Friday, 29 January 2016

S&P500 ETF (SPY) trade - Update #3 (final!)

I mentioned SPY Bull Put Credit Spread trade on 20 Dec 2015 with two updates on 21Dec and 25Dec.

If you follow this trade, I hope you have adopted the suggestion posted on 25Dec, which is to take profit and move on to the next trade. However, if you still hold on to this position, you don't need to worry as well.

Let's recap this position 

Bull Put Credit Spread - 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

Total Premium captured was $1.20 ($120 per options contract) 

Fast forward to today (29 Jan 2016), 
1. SPY 195 PUT strike, Jan wk5 2016, 0 DTE, mid premium price $6.35
2. SPY 190 PUT strike, Jan wk5 2016, 0 DTE, mid premium price $2.00

If we close the position when market open, we will need to pay $4.35 ($435 per options contract). As we received $1.20 ($120 per options contract) earlier when we open the position, our total loss is $3.15 ($315 per options contract). It is not bad as the position is protected. Imagine if you buy this ETF at 195 and now it is trading at around 189, your unrealized profit will be $6 ($600 per equivalent options contract), which is double the loss of the options trade!! Do note that the lowest SPY price was $181. If you monitor the price movement frequently, you may have sold it at that price (loss $1600 per equivalent options contract) if you were fear!!

However, it is blessed that we are options trader! As an options trader, there are more options (pun intended) we have to salvage the situation. :)

#1, we can roll the position to further month to let the probability to play out. Basically, what it means here is to close this Bull Put Spread position and open the next month Bull Put Spread position, but with lower strike (e.g. 185-180) to increase the probability of success and capture back the premium. 
#2, we can construct a Bear Call Spread at $200 resistance level to capture extra premium. 

Depending on individual's perception of the market, we can do #1 (Bull Put Spread) or #2 (Bear Call Spread) or both #1 and #2 (Iron Condor). My personal view base on the chart is that in short term (within a month or two), the market should trade sideway before resume downside move (I am longer term bearish). Hence, I would prefer to construct #1 and #2 in order to capture more premium. 

A) We do not need to wait until the last day to repair. We can repair when the market goes against us. In this case, repair when the price drops below $200. It is always good to use support/resistance as a pivot point to repair.

B) It is highly recommended to close position when 50%-60% of the profit is captured. This prevents a profitable trade becomes a losing trade. We enter a trade when the probability of success is high. However, high probability does not mean 100% profitable, we will need to respect the market and the market is random! Cheers! 

Thursday, 28 January 2016

Trading/investing - a game of probability?

When I mention trading is a game of probability, no one seems to disagree. However when I say investment is also a game of probability, not many seems to be convinced. Dividend, growth and value investors may speak with conviction that they are buying into a business, not exchanging papers and they are not speculating for a quick bucks etc. yup that's true and while I do agree that buying a wonderful business at fair price is a good investment mantra, I still look at it from a different angle - a game of probability. Do allow me to explain.

If you are a value investor, you will study and pick the business with strong balance sheet, solid management team, great long term growth prospect and most importantly undervalue or at least fair price company (There are numerous way to value a company, the most prominent should be using discounted cash flow method or relative method). You will then wait for the share price to move up to the intrinsic value/fundamental value. You will decide to sell the stock and move on to hunt for the next value stock when the stock price becomes expensive (high P/E). All the steps that are mentioned here require effort and the more you understand the business (reading annual reports) the more comfortable you are to buy and hold the stock. What you have done here is the hardwork to increase the probably of making a good profit in this stock/business. Does it guarantee a success? Not 100%. That's the reason we need to learn money management, portfolio allocation etc and all these further improve the probability of success. Some investor guru suggest to pick the dividend stock, what is the rational of doing so if we could pick a value stock which give us few hundred percents of return? Do we still bother the dividend in that sense? The problem here again is that we don't know and never know if the stock/business that we have picked will really spike up. If we are wrong, the dividend can at least reduce the cost base. When the cost base is lower, the chances of the success will be higher. We are still talking about the probability of success over here.

If you are a technical trader or a chartist, you may look at the candlestick chart and some other indicators to craft your trading plan. You determine the entry price, profit target and stop loss. You calculate the risk reward ratio. You ensure that you are comfortable to stomach the risk/loss if market goes against you. So what are you trying to do here? You are trying to do all it takes to increase the odd of winning. You are dealing with a game of probability in which you limit the losses while letting the profit run to enable a higher chance of success in trading the market. 

In summary, regardless which approach we take, we are dealing with probabilities. Hence, we should only trade or invest if and only if the chances of success is high. Cheers!

Sunday, 17 January 2016

Happy New Year!

It is a bit late to greet everyone a happy new year! The first 2 weeks has been very hectic for me, mainly due to my work commitment, business traveling as well as spending some quality time reading, trading and organizing my thoughts. Browsing through the articles that I have written over the past few months, there are still a lot of ideas and techniques which I will be sharing over the next few months/years.

The first 2 weeks of the new year has been tough for many retail investors. Crude Oil price has sinked below $30 per barrel, DOW and S&P also dropped the most if compare to the historical data. However, for Options traders/investors, we should either minimize the lose or we would even make some good profit during these period.

In the next few weeks of this brand new year, I will complete the spread trade repair strategies. I will also share my thoughts on how I would strategize my portfolio position base on my current bearish outlook of the financial market (in technical term, how to skew my delta neutral position into a slightly bearish position). I will also share the market outlook from metaphysic perspective.

Stay tune, have fun in 2016 and may the 'options' be with you! Cheers!