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Jack of All Trades - Trading Journal

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Jack of All Trades - Trading Journal





FROM THE LOG: Thursday, January 5, 2012



Buy to Open FEB 100 Calls @ .06 and .08

Sell to Open Feb 95 Calls @ .28 and .26

 Net Credit .20

 This helps balance the IWO condor some, but we are still not filled on some of the puts.  Using a 20 lot as a standard, here’s how we look now:

20 FEB 100 Calls

20 FEB 95 Calls

 9  FEB 66 Puts

 9  FEB 71 Puts

 Total Net Credit (less commissions) $608.12

 We have orders in to fill the remaining 11 units and may have to wait for a nice down day for a fill.

 We placed other orders for the day but did not get filled.




I am often asked how I hunt for new set ups, options, spreads, futures, stocks, etc. 

Options consist of intrinsic value (difference between the strike price and the price of the underlying), and time value.  Remember, we sell TIME premium and buy INTRINSIC premium.  Expressed another way, we sell volatility. 

One of the ways we take in larger than average premiums is by tracking Volatility Events, using proprietary systems.   These systems largely automate the process.    We used to do it by hand and that works too. 

We target expensive stocks that have just exhibited extreme volatility.  The increase in volatility juices the premiums, giving us a perfect time to sell strike prices that will most probably never see the light of day.   When the Volatility Event passes, such as during and after earnings, the underlying will likely calm down and drain all that juicy volatility premium right into our trading accounts. 

Another type of Volatility Event is when a perfectly good company misses analysts estimates and disappoints the whisper crowd, probably for the first time, and even though earnings are up, volume is up, the stock gets sliced and diced.  This demonstrates how much emotion and expectation plays in stock movement.  

Extreme emotion means extreme premiums in the options market…premium we will be collecting to fatten our trading accounts.

Friday night I will talk about how to be CALM, COOL and COLLECTING and in these very volatile markets.

 Be Blessed




FROM THE LOG: Friday, January 06, 2012

No transactions today.  Watching IWO for an entry to complete the 11 units not filled yesterday, but premium has decreased and is below our minimum requirements.  If it doesn’t come up soon, we will go with the completed call side, and the 9 units on the put side, as long as the market cooperates.  As of now, we are slightly profitable on this spread.

Also was watching EWY for an entry into the put side, but here too the premiums decreased below our minimum requirements (our minimum requirements are a comma on each condor.  For an explanation of what a comma is, see our previous posts).  We are about in the same position as IWO above, with both positions being slightly profitable.

The downside is that it takes as much margin to carry these lop-sided condors as it does to carry a full condor (about $10,000 for a 20 lot), so it is not the most efficient use of margin.  If better opportunities come along, we will close these spreads and use the margin elsewhere.  Also, keep in mind, we are VERY risk adverse and like to keep our risk to a few hundred dollars on each trade.





2011's sales of silver US and Canadian mint coins could mark the first time volume has exceeded domestic production. (1) China's gold purchases have increased as the Lunar New Year approaches and tensions with Iran escalate. (2) The London Bullion Market Association's annual forecasts suggest that gold will reach a new high this year, topping $2,000 per ounce. (3)


HOW DO WE STAY CALM, COOL and COLLECTING in these markets?

Looking at the charts of the overall markets, and knowing that the S & P finished within 1% of where it started at the beginning of the year, tells us the market has picked a direction.  It is not a direction that many traders will like though.  There are traders who try to make money when the market goes up.  There are even some traders who try to make money when the market goes down.  Then there are those rare traders that seem to make money by trading with no direction at all, remaining calm, cool and collecting outsized premium.

That would be us.

The markets go up a little as money flows into stocks and commodities, then they go down a little as money flows out  of stocks and commodities.  All the while, Miss Theta ( Daily Time Decay)  does her thing on our behalf…that is, picking the pockets of hapless traders to fatten our trading accounts.

In all of the markets, there is little that can be stated for certain.  Almost every trade is based on opinion.  Opinions are a penny a carload.  Just listen to CNBC to get your fill of opinions.  Opinions pass as fact throughout the wall street community and media.

There is, however, one thing about the markets that we can know for certain.  It is that ALL options, not some of them, but all of them, will be worth zero at expiration.  On the way to expiration, they lose value on a non-linear scale, slowly increasing the rate of loss until in the final 30 days of life the loss accelerates until it becomes …zero.

In addition, some 70 or 80% of options expire worthless.    Once you know and understand that, you can apply that to a strategy to make money.

Do other people know that?  Sure, but the majority act like they either don’t know it or don’t believe it.  Just like in other areas of life, they are deceived.  Either way the deception becomes their truth, so they are not able to take advantage of it.  Well, I BELIEVE it and KNOW it to be true.  I make money consistently from that truth.

The key is to pick assets that have increased premium due to volatility, or a volatility event, due to the overall market, and sell out of the money premium, but with an underlying that should remain calm and quiet.   This is just one of the ways we make money in the market.

The next post, we will discuss another strategy to successfully capture market profits










 No Transactions yesterday, Monday, January 9, 2012


FROM THE LOG: Tuesday, January 10, 2012

Commodities:   Naked Strangle


-5 MAR 25.5 Calls @ .29

-5 MAR 20.5 Puts @ .19

Net Credit $2,114

Margin:  $9,536

ROI:  22%

Probability: 80%

Annual Return: 219%

Theta:  $96.07

Sugar has been trading in a range of 22.5 to 25 since mid-November.   Implied volatility is above Statistical Volatility,  by 5 or so %.  This is not a fantastic sort of trade, but with 37 days to go, it might be considered a utility trade pending a better opportunity.

Attempted a Crude Oil Strangle but no fills in a volatile market.


Spreads :


+20 FEB 71 Calls @ .04

-20  FEB 68 Calls @ .21

-20  FEB 54 Puts @ .41

+20 FEB 49 Puts @ .11

 Net Credit .47, or $940

 Call spread = 3.00                                        Put Spread = 5.00

Spread – Credit: 3.00- .17=2.83                Spread – credit: 5.00 - .30 =4.70                                            

.17/2.83 = 6%                                               .30/4.70 = 6%

 Probability of Profit = 86%

Annual yield: 71%

Theta: $36.86



+20 FEB 60 Calls @ .01

-20 FEB 56 Calls @ .14

-20 FEB 43 PUTS @ .70

+20 FEB 38 Puts @ .25

No Fills on the Calls, but the Puts were filled.

Net Put Credit:  .45



+20 JAN 129 Calls @ .02

+20 JAN 108 Puts @ .03

Closed out the SHORT strikes of this condor with 11 days to go to expiration.  Because the long strikes would cost more in commissions than we would get for selling them, we will let them expire worthless.  There is always the very outside chance the underlying will go bananas and  become a huge directional play for no cost.  Unlikely, but It does happen.

We filled this condor Dec 7, 2011.  In slightly over 30 days, we harvested $1,629, or 95% of the available premium and have compressed time by 11 days.  That means we have closed out these spreads before the expiration date as well as eliminated our risk, secured the premium to our account and recycled the margin for another trade.   This is the way we manage our spreads.

Tried to complete the remainder of the EWY spread but could not get a fill.



One of the many advantages of credit spreads is that they are not dependent on market direction.  In fact, no direction is just perfect for selling credit spreads.  It is a lot easier to determine where the market or the underlying is NOT going to go than where it is going to go.  It is also true that markets and their stocks spend most of their time in a non-directional mode, so we love the meandering, go nowhere, kind of market.  When up and down trend traders are complaining that they need a rally, we are sleeping at night AND making money.  When we consider that the S & P ended up the year of 2011,at about the same place it started, we realize what a great year 2011, was for credit spreads and 2012 looks like another one just like it.   Under those conditions, our only concern is that we find the best spreads and place and manage the spreads properly. 

HOW DO WE PLACE SPREADS:   Placing a spread is a balancing act.  It is a mixture of science and art.  The object is to balance risk with reward in such a manner that our record of successful trades far outweighs our unsuccessful ones, and our cash received far outweighs our cash paid out.  Every time I look at our trading accounts balances I expect to see an increase over the previous time I looked.  We have been doing exactly that.

Markets and certain of the underlying do not go in a straight line, yet they do become over extended.  They go too far, too fast.  When we encounter that we are able to take advantage of over-extensions as well as volatility spikes, or volatility events, as discussed yesterday.

We look for volatility that is higher than normal because the premiums commanded in selling a particular option under those conditions will be higher than normal.  We use the math shown on EWZ above to determine the return on various wing spreads and the best placement of the long option.  The results are sometimes surprising.

Once an option trade is completed and in our Cash Cow Stable, we wait for volatility to revert to the norm AND the ravaging effects of Miss Theta and her daily time decay.  When volatility reverts to the norm, premium will rapidly decrease and along with the more plodding Miss Theta, much like an ice berg, all that juicy volatility drains right into our trading accounts.

All options are made up of intrinsic value and time value.  Intrinsic value is the difference between the strike price and the price of the underlying.  Anything else is time Premium.  During the life of an option the relationship of Intrinsic Premium and Time Premium to the price of the option continually changes.  This is the concept to master for anyone who wants to trade options via credit spreads.

Volatility pushes UP the Time Premium.  Our basic strategy is to sell time premium.   When we have to buy back the option, we want to buy it back with a price made up of mostly Intrinsic Value and NO Time Value.  When buying an option back, the less time premium the better and sooner is better than later.

WE ARE SELLERS OF TIME PREMIUM, OR STATED ANOTHER WAY, WE ARE SELLERS OF VOLITILITY.  We do so using unhedged spreads called Naked Strangles, and hedged spreads called Bull Put Spreads and Bear Call Spreads.  When we combine two of the hedged spreads on the same underlying in the same month, we call them an Iron Condor.

Where do we find high volatility, or time premium to sell?  A spike down in the markets or the underlying, will cause volatility to increase.  When volatility exceeds the statistical standard we get interested in that underlying because volatility is then higher than the norm…premiums are higher and it is a good time to sell premium.  At that point, an examination of the option pricing will show larger than normal TIME PREMIUM.   

Option prices are often skewed in the direction of the underlying.  Transacting at the extremes of the underlying allows us to take advantage of the volatility and get a higher premium, or higher credit.  That is an edge, the first edge.   A second edge is that when an underlying is moving to extremes the likelihood, or mathematical probability, that it will reverse in the opposite direction is much greater, thereby moving away from our strike price and contributing to and compounding the daily theta, or premium decay.  A third edge is that the more extreme moves of the underlying broaden the distance between wings (which decreases the likelihood of a strike being threatened), AND gives us more credit.  A  fourth edge is that when all of the first three happen, the price of the option decays faster which allows us to buy it back earlier and in effect compress time.  Greater profit, faster is the likely result.

I know of no other strategy that has these advantages, which is why we have constructed a consistent, profitable river of cash flow out of it.

The strategy is NOT to wait for expiration.  That is Plan B.  Plan A, is to close out the spread AS SOON AS IT EARNS 80 to 90% of the available premium.  Harvest the profit, eliminate the Gamma risk and recycle the margin.  That is the primary goal.

The closer to the money  (the strike price in relation to the price of the underlying) we place our SHORT option, the more credit we bring in.  That in itself reduces risk.  Yet, the closer to the money we sell those options, that increases risk.  This is where the balancing comes in.  Find the ideal distance from the underlying to place the wings.

Determining the underlying’s trend, if there is a trend, is important because the price of options are often skewed in the direction the underlying’s price is moving.  This fact can and does make us a lot of money, since the premiums are inflated in the direction of movement.  If you are sure the underlying trend will not overrun your strike price, that may be a good time to sell a credit spread.  Technical tools can be used to watch for exhaustion in the underlying if it is trending.

In other words, we set the call wing when the underlying is advancing.  On a nice down day in the underlying, we set the put wing.  There is NO requirement that BOTH wings of a condor need be set on the same day.  In fact, just doing this one procedure makes us a lot of money.

Next we will discuss how we place the wings of a Condor, how far out we go, what asset types we use and defense.  Then we will talk about Delta and Gamma.  Till tomorrow…

Be Blessed



FROM THE LOG: Wednesday, January11, 2012



Filled the calls which completes our condor.  Here is how we look now:

 +20 FEB 60 Calls @ .03

 -20 FEB 55 Calls  @ .24

 -20 FEB 43 Puts @ .70  (Tuesday)

+20 FEB 38 Puts @ .25 (Tuesday)

 Net Credit .66, or $1320

Net ROI:  15%

Probability:  88%

Annual Yield:  143%

Theta:  $43.93



 Buy to Close JAN 75 Calls @ .01

Buy to Close JAN 52.5 Calls @ .02  GTC  (ordered but not filled)

 We set this condor in motion November 28, for a net credit of  $845.  This spread has 10 days to go to expiration, but we always close out early for .01, .02 or .03 cents, when 80 to 90% of the spread is earned.



 No fill on EWY puts for this condor.  Market Makers do not want to transact, even at 90% of natural bid/ask.

 The volatility is falling on this ETF.  If we cannot get a fill at our minimum required credit, we will carry it as a Bear Spread AS LONG AS THE PREMIUM continues to drain from it.  We will set tight loss parameters and if it goes negative more than $100, we will close all.  



 Buy to Close JAN 25 Call for $5.10

 We closed out this covered call which had gone into the money at just ten cents above Intrinsic Value.  With only 10 days to expiration we don’t want to be called just yet.  Ex dividend date is about Jan 25th, for $1.12 per share.  Options get flakey in the last five to ten days or so of their life and it is important to get rid of them at around that level.  This stock is doubly that way because of the huge dividend.

 Sold the JAN 30 call for $1.05.  This premium was ALL time value when we filled, and will decay over the next 30 some days to intrinsic value or zero, before we have to expand the goal posts again.   Each time we capture the time value, regardless of whether we get overrun by the underlying, because this is a covered call and as it goes in the money, the Delta heads toward 100, which means the value of the underlying INCREASES in lock step with the premium (which by then is mostly intrinsic value).

 An option’s time premium is greatest At the Money (ATM).  Out of the Money (OTM) is all time premium but the amount in stocks falls off quickly.  In the Money options are mostly Intrinsic Value.  We want to sell time value, therefore sell ATM and cover ITM.

 We are setting up this quarterly dividend stock to be a “Monthly Dividend” stock.  Instead of yielding 4 payments per year totaling $4.48, for a yield of 14.9%, we are changing it to a monthly dividend stock paying 12 monthly payments of something on the order of $12 plus the dividend, or $16, yielding about 50%.  And, that is before yield because of appreciation. Overall portfolio yield should be much higher.

 This is an example of a transaction in one of our specific portfolios, the Dividend Machine, designed to create another of our multiple “Rivers of Cash Flow”.   This more or less quiet type of stock is not the best candidate for this process.  Like this stock,  a stock slowly trending also with good fundamentals, but with more volatility and more liquidity, so we can push yields up around 70-80%.



 Sold the stock @ $54.06



 Sold the stock at  $45.00



 This slow market is characterized by lack of breadth, trading is a narrow range.  Tuesday’s range was a sick 7 points.  Value wise, it was 4 points.  Great expectations pushing against bleak realities have generated a sideways to up market which will likely morph into a sideways to down market shortly. 

This places the vast majority of directional traders stuck in the neutral camp with little or no action.  Unfortunately, for those traders neutrality is NOT an investment strategy.  The odds are we will oscillate around a range, not going up and not going down much…not exactly the bull market traders were hoping for.

 That is exactly the type of market we love, giving us double-digit monthly profits.  Our spread trades have never done better.

 Tomorrow, we get back to condors.

 Be Blessed



FROM THE LOG: Thursday, January 12, 2012

 Placed the following orders… NOT fills:


-20 Sell to Close JAN 134 Calls @ .02   GTC

-20 Sell to Close JAN 103 Puts @ .03   GTC


-10 Sell to Close JAN 80 Calls @ .03   GTC

-20 Sell to Close JAN 48 Puts @ .03   GTC

The above are the left over LONG parts of the condor wings after we bought back, or closed, the short strikes for a profit because they had earned 90% or better of the available premium.  Normally, because the long positions are about worthless by the time we close the short strikes, we leave these longs to expire worthless.  They do not impact our profit record from the standpoint that they are already factored in as debits.  When long options become almost worthless, just days before expiration, we do not want to transact and incur commissions greater than what we can sell the options for. 

In this case, as an experiment, with just a few days left until expiration and theoretically worthless, I offered them for sale at a price slightly above the cost of commissions…just to see what happens.

No other transactions today.



In trading spreads for their premium yield, we try to determine where the market is NOT GOING?  Markets are said to be range bound most of the time.  We LOVE range bound markets and that fact gives us a large spectrum for trading credit spreads (as well as a huge advantage over other traders).  Of course, even in trending markets we know that no market, stock or commodity goes in a straight line to anywhere.

What strategy do we us to execute the wings of a condor?  Do we place one wing at a time, or do we place both at once?

Regular readers of this log can see that we often have one wing in place then work over some days to get the other end in place.  Sometimes we do not get the other wing in place.  Then we play the spread that we have as a single ended spread with tight loss parameters.  The problem with single ended spreads is that it takes as much margin to carry a single ended spread as it does to carry a condor, which yields twice as much premium.  Single ended credit spreads are not very margin efficient but can also be profitable.

Brokers understand that both wings of a condor cannot be threatened at the same time.  When one wing is in stress, the other is profitable. 

In establishing condors, we prefer to put on one wing at a time and place the short and long positions as a spread, expressed in a NET CREDIT.   One wing at a time allows us to SELL the short strike at the greatest premium because we use a day when the underlying stock or commodity is slightly trending or spiking in the direction of the sale.  In other words, when the underlying is rising, we sell the short CALL strike and set up a fatter premium than we otherwise would.  When the underlying is trending or spiking downward, we sell the SHORT PUT strike to get that fatter premium.  This is because option prices are often skewed in the direction of the underlying and it is critical for success in selling premium that we get the most credit possible.  This allows us to expand the wing differential and reduces risk.

What kind of assets do we use?

We use highly liquid stocks, ETFs and occasionally commodities.  We like options that come in $1 increments as that gives us greater flexibility in setting up the spread.

How far from the underlying do we place the wings?

Again, this is part science and part art.  We like to go out to the Second Standard Deviation but cannot always get sufficient premium there, so we wind up somewhere between Second Standard and First Standard.  Far enough away so the mathematical probability of a threat is small.  We also look at support and resistance lines and usually place the wings beyond those areas.

Standard Deviation is a widely used measure of variability, or diversity, used in probability theory.  Much of our trading revolves around probability theory.  SD shows how much variation, or dispersion, exists from the average, or mean( expected value).  A low SD( such as First SD) indicates the data points to be very close to the mean, whereas a HIGH SD indicates  the data points to be spread out over a large range of values.  We like spread out better than close to.

In addition to expressing the variability of a range, or the differential or distance between wings, we use SD to express the confidence in our placement of the wing.  Volatility, not in the sense of premium received, but the mathematical probability of the underlying threatening our short strike expressed as probability of profit. 

All that said in one sentence is that it helps us understand how much variation there is from the average or mean and therefore, where to place the wing.

.We use software that defines the first, second and third standard deviations and models the options position graphically and statistically.  It turns out that the First SD accounts for 68.27% of the set (distance from the underlying).  Two Standard Deviations account for 95.45% of the set, so are easy to calculate manually if necessary.

When setting the wings we want to see where the underlying is going.  For this we use a proprietary set of algorithms to determine the immediate trend of the underlying. 

 We do not have to nail this perfectly as we would if we were BUYING a speculative short term Out of the Money call or put.

Doing spreads is like hand grenades or atomic bombs.  Close is good enough.

Tomorrow more on Condors

 Be Blessed



FROM THE LOG:  Friday, January 13, 2012


-20 Sell to Open FEB 47 Puts @ .46

+20 Buy to Open FEB 42 Puts @ .12

Net Credit .34.  No Fill.

The Net Credit is Mid-point between Bid/ Ask at the close.  When ordered it was about 60%, so was skewed toward the natural bid/Ask and should have resulted in a fill.  Still NO FILL.

Volatility has come out of the options by several percentage points.  That makes it harder to fill and less net credit were we to fill.  When we come back on Tuesday, we will re-evaluate this spread for  1)  Re-ordering even closer to the natural, or, 2) Keeping only the call side for theta decay, or, 2) close out the whole mess and go on to other things.



Now that we have spread our wings and taken off in our Condor, how do we land this thing?  Keep in mind, that while we are flying, Miss Theta and her Daily Time Decay Posse is doing what they do best, which is to chew up the premium and set it to our trading accounts.  This is how we make money!

As sellers of Time Value, we sometimes look at the calendar and wish for time to move faster.  The truth of the matter is that time already moves quickly these days because we all lead busy lives and, to deviate from our trading for a moment, time appears to be speeding up from a physics and spiritual point of view.

Once we establish a Condor and a predetermined flight path, usually 30 to 60 days out we wait for the premium to decay and set in our accounts.  If we hold a spread until expiration our cost to buy back the SHORT position is exactly…zero.  But, is holding all the way to expiration the most efficient strategy?

The answer is no.  In fact, holding to expiration is Plan B.  Plan A is to hurry time along.

Is there a way to hurry time along?  Yes there is.  One of our strategies is to establish a river of cash flow using credit spreads, often as condors.  That works best if we close out the spread as soon as it earns 80 to 90% of the available premium.  It is not worth waiting around for days and sometimes weeks, to earn the last few pennies.  We can hurry time along and close out the short positions early and remove the risk, book the profit, and recycle the margin into more juicy premium in another spread,  which premium we will promptly drain right into our little ol’ trading account, with a thank you to Miss Theta.

Time Value is a function of Implied Volatility.  If volatility is high, we get more premium.  If volatility is low, we get less premium.  Volatility sets the TIME Value of an option in that High Volatility EXTENDS the time Value of an option and low volatility COMPRESSES the Time Value of an option.

To collect a lot of premium, we sell options when volatility is high and buy back options when the volatility is low and the option price is mostly Intrinsic value (the difference between the ITM strike price and the price of the underlying.  OTM options are always 100% Time Value).

By selling the short positions when volatility is high and buying back the positions when volatility is low, we can compress time, or speed up time, in a real sense, executing our strategy of selling time value and buying intrinsic value, and exiting a spread before the expiration date with profits in hand.  Consequently, we track the flight path of each spread and record the time a spread is in force until closure and compare it to the predetermined time it was programmed to be in force.  We find that we are able to hurry time along to the extent of almost 50%.  In other words, we close out spreads with 80-90% of premium at about 50% of available time.

Volatility spikes when the market goes downward.   At that point, we sell Put wings of our condors, or even singular Put spreads, going with the trend and collecting fat premium.  When the trend goes up again the volatility collapses to compress time.  At that point, we cover the transaction for the majority of the premium and move on to another trade.

Any of our readers may post a comment, question or answer at the site.  Just find the “Quick Reply” tab and type away.  

Next week we will talk about defense.  Trade well and

Be Blessed