Very nice summary Cache...thanks for taking the time and sharing your thoughts. Especially "at the Margin thinking". It is very similar thinking for me as well but I've never put down on paper specifically "why" I do what I do. Continued success!
Thanks for your insights your thoughts. I especially like what you say about risk and reward...an interesting perspective as the trading I started beginning of 2006 has been Farther OTM credit spreads and using the 70-80% capital method. I'll start looking through the journal some more at the beginning. Flint
CacheLanding, Excellent and very useful post. thanks for sharing. I have a question for you regarding one of your comments: "You always here the statement, "cut losses short and let winners run". If you intend to be a premium seller, toss that statement into the garbage, and never consider it again. It is one of the most worthless statements you could make as a credit spreader. " Can you elaborate on this? Are you referring to the "cut losses short" or "let winners run" when you say toss that statement into the garbage? thanks, Frank
This feeling is common. If I open position against the bullish trend I`ll feel fine even if my calls get overrun, but if I opened puts ... I would kick myself if I could
In a way I'm referring to both parts, but more so to the "let winners run" part. When you sell ATM/OTM credit spreads you are automatically limiting your potential profit. It is worth it because you are also combatting theta and limting losses as well. Anyway, it does you no good to try to let a credit spread run. You'll just find yourself in a situation where you are risking a reversal that would take back all your paper gains, all for the sake of making a couple extra bucks. Like I said before, the r/r gets worse as you accumulate paper gains on these positions. Regarding the cut losses part, you should be able to cut losses, but on an ATM/CTM credit spread, don't be afraid of your short going ITM. I'm out of time, but if you'd like more explanation, just let me know, and I'll get back to it. Cache
SHLD is looking great for some puts, especially if Monday allows an entry closer to 160. I also like KBH for a quick play. Why not short OIH when it fills the gap? Look at ICE and GENZ for your bullish on retrace list. Just my 0.02.
Cache, Thanks. That definately clarifies it for me. I'm looking to open up some new positions this week, and will keep that in mind as soon as I get a decent profit (assuming I get a profit). Frank
There are two things that might help you in deciding when to take profits. The first has to do with increased risk that I already mentioned above. The second has to do with compounding gains more frequently. Which would you rather have; 1) 5% return on account every month 2) 2.5% return every two weeks 3) 1.25% return every week Obviously, #3 is going to provide the largest returns. Many credit spreaders forget the concept of compounding. They will sell a 10-point SPX spread 1 month from expiry for $1. Ten days later it will only be worth 0.40 but they still hold it because it still has a pretty high value that they are giving up. They never stop to think that if they offset the position, they will free up all that margin and would be able to open another position with a much more desirable risk profile. They could potentially get another return equivalent in size to the first one. Now instead of getting one 11% return, they are getting two 6% gains. The point is that contrary to popular belief, it is generally a good idea to consider taking profits early. JMHO. Cache
Cache, I learn so much with your good description, your coverage is wide that it addresses various angles. You have mentioned that need not be afraid with the short going ITM, could you share your adjustment strategy ? Or you simply use the probability of chance to see how it settles since the risk vs reward ratio is 2:1 (just another 2 more months to make it back). Saw your chart having the RSI and Stochastic, could you share your entry criteria (unless it is a trade secret) ? Thanks is in advance for the chance to learn.
all my credits are bought back, every month as a rule. i cannot tell you all how many times doing that made a winner out of a nail biter...