High Expectancy Trading

I am distributing my risk capital to several instruments.  Today I opened an Iron Condor in POT:

Short Jul180 Put, Long Jul170 Put
Short Jul280 Call, Long Jul290 Call

I opened the positon with a net credit of .90.  The margin required is the difference between the strikes multiplied by the contract size (10 X 100 shares = $1000) multiplied by the number of contracts you want to trade.  I expect to close the short options when they reach .05 so that nets out a profit of.80, or $80 for every $1000 in margin.  I expect to close this trade in the first or second week of july.  That’s an 8% gain in just 2-3 weeks! 

The probability of my short Jul280 Calls being in the money at expiration is only 4.71% at the market close today.  This increased as the stock gained value today.  The probability of the short Jul180 Puts being in the money at expiration is only .39%.

This is a great trade if the stock behaves itself.  POT is very volatile and capable of moving fast.   That is why the option premiums are so high.  I do not recommend trading this stock with a large percentage of your account.

My trading is very active.  Refer to my post on 6/13 for a description of the Iron Condor trade.   Here is a summary of my current positions:

USO Iron Condors
     Short (sold) 85-strike Puts, Long (bought) 81-strike Puts, entered on 5/30/08
     Short 118 Calls, Long 122 Calls, entered on 6/5/08

     Short 91 Puts, Long 87 Puts, entered on 6/12/08
     Short 133 Calls, Long 137 Calls, entered on 6/16/08

IWM Put Credit Spread
     Short 68 Puts, Long 65 Puts, entered on 6/6/08

AAPL Iron Condor
     Short 145 Puts, Long 135 Puts, entered on 6/16/08
     Short 210 Calls, Long 220 Calls, entered on 6/16/08

Yes, I am trading in Apple (AAPL).  I decided to take advantage of the tremendous volatility in the options for a couple individual stocks.  I am only using 10% of my risk capital for any individual stock trade.

I am also looking at RIMM.  The returns on AAPL and RIMM Iron Condors is pushing 170% annualized ROC.  This is amazing, but of course, these stocks are very volatile.  I try not to carry a trade in these stocks when they release earnings.  AAPL earnings are in late July.  RIMM releases their numbers this coming week.  I may look to open an Iron Condor in those RIMM options after they release.

My AAPL Iron Condor (and one of my USO Iron Condors) is held in my Think or Swim account.    I highly recommend these guys.  They are all traders themselves so they are very knowledgeable and they are actually helpful.  They only hold margin for one side of the Iron Condor.  This dramatically improves the profitability (ROC) for these positions.  I stand to gain ~10% on each of these trades…yep, that’s 120% annualized.
 

Sorry for not posting for the past week…travel and family stuff.

OK, I currently have credit spreads in IWM Puts.

I also have credit spreads in USO Puts and Calls.  This combination position is called an Iron Condor.  Iron Condors are particularly attractive if option implied volatility is high in both Puts and Calls for the same ETF.  The key is ROC.  Only one credit spread will be at risk at expiration.  It is impossible for both the short Puts and Calls to be in the money at expiration.  So, most option brokers only hold margin for one side of the trade.  This is an excellent advantage for this trade.  You essentially get to trade two credit spreads for the margin of one.

I’ll post later on the specifics of my current positions.

This past Friday, 5/30, I opened a credit spread in USO (US Oil ETF).  It has moved against me ever since.  It may be time to talk about how I defend trades since this one is not going well so far.  But, we are not ready to defend yet.

Update on positions:

IWM 66/63 Credit Spread in June –> Opened for .17 credit, now at .05, so I have a .12 gain.  I will close at .04.
USO 85/81 Credit Spread in July –> Opened for .35 credit, now at .50, so I have a .15 loss.

My short 85 Puts in USO have an 8.45% probability of being in the money at expiration now.  I opened the trade when the 85 Puts had a 5.23% probability of being in the money at expiration.  I take action to defend trades when the probability of being in the money is 15% or greater.  This will happen if USO drops 4-5 points within the next week or so.  If not, I’ll just hold on to collect my full profit in the spread of .31.  (closing the spread at .04)

I opened the USO Put spread because the volatility in oil right now has created some outrageous prices in Put options.  At the time I opened the trade USO was trading at 103.1 so my short 85-strike Puts were way out of the money.  At that time it would take an 18% drop (Before 7/19) to lose money in the trade.  Even this far out I was able to place this spread at a .35 credit. (by selling the 85-strike Puts and buying the 81-strike Puts)  This equates to a 95% ROC and a 75% expectancy.  This is excellent.  But, oil is volatile and this trade has done nothing but go against me now for three days in a row.  I am preparing to defend.  I will post about my defensive techniques soon.

I closed this spread by purchasing the short options back on Thursday, capturing all the planned premium.

I opened this position on 5/12/08 by selling the 64 Puts and buying the 61 Puts for a net credit of .17.  I closed the position on 5/29/08 by buying the 64 Puts back at .04.  This is a gain of .13 per contract, times 100 shares per contract nets out a gain of $13 per contract.

I am holding on to the long 61 Puts to help with margin in July.  I’ll explain this in a later post.

The average margin required over this time period for one contract is $300.  This is lower than the last spread because this spread is only 3 strikes apart.

To determine how many contracts you could have sold on 5/12/08 just divide the amount you want to use as margin by $300. (again, I use 75% of my capital, and I call that 75% my Risk Capital)  Multiply the result by $13 (subtract commission) and you have your profit.  You would have made this profit in 17 calendar days! (the difference between 5/29/08 and 5/12/08).

The gain in those 17 days was 3.74% return on capital. (ROC - % return compared to the amount of margin required) The annualized ROC on this trade is a whopping 80.37%!  This means that if you made this bet with these same parameters every 17 days, for an entire year, you would gain 80% of your risk capital.  Wow.

I closed this spread by purchasing the short options back on Thursday, capturing all the planned premium.

I opened this position on 5/2/08 by selling the 64 Puts and buying the 59 Puts for a net credit of .25.  I closed the position on 5/29/08 by buying the 64 Puts back at .04.  The 59 Puts are not trading because they are so far out of the money and we are so close to expiration now.  This is a gain of .21 per contract, times 100 shares per contract nets out a gain of $21 per contract.

The average margin required over this time period for one contract is $500. 

To determine how many contracts you could have sold on 5/2/08 just divide the amount you want to use as margin by $500. (again, I use 75% of my capital, and I call that 75% my Risk Capital)  Multiply the result by $21 (subtract commission) and you have your profit.  You would have made this profit in 27 calendar days! (the difference between 5/29/08 and 5/2/08).

The gain in those 27 days was 3.84% return on capital. (ROC - % return compared to the amount of margin required) The annualized ROC on this trade is 51.97%.  This means that if you made this bet with these same parameters every 27 days, for an entire year, you would gain 52% of your risk capital.  That is excellent, in any trader’s book.

I’m not superstitious but I’m thinking my cautious tone on Monday scared the market into rallying this week.

I closed two of my credit spreads today for full gain.  I predicted I would close them on 6/2, so this is two trading days early than predicted.  This is excellent.  I’ll post soon as to how well these trades did.  I believe this is the best result I’ve had yet this year!

As you can see from the picture below, IWM broke the up-trend line on 5/21 with pretty good volume.   (click on the picture to see it full-sized)

This likely signifies that the rally is over.  Typically, when uptrends like this are broken with big volume, the near-tern future trading is either sideways or down.  But, nobody can predict what the market will do next. (although many try) 

This is time to be cautious.  I am considering my next move to defend my positions if IWM drops drastically this week. 

I am considering buying a few close to the money Puts in IWM.  This is a good hedge against a drop.  If IWM trades sideways in the next week I can likely sell the purchased Puts for only a small loss.  If the market happens to move up, I may reach full profit in my positions by the end of the week.

Update on positions:

Short 64, Long 59 - Currently trading at .13, opened for .25 on 5/2, so I have a .12 gain so far.
Short 64, Long 61 - Currently trading at .10, opened for .17 on 5/12, so I have a .07 gain so far.
Short 66, Long 63 - Currently trading at .18, opened for .17 on 5/16, so I have a .01 loss so far.

IWM closed at 73.17 today.  The positions lost some ground yesterday with the big drop but basically gained it all back with the move in IWM today.  Time is ticking away and taking it’s toll on my positions.  I still predict I’ll close these on or before the first week in June.

Short 64, Long 59 - Currently trading at .09, opened for .25 on 5/2, so I have a .16 gain so far.
Short 64, Long 61 - Currently trading at .07, opened for .17 on 5/12, so I have a .10 gain so far.
Short 66, Long 63 - Currently trading at .13, opened for .17 on 5/16, so I have a .04 gain so far.

IWM broke a key up-trend line yesterday.  It seems that the skyrocket in oil prices has slowed this bull run in stocks.  IWM will probably trade sideways for a while which is just fine with me.

Like I mentioned Tuesday, I’m looking to diversify with other ETFs.  One of the most promising seems to be USO, an oil ETF.  The option implied volatility is at historic levels.  This is good for credit spreading.  An issue for USO is option volume.  It’s fairly thinly traded so large positions are not advisable.