Money Management

Before you trade or buy any investment instrument you should determined how much capital you are willing to risk on that particular trade. Contrary to prevailing opinions –

Your first goal should be-

• Not losing money rather than trying to make money.
  

Your second goal -

• Try avoiding getting into a catastrophic loss situation, where you let a small loss turn into a big loss.
  

Most fatal airline accidents start off as a small mistake by the pilot, but then instead of correcting the initial mistake, somehow the judgment of the crew or the captain get crowded and that leads to another small error. Over a short period of time what started off as a small mistake gets compounded to the point where catastrophe hits. So my simple advice is that, if you put on a trade that begins to go bad, don't compound the initial mistake with yet another mistake by increasing position size, or wishing for the market to make you whole. You are responsible for putting on the trade and you should be responsible for taking the trade off, even if it is for a loss. No matter how small or big it is, you made the initial decision to put on the trade make the next logical decision to close it or insure it and don't ever wish for a miracle.

If you can manage your losses to a disciplined 2% or less of your investment capital on all trades, then you have a leg up on the competition. Whilst, losing money is not fun, you have to treat the losses as part of the cost of doing business. Never let a small loss turn into a big loss – you have to realize that all big losses start small and compound, it is always a lot easier to take a small loss initially than a big loss. Capital Preservation or the Preserving of you trading capital should be your top priority, period, anything short of that and you are basically gambling.

 

Income Trader

 

January Trade Cycle - Overview of 3 weeks old trade

Portfolio Update for January Cycle

For the January Cycle we took in a net premium of  $5,510, net 15 contracts of 860 strike call protection and 7 contracts of 670 put protection. Our goal for the current position is a net return of 10%.

December Cycle 8.6% return even with two adjustments

Even with two adjustment we still ended December with an 8.6% monthly return and generated $6.500 income on $75,000 total invested capital.

P&L for Dec Cycle after second adjustment as well as position summary

                              

Second adjustment for the Dec cycle

Readers, the past two days saw the equity markets move considerably in the positive direction.  Accordingly, we had to make some adjustments to our position to ensure that we maintain our safe distance in regards to the delta of our call positions.  As the markets moved up yesterday, the short call delta’s moved up to 17.  Although our positions were safe, we thought it prudent to adjust our positions pending the jobs report this morning.  Accordingly, we moved our call positions further up the chain from 780/790 to 790/800 to get a delta of 10.  Thus, we executed the following trade for a total debit of .95 cents.

+50  RUT Dec 780C

-125 RUT Dec 790C

+75  RUT Dec 800C

Note that the trade just closes our 780/790 and opens a new one at 790/800.  We added on 25 additional contracts to help pay for a part of the trade.

Since our 610/600 put position (we had 25 contracts at this level) had declined to just .05 cents, we took our profits and closed the position.  However, to help pay for our adjustments on the call side, we adjusted our remaining put positions i.e. the 25 contracts at 650/660.  We took some credits / premium by moving the 650/660 position up to it up to 680/670 (delta of 6). We received .85 cents credit.  Accordingly, we executed the following trade:

-75 Rut Dec  680P

+75 Rut Dec  670P

+25 Rut Dec  660P

-25 Rut Dec  650P

Note that we added an additional 50 contracts to take some credits and then turn the overall position back into an iron condor.  The total cost of the overall trade calls plus puts is .10 cents (.95-.85)

Find below the resulting graph.  Enjoy the weekend.

Graphical depiction of the position/trade

Update of Portfolio P & L

Our adjusted position is doing fine and our delta's are now much manageable with our current adjustment the net premium taken in per contract has gone from $1.20 to $1.26. Our current P & L is now $1,437.50. which is a 3.28% return so far.

Portfolio Update for Adjusted positions

 The update position should look like the positions highlighted in the yellow background.

Happy Black Friday - Time for an adjustment

Followers, happy black Friday. Hope you are able to find all the sale items that will make your "Christmas portfolio"  whole.  Although the market opened on the lower side. Our Dec calls have hit a delta of 20. Sometimes moving as high as 21 when there is push into positive territory. To this end we will adjust our short call position to move back into a much comfortable range. We will create the following trade:

+50 C 770

-100 C 780

+50 C 790

This will invariably  close out our -50 C 770 position and reestablish it at the C780 mark. Our final position should be

-50 C 780

+50 C 790

We will also push out our put side when we are sure that the market has stabilized. We will roll up half of our put position to the 660/650.  We will make the following trade:

-25 Dec 660 P

+25 Dec 650 P

+25 Dec 610 P

-25 Dec 600 P

Guys, by making these adjustment, we have taken some of our profits off the table. However, we are in a much better position. We will roll the rest of the put postion up later. Find below the resulting overall trade:

-25 Dec 610 P

+25 Dec 600 P

-25 Dec 660 P

+25 Dec 650 P

-50 Dec 780 C

+50 Dec 790C

Portfolio Update for December Cycle

For the December cycle we took in an average premium of  $1.20 per contract. We expect to generate 13.63% return if everything works as planned and we don't have to adjust. So far the portfolio is up 2.56% with 24 days left to expiration.

Our contract size is 50 contracts, so those trading a smaller account should adjust their positions according. Please, do not be fully invested and always hold 50% of the account size in cash, in case we have to adjust. Because there are certainly occasions we will have to adjust the positions to stay away from danger and to keep our delta's within sensible risk criteria.

Thanks for following "Updownfinance" blog and keep sending your comments as to how to make this product even better. It is certainly good to know that a lot of you have stated you have started making money on a consistent basis by following this blog.

November expiration completed 12.36% return

All trades settle by tomorrow.

New Trades for the December Cycle

These are the new trades for the December Cycle and our Delta's are pretty good at this time and our Theta's are positive. December is a shorter option cycle than November, so let's see how our Theta decays works in our favor.

12.36% total return for the Month

12.36% total return for November options cycle. "This is how we do it". Please stay tuned for December cycle. I have been travelling lately and have not been able to post as much as I should.

Thanks for following the blog updownfinance.blogspot.com.

P&L 10/29/2010 - Portfolio up 9.01% in current option cycle

Income trade is working as planned and will mostly like close up the trade for current month, sometime next week as we have achieved our price target of 8%+.

P&L as of close of market 10/27/2010

No need to adjust position so far

So far our income trade is working as planned and we are comfortably within our strike points both for PUTS and CALLS. If we achieve a target of  8% + by next week we will begin to scale out and drastically reduce the risk for the the next three weeks before options expiration.

Portfolio up 7.3% in current option cycle

Posted P&L for portfolio as of today 10/27/2010 - see P&L below

Portfolio Update

Portfolio is up 7.3% with three weeks to expiration. As stated earlier this is a hands off approach to investing or income generation. As long as our Delta's stay within our comfort zone, we let time decay work in our favor.  Once again, thanks for following our trades and hope you are learning a new way to generate income.

Update of the Portfolio - Graph

With about 24 days left to expiration, the portfolio is in good shape and as the graph shows we are comfortably within our range. Most of the premium on the Put spread has been achieved, since there is only .10 cents of premiums left, we might have to roll the 550/560 puts to collect additional premiums if the risk reward were to justify it. Otherwise any further decay close to .05 cents on the put side will  result in closing the Put side of the spread and booking a net profit of $2250 on that side of the trade. We will then have only the call side of the trade open.

Please, send me your comments if you have any questions as to the mechanics of how our income trades work. Thanks for visiting our site and hope you are benefiting from our trades and learning as well. For those new to income trades. it is worth pointing out this is a skill and it takes a while to get good at it, so be patient and keep at it and follow the blog.

What we try to do with our income trade

We create our income trades by initiating a  CALL credit spread and a PUT credit spread on the same stock or index. We try to pick our strike prices to be at least two standard deviations from the current prevailing price. We also set up our positions with enough time before expiration, so we are selling time premium. Our instrument of choice is almost always an index and there are a lot of indicators we factor in before we initiate the trade including the volatility index - VIX.

Our instrument of choice is always an index because at the very least we want to eliminate the "Problem of the Lemon" - Which states that the person selling you a used car always knows more about the used car than the buyer can ever know.Why is this relevant to stocks - the individual investor in a stock is always faced with the problem of the Lemon, Despite all the securities laws and enforcement- corporate insiders, wall street analyst and hedge funds with their extensive network of informants are always going to know more about a stock and react faster than the individual can ever know. When you coupled that with the prevalence  of High Frequency Trading (HFT) the individual investor is fully disadvantaged trying to trade individual stocks . (please google HFT and read all you can on High Frequency Trading). We there fore structure our index trades utilizing indexes like the Russell 2000 index (RUT) - The RUT is an index that contains 2000 stocks and we eliminate the Lemon Problem because it will be virtually impossible for any one to have inside information on 2000 stocks at any point in time. It is also a diversification solution, which is basically the only free lunch you can get in finance and in investment. The other instrument of choice is also the S&P 500, which is an index containing 500 stocks of the leading companies.

Finally, we treat our income trades like an insurance business, where we are basically writing catastrophic insurance on indexes. So like any insurance company there is a chance though slim that once in a while a catastrophe might hit, so we closely monitor our positions and readjust or re insure the position if the indexes begin to move with extreme volatility. The goal is never to take a catastrophic loss.

Mechanics of the Trade - Credit Spread

The basic goal of an income trade is to generate a net credit to the account through a credit Spread. Credit Spread - The simultaneous sale of one option and purchase of another option that results in a credit to the investor's account. Thus, more funds are received from the sale than are required for the purchase. An option credit spread example would be buying a Jan 50 call on ABC for $2 and writing/selling a Jan 45 call on ABC for $5. The net amount received (credit) is $3. The investor will profit if the spread narrows or if ABC never gets pass 45 

In the example above we initiate a credit spread on Red Hat (RHT) -  We sell the December 45 Call and Buy the December 50 call for a net credit of .67 cents, we sell 10 contracts so we take in a total premium of $670. As long as RHT does not go beyond 45 by December we keep all the premium that we took in.


Just like we did above for calls we can initiate a credit spread for Puts as well.

Portfolio Update

Net Theta Decay $3000 so far which is a 6.75% gain with 28 days left to expiration. IF we stay within our projected Deltas we should see more Theta decay next week. If we get within 8%+ next week we might close the trade and  wait for the next cycle as our goal is to generate a net 8%+ per month, with defined and limited risk.

Updated Profit and loss for Portfolio - Already up 5% in two weeks

The trade is going as planned. Theta decay has began to set in and will only accelerate with each passing day.

Portfolio Update

I will be posting an updated portfolio position at the close of market today. So far the income trade is working as planned. Since this week is the begining of the option cycle for November Theta decay has began to set in. Trading for income requires a lot of patience and at the heart of it, it can be boring, but the end goal of generating income is the most important factor here. If you are looking for contstant action and daily buy and sell then this is not a stratgey for you. But if your goal like mine is to generate consistent income then just follow the trades and check daily for updates.

I do post updates when required, but do make it a point if you are following the trade and have set up a similar trade in your account to check daily. Because about 25% of the time we might have to adjust the trade to reduce our Delta or re position the call or the put side, so our nest is not bridged.

Please, send me your comments if there is anything on your mind.

Portfolio Update

The overall delta of the portfolio is around -140 as of 14/12/2010, with 35 days to expiration. The portfolio is still in good shape and we expect Theta decay to set in as we move into the next option cycle next week. We design our portfolio for income to be hands of management and only adjust if our Delta's move out of our comfort levels.

Portfolio Update

Update of profit and loss for 100K portfolio, please divide P/L by 5 for 10k portfolio

This is the profit and loss as of today 10/11/2010 at 12:00pm , this portfolio was created on Thursday 10/07/2010. So far the portfolio is up $750 (4 days) for 100K portfolio with $50k margin net $5,500 net premium ($50k - $5.5k =$44.5Knet margin) taken in and up $150 for 10k portfolio with $10k ($10k-$1.1k=$8.9 net margin) margin and $1,100 net premium taken in.

The portfolio has positive Theta of $195 for 100K and Theta of $47 for 10K.

Sign in and leave your email if you want to receive live updates

Signup and leave you email information if you want to receive live updates to my income trades. Most of these trades have an 80% probability of working out. If you want to receive live uodates when we update the portfolio then sign in so we can keep you current on our daily portfolio values and adjustments if it becomes necessary.

Also we will appreciate anny comments about making this service better for you. Welcome and lets make consistent monthly income

Income Trade Non directional Iron Condor for November expiration

This is a non directional income trade. We only adjust if our delta goes to 20. If you put up a similar trade please follow our blog closely incase we need to adjsut it. This trades returns 12.3% in a little over a month.

Instrument Russell 2000:RUT
20K Portfolio Creadit Spread
Iron Condor	Side	Quantity	Symbol	Exp	Strike	Type	Net Credit	Total received
	Sell	10	RUT	Nov	770	Call	$          1.10	$    1,100.00
	Buy	10	RUT	Nov	780	Call
	Sell	10	RUT	Nov	560	Put
	Buy	10	RUT	Nov	550	Put
Margin Required	$    8,900.00	Per 10 contracts
Net Credit	$    1,100.00
Return	12.360%
For $100k portfolios
Iron Condor	Side	Quantity	Symbol	Exp	Strike	Type	Net Credit	Total Received
	Sell	50	RUT	Nov	770	Call	$          1.10	$    5,500.00
	Buy	50	RUT	Nov	780	Call
	Sell	50	RUT	Nov	560	Put
	Buy	50	RUT	Nov	550	Put
Margin	$  44,500.00
Net Credit	$    5,500.00
Return	12.3596%

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