Options Trading Newsletter - Issue #38
WHAT YOU DO TODAY WILL RESULT IN WHERE YOU WILL BE IN THE FUTURE
It is always possible to design your own future
SOWING SEEDS FOR YOUR FUTURE
Yesterday, I made a visit to the nursery to buy some fertiliser for my plants. I told the shop owner I needed flowering fertiliser and she recommended me 2 types which I should use alternately. So I figured, the plants also need a diversity of nutrients as not all nutrients may work well if continually feeding them the same. The same for us, not everything may work for us at the same time, some work better during certain time and some may not even work, even though in the past it has.
For traders, diversity of strategy is one point we need to take care of. We need to have an arsenal of different strategy to deploy on our portfolio. Even on the same stock, we cannot use the same strategy the whole year round. Example, when the stock is oversold, perhaps a vertical bull put spread will work well, or if the stock is trading sideway, then an Iron Condor or Strangle might work and if the stock is overbought, perhaps a bear call spread. With this, we can work also with a pool of stocks where we are very familiar and knows when it will throw a tantrum (sideway), get a cold (bearish), or become super hyper (bullish) and feed it with the right trading strategy.
The second thing that happened during my visit to the nursery is the more relevant topic here.
"Sowing the seed for your future"
The shop owner asked me if I wanted to plant some lettuce for the coming Chinese New Year. I asked, is it easy to plant and how big it will grow? She said just put 3 seed in each pot and the lettuce will grow to the size like both your palm in 2-3 months time. Just give some sun and water it regularly. Ok, it seems simple enough and I had not planted this vegetable before, apart from tomatoes. And planting your own lettuce for Chinese New Year seems interesting. So I bought a pack of seedling and a pack of vegetable soil and headed back home. The seedlings, I paid like 4 bucks.
Upon reaching home, I put the soil in 5 planter bags and then opened the lettuce seedling package and to my surprise, the packet contained maybe around 200+ seeds. Remember the owner said put 3 seeds in one pot and you will have lettuce when Chinese New Year comes. Hey, I thought it was for personal consumption and did not imagine to have a supply of lettuce for the next 20 years Chinese New Year.
So what's the relevance here? Sometimes things we do now, not only have immediate benefits but will also give us rewards in the long run. Also, we might be surprised that things which we invest a small amount (eg. lettuce seedling) can have such big potentials. Just like when I started to learn trading, all I wanted was just to generate an additional $1000 a month, little did I know how much more I can get with the skills I learnt. All you need to do is to nurture the things you sow and you will reap the rewards many many years to come.
Like I always say... "Train, Trade and Thrive"
MARKET UPDATE
SPX
Although SPX inched up last week, the uptrend seems a bit constipated as it is still facing a bit resistance to breach the previous high of 4718. Everyone's hope for the Santa Rally confirmation depends if this level is breached and confirmed with a bullish pinbar to have more certainty.
The funny thing the market does is when everyone expects something, it will try to do the opposite first before going to the right direction. More experience traders would know how to see the relevant signals if the uptrend is going to continue or a bull trap emerges to scheme the happy year end Xmas shoppers.
We will continue to watch what price action pattern emerges to decide how to play the market for the final 2 months of 2021.
NDX
NDX seems very bullish with a good uptrend pattern breaching previous ATH and closed at 16574, 90 points up on Friday. The new ATH was also reached at 16625.
The talk last week was on AAPL which went up $10 (7%) within a week. This came after AAPL came out to say the development of a new Apple EV could come out as fast as 2025. The market really loves EV and would give a lot to chase for all stocks EV. Rivian (RIVN) had a market cap of $110 billion bigger than General Motors and Ford.
And guess what? RIVN only delivered less than 200 cars in October before the listing and market gave it a 100+ billion valuation. Tesla produced probably 800k cars till September this year and market gave it a 1 trillion valuation.
The thing is you can even produce 200 cars at $200 million, give it out for free and market buys in for $110 billion. It is a crazy world. And in 10 years time, maybe half the cars in the world would be an EV and the market would be saturated with so many choice and I wonder where those hyped up valuations will be? However attractive it may be for now, I would not YOLO my retirement on it.
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CSP PORTFOLIO PERFORMANCE (UP 19.8%YTD)
(Portfolio performance is on MYstylework's Portfolio and is not a recommendation to buy and for informational purposes only. You are adviced to seek your own professional adviser's views and perform own due diligence when evaluating any stock, options or investment trades)
We normally don't monitor our portfolio weekly. We just do this because the newsletter is issued weekly and we make an update of the portfolio returns. Because if you notice, the volatility of the portfolio can be quite big between weeks, around 7 to 10% at times. But of course, it comes back after the downs as these are mainly timing as some positions were rolled and the following week, it goes OTM again.
The only longer downs are sometimes on the assigned stocks where we need a bit more time for them to recover back to the assigned strikes. Currently, most of these stocks are on China counters. But overall, we are not so worried as these are fundamentally strong stocks. So if you trade this Income Strategy using fundamentally strong stocks, even if the portfolio is down because of the unrealised losses from the stock value, you still can sleep sound at night. If you trade more speculative stocks purely because it gives high premiums, then sizing is important as even if you have a bad one, the overall portfolio would not be that hurt.
November month expiry, we saw 9 positions expired worthless. We have traded a bit more weeklies nowdays especially on KWEB and have 8 which we rolled and will expire next week. because of the high IV of KWEB, premiums we get is normally around 2% a week on initial entry and if we are rolling it, we will get another 0.5%. If price does not move much, we would get 8% a month, but of course that would be best scenario and KWEB has been a bit volatile lately.
The more speculative trades on RIOT has also sizzled down as BTC has dropped from its high. We will wait for things to stabilize a bit before we make reentries for this speculative counter. Remember on sizing as this is speculative and don't get in if you cannot lose the capital and go for more safe counters. MARA and HUT we are not touching as these are even more volatile and we cannot get a high enough safety margin for the strikes.
HIGH POP Vs ROI
In trading Options, the rules are all defined upfront.
The gratifications and the risk and rewards are all given. If you want to be paid with high certainty you are bound to take more risk. The higher risk you take, the more people are willing to pay you. That's the reason for undefined trades (ie those with unlimited risk) you will be paid the most and you will also get to chose which probability of profit (POP) on your trades. You can even choose to start with a 90% POP or even 99%, but of course the higher the POP the lesser you will be paid.
As premium sellers, we decide what kind of risk we are willing to take against the premium received. This is decided upfront on the trade as our gains are always capped, so the risk to return ratios are an important element to know, so that we do not take more than required risk.
I generally work on this as a benchmark ROI target to achieve for different type of credit trades on 30-45 days expiry period.
#1 Cash Secured Puts - 2% [Delta 20-30 - POP 70-80%]
#2 Vertical Spreads - 20-25% [Delta 20-30 - POP 70-80%]
#3 Iron Condors - 33% [Delta 20-30 - POP 55-60%]
If you work along this lines, you will ensure that the risk to reward are at an acceptable POP. The higher the returns the lower the POP. That's why you will see that the highest POP we can get comes out from Cash Secured Puts, moving into vertical spreads and then iron condors.
FREE iPhone 13 Challenge
We entered an Iron Condor for Trade 4 and last week AAPL rallied +10 because some smart executive came out yapping on Electric Vehicle project just because RIVIAN was all on the news and AAPL could not keep their mouth shut.
Iron Condor is a neutral strategy and we would love if the price stay put. Although, when we entered the trade we already gave a bigger buffer for the stock to go up, we did not expect that AAPL would move up 2 standard deviation in a week.
So the trade started to get into negative territory because the Call side is getting tested, or now slightly ITM.
We do not normally do adjustments for Iron Condor, but this time round, I give it as a sudden EV hype and people starts to jump in with all the hoo hah on EV in the market. Rivian has started loosing steam last week as the stock dropped from its high of 179 to 128 now. If it drops further during this week, then it will fizzle AAPL down a bit.
The rolling up of the Bull Put Spread of the bullish part of the Iron Condor is to protect the trade in case the price goes further up. We got an additional credit of $81 but the downside is we now have a narrower profit window of just between 155 to 160 compared to 145 to 160 before the rolling. I do not expect AAPL to sizzle down by 10 but probably 5 would be possible if the SPX is in red for the week, it will surely go there and we can then exit with a smaller profit sooner.
For those who have not registered for the iPhone 13 Challenge, the registration link is here [Register Here]. We will share the trade entries when we do a trade and also explain in detail the executed strategy in a video at the Challenge Members Area.
TRADERS TALK
Did you hear last week's Traders Talk?
I was speaking on why you should not invest in property but instead learn how to buy property. Is there a difference, yes for sure!!! Listen to Traders Talk Series 23 if you have not done so. View Past Traders Talk
I have even got the highlights here for a sneak peak...Sneak Peak Traders Talk
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DISCLOSURES
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf
MYstyework is an Online Financial Literacy Educator and materials provided is solely by MYstylework and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. MYstylework, through its contents, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. MYstylework is not in the business of transacting securities trades or an investment adviser.
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