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. 

Lesson
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! 

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!

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!

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.