Tuesday 29 December 2015

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!

Friday 25 December 2015

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!


Wednesday 23 December 2015

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 :)  




Tuesday 22 December 2015

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.  








Monday 21 December 2015

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!



Sunday 20 December 2015

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.

Thursday 17 December 2015

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).





Wednesday 16 December 2015

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.









Monday 14 December 2015

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!




Sunday 13 December 2015

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. :)










Friday 11 December 2015

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. :)








Thursday 10 December 2015

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. :)










Wednesday 9 December 2015

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!




Sunday 6 December 2015

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!