Got an email today from a trader in trouble.

Here’s the situation and what I told her:

Would Allen considering giving me a advice fix for my AAPL and GOOG calls?  I have January 19, 2013

AAPL $665 bought for $42.41 now $9.90

GOOG $775 bought for $41.30 now $4.50

 I sure would appreciate some advice!!

Before you read my answer, what would you do in this situation? Take a few minutes to come up with a couple strategies.

Here is how I responded:

Ouch.

 Thats why i hardly buy options anymore.

if you dont think they are coming back, i would sell.
If you do think they will rally, you can sell current month options against them for the premium.

So on Aapl 665, Nov 630 calls are paying 2.22. Once those expire in 15 days you can sell next months, or even weeklies. But if the stock rallies above your [...]

Here is a trade I just put on in the personal account.

It’s an iron condor on Apple. It has a 77.43% Probability of profit with 22 days left to expiration.

Sell to Open June 355 Calls, But to Open June 360 Calls

Sell to Open June 310 Puts, Buy to Open June 305 Puts

For a credit of .63

For each contract you do, you get a credit of $63 which is the max gain on the trade. The max loss is $437. So the potential ROI is 14.41%.

My plan for this trade is to keep it super simple. Let it ride until expiration. Look at exiting when up 10% or more. If I get down 15% or so I am going to exit. This is a small position and one I put on because my wife made me. I am teaching her how to trade options and she is coming up with her own [...]

Rumors of Steve Jobs’ cancer returning might be true. But I doubt he is going anywhere anytime soon.

Proof: He showed up to the White House to attend the President’s dinner yesterday. And in the picture, he looks fine to me, although you cannot see his face.

Here is a blog post with the picture along with a story about Steve bulldozing his house on Monday to build a new one. If he thought he only had a few months or weeks to live, would be waste time tearing down an old house? Probably not.

http://www.appleinsider.com/articles/11/02/18/apple_ceo_steve_jobs_photographed_at_dinner_with_president_obama.html

Just did a Put Credit Spread on Apple in my personal account.

Sell the Feb 320 Puts, Buy the Feb 310 puts for a credit of .95 cents

Total risk per spread, also the margin, $905.
Maximum return per spread: $95 for a potential ROI of 10.49% before commissions.
19 days left in this trade before expiration. 83% probability of profit according to thinkorswim.

This trade is a little too risky for the OptionGenius portfolio so I am posting it here. Why risky? Because it is not too far away from the current price of 338. There is support at 320 which is good, but if the market turns over, Apple will be one of the first to slide.

If Apple does drop, I will probably exit the trade when I am down 10-15% which is $135. I don’t know if I will have time to post any adjustments on the blog so trade at your [...]

A little over a year ago I went to one of those free trading seminars provided by companies that want you to sign up for their coaching or training.

The concept they were teaching was day trading and so it did not interest me very much, but a couple things the speaker said were very interesting. The guy’s name was Tom Busby.

He said that once a stock breaks a hundred $ level for the first time it zooms up 10%.  For example, once a stock breaks through $100 it is going to $110. When it breaks through $200 it is going to $220, etc.

I had heard this before somewhere so I started looking it up. It turns out that Jesse Livermore mentioned this in one of his books. Livermore was probably the best trader of all time.

So now with two reference points I decided this was something worthy of looking into. [...]

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.

For the month of May, my results were a nice gain of 11.71%!

This is following a nice double digit gain last month.

We had four trades this month:

SPX, the S&P 500 index
RUT, the Russell 200 Index
 AAPL, Apple Computer
 WMT, Wal-Mart.

I recorded double digit gains on three of these and a 9.5% gain on the SPX position.

Just another day at the office.

OptionGenius.com members can see each trade and any adjustments on the Past Trades page in the membership section of the site. If you are looking for double digit monthly returns, what are you waiting for? Sign up today. I already have one trade for June underway and I am looking for more.

One of my favorite habits is to reward myself after a positive month. To treat myself,  my wife and I go out to lunch at one of our favorite restaurants. Normally it is my favorite, On The Border. But this [...]