Let's Trade Options

thinking ahead...

Following the premium, and it's currently in GDX, so layering on a little more here, but farther out in time from my current setups (as always, going fairly small, dispersing risk):

GDX June 24th 20/26.5 short strangle
Probability of Profit: 72%
P50: 78%
Max Profit: $95/contract
Max Loss/Buying Power Effect: Undefined/~$250/contract
Theta: 3.11/contract
Delta: -9.7/contract

Notes: I'll shoot for taking this off at 50% max profit ... .

Small vol pop today ... . Close to getting out of a couple of these buying power heavy diagonals/poor man's covered calls I've got on in VXX ... . Probs need high 16's, low 17's ... . No worries, though ... .

Filled for $96 ... . Now if I can get some of these premium selling plays I've layered on over the past few weeks to hit 50% max profit in the next few days, I'll be a happier camper ... .

Bought to close SPY June 3rd 212/215 short call vertical for a $5 debit, netting $45/contract.

With 14 DTE, the call side of this IC is approaching worthless, so I'm closing it out rather than rolling it toward current price (I generally don't do that if there are less than 25 days remaining in the setup). Keeping an eye on the 196/200 short put vert side ... . Getting a little tight in here, so I'd be happy to pull that off at 50% max, since I took the call side off for near maximum ... .

WELL, way to keep on the theta mine....if we stir up some vol here going into June I could see selling a SPY bear call spread, up above $209 and Jun 24 maybe....need to have this in my toolbox for markets that don't move.....but I have been moving away from it as a go-to nut driver....back to my gambler roots, I am content to set up for the big vol pops...you know they are out there.....this is the same as putting a slab of fatback on the biggest hook you can find, just keep throwing it out there....I know I can catch a catfish longer than I am tall...

buy every dip, sell every rip, the bots have ruined the stock market, the shit could go sideways forever, they don't care....

Most of my SPY plays are minnows in the bucket, although if you can afford to go 4-5 contracts big, they can make your day. I'm kind of just casting lazily about while I wait for the vol pop ... . I'm positioned for the pop; have to remember to keep powder dry for the post-pop reversion, even though some of my long VXX setups are bound to come off with a move to the high 16's, low 17's ... . Lot of hand sitting goin' on here ... .

Looked fairly promising this a.m. Came within 10 cents of pulling one of these buying power hungry setups off, but nooooo ... . Always the come hither look, followed by the go away push ... .

The other instrument being a total bitch -- XAUUSD. I'm in a GLD play (broken IC), so now I'm basically forced to watch this cluster in action ... . This a.m., the f'er looks like it's going to totally implode, breaking through 1250 (down is better for my GLD position at this point), only to yank that away:



Similar oil action on Greenback giving up some of its strength. I've been waiting for a break of 47 to consider a short play in either XOP or OIH (USO's just priced too damn small to screw with):



Sure enough, bounces off the "top of the box"/resistance at 47.00. Ugh. Stick that play in a drawer for later ... .

Layering on a bit more bread on my butter while VIX>15 ... . This is about as full a boat as I like to have (not <25% in cash), so I may not be posting many new trade ideas here for a bit ... . I know ... boring ... .

IWM July 1st 100/103/114/117 iron condor

Metrics:

Probability of Profit: 58%
P50: 65%
Max Profit: $102/contract
Max Loss/Buying Power Effect: $198/contract
Theta: 1.56/contract
Delta: -4.62/contract

You know the drill ... . Look to take this off at 50% max profit ... .

Price is right at my short strikes AH post-announcement ... . I need (a) price to stay in that vicinity; and (b) volatility to "politely collapse" for this to be a quickie inzee outzee ... .

this CSCO strangle would have lost money

A total side note on trade sizing ... . I don't generally post the number of contracts I'm actually using here (you'll notice it's always a 1 contract setup, pretty much no matter what; in reality, it's a totally different number of contracts, since I'm not comfortable with sharing the size of my trading account here).

In any event, as with all things, the size of your trades is important. As a handy rule of thumb, I try to keep the max loss of these defined risk setups (speaking primarily of iron condors and credit spreads here) to nor more than 2-3% of my equity per trade and use the appropriate number of contracts and/or vary the width of the wings or spread to hit something in that 2-3% ballpark. So, just as an example, if I have a $10k account, I look to trade no more than the number of contracts that would represent a $200-$300 max loss scenario for that setup if I were to be a total doofus and do absolutely nothing to manage the trade (which is really the only time a max loss occurs with one of my setups). For some, this is an extremely conservative per trade exposure percentage, but it allows me to disperse risk over multiple expiries, particularly in my "bread and butter" core positions and make multiple smaller trades in a diverse set of instruments if I want to or see the opportunity to do so.

One of the biggest mistakes people make trading these instruments (well, hey, virtually every instrument -- whether it be spot forex, shares in a stock, futures) is going far too large contract wise for the size of their account. Even a poorly managed 1 contract setup can put a ding in your account if you don't know what you're doing or aren't sure of how to manage a broken setup ... .

Naturally, short strangles are somewhat trickier, since the risk is undefined; you can't possibly know your "max loss" from the outset. I tend to keep those smaller as a general matter than defined risk because the buying power effect of those is greater; they're usually half the number of contracts I use on the defined risk setups just as a rough guide, well, just because I'm comfortable with that. Frankly, and although I've waffled on this subject various times, I generally prefer defined risk (with all its warts), since you know your max loss from the outset and you can deploy your capital more efficiently that way. That being said, some crap just can't be decently played with anything other than a short strangle due to the cost of the underlying, so you just have to man up and pull that tool out of your tool box on occasion (assuming you're trading outside an IRA; short strangles can't be traded inside one).

The other rule of thumb involves how much cash to keep on the sidelines. I'm pretty much one of those no less than 25% in cash at all times kinda guy (although I've been known to violate that rule "on occasion" so long as the cash is sufficient to cover a "shit happens"* moment that I can visualize occurring with what I've got on; a knowledgeable options trader can easily spot these potential shit piles a mile away and plan ahead). Keeping cash on the sidelines allows you room to get into new opportunities while what you've got queued up works itself out, and gives you a shot to work out of "shit happens" moments which will and do occur from time to time ... . Keeping 50% on the side may be ideal, but, hey, I'm trying to make money here ... .

* -- "Shit happens" moments are generally unwanted, random assignments because you've got an ITM short option on or one that occurs because you weren't paying attention to an ex-divvy date, where there is an increased assignment risk for ITM short calls.

Hey, TF, another pretty much nowhere day ... .

another dead flat day, markets run by bots, for bots, only some exogenous event could possibly push it off the dime, I guess....

lol ... yous read my mind...

good post, ZS....I am more of a gambler than an investor, and I am fine with that.....not that I am not trying to always manage risk, though. On IRA accounts, I will usually trade (now) ONLY defined risk trades and I will try to keep max loss risk down below about 15-20% of account. I will say that there is an advantage in trading larger sets of contracts - I have shown you this before - that there is a heavy price to pay, percentage-wise (in comms), when you are trading <5 contracts. I usually will have 10 or more on trades that I am really committed to.....when I have bigger numbers, 20 and up, I know that it will be easier for me to manage by closing part of the set at less-than-ideal returns....this has often meant keeping trades from turning into losing propositions....

the other thing I can say about trading that has been a level jump for me this year, and I have alluded to it lately....a trade is never a static event...I (almost) never place trades anymore unless I am thinking about things I will do to them down the line....often the initial trade is not what I am after, but a cheap way to work my way into a later position...