In Play

Jeff:

I too have the AAPL 210 Calendar? Are you concerned about the low end?

To safeguard, I also bought a 200 Calendar and will let things play out for a while to see if I will keep as a double or close one.

A little concerned. I bought a 195 Put Calendar today.

◄ Jeff ►

Jeff:

Ouch, what is happening with PCLN? I have a position there too.

If you get a chance could you do a video on using TOS's Risk profile analysis. I have problems understanding how to adjust the dates. I want to be able to make assumptions like: suppose I place a trade on 1/6 and the stock goes up 1.00 and 20 days go by. What is my net profit?

Also, I am interested if you do calendar trades as opposedd to same month verticles. I have been watching a few of Dan Sheridan's video and really like this approach.

Happy New Year!

Bruce

Bruce,

I sure wish I had an answer for every price move on my positions - I sure don't have one for PCLN. I'll sit tight, however, as all the news that I have been seeing indicates the price should move up.

I have tested Calendars and Double Calendars as a substitute for Iron Condors on the long side and Straddles on the short side. There is a possibility that I might do some in the future, but for right now why mess with a winning strategy?

Thanks for the video suggestion. The TOS platform can be overwhelming - fortunately I have enough time to play around with it. I know exactly what you are looking for and I will make the video soon.

- Jeff

Are you still planning to sit tight on PCLN? I am considering rolling my trade to February.

My trade:
Bought the Jan PUT 210 for .79 and sold the Jan PUT 220 for 2.51

Bruce - I am encouraged by the price action on Friday and I will wait 1 or 2 more days to decide. - Jeff

PCLN
Crazy Day with a half hour to go.
High 218.82

Low
212.25

I'm sticking it out too.

Bruce

Jeff,
I am new to options spreads and would like a simple explanation of your AFL spread.

ie:12/28/09 AFL Price 46.78 Type JAN -49/+50/-44/+43 Iron Condor Credit 30 Risk 70 Max Gain 42.9%

is the plus/minus a buy or sell to open position ? Is this a buy or sell spread?

Thanks for the letter and all the insight.

Rob

Rob,

With an Iron Condor I am betting that the stock will closed between 44 and 49 at expiration on 1/15/09. I sold to open a JAN 49 Call and a 44 Put, then at the same time I bought a JAN 50 Call and 43 Put. This is called an Iron Condor and I 'sold' it, meaning I received a credit when I opened the trade of $30 for each combination of 4 options. Since the spread is a dollar and each option contract is for 100 shares of stock, the risk is $100 minus the credit that I received ($30) which equals $70. Based on the credit of $30 and a risk of $70, the return is (30/70)X100=42.9% (includes commissions).

- Jeff

Jeff,

Why do you do bull call spreads instead of bull put spreads? It is unclear given that you tend to do bear call spreads for credit but the bulls are debit spreads.

Rob

Rob,

Your right, my main focus has been on credit spreads, but there are time when a debit spread is VERY advantageous! I am not adverse to using any option strategy to make money in any market condition or on any underlying's direction. Here's why...

The return on risk is much higher doing the debit spreads. Most of the time I can make $500-900 (40-60%) on a $1,500-2,000 risk with a debit spread (and sometimes over 100%) versus $300-400 max return on a $2,000-2,400 risk for the credit spread (around 12-20%). I tend to do the debit spreads on fast moving stocks, or stocks that are in a strong trend. I will buy an ITM option and sell a OTM option. This way, even if the stock's price says the same, I can still make the max profit by collecting time decay. But many times I can collect 80% of the max profit in just a few days if the stock moves quickly in the direction of the option. For example RIMM - I bet that it would rise on its earning last week, and I collected nearly $900 in two days. In this market, you have to use many tools to take advantage of any situation.

- Jeff

Jeff,

I think you are not comparing the same things here. The same 40-60% realizable in a bull call spread can be achieved using a bull put if you use comparable strikes. Since you are buying an ITM strike and selling OTM for the bull call, you should be buying an OTM put and selling ITM put for a fair comparison. The risks and ROI are the same. In terms of fast moving stocks, the bull put is even better since it has a more negative vega than the bull call. The option values will erode faster with puts when the stock moves higher. One advantage of the bull call spread is that if the market moves against you, you tend to lose less than in a bull put since vega increases more in puts than calls. Overall, both spreads are very similar. I tend to favor bull puts as I do not have to put money upfront.

Jay

Jay,

You are absolutely correct - with one minor adjustment. Yesterday I was considering a 111/113 Bear Put on GLD. I compared it to a 113/111 Bear Call and risk/reward were exactly the same and a slight advantage to the Credit spreads in Theta (more negative vega). Here's the minor adjustment - the strikes have to be the same. I would never buy and OTM and sell an ITM on a credit spread (I think it was a typo). This is an exercise that I never did before and I thank you for that. This works for both a Bearish and a Bullish stock (I compared AAPL too at 200/210 strikes). One other thought - since brokers hold available cash for Credit Spreads, to me it's the same as paying up front on a Debit Spread.

Thanks - Jeff

Jeff,

Where did you get your training in Credit Spreads? Would you recommend them? Any books, CDs/DVDs, or websites you recommend to learn the details of the subject.

Thank you,

Barry

Barry,

Most of my training is from the school of hard knocks, acquired over several years of attempting various option strategies. This gave me a pretty good understanding of options. But, http://jeffreyziegler.com has a pretty good course for $50/month. Check out his site. Initially you get all his training material in the first month, and if you think it's worth it, you get several videos each month with timely market observations and trade tips. (I am not affiliated with him at all).

- Jeff

What size of contracts do you normally do on your bear calls? Thanks.

Fred,

I follow my money management rules as stated in my Trading Plan (see download box) which is no more than 5% of my account in any one trade and no more than 50% of the account total at risk in any time.

So if you had $100,000, a Bear Call with a strike spread of $5 (at risk would be $500/lot) can have a max of 10 lots.

- Jeff

What rules do you use to decide which trade to go as high as 5%. Also what would be the smallest number of contracts you would go. Would you trade with as small as 5 contracts or 3 contracts? Also when you say no more than 50% of the account total at risk in any time, do you mean you always keep 50% of your total capital out of the market?

Almost all my trades are close to the 5%. Using that rule and the $100,000 account, the smallest number would be 5 at a $10 strike spread. Sometimes, although rarely, I will trade less than the allowed 50 on $1 strike spreads, just because I don't like giving that huge commission to TOS. You are correct, I leave 50% of my account in cash when trading spreads - this allows me enough to buy back short options if the underlying moves rapidly against me (for example on POT yesterday) and doesn't put my entire account at risk if we have another Black Friday.

- Jeff

Hi, Jeff, can you please explain how you compute the probabilities?

Ben,

The probability is computed for me by my broker's platform (TOS). I know that optionsXpress also has a expiration probability calculation on their trading platform too. I have no idea what the formula is for it.

- Jeff

Jeff,

I've noticed that the Delta number for an option is very close to the probability. Can a trader rely upon Delta for probabilities?

Phil

Phil - You're right, it does. I guess you could in a pinch.

- Jeff

Hi, Jeff, thanks. Sorry I should have posted the reply here instead of emailing it to you, so here it goes.
=====
I am using IB, so I am not sure if they have such a calculator.

Anyway, to clarify, is it the probability the price of the underlying stock will finish above (below) the strike price associated with the sold leg of a bull put (bear call) spread?
===
Also, are you calculating the probability using something like the calculator at the following link http://www.optionvueresearch.com/webtools2/Prob...

Thanks and cheers.

Ben - yes. Or to put it another way "to expire profitably" or in the case of selling spreads, to expire out-of-the-money (OTM). The calculators actually give the probability of expiring ITM and you must subtract that from 100 to get the OTM probability.

- Jeff

Ben,

Signup for a free TOS paper account and you can use all their tools. They have the best analysis tools around for the price and even if you were paying. You can do " what if" analysis to see if holding is better than selling, etc.

Rob

I am trying to understand your AFL Iron Condor. It looks like a lot of work (and commission) for a .20 credit.

So if you stay above 40 and below 46 you collect .20? And you have an 80% probability of staying in middle for another week? And you have a maximum loss of .80 if it goes to 39 or 47.

Do you usually let these expire on own or do you usually close them out early?

Bruce,

The work part is easy with thinkorswim's trading platform. The .20 credit is a pretty good return on .80, wouldn't you say? That comes out to 25% return on margin (risk). OK, so the commission is 5.00 for each 20.00 credit, so with commission the real gain is 18.75%. I'm still quite happy with that!

Yes, if the price expires between 40 and 46 I keep the .20 credit (or $20 for each lot). Right now the probability is 86% and getting better each day that the price behaves.

I will only exit early if the price of the shorts are less than .05 - then I don't have to pay a commission and it reduces my risk somewhat.

- Jeff

In reply to Jeff reply "15th of October" - THE DAY OF THE FINAL HIGH ?

THE GAP IS NOW CLOSED ON SP-500. We have add an incrediable run since the March lows. To me as an observer and student of technical charts, this run is over!! That is a statement, which will be either be proven wrong or right with time going forward. I don't mind if I'm wrong, that is OK. I also believe the up-trend line has already been broken. Most people will not draw it like I do to support my RSI divergence.

Now ,lets sit back and watch the true master tell us ALL!!! The Market itself. UP / DOWN or SIDEWAYS :)

This is my own interpretation of the market as of Friday's close.

http://www.freestockcharts.com?emailChartID=c4a...

Have a good week eveyone.

Serg

NEUTRAL -BEAR FOCUS USING TECHNICALS

When I look at many charts now from the Watch-list like the 3 below, I am more bearish then bullish right now. "I love RSI divergence against price." Check it out guys on it.

SPY / AAPL / BIDU all looking VERY tired right now using RSI against it.

So does this give me an an edge when I say things like "looking very tired"?- I WOULD SAY NO. It keeps me guessing too much. I'll stay away until price confirms breaking of their trend-lines up. RSI is a good warning indicator used in this way. They all have had an amazing run since March and PRICE GREED can all blind us.

So lets look at FUQI compared to the above 3 watch-list. Trend line was bullish (upwards) looking back from April break-out...price increasd a massive 700% (TOO MUCH GREED), but it has now peaked to me looking back to mid Sept. The uptrend line which was in place is now broken and as of Fridays close the $26 dollar mark is gone.

I AM NOW BEARISH ON THIS STOCK WITH THIS CONFIRMATION OF PRICE ACTION FROM FRIDAY.

Summary of reasons: RSI divergence gave a heads up that the trend was coming to an end (I believe it has), It's up trend-line has been broken, Price has consolidated and breaking down very slowly day by day. Awaiting now a retracement forming a bear flag and then go in for a bear call for November.

Sharing for Success!

Cheers
Sergio

SPY - Could it be that the market is trying to close the 109.61 GAP (between 03/10/08 - 06/10/08) before continuing its down-ward trend or will this aggressive Bull (or mad cow) totally ignore it and continue further up and up?

Its an interesting cross road if you love technicals!

Serg

Sergio,

The nay-sayers seem to have given up. Now the 'talk' is about all the $$ on the sidelines that will come in now that the bull is in its sixth month, or third month - whatever spot on the chart you want to use. One theory says that when everyone is talking bull, it's time to get out. Like you said, the charts don't lie.

Gaps will always be filled - eventually - on indexes. It would be interesting to see if a gap that old still has meaning.

- Jeff

What was your adjustment for uso?

Rob

Ron - Same thing, same day (strangely enough) closed USO on the 12th for a 23 net loss.

- Jeff

The aapl credit looks off. 1.03-0.05 is 0.53 not 0.75. The rest look right. What are you doign with the GRMN trade since the run up?

Rob - good eye on AAPL (proves someone actually reads them). I think it was a typ0 :)

- Jeff

Rob - I closed GRMN on the 12th for a 23 net loss. It set off my alert and looked like it was going to keep going up, so I bailed.

- Jeff

Jeff,

What alert levels do you typically use for this?

Rob

Rob - I put a study called Average True Range on my chart, then take the current ATR and subtract/add that to my short strike and set my alert at that level or somewhere close. It's not an exact science but this is a guideline.

- Jeff

Jeff, With GRMN approaching the short call strike, do you have a plan B ready if GRMN closes above $39?

Thanks!
Phil

Phil,

I actually closed that trade today for a $23 loss - I just have not had time to update the blog.

- Jeff

Thanks Jeff. Hopefully the resistance will hold up for you, but even better you nailed it tonight over its head!

The only thing that scares me on this one is the tighnighting of the bollinger bands....indicating a break-out.

Cheers
Serg

A breakout up or down or a period of consolidation.

- Jeff

Re: GRMN bear call spread --

TOS shows the midpoint of the respective options for the credit spread to be $17 currently, probably because GRMN has moved a bit higher today. Do you usually get filled at the midpoint, if, in fact, that is what you use for order entry?

Phil

Phil,

My midpoint when I entered the order was 15, and I had to wait over 30 minutes for that to fill and it was filled in pieces. For some strange reason, there was not an volume on these Calls until my order went through. Let's hope it's not too good to be true.

I always use the midpoint unless the stock price is fluctuating a lot, then I usually watch if for a while to see what the highest credit is, and then lock my order in at that price. If I don't get filled, I frequently just pass on the trade - not wanting to chase it. I find that when I do chase it, I could have been filled at a higher credit later in the day.

- Jeff

Jeff,

Your Garmin trade is amazing. A $1.00 spread, returning 17%+ that will expire in 2 Fridays with an 82% probability of profit. That's my kind of trade.

Thanks for the dates on the trades.

Phil

GRMN: Exit Plan?

hi Jeff,

What would be your get out price point on it. I guess your bearish on this one due to strong resistance at the 38 price level and your anticipating that it will hold?

Cheers
Serg

Serg,

I have an alert set at 38.50. If it hits that, I will look at it and decide what to do. You're right about the resistance.

- Jeff

Jeff, could you post the date of your trade on your in-play page? Also, do you use a service to find credit spread trades? Thanks for all you do. Phil

Phil,

The date for the trades is now there. I don't use any service. I have a list of about 50 favorites that I just watch and look at each day. When any of them look like they are setting up, I put them on a short list for serious consideration the next day.

I have been thinking of setting up my own service but I'm not ready for that as of yet.

- Jeff

Managing the Risk in these trades above?

Jeff, looking to learn and pick your brains (hope you dont mind!!) especially, managing loosing trades and money management with discipline.

Could you tell us what is your exit strategy for each of these trades above. Placing them is the easy bit, but knowing what to do when the feathers hit the fan is more important.

Also, what methods do you use to get out?

1. Eg option doubles you exit? Yes or No?

2. A break of a pre-defined resistance level?

3. Monitoring the Delta of the Short?

In your trading plan you mention a 80-85% probability of success.

How do you define these values?

Regards
Sergio

Sergio,

First, I set alerts - usually about 2% off of my short option strike or a pre-defined resistance/support level. When I am alerted, it's decision time and I do 1 of 3 things:
1) If I have held the combo long enough, it may already be profitable so I will just close the trade. Theta is our friend.
2) If the stock is making a very strong move against me, I like to buy back the short option and let the long option run for a while. This is a favorite of mine and can result if a larger profit than originally planned.
3) If I think the stock is just making a head fake and 1 & 2 won't give me a profit, I wait.
Never, ever let a spread expire ITM!

Probability of an option spread is available at optionsXpress and thinkorswim's trading platforms.

- Jeff

Chris - The devil made me do it! Actually you're not the first to ask. I bought back the Puts today for a 22% gain.

- Jeff

Jeff,

What made you decide to get into VMW 1 week ahead of their earnings announcement?

Joe,

There is a lot of confusion in the group between Jeff Partlow and myself, Jeff W. I think you are referring to Partlow since I have no such sheet. You might find it at his blog http://coveredcallsadvisor.blogspot.com/

Jeff W

Jeff,
You had mentioned in the yahoo group recently about your buy and sell spreadsheet{free cash flow} could not find it on your site.I very much would like to look at that and thanks a bunch for you conyinued comments and support of the group.