This Is So Difficult

by Jeff on January 17, 2010

tog_logo_bw_new_iconThis expiration was devastating to me. In the spirit of honest reporting, I must admit that I lost some money this expiration in my Spread Account. The total loss was $2,772 and although only about 5% of my account, still a number that is going to be difficult to recover from. You can go through each painful loss (and the gains) on my new Closed 2010 page, which includes each transaction and monthly summaries when available.

Where did I go wrong? Well again it was impulsive trading and not thinking a few things all the way through. The biggest mistake and stroke of bad luck was the GOOG (bull) and BIDU (bear) trades the day before Google decides to challenge China on their censorship rules. That alone cost me about $2,300. The other was Priceline (PCLN) when it uncharacteristically decided to turn over on me and hit me for another $780. I must admit I played all of these a little too tight and didn’t give myself enough room to react to sudden movement.

So that’s the way it is when you get greedy and want to squeeze the last few hundred bucks so close to expiration. If those trades had worked I would be here telling you about a record month instead of this. All my other trades that had the proper spread for lower risk did fine and the few that did make bad moves had enough price room for me to react.

Not to be frightened away from the market (man, I really love this!), I already have several trades ready for Tuesday morning. With the way the market was behaving last week, this should be a very interesting opening after a 3 day weekend.

Conservative Account

I had a reader ask me about this account this morning and how I was doing writing Calls against dividend stocks. I’m going to cheat a bit and copy my answer into this post. Here it is…

I have been trading Covered Calls and Naked Puts for over 5 years. Historically, I have averaged 3-4% monthly and 20-25% annually with this strategy. However, I was using CallWriter lists that did not necessarily include dividend stocks or high value companies but mostly stocks that were giving high premiums (ergo high volatility). Towards the end of 2009 I adjusted that strategy a bit to ONLY include high value companies that pay a good dividend regardless of volatility (I figured the dividend would make up for the volatility). Generally, I look for companies that have a greater than 3% annual yield and have been paying that dividend for more than 10 years (I have a watch list that I monitor). Next, I watch for a dip in the price and then sell a Put (Naked Put) on that stock – usually a month or two out. This reduces my entry price by the amount of the premium. If the NP expires OTM, I either write another one or find another similar stock.

I started this strategy in one account that I call my conservative account on 11/19/09 (1st trade). So far I have not lost one penny in that account, but I have also not hit any home runs either. You can bet I am killing anything you can get in a Money Market or any other ‘guaranteed’ income accounts. I also have not owned a single share of stock since all my trades so far have all been NPs and all, with two exceptions, have expired OTM. Exception one is AT&T (T) which will be assigned this weekend and I will start looking to sell Calls and/or buy some protected Puts on Tuesday. The second exception is NYSE Euronext (NYX) which I recently rolled out & up for additional premium.

My actual results so far is $1,881 in option premium in a (approx) $36,500 account (as of 11/19/09) for a total 5.07% gain. This is almost equal to my former Covered Call strategy with a LOT less trading and stress. It’s nice to write a NP against a stock that you want to own and are willing to pay the Cost Basis price (strike minus premium).

You can see the details of those trades on my NEW Conservative Account page/tab.

Thanks for taking the time to read this. I welcome any and all comments.

- Jeff

Tagged as: closing early, Iron Condor, January Expiration, Naked Put, option spreads, Strategy, Vertical Spread

  • Bruce

    So if it was difficult on January 17th then how do you describe the market here on January 22nd?

    I was gaining more and more confidence in the past month (always a dangerous sign). Now a correction (small or large is a matter of perspective).

    So as I squint at the headlights in my eyes I need to make some decisions. Embrace the bear and profit from the trend or buy up my favorites when they are on sale?

    I can’t decide and instead have decided to commiserate with The Option Guru. Any sage advice?

    • Jeff

      Bruce,

      I would like to say that you have come to the mountain, but it’s really just a mole hill :)

      When I see stock with great earnings (IBM, GS) and then watch them fall, that is telling me something. Three 2% drops on major indexes in a row excites me in a sick way. I was able to get in a couple of Bear Calls early this week, but it this point it’s too late to ‘chase’ the bear move. Unless you can find a stock that is holding up (advance/decliners was 557/2525 today), it’s best to just wait for a bear flag, and when you get confirmation on continuation of the bear trend, jump on it!

      I don’t think the ‘sale prices’ are at their peak. On the S&P I have a long-term lower channel at 1080 and FIB 23.6% retracement at 1038. Watch for a bounce at one of these levels. We will see if they hold as support or totally break down. We take escalators up and elevators down.

      Good luck.

      - Jeff

  • http://optionguru.in Oguru

    Hi Jeff,

    Just a piece of advice towards your site structure. Its good, Jeff ! I am reading your Trade logs. I noticed that the page http://theoptionguru.com/ has no Index value in Google, But http://theoptionguru.com/blog has PR 2. Why not you modify your http://theoptionguru.com/ to point to http://theoptionguru.com/blogs/ and http://theoptionguru.com/archives (or something like that) point to http://buywrite.wordpress.com ?
    This will be good for google to index and earn good PR in the long run.
    Just my two cents …
    By the the way I am writing with the same name “optionguru” in my Indian Options Blog.

    • Jeff

      Oguru,
      Thanks for the advice. This comment ended up in my spam folder due to the number of links. I took your advice and re-directed my page. I visited your blog – I see it’s new – good luck and post frequently.
      - Jeff

  • Paul

    Jeff

    If you average 20 -25% annually on 3 to 4% month returns could I assume you are not in the market half the time … as 3 to 4 would translate to 36 to 48 …. or am I missing something (more likely).

    Could you explain why you do a naked put in place of just buying the stock and writing a covered call? For some reason a feel a lot more secure doing a buy write …. not sure what it is…

    • Jeff

      Paul,

      You’re right, I am not always 100% in every month. For instance, right now I am only 75% in. I also don’t expect every month to be profitable, so I have set a conservative target of 20-25% with reality in mind.

      Why not Buy-Writes? That’s the way I used to do it, with a buy-write (the name of my former blog). Over time, the many people that contribute to the JustCoveredCalls Yahoo group have convinced me that there is another way that is a bit less risky. Selling a Naked Put (a Covered Call is sometimes called a synthetic Naked Put) allows me more flexibility on how I enter the stock. If I was doing a Buy-Write, I would be looking for a stock that is at the top of its current trading range – that enable me to maximize my Call premium while minimizing the possibility of expiring ITM.

      With a Naked Put, I am looking to buy at the bottom of its current trading range in order to minimize the option expiring ITM while looking to sell a strike that would put my cost basis below a recent low. Even though I would be happy to own any of the stocks I am trading in my Conservative Account, the ideal scenario is to have the stock turn bullish after I sell the Put and then just keep the premium without ever owning the stock. Ultimately, it comes down do a question of style and what you are comfortable with.

      If the stock turns bullish and I have a Naked Put, I have a bit more flexibility on what I can do to recover and I don’t have to worry about the stock. Again, just a matter of what you are comfortable with. So if you’re not sure what it is, then keep doing what you are doing. BUT, if you have the time and a paper account, give the Naked Put strategy a try. For instance, my NYX trade is working according to the book. I entered on 11/25 with a JAN 25 strike and a cost basis (if Put the stock) of 23.88 which was well below the recent low on 11/3 of 25.01. Then on 1/11 I rolled it to FEB 26 for an additional 0.80 credit and a new Cost Basis of 24.08 which is right at the last low on 12/08 of 23.98. I am not going to worry about this trade until the second week of February – kind of a nice since there are plenty of other things to worry about. Right?

      - Jeff

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