Each time I go to my yoga class the instructor has a word of the day, and I wanted to apply that to options education. The word of the day is intention. The dictionary defines “intention” as an aim, a plan or a purpose.
While naturally many people would think, well my intention is to make money. I think through lack of planning many people lose sight of their trading intention. Let’s take a look at what should go into our trading intention.
Besides learning different strategies to utilize, the first thing we need to do is determine a long-term trading goal.
Where do we want our trading success to take us, is our goal to have a monthly income stream? Or a nest egg to retire with?
Of course these goals could be simultaneous. Whichever goal you choose it’s important to keep a record of your trading results and where you are at on your path to your intention.
Trading records should be looked at daily, monthly, quarterly and yearly to give us an overall view of whether or not our current plan is working. This will give us a chance to make adjustments in our trading plan in a timely manner if need be.
Setting Realistic Goals
When we set our original trading goals it is important to be realistic. If your goal for instance is to make $2000 per month and you are trading with $10,000 we must look at how realistic that is. In my experience if you can follow a good trading plan, you should be able to generate 3 to 7% a month on average with your option trading.
A more realistic goal might be $500 per month on a $10,000 account. The lower the percentage of return on your capital that you need the easier it will be to reach your goals, But having realistic goals of your capital is key.
Lastly, you have to allocate your assets properly with your trading goal and intention in mind. What strategies am I going to trade and when? What role will volatility in the markets and in the trading vehicles I utilize play in my planning and success?
All of the above must be in focus and on your mind and constantly reevaluated for you to achieve your trading goals.
Recently I wrote an article about the “time bomb butterfly” that was published in the March issue of Modern Trader Magazine. The butterfly option trading strategy has many different structures and uses.
The time bomb butterfly involves buying an out of the money all call or all put butterfly in the direction you think an underlying asset is going to trade.
Currently in the market there is a lot of uncertainty among traders as to which direction the market will now head.
Time Bomb Butterfly
This can be a good set up for the time bomb butterfly in the SPX. One example would be an all put butterfly placed in the April expiration 37 days from now, that is centered at 1940. While the width of the fly is up to the individual trader, using a 20-point wide wing could be structured as follows:
Buy 1 APR 16 1960 put
Sell 2 APR 16 1940 puts
Buy 1 APR 16 1920 put
This butterfly is currently trading at approximately 1.25 per contract, costing $125 for each 1/2/1 fly structure that is entered plus commission.
If this butterfly at expiration is trading near 1940 this trade would net more than a 10 fold profit. It also has profitability from around 1925 to 1955. If you have a bearish sentiment over the next month for the SPX this is an interesting trade to consider.
Consider the Time Bomb Butterfly
I like using the time bomb butterfly strategy more than vertical strategies because of the low cost and possible exponential reward. Consider the time bomb butterfly the next time you want to trade predicting market direction.
Over the course of this week, I will be going over several different strategies for SPX in this Volatile Market, and a cash secured put is the first that I will discuss in this post.
Even with the rally Friday (Jan 23), the markets are still down considerably in the last 4 weeks. SPX closed Friday at around 1907, up around 37 points for the day! Dec 29, SPX closed at 2078.
We are still 171 points away from the Dec 29 close. That’s about 8 ½ % from those lofty levels. With that as perspective, I think cash secured puts might be attractive here in certain stocks.
Cash secured puts are the same strategy as covered writes, but not as popular. SPY closed Friday at $190.52 up an amazing $3.83 or 2% for the day. I will use the February expiration in my example.
I will sell 1 Feb 180 put for $1.50. If SPY closes above $180 by February expiration, Feb 19, I collect the entire premium of $180.
If SPY closes under $180 by February expiration, I obligate myself to buy the SPY ETF at the short strike of $180 minus the premium of $1.50 or $188 ½.
That’s about 6% lower than the current SPY price. As of Friday’s close, we are already down about 8 ½% in SPY since Dec 29.
This Strategy Accomplishes 2 Objectives
Income and accumulation of ETF’s and Stocks at discounted prices. This strategy is for those who like the market or certain stocks over the next 6 months to 1 year.
The way I chose the strike for this example was to sell a strike with a 20 delta.
What does that mean?
It means that there is only a 20% probability that SPY will be under $180 by February Expiration, which is Feb 19. That also means there is an 80% probability I will collect the premium of $1.50 I sold.
Many stocks have been down 8-20% in the last 4 weeks. Make a shopping list of stocks and ETF’s that you like at the current levels.
Then go and look at an approximately 30 day option expiration and evaluate a 20 delta put for a possible cash secured put.
What does the term cash secured put mean? It simply means you have enough capital in your account to buy the stock if you get assigned on the short put.
Cash Secured Puts
What’s the downside to cash secured puts? If the stocks or ETF’s immediately soar, the premium on the short put won’t equate with the appreciation you could have had by just buying the ETF or Stock.
I like this an long term Income and stock accumulation strategy and would recommend selling cash secured puts in stocks on a regular monthly basis.
Is it scary to sell puts after a correction? Absolutely, but that is when some of the best opportunities arise.