The $AMZN trade and repair

9 March update is at bottom

Coming into earnings today i had:

- 190/195 credit call spreads which were from Jan Roll
- 170/175 credit put spreads which i put on to hedge the call spreads and make an iron condor (this "hedge" helps pay for rolling the call spreads)

when you add spreads to make position an iron condor, you can add any amount of lots up to equal amount to your calls and it will not require any additional capital / margin.. since both puts and calls cant both be excersised on you..one of them will be at max profit. I add the "hedge" spreads at a lower amount of lots...so if i have 15 call spreads, i will start the "hedge" with 10lots as an example.

So, i have more calls than puts currently. if the stock moves as expected in one direction or another, my greater risk is to the upside (i lose more on call credit spreads). So to help reduce some of this risk i entered into a weekly/monthly 215 call calender.. the presumption is it moves up a little past the implied move, the weekly 215 calls (sold) lose their value rapidly(vol crush, vol suck, whatever you bigshots want to call it) and the monthly 215calls (bought) lose value alot less compared to the weeklys. You can pull up a probability calculator / graph on internet if your platform does not have it. This tool helps you determine how many lots of the calender to enter. Trademonster has this under analyse tab.So i added a 5lot of the calender.

Possible outcomes:

1. Stock stays between 175 -190 at feb opex, i close both puts and calls for profit. the weekly calender is small loss (just the amount i paid, which is insignificant to amount of profit from the puts and call spreads)
2. Stock moves down lower than 175.. I will roll the put spreads to following month. Collect max or near max profit on the call spreads and take the same insignificant loss on calender. Profits from call spread will more than pay for put roll
3. Stock moves up near 215. Take max profit on puts. roll to next month the call spreads. Take profits on calender. Put profits and calender profits pay for roll of calls to next month

would prefer either 1 or 2. i dont like having call credit spreads, i only put those only to make iron condors.. im just in a position i have to manage for a month or two to make the profit or lessen a potential loss.

1feb - stock moved down 10% after earnings.. got the down move i was looking for so closed the call credit spreads this morning. The profit from this months calls exceeded last months loss on calls that i had to roll.. so essentially flat.. remember the calls were put on last month as a hedge..stock moved up, had to roll to Feb, now closed for no loss... thats what you want to see happen when you have to roll spreads to the next month.so mission accomplished..sometimes you just have to take a loss but most of the time you can manage the position to get a profit the next month or to lessen the amount of loss.

1Feb part 2 - also took the opportunity to adjust the 170/175 credit put spreads. i rolled them down and out to the MAR 165/170 for a small credit and added 2lots to size.. so instead of playing chicken with the 175 level for the next 17days and having no hedge on (the call spreads) for this month i figured it was prudent to get that extra 5bucks in distance on the puts, gain another month, and have the flexibility to add march calls to make iron condor.

Update 3 - 2 FEB - stock has bounced back from earnings selloff and today i sold some MAR 200/205 call credit spreads making the position into an iron condor. for max profit on entire postion stock needs to close betwee 170-200 at march opex. because i already had credit put spreads these added call spreads require no additional margin/capital.. now in wait mode for a month for time decay.

9mar update - closed the position. might be hard to follow this position if you have not been following along from the start but this morning i started with the same positioning i had on the 2feb update:
- 10 Mar200/205 credit put spreads
- 15 Mar165/170 credit put spreads

exactly what i needed to happen, did..that is nothing..stock stayed within a range, time decay kicked in and with one week to Mar Opex i closed:
- credit call spreads for .06 for 91% gain
- credit put spreads for .12 for 92% gain

Summary:
- Mar200/205 spreads, sold for .65, closed for .06 = profit $590
- Mar165/170 spreads, sold for 1.58, closed for .12= this month profit =$2190 minus loss to roll from Feb ($880) = $1310 total profit for 2months
Total profit for credit spreads for 2months of work =$1900

the takeaway from this is that you can sell a credit spread and if stock moves against you, you do not just have to close at opex and take the loss, you can repair what appears at first glance to be a $4000 loser into a winner by rolling to next month and / or turning into an iron condor. even with 80%+ probabilities in your favor, sometimes you have a loser..but even then you can usually adjust the trade like i did to come away with a profit or reduce the loss

Credit Put Spreads Part 5 - Time to expiration

5. Time to expiration - as part of my credit put spread strategy i consider how long i have until options expiration. The markets have had greater price swings last few years than normal, ie your stocks move around more. so realizing this will happen, i usually select the front month for my credit put spreads and almost never use weekly options for credit spreads.  I enter a spread with the assumption that i have not picked the bottom. That the stock will move around a bit after i enter. By picking an expiration with a few weeks to go i reduce my stress (i have time for it to recover if it drops vs freaking out if i put on a weekly spread and stock moves against me).

The reason i dont pick an expiration month a few months away is that the nearer dated month will have more time decay than further dated. The best case when entering a spread is that the stock makes an upward move, ie your spread decreases in value (you profit).. so if that happens a front month spread will profit more than a further dated spread. So front month spreads give me two advantages.. better profits on an up move and better time decay. Additionally, going out several months you start getting involved with earnings dates.

Now you could sell weekly spreads because of the quick time decay and you will have some profitable trades. But in order to get any decent premium i would have to have strikes closer to at the money (the 20delta on weekly is not the same delta on monthly). So going closer to ATM means higher likelyhood that stock moves against me.  Having the strikes far enough away (20delta) allows for the greater swings of the stock, so for my style weekly options negate that. You could have an event happen where your thesis is a quick reversal or flat (ie, picking the bottom).. Such has earnings selloff, rumor, stock down big in sympathy to some other stock, etc.. then maybe you can do a weekly spread. But then again if you enter a monthly spread with few weeks to go AND you have successfully picked the bottom, the monthly will also profit to a lesser amount.

I also like the flexiblity of being able to make the spread into an iron condor if needed if the stock moves against me.  Its your call though, if you feel comfortable with the risk / reward of selling weekly spreads then knock yourself out. I'm just sharing what im comfortable with and what has worked using my system

Selecting Entry Points using Technical Analysis(original)

Selecting Entry Points using Technical Analysis – you can enter into a credit put spread at any time for a variety of reasons either fundamental or based on technical analysis (TA).  Consider why you are entering the position at that particular price point.. why that price exactly, what is your reasoning if you had to explain it to someone. I try to take to the viewpoint of using an entry point based on a target based on TA. I think that since so many on wallstreet are using TA and are watching the same levels that you are it seems that these levels work more times than not… self fulfilling prophecy.  so I look for certain technical levels for entry vs just taking the “I think now is a good time to enter” approach. Just seems like a better method than guessing about your entry. Levels that I look for are breakouts thru resistence, upside moves thru a moving average, bounces off of moving averages, bounces off of support levels, breaks to new highs.

so for the example chart of Mastercard MA (disregard upcoming earnings for this example). There is a short term support level near 337. also the 150day moving average is right at that level. so if the stock pulls back to that area and holds (tests support) the presumption is that previous buyers are stepping in to add to their position (ie giving support to stock) and it will reverse higher..therefore i would begin looking at an entry for a credit put spread when stock was near that level.

Or, there is short term resistence at 355 level, so breaking thru this level higher, i would look at an entry. So you now would have a target for entry at 337ish or 355ish. You could wait for an upward break of the 50day moving average as well for an entry.

Technical analysis is not guarenteed, but what is. Im trying to have some type of rational reasoning for WHEN i enter a stock. You could enter a credit spread right here right now,trading at near the mid point between support and resistence, and it might make money.. but why right here..what did you see that made you want to put it on right now, what advantage do you have?  i would rather have a more analytical method to my entry points. Think i saw Carter Worth mention one time that via backtesting he spotted that stocks bounce off their 50day moving average 70% of the time. so if thats accurate, now you have a higher probability entry point. so put a higher probability entry point together with a higher probability spread as ive blogged previously, you have the makings of a statistically likely profitable trade.

You may think that TA is useless crap, maybe it is. but enough people base their trading on it that it seems worthwhile to incorporate.

Credit Put Spreads Part 4 - Delta Selection

4     Delta selection – closely related to probabilities is the selection of the short strike for the credit put spread.  My criteria is that the short strike must have a delta of 25 or less. Preferably 20 or less. As a quick reference a 20 delta gives you an 80%probability of profit, 15 delta is 85% probability. The probability calculator on the broker website will calculate it more accurately but it gets you in the ballpark. Anything higher than 25 delta starts getting closer to at-the-money which by definition is a 50delta, ie a 50-50 situation. You may choose a higher delta in order to get more premium but I am comfortable with 25 delta or below.

      So when identifiying a stock to look at, i pull up the options chart and my eye goes quickly to the delta column looking for the 20 or 25 level. Anything higher than that usually gets eliminated from consideration. Like in probabilities section, there will be many profitable trades with deltas higher than what im looking for. The higher the delta the higher the premium you receive but the lower your likelyhood of a profitable trade. Again i let the probabilities (delta) drive the selection process for entering trades, not the premium received.

Credit Put Spreads Part 3 - Probabilities

3.       Probabilities – although anything can happen. Bad company news, lawsuit, government legislation, flash crash, etc. the most important part of the credit put spread strategy is to enter into trades with a very high probability of achieving a profit. You have to decide early on that entering into these credit trades is to make money; it is not to “play” some event like earnings. It is not like going into a casino, it is not a game of chance. Options are priced to reflect the current probability of future price movement. Most broker websites have options calculators included to determine the probability of profits. Trademonster has this available under the Analyse tab. I have a goal/ guideline that put credit spreads will only be entered if the probability of max profit is 75-80% or higher. A 50% probability is essentially a coin flip. You would not bet money on a 50-50 scenario but would likely bet if the probability of a coin flip coming up heads was 85%. You would obviously bet on the 85% side. Most trades are in the 85-90% probability range. Anything below 75-80% is usually eliminated from consideration. Although there are plenty of profitable trades to be had with probabilities under 75% im trying to string together alot of winning trades vs going for the home runs. The probabilities determine if i enter the trade, not the amount of the premium i will receive.  Eliminating the bad trades is the first step in having successful trades.
            For quick mental reference with using credit put spreads.. the "delta" of your short strike put will match up pretty closely with what your max profit probability will be.. example.. delta is .19 then max profit probability will be close to 81%  (100 - 19 = 81)

Credit Put Spreads Part 2 - Diversification

2      Diversification – I follow about 20-30 stocks on my watch list and generally just select put credit spreads from this list over and over. I dont run nightly scans of 2000 stocks like some traders do. Those 20-30 tend to be the stocks that have the most liquid options and will almost always be above $50. I try to select at least 5 different stocks for put spreads per each option expiration cycle.  The idea is to have 5 or more put spreads in different stocks so any one will not wipe out your account. Either that or stay in cash until you see something you like vs going large on just one or two stocks. Although a general market decline or a flash crash type move will affect almost all stocks since so much of buying and selling is controlled by computer programs and most stocks are correlated with the general market. Being in several stocks will spread the risk around.

Credit Put Spreads Part 1 - Lot size

Risk Management – there are several ways I use to try to reduce my risk. I will use the example put credit spread of AAPL 515/520 for 1.00 credit. For a 10 lot it will require $4000 of buying power. Your max loss is $4000 if stock closes below 515 on option expiration. ($5 wide spread is $5000 minus the $1000 credit you receive when selling the spread gives you the $4000 potential max loss)

1.       Lot size – lots are how many option spreads you sell. I usually stick to a 10lot, meaning I sell 10 of the 520 puts and buy 10 of the 515puts. I do this so my account is not over weighted on just one security.  You may have a $100k account and could do an all in trade and sell a 100s of lots. But obviously if the stock closes below 515 at options expiration it would almost wipe out your account, also you would not have any capital left to roll the position to the next month if needed. By only selling a 10 lot, your max loss is only $4000. This allows you to diversify and sell spreads on several different stocks at the same time.  Being consistent with the 10 lot guideline keeps my head from getting big and keeps me from being too risky when I start feeling really good about my stock picking prowess.  Similar to this is to commit only a certain amount of capital to the trade, say $5K or $10k.. so you can increase the lot size if you are going to use tighter strikes.. like $5 wide vs $2.50 wide on some stocks. If you are working with a larger account size, then maybe a 20lot max might be appropriate. You can even use the guideline of risking a certain percent of your account to determine how many lots to enter into.

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Monthly Disclaimers and Books to Read

Monthly Disclaimers

1. dont start bitching if we both lose money. when you start paying me $99 a month to follow trades, then you can bitch

2. make up your own mind if trade fits your goals, don’t put it on just because I do. that would be stupid

3. have your own risk / reward system. mine is to hold to expiration if necessary to let stock recover or roll to next month if needed.  i dont use stops on spreads or short calls/puts.

4. Decide for yourself when you want to exit the trade. dont wait for me to close mine. have your own profit % target before entering trade.

4a. Don’t ask me what im doing with XYZ trade, when I close it ill post it same day. You want real time, that will be $99

5. dont expect my tweets to be real time. Im only on a desktop monitor. i may be in other room, napping, eating or reading.

5a.  and that computer is for stocks, porn, surfing, memes, email, etc. tweets may be hours old

5b. Besides you shouldn’t be hanging on my every word on what to do. Just like anyone else on twitter, fast money, or cramer.

6. questions / requests will be answered if im not busy ,but expect you to have basic knowledge of technical analysis and options

7. any charts /notes i post are to get thoughts going about entry points and for discussion. use your TA to confirm mine

8 . most importantly-if a trade doesnt feel right in first 5seconds of looking at it(gut check) i pass on it.

9. My Gut over rules any previously tweeted metrics or strategies or entry points

10. Comments / questions in ALL CAPS will not be replied to.

11. I determine profits as percent of max gain. making $850 out of max potential of $1000 =85% gain. knock yourself out if you do ROE style

12. If all you want to do is argue with me instead of take my 2cents as a tool in your investment toolbox you get ignored or blocked.

13. if you are going to tweet me every time your stock drops 1 point you will be ignored. put on your big boy pants if youre going to follow

14. if you don’t like my pictures of hot women or memes then youre gay.

14a. if you dont like this video then you are gay http://youtu.be/dFg4kQ-wAu4

15. if your tweets are protected you will get blocked. sharing information is 2 way street.

16. No I will not manage your money for you, but if you did good following mine, you can send me a donation to my paypal account  

17. If you are going to follow me into trade/like the idea , have the courtesy to tweet it and mention me. don’t just be a lurker. 

18. Im putting alot of effort into providing info in the blog..if there is something you like retweet the setups and charts.

Try these books if you are starting out:

- The complete guide to option selling : how selling options can lead to stellar returns in bull and bear markets by James Cordier

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The option trader's guide to probability, volatility, and timing by Jay Kaeppel.

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How to make money in stocks : a winning system in good times or bad / William J. O'Neil.

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How I Made $2,000,000 in the Stock Market by Nicolas Darvas

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Summary of MasterCard trade

if you were following along with the charts ive been posting on MA then this should be familiar. have been watching while stock was above 370 for a pullback to the 50day /support area at 360ish.. entered the 335/340 credit put spread on 4jan for .75 credit. again, i look for entry points that are a higher probability of profit vs just taking a shot whenever.. higher probability does not mean guarenteed, does not mean picking the bottom, etc., so i was patient and entered in the area i was watching. next part of strategy is to select the short strikes that have a worthwhile premium and IDEALLY are positioned below some other technical support indicator such as another moving average, a trendline, or another lower support line. for this trade there was some support near 343area. so the short strike was to be the 340 level. as we all know, support is not a concrete wall, sometimes bounces off to the penny, sometimes crosses by a few percent, sometimes goes sideways for a while, sometimes goes right thru. point is to have some logical reason for why you are picking that short strike level.. so for me picking a strike right under a support level makes more sense then just a random level because the premium is good.. i let the chart pick the strikes, not the premium available.
   next thing to consider is i want there to be enough time left before opex for the stock to recover if it moves against me after entry since i have to assume that i did not pick the bottom. there are trades where you put on the spread and the stock takes off, the same day or same week and you can take profits quickly but i will assume that is not the case all the time. so after entering, the stock dropped another 20points in next week. by having enough time, i was able to hold and let time decay kick in, volitility come down a bit once it started moving sideways, and finally on todays up +7 day was able to close the spread at .25
   this is also an example of why i do not use stops.. first you can always roll the spread to the next month or sell some call spreads to make it an iron condor.. but in this case after entry and the 20 point drop it would have looked like a huge loser after 2-3 days where many would have taken the loss and moved on fearing greater loss at opex.. although that can happen and has happened.. my stats/history show that i made huge amounts by holding to near opex vs selling for a loss after a few days.
    this is a quick summary of how i approach these trades. you may not have the same patience, you may have different hedges, or you may simply not have the desire to wait for a recovery, but ive made more money by not doing anything than by trading just to trade.. you have to be comfortable with your system. i am confortable with this method.

Adding credit put spread to an ITM diagonal $CF

     This is a high probability, low risk addition to a diagonal spread. First off, a diagonal spread is exactly like a stock covered call. Use CF as the example. you could buy 100shares and then sell a front month short call to collect the premium, or you could buy a lets say 2014dated 100strike call for considerably less than 100 shares and then also sell a front month short call to collect premium.. no added margin needed, just like a covered call.
     i have 2014 DITM (deep in the money) call and had a Jan 140 short call that i sold when stock was at 130. now $35points higher i rolled the jan 140 to the Feb 140 for a small credit. the feb140 is going for about $26 ($2600). Just as some people own stock that they will hold no matter what, i will hold the LEAP no matter what, so the daily/monthly swings (ie. value) are not that important. with a diagonal my strategy is to capture the monthly premium of the short call and be able to participate in some of the upside movement of the stock by holding the LEAP. so really the only part of a diagonal i need to worry about on a monthly basis is the short call (the Feb140). like i said, the feb140 is going for about $2600.. now i will look to add a credit put spread to that short call. remember i am ignoring the LEAP since i will hold that till 2014 anyway.
     I will look for an entry on credit put spreads at/below that short call strike of 140. Use the 135/140 spread as example. at this moment could probably sell for about .50 credit.. so for the usual 10lot would be $500 credit with max loss of $4500. conveniently lines of with weak support line, but now consider if stock pulls back and closes at 135 on feb opex. two things happen, the put spread is at near max loss which i will just roll down and out or roll flat to next month AND the short feb140 call expires worthless (max profit to me of $2600). So obviously the short call is essentially a hedge against the credit put spread.. so my potential max loss from this "position" is only $1900 ($4500 minus $2600). you can also look at it like the short call profit helps pay for any increased lots you add if you have to roll the put spread to next month.
    Additionally if i roll the losing puts i will also resell another short call. no added margin needed since it will be getting back into a diagonal spread with the previously held and ignored LEAP. This is not some foolproof revolutionary new technique that i discovered and created a cool name for, i only do this if i have a diagonal where the stock has taken off and im only collecting a few bucks to roll..ie the short 140 call in this example is way in the money so there is not much time decay/time value for me to get. the diagonal will be a low money gainer since its run so far. i guess you could do this when the short call is not in the money but that will reduce the premium protection (the hedge) significantly. The point of what im doing is to have a significant hedge, giving me almost a free shot on the credit put spreads.
    So heres the actions to take at FEB opex:
       a. stock closes above 140, close credit put spreads for profit or let expire at max profit, buy back short call for profit and roll to next month(which i would have done anyway regardless of if i had credit put spreads)
       b. stock closes below 140, roll credit put spreads either flat or down and out adding enough lots to make is for zero cost or credit, which is what i would do with any credit put spread that closed down, regardless if i had short call or not. Buy back the short call for .05 or let expire at max profit, and look for opportunity to resell short call in the next month

This might not be for everyone but it has been a 90%+ winner for me in the past.  i will be looking to put this on when CF pulls back a bit closer to moving averages. Yes, i know the value of the LEAP will go down if it drops to under 140..but again i am ignoring near term movement since i will be holding till 2014.