November Trades

The market is projected to continue dropping the remainder of 2008 and into 2009. The cost to short this market (buy put options) is very expensive. In the past we could buy put options for $10 and less each. Now the farthest away put options are $30. This months trade is a RUT Bear Call trade that expires in 27 days. If we can get this trade filled early next week before a major drop then we could have a very safe trade that expires. Also, I am only trading one index on the call side this month. Since all the indexes are moving in tandem now it only makes sense to trade one index. I have received many emails requesting fewer trades so now is a good time to start. Plus we will reduce our trading fees processing one spread trade, or one Iron Condor trade when they are safe, each month.

Bull Put Trades Expiring in October must be Closed

With the markets in the US and now all over the world dropping we must close all our Bull Put spreads. Subscribers who had their trades closed automatically with a stop loss order are OK this weekend. Others have 2 options.

1) If you have the funds buy back the short option you sold on Monday and keep the long option open. The long options will grow in value as the market drops and can be sold for a profit that will more than cover the cost of buying back the short option.

2) Exit the entire bull put trade for a net loss. Unfortunately their are no save trades to roll to and the premiums on Bear Call trades are very low.

The only relief that will might stop the markets from dropping is an interest rate cut next week. Below is a text being included in many market updates this weekend:

Roberts and other market watchers say it's possible that the Fed, and perhaps other central banks, could cut interest rates this week — ahead of the central bank's scheduled meeting at month's end — if the credit markets don't show signs of life. With oil prices well off their midsummer highs and indicators pointing to a slower economy, the Fed's worries about inflation are less than they had been, making it easier to justify a rate cut.

We were in a Bear Market but now it is worse with bank failures and a major credit crisis. The Dow is expected to keep dropping for the remaining of the year reaching 9,000 or lower. The only safe option trades that can be completed are Bear Call Credit Spreads and the purchase of DIA and SPY put options. Iron Condor trades cannot be completed in a market like we are experiencing now. I will be refunding all subscription fees since we are realizing a net loss for a second month in a row.

Update on October Open Trades Expiring in 17 days

The markets continue to be very volatile and challenging to trade. This month we have been trading a solar company stock that is very Bullish due to favorable legislation passed earlier this month. These Bull Put trades are retuning 8% to 9%. Next week we will complete an Iron Condor returning 15%. I rarely trade stocks but this month an excellent trading opportunity occurred that was hard to pass on. At least we are making a positive return while the market decides what direction to take. This financial crisis and how the US plans to stop the failure of more firms is keeping investors on edge.

September Trades Expired Friday 9/19/2008

The past 2 weeks have been very challenging. With the market clasping quickly. We had to close all our NDX and QQQQ Bull Put credit spreads for a loss. Our QQQQ hedge was closed to early for $5 a contract instead of $15 a contract if sold during the last week of expiration. Subscription fees will be refunded next week.

New Trades Expiring in October will be emailed later today and earl next week.

Hedging

We are going to hedging (buying calls and puts) on both sides of our Iron Condors from now on. The best time to put on a hedge is when you get a tip off that the market is ready to get worse or better. This is not easy to do but is practiced buy a lot option traders. I like buying FOTM call and put options that cost $2-$3 per contract like we did this month. Subscribers who held off selling their qqqq to this week recovered a portion of their loss from selling the NDX Bull Put credit spreads. The key is to invest 10% to 30% of your collected credits in these FOTM call and put options. This is just like buying insurance.

Close Strategy

There were a few subscribers who brought back their short NDX put options first. When they sold their long options they were able to cover the cost of closing their short options and prevent a loss. This was one of the adjustment options I posted on the members page for the NDX 1725/1700 Bull Put trade. In order to implement this strategy you must have trading capital available to pay for the short options.

Update on Open Trades Expiring In September (19th)

The markets were up and down again last week. The indexes we have open trades with are hovering and not causing any concerns. All our Bull Put trades have lots of distance and are very safe this weekend. We also have a hedge trade in place in case the market crashes. It would make sense to hedge the call side if the market starts moving up on a consistent basis. But this market continues to go up and down with the net effect of not changing very much. Our hedge on the Put side is very necessary because a market crash could occur at any time causing the market to drop 8%-12% in just a few days. This is also why we should have contingent stop loss orders in place to automatically close our Bull Put trades. We should be able to manually sell the Put options for a big profit after the market drops. The markets will never rise 8% to 12% over a few days but it could over a few weeks. At the beginning of an uptrend we would buy some call options if we have any Bear Call trades open.

We are doing very well collecting multiple credits on the NDX index this expiration period. I really like this index because these 100 companies are making profits and not losing billions due to the credit and mortgage crisis.

Update on Open Trades Expiring In September (19th)

Our replacement NDX Bear Call trade filled this week so now we have a completed NDX Iron Condor trade filled earning 7.3%. These markets are still volatile and very sensitive to news and oil prices but moves in both directions so the net effect is neutral. A neutral effect is perfect for credit spread and Iron Condor trading. Our hedge trade has not changed in value this week but is in place to grow in value in case the market crashes. If the market does not crash but drops 3% or more in September we might be able to sell this Put option the week of expiration to break even or earn a profit.

Trading Capital Allocations

This is a hypothetical example of allocations that conservative options traders might consider:

1) Total Investments: $1,000,000 (IRA’s, Mutual Funds, 401K’s)

2) 10% Amount Allocated to Credit Spread Trading: $100,000

3) 65% of my Credit Spread Trading Account Allocated to new trades each month: $65,000

4) 35% of my Credit Spread Trading Account Account kept in reserve for possible adjustments: $35,000

September NDX and RUT Trades - Allocation of $65,000:

77% to NDX 25 point Bull Put Trade (20 contracts): $50,000 (77% of 65,000)
23% to RUT 10 point Iron Condor Trade (15 contracts: $15,000 (23% of 65,000)

I place all my new orders on the Saturday following expiration Friday. So I would have placed and order for 20 NDX 25 point contracts and 15 RUT 10 point contracts.

The percentages above are averages but very close to my actual experience. Some months when I feel the markets are trading in a more neutral pattern I will use 80-90% of Credit Spread account for new trades. I also use 10% of my collected credits to hedge my trades. I like buying QQQQ or SPY short term puts and calls for $1 to $2 per contact for insurance in case the market crashes or increases by 10% quickly.