I’m not going to let one bad week take me out of a winning strategy. As I write this, /ES (SPX futures) is down 5 or so and SPY could open around 109.8. Early evaluation shows (and this can change quite a bit after the open even if price is flat) a 113/115 Bear Call to be within the parameters of the methodology (0.20 credit). No, there is no PPS reversal, but there is solid resistance at 113.2 and only 4 days (or less – just the length of the white line) to hold. I’ll make the decision at 10am. See the chart below. You can bet this is going into my trade journal!

◄ Jeff ►

Since I added (quietly) the Trading Pro System link (formerly Trading as a Business) on my blog, I have been re-reviewing (for the 4^th time) the videos from Module 00 through Module 11. What I found is that I have been deviating from one very basic concept of trading: keeping a Trade Journal for each trade. I realize that I have been shooting from the hip the last month or so and I managed to shoot myself in the foot – several times. Yeah, I record it all in a spread sheet, but nothing can replace hand-written notes.

I can always rationalize and find some uncontrollable factor to blame for this, but I must admit that it is my own lack of discipline that is to blame. So I dug out my old Trade Journal, spruced it up, and I will now faithfully fill it out for every trade and note the status each day. If you like, you can view it here and use it yourself. Note: There is a wide left margin to allow for punching holes for use in a lose-leaf binder.

August

August was a OK month. I managed to make up for most of the loss in July and came in at a positive $1,749 for a overall 3.36% gain (YTD 33.56%) – better than the S&P benchmark of -4.78%. Even with the poor S&P performance, my Conservative Account eked out a modest 1.37% gain and is almost flat for the year (S&P is down -5.9%).

But that’s meaningless compared to what happened this week. I was short a lot of delta on Wednesday when the market reversed, and I took it on the chin. Thinking that I had the Weeklys nailed, I increased my risk by boosting my lots to 15. And then, like a real idiot, I effectively doubled down by doing 10 lots on an IWM weekly Bear Call. SLAM! $2,470 in the hole and it may not be over yet.

Remember CME? I did the adjustment on Friday by rolling up the Put side and holding on the Call side. I need the market (now looking over-bought) to cool down and pull back 2% or so. This is a short expiration month – as we all know (a short always follows a long expiration period).

Eli Lilly (LLY)

Remember, I rolled this CC up to a SEP 37 last month and went negative on my credit for this position. A week later the price was below 35 and dropping. Tuesday I plan to buy back that Call (it’s now worth 4¢) and possibly sell and OCT 35 to get me back into the plus column by a hundred bucks or so and bring my cost basis to about $34.50.

Lesson? Think twice about rolling up. I could have stayed at 35, but there wasn’t enough extrinsic (time) in the SEP 35′s at that time. A possible option was to roll out one more month to OCT or later. Protective Put? Naw, I’m not a Collar kind of guy.

That’s it for now. We have off until Tuesday, unless you are a Futures or Forex trader. Enjoy the long weekend.

◄ Jeff ►

In Chapter 2 of the SPY 10am Weekly video, I show how turning a one sided Credit Spread into an Iron Condor can boost you profit while not affecting your risk – sort of.

An Iron Condors is simply (simply? It took me a couple of years to really understand an IC) a Bull Put and Bear Call Credit Spread on the same underlying with the same expiration date. Most, if not all brokers will only hold the spread amount as a sort of margin requirement (the cash will not be available to you until after the trade is closed and settled – usually the day after you close it) for one side of the trade. In the case of the Bear Call I did on SPY on Tuesday 8/24, TOS removed $2,000 from my “available to trade” bucket (but remember I also collected a cash deposit of $280) – just in case the trade went really bad, that is the maximum that I can lose. Thus, defined risk!

When I added the -103/+101 Bull Put (making the Iron Condor), TOS did not require another $2,000. How sweet it is!

Now, did I add any risk? No, as I stated above, and yes. Why yes? Because when I had the Bear Call I only had upside risk. Now, with the Bull Put, I also have downside risk. Hey, nothing is free. BUT – only 24 hours to go. Another possible $240. Hmm… $10/hour. Hmm…

OK, so watch the video on the “New Downloads” section on the far right. It’s called (obviously) SPY 10am Weekly – Chapter 2 (duh).

◄ Jeff ►

I have an Iron Condor currently open on CME. Price has been steadily moving down on this stock and I decided that I wanted to prepare for a possible adjustment. Rather than type the whole thing out, I made it easier on myself and produced a quick 7 minute video for you to watch and critique. You’ll find it under “New Downloads” on the far right column and it’s called CME Iron Condor Adjustment.

Oh, and although I didn’t say this in the video, this same technique can be used to adjust Credit Spreads too – you just do one side and not both like you would on an Iron Condor.

Enjoy.

◄ Jeff ►

Let’s dispense with the usual posting subjects and talk a bit about the economy and market sentiment. You know me, I usually don’t write about this subject very often, but I ran across a few items this week that may be of interest to you.

I want to direct you to the blog of Jeffrey Ziegler, Fit To Trade. I am a former subscriber to his service and I have a copy of his Spread Training System. I am not going to evaluate his material at this time. What I want you to look at are the two videos he has posted on his blog, from 8/18 and 8/19.

The first video (in his August 18^th post) is from a gentleman by the name of Tony Robbins (this is the first time I ever heard of this man). Looking at his web site, it doesn’t look like this is the type of subject he normally discusses. That to me means that his motivation for this video is outside his normal business and is deeply personal. It really makes a lot of sense.

I am a member of the leading edge of the Baby Boomers and can speak for my self how my spending habits have done a 180 in the last 5 years. If the Boomers represent ½ the economy, then we are in for a huge contraction of not only our GDP, but every other economic indicator too. The only exception is the government, which is expanding at an alarming rate.

The second video is from a Strategy Session on CNBC with David “The Brain” Faber and Kyle Bass (never saw him before either), managing partner at Hymen Investments. The numbers that Kyle throws out regarding Japan (but they are not the only ones) are downright frightening!

You and I both know that the US is not in such great shape either. But I want to make you all aware that as option traders, we have the opportunity of playing the market up, flat or down. We also know that the market goes up like and escalator and down like an elevator – Bull markets can make millionaires overnight.

Keep your powder dry

◄ Jeff ►

First let’s look at the ◄SPY 10AM Weekly► strategy. I didn’t enter one last week, but I did enter a Bear Call spread with the short Call at 114 – that was on Tuesday. Wednesday’s huge Bear move allowed me to enter my 4¢ limit order on the short 114 and it executed 12:30 pm that day, and take my profit. I was able to collect $196 (10.9% gain) in just 26.5 hours. Go Guru! Oh, and if you haven’t seen the video on this strategy, you’ll find it in the “New Downloads” section in the far right column.

The other Weekly that I was playing with was an AAPL Call Calendar spread (details on the right). Originally I opened with a -JUL4/+AUG 260 Calendar. I hung on to the Long AUG 260 as I rolled the JUL4 short 260 to JUL5, then to AUG1 and finally to the AUG2 260 weekly. As long as AAPL was cooperative and not going anywhere, I wanted to milk it as much as possible. Finally, over several weeks, I was able to gain a total of $496. I closed it on 8/10, figuring my luck had just about run its course. I got out just in time. AAPL is at $252 as I write this.

Overall this month is mixed and I am slightly ahead right now. The huge down move on 8/11 helped me quite a bit. My Bear Call on CREE was making me nervous, especially holding through earnings (naughty naughty), but I had a feeling that their guidance would not be very good, which is similar to what is happening to a lot of companies this earning season – good earnings/revenue and poor guidance. I bought back the short Calls yesterday for 5¢.

The Guru’s Market Sentiment: Neutral to Bearish. Maybe you didn’t ask for my opinion, but there it is anyway.

Based on my sentiment, I will be shopping for Bear Calls, Bear Puts and maybe some Calendars/Double Calendars biased towards the down side. Calendars should be looking better now that earnings season is over. Remember to look for candidates where the back month volatility is lower than the front month. This will help reduce the risk of back month volatility collapse and give you are better debit price on your Calendar.

Conservative Account

Today I continued to roll AUG Covered Calls to SEP with the exception of KFT and my new one, PAYX – all those that I rolled were ITM. There are 2 reasons for the rolls this early: 1) pending DivEx date on QCOM and 2) Extrinsic values were a penny or less. When the value of the Call reaches parity with the price of the stock, it’s more tempting for the Call holder to exercise. Conversely, in this volatile market, if I were holding a long Call I wouldn’t be looking for a penny or two under a stock price when it could move up to a dollar in a few hours. I was just being “Conservative”. Strangely, KFT still has 11¢ of extrinsic left in it – possibly because it’s less that $1 ITM – so I am holding off with that one until later next week.

About QCOM: remember I mentioned a few weeks ago that I was going to dump this holding because the returns just weren’t meeting my goals. Well, the story has temporarily changed. The roll that I did from AUG to SEP gives a credit of 50¢ on a $38 stock. That’s 1.3% for a month. That also will make me eligible for the 19¢ dividend in September, bringing the total to 69¢ and a return of 1.8%. After that I may unload it. Let’s see… I entered this Covered Call as a Buy/Write on 4/29 and if it get’s called out in SEP, it will have returned 6.54% – not bad, not bad at all.

You can get all the details of each open, roll and dividend event for each position by clicking on the Conservative Account tab at the top.

◄ Jeff ►

Eli Lilly (LLY) has their ExDiv date scheduled for August 11. Last week I was short the AUG 34 Calls, which were deep ITM with the stock at $36+. On August 6^th (last Friday) I made the decision to roll those AUG 34 Calls UP and OUT to SEP 37′s because of the looming ExDiv date. This strategy cost me $2.29 in debit – what a lot of Covered Call Writer’s would cringe at. Only the future can tell us if this was a good move or not. Just for fun, let’s take a look at the data and some possible scenarios:

• The result of the roll up/out is raising my cost basis from $32.90 to $35.19. If the stock gets called, I will still make a 4.9% return.
• LLY will pay a $0.49 dividend on 9/10, bringing my cost basis down to 34.70 and a 6.2% return if called in September (I have only been in this Covered Call for 3 months).
• Right now, LLY has a published 5.3% Dividend Yield – and that’s if I don’t write any Calls against it. Yes, of course I want to hang on to this stock! Based on my original entry price of $34.85 for the stock, my Dividend Yield is 5.6%

Scenario 1 – The price continues to rise and is above the $37 strike near SEP expiration. Since there is no danger of an ExDiv date, I would probably just roll the ITM SEP 37 to an OCT 37. If the price has made a big move up, I would consider a roll up maybe one strike.

Scenario 2 – The price consolidates and remains below the $37 strike. Again, if the price is not too low it would call for another roll out at $37.

Scenario 3 – The price pulls all the way back below my Cost Basis of $34.70. Since I still make a Dividend Yield of at least 5%, I would let the SEP 37 expire worthless and wait for the stock to recover while collecting those $0.49 Dividends each quarter. It would also be prudent to consider loading up on more shares if there is enough capital. I have two very important rules that I never break: 1) I would NEVER write a Call any further out than the next month in order to capture more credit and 2) I would NEVER write a Call with a strike below my Cost Basis.

This company has strong, steady and solid fundamentals (great profit margins, steady revenue growth and plenty of cash). I expect the dividends to keep on coming (they have since 1885) and may even increase (42 years of consecutive dividend increases). Yes, I see that the current price is very near a resistance level of $37.50, but that’s OK – I am ready to deal with any possible price movement – or none at all.

◄ Jeff ►

Just a short and quick post here to let you know what is going on with my weekly AAPL Calendar. Here’s the good thing – AAPL has been rather mellow the last few weeks, as many other stocks and indices have been

So, I may have been a bit impetuous, but I rolled the short 260 AUG1 Call to AUG2 for a $2.38 (or $238) credit today. If I were to exit tomorrow at today’s prices, I would be up $940 on this trade (the ‘what if’ line). I still have 1 more roll and it looks like the last week will be a vertical spread, since the expiration dates will be the same (unless I also roll the AUG expiration to SEP). Check out the table on the right for the details.

◄ Jeff ►

I want to introduce you to a simple, high probability weekly SPY options trading methodology. It’s so easy I even recommend the time of day to make your analysis and place the trade. That’s it – just a few minutes each day at 10am and then you are out and free to go play golf, play with your kids/grandkids or look for a real job – if you really want to.

Basically, it’s using a proprietary indicator called Person Pivot Points available on thinkorswim’s platform via TD Ameritrade’s charts, Price Action and delta (option Greek). All the details are in the new video posted on the right called “SPY 10AM Weekly” under New Downloads.

Sounds too good to be true? Maybe it is, but the video will show you, using the OnDemand feature of the TOS platform, that it was 100% successful 5 weeks in a row from 6/23 to 7/20 – all in HD quality and Dolby stereo.

(OnDemand is a thinkorswim’s proprietary feature that provides the ability to play back any trading day, in real time or fast forward, tic-by-tic, on any stock, ETF, option, future and currency pairs on any day from 12/7/09 to 7/24/10. Yes, it allows you to trade any of these as if you are there at that date and time. You can watch a 5 minute demo here: OnDemand Demo)

At TOS you need $3,500 to open a new account. That’s all you need to trade this strategy, although you should make sure that you can afford to lose that amount, since nothing is guaranteed. You never have more than $1,800 at risk at any one time – if this is all the trading you do in this account. But don’t take my word for it. Just open a regular account at TOS (you can even do this in an IRA – I do). If you already have one – great. Watch the video and switch to OnDemand and practice, practice, practice until you prove to yourself that it really can be done.

July Results

By the way, my monthly results have been updated. It’s not as bad as I thought a week ago.

I entered into a single calendar on AAPL on 7/19 using the normal August expiration (8/20) as my back month and I am rolling the short front month each week (details at left). Follow along as I roll from week-to-week – I have 3 weeks left. So far, I think this will make money as long as AAPL doesn’t go bearish on me (should I buy a protective Put?).

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As always, feel free to email or comment.

◄ Jeff ►

My trading style is not a ‘set and forget’ method. You have to be aware of all your positions every day. If you can’t take the time to analyze each one each day, then find another methodology (more on that in the next few posts).

The week of expiration I had unanticipated duties that interfered with my daily routine and took a lot of time away from my computer. (No, I don’t have an iPhone and I won’t get one – too expensive to buy and own for my tastes.) That’s not really a good excuse, but it is a great lesson. Because of the distractions, I was unable to concentrate on the best action to take on many losing positions. I believe there was a bit of bad luck thrown in to boot in the form of a market bounce when I was very short.

The Weeklys had a big impact and have me reconsidering that strategy. Turns out if the trade goes against you, there is not any time left to make a good adjustment and the best course seems to take the lose and get out. That’s not the type of trading I like to do. I have back-tested a more conservative Weekly expiration methodology and I will detail that, along with a video, in my next post.

So net-net, I am down $2,181 so far for this month. Of my current open positions there is not much there to help the July 2010 number – unless the market gets very Bearish in the next few days.

I’m not going to go into all the gory details on each trade – nobody likes to hear bad news (although some might be cheering or saying “I told you so”). Suffice to say the distractions and lack of concentration (aka following rules) is to blame for almost all. Some of the big losses were at earnings, for cryin’ out loud. How many times have I said “Never, never, never hold through earnings!”

As I have said many times in the past when I have a bad month, it’s a painful but great way to learn a lesson. Education isn’t cheap. Good news is the Year-to-date numbers are still good. Whew!

◄ Jeff ►