I should start off a directionally neutral strategy with high probability ICs - but I stand suitably chastened.

Could you please guide me, in how to choose directionally neutral trade plan.

Much appreciate your advise.

Rgds,

Newboyo

 

I will be as succinct as possible. Stop trading these ICs immediately!

Elaboration can be found here:
http://www.elitetrader.com/vb/showthread.php?s=&threadid=49586&highlight=spx+credit+spread

Being 2 sigmas out of the money doesnt mean you arent trading direction. You are approaching selling premium the wrong way. Read the whole thread i posted before you risk another real dollar, not that it is worth much these days anyway.

 

Hello Ryank, Rcanfiel, Rallymode,

Thank you - especially Rally mode- for pointing out the dangers of ICs to me. Reading Rallymode's posts on the SPX IC thread was very instructive.

Could you please help by telling me what could I do to learn selling spreads properly.

I have just started reading Cottle's Options Trading , The Hidden Reality.

Rgds,

Newboyo

 

Start reading all posts by the following members, search their names:

riskarb
optioncoach
atticus

It will be literally thousands of posts, but for options, those are the best ones to read.