I play poker and trade options, seeking edges from study, reflection and analytics.

Restart, Credit Spreads and NFLX

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This site was started based on a trading challenge, three figures to seven. Crazy, right? Probably.

I still think it’s possible as originally written, but this restart shifts “three figures” from making all in bets with a $500 account, to risking one to five percent per trade with $10,000. Past posts illustrate the access, opportunity and emotional hurdles that accompany a low capital level.

Adjusting my personal assets profile allowed the upward revision. (Check out the blog.) Now, I’m more focused on personal development, overall productivity and getting in the habit of making solid, winning trades.

Part of the process is becoming less encumbered with writing up every trade -- the evolution of my strategy, toward making more frequent, higher probability trades, won’t allow it anyway.

Keeping a journal then publishing a weekly recap should improve my rhythm, routine and preparation without sacrificing accountability and personal improvement. As a reader/ subscriber to this page, I think I’d prefer that cadence too.

Elements may include:

  • Weekly P/L
  • Market thesis
  • Trading framework 
  • Target strategies (e.g. credit spreads and single leg options)
  • Summary of each trade
  • Style and strategy discussion
  • Analytics discussion
  • Ideas and setup tracking

Content should become more comprehensive and sophisticated as my process matures and trading generates consistent profit.

For the week ending January 12th, 2018

Starting/ ending capital, including open trades: $10,000.03/ $9,718.48 ($281.55)

I did not develop a market thesis going into this week.

I did not have a clear trading framework going into this week, but I exited it with one... 

I've been refining copious notes from the last ~18 months and developing proprietary analytics to automate idea generation and trade analysis. I’ve been brushing up on options trading generally and adding new strategies, using resources like Option Alpha’s education courses and podcast.

This work, brought into focus by Option Alpha’s 33rd podcast with Sarah Potter from shecantrade.com, produced this current iteration of my trading framework:

Prep Sunday and Monday. Trade Tuesday through Thursday and sometimes Friday. 
Regularly curate a list of trading securities based on price, volume, implied volatility and (option) open interest -- trading where other people are trading has several positive implications, especially for options traders.
Focus on weekly options. Use weekly and daily charts to identify trend and time trades using the hourly chart (i.e. counter trend movement). Primary technicals include MAs, MACD and RSI with an eye on support and fibonacci levels and volume.
Options strategies include credit spreads (vertical when directionally biased, condors/ butterflies when neutral and markets are volatile, and for hedging), debit spreads (when following a trend and the trade is choppy) and single legs (when following a trend and the trade is clean or higher highs and higher lows).
A typical trade opens with a credit spread, at a predetermined entry point, risking ~2% of account -- this position sets a directional assumption, provides context for a potential single leg play and helps develop feel for how the underlying security is moving. The short strike should be calculated ~30% chance of being in the money (ITM) at expiration. Immediately submit an exit order to capture ~60% of available profit. If the short strike’s ITM% moves into the 50 range, create an iron butterfly to reduce risk.
If the credit spread is open, unhedged, to trade the longer-term trend’s resumption, open a single leg trade on a confirmed retest of the entry point mentioned above, risking ~2% of account. Close the trade or spread out late in the week, in high-theta-risk situations, to reduce profit risk or if momentum wanes on the hourly chart. Single leg strikes should be around ~50% ITM. (More experience will help me determine stop loss strategies, but it’s logical to close the position if I’m moving to butterfly the short spread.)

I love this tweet from original turtle Jerry Parker. There’s truth there, but I think technology enables us to do much more than we used to before getting emotionally attached to a trade.

Want a surefire way to jumpstart your framework and strategy work? Open a fresh new account, with a relatively large sum, and have your first trade reduce its value...

Based on my evolving trade analytics and learning about ITM% on thinkorswim, I opened a bear call spread on NFLX on Tuesday, 01/09/18 a few minutes before 4pm.

I took in a $125 credit for selling 1 Jan 19th 212.5/ 217.5 call spread, risking 3.75% of account. The short strike ITM% was ~36, and I took in just 25% of the spread’s value. Experience may tell me that “proper pricing” is rare for short-duration spreads, Kirk at Option Alpha says this was a poorly priced trade.

The daily chart of NFLX on January 9th. A decline in the MACD Histogram and RSI did not foreshadow sideways or downward action in the stock.

The daily chart of NFLX on January 9th. A decline in the MACD Histogram and RSI did not foreshadow sideways or downward action in the stock.

Because I’ve focused on daily GOOGLEFINANCE data to build analytics, I forgot to look at the slower and faster charts to confirm my directional assumptions. Consequently, I missed the bullish weekly momentum that would have kept me out of this trade.

The position quickly moved against me, but I didn’t have a plan for adjusting the trade. Of course, I cleaned this up in the above strategy outline.

To do’s:

  • Work on this week’s market thesis, trading framework and target strategies
  • Identify a handful of setups to watch
  • Create a Google Sheet that pulls weekly and daily stock data
  • Think through optimal weekly+daily technical setups
  • Think through sheet setup for dynamic stock and ETF lists
  • Blog “Trading Three Figures - Take Three”

Live Testing, FSLR and Takeaways

#024 BIDU Puts Expired