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Meet our Readers: Wayne

Like many beginners, when I started trading options, I sold covered calls, then cash secured puts. Then buying calls and puts. I remember in those days, I often said to myself, “covered call writing is such a wonderful strategy because at the end of every month the calls expire worthless and I’d sell another call and collect the premium. I can do this month after month!”

But after using this strategy for a while, I have to say that this is not as “safe” of a strategy as some people believe. Yes, you sell your call; keep your premium no matter what happens to the stock. But the fact is you can lose a lot from your declining stock–much more than the premium can ever give you. Yes, in a declining stock you can keep selling lower and lower strike calls, but the loss from the stock would still be greater than the premium collected, or break-even at best. For example,

–bought SPY at 120 and sold the 119 call
–at expiration SPY closed at 114. Premium kept, long stock.
–sold the 112 call trying to collect higher premium in a declining stock
–at expiration SPY closed at 108. Premium kept, long stock.
–sold the 106 call trying to collect higher premium in a declining stock
–suddenly SPY went up and at expiration closed at 115
–assigned at 106

Overall, SPY was bought at 120 and assigned at 106, a loss of $14. Yes, I collected premium along the way, all ITM calls:
— sold 119 call when stock at 120 then,
–sold 112 call when stock at 114 then,
–sold 106 call when stock at 108.

Sorry, I couldn’t find the exact amount of the premium collected. But, I do not think it’s more than the $14 loss from the declining stock. Perhaps at best, it was a break-even. That is, I collected $14 in premium but then lost all of it from assignment at the end. (This message is not: assignment is bad.)

Well, even if it was a break-even, it still wasn’t a good experience: I put in all the time, effort and anticipation that I am using a very “safe” & “good” strategy, but at the end, it was just a break-even or a loss.

So, I just wanted to share with you about the experience that CCW is not without risk, especially when the stock plummets and suddenly shoots up. And the fact is, it is not uncommon nowadays to see a volatile market, so stock prices behaving in an unpredictable & erratic manner is not at all unusual.

Wayne

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Meet Our Readers

Mark:

This email is in response to 'Real Life Iron Condor Trade' and 'Meet Our Readers.' This series of trades leads to the least common multiple of my present position in RUT.

I am interested in your (and possibly your readers') thoughts.

Not certain which way to express IC and DD trades, but I think this will be intelligible:

The trades

12/16 +20 RUT FEB IC 700/710/830/840 @ 3.50 credit
[On Dec 16, I bought 20 iron condors, collecting $350 apiece]

Concern begins developing over RUT gains, so I bought some insurance.

12/21 +1 RUT FEB C 800 @ 19.40

The cost of this insurance was to be offset by the sale of some 830/840 or 840/850 call spreads.

The market continued to rise and disagreed with me about the value of those spreads.

Ready to put more at risk

1/07 +40 RUT MAR IC 700/710/850/860 @ 3.50 credit

1/14 +50 RUT MAR IC 730/740/860/870 @ 3.57 credit

But not so thrilled with being short that much vega: Thus,

1/14 -10 RUT MAR P 740 @ 10.90

1/14 +10 RUT JUN P 730 @ 27.55

1/14 -10 RUT MAR C 860 @ 6.80

1/14 +10 RUT JUN C 870 @ 20.60

My thinking is that vega largely protects me on the present collapse in RUT price and so I have done nothing. Even so, the 740 strike looks painful. The plan is to begin selling delta and buying gamma somewhere between the 740 and 760 strikes, if RUT reaches 770. I'll try to slough about 60 deltas and snag a gamma for about $3,000. Once the 750 level is breached I shall need to buy 20-30 of the 740/730 spreads.

Below 740 would the time to consider unwinding the diagonals, and I am always looking to unwind the rest at good prices. The remaining reward for FEB is starting to feel small.

The real money (i.e., paying a debit) diagonal is new for me, but felt necessary for continued premium collection.

On 2/1 I was able to buy in 20 RUT FEB 710/700 P for 0.30 and happy to do so. Shortly thereafter (2/3) I bought to close, 20 RUT FEB 830/840 C @ 0.70 and also sold 1 RUT FEB 800 @ 9.00

On 2/3 I put on the new position: +20 RUT APR 730/740/850/860 @ 4.40 which (afterward) I notice has my positions bunched more than I would prefer.

On 2/7 purchased protection in the form of 2 RUT MAR 830 C @ 12.90

On Friday (2/11) I removed risk by purchase of 40 RUT MAR 710/700 P @ 0.40, but there’s still plenty of risk at the 830 strike.

906


If you want to share a trade, personal incident, or relate how you became an options trader, please send e-mail to blog (at) mdwoptions (dot) com.

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Meet our Readers: Dave

Hi Mark,

Then

April 2008– I’d been messing with the markets for 20 years on a part-time basis. Some good years, some bad. We sold our waterfront house at the absolute pinnacle and it was my big chance to retire. I plowed about $350,000 into mostly GE and sold slightly OTM calls (no put protection). Laughingly I considered myself an “experienced” investor.

I watched the calls become worthless almost overnight, thankfully I kept rolling them down… down… down… My losses were gut-wrenching but those calls cushioned the blow and quickly opened my eyes to the power of options. I also learned (burned into my soul being) that how much you don’t lose is infinitely more important than how much you make. Somewhere in the middle of that nightmare I came across your Options for Rookies book. Everything changed.

Now

Now I manage 2 accounts. One is entirely iron condors. The other consists of high dividend companies– who’s dividends pay for low gamma OTM puts, while I sell calls every month against the stock. Boring? Yep. It works.

I’ve learned that, I personally; don’t have the psychic power to predict where the markets are headed next (duh). Your book and your blog has helped me immensely. I truly believe you’re waiving the keys to the kingdom to your readers.

Thank You,

Dave Spencer



This is your chance to tell your options story. Take advantage by sending that story to blog (at) mdwoptions (dot) com

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Meet Our Readers

Open invitation to all readers: If you would like to share your story about how you became involved with options, or used options to achieve goals, or basically any personal story, please sent an e-mail to blog (at) mdwoptions (dot) com. You may remain anonymous, or use your name.

***

As a beginning options trader, I have made the mistake that so many of us make: real trading without real understanding. And yes, I lost money, but fortunately a very small amount. In my case I was tripped up by the release of an economic report (specifically, the PMI) that moved the stock market against my trade bias.

In truth, I could have been tripped up by a dozen other factors that I just wasn't aware of. I was disappointed that I lost money, but was more disappointed in myself for not doing my homework in advance. I should have known about factors as important as regular economic reports.

Rather than discourage me from studying trading, this experience really motivated me to learn what I need to know. Most people can understand pretty much anything with enough effort, and I needed to prove to myself that I can do this.

So the first thing I did was find out which reports are likely to move the markets, and I marked all the relevant release dates on my 2011 calendar. (BTW, here's a good source for this information: http://www.investopedia.com/university/releases/default.asp)

Then, I realized that I'd better go back and be absolutely sure that I understand the option greeks and how to use them when planning and managing a trade. I'm about 80% of the way there, and virtual trading has really helped me put these ideas into practice. For those of you just learning about options trading, please be sure to take advantage of this free virtual trading website at CBOE:

http://www.cboe.com/tradtool/virtualtrade.aspx

Take your time, do your homework, and have realistic expectations. You won't succeed otherwise. Also, much thanks to Mark Wolfinger for his most excellent blog and his dedication to educating others. His advice has helped me tremendously.

Happy trading,

Robert D.

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Meet Our Readers

My Journey to becoming an Option Trader

Over a three year period I went from a mutual fund only investor to a stock only investor, to a debit spread option trader and now primarily a credit spread option trader. During this period of time from January 2008 until December 2010 I read various books and subscribed to different services. 

I made my first investment based upon recommendation from the American Association Of Individual Investors (AAII).  I purchased over 30 stocks during January 2008 and it was during this month the market started making some large moves both up and down.  I also began a subscription to MorningStar and Investor Business Daily and began watching Cramer and Fast Money TV shows.  After about six months I began realizing I did not have enough time to monitor financial news on this many stocks since I still had a day job.  I scaled back to approximately 15 stocks but I still lacked a real strategy and a discipline approach to investing, I was continuing to search for a better way to invest and make money.  The death kneel  for me as a stock investor came in October 2009 when I was invited to attend a presentation made by our companies primary lender( at the time I was our company's CFO) by our lender's CEO and CFO. Each of them had just returned from attending discussion in Washington about a program everyone was interested in hearing more about called TARP.   This bank's presentation offered confidence in their position related to loan losses, bad debt reserves, exposure to housing etc.  I was even able to ask questions one on one with the CFO and CEO and then I felt confident about the bank's future.  I went out and bought some stock and two weeks later this bank was forced to sell to a larger firm since it was not going to be a recipient of TARP funds due to its large amount of home equity loans.  From that event I concluded if I cannot determine a company's financial prospects from a personal presentation from the CEO and as well being able to look in them the  eye to ask questions then what chance do I have of knowing what stocks to buy to make money.

As 2008 came to end my investment portfolio was dwindling and economy along with stock market seemed more uncertain than ever, now what do I do?  I believed I still needed to invest in stocks but was uncomfortable with the risk, staying in cash seemed like a doomed strategy by never regaining what I had lost.  As 2009 started I began to purchase stocks using Vertical Spread Options.  I found I was comfortable with the risk and related reward.  Individual stock prices were so depressed during the first quarter it was almost as if any stock was as good a pick as another, fundamentals of stock investing seemed to me to have been thrown to the wind.  Fortunately as the summer of 2009 rolled around the market and my portfolio was doing much better but I was still searching for a better way.  I has stopped all my subscriptions to AAII, IBD and MorningStar but did join Vector Vest.  That summer I also lost my job two weeks before my daughter got married and after 35 years of working decided to see if there was another way ahead for me.  I thought perhaps about day trading but the idea of getting in and out of positions in a day or even a few days seemed like a roll of the dice. I began to focus on using the VV system and tested many of their strategies using their "what if" software.  After just a few months I thought there were just too many possible strategies to select from and many of the stock were small firms I had never heard of so I stopped my VV subscription.

As 2009 ended it was a very good year for my portfolio and the vertical option strategy had worked well yet I still was searching for a better way.  I came across a service called Terry's Tips which primarily sold calendar spread with the idea that by rolling the premium over month to month so one would collect additional income.  Still being unemployed I liked the idea of collecting a monthly premium for income.  In January 2010 I purchased a variety of SPY calendar spread both call and puts, some out a few months and others out even further to year end.  Second quarter of 2010 with the  market once again gyrating I found it very difficult to manage these long and short, puts and call positions , how do I decide which to buy/sell roll or close?  It was at this time I came across the Iron Condor strategy were premium is collected upfront.  It seemed to me like a trade based upon making an over or under bet in a football game just as long as it stays in that range then you make money.  I began trading SPY only iron condors and went back a few months to see what range SPY went from options expiration to the next month expiration and began using this method to select where to sell the short strikes for calls and puts.  I also began to understand how to better use Greek symbols in trading options.  During 2010 I continued trading SPY calendar spreads but only on calls, it seemed as I was rarely successful on calendar spreads puts.  I also continued trading verticals on selected stocks (only about 8 to 10 stocks of large companies with liquid options) 

As 2010 ended my primary trading focus was on SPY iron condors.

I know I still have much to learn in making adjustments to condors and better using Greeks to manage changes yet at this time I am very comfortable with where I am at as a trader.  I actually look forward to Monday  and what will happen next in the market and what I may learn.  Of course being able to be with my family, play golf and run marathons whenever I want is also a pleasure.

The Option Rookies Blog archive has been very helpful to me in refining and expanding my knowledge of options trading.

Regards,

Frank   

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If you want to share your story, send an e-mail to blog (at) mdwoptions (dor) com


 

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