Coach, I am looking into using contingent stop loss orders to exit these spread positions to cover my but during periods of time that I am unable to closely monitor the SPX. I also wonder if they would be effective as a risk managment tool for traders that have a hard time pulling the plug on trades entering a danger zone. Do you have any thoughts as to the viability of this approach? I am particularly interested in the best method to structure these orders. Would you place the trigger at a set distance from the short strike or maybe at a distance from support or resistance levels of the index? Thanks in advance for your comments.
The beauty of this strategy is that you do not necessarily need to sit on top of it all the time. If your strikes are 40 points OTM and the SPX is up 1.20 today, you gain nothing by checking the quotes every minute. You could even simply check in the morning and at the close at your leisure as long as you are sufficiently OTM. Naturally when the market starts moving closer to your strikes, some due diligence is required. Contingent stop losses are not a good idea in my opinion. Now you can probably make a contingency such as if the index is within 15 points you close out your spread but I do not like that for two reasons. 1, if the contingency is hit, you may buy back your spread at a market order which, given the wide SPX b/a spreads, you will lose so much more money than if you did it manually. 2, I use the 10/15 points away from strike price as a warning signal and not an automatic adjustment. Sometimes if there is a short time to expiration and strong resistance or support I may decide to hold, or perhaps I have a partial hedge on and I am willing to wait longer. I think the personal touch is still required here when the index is closing in on your short strikes. Also, it may be better to simply roll down then to close out and take the large loss so the contingent stop loss is too simple an approach to limiting your risk and may result in greater losses than you really need to take. Now as a tool for traders that have a hard time pulling the plug, I definitely say no. If you have a hard time pulling the plug then my advice is LEARN. Risk management is discipline and acting under pressure. If you have trouble pulling the trigger to make the risk management move, then you may not be ready to trade this strategy. THis goes for any type of trading. No matter what strategy you are using, you have to have the skill to pull the trigger on your plan no matter what because it will save you in the long run. A contingent stop loss is a false sense of security and only makes the problem worse. Instead of looking for the alternative to not being able to pull the trigger, I will tell you that you will make more money if you instead focus on learning how to pull that trigger. Best advice I can give you is work on that skill and contingent stop losses will not even be necessary. Nothing can ever take the place of personal risk management . SO my advice is this strategy should only be traded if you have the discipline to stick with your risk management plans and pull the trigger. In September, despite strong resistance at 1245 and my 1250 strike, I pulled the trigger and adjusted when the index hit 1241. The index quickly reversed and went lower so in hindsight it was not needed but at the time I simply went into automatic and made the adjustment. Even closing out the put side and rolling them higher was automatic and even though I could not get the good price on the new higher strike puts to bring in more credit, I was still happy that I executed the trades as planned and still resulted in a profit. Take the time now to develop those necessary skills and no matter what you trade your performance will improve. Once you develop your "Pull the Trigger" balls, you will trade with more confidence that even if the trade is moving against you, you will calmly make the right adjustment and stay on top of it. Phil
Thanks for the informative reply coach. Your points are well taken. I occasionally make trips overseas for business and pleasure, and at such times the market can be dificult to track. I was looking for an auto-pilot for those periods, but thanks for pointing out the pitfalls of a stop loss strategy. The beauty of this strategy is that you do not necessarily need to sit on top of it all the time. If your strikes are 40 points OTM and the SPX is up 1.20 today, you gain nothing by checking the quotes every minute. You could even simply check in the morning and at the close at your leisure as long as you are sufficiently OTM. Naturally when the market starts moving closer to your strikes, some due diligence is required. Contingent stop losses are not a good idea in my opinion. Now you can probably make a contingency such as if the index is within 15 points you close out your spread but I do not like that for two reasons. 1, if the contingency is hit, you may buy back your spread at a market order which, given the wide SPX b/a spreads, you will lose so much more money than if you did it manually. 2, I use the 10/15 points away from strike price as a warning signal and not an automatic adjustment. Sometimes if there is a short time to expiration and strong resistance or support I may decide to hold, or perhaps I have a partial hedge on and I am willing to wait longer. I think the personal touch is still required here when the index is closing in on your short strikes. Also, it may be better to simply roll down then to close out and take the large loss so the contingent stop loss is too simple an approach to limiting your risk and may result in greater losses than you really need to take. Now as a tool for traders that have a hard time pulling the plug, I definitely say no. If you have a hard time pulling the plug then my advice is LEARN. Risk management is discipline and acting under pressure. If you have trouble pulling the trigger to make the risk management move, then you may not be ready to trade this strategy. THis goes for any type of trading. No matter what strategy you are using, you have to have the skill to pull the trigger on your plan no matter what because it will save you in the long run. A contingent stop loss is a false sense of security and only makes the problem worse. Instead of looking for the alternative to not being able to pull the trigger, I will tell you that you will make more money if you instead focus on learning how to pull that trigger. Best advice I can give you is work on that skill and contingent stop losses will not even be necessary. Nothing can ever take the place of personal risk management . SO my advice is this strategy should only be traded if you have the discipline to stick with your risk management plans and pull the trigger. In September, despite strong resistance at 1245 and my 1250 strike, I pulled the trigger and adjusted when the index hit 1241. The index quickly reversed and went lower so in hindsight it was not needed but at the time I simply went into automatic and made the adjustment. Even closing out the put side and rolling them higher was automatic and even though I could not get the good price on the new higher strike puts to bring in more credit, I was still happy that I executed the trades as planned and still resulted in a profit. Take the time now to develop those necessary skills and no matter what you trade your performance will improve. Once you develop your "Pull the Trigger" balls, you will trade with more confidence that even if the trade is moving against you, you will calmly make the right adjustment and stay on top of it. Phil [/QUOTE]
I think you can still trade a strategy like this if you travel occasionally. As long as you have occasional internet access. In July I went on a cruise for 10 days and checked in 2x using internet for a toal of 30 minutes. I think instead of a stop loss, you can simply access some market info online and stay in touch if possible. I just think the stop loss has too many pitfalls to work effectively. Phil
Phil, " In July I went on a cruise for 10 days and checked in 2x using internet for a toal of 30 minutes." -- yes, this is the benefit of this strategy, but sometimes I wonder what would happen if you DID need to suddenly do some fast-acting adjustments while on vacation....
If you are using the internet to trade then it does not matter if you are in your office or on a cruise with internet access. The SPX was still far from my strikes and a quick check on CNN each morning let me know if the market was gonna be moving too much or too close to my short strike. I did not need to check more than once each day and 2x I went on the internet to just check the portfolio. Laid out on the beach with no worries lol. Nowadays it is easy to stay in touch. If you know you got a big trip coming up to a remote area, then simply pass on any trades before going away. Sometimes vacation is more important than trading . Phil
This might be an overly simple approach, but I setup my OX watch lists with the Index's I trade. I then pick my "fence" points, or prices that I want to know the SPX/OEX/RUT hits. Once it hits that price, an Alert is triggered and optionxpress sends me a page to my cell phone, and a email to my inbox. If I know I'll be in the Congo, without access to either of these on a relativly short time frame, I just don't trade that month, or close out before I leave....which is rare. If you have one of those new fangled cell phones, most brokerages allow you cell phone web access as well. For example, OX's mini web access is: http://www.oxwow.com I've used it in a pinch when I was stuck at an airport and it works like a charm.
Hi Coach, In this thread, you have shared some "scalp" trades you have made close to expiration. Would you please elaborate on the conditions you look for when scalping. For example, how far OTM, what is an acceptable credit, how many days out, etc. Thank you for helping me improve as an option investor. modegolf
NOV POSITIONS OPEN FOR BUSINESS. Although market is a little flat I decided to grab some NOV put premiums with some margin space: STO 90 SPX NOV 1150/1160 Put Spreads @ $0.65 (.2/1.50) Credit = $5,850 Risk = $90,000 Return = 6.5% Looking forward to adding to it as OCT position melt away in this flat market as of late. Will be posting the SEPT results in a little while. Current OCT Positions: -110 SPX OCT 1165/1175 Put Spreads @ $0.55 -100 XEO OCT 530/545 Put Spreads @ $0.65 New NOV Positions: -90 SPX NOV 1150/1160 Put Spreads @ $0.65 Phil
I am attaching the spreadsheet for SEPT positions. The net profit for the month was $6,024 which is about 2% return for the month on margin. Quite happy with that, especially after the adjustments I had to make with SPX slipping over 1240. Few explanations of the profits for Sept. First, on a 1270/1285 spread I opened in late August, I legged out of the short call for a profit hoping to get out of the spread by legging to better squeeze the bid ask spreads. Was not a good idea so after taking profits on the 1270 Call, I resold it a few days later to get back into the spread and forget the mistake if trying to let out. The 1270 was closed in late August and the re-legged into spread was closed in Sept so it appears partially on AUG and partially on SEPT. Confusing I know but bottom line, forget legging out of spreads lol. Second, I took a loss on the adjustments I had to make to the 1250/1260 spread to roll it higher to 1255/1265 of about ($8,300). This loss was half the loss I would have taken if I simply closed out the 1250/1260 spread [approx ($16,000)] so I did take a proactive step to reduce my risk. The risk should have been reduced further but I got a little screwed on the put side when I closed them for profits and rolled them up for more credit. I took in less credit then waht was remaining in the profitable put spreads so I cut myself short. In the time I took rolling, the b/a values were not as favorable and I was left with what I was left with. I should have looked for better credit or left the puts alone. In hindsight and review, as I wrote, I would have still taken the same actions since it was my risk management plan. The higher strike 1185/1200 puts reduced my ($8,300) loss another $1,875 form profits to ($6,425). So I still greatly reduced the potential loss that could have been suffered from simply closing out the 1250/1260 spread. I think I maintain my confidence if I stick with my plan but I made a note to myself to review all the credits first and choose the best alternative (take profits and roll up opposite sides or leave them in place). Another wrinkle is that when I take profits and roll up opposite side I can add more contracts if margin allows to bring in more credit. Bottom line I still had profits from 2 other spread positions (first two listed in spreadsheet) closed early in the month to bank to offset those losses completely and still make 2% for the month. So all in all, we got to see an adjustment being made, how it helped reduce our risk, how we used resistance to decide that it was best to roll up for more room, and how keeping the money moving and banking significant profits can help you absorb losses when needed, and one should avoid legging in and out of these suckers. Ok, 5 months profitable in a row on the Journal and counting but lets not get too cocky. The market is a poisonouse creature that must be handled with care and you never want to turn you back on it. As long as I make my minimum 2% I am quite happy. Also, a rough estimate that return on margin since MAY is just over 20% (i.e., total profits over average margin risk in same time period). Phil