Many of my members belong to other option trading advisories. Some of these are similar to mine.  And normally you have to become a member to determine if their claims and trades are reality.

So this post is to just say beware of option trading advisories. Even mine.  never put money into a trade without papertrading the strategies first. Take everything said at face value and make them (and me) prove to you that they are telling the truth and that their trades do make money.

Here is an email from a member who tried another service. The name of the service is blocked out.

By the way, I had to open a XXXXX account just to see what those guys were up to.  Their 100% auto-trade loss last October was pretty scary (the only thing that saved them was that they came up with 100% gain in one day on what I guess [...]

Hi, I just went through the course.  I have a question on the iron condor.  I had subscribed to another site that did those.  They said they picked strike prices far away from the current price so that the odds were better than 90% that they would make money.  Of course the market started to gyrate 100s of points per day and everyone was holding their breath for days. So I learned that these spread trades are not boring at all but can be extremely stressful.  I was glad to see that you weren’t just touting you make money 90% of the time.  I see that all the time but they fail to explain that you can lose 100% of your money up to 10% of the time.  That makes the strategy not conservative at all.  So my question is how much capital would you allocate to iron condors?  Also, [...]

A fellow trader emailed me about a new movie about floor traders. Options are still traded on the floor but more and more floor traders are leaving because as it says in the trailer, everything is moving to computers.

Looks like a good movie.

Trailer #2

Options Trading is growing like gangbusters.

Good news for us is that the first step for someone new to options will be will learning to buy and sell options, not sell. And so option sellers like us, will have more volume and liquidity to work with.

Here is a video of the crazy man Jim Cramer interviewing the CEO of OptionsXpress after they released their 2009 3rd quarter earnings.

Here is a question that comes after reading Lesson 2 in my 9 Lesson course on selling options.

When you say, to buy back the option before, the expiration date, don’t you incur additional costs, that reduce your profits even further ?

Good question. In some trades like the Calendar spread you have to buy them back because you don’t want to get long the option. But in an iron condor or credit spread, you can wait and let the options expire. If you buy them back you incur commissions plus whatever you are buying it back for.
 
In many cases it is a question of risk vs cost.  if there is a lot of time left before expiration, you are probably best buying the trade back in case there is a move against you and you end up losing money. On the other hand if you let it expire you can save a few dollars and maybe 1 or 2% points on the trade. 
 
So lets say you it will cost you $20 to buy back a trade, but if the trade moves against you, you could lose $1,000. Do you take your profits or hope for that last $20. Even if the trade moves just once against you in 4 years, you still lose money.
 
Make sense?

Here is a real life example.

On October 12, 2009  I did a credit spread on AAPL. I Sold the Nov 165 Puts and Bought the Nov 160 Puts as protection for a credit of .50 on each spread. There were about 40 days to expiration.

On this trade if the puts expired worthless I would make 11.11% before commissions. (Credit of $50 divided by max loss of $450 per spread = potential return of 11.11%) 

Well AAPL just had earnings yesterday and the stock shot up to about 200 today. This morning, I was able to buy back the credit spreads at .07 each.

So I made .43 per credit spread in 8 days.  That is 9.5%

Why did I buy the spreads back? I could have let them expire worthless. If I did i would make another .07 per spread. But there is still 31 days left to expiration. So I decided to make my profit and money and look for another trade.

Who knows? Maybe AAPL will settle down and I will sell another credit spread on it this month for more credit. Or maybe I will do something else. All I know is that I don’t want to risk losing $450 per spread (anything can happen and APPL could drop in price) to make another $7 per spread.

Yes I did pay the commissions by buying the spreads back. But on each spread I paid $2.50 in commissions.  $2.50 going in and $2.50 coming out which is a total of $5 in commission per spread. So instead of mkaing $43 per spread I made $38 per spread which is still 8.44%.

(That’s why having an option friendly broker is so important. I pay $1.25 per option with no trip charge. If you are paying $10 plus $1 per option or some other crazy commissions then you ae playing a game that is stacked against you. Get a better broker.) 

In my opinion, take off your spreads when they are close to worthless if there is alot of time left. Take your profits. Everyday your money is out of the market is a day you cannot lose it.

This is not to say I never let my spreads go to expiration. Sometimes I do, but not too often on a highly volatile stock.

Another great month for OptionGenius.com members.

Even with the markets continuing their climb higher, we still
are turning in a better than market performance. Not to mention
that OptionGenius.com is beating the pants of just about every
mutual fund out there!

September gains: 8.78%

That makes the S&P 500’s 3.57% gain in September gain look puny.

It’s not too late to get in on October trades.

There is no way to tell when the market will slow down or
reverse and drop again. Wouldn’t it make sense to diversify
your portfolio with some trades that are actively managed by a
professional trader with his own money on the line?

That’s right. I trade my own real money at OptionGenius.com and
I hate to lose.

I expect to end the year with a gain of over 50%. That’s alot
less than the 102% I made lat year, but I challenge you to find
any investment that will make over 50% for the entire year of
2009, not just [...]

In my last post I listed a Free Trade on POT which is called a Calendar Spread, also known as a Time Spread.

In that trade we sold the Oct 90 Calls and Bought the Nov 90 Calls.

The trade makes money when POT stays in range around 90. Basically what we want is the Oct option to decay and lose value while the Nov option (which we bought) retains its value. Time Decay quickly erodes an option’s value, especially in the last 30 days. That is why I prefer to put these types of trades on with 30 or fewer days left for the front month.

We enter this trade with a debit meaning we paid for the trade. That is because the Nov option was more expensive than the Oct option because the Nov option has more time premium.  POT also has earnings after the Oct option expires which means that the volatility (value) of the Nov option will be elevated (at least a little more than normal).

What we want is for POT to stay in between the break evens until it gets close to expiration. The Oct option loses value everyday and that is how we make money. During the last few days before expiration the fluctuations in prices can move wildly.  That is why I prefer to be out of this trade before expiration week. But in this trade we put it on pretty late and will have to stay in longer.

To exit a Calendar Spread you have to sell it. Otherwise you will still be holding the back month (Nov) option even if the front month (Oct) expires.

The beauty of Calendar Spreads is that they are cheap to trade, easy to adjust, and can result in large profits – 20-40% is common. You can also keep your losses small.

I got this trade idea from a very smart member. His observation was that POT

was channeling and that it would be a good set up for an income strategy.

The only problem was that earnings are after expiration which is in 10 days.

Earnings could move the stock but it also keeps the volatility of the options

high and that means high premium.  There is also a dividend to be paid on the 15th, which is one day before expiration. A dididend will lower the price of the stock by the amount of the dividend which in this case is 10 cents.

His idea was a butterfly. I decided to do a calendar because it is easier to adjust and share it here.

Buy 1 Nov 90 Call and Sell 1 Oct 90 Call. This trade cost me $315. My breakevens are at 86.14 and 94.40.

I feel this trade will work. But it will have to be held close to expiration. 

If POT gets outside the breakevens, exit the trade. or if you are experienced enough, add another calendar on the side of the brreakout.  If POT stays around 90, stay in as long as you can.

Hello OptionGenius.

I have been trading credit spreads for about 3 months now with some success.  I read the nine part  course and realize that my past training didn’t discuss much about selection of trades and adjustment of trades.  When I was looking around the website, I saw a brief reference on how you scan for and pick your trade opportunities, how you use the mathematical models with standard deviation to help your selection and how to determine exit points., but there weren’t too many details on these topics.   Do you share the information about scans, about the mathematical models and how to use them as the subscriptions move along?

Eric,

For credit spreads most traders use technical analysis to find support and resistance and use those levels to pick strikes. I have found that, that strategy works except when it doesn’t. support and resistance are guidelines not walls that the stock will [...]

HI Allen,
 
I have been trying to trade since Wednesday.

 My orders never get filled at Mid. Do you set the limit below the mid?