Abu Dhabi

11/27 the markets are getting swatted by the credit issues, bank wright downs and subprime sludge have a hold on the markets making for volatile trading and much uncertainty.
This morning we get news out of no where, Abu Dhabi, think Garfield! They are injecting a few billion into Citi bank, a troubled super banker. This established a little faith in US markets and investments and brought the bulls into the game.

The Point:
When you feel like you figured out the markets and want to pick a direction, something from Abu Dhabi may come out of no where and knock you upside the head.

Application:
Keep yourself hedged to the upside and downside, don't use naked options, manage your risk accordingly, plan your trade, trade your plan. period.

condor check list

1. Has the short delta hit around 22-25 or put 20-22? Take off bad spread. Wait 24 hours then roll both spreads up on upside or down on downside
2. Never add new short calls over 10 deltas on calls or puts!
3. Have credit spreads shrunk to $0.15 - .20? Take off.
4. Have profits hit 50-60% of cash flow? If yes, "tighten noose" - that is, change your adjustment points from breakeven to proit-protect, ignore delta
5. Has loss hit one or one and a half times cash flow? That is the most you should let the condor lose. Take it off, come back to play another day.

Heavy Income Business (Condors)

Must have a plan when you trade!
Keep the probabilities on your side,
therefore run your business heavy on income trades.
Debit, or speculative naked options have the probabilities stacked against you and margins can kill you!
Back to your plan:
In times of peace make your adjustment plan, so when war is upon you, you will execute as planned. (period)
With Iron Condors, need to be consistent with your execution.
ex. go 50-55 days out will be able to create a spread that is 90% probability low yield, low risk mngmnt.
or ex. every 30-40 days with 70-80% probability, better yield but more risk mngmnt.
RISK MANAGEMENT RISK MANAGEMENT RISK MANAGEMENT!!!!!!!
With condors if you loose one of these you will be hurt bad!
This is a craft, you need to work at the risk management!
When price goes against you, step 1 buy in the bad side, then wait 24 hours, to let emotions settle down. Then step 2 go another standard deviation out and sell 50% more contracts there. Then you challenge the market to do it again. If it does throw up the white flag.
Will close b/f expiry b/c risk/reward is not attractive the closer to expiration you go. You must have a solid risk management to control your losses.
Look to diversify your price and volatility by having 5-7 income trades in your portfolio using calendars, condors, double diagonals.
Remeber to look at the skews of the ATM calls in front month and next month options. If there is a positive skew the market is pricing some event or move in, investigate.
5 point strikes minimum .35 credit each side
10 point stikes minimum .60 credit each side
You need to blend your trading with you job, put in automatic stops, contingency order if underlying hits your adjustment point.

X1 Trade by Jeff McAlister (STS)

Buy long stock add a long put deep ITM with furthest LEAP series available. LP to have less than 30% extrinsic (time) premium. Then add a short strangle front month to pay down the LP. To establish the risk of long stock with long put you must take the time premium minus the total credit from the short strangle. You will incur risk with the short strangle but only on the down side with the naked short put, the short call can be covered by the stock. Look to place shorts at key support & resistance levels.

Adjusting: roll the entire strangle (envelope) when adjusting to lock in profits and minimize losses.
In case of a gap up or down will need to work at mitigating the losses over time, should still be able to come out ahead by the end of the LEAP LP.
Can also add verticles to the trade to maximize current trend, or replace the short strangle with a iron condor etc.
Doing this trade with an ETF makes sense, since the risk to zero is irrelavent. Also as a diversified product, gaps up/down are less common and not so severe when they happen. You may also short strangles/verticles against underlying each and every month, not worrying about earnings or announcements with an individual stock.
The picture above is a snapshot of the analyzer for a QQQQ envelope trade with additional bear call at the 52 strike.

Income Strategies Gorilla Calendars (Dan Sheridan)

Favored Income Strategies:
Calendars
Double Calendars
Condors
Double Diagonals
Butterflies

Guidelines:
Vols less than 30
Predictable industry (no bio tech/drugs)
Look at the price chart (see if moved over 10% last month and why)
Don't place in earnings month or fixed announcements

Gorilla Calendars:
What are they: sell one month and buy next month out
Income spread b/c looking for near term short option to decay faster than back month's long.
How to find: IV is btwn 14-28. Looking to pay as little as possible
Most desired time to put on: 25-35 days from expiration
Execution is crucial! don't accept more than .05 off the mid, be patient for fills.
How much to pay: .10-.50, which is great. But nothing wrong with paying up to .90
Remember the Gorilla Calendar idea is to set up a one-month calendar take a small profit and run for the hills.
Time Premium: you want time premium of short option more than 50% of long option
Minimum to receive from short option: at least 0.30, which will usually be all time premium. Just remember the time premiums short should be at least 50% of time premium of long. That means if you sell an option for .30 you won't pay more than .60 cents.
When to take off profits: up 40% vs what you paid or debit. If you pay .50 take off for .70 typically in 2-4 weeks.
IV to be in the mid to low range in last one to one/half years. If at the high end make sure to stress test the calendar in the analyzer
Industry: no oils, bio techs, or other vol industries
Price: when trying to detect too much speed in the underlying vehicle:
?determine if the underlying moved more than 5% last week in one direction?
?last month was there more than a 10% move in one direction?
?in the last three month, was there more than a 15% move in one direction?
?in the last nine month, was there more than a 25-30% move in one direction?
**If you answered yes to any of these four questions consider waiting...

Look out for earnings months, no trade.
Skews: There should be no positive skew over four to five points b/f you put on a position. If one develops after putting on the position take it off.

Risk Management:
If you pay less than .40 for the gorilla calendar, leave it alone till expiration day unless you take off for 40% profit or more any time b/f that. On expiration day, take off the complete spread on both sides. Be careful if short option is ITM and time premium hits .05; you may get exercised on the short call. If you pay greater than .40 for the gorilla calendar take off when time premium of short options hits .05 unless you take off for 40% or more any time b/f that.

LONG TERM Calendars (Portfolio Plan cont.)

Long Term part of the Portfolio
Long Term Calendar:
you can use a well diversified index or ETF with vols below 25. This stuff will compete with the long term retirement portfolio. Mildly bullish play
Example: MNX calendar
every 30 days put on a OTM calendar (3% OTM) (mildly bullish calendar 3% OTM every 30days) Don't trade anything w/out a plan, prepare for a battle in a time of peace. Plan out your adjustment prices, when to take out profits (up 10%) when loosing when down 5% take off half when down 10% take it all off. This is a craft, work at it.

Summary:
When to put on: 30 days to expiration
What:Well diversified indexs or ETFs
Plan: down 5% take off half down 10% take off the rest up 10% take off all.

Porfolio Plan by Dan Sheridan

Look at the Whole Portfolio , do not focus on individual trades get a broad outlook. Divide your portfolio into Long Term, Income Trades, and Speculative (see picture graph).
Its not how much you make its your YIELD! What % did you yield on invested capital.
Long Term positions have Long bullish positions to take advantage of the overall bullish movement of the markets

Income trades take advantage of the grinding ranging behaviour of the markets. This is similar to insurance companies that take in income when nothing is happening.

Earnings plays: look at the last earnings and see what movement occured: http://optionslam.com/ (good website to track historical earnings movement) Also consider the volatilities!
Can play earnings with a double calendar: look at the straddle and the % move needed to break even, or the movement the street is pricing in. Then set your calendar break evens to take advantage of these points. The skew in volatilies should work in your favor as long as the stock doesn't explode up/down. Now, instead of having a straddle where you need the stock to move big to make money, you have a nice realistic range where you make money. Good example is from Goog earnings play (see pictures above) This trade would go into the speculative part of your portfolio.

Calendars & Condor income spreads: these last few months have seen volatilities greater than what we have seen in over 15 years! This is a code red for income traders, extreme vols and difficult for credit spreads, calendars etc.! If you have negative vega positions in your portfolio (meaning if vols go up you get hurt) So, for individual postions, don't put on a neg vega trade when vols are fluctuating huge, but if you have too much positive vega it makes sense to add a neg. vega trade to balance the portfolio.
To place a calendar trade first look at the IV and make sure the vols are tame or average w/out large skews btwn the front and back month option. If there is a large skew the market is pricing a big move in one of the month.

Dan Sheriden (TOS) Condors

Need to divide your portfolio into catagories:
~short term 1or2 month income
~long term
~spec trades

throw in 4 things into monthly (1or2 month) theta income trade recipe:
*Credit spreads
*Calendar
*Double Diaganol
*Condor
Combining credit spreads with calendars, diversifies the strategies and the greeks. For example the positive vega calendar and negative vega verticle. This maximizes theta and neutralizes vega impact. Diversify price and volatility risk.

2 types of condors: High Probability (80%+) vs. Low Probability condor
Look out for volatility.
$$$High Prob condor(RUT example)
Place these trades 35-50 days (4-7 weeks) b/f expiration
Selling high volatility is not always the correct answer. It is only correct when you think volatility is going down. HIgh volatility is not a license to sell. The nature of volatility: 17-24 is a mid vol level, great trading vol level.
30,35-40 vol range is scary, dangerous. You will get compensated for selling high vols but it is risky.
(note) Call spreads trade 40% richer than equal distant put spreads, so it is optimal to place a condor into a rally opposed to a sell off. When a rally ensues you may want to consider placing a 2 strike wide call spread by 1 strike wide put spread, this will take in considerably more premium.

$Risk Management / Dont ever trade without a plan. Look at the maximum risk $840 and return $160 (80% probability condor). If you loose once in a year you will be a big loser with a max risk at $840. Put a plan in place when entering any trade, just like running a business. Don't loose more than 1.5 - 2x your max reward, on this trade get out of this trade at approx. $300 loss.
Also how will you handle profits, when will you take profits???
tighten the noose when you are up approx 60-70% take some off or get out of the trade, book profits.
*Adusting this trade: if you sell this at approx 7/10 delta, when the delta of the short put is at -20 you are starting to feel some pain depending on the volatility, take off some of the puts and roll down. When placing this trade look and see what strikes put/call have .20 delta, then set your plan to adjust the trade when that point is hit. Can also midigate risk by overlaying a put/call debit spread to protect the side you are concerned about. For example on the put side 50/47 you may want to overlay a 51/48 to reduce risk to the down side. This would be on a ratio basis, you would have 5 contracts of the condor and 1or2 of the debit spread.
$$$Low Prob Condor (60-63% prob risk reward 1:1.5 or 2)
will trade this differently, put it on with 30 days to expiry get off in 14-17 days, making 10-15% reward. Now instead of selling a 7 delta strikes (high prob), sell 20 delta strike options, this will equate to a 60% prob of success) This is a different animal, you are only in this trade for 7-17 days, once you have 10%+ you start tightening the noose, taking profits. Max loss 15-16%. You are taking in more theta, faster, in this trade vs. the high prob condor discussed here.
Adjustment: (specific criteria with 5 contracts on) Max risk 15% don't loose more than this. Taking profits at 12-15% of margin, protect profits.
with 5 contracts on, when down 11-12% of the margin/risk, take off 40% or 2 of the loosing side. When it gets to the short strike take off another 40% or another 2, then the other 1 when your down more. this will protect you when the market runs then backs off. were trying to stay in the game, don't want to get shaken out of the game. At the end of the year, look at your 12 trades over a year, how much did you make in a good month vs how much you lost in a bad month. DONT LET YOUR BAD MONTH OUTWEIGH YOUR BEST MONTH.
****notes When you look at how the indices have performed this year, consider the inversions btwn the indices and skew your postions. For example: the nasdaq was trading well above the other indices espicially the Russell. so to skew condors accordingly makes sense. All Indices will gravitate towards parity, one still may outperform but the gravity will have an impact over the term.
***find a strategy and approach that works for you, observe the criteria used and method you employed to achieve sucess, then master it. Don't get yourself going in a million directions, focus on the strategy and underlying that works for you.
**Look at this business like insurance companies, you're in for the long run.
*January expiration month is generally the busiest month, a ton of open interest (Jan LEAPs still open, back from holidays) January is a great trading month b/c of liquidity.

"Early" New Years Trading Resolution Plan

http://www.optionpundit.net/market-psychology/trading-plan-resolution

Option Pundit is my hero, I wish one day to achieve his market prowess and deliver his monthly returns. The above link is a meaty new years resolution to glean from.

*Notes from TOS chat for 2007 New Years Trading Resolutions*
On an overall risk management outlook, do not risk more than 25% of your total capital in overall maximum risk. For example if every trade position you have on goes completly against you and you must assume max risk, do not let this amount be greater than 25%. You don't want to get blown out of the game.

JMD's Quest

Investing my time and passions into an education has taken me on a journey to find a consistent trading plan. Finance and investing offer a world of information and complexity beyond any one person's ability to digest. My goal is to distill this information into a trading vehicle that will navigate through the stresses and volatility of the markets.
I will glean from my experiences in specific trades and share all their little delicacies. This will be my exposition.

Sell Crap & Manage Risk

Sell Crap and Manage Risk!

3 Criteria to follow when selling options (crap):

1. Massive liquidity / Tight markets / High open interest
Be the smallest fish in the biggest pond.
2. Sell verticle/time spreads 4-10 weeks before expiration. The closer to expiration you get, your theta decays faster but gama will outweigh. Gama will explode delta all over you! If you let your options expire worthless you are stupid.
3. Place verticles with 50-70% probability of success, if experienced up to 85%. Figure your probability of success by dividing the risk by the spread. For example an 80/75 put verticle with 1.80 credit and 3.20 risk would have a 64% probability of success (3.20/5.00)

*note
spread your inventory out over several strikes, don't over allocate yourself.

These notes were taken from a Think or Swim educational conference in Irvine by a professional market maker / trader.

Intro

Contrary to popular belief, Options’ trading is not easy. As Dan Sheriden says, it’s a craft and it takes time. One needs to learn the craft, readjust and master it before you start sailing in the sea.