Sunday, May 25, 2008

Update on Open Trades Expiring In June (20th)

INDEX Update: The 3 filled Bull Put trades are safe even though the markets were down last week. If the markets continue to trend in this one direction we will close these trades early and open new trades. These are the first half of 3 Iron Condor trades I want to complete next week. indexspreadoptionstrading.com

ETF Update: The new trades expiring in June are very safe and have a very high probability of expiring on June 20th. The June SPY Iron Condor trade is earning 9.9% which is the highest returning trade so far this year. etfoptiontrades.com

Sunday, May 18, 2008

Selecting Strikes for My Option Trades

I select strikes using two tools:

1. Technical Analysis
2. Probabilities

1. TA- In the case of bull put spreads, I look for support points and lows within the past 52 weeks and start with strikes outside of the range.
2. I use powerful models for probability calculations and look for strikes that have a 90% or better chance of expiring worthless.

My goal here is to simply collect premium month to month. Using FOTM put and call spreads is a way I can do it without predicting the market for the month. In any given month, the market can move higher, sideways, or significantly lower and I still have a profit. In my view I am trading without concern over market direction except for a major crash lower. During a crash my contingent stop loss orders would be triggered and my Bull Put spread trades in trouble automatically closed.

All May Trades Expired Last Weekl

The 2 RUT Bull Put trades and our NDX Iron Condor expired worthless last week. This month we earned 8.7% on the NDX trade. The markets appear to be settling down to a more normal trading pattern of slowly rising. This pattern is perfect for Iron Condor trading when the trades are safe with a lot of distance.

New trades expiring in June will be emailed and posted this weekend. We had one June DIA Bull Put trade filled last week.

Tuesday, May 13, 2008

Update on Open Trades Expiring This Week (May 16th)

The 2 May RUT Bull Put trades and our May NDX Iron Condor are safe and will expire this week. The 8.7% return on our NDX Iron Condor is the highest return on a trade this year. I will try and repeat this performance with the June trades I will be posting and emailing this weekend.

Friday, May 9, 2008

Benefits of Index Spread Trading

Benefits of Index Spread Trading

1) Credit spread trading is a simple, safe, and stress-free type of trade that does not require a great deal of monitoring. You just place the trade, collect the credit, and wait for the options premiums to decrease or expire worthless. Minimum time is required to process and track these credit spread trades.

2) You receive the proceeds of each credit spread trade immediately when your order is filled and you keep these proceeds no matter what happens.

3) The credit spread has two primary advantages as an income generating strategy. First, the position benefits from time decay. Since options decay in value with the passage of time, the value of the credit spread will in turn decay over time. By writing a credit spread, you are selling a decaying asset and receiving a credit or a premium up front. If the underlying market remains stable until expiration, the spread expires worthless, allowing you to keep the premium received. In a sense, you profit from the passage of time.

4) The credit spread also allows you to benefit from market movement. If one writes a bullish credit spread using puts, the value of the spread would rapidly decline as the market moves higher. The converse is true for bearish call spreads. With this flexibility you can inject an element of trend following into your trading program to increase your odds of success.

5) Gains on stock index spread trades are considered ITC Section 1256 contracts. This means any gains made in these trades are taxed under a 60/40 rule. This rule states that gains are treated as 60% long-term capital gain income and 40% short-term capital gain income (ordinary income) regardless of how long the investment was held. So when we hold a index spread trade for 30 days (our average holding period), 60% of the profit made from that trade is treated as long-term capital gain income and taxed at 15% or 5%.

6) Trading capital is only used to support margin requirements when trading credit spreads. Most option brokers allow you to invest your trading capital elsewhere to be used as collateral for spread trading. Trading capital can be invested in closed-end funds that pay dividends monthly and are diversified across munis, preferreds, REITs, corporate bonds, floating rate loans, convertible bonds and other fixed instruments. Between the dividend yield and capital appreciation you can earn 7%-10% annually. Most brokers allow you to margin 100% of cash amounts, 90-95% of t-bill amounts and 50% of the stock amounts like closed-end funds.

Update on Open Trades Expiring In May (16th)

All open May trades will be expiring next week on the 16th. The markets have really settled down and now seem to heading back down. News around the world is not good and the price of oil and gas are increasing at an alarming rate.