Trading Spreads for Consistent Profit in Small Accounts: The Entrepreneur

Week of 6/23 and 6/30

Took a week off from writing as well as from aggressive nature trading. When I surveyed the landscape of trades I had open, I decided that it was too much. This is something very important to learn. I felt like it was too much for two reasons. One, because I had almost all of my capital at risk, which is dangerous. Two, because I just had too many separate items to keep track of. When trading, one must always stay within in the confines of relative comfort. Understanding that this business is inherently risky, but managing that risk in a way that you still have control is the key to success. When things begin to slip out of my control, I tend to get reckless and/or senseless, with decisions. So over the last two weeks I have closed many more positions than I opened, back down between my target number of 5-10 open trades and a little over half capital exposure (this is higher than recommended exposure because of the size of the account). There was much more volatility these last two weeks in the market, which is great for creating profit potential. The other side of the coin there, is we are heading into a holiday. Monday is a half day for markets, and they are closed on Tuesday.  That tends to mean thin markets, where either nothing happens, or we get large swings and wide spreads. I think I will wait for next week (after 4th of July) to ramp up the activity.

The subtitle for this post is “The Entrepreneur” because I want to encourage anyone who is interested in trading to go for it. The sales pitch says, “Want to be your own boss? Want to make money? Want to feel successful?” I cannot promise any of those things. I think they are possible to accomplish with trading, but as is the case with so many other types of businesses, you really have to work hard and smart. I believe that this is a simple avenue to something like having your own business. You make the choices about the business. You reap the rewards of your success and also your failures. I do caution that there is a statistic out there that says that only 10% of traders are successful. That is meant to scare you. Because this is money in a slightly more risky endeavor than the norm. But there is risk involved in any business.  The access to markets has evolved in a way that anyone and everyone can participate. What other business can you get started with two thousand dollars? It is up to you how well you educate yourself on how to do so.

Enjoy the journals. As always comments and questions are welcomed. If my processes needs explanation, please let me know.

6-30

Trade Journal – Open Trades

Trade Journal – Summary

Trading Credit Spreads for Consistent Profit in Small Accounts

Week of 6/16

This week was tough to watch, but I did manage to eek out a profitable week, at least from the cash perspective. I have a more large positions in the hole than I would really like to have, but they are mostly still in bounds and have over thirty days to rectify. My return numbers a re a little skewed because because I count open trades in that statistic. They would be considerably better if I counted only closed trades. I like to have a picture of where I would be If I cashed out everything on a given day. Win percent bounces around between 90-88 percent, which I am more than happy with. I have begun to trade closer to the seventieth percentile and maintain a high percentage win.

News seems to be affecting the market a little more this week than it has in the relative past. I will need to start paying attention to what stories seem to shake up the IV. Everyone is clamoring about the next market crash and it’s apparent Armageddon nature, given the stage of exuberance recently shrugged off. Generally that means we go higher just to frustrate the institution. But what if the market does crash? I recall hearing stories about peoples retirement accounts getting cut in half in 2008. If you have a had a retirement account for a very long time you remember all of the times it has been cut in half on market crashes. In the end you realize it’s ok, because after all of those crashes, here we are at record highs in the market. But what if that account did not have to give up half of it’s value and you still got the increase  back to all time highs. That is the beauty of options. I believe that a significant amount of money should move out of passive retirement investments and into self managed accounts. If you can educate yourself on a working system and implement it with precision, then you and me, regular people, can beat the passive retirement investment community. You can be your own hedge fund. Even in retirement one could potentially continue trading for income. It is a no brainer, but the barrier to entry is the killer of most disciplines, desire to learn. As long as the ability top trade derivatives exists, I consider this the fourth or sixth most important lesson in life.

6-16

Trade Journal – Open Trades (6)

Trade Journal – Summary (3)

Credit Spreads for Consistent Profit in Small Accounts: Statistics Course

Week of 6/9

In every new week, I think to myself, this can’t possibly turn out good. The situation always seems, at first, dire. But I do not react to my emotions. I stay mechanical. Or at least attempt to stay mechanical. The result is that the trades work out and I realize there is no need to sweat. I keep mentioning this emotion, because I am still building a faith in this strategy. What my emotion doesn’t fully comprehend is that the probabilities of success are built into the trades. On average my trades have a built in statistical probability of success around 70-80 percent. I am actually around 90 percent successful with the utilization of human edge, meaning my decision making abilities. In a random world I would still be marginally successful. How do I know my probability of success? Recall one of the greeks of options trading is delta. Delta is a statistical function of the probability that an option will expire in the money.  In a perfect world I would be able to stay north of the .16 delta, which possesses about a 16% probability to expire in the money. Pretty straight forward. But why is the .16 delta optimally desirable. On a normal distribution curve 84 and 16 percentiles represent 1 standard deviation. If I trade based on price being at or just outside of the underlying’s one standard deviation of prices, then I take advantage of an inherent statistical probability of success. I am no statistician, but this idea is not especially difficult to grasp.  Who knew that the stats class that I abhorred would one day be useful.

This week was quite fun. The early panic quickly gave way to a rather profitable week, which culminated in a PL with far too much risk and an uneasy feeling about how next week will start. But I have been here before. The trade notes outline well the thoughts on each trade. You will notice some adjustments to trades that may be in trouble. I may discuss the process of adjusting in the next post. Return on risk is down because I took on a lot more risk on the tech draw down on Friday. Those are unsettled trades.

Enjoy the Journals. Don’t forget to comment any questions

6-9a

Trade Journal – Open Trades (5)

Trade Journal – Summary (2)

Trading Spreads for Consistent Profit in Small Accounts

Week of 6/2

It would appear that I have some positions in distress… But I’m not worried about it. Three of these positions are downside hedges, which are like insurance. You only get to collect on insurance if something bad happens. Well most of the time. Some of these hedges are paying in spite of good fortune. There is a new trade type on the board that I did not discuss last week. The Iron Condor is a neutral direction position that takes advantage of decaying theta and vega. Everything you need to know about Iron Condors . Needless to say, it’s working out well. I am not fretting over the looming draw down in my P/L. As a function of cash management I will begin pulling off certain losers against weeks where I have profit. I will exercise faith in the process on the not so certain losers.

A little philosophical tidbit. I can accept losing trades only if I recognize them as a necessary part of the larger plan. When that recognition takes place it is easier to deal appropriately with losses. I do not feel the need to go to extraordinary measures to salvage a lost proposition, because I know that, one it is unavoidable, but more importantly not the end of the world. The NBA finals are on right now, which reminds me of an applicable basketball analogy. When a person is having a hard time shooting from distance, the way they get out of trouble is not by quitting on the long shot. They need to keep trying from three to find the groove. Klay Thompson misses a jumper, gets his own rebound and immediately goes up for the same shot and drains it. Klay knows that misses happen, but he also knows that he is a great shooter. If you are confident in your system, there is no need to sweat it when you hit a bump in the road. Establish a functioning system and believe in it.

Enjoy the journals, and as always please comment or email me

6-2a

Trade Journal – Open Trades (4)

Trade Journal – Summary (1)

Trading Spreads for Consistent Profit in Small Accounts

Week of 5/26

At one point thought I was going to turn in a negative week. This is why I love this strategy. You can save the panic for other areas of your life. The awful LOW earnings trade turned profitable after a rally the next day, and I don’t know what ULTA was doing before it’s earnings call, but it turned out great. You see the beauty in being a seller is that you are never out of it. The old SNAP earnings trade, that you may recall was a 25% disappointment, has leveled off and I am now bouncing around break even. Time and price action work in my favor if I can be patient. I don’t think I have to tout the success of the system anymore so…

How does one get started, or better yet how would I get started trading this system.

  • Watch all the videos and read all of the books. Educate yourself on as much of the terminology and sub strategy as you can
  • Paper trade to develop the rules and designed systems that will be the standard for a trading career. Keep a journal and really learn what is going on during this time.
  • Gather capitol in whatever amount I am willing to risk. Keep in mind that, because this is an investment, whatever I put in is at risk of disappearing. Really understand that fact. I would not put any money in that I could not afford to lose 100% of. It is possible and actually likely at some point. Ever heard of a hedge fund that went bust?
  • I would go to Tastyworks (best fees I have found) and open an account. In order to trade option spreads I have to open a margin account, which requires 2000 minimum funding.
    • A note on margin… Margin can be a great tool if you understand what it is and do not abuse it. I avoid margin whenever possible because it is essentially leverage. When you leverage your gains, you also leverage your losses. It is never a good idea to leverage losses against money you can’t cover. So while they will force you to have a margin account, you can keep track of your net risk in your own notes and avoid exceeding what you can cover with the cash you can afford to lose.
  • Follow the system that I have designed ahead of time. Have fun trading.

I have shared articles from people who have been unsuccessful at this and largely disappointed. I’ve been there. I had a baseball coach that once told me, the thing that makes a great athlete is the ability to adjust. This system is my present adjustment to adversity in trading option markets. It serves well for now, but I am certain there will come a time when it either no longer meets my needs or no longer works at all. But then I only need to adjust, learn, grow. To be cliche, success is what you make of it. That is as true for trading as it is for anything else. Enjoy this week’s journal. As always if you have questions or comments, please feel free to post to the comments section, or email me directly at deanjohnson202@gmail.com

5-26stat

New format here for Journal and Summary

Trade Journal – Summary

Trade Journal – Open Trades (2)5-26

Trading Spreads for Consistent Profit in Small Accounts

Week of 5/19

What a great week! I decided it was time to take the training wheels off and explore some other strategies. Using vertical debit spreads, which is just the reverse order of the vertical credit spread I have been doing, gave me the ability to be short delta and maintain my long theta priority. There is no reason to take a trade where time is not working for you. Here is a little info on the thought process of strategy selection

Hi IV (tend to be long delta)

  • -Earnings = put credit spread
  • -Dip in market= put credit spread

Call credit spreads will not necessarily see a reduction in vega if you get a directional move down. That is why I stay on the put side

Low IV (tend to be short delta)

  • -Market top= put debit spread (primarily as hedges against the put credit spreads)
  • -Ranged market= calendar spread ( these are slow trades)

Both can be used interchangeably at market top depending what you believe the resolution will be.

Utilizing a mix of these strategies keeps my portfolio balanced, to some extent. It also helps in finding trades when the market is not helping out much.

We had the first sign of volatility in a long time, and I took advantage in a big way with that AMZN trade. I don’t normally trade in more than one lot, but when AMZN gives you a dip to buy and then gives you another chance to more than double your credit, you sell the second lot. I happened to have several hedges on the day that the market shook a bit which helped with overall performance. They were not especially large but it is good on those days to have something to scoop up some profit. It is healthy to find opportunities in both directions. I am also implementing a number of trades requirement of five to ten active trades at all times. For the statistical advantage to play out, I need a large enough number of occurrences. That is subjective, but for this account size, those numbers are sufficient. You will notice I have a lot more trades this week than in previous weeks. I ended the week with eight trades on the board. I have not booked a loss in quite a while and half anticipate a little string of losses coming soon.

Just to recap this week

  • Added two new strategies (vertical debit spread and calendar spread)
  • Set number of trades goal at 5-10 active

5-19a5-19b5-19c5-19d5-19e

Credit Spreads for Consistent Profit in Small Accounts

Week ending 5/12

The trade plan and rules have developed into something better. Experience teaches a better way in some cases.

-I am not afraid of earnings. In fact have needed to thrive on them to get any action.

-The profit taking limit is now 50%.

-Strike selection is still the same, but the short strike is no longer a stop loss. Losing trades still benefit from normal option decay, so it makes sense to keep them on, and you might even get a reversal that brings back some profit.

The FXE trade worked perfectly. The election outcome was not the most advantageous, but that thing was so inflated for the news that it had no choice but to drop. Looks like it will be a slower week. IV bumping all time lows and earnings season is winding down. The catalyst for IV is leaving. Fortunately PCLN was a gem this week with multiple very fast profits concluded with nailing the earnings outcome. Logged the best week yet and really only traded one stock. To wrap things up I took a chance on SNAP with its first earnings announcement since IPO. What a bust! The silver lining is that we get to see what happens when you hold one of these losers. Right in the last minutes of the week I decided to throw on some trades for companies that have earnings next week (week ending 5/19) that are directional for a ramp up to the earnings day. I can make money by the stock going up, and if it does not, then I leave the positions for the IV crush on earnings day. I may roll those to longer dates if I do not take profit before their announcements. Also I decided to take a hedge on QQQ against my plethora of long positions. I am looking into how I may create these hedges with more favor in terms of theta decay, calendar spread or put debit spread? I will be making more effort in the future to maintain 5-10 positions. Part of obtaining statistical norms is that you need sufficient occurrences. It is necessary to trade small and often to achieve desired statistical outcomes.

To date I have used two basic strategies

-Single option buy

-Vertical credit spread sell

I will look to add two new strategies in the coming weeks. Look for those in future posts.

You will begin to see a statistics chart on posts, that simply show performance. I am supposed to be profitable and carry around an 84% win

5-12 a

Closed Trades

5-12b

Open trades

5-12c

Statistics

5-12d