Options Trading Newsletter - Issue #32
Houston we have a problem.... So what? What's the Big Deal?
HOUSTON WE HAVE A PROBLEM...
Many people think that a problem is not a problem and shove it under the rag. Can you imagine if you continue to do this what will happen under the rag over the years? Filled with filth of course.
By then it becomes a bigger problem and that problem may result in a life or death problem....kind of like "Houston We Have A Problem" type of problem....It's definitely going to be a big deal when this statement is out!
To avoid this, accept responsibility that you need to be accountable to yourself for every action you take in life. You will be the source and cause of every decision you make. If you run away from a problem or commitment you have denied yourself with finding a solution and fulfilling your commitment.
So what do we need to do then if you encounter a problem? The solution is actually very simple if you break it up in chunks.
#1 - Acknowledge the Problem. Never go into a denial mode or become an ostrich. The problem will not go away.
#2 - Find out what commitment you have to have resulted in this becoming a problem. If there is no commitment there will be no problem, get it? For example you are committed to lose weight, you continuing to be obese then becomes the problem.
#3 - Evaluate what are your possible solutions. Not only one but find all possibilities that can solve your problems and you need to do this quickly. Otherwise, it will lead to procrastination and in goes your problem under the rug again.
#4 - Work on something that is consistent to your commitment. Focus on that solution you found in #3. Example exercising is consistent to your commitment to lose weight. Then go exercise to lose weight.
If you understand what I shared above and accept the fact that it is only you and you alone that needs to accept responsibility for your actions and your successes or failures, then you will continually grow out of all your problems and achieve a more fulfilling life.
MARKET UPDATE
SPX - Resistance Again?
Well here we go again. Just like the previous bounce, it seems that it is not so easy way up for the SPX. On Thursday SPX shot pass EMA50 but closed below it. Then on Friday, it tried once again but even failed more misserably closing even further below EMA50.
The non-farm payroll of lower than expected job creation shows that economy recovery is not as what is expected. For the market, it seems somewhat good news as that may result in the Fed continuing its financial assistance on the pandemic recovery and may not start hike rates so soon. Anyway, the market may have expected this as it caused little upstir and we are still in the woodshed end of Friday.
The price action may even hit a lower high if it continues to go down next week. Our trading plan are still same, thread lightly and we continue to take profit once it hits 50% mark on our positions last week to reduce risk.
At the same time, we also entered a bear put spread on the eMini S&P Futures (/ES) before market close in case market drops off another few point to neutralise some potential losses that may come if market turns bad or continue to go sideways.
NDX
NDX closed Friday lower by 76 points to 14820. The early week strong rebounce has failed to even touch EMA50 and lost its steam down. Even when the bad payroll report on Friday did not spur anything much on NDX. Many of the NDX component stocks did not move much by Friday.
The only thing which was up was the China counters with BABA leading the way. As we have pointed out last week BABA was looking to tilt its head up above 148 and in fact whole of last week, it has gone up by 17 points and closed at 161. Besides the fact that the reports showing Charlie Munger had pumped in another USD44m into Baba at an average price of 148 which had led many investors jumping in on Tuesday, the recovery of the Hang Seng Index last week has also eased up the negative sentiment on China stocks, leading many other counters up for the week. Bidu, Tencent, Meituan, JD and SE were all winners last week.
CSP PORTFOLIO PERFORMANCE (UP 17.5% 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)
This week we see the portfolio return go higher mainly coming through the improvement in the assigned positions of the China stocks. On the income part, we continue to add on more positions to replace the expiring positions in 15 Oct.
Out of the 11 expiring positions, only 3 were left ITM which we will probably roll forward for more premiums by mid of next week. Just like the positions on KWEB which has gone deep in the money, we were rolling it several times and each generating around 0.5% per month which worked out to 2% per month, even though it is in a loss position (ie. ITM).
If you follow our portfolio, you will see over the long run the volatility of the returns tend to always snap back to the 2% return target we have. The reason being, regardless of where the market goes and how our portfolio performs, we are continually doing the same thing every month, which is to generate returns by selling puts at a 2% per month return target.
The portfolio fluctuations comes from 2 other factors:-
#1 - The current trade price volatility
#2 - The assigned stocks price volatility
For #1 we are not concerned of the in between volatility as our target is for the trade to expire worthless at the expiry date. In case it doesn't we make a repair and collect more premiums during the next period.
#2 - In the long run we expect that the stock price to recover to the assigned price and as such the temporary unrealised loss will eventually be recovered to normalise the portfolio returns back to target. That's why we trade on only strong stocks because temporary price drop will eventually be recovered over time.
MECHANICAL TRADING
Many people trade using emotions and trade patterns depends on what is happening around the market. As a result, the portfolio may at times be profitable and at times may not be profitable.
Also, a decision of which counter to trade and which not to trade may also influenced by what is trending at that time.
As a long term trader, we would need to try to distinct ourselves from these type of trading and move into what we call mechanical trading. Trading that are influenced by only standard option measurements rather than intangible measurement on a particular stock or market trends/news. The reason we move into this type of trading is to create consistency in returns.
Examples of standard option measurements would be things like, Implied Volatility (IV), IV Rank, Delta, Standard Deviation/Expected Move. When we move into mechanical trading, trade decision purely become rule entries and our outcomes goes into being mathematical outcomes which can be planned with a targeted probability.
One example would be trading within expected move. We use the SPX as an example because SPX tends to represent market and may not be so prone to noises. Below is an example of the rolling 1 Standard Deviation move measured from June to August.
If we backtest such mechanical trading say using an Iron Condor strategy over the past 4 months, we see that all the trades would yield positive results. Because trade entry using 1 SD move has a 68.2% probability of winning and if we consistently do a trade entry at a preset timing the results will be even more predictable. Of course, there may be unexpected things which might influence the 1 SD movements which is volatility. But once we understand which factor drives the parameter/rule set which we use to trade, we will be able to manage it in case that factor is distorted from norm. For example VIX will influence the 1SD of SPX.
Below is the results of the backtesting we applied on SPX on 1 SD Iron Condors at different entry intervals. You will see that by entering mechanical trades at a fixed entry and exit timeframe, all the trades 4 trades entered in June-September will yield positive results.
In the next months, we will put up a mechanical trade process on SPX to run a live strategy and see how it will perform over time. We will share the results later.
FREE iPhone 13 Challenge
It has been around two weeks since we started our iP 13 challenge. The profit performance is quite encouraging with the first trade already at 53% profit level in just 2 weeks while Trade 2 is catching up at 34% in just a week in.
Trade 1 - Entry 28 Sept - Strategy Jade Lizzard 53% up!
If you look at the AAPL chart below, the shaded area is the price profit range from 120 to 148. The trade will be challenged more on the upside but because the credit received from the lower strike of 120 is more than the max loss of the upper bear call spread, there is no risk even if the price shoots above this level. We will not lose in the trade but the profit will go down significantly. We will trade manage or exit when the upper strikes starts to be challenged.
Jade Lizzard is a high probability strategy with more than 90% POP
Trade 2 - Entry 4 Oct - Strategy Bull Put Spread 34% up!
A Bull Put Spread is a bullish strategy using a vertical put spread. Max win and max loss is defined upfront.
As AAPL has gone down significantly from its high, further downside risk may be limited. In addition, we are putting our short strike at a level close to the 200 EMA and the long strike below 200 EMA which is quite a safe zone.
We will use both a quick upward reversal and time to our advantage as this could accelerate the premium decay. In 5 days from trade entry, we are already up 34% on profit for the trade. If the price recovery of AAPL continues into next week, we would look into exiting the trade between 50-70% return on investment.
Bull Put Spread is a defined risk bullish strategy
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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 15 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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