Short Note - 2015

Few more days to bid farewell to 2015. It is a very fruitful year for me as an options trader. I am also very please that I have taken my first step to launch my blog and hopefully, this single step will turn into a big leap in 2016. I would like to thank everyone who has given me a very encouraging feedback and comment! I will share more live trades in 2016 (not recommendation :P) to illustrate how I trade and repair strategy if the trades go against me. Cheers!

S&P500 ETF (SPY) trade - Update #2 And Merry Xmas!!!

Merry Christmas everyone! As today is also US holiday , for those who have credit spread, you should be glad as time decay is on your side!

SPY Bull Put Credit Spread trade is doing good and we can consider to close the position next week to capture 50-60% of the premium collected.

Explanation: We initiated the position to collect $100 per options contract, we can close the position by buying back the spread at around $40-$50 per options contract as this can:-
#1 avoid a profitable trade to become a losing trade &
#2 free up the margin for better trades.

We can also choose to keep this trade until expiry date. Cheers!

Few thoughts on options trading through Q&A Part #2

The conversation between my friend and I, Part 2! 

Q: Trading Options is extremely risky. I afraid to loss all my money in trading options. 

Lifestyle Options Trader (LOTr): There is risk in everything that we are doing. If you drive a car on the road, there is a risk of car accident but it does not refrain you from driving. What is more important is that you need to drive carefully. The same analogy for trading options. As long as you trade carefully and manage the risk well, you are safe! People can lose all their money in trading any financial instruments or doing any business. Hence, I strongly disagree that trading options is extremely risky as I hold the believe that trading options in fact is extremely safe if and only if you trade it correctly. To learn more, you can refer to my previous post such as portfolio management, common trading pitfalls, etc.

Q: Can I make a million in a year or two by starting up with USD3k as my capital in trading options? 

LOTr: OK, so now we are talking about getting rich quick :). Theoretically, this can happen as options can be used as an instrument to leverage, which mean if you buy stock to make 10% return, options can magnify it to 50-100% return. However, we also need to understand the concept of probability. While this can happen, it also means we need to trade against all odds by taking in extra risk to reap the exceptional return and hence the probability of success is low. My style of trading is to create a healthy cash flow and never over-leverage to avoid black swan event to hurt my portfolio. 

Q: Learning options trading seems to be complicated... 

LOTr: I recommend you to read my blog starting from the very first post. It should be able to give you a very good understanding of options as I tried to avoid using technical term in my first few posts. I am also in the midst of developing a website for options education purpose and I hope it will help you better. Of course I welcome all the feedback to improve my blog!  :)

Q: What is your plan in the near future? 

LOTr: As mentioned previously, I am currently developing a website for options eduction. I am also coaching a few friends who are keen in trading options. Apart from that, I am preparing options eduction material that include a lot infographic to ease the learning. I hope I can share this with wider audience in the near future. Last but not least, I will continue to blog :)  

Trade adjust/repair method #2

Trade adjust/repair method #2 base on the original trade. For trade adjust/repair method #1, you can refer here

So, this is what we have done. We have created a Bull Put Credit Spread and capture $1.20 ($120 per options contract) premium when SPY is trading at 200.

1. STO SPY 195 PUT strike, Jan wk5 2016, 39 DTE, premium $3.3
2. BTO SPY 190 PUT strike, Jan wk5 2016, 39 DTE, premium $2.1

If the market go against us after 5 days, says it drops to 196 and the technical chart shows that it is now consolidated in the range of 195 to 200. The 2nd method which I would suggest is to add a Bear Call Credit Spread (BCCS) to the position. Example of the BCCS that we can do is the following.

3. STO SPY 200 CALL strike, Jan wk5 2016, 34 DTE, estimated premium $2.8
4. BTO SPY 205 CALL strike, Jan wk5 2016, 34 DTE, estimated premium $1.8

We are capturing additional premium of $1.00 ($100 per options contract) and we have four open trades now.

1. STO SPY 195 PUT strike, Jan wk5 2016, 34 DTE
2. BTO SPY 190 PUT strike, Jan wk5 2016, 34 DTE
3. STO SPY 200 CALL strike, Jan wk5 2016, 34 DTE
4. BTO SPY 205 CALL strike, Jan wk5 2016, 34 DTE

Do note that for trade 1 & 2, the DTE is changed from 39 days to 34 days with the passage of time (after 5 days). With this additional 2 new trades (trade 3 and 4), we expect SPY to trade within the range of 195-200 in the remaining days to expiry.

In summary, we deploy this repair method #2 when we expect the stock/underlying to move slightly bearish.  

S&P500 ETF (SPY) trade - Update #1

You may refer to the original post here. S&P 500 Index Futures (/ES) validated this trade prior US market open and this trade (SPY Bull Put Credit Spread trade) is taken when US market open and premium $1 ($100 per options contract) is captured. 

1. STO SPY 195 PUT strike, Jan Wk5 2016, 39 DTE 

2. BTO SPY 190 PUT strike, Jan Wk5 2016, 39 DTE

SPY closed at 201.67 and further update will be shared. Adjustment/repair method may be deployed depending on how SPY performs in the next 38 days. Cheers!

Trade adjust/repair method #1

I did mention about the important of trade adjustment or repair in the previous posts when we trade options. Let me kick start the first method in this post!

It is always easier to illustrate via an example. Let's assume we have a Bull Put Credit Spread that consists of 2 options trade as per below:-

1. STO SPY 195 PUT strike, Jan wk5 2016, 39 DTE, premium $3.3
2. BTO SPY 190 PUT strike, Jan wk5 2016, 39 DTE, premium $2.1

Let say SPY is trading at 200 now and we will get premium $$1.20 ($120 per options contract) upon the construction of this options trade. We understand that the max losses if we do nothing and SPY drops below 190 will be $3.80 ($380 per options contract). We also understand that when we contract this trade, we have a good chances of success because as long as SPY remain flat at 200, going up a lot, going up a bit or even dropping to 195 in the next 39 days, we will pocket $1.20 ($120 per options contract) happily.

If the market go against us, the first method which I would like to share is to close the sell options leg and let the buy options leg to recoup the losses and turn the position into a winning position. This is the most aggressive method of all. We are trading against the time decay especially if the options has DTE of less than 30 days. However, when market is dropping, it can descend fast and we can subsequently close the remaining options leg.

Imagine SPY is trading at 193 after 5 days and our technical chart shows strong support has been broken and we decide to deploy this aggressive method. This is what we can do:-

3. BTC SPY 195 PUT strike, Jan wk5 2016, 34 DTE, estimated premium $5.5

We remain our SPY 190 PUT strike, premium should be around $3 and let the premium price to go up more when SPY continue to drop. I recommend to close this remaining options leg after a day or two max when we breakeven or slight profit. It is not recommended to hold on to this remaining leg too long as the time decay will hurt our premium.

Imagine if we close our remaining position after two days when SPY hits 189:-

4. STC SPY 190 PUT strike, Jan wk5 2016, 32 DTE, estimated premium $5

In summary, our net profit in this options trade should be $0.70 ($70 per options contract) (premium $1.2 collected upfront when we initiated the position - $5.5 when we close the 195 PUT and + $5 when we close the 190 PUT). It is not bad at all considering we are very wrong in this trade :)

It is definately not bad for me to complete this blog at exercise bike in front of a great view.

Quick update on my project

I am boosting up my web developing skill now in order to roll out my options website in Jan 2016. I feel great to return to the coding world after so many years.

I will continue to blog and I will integrate the two (my blog and my website) to create more value to the readers.

May the force be with me :)

S&P500 ETF (SPY) trade

DOW Jones and S&P dropped two consecutive days post rate hike last Wednesday. I will monitor Monday's S&P 500 Index Futures (/ES) before market open to decide if I will proceed to initiate a Bull Put Credit Spread against S&P500 ETF (SPY). My view is that the SPY has a high probability of trading range-bound/consolidation between 195 to 215 in the next 1 or 2 months. Hence, I am keen to construct the following trade after the market open tomorrow:-

1. STO SPY 195 PUT strike, Jan Wk5 2016, 39 DTE 

2. BTO SPY 190 PUT strike, Jan Wk5 2016, 39 DTE

These 2 trades should be initiated concurrently and I am looking to collect premium of $1.20, which is $120 per lot options. In terms of risk, the max risk in this strategy should be $3.80, which is $380 per lot options if SPY drops to below 190 after 39 days. Do also note that the max risk should only happen if we do nothing against the trades after we initiate the trade. I will discuss trades repairs method in the next post. Basically, there are 7 adjustment/repair methods. 

In case you have forgotten the acronyms 

STO - Sell To Open

BTO - Buy To Open

Wk5 - Week 5 of the month 

DTE - Days to expiry

I will update tomorrow if I will execute this trade. Cheers!

Disclaimer: This is not a recommendation, it is just for educational purpose only.

Options Strategy - Bear Call Credit Spread - Strike selection

Considering we have chosen Bear Call Credit Spread (bearish outlook and we expect the stock price to drop) as a strategy that we intend to deploy, we may need to choose a pair of strikes. There are numerous pair of strikes that we can choose from. In the screenshot below, I have chosen 3 pairs of strikes that represent In-The-Money (ITM), Near At-The-Money (Near ATM) and Out-The-Money (OTM). Which pair provides the optimal return?  

1. Strike 95-100 (See 2), Both ITM strikes, Stock/Underlying Price @ $109.97 (See 1)
Sell 95 Call @ ~$16.20
Buy 100 Call @  ~$12.00
Total Premium Collected : $4.20 ($16.20 - $12.00)
Maximum Losses : $0.80 ($5 strike - $4.2Total Premium)
Note: In order to collect total premium of $4.20, the stock needs to drop from the existing price of $109.97 to $95 upon options expire. It is a low probability trade as we are looking at ~$15 drop in short time frame.


2. Strike 110-115 (See 3), Both Near ATM strikes, Stock/Underlying Price @ $109.97 (See 1)
Sell 110 Call @ ~$5.25
Buy 115 Call @  ~$3.05
Total Premium Collected : $2.20 ($5.25-$3.05)
Maximum Losses : $2.80 ($5 strike - $2.2Total Premium)
Note: In order to collect total premium of $2.20, the stock needs to stay below $110 upon options expire. It is an average probability trade as we expect the stock to be flat or going down when options mature.


3. Strike 125-130 (See 4), Both OTM strikes, Stock/Underlying Price @ $109.97 (See 1)
Sell 125 Call @ ~$0.79
Buy 130 Call @  ~$0.38
Total Premium Collected : $0.41 ($0.79-$0.38)
Maximum Losses : $4.59 ($5 strike - $0.41Total Premium)
Note: In order to collect total premium  of $0.41, the stock needs to stay below $125 upon options expire. It is a high probability trade as the stock is currently trading at $109.97 and there is an upside "buffer/cushion" of $15. However, if we look at the max losses vs total premium that we can collect in this trades, it does not warrant a good risk-reward as we are making too little to justify the risk that we are taking.

Conclusion - #2 should represent the optimal trades by providing the best risk-reward ratio to the traders (ignore fundamental & technical analysis and only focusing on statistical analysis).

Options Strategy - Bear Call Credit Spread

In the previous post, we discussed Bull Put Credit Spread.  In this post, let's decompose and explain Bear Call Credit Spread using Lifestyle Options Trader's method.

Bear Call Credit Spread (BCCS)
1. Bear -> Bearish Outlook
2. Call -> Call Options
3. Credit -> Receive premium
4. Spread -> Consist of 1 Long and 1 Short position

What does this mean if we were to deploy this strategy? It means we expect the stock price to go down or flat. We construct this strategy using two Call Options, one long (buy to open) position and one short (sell to open) position and we will receive premium.

Let's see the example below:-

This is Apple stock and it is trading at $110.49 (See 1). As we expect the stock price to go down or flat, we can construct BCCS using two Call Options. In this example, we select 115 strike and 120 strike (See 3).

1. We will buy to open 120 strike at $1.87 (mid of $1.85~$1.89) and;
2. We will sell to open 115 strike at $3.42 (mid of $3.40~$3.45) (See 2).
3. We need to open this two position together

We will receive a premium of $1.55 ($3.42 - $1.87) from this spread trade. The strike wide is $5 (120 strike - 115 strike).

With this strategy, as long as the Apple stock does not go above $115, we will take $1.55 as our profit ($155 profit for every options spread we create as 1 lot = 100units) upon options maturity. As the stock is currently traded at $110.49, there is $4.51 'buffer/cushion' before we take action to repair. If we do nothing and the stock price increase to $130, the maximum lose incurred would be $3.45 ($5 strike wide - $1.55 premium receive). The maximum lose would still be $3.45 ($345 loses for every options spread we create as 1 lot = 100units) even if the stock price shoots up to $200 or $300 upon options maturity.

When we construct Bear Call Credit Spread and Bull Put Credit Spread, we limit our losses (in this example $345 per options lot). If we choose not to take action against this defined risk trades, meaning, we create this options strategy trades, forget about it and only check again after the options matured, the maximum losses that we could incur will not exceed $345. This type of trades can bring peace of mind especially to those traders that do not/unable to monitor the market whole day.

The Intelligent Option Investor

I came across this book and a quick flipped through suggest my earlier post of using options to enhance yields and protect gains of value stocks are aligned with the core idea of this book. I will complete it by next week and update great points in this blog!

Entering Options Strategy (Bull Put Credit Spread)

A lot of friends approached me and asked what is the best options strategy to deploy if he/she intend to start trading options with USD5k-10k capital? My answer is trading credit spread (bull spread or bear spread or combination of both). Trading credit spread is entirely different from few strategies that I shared in my earlier post. There is no concept of cost reduction and there is also no intention to buy the stock upon options maturity. Hence, I would categorize this strategy as a slightly aggressive strategy.

There are two types of credit spread, Bull Put Credit Spread and Bear Call Credit Spread.

Let's decompose and explain Bull Put credit spread using Lifestyle Options Trader's method.

Bull Put Credit Spread (BPCS)
1. Bull -> Bullish Outlook
2. Put -> Put Options
3. Credit -> Receive premium
4. Spread -> Consist of 1 Long and 1 Short position

What does this mean if we were to deploy this strategy? It means we expect the stock price to go up or flat. We construct this strategy using two Put Options, one long (buy to open) position and one short (sell to open) position and we will receive premium.

Let's see the example below:-

This is Apple stock and it is trading at $113.18 (See 1). As we expect the stock price to go up or flat, we can construct BPCS using two Put Options. In this example, we select 110 strike and 105 strike.

1. We will buy to open 105 strike at $3 (mid of $2.96~$3.05) and;
2. We will sell to open 110 strike at $4.65 (mid of $$4.60~$4.79) (See 2).
3. We need to open this two position together

We will receive a premium of $1.65 ($4.65 - $3) from this spread trade. The strike wide is $5 (110 strike - 105 strike).

With this strategy, as long as the Apple stock does not drop below $110, we will take $1.65 as our profit ($165 profit for every options spread we put up) upon options maturity. As the stock is currently traded at $113.18, there is $3.18 'buffer/cushion' before we take action to repair. If we do nothing and the stock price drops to $100, the maximum lose incurred would be $3.35 ($5 strike wide - $1.65 premium receive). The maximum lose would still be $3.35 if the stock price drops all the way to $0.

There are several repair strategies if the stock price goes against us. I will slowly reveal it in the future post. :)

Is it possible to create a trade that will never lose?

The answer is yes with the help of options! While buying options can protect a stock (see here),  buying options can also lock-in a profitable position to ensure the position will never lose.

Let say we purchase Apple stock at $120 and the stock moves up to $130.

We buy a Put options by paying say $2 at $128 strike to lock-in our profitable position.
1) If Apple stock drops to $100
  a) Stock - We lose $20 ($120 - $100)
  b) Put Options - We profit $26 ($128 - $100 -$2)
  c) Our net position -  We profit $6 ($26 - $20)

2) If Apple stock drops to $50 
  a) Stock - We lose $70 ($120 - $50)
  b) Put Options - We profit $76 ($128 - $50 -$2)
  c) Our net position -  We profit $6 ($76 - $70)

3) If Apple stock rises to $140 
  a) Stock - We profit $20 ($140 - $120)
  b) Put Options - We lose $2 (Put Options OTM and become worthless, we lose our premium paid)
  c) Our net position -  We profit $18 ($20 - $16)

4) If Apple stock rises to $180 
  a) Stock - We profit $60 ($180 - $120)
  b) Put Options - We lose $2 (Put Options OTM and become worthless, we lose our premium paid)
  c) Our net position -  We profit $58 ($20 - $16)

Using options to lock-in a profitable position creates a peace of mind. :)

Insurance is important to us, how about insurance for our stocks/portfolio?

Buying options to protect a stock is like buying insurance to protect ourselves. Options is very similar to insurance. When we buy an options, we are acting as the insurance policy owner. We pay premium to the insurance company to get insured. When we sell an options, we are acting as the insurance company. We collect premium from the policy owner periodically.

While selling options (not selling naked but defined risk trade) is a good strategy for income, we cannot ignore the importance of buying options to protect our stocks or portfolio. We are not talking about buying far OTM options to speculate because a lot of time, buying far OTM options will always become the income of the options seller as the OTM options has high probability to expire worthless.

Let's illustrate with a case study. Imagine Apple stock is trading at $120 now and pending an important corporate announcement next Friday. As a long term Apple stock investor, we understand the stock will drop tremendously if the news is negative or rise sharply if otherwise. As Apple stock holder, we can choose to hold the stock and sail through the announcement and prepare to take the hit if the news is bad. Alternatively, we can sell the stock first and buy back later after the announcement. We may potentially miss a good run up if the news is good and we would need to buy back the stock at higher price later.

If we use options, we can buy a Put options by paying say $2 at $118 strike to protect our position.
1) If Apple stock drops to $100 after the announcement:-
  a) Stock - We lose $20 ($120 - $100)
  b) Put Options - We profit $16 ($118 - $100 -$2)
  c) Our net position -  We lose $4 ($20 - $16)

2) If Apple stock drops to $50 after the announcement:-
  a) Stock - We lose $70 ($120 - $50)
  b) Put Options - We profit $66 ($118 - $50 -$2)
  c) Our net position -  We lose $4 ($70 - $66)

3) If Apple stock rises to $140 after the announcement:-
  a) Stock - We profit $20 ($140 - $120)
  b) Put Options - We lose $2 (Put Options OTM and become worthless, we lose our premium paid)
  c) Our net position -  We profit $18 ($20 - $16)

4) If Apple stock rises to $180 after the announcement:-
  a) Stock - We profit $60 ($180 - $120)
  b) Put Options - We lose $2 (Put Options OTM and become worthless, we lose our premium paid)
  c) Our net position -  We profit $58 ($20 - $16)

It is obvious that adding a put options into our stock or portfolio will cap our losses (in this example to $4) regardless how sharp the stock drops but it does not cap our profit potential. If you have not consider to learn options yet, I hope this article can intrigue your interest to learn options now. :)

Few thoughts on options trading through Q&A

Let me share the conversation between my friend and I. Enjoy reading!

Q: Why you choose the name Lifestyle Options Trader?
Lifestyle Options Trader (LOT): Trading can be stressful. I used to burn late night oil (due to time zone different) to monitor my position when the market is volatile. After spending years to study and trade in the stock and options market, I have developed a method which enable me to trade the options in style. It is my daily activity which I enjoy doing it very much and it is already part of my life.


Q: What is your most favourable options strategy?
LOT: It depends whether I am looking at long term or short term. For long term, i would prefer to buy long duration options (options that mature in 1 or 2 years) and sell shorter duration options (options that mature in a month) every month. This is a great strategy which enable me to continuously reduce the cost base of the long duration options and/or enjoying a monthly income through selling shorter duration options. As for short term strategy, I prefer to trade range bounce market in which I can profit as long as the stock does not break either side. If the stock does breakout, I will repair the position base on the market condition. This strategy has served me well so far.


Q: It seems like a sure win strategy. In that case, how could you lose money?
LOT: It is not true. Even though the strategy that I deploy has high probability of success and the repair method does further improve the chances of success, it does not represent 100% success rate. At certain market condition, I would just close the position, take the lose and move on.


Q: How do you avoid black swan event?
LOT: Don't sell naked options unless you are monitoring your position every second. Always hedge your position and construct a defined risk strategy, which means when you enter a position, you should have already known the max profit and max lose. Do not set stop loss when trading options as stock price gaps up/down will hurt your account badly.


More to come :) Cheers!

Portfolio Management

If I were to name the two most important criteria to become a successful options trader, I would pick managing portfolio and managing risk. The ultimate goal to trade options is to stay in the game and to make money consistently. In order to stay in the game for long, we should be very discipline and never ever allow any single trade to ruin our portfolio.

Quoted from George Soros "It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong." This summarize the essence and the important of managing our trades and portfolio.

We can decipher portfolio management into technical and psychological aspects. From technical perspective, for a small account (<USD10k), it is recommended to follow 7:2:1 ratio in which 70% should be attributed to conservative income investing style via buying good stocks and selling premium to enhance the yield periodically; 20% should be moderate risk income investing style such as structuring credit spread and the remaining 10% can be used as high risk leveraging trades such as debit spread or straight call or put. There is no one size fit all but the ratio recommendation can be a good starting point for a new beginner. For those who are more adventurous, the ratio can be adjusted to 6:3:1 etc. The rule of thumb in options trading is try not to lose money and try to build up the portfolio slowly and steadily at the beginning. When your portfolio is growing healthily throughout the years, it will be encouraging and you will continue to stay in the game!

Psychological aspects is a bit difficult to teach as it requires the traders to go through the process and experiencing it. However, it can be improved by adhering to few rules such as using the options strategy which enable you to feel comfortable in the worst case scenarios (price drops 10%, 20% or rises 10%, 20% etc), joining an options mentor or group of traders that are discipline and stick to the core plan, never sell naked options as a retail investor etc.

Lastly, we need to be patient! While we always find ways to enhance our portfolio's yield, we need to ensure we do not over-leverage. If we have too many open positions and our overall position is too screwed to one side (either too bullish or too bearish), we may expose to a higher market/event risk and that will hurt our portfolio if market go against us (either up or down). Do remember, a lot of time, slow and steady wins the race! Cheers!

Common pitfalls in trading options!

If you read my previous articles, you may be confused why there are so many people still losing money if trading options can be very conservative. Let me compile a list of contributing factors of losing money in trading options.

1. Buying out of money options with short day to maturity
This is indeed a speculation. Imagine this, Apple share is trading at $120 now and we open an options position we wish that the share price to hit $150 in 1 month. We pay $0.30 for every options we purchase and happily wait for the Apple share price to shoot up. Unfortunately, this type of trade seldom success. We are expecting Apple to go up 25% ([150-120]/120) in a month, if we project it to a year, we are expecting 300% rise! If after 1 month, the Apple share does rise sharply and end up at $150, we are still losing all our money. We will only start making money when Apple share goes beyond $150.30 (Remember the $0.30 options price that we have paid?). So, this is a very low probability of success trade.

2. Over-magnifying the power of Call Options
Continue from #1, if we are too indulged with the thinking of putting small money in our account to make big money in a short period of time, we may scale up the number of options that we want to purchase. Instead of paying $30 ($0.30 *100units) to buy 1 options, we increase the number of options to 100 options and hoping that the Apple shares will sky-rocketing before the options expired. If the Apple shares reaches $200, we will be making $497,000 ([$200share price - $150strike - $0.3premium] * 100options * 100units] in a month! An astounding result? Again, do assess the probability of success.

3. Over-leveraging options trading
Imagine we have identified Starbucks as a great value stock that is currently trading at $63. Instead of buying the stock directly, we sell an options, with the intention to buy the stock if it goes below $61 in a month time. As an options seller, we are paid with $1 for every options that we sell. It looks great so far. After a month, assume the Starbucks share price trades at $62, we will be happily pocketed $100 as 1 options represent 100 units. After a few rounds of not converting to stocks, we may be greedy now. Instead of 1 options, we now want to sell 10 options to collect $1000. Here's the problem now. If Starbucks drops to $55 (using the same example) on maturity date, we are obliged to buy the stock now. As we sold 10 options, we need to buy 1000 units of Starbucks (10 options * 100units), which means we need to have $60,000 ([$61strike-$1premium]*1,000units). If our account does not have sufficient cash to buy $60,000 worth of Starbucks, the brokers will liquidate on the spot by selling the stock away at $55 and book in the loses of $5000 ($60,000 - $55,000) into your account. A disaster, isn't it?

Avoiding mistakes and always keep in mind the factors that will make us lose money will increase the chances of our success in trading and investing! Cheers!

Probability of trading/investing success and the probability of sighting the Northern Lights

After spending 2 weeks in Norway chasing Northern Lights and savoring one of best panoramic scenic view in life, I am back to action again! I am also glad that I managed to complete few books and magazines throughout the long haul flights, did some deep thinking apart from indulging into Norwegian's culture and great nature.

I believe many knows that viewing Northern Lights is by chance/luck and there is no 100% certainly of seeing it at any specific night. We can however increase the odd by choosing a better location, say Tromso, Norway, rather than Finland or Sweden, engaging an experience local guide, selecting the month/year that provide higher probability of viewing, etc. All the above can definitely increase the chances of viewing but it still does not guarantee a successful viewing. Hence, are we still going to take the chance to view Northern Lights by knowing all these? I believe the answer is yes for many people as this is definitely one of the bucket list of many I presume. Why? Because the reward of getting to view and capture it in live is just astounding!

How does this relate to trading/investing? There are various method we can use to determine the stock picks, we use fundamental valuation method, we may use technical indicator, price action, volume analysis, etc to project the share price. Does it mean that we are destined to trade/invest successfully by applying valuation method or technical method? While we can safely say that financial tool/education can greatly increase the odd of success in trading/investing, it will not 100% guarantee a success in every trades that we perform. Hence, are we still going to trade and invest? I believe the answer is yes. Why? Because the reward of getting to trade and invest successfully will be tremendous!

Perhaps the next question in mind is that, do we need to profit in every single trade? Quoted from the grand strategy, we can lose a battle but to win a war. If each battle represents a single trade and the war represents our portfolio, then focusing to grow our portfolio by not too carried away with few lose trades should be a wise move.

In summary, the chances of sighting Northern Lights in a specific day (analogy to a single trade concept) may require a bit of luck but to sight Northern Lights in a whole week (analogy to a portfolio concept) would almost a guarantee. Needless to say if you stay there for a month or two, the chances of not sighting should be zero. Hence, try to chase more days if you happen to be there in the future! Cheers!

Trading/investing and metaphysic science

While waiting to check in a hotel in Tromso, Norway, I would like to do a short post against something that I ponder during the journey. I believe those who have been in the trading/investing business for long should understand the concept of letting profit run and cutting losses fast (extremely important for short term trader but not too crucial for long term value investor). However in reality, not many trader/investor can fully execute this concept seamlessly, mainly due to the human pyscholoygy of risk seeking when the odd is against us and risk adversing when we are in the domain of gains.

Interestingly, there are still traders/investors who can execute this successfully. This lead me to look at this phenomena in different angle. As an avid reader, I do have immense interest in Chinese Metaphysic. In the study of metaphysic, we aware that every individual has their own path to success. Some people can be very successful in short term trading while some are more suitable to do long term investment. Some are very comfortable to cut losses swiftly without much 'pain' but some just can't do it in style. While education and continuously learning to become a successful trader/investor is crucial, we still need to find a way which we can feel very comfortable to trade/invest.

By understanding ourselves through metaphysic, we are sort of de-coding our DNA in learning ourselves in-depth in order to select the least resistance path to en-route a trading/investing success. We will avoid pushing or forcing ourselves to follow a set of rules which may lead us to success but would also strain us throughout the journey. All roads lead to Rome, let's pick the most comfortable way to reach Rome in style!

The good news to us is that regardless we are short term/long term, aggressive or converative trader/investor, options is versatile to suit all circumstances of our trading/investing journey!

Rolling-over mechanism

Let me do a quick post before heading to the airport soon to embark my journey to Norway to chase Northern Light! I should be away for two weeks before resume writing the next post.

In the previous post, I introduced a technique called "rolling-over" an options position. Rolling over an options position means closing the existing options position that is going to expiry and opening a new options position with longer date to expiry.

(1) Position Now (Before Rolling Over)
-1 AAPL Nov 15 120 Put

[This means I am holding 1 unit of Sell to Open Put Options position of Apple share at $120 strike price that is going to mature in Nov 2015 (3rd week of the expiration Friday, 20 Nov 2015)]


(2) Rolling Over Mechanism
+1 AAPL Nov 15 120 Put (Close the existing position via Buy to Close)
-1 AAPL Jan 16 120 Put (Open a new position via Sell to Open)

[If I intend to roll the position to a further date of expiry, I should execute the above 2 transactions]


(3) Position After Rolling Over
-1 AAPL Jan 16 120 Put

[Now, this is my position and the only different of this position against the position in (1) is the maturity date. In technical term, it means that we have rolled over the position from Nov 15 to Jan 16.]

I mentioned four stages of becoming a successful options trader in the first post. In stage 4, we aim to achieve > 90% profit by using advance repair method. One of the advance repair method requires us to roll position skillfully. Hence, it is important to internalize this concept in order to become a successful options trader. Cheers!

Holding a great value stock and win, win, win in any circumstances!

It has been almost a week since my last post, mainly due to my hectic business travel to Taiwan over the past couple of days. There is one incident which I would like to share with the readers, which I felt quite inspiring, is the street singers that I came across on my way to Elite Bookstore after having my dinner in Taipei 101. They sang pretty well and I believe they deserve a bigger platform for them to showcase their talent. Nevertheless, they portrayed their passion in singing despite the venue and the crowd. Passion is the key and the driver that pushes us to achieve bigger goal in life. In trading and investing world, passion is the most important element to fire us up to continue learning, improving and persevering...

In the previous post, I discussed a strategy which enable us to reduce cost base in acquiring great value stocks. In this post, I will discuss a strategy which we can use when we are holding the shares. I will use the example given in the last post to illustrate this concept. Hence, if you haven't read the previous post, you may want to go through it first.

Imagine now we have 100 unit Apple shares, which we bought at $108 per share and the stock is trading range-bounce with resistance $110 (In other words, it means Apple stock will find difficulty to trade above $110 base on technical chart/analysis due to market psychology). We can sell to open a Call options at $110 with 2 months date to expiry and collect a premium, say $1 per options contract. There are three scenarios when this options matured.

Scenario 1: if Apple stock trades at $100 (below Options $110 strike) when options is matured (Options OTM)
We are happy to pocket $1 premium and we can consider to initiate another sell to open Call options to collect the next premium. At this point of time, we have further reduced the cost base from the original buying price of $108 per share to $107 per share ($108 - $1 premium). We can also look at this from another dimension, where we are making $1 out of $108 in two months, which give us a yield of 5.56% per annum.

Win!

Scenario 2: if Apple stock trades at $110 (equal to Options $110 strike) when options is matured (Options ATM) 
Most brokers would exercise ATM options, which means as this call options seller, we need to sell the stock at $110 to the options buyer. When this happen, we will profit $3 per shares ($110 selling price - $108 buying price + $1 premium). If you are still happy to hold the shares, you can easily buy to close the call options before the maturity. If you buy to close the call options at $0.10 per share, you are still collecting the premium of $0.90 ($1 - $0.10) per share.

Win!

Scenario 3: if Apple stock trades at $115 (above Options $110 strike) when options is matured (Options ITM)
Our ITM options will get assigned, which means as this call options seller, we need to sell the stock at $115 to the options buyer. When this happen, we will profit $3 per shares ($110 selling price - $108 buying price + $1 premium). Do note that our profit potential is capped at the options strike price. We will still profit $3 per shares even if Apple stock goes up to $200 when the options matured.  We can consider the technique of rolling-over the options if we prefer to hold the stocks. I will explain more on this technique in the next post.

Win!


In summary, regardless of which scenarios happen, we are still either making a good profit or reducing our cost base further. This demonstrate the power and the flexibility of using options to enhance our portfolio! I hope I have stimulated your interest to learn further to add options to your trading/investing journey by now! Cheers!

Trading Options is more conservative than value investing!

When we talk about value investing, we must mention the world class great investor Warren Buffett. The idea of value investing is basically picking up stocks with great fundamental by studying the company financial statement, understanding the company business, management, competitive advantages, growth etc. and value the company to gauge if the company is undervalue. If yes, buy it and wait for the value of the company to be unlocked to it's fair value. When this company stock is overvalue, we sell it and move on to search for the next value stock.

Example, Apple is a great stock, the stock price is currently trading at $120 per share and after we apply valuation method (e.g. Discounted Cash Flow or Price-Earning Growth, etc), assume $112 is the intrinsic value (disclaimer: this figure is just for illustration purpose only, I do not really calculate Apple's intrinsic value) and we are happy to buy the share at any price lower than $112 and hold it for many years, there are 2 things that we can do.

Option #1, add Apple stock to watch-list, wait for the price to hit $112 then initiate to buy Apple Stock.

Option #2, initiate a SELL PUT Apple @ Strike price $110 for 2 months DTE (Date to expiry), receive options premium, say $2. Wait until options to mature.

Scenario 1: if Apple stock hits $115 when options is matured (Options OTM)
We can initiate another SELL PUT Apple @ Strike price $110, receive options premium, say $2.5 for the next 2 months. Basically, we can continue to sell a put as long as the stock price does not hit the strike upon maturity and the stock is trading range-bounce.

Scenario 2: if Apple stock hits $106 when options is matured (Options ITM)
The options is exercised! We are happy because we can purchase the stock/understanding at the strike price, which is $110. As we have received $2 as premium upon the selling of the put options, our cost base is reduced to $108 ($110 - $2). If compare to the Option #1, where we buy the stock at $112, by using options, we are now buying the stock at the cheaper rate, $108.

Warren Buffet loves to deploy this strategy to reduce cost base in acquiring great value stocks. this strategy improve the margin of safety further and allow the best use of capital to create income while waiting for the stock price to drop to fair/undervalue.

What should we do if Scenario 2 happens? Shall we just wait patiently for the stock price to appreciate or we can do something differently to further enhance our yield? I will share it in the next post! cheers!

Options fundamental - continue ...

~If there is one thing we should wish for our children, it is to become an optimist. If there is one thing we should teach our children, it should be trading/investing.~ 

The first phrase is quoted by Daniel Kahneman, while the 2nd phrase is by me :). Trading/investing is both art and science which can benefit us whole-life if we do it correctly, be it a profession or a hobby.

In the previous post, I did mention about Buy Call or Sell Put if you aspire the stock/underlying price to increase; Buy Put or Sell Call if you own the perspective that the stock/underlying price to decrease. In this post, I will explain when we should buy or sell an options. 

As an options trader, we can be an options buyer or an options seller. In order to avoid confusion, we would normally say we buy to open (BTO) a position, we sell to open (STO) a position, we buy to close (BTC) a position or we sell to close (STC) a position. Hence,

1. When we want to be an options buyer, we will BTO now and STC the position later.

2. When we want to be an options seller, we will STO now and BTC the position later. 

We can be an options buyer in a trade and an options seller in another trade. These two positions can be open simultaneously and independently from each other. The next question is, when we should be an options buyer or a seller. There is no one size fits all answer. When the stock volatility is high (We can add volatility indicator to the chart to gauge the high/low volatility of the stock, this will be shown next time), it is advantage to be a seller (hope you remember the concept of reversion to mean that i explained in the previous post). In this scenario, 2 options greek, vega and theta (out of the 4 options greeks, Rho is not important hence I will ignore this Greek) will work FOR you as an options seller. Hence, in this scenario, if you view is the market will be flat or slightly bullish (stock in uptrend moving up), you can Sell to Open a PUT.  If you view is the market will be flat or slightly bearish (stock in downtrend moving down, then you can Sell to Open a CALL.

When the stock volatility is low, it may not be advantages to be a options seller because of low vega. Low vega will also indirectly means lower options premium. When we are a buyer, we always want to buy low sell high and when we are a seller, we prefer to sell high first then buy low later. With a lower options premium due to low volatility, we can consider to be an options buyer. As an options buyer, we need to note two important points:-

#1, 80-90% of the options expired worthless, this means from statistical perspective, being an options buyer is not favorable as this indicates 80-90% of options buyer are losing money. 

#2, as an options buyer, theta (time value) will always go against us. Even if our direction is right (we want stock/underlying to increase and it does go up), but due to the theta value decaying, we may still face a lose. 

With such an unfavorable position to begin with, does it mean that we shouldn't buy to open an options position? When we mention about Sell to Open a call or Buy to Open a Put, which strike price should we open? which Date to Expiry options should we look at? How to read an options chain? All will be revealed in the next post. Stay tune :) Cheers!

Options Greek demystified..

When we trade options, we cannot and should not ignore the important of Options Greek. Options Greek is like dashboard in your car. In car dashboard, there are speedometer, odometer, fuel gauge etc. These indicators enable the driver to control the car and drive smoothly. Ignoring the Options Greek in trading options is like neglecting the car dashboard while driving. It may lead to disaster.

As we understand the important of the Options Greek, the next question that we should ask is how extensive we need to study and learn the Options Greek. Fortunately, we just need to know the usage/concept and we don't need to know how it get calculated as a good trading platform should auto-calculate for us.

Options Greek consists of Delta, Gamma, Theta, Vega and Rho. A complex formula that consists of all these 5 Options Greek will calculate the Options Premium Price. For those who have heard of using options as an income investing, selling options (When Seller sell the options contract to the Buyer) will enable the Options Seller to collect the options premium as an income.

Delta - For Call Options, a delta of 0.3 means when the stock/underlying move up $1, the options price will move up $0.30. For Put Options, delta will always be -ve because when the stock/underlying move up, the options price will decrease.

Gamma - The velocity of the Delta changes against the stock/underlying price changes. E.g. when you buy a Call Options at Strike price 100 and the stock is trading at $99, we call this options OTM (Out of The Money), the delta is 0.4. When the stock price is moving up from $99 to $100 (Options ATM), the delta increases to 0.5. When the stock price is moving up from $100 to $101 (Options ITM), the delta now increases to 0.7. The changes of the delta from 0.4 to 0.5 when the stock price changes is represented by Gamma. The important point here is that, when the options is going to expire, gamma risk will increase, the margin will therefore increase drastically against the naked options seller (without hedge).

Theta - It represents time value. For OTM options, the time value will continuously dropping and become zero when options expires. Hence, theta works for Options Seller and work against Options Buyer.

Vega - It represents volatility. The more volatile the stock/underlying, the more expensive the options premium. There is a concept called reversion to mean. If the stocks volatility is high now, it may drop back to the norm/average level. In a high volatility environment, it is good to Sell Options (as options premium is expensive), in a low volatility environment, it is good to Buy Options (as options premium is cheaper).

Rho - It measures the options price changes to the changes of interest rate. Basically, we can forget about this Greek and it is the least important Greek.

Do take some time to digest the Options Greek. We just need to know enough to take advantage on this 'dashboard'. We will explore more in the next post. Cheers!
 

Back to the fundamental!

Good evening everyone! Let's talk about the basic building block of options trading. For those beginner who has never traded options before, options is a derivative which derives from the financial instrument. The financial instrument can be stock, ETF, futures, forex, etc.. We would normally call the financial instrument as 'underlying'.

The options market that I trade is US market. We all understand that US market is the most liquid market in the world which provides plenty of trading opportunity. For those of us who live in Asia, it is definitely an advantage as we can trade in the evening/night while keeping our full time job in the morning.

When we want to initiate a position in stock market, we will buy if we perceive that the stock price will go up or we will sell short if we think the stock price will go down. This short sell opportunity is not applicable to retail investor with smaller trading account. However, in options market, there are more flexibility in this essence. We can easily buy or sell the options.

There are two types of options; call options and put options.
1. Call options : Provide the Buyer the right to buy the stock/underlying at the agreed price on pre-defined date.
2. Put options: Provide the Buyer the right to sell the stock/underlying at the agreed price on pre-defined date.

Example, Stock A is trading at $100. The Buyer buys a Call contract from the Seller today. The agreed price is $110 and the pre-defined date is 1 month from today. After 1 month, the Buyer and the Seller check the price. There will be three scenarios. (Do note that as an Options trader, we can be either the Buyer or the Seller)

Scenario 1: The Stock A is trading at $140  - This options is ITM (In The Money)
Scenario 2: The Stock A is trading at $110 - This options is ATM (At the Money)
Scenario 3: The Stock A is trading at $90 - This options is OTM (Out of the Money)

When an options is ITM, Call options Buyer can exercise his right to buy the stock at this agreed price (which is $110 in this example) from the Seller. It also means that the Call options Seller has the obligation to sell the stock at $110 to the Buyer. Of course, as a Buyer, in order to enter into this contract, he/she needs to pay a small fee (options premium) to the Seller.

If the options is ATM or OTM, the Call options Buyer will not exercise it. The main reason is the Buyer can buy the stock directly from the market with cheaper price as compare to the agreed price. Since the Buyer does not exercise the options, he/she will lose his options premium that has been paid to the Seller upon entering into this Call contract.

Before this post becomes too academic, I would like to stop here. The idea above should be adequate for your to understand the concept and you can derive the concept to Put Buyer and Seller.

I have one tips to share. This should be a very original idea as I haven't seen anyone using it yet. For those new options trader who always confuse the Buy Call, Buy Put, Sell Call, Sell Put, you can try the following:-
1. Call (use + sign as it represents up)
2. Put (use - sign as it represents down)
3. Buy (use + sign as it represents up/aspire the stock price to go up)
4. Sell (use - sign as it represents down/aspire the stock price to go down)

Next, we have 4 combination
1. Buy Call (++) -> +
2. Buy Put  (+-) -> -
3. Sell Call (-+) -> -
4. Sell Put  (--) -> +

Conclusion,
a. 1 & 4 show + sign; it means that if you Buy Call or Sell Put, you hope the stock price to go up
b. 2 & 3 show - sign; it means that if you Buy Put or Sell Call, you hope the stock price to go down
c. If you Buy, you pay premium and if you Sell, you receive premium

At a glance, you may feel that there isn't much different between 1 & 4 or 2 &3. In reality, there are a huge different. The different would require the understanding of Options Greek to appreciate. So what is Options Greek? I will leave it to the next post to explain. Cheers!

A journey of a thousand miles begins with a single step...

... a single step which I believe will improve my trading skill as I take time to ponder and document my trading journey. A journey which will bring me to achieve my aspiration of becoming a successful options trader, investor, author, trainer, traveller and philanthropist.

As this is my first post, I would like to share the reason why I choose to trade options over other financial instruments. I traded stocks equity, ETF, forex, futures, commodities prior "falling in love" with options. Options is the only instrument which allow us to trade conservatively, being wrong but still able to turn it into a winning trade, enjoy a greater margin of safety and timing the trade is not too important. I will provide more elaboration against each advantages in the future posts.

In my own classification, there are four stages to complete prior reaching the ultimate goal to become a consistent profitable options trader.
Stage 1: Understanding Options (No Trading Experience)
Stage 2: Hedging, Leveraging (Buying a Call or Put)
Stage 3: Income Trading (Spread Trading)
Stage 4: Achieving > 90% Profit (Advance Repair Method)

In the next post, I will use my own method to explain the basic of options. I will also elaborate the four stages in detail in the following post. Cheers!