Monday, August 11, 2014

win and lose at the same time to win!

Spread 'em!

If you don't know about options then I have to say I feel bad for you.  I'm trading on the options market to support my family on a paltry capital pool and I'm managing to survive.  Not completely unscathed, but I'm holding my own most of the time.

My previous post was about the short-put.  Which is awesome until the markets explode and you're tired of waiting rolling rolling rolling waiting for it to recover.

How do you fix that?  The spread, more specifically for me, the bull-put-spread.  It costs a bit but it completely controls your maximum loss.  (Yes yes, I know, you can avoid losses by rolling, but rolling will only work if you expect the company or index to resume an upward trajectory.  Indexes will of course but companies not always.)

So you do the same with the short put, but then have a LONG put a dollar or five below it, both with the same expiry.  It costs you to buy the long put, but it saves your posterior if things go south.

Being that this is the stock market, things WILL go south and FAST.  Every 3-14 years there's a big implosion.

How to swing it?  If you don't want to be up and down thousands of dollars every day chowing down on a steady diet of cigarettes and antacid tablets,  then find some big companies that you like and expect to go up.

Here's what I did with an Apple trade last week:

BUY Jan 16, 2015 PUTs $80 strike. (Cost me $150 per contract)
SELL Jan 16, 2015 PUTs $85 strike. (Netted me $258 per contract)

This got me $108 per contract in my pocket up front.

So what happens next?

If apple goes up I win.
If apple goes sideways I win
If apple goes down to $85.01 I win
If apple goes down to $84 I break even
If apple falls more than that I'll lose to a maximum of $500-108 = $392 per contract.

Loss = maximum risk - premiums received on the trade.

If apple falls in between 80-84, I could sell off the $80 put and reclaim a bit of cash and then take the assignment of shares @ $85.  So I would be down, and would need apple to go back above $84 to break even.

Since I like apple I'd be happy with this.  As always, I live tweet my trades on twitter.  (Ask for the account name)  Questions and comments, ask away @blerghhh on twitter.

Stay hungry my friends!