Prologue
A goal without a plan is just a wish.
(Antoine de Saint-Exupéry)

There will always be fellow traders with more funding and more experience. Those who are the most experienced will run their options business on a schedule.

All of us must function within the same 24-hour restraint – or 6½ hours while the market is open. You can only react so fast; you can only prepare so much. Setting a schedule and following your rules are two fundamental necessity for managing a successful trading business.

Damocles’ Weekly Goals
Make 2 Weeklys Vertical Bull Spreads Trades (expires 21 – 28 days) – 1 trade on Tuesday, 1 trade on Thursday.
  • If high OTM probability Put spreads:
    • Strike width = 10, # Contracts = 1, Prob. OTM 80% – 85%, Prob. Touch 25% – 35%
    • Max trade risk < $1,000 (but be vigilant to risk-management rules)
  • If ATM Call spreads:
    • Strike width = 1
    • Max trade risk <$100
Make Cover Calls Trades – (Still developing rules for Cover Calls.)

 

Damocles’ Schedule

Mondays

  • Re-chart the trend channels for all stocks in the watch list.
  • Setup the Watch List for this week’s possible trades.
    • Typically, I do not make spread trades the day after a (long) weekend. Let the market settle-down from any weekend news.
  • Check the current news on the stocks in the watch list.

Tuesdays

  • Analyze the trade movements in the watch-list as they were set up Monday.
  • Configure and submit 2 or 3 “long-shots” trades.
    • If 1 long-shot trade is accepted, then cancel the others.
    • If no long-shots are accepted, then we will try again tomorrow.
Wednesdays (Mostly the same tasks as Monday)
  • Make minor trend tweaks and review news of watch list stocks.
    • Red flag, if you have to make significant trend channels tweaks then the market may be too volatile to consider trades this week.
  • If none of the Tuesday’s long-shots trades submission took, then re-adjust trades configuration to the current price and resubmit a couple of possibilities. If one of these trade possibilities takes, then cancel the other pending possibilities.

Thursdays (Mostly the same tasks as Tuesday’s)

  • Review/analyze the trades movements in the watch-list as they were set up Monday.
    • Red flag, If the premiums listed for Thursday is more than the premiums suggested on Monday/Tuesday for the exact spread configuration, then the market sentiment is getting volatile (a big jump may be coming or the market is trending downward).
  • Configure and submit 2 or 3 “long-shots” trades. 
    • If 1 long-shot trade is accepted, then cancel the others.
    • If no long-shots are accepted, then we will try again tomorrow. 

Fridays

    • If none of the Thursday’s long-shots trades submission took, then re-adjust trades configuration to current price and resubmit.
    • Update all trading log files for the week.
Trend Channels
This image is ETF:QQQ and shows 2 trend channels. The upward trend channel was sustained for over 4 months. May’s downward trend lasted for about 6 weeks with what appears to be a breakout happening about 2 weeks ago.

Right now it appears there’s indecision on which way the new trend will go, but the 9-day SMA had a significant breakout of the down channel and is almost ready to blow past the 50-day SMA. When that happens, I’ll feel better than a turnaround might have possibly, conceivably, maybe, indeed occur.

Watch-List for this week’s possible trades.
(Note, I will cover each of these spreadsheets in future posts.)
Spreads
Covered Calls
P&L and Performance Status

YTD: Net profit = $1,234.19, ROC = 30.5%

Last Month: Net profit = -$524.11, ROC = -17%

  • Started 11 trades (6 Put Spreads and 5 Cover Calls).
  • 10 trades have completed, 1 still cooking.
  • Of the 10 completed trades, winners = 7, losers = 3
MTD: Net profit = $440.05, ROC = 17.7%
  • Started 10 trades (6 are cover calls and 4 are spreads).
  • 4 trades have completed, 6 still cooking.
  • Of the 4 completed trades, winners = 3, loser = 1
Trades Ended 6/14/19:

ETF:IWM 144p/143p – Expired 6/14 – Worthless – Net Premium Collected = $43.05
For this week, I just had just one Vertical Bull Put Spread working due to the market downturn over the past several weeks. I submitted this trade on May 23 when I thought the market might be turning around but I did not want to put at risk more money without knowing for sure…

ETF:DIA 264p/262.5p – Closed 6/20 – ITM – Net Premium Collected = $34.05
This trade had an expiration date of 7/5. But DIA was going ex-Dividend Date on Friday 6/21 and my short leg (strike 264) was ITM. Therefore, the short leg was a prime candidate for an assignment.

However, the $34.05 profit on this trade represented a 46% ROC. If it was assigned, then there would be a $20 assignment fee plus margin interest until I sold the log leg. Those fees and interest would have negated any profit.

Additionally, a 46% ROC on this one trade is a record high for me (really rocks!). I will analyze this strategy closer.

Trades Still Cooking

ETF:XLV 86.5p/85.5p – Expire 6/21 (this Friday) – Net Premium Collected = $27.05
Currently the probability of OTM = 97% so I feel the $27.05 premium collected is pretty safe.

UNH 250c – Expire 6/21 (this Friday) – Net Premium Collected $184.55
At UNH’s current value of $253.22 and the current probability of OTM = 0%, it looks like this will expire ITM. I expect this to be assigned this Friday.  So with the current cost basis at $246.61 and being sold at $250, the 100 shares trade yielded a positive $339 return + $108 dividend + $184.55 of premiums collected for the cover call – @$25 for trading fees = approximately $606 for 2 weeks use of the $23,661 cash sitting around. This is a 2.5% return in 2 weeks or 66.5% return annualized.

ETF:DIA 251p/246p – Expire 7/5 – Net Premium Collected = $99.05
Currently the probability of OTM = 94.7%.

New Trades for This Week

CSCO 56.5cc – Expire 6/21 – Net Premium Collected = $38.55
This trade is primarily to satisfy an account change I must make before the end of the year. I need to eventually sell this stock and transfer the money to a different account. So between now and the end of the year, I’ll make low probability Cover Calls to collect as many premiums until it sells.

ETF:DIA 251p/246p – Expire 7/12 – Net Premium Collected = $55.05
This is an identical spread configuration as I traded last week. But instead of the premiums being $99 it fell to $55. This is a good sign since it signifies that tradeiverse’s (the universe where traders live) are giving this less chance of going ITM.

ETF:QQQ 176p/171p – Expire 7/12 – Net Premium Collected = $73.05
Looking at the trend channels, it appears that QQQ had indeed hit bottom and is now back on the same trajectory upwards as it was before the Trump US/China trade tweet (tweeted mid-April).

The 9-Day SMA had crossed the 50-Day SMA signaling an upward trend. I’ll expect it to bounce around within the channel, but my short strike price of 176 seems to be well out of range… (Well, at least until the next Trump Tweet…)

MSFT 138cc – Expire 6/21 – Net Premium Collected = $26.05
This was nothing more than a target of opportunity. With only 3 days left in this trading week, the premium price of this strike appeared to be in play. With 3 days left, MSFT would have to rise by 2.2% (which is doable) and the Prob. OTM is 88%. MSFT had already been on an upward tare for the first 2 days of this week so I’m predicting a little pullback as other investors take gain.

Rules of the Week
  • Close ITM Vertical Bull Put Spreads when the premium either doubles or reaches $1.00
  • Close ITM Vertical Bull Call Spreads before expiry to avoid exercise/assignment fees
  • Close ITM Vertical Bull Call Spreads when net profit equals 80% of max gain.
Epilogue

One of the cool things about Options Trading is that you get to pick your risk. The more you risk, the higher the premiums.

One way to manage risk is to set the duration of spread trades. You can do Options Day Trading (super high risk) or set up an options trade to last 3 years – yawn! For me, I decided to trade spreads that will expire within 30 days (or less). So technically speaking I am using the same chunk of cash 12 separate times within a year.

So, if I set up a 30-day Vertical Bull Spread Trade that has a max loss of $1,000 and in doing so I received $50 credit as premium and should this trade expire worthless at the end of the 30-days, then my Return on Capital (ROC) = $50 / $1,000 = .05 = 5%.

If I used that same trade configuration for 12 months in a row and each of the 12 different trades expires worthless, then I would have collected a total of $600 off of that same $1,000 chunk of cash. That would be an annualized ROC of ($50 X 12 = $600) / $1,000 = .6 = 60%. Not bad.

Therefore, if I set up my schedule to trade 1 option spread per week of a similar configuration as described above, then for a maximum loss risk of $4,000/month I should see a $200 a month income stream.

As a final compos-mentis note, it should be frightfully obvious that I am putting at risk $1,000 for the possibility of making a puny $50. Hitting the max loss on just 1 trade will require me to win 20 others just to break-even – not good. So strict risk-mitigation rules are mandatory for your schedule. Risk Management will be a topic of a future post.

Cheers…

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