Prologue

Tracking progress and behavior are essential to self-improvement. Whether I am keeping track of calorie intake at the dinner table, sit-ups repetition at the gym or lost balls on the golf course. Keeping a log of my activities is my key to improve.

I started my research trek last year with a deliberate goal of proving to myself if I can make a consistent income from Options Trading. The general consensus in non-commercial Internet blogs research is divided. So I need to be able to keep track and analyze my successes and failures myself. That cannot be done without maintaining a trading log PLUS keeping a trading journal (for me… this blog…).

I started my log on the first options trade I made last year and I started my journal about 8 weeks ago. I needed to track my successes and failures plus explain why I made these trading decisions. I needed to learn from my failures. I need to come up with personal behavior rules, schedules, and spread-construction knowledge. I needed to learn the cause/effects and news/market reactions. (Yep – I’m just a needy guy!)

One example of using my log is the P&L section below. I can summarize my performance over the past 18 months of trading to see if I’m improving. I can also use it to develop an important new threshold matrix-like Return on Capital (ROC), max dollar risk and frequency of trades (don’t want to risk more money than I’m willing to lose…). I use my log as an important trading tool that I review daily.

When I started my trading log, I had no idea what info I should track. Most Internet suggested formats came with a ‘pay here’ button. The image above is the layout I came up with from bits and pieces from my research. Anyone with good Excel experience should be able to extrapolate the information in these cells. I will consider it a framework to build upon.

Having a systematically maintained Trade Log, a self-questioning journal and an actively updated Watch List should be a mandatory part of any Options Trading for Income 101 course.

P&L and Performance Status

YTD (2019)

Net Profit = $1,929.26
Started 88 trades: 44 Vertical Bull Put Spreads, 44 Cover Calls 

Profit for Spreads $-239.15
ROC for Spreads (target = 72%): -6.0%

Profit for Cover Calls $2,188.41

Inserting a 6-month self-assessment, my performance YTD is quite dismal. Although I can certainly claim a profit, not sure if I can claim a paycheck. Cover-Calls options on stocks that I already own is the only positive. But my overall performance with Options Spreads is negative. However, I will add the caveat that the majority of my new Spread rules were only defined and implemented over the past few weeks. I thoroughly expect (hope) a significant improvement going forward…

Last Month (June)

Net Profit: $741.92 (Final)
Started 15 trades: 6 Vertical Bull Put Spreads, 9 Cover Calls (all trades closed)

Max $$$ Available for Spreads (Max Risk): $3,960
Profit from Spreads: $318.32
ROC from Spreads (target = 6.0%): 6.7% 

Profit from Cover Calls: $423.60

Note about June’s ‘Max $$$ Available for Spreads’: I did not really solidify what this should be until the past couple of weeks. I know June’s actual $$$ risk was more than the ‘now defined’ $3,960.

MTD (July)

Net Profit: $508.20
Started 13 trades: 8 Vertical Bull Put Spread, 5 Cover Call

Current at risk $$$ for Spreads (Max: $3,675): $3,887 (98% of max risk)
Profit from Spreads: $313.40
ROC from Spreads (target = 6.0%):8.1%

Profit from Cover Calls: $194.8

Schedule for this Week

Monday:

• Review and tweak Trend-Channels for all stocks in the watch list.
• Confirm that the target expiration date for all options trades is 25 days out (4 weeks).
• By 10 AM, stage possible trades for all watch list stocks (but don’t trade anything).
• Watch 1 Webcast or take one online mini-course to be completed by Friday.  

Tuesday:

• Review how yesterday’s staged trades moved. Adjust premiums to take advantage of movement (these are “long-shots”). 
• Submit a couple of Vertical Bull Put Spreads, but keep a close watch. If one takes, cancel the others (we just want one new active trade). 

Wednesday:

• If no “long-shot” spreads were accepted yesterday, then readjust premium to ATM prices and resubmit. We want only 1 vertical spread accepted so keep watch.
• Recheck/tweak trend-channels. 

Thursday:

• Reset target expiration date to 29 days out (the following Friday). 
• By 10 AM, stage possible trades for all watch list stocks. 
• Submit a couple of Vertical Bull Put Spreads, but keep a close watch. If one takes, cancel all others. 

Friday:

• Same as Wednesday.
• Update trading journal (this blog) and update it to the Internet by end of the day.
• Make sure you watched a webcast.

Trades Ended 7/19/19

AMD: 36cc – 4 contracts – Open 6/26 – Closed 7/16 – Profit = $10.10
This contract was set to expire on 7/19. But after several great up-days, the price of AMD got awful close to ITM.

What started out as a Head Room (HR) of 20.5% at the opening on July 16, that percentage dropped to 4.4% on 7/16 (AMD’s stock value raised more than 15% in just 3 weeks – YEAH!!!). But now at 4.4% HR, this is much less than 1/2 of the original HR to trigger a sell alert (see “Cover Calls Exit Strategies”). I still had 4 days to go until expiration.

Additionally, during that morning of 7/16, the premium price shot up above my Break-Even price. It was becoming apparent that only one or two more minor-up days I may lose the stock to an assignment. (Which is a pain but I have a recovery plan already laid out.)

During that day, the price of AMD started to pull back and the premiums dropped to the point that I could close the contract early and still make a little profit. With 4 days left in the trade, I decided to take the smaller profit and cut-bait.

SPY: 280p/270p Put – 1 contracts – Open 6/28 – Closed 7/19 – Profit = $70.05
I closed the short-leg 7/19 because I had exceeded 85% of the premium collected plus since the price of the shot leg was now 5 cents I could buy-to-close that leg for just $5.00 and not pay a trade fee. The long-leg is still active but that is risk-free.

Additionally, prior to closing this short leg, I had $3,814 already at risk from existing spread trades. Since I now have a self-imposed maximum of $3,960 at risk at any given time, by closing this short-leg early I was also able to free up $918 that I can reuse for other spread trades sooner than later.

Trades Still Cooking

Current dollars at risk for Spreads (max $3,960): $3,887 (98% of max risk)

QQQ: $183p/$173p – 1 contract – Open 7/3 – Expires 7/26 – Net Premium = $54.05
When Opened: Probability of OTM = 82.0%, ROC = 5.8%, Max Risk = $940.00  
Now: Probability OTM = 98.5%
The threshold rule of ROC being >= 7.5% per contract was not defined when I made this trade. With an ROC of 5.5% this trade started out as a loser (going against my 6.0% ROC for the month). Even though it will end up a winner, it should not have been made.

Yesterday I have received a “Sell Flag” on this contract. The profit is now 93% of the premium and per my exit rule, I should consider closing this trade early. Additionally, the price to buy back the short-leg is only $.03, less than the $.05 threshold that Ameritrade would charge a trading fee. But with only 3 days left until expiration and the probability of OTM is > 98% certainty that it will expire worthless, I’ll just wait and let it expire and keep the $3.00 to buy a beer.

DIA: $257p/$247.5p – 1 contracts – Open 7/5 – Expires 8/2 – Net Premium = $56.05
When Opened: Probability of OTM = 81.9%, ROC = 6.3%, Max Risk = $888
Now: Probability OTM = 95.3%
This has the same basic error as the QQQ trade above. The ROC of 6.3% is less than the 7.5% minimum, plus when combining this trade’s risk of $888 with the trade risk of $940 from the QQQ trade I allocated $1,828 (nearly half) of my maximum allowed $$$ risk in one week. This made it hard to evenly spread these trades throughout the month. And again, even though this trade will end as a winner, it should not have been made.

CRON $17.5cc – 3 contracts – Open 7/9 – Expires 8/2 – Net Premium = $38.55
When Opened: Probability of OTM = 85.6%. Head Room = 13.0%
Now: Probability of OTM = 96.2%, Head Room = 18.2%
It’s currently at 80% of profit. Once it hit the 85% mark then I should get a “Sell” signal.

IWM: $150p/$148p – 2 contract – Open 7/10 – Expires 8/2 – Net Premium = $41.05
When Opened: Probability of OTM = 78.4%, ROC = 11.7%, Max Risk = $352
Now: Probability OTM = 85,8%
By this trade, I learned the lesson of ROC and Max Trade Risk limits.
The Probability of OTM was greater than 80% when I submitted the trade. IWM’s price fell since and when the trade was accepted OTM was now 78.4%.

QQQ: $184p/$182p – 2 contract – Open 7/11 – Expires 8/9 – Net Premium = $39.05
When Opened: Probability of OTM = 80.6%, ROC = 11.0%, Max Risk = $354
Now: Probability OTM = 88.6%

QQQ: $185p/$183p – 2 contract – Open 7/16 – Expires 8/9 – Net Premium = $31.05
When Opened: Probability of OTM = 83.0%, ROC = 8.6%, Max Risk = $362
Now: Probability OTM = 86.2%

IWM: $147p/$145p – 2 contract – Open 7/19 – Expires 8/16 – Net Premium = $33.05
When Opened: Probability of OTM = 81.8%, ROC = 9.2%, Max Risk = $360
Now: Probability OTM = 87.5%

AMD $41cc – 2 contracts – Open 7/19 – Expires 8/9 – Net Premium = $30.05
When Opened: Probability of OTM = 93.6%. Head Room = 24.7%
Now: Probability of OTM = 92.5%, Head Room = 21.8%
Note: AMD is having their conference call 7/30. Conference calls always creates an unexpected twist on the price of the stock. I usually try to avoid selling a cover-call when the quarterly conference call happens prior the expiration date. I need to keep a close eye on this for the next few days.

New Trades for This Week

This week’s Schedule and goals:

• Make 2 – 3 Vertical Bull Put Spreads by Friday
  • All trades must be >= 7.5% ROC
  • All short-legs must exceed 80% OTM probability
  • 9-day SMA must be higher than the 50-Day SMA (using 30-Day Time Frame)
  • Max trade risk:
    • Per Trade = $495,
    • Per week = $990,
    • At any point = $3,960
• 1 1-month cover call by Friday
  • All trades must exceed 90% OTM probability (unless I’m looking to unload the stock).
  • Strike price must be above the trend-channel at the expiration date.
  • Headroom must exceed 10% (this rule needs to be refined)
  • Premium received must be more than the assignment fee.

ACB $7.5cc – 3 contracts – Open 7/22 – Expires 8/16 – Net Premium = $20.55
When Opened: Probability of OTM = 81.4%. HeadRoom = 11.9%
Now: Probability of OTM = 85.7%, Head Room = 14.5%

The strike price I chose is well above the down-trending channel. My rule of selling a cover-call on a stock I want to keep must have an OTM probability of greater than 90% was marginally waved in order to start getting some money back on this.

Aurora Cannabis (ACB) is a Pot-Stock that I purchased just prior to Canada legalizing recreational marijuana. Pot-Stocks across the board went wild during that debate and I jumped into the fever of it all. To say the least, I lost my shirt on this stock but luckily I did not invest more than $1,000, to begin with.

Although this stock violates my “Trade-the-Trend” rule by trending down for nearly 6 months, I still want to keep it (see Epilogue). My investment in ACB is now only worth a couple of hundred dollars, so it won’t make or break anything if I sell or hold.

QQQ: $184p/$181p – 1 contract – Open 7/23 – Expires 8/16 – Net Premium = $23.05
When Opened: Probability of OTM = 82.5%, ROC = 8.5%, Max Risk = $271
Now: Probability OTM = 86.0%

QQQ spend a couple of days moving sideways, but still following the trend channel for the past 2 months. The 9-day SMA is still above the 50-day SMA so the price trend is maintaining an upward momentum.

DIA: $263p/$261p – 2 contract – Open 7/25 – Expires 8/16 – Net Premium = $33.05
When Opened: Probability of OTM = 82.0%, ROC = 9.2%, Max Risk = $360
Now: Probability OTM = 81.9%

DIA like QQQ also spend a couple of days moving sideways, but still following the trend channel for the past 2 months. The 9-day SMA and 50-day SMA appear to be right on top of each other so the immediate trend is speculative.

When I submitted this trade, I was looking at a 180-day Time Frame chart, which had the 9-Day SMA much higher than the 50-day due to the chart scale size. When creating the chart for this blog, I changed it to a 90-Day Time Frame which changed the scale showing a tighter resolution. A new rule will be to use the 90-day Time Frame chart to confirm SMAs.

The trend-channel for DIA is still marching up and the price averages are staying inside the channel. The Strike price has a high probability of expiring OTM. So at this point, I don’t think I screwed up that much.

Epilogue

I want to go off on a tangent concerning Pot-Stocks…

It is inevitable that recreational marijuana will become legal in the US. Various permutations of Pot are already legal is some states and there is a lot of pressure on the Feds to go all the way. But from my perspective, nothing like this is going to happen in the current Congress.

Early in 2018, I got suckered into buying a couple of different pot stocks as the legalization debate in Canada fueled a frenzy of different penny stocks. I bought Cronos Group Inc. (CRON), Aurora Cannabis (ACB), Medical Marijuana (MJNA) and GreenGro Technologies (GRNH). I knew these were hugely speculative and I did not but more than $3,000 is a lot of them. Today, my inventory of pot stocks is worth less than a third of my original investment.

Even though all these investments have trended down, I am still holding onto them for various reasons. One, selling them now won’t really do much good anywhere else. Two, they are my high-risk speculation stocks. Everyone should have some just in case you do roll snake-eyes 3 times in a row. And three, when Pot is legalized maybe one of these will catch fire – thinking positive.

However, when marijuana is legalized in the US, all of these companies will either be bought by conglomerations for dimes on the dollar or will be ignored into oblivion. Only companies with existing distribution channels for these kinds of products are going to be the marginal winners of the legalized Pot (such as pharmaceuticals, tobacco, alcohol, etc.).

So, above when I sold a cover-call for ACB or CRON, I really do want to keep the shares but will not be heartbroken if I lose them. If great news on the marijuana front causes these cover-call options to skyrockets into ITM and get assigned, I know the lack of news afterward will cause them to crash back down and I can repurchase (if I want). That is the way pot stock prices have oscillated over the past couple of years.

Cheers…