High Expectancy Trading

So far, all trades are behaving just as planned in September.  I have not defended any trades this month.  I am up 2.36% so far and it’s looking to be at least a 5% month if all goes well. 

Here’s a synopsis of my open credit spreads.  You could say I have Iron Condors where I have credit spreads on both the call and put side of the same instruments.  Again, Iron Condors are great because my broker (thinkorswim) only holds margin for the side most at risk.  I do not hold Iron Condors in most instruments because the I can not find positive expectancy trades on the opposite side of my current position.  When measuring expectancy I must consider the combined risk of both (put and call) positions.  If the expectancy is positive for a trade on one side but negative for a trade on both sides, I only open a trade on the one side.  Here’s the list of my currently open positions:

• Short AAPL Sept200 and Sept210 Calls, Long Sept220 Calls (trying to enter credit spread on Put side Monday)
• Short IWM Sept60 and Sept66 Puts, Long Sept57 and Sept63 Puts
• Short USO Sept120 and Sept125 Calls, Long Sept126 and Sept130 Calls
• Short USO Sept80 Puts, Long Sept76 Puts
• Short POT Sept270 Calls, Long Sept280 Calls
• Short POT Sept130 and Sept140 Puts, Long Sept125 and Sept130 Puts
• Short GM Sept7.5 Puts, Long Sept5 Puts
• Short SHLD Sept65 Puts, Long Sept60 Puts

OK, this takes my system gain to 10.35% since 1/29/08 (Mar expiration options), when I started trading this system consistently.  Considering the volatility this summer, I’ll take these results.  This is an 18.08% annualized gain.  Very few others will make that this year…just my hunch.

I have data going back 2+ years but I began strict system trading selling options with the March 08 expiration, so I will start tracking monthly results on this blog in March.

Expiration Month      Result
Mar 08                +3.55% (naked Puts in IWM only)
Apr 08                +2.93% (naked Puts in IWM only)
May 08                +3.05% (naked Puts in IWM only)
Jun 08                +4.08% (began credit spreads in IWM only)
Jul 08                -3.77% (began credit spreads and Iron Condors in IWM, USO, POT, AAPL and RIMM)

Total as of 8/3       +9.85% (19.12% annualized)

Aug 08 (as of 8/3)    +0.63% (month started late because of late closing positions in July)
Sept 08 (as of 8/3)   +0.73% (just opened positions in this month this past week)

July was a trendy month.  Stock ETFs all tumbled and oil rocketed. 

The IWM peak to trough move was 76.22 on 6/5 down to 64.52 on 7/15.   I tend to open positions for the next expiration month around the first of the prior month.  I get the best combination of ROC and exectancy here.   So, this move happened after I opened my July expiration trades.  This was a move of 11.20 or 15.35%.  The Puts I sell in IWM are between 12% and 15% out of the money.  I take first defensive action when the short option’s probability of being in the money reaches 15%.  I take the second defensive action at 25% probability.  (these probabilities are calculated using historical volatility averages…not implied volatility)  So, a move of 15% would result in me reaching both the first and second defensive points. 

See my previous post about defense to understand what I do at the first and second lines of defense.

The USO move during the tenure of my July positions was 98.62 to 119.17.  This is 20.55 or a 20.83% move!  But oil is much more volatile than IWM.  In July I sold Puts and Calls in USO between 13% and 15% out of the money.  Of course, a 20% move in a month would cause me to hit the second line of defense and close the positions.