Hope you have a wonderful, happy, and well rested holiday!

Here is an update of the MCD and JNJ butterfly trades I showed you in my last video. Had to make an adjustment to each because of the strong down move in the market which also affected these stocks.

Click here to view the embedded video.

MCD and JNJ Butterfly Trade Adjustments is a post from Option Selling.
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The stock is NLY. The trade is a simple Put credit spread

Sell to Open Oct 16 Puts (.40)

Buy To Open Oct 15 Puts (.26) for a credit of .14 cents per spread.

Trade has a 74% probability of success. And can make 16.2% if left to expiration.

NLY is a financial company but a very boring stock. I love owning this one as well because it pays a little over 10% dividend right now.

So here is how the trade works: If NLY is above 16 on expiration day (right now it is trading at 17.68) I make the whole 16.2% minus whatever commissions I paid to get into the trade. If NLY is below 16 and above 15 I will be assigned the stock if I don’t exit the trade. Again, I don’t mind owning this stock. if NLy is below 15, I lose the entire amount that I can risk, which is $86 per spread, plus the commisisons I paid unless I exit the trade.

Here’s the cool part. This is a chart of the stock. The red line is the breakeven on the trade. NLY has to be below that line for my to lose money. Guess what? It has not been that low in MONTHS!

But wait! It gets better. I plan on adding a call spread as well. Selling the 19 stirke and buying the 20. Notice that the stock has not been above 19 in months either. So even though the probability of profit is listed as 74%, I feel it is a lot more than that.

No Stress Options Trade is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

The weekly calendar needed to be adjusted but since it expires today I am not posting the picture here.

The Oct/Nov Calendar is still within the breakevens. It is trading right now at $126.72 and the upside breakeven is $127.95. Here is what the trade looks like right now. Notice how it has gotten close to the upside breakeven.

GLD Option Calendar Spread

If I add the 128 Oct/Nov Calendar it will look like this:

GLD Calendar Spread Update

This will center GLD in our trade and extend the breakevens. But I am going to hold off making this adjustment until GLD moves up a bit closer.

When adjusting you need to look at multiple factors. Time decay is working in our favor and so holding off on an adjustment can result in a higher yield. Also, even though the trade is far from the breakeven point I am still down about 5% so far in the trade. I don’t want to be down a lot more before I adjust because a sharp up move would force me to exit the trade at a max loss.

GLD Calendar update is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

Iron Condor in YUM:

Sell 6 Sept 46 Calls,   Buy 6 Sept 48 Calls

Sell 6 Sept 42 Puts, Buy 6 Sept 40 Puts

Thinkorswim is showing the mid price to be .18 cents. So the credit would be $108 and the margin would be $1092. That means the potential ROI is 9.8%. There are 9 days left to expiration. With so little time left, there is no room for adjustments so the trade would be to ride it to expiration.

The breakevens are 41.86 and 46.20. As long as YUM expires within these two breakevens, the trade is profitable. The trade has a 65.15% probability of making money.

This one would be a good one to papertrade. The one downside on this iron condor is the commissions. If you are paying too much for commissions, this trade does not have the proper risk/reward. In your case you would have to get into trades with more time/premium left to offset the commission charges. But the good thing is that hopefuly this trade expires and you don’t have to pay commissions when exiting the trade.

The trade is centered right now with YUM trading at $44.16. Not sure how it will trade over the next two weeks but there does seem to be some support at $43.45. My feeling is that the overall markets will pull back this week and YUM should pull back in sympathy.

You could trade just one side of this iron condor – either the puts or the calls, but then again the risk/reward is horrible and not worth the risk (in my opinion). Thanks to the iron condor we are collecting premium on both sides – the calls and the puts – and that is how we get .18 cents.

Sample Iron Condor Trade is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

That’s what one of my members got today. He actually did much better than I did. I am still in this trade. He was able to get in at a much better price than I did yesterday and already exited the trade today.

The trade is a butterfly on IBM. For members, it is May Trade #2

I got into the trade for a debit of 1.24, but this member got in at 1.15. For 4 contracts his cost was $460.

He sold the butterfly and exited the trade for 1.35 today. That’s a gain of $80 and a return of 17.39% – in one day!

I myself am up a little less than 10% so far.  Hopefully I too will be out in a couple more days with a nice double digit gain.

17.39% Return in One Day is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

“Allen,
 
I had a wonderful two days with this volatility, by changing your procedure slightly.
 
The changes I implemented are:
 
1. When it looks like we are in a bearish market, do only the bearish call spread and NOT the bullish put spread. Do the converse when in a bullish market.
 
2. In a volailte market that whipsaws, do not close out both the high and low strikes simultaneously. Rather close out the short position first, since that is the one costing us the maintenance requirement. The long position has no impact on the maintenace margin requirement.
 
This is what happened:
 
On Thursday May 06, being my birthday, I wanted to try my luck at Day Trading with options, since the market looked quite volatile!
 
Did a RUT May 720/730 bearish call spread. Bought the 730 call at 2.39 and sold the 720 call at 3.99 for a $1.60 credit.
 
At about 2:30 I tried to buy the 720 call back to close. The screen went bonkers with ask prices lower than bid prices! Then all I got was the dreaded hour glass image!! This is when the market went crazy!!
 
Around 3:45 EDT, I gave up and entered a buy order good till cancelled for the the 720 call at a price of $2.00 and then went away from the computer.
 
Around 4:30 to my surprise, I found this was executed at 4:03pm, for a profit of 1.99 !!
 
Today, Friday after hearing the super jobs report, I entered an order to sell the 730 Call at $2.00 each. It had was bid at < 50 cents depending on where you looked!!  To my shock, this order got executed by 11:00 am EDT!!  It closed at 1.15 today! My loss 0.39. So the net profit was (1.99-0.39) or 1.60. Or I got to keep 100% of the credit received without waiting for expiration!
 
On a 100 contract spread, with the commission included, the profit was $15,679 or 18.6% in two days!!
 
While I do not quite follow your exact steps you suggest, I would not have had the guts to do this without reading your material.
 
Thank you”

I am posting this email for educational purposes only. I am glad this member did well but it could just as easily turned out badly. I agree with his strategy #1, where you only sell options on the side that is away from where the market is going. But I am not smart enough to always be able to tell which way the market is going. If I was, I would just buy puts or calls and ride them.

Ever since March 2009, the market has pretty much gone straight up. But every day there is someone somewhere saying there will be a correction and the market will come back down. I myself expected the market to go up until after 1st quarter earnings. But the rally sustained until 2nd quarter earnings.

Now with the increase in volatility and fears of Eupore the markets seems to be taking a breather before they pick the direction. It might be back up, it might be down, or it might be flat.  To me it doesn’t matter as long as the move happens slowly.  An option seller can make a ton of money when the market moves less than 1% each day.

As for strategy #2, this is a bit moe re risky because if you buy back the short option and the market rebounds you can lose money very quickly. But this is an adjustment I have read about so there are traders who use it. Never used it myself though.

Another Way To Play The Volatility is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

First, thank you for providing a great service. I have been trading options for about a year and have learned a lot from your tips and alerts.

Now, I have a question about position sizing.  I am trading $100k of my funds using your alerts. When you send out an alert I multiply the number of contracts by 10 when putting on the trade. My question is: instead of just multiplying the contracts, can I use a combination of increasing the contracts and/or increasing the width of the strikes?

 

For example, if the alert was to sell 2 SPX 1200/1210 Calls, instead of selling 20 10 point spreads, could I sell 10 20 point spreads? What would be the pros/cons of doing something like this?

It seems to me, if I widen the strikes, then when I need to make an adjustment, I could sell the near strike and buy the next strike as opposed to rolling the whole spread. Is there any advantage to this other than lower commissions and (possibly) better fills? More risk? I feel like I am missing something or not really thinking the strategy all the way through.

Thanks,
Adam

My reply:

How Wide Should Your Strikes Be In A Credit Spread? is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

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, in your example, when the price dropped near the lower strike price you closed out the options on that side and then entered into new options just farther down in price.  I can’t figure out why that couldn’t be done all the time so you really could have entered into this trade even when the market was swinging wildly in Oct.  I guess a follow up to that is how did you end up losing 30+% in that one month?  It would be great to learn what can go wrong.  Thanks.

First you have to limit your loss. 100% loss is not acceptable. I am out of a trade when I am down around 20%. The month I lost was a very large, sharp, quick, move. That is the worst enemy of the condor.
 
Most months you have no problems, like this month. i though it would be wild, but even with earnings I have not had to adjust my condors at all. Both are doing nicely.
 
If the price moves towards my strikes, at a certain point I will roll the options away from the money. That is a simple adjustment and one of the ways that help me to stay in the trade and profit even when the market does move. But last September, it was just too much too fast and i just got out of the market instead of try to play with it. I took my loss and exited. Which saved me because Oct was another horrible month for the condor. Through experience I felt that the market was not acting correctly and stayed out of the market.

“The Iron Condor is not boring.” is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

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.

The Calendar Spread is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

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.

Free trade: October 07, 2009 is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com