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

Good Setups, Tactical Improvement

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Stats for the week ending January 19th:

  • Account value: ~$9,307 (~$311) -3.2%
  • Change YTD: (~$693) -6.9%
  • Opening trades: 6
  • Closing trades: 1
  • Open positions: 0

The above values are approximate; I'm unsure how the long/ short assignments, from expired ITM spreads, will settle tomorrow.

This week exposed knowledge gaps, in hedging and trade management, which I've addressed. I learned the following:

  • Be patient with entries
  • Don't hedge so quickly
  • Don't hedge so aggressively
  • How to adjust a hedge when the market continues to go against
  • Just as you can construct an option strategy in parts, you can close it in parts (i.e. an iron butterfly's ITM leg) to avoid exercises and assignments

Related resources: (video) Adjusting Options Trades That Go Bad, (podcasts) How We Cut the Loss... and Managing Inverted Options Positions

I updated my trading framework. The last iteration can be found here.

Prep Sunday and Monday -- trading weekly options is about the preparation, which begets confidence and adaptability (in scenarios, setups, levels, etc.) in the faster decision-making environment. Checklist below.

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).

Open positions Tuesday and Wednesday, sometimes Thursday and less frequently on Friday.

Generally, credit spreads are opened based on levels while debit positions should be opened in the day's last half hour.

No debit positions unless the week’s P/L is positive (i.e. a credit spread must be on the books and working).

Adjust/ hedge Thursday. Generally, a trade should be on overnight before adjusting.

Monitor profitable positions and close ITM legs on Friday.

An ideal 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.

If the credit spread is open, unhedged, to trade the longer-term trend’s resumption, open a debit spread or single leg strategy following a confirmed retest of the entry point mentioned above, risking ~2% of account. Based on the schedule above, exit the trade or hedge, especially in high-negative-theta situations, to reduce profit risk or if momentum wanes on the hourly chart. The long strike should be ~50% ITM.

Related resources: (article) Why End of Day Trading is Superior

I refined my process with this prep checklist:

  • Market thesis
    • Scenario 1
    • Scenario 2
  • Update Google and Excel sheets’ stocks list
  • Mark technicals and sensitivity
  • Stock technicals and sensitivity
  • ID ETF/ XYZ targets (for each scenario)
    • Charts deep-dive (technicals, harmonics, patterns and candlesticks) in Tradingview and tos (clear all drawings)
    • Get familiar with sentiment (next) and fundamental story (last)
  • Set target levels (with an eye on volume and open interest to confirm)
  • IV and option strategy
  • Take notes, check notes

I approached this week cautiously bullish, largely based on SPY technicals. As I'm still building my process and analytics, I look forward to putting more time into this section going forward.

Apparently, I was anxious to get positions on the books. In the 10 o'clock hour Tuesday, I opened a FSLR 68.5/67 bull put spread and an OSTK 79/82 bear call spread. The latter trade was directionally balancing, targeting Overstock's off-the-charts volatility and based on OSTK's technical weakness and Bitcoin's correlation/ bearishness.

Considering the moving averages on the OSTK hourly chart (below right), it would have been prudent to wait for the $79 level before initiating the position. As the stock moved toward that level, my trading framework forced me to hedge the position with a 76/79 bear put spread, creating an iron butterfly.

 OSTK chart array. What high volatility looks like.

OSTK chart array. What high volatility looks like.

Concurrently, FSLR forced me to put on a similar hedge. The impatient entries and hurried hedges produced total losses with respect to net margin risk. Had I not put on the hedging trades, the initial credit spreads, despite the clumsy entries, would have expired worthless.

Without knowing how to manage the losing trades, I did nothing on Wednesday. Thursday, I tried to trade my way back to the black. In the 10 o'clock hour, I sold an NVDA put spread then bought/ sold (stopped out for a loss) an NVDA call spread. The short put spread expired worthless, but the debit call spread was another clumsy entry that could have paid off.

 Filled trades to date. Setting the stage for trade analytics.

Filled trades to date. Setting the stage for trade analytics.

Not knowing to close the in-the-money legs of the FSLR and OSTK iron butterflies, the whole positions were left to be exercised which will surely cost extra money.

Preparation, levels and patience. Quick, aggressive hedging. Skillful trade/ hedge management. Profits before debits. End of day trading. All mistakes made this week and addressed in this review.

Hoping to write more about process, analytics building, scheduling and profits next time!

Live Testing, FSLR and Takeaways