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.