High Expectancy Trading

Well, the Fed helped me out.  They lowered rates again today by .25 a point down to 2%.  The market reacted negatively to this mid-day.  This signals that the Fed is not convinced the economy pull-back is over.  This may mean we have another quarter or two of volatile trading.  This is great!  Volatility keeps investors nervous about stocks.  Nervous investors buy insurance to protect themselves.  Most investors us Puts in ETFs as insurance.  Demand in Puts drives the prices for these Put up.  I’m selling these Puts!  I will open a new position late this week or early next week.  I expect some continuation of this drop over the next few days.  I want to let that play out before selling more.

OK, I did open a position yesterday, Monday.  I did this because I was behind a week.  I closed two weeks worth of trades in one week so I found myself needing to put my hard earned capital/margin to work for me.  Yesterday I sold 60-strike Puts in IWM with a 6/30/08 expiration.  I sold them for .32 with a 95.75% probability of collecting all the planned premium. (.32 - .04 = .28 profit = $28 per contract)  My expectancy is 45 cents per dollar of premium.  This is excellent.  A positive expectance means the odds vs. payoff is in our favor.  Anything greater than 0 is good.  …greater than .25 is great.

I love this system for the simple fact that I can actually calculate the expectancy per position.  Most trading systems must be traded for 200+ instances before you can estimate expectancy.  I can calculate it without a single trade.  This is because I have a model to estimate probability of success and a method for estimate how much I make if I win and how much I lose if I lose.