Sunday, October 23, 2011

A little follow up to the article below, this is for us IRA trader's, when I say I "short" some thing, I, of course, am not allowed to short in an IRA, BUT, you can use options. Now, they vary from firm to firm, IB allow's me to do this, in fact I can do NAKED puts, but NOT NAKED call's, all you have to do is set your IRA account up as a margin account, Fidelity and Vanguard will not allow me to do this, I just tried with Fidelity.
Anyway, I do vertical Bear spreads,, that's where you buy a LONG call, and SHORT a call with the same expiration, at a lower price strike, and I do nothing but WEEKLY options. There's a whole bunch of things that have weekly options now, you can get an up to date list at the CBOE,
I do this because in the EXTREMELY unlikely event that I may be WRONG on the trade, OR, news comes out that Europe and Bennie Da Pumper are going to do what's RIGHT, and break the banks and jack interest rates to da moon, or some weird news event intraday, I'll turn the thing into a covered call by buying the underlying stock. Now, there's all kinds of ways that various people "cover" these things, or more likely, ADJUST, the trade, Options For Rookies has a ton of articles on it, mostly on Iron Condors, which, generally speaking, I make a habit of doing every week any way.
I prefer to NOT take a loss on the trade, ESPECIALLY, if we are close to expiration on Friday, and I think we will have a chance of covering the spread on the trade, and I only do this if we are going to get over my LOWER strike price. Depending on how it's acting, WHEN it gets to the strike price, I'll BUY the stock and hold it like a covered call, and, HOPEFULLY, the LONG OTM call option is POSITIVE, so I can take profits on that, or I may hold it, and hope for a profit, or MORE of a profit. 
This is only if the trade doesn't work, my OBJECTIVE is to make money on the trade, NATURALLY, but some times shit happens. Now, I, "ALMOST", "ALWAYS" (those are disclaimers), have a position in the SPY, SSO, or IWM, so it doesn't bother me to do this to much, I do a covered call with a married put type strategy on them at times any way. Some thing else I do at times, which is a little more complicated, but I LIKE, is I do a Delta Hedge on the position, IF it starts going against me. Like, take the IWM, PLEASE (hahahahaha, you gotta be REAL old to know who used to say that), I, USUALLY, take the SHORT option TWO strikes out of the money, with the LONG option TWO strikes above that, so you have TWO points between the strikes. It varies of course, depending on how much difference there is in price, and how fast the SHORT option will pick up Delta if I'm right, etc etc etc. As an example, say I buy 10 contracts of the LONG call for .50 cents, and sell 10 contracts of the SHORT call for $1.00, and the DELTA, is .50 cents on the SHORT call, and say, .25 on the LONG call, this is just as an example. So the market starts moving up, the "trade" is negative, and I start thinking we may continue to go higher. What I'll do, and to make it simple, let's say we are a penny over the starting price on the IWM when you get into the trade, IE, $1.99 under the short option strike, I'll buy 250 shares of the IWM, that's because, IN THEORY, the DELTA on the short call is .50 and the long call .25, or, .75 for both. So if the market DOES continue higher, by the time we get to the short strike, you are UP almost $500 on the 250 shares, and covered the spread on the original trade, so you don't have to do any thing if you don't want to, at that point of course. Of course, you are getting closer and closer to expiration, and both calls are losing THETA, so the parameters change almost daily on it, which you may want to adjust with the long stock position, like if you are up a point in that, and it "appears" we won't take out the lower strike by Friday, you just take profits in the stock and hold on, with your finger nails in my case. This is just an example, you don't have to do it like this, you can do a Bull Put spread instead, maybe a conservative one that only credits the .50 cents you need in the Short call spread, I just do it like this because I'm generally comfortable owning stock in those three items. The short call acts like a covered call when you have the reduced shares in the stock, so you have a little cover in it in case the markets turn back down in the direction you originally were hoping for. 
You can do this the opposite way as well, that is if you are trading out of an IRA and can only BUY stock to cover a spread, by taking the short indexes, like the TZA, FAZ and SDS, but I personally don't like the spreads, especially the TZA, it's just to wild for the, what I consider, CHEAP spreads you get, and I think the SDS sucks, at least it does in the price area it's sitting in now, I would do Bull put spreads on the regular Indexes before I'd take those udder things. 
Any way, that's just some thing I do, I certainly would welcome other ideas.  


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