Taking profit should be the easiest thing in Option Selling, especially in Credit Spread. You either take the 100% credit through the expiration or you take part of the credit before expiration. As described in this post "Exit Strategy", I no longer wait till expiration. I only take part of the credit, mostly at 70% of the credit.
Stopping loss is more difficult, in most trading. However, it is the most important decision to make, especially in Credit Spread Option Selling when the Risk/Reward ratio of the position is almost 10:1.
The below are some updates/refinement made to my Exit Guidelines, to make it more defined. Hopefully, taking profit and stopping loss is easier with these guidelines.
Exit Guidelines
1. Take profit
- Delta <= 5 (usually about 70% of credit)
- target profit >= 70% of credit
- target profit >= 50% of credit when Days In Trade is <=5
2. Days To Expiration (DTE)
- 7 < DTE < 14
- exit the position before DTE is less than 1 week (start staring at it when DTE is less than 2 weeks)
- exit with whatever profit or break even if possible, else exit with a small loss
3. Stop Loss
- 25 < Delta < 30 and DTE < 30
- Loss >= 200% of credit and DTE < 30
This is also updated in the Trading Plan.
Monday, June 22, 2015
Friday, June 19, 2015
Weekly Market Review K200
Daily : Downtrend.
Weekly : Downtrend.
Monthly : Sideway.
- Lower high lower low. Ever since it fell below 250, it failed in the last few attempts to close above 250. Weak. However it stay above the longer term uptrend line.
- MACD is still heading down but narrowing. Will it cross? Or will it touch and widen again?
- My view remain bearish. However, the MERS case is under control now. We could see some support or even some up move from here.
Weekly : Downtrend.
- Lower high lower low. Price fell below MA200 and stay below. Weak. However, we have a long pin bar. So, we might have some support here. We need the next bar to confirm or reject it.
- MACD is heading down and open wide. Weekly view is still bearish.
Monthly : Sideway.
- Price move down below the uptrend line and up back resting on it. Still look bearish. We have about 1.5 weeks to conclude this bar to see if it is a bearish bar or a pin bar.
Sunday, June 14, 2015
Weekly Market Review K200
- Lower high lower low. Price failed to stay within the Jun 3rd bar and closed below the Fibo 61.80%. The resistance turn support at 254.68 didn't hold. It is heading towards the previous low near 250.
- MACD is still heading down but start to narrow. My view is still bearish. Any up move is probably just retracement.
Weekly : Downtrend.- Lower high lower low. Price just stay slightly above the bottom of the previous Inside bar range (260.68-251.43). MA200 is around that level too. That should provide some temporary support.
- MACD is heading down and open wide. Weekly view is still bearish.
- Price move down back to the middle of the range. Both the current and previous bar look bearish. We could see price move down to the lower of the range.
Sunday, June 7, 2015
Weekly Market Review K200
Daily : Downtrend.
- Lower high lower low. MA200 failed to hold. MACD heading down and widen.
- June 4th & 5th bar are both inside bars of 3rd bar. No direction. Most of time, it will break in the direction of the trend, that is down.
- It is near fibo 61.80% level. And it just hold above the resistance turn support at 254.68. This may provide some support, or even retrace for a while.
- But my view is still bearish, unless the future chart shows a different view.
Weekly : Downtrend.
Monthly : Sideway.
- Lower high lower low. Uptrend line failed to hold. Price slightly below MA50.
- Back to the previous Inside bar range (260.68-251.43). The 260.68 level has been a support for 4 weeks. The bottom 251.43 should provide some support? MA200 is around that level too.
- MACD is making a cross down. Weekly view is bearish.
Monthly : Sideway.
- It is a obvious sideway market since October/November 2012. That is sideway for 30 months.
Sunday, May 31, 2015
Combo Order Execution for K200
In my previous post Problem In Combo Order Execution for K200 and N225, I described how my Limit order to Sell didn't get filled even when there many order queuing to Bid for it. To this problem, Interactive Brokers (IB) reply was :
I finally got to experience it on May 27. I need to go to my son childcare centre to celebrate his birthday. Thus, I have no choice but to submit a Limit order before I leave. With the understanding of how IB combo order works, I submit a BUY combo order to close my K200 Jul09 +280 - 285 Call Vertical Spread at 0.15 (my target price).
Under normal execution, if there is someone selling at 0.15, my BUY Limit order will be, should be filled. Under IB execution, there must be someone selling at 0.14, then my BUY Limit order at 0.15 will be filled. But at what price? 0.15 my BUY/BID Limit order price or the SELL/ASK price at 0.14?
At 9:47am, there are orders queuing to SELL/ASK at 0.15. True enough, my BUY/BID Limit order didn't get filled.
At 9.50am, when the SELL/ASK price move down to 0.14, my BUY/BID Limit order was triggered. And it bought at 0.14 the SELL/ASK price.
This is not too bad actually. At least, I can now close my position at my target price (or 1-tick lower) with a submitted BUY Limit order. I do not need to stare at the screen to close the position.
However, this is not workable for SELL Limit order. You will not want to submit a SELL Limit order at a pre-defined price say 0.25 and leave it for the market to fill you. For a Delta 10, it is a good price at 0.25. However, if the Delta have moved to 15 and you got filled at 0.25, that will not be a good price. In the first place, you might not even want to open any position with Delta 15.
Please note that the condition for legging in a non-guaranteed combo order is the limit price must be at least 1 tick though the implied quotes. Since your order was just hitting (not through) the bid price, the combo order was not submitted. Please let us know if you have any further questions. Thank you.Regards,IB Customer Service
I finally got to experience it on May 27. I need to go to my son childcare centre to celebrate his birthday. Thus, I have no choice but to submit a Limit order before I leave. With the understanding of how IB combo order works, I submit a BUY combo order to close my K200 Jul09 +280 - 285 Call Vertical Spread at 0.15 (my target price).
Under normal execution, if there is someone selling at 0.15, my BUY Limit order will be, should be filled. Under IB execution, there must be someone selling at 0.14, then my BUY Limit order at 0.15 will be filled. But at what price? 0.15 my BUY/BID Limit order price or the SELL/ASK price at 0.14?
At 9:47am, there are orders queuing to SELL/ASK at 0.15. True enough, my BUY/BID Limit order didn't get filled.
At 9.50am, when the SELL/ASK price move down to 0.14, my BUY/BID Limit order was triggered. And it bought at 0.14 the SELL/ASK price.
This is not too bad actually. At least, I can now close my position at my target price (or 1-tick lower) with a submitted BUY Limit order. I do not need to stare at the screen to close the position.
However, this is not workable for SELL Limit order. You will not want to submit a SELL Limit order at a pre-defined price say 0.25 and leave it for the market to fill you. For a Delta 10, it is a good price at 0.25. However, if the Delta have moved to 15 and you got filled at 0.25, that will not be a good price. In the first place, you might not even want to open any position with Delta 15.
Wednesday, May 6, 2015
Trading Iron Condor
image: from book cover
Like the flapping of its wings, the opening and closing of a condor trade should be done infrequently. The patient drift through calm air reflects the slow and steady time decay and the low volatility that will lift our profits. Treat this awesome bird with the respect it deserves and you can ride on its wings."
Profiting with Iron Condor Options, by Michael Hanania Benklifa.
Saturday, May 2, 2015
Last trade on Nikkei 225 (N225) Index Options
On April 30, I closed my last contracts of Nikkei 225 (N225) Index Options. With that, I will stop trading N225 Index Options.
The main reason to stop trading N225 Index Option is : Tick Size!
Source : Option Spec (http://www.jpx.co.jp/english/derivatives/products/domestic/225options/01.html)
What this means is :
As an Options Seller, you want your Options to expire worthless. That is to say, you want your option price to go down. You do not want your option price to go up. You make money when option price goes down; you loss money when option price goes up.
Here is the problem of the Tick Size. When the option price goes down, below 50 points, it goes down 1 point at a time, slowly. When the option price goes up, over 50 points, it jump 5 points at time!
A typical premium collected from N225 Credit Spread is about 20 points. To reach the targeted profit of 80% (4 points), it goes down 1 point slowly from 20 to 4 points. However, when your option position goes against you, it will jump 5 points at a time. And 5 points is 25% of your collected premium!
At the point (Delta 25-30) that you need to make adjustment (or cut loss), your option price is definitely over 50 points. Your option price is definitely going to jump 5 points at a time. And because of the Difficulty In Trading Combo Order for K200 and N225 and the Problem In Combo Order Execution for K200 and N225, you will not just loss 5 points. You will loss 10 points due to the Bid/Ask Spread. That is 50% of your collected premium!
As you can see from the above screenshot, at Delta 14-23, the option prices are already above 50. With a tight Bid/Ask spread, you will see 5 point Bid/Ask spread at single option contract. With spread (due to two option contracts), the tight Bid/Ask spread is 10 points. The above screenshot didn't have the fortune of tight Bid/Ask spread, you ended up with 15 points Bid/Ask spread.
My analysis of my trade results show that I always end up losing more than 3X of the collected premium when I adjust (or cut loss) at Delta 25-30.
Even though Option Selling has higher probability (about 80%) of wining, you will still be hit with losing (even if it is 20% probability). Losing trade is certain. You will have to accept that you will have losing trade, about 1 out of 5. Hopefully 1 out of 10.
If you make 64 points in 4 wining trade (4 * 16 points = 64 points) but you loss 65-70 points (3 * 20 points + 5-10 points spread), you will end up losing even though you have higher probability of wining. This does not work.
The total wining must be more than the total losing. The lost trade has to be limit to about 2X, ie 40 points. With that, at least, you will end up wining 24 points (64 points - 40 points) for 1 losing trade out of 5 trades.
Therefore, here ends my option trading with N225. I will only trade K200 from May. I will start to explore commodity future option to diversify. I think trading with just one Index Option is a bit risky even though I know there are people simply trade S&P500 Index Option or Russel 2000 Index Option solely.
Well, let's continue to explore in this journey of Option Trading.
The main reason to stop trading N225 Index Option is : Tick Size!
What this means is :
- If the Option price is 50 points or less, the Option change price in 1 point up or down.
- Once the Option price goes over 50 points, the Option price change in 5 points up or down.
- And if the Option price goes over 1000 points (ie 1000 * JPY 1,000 = JPY 1,000,000), the Option price change in 10 points up or down. I have yet to encounter any Option price above 1000 points.
As an Options Seller, you want your Options to expire worthless. That is to say, you want your option price to go down. You do not want your option price to go up. You make money when option price goes down; you loss money when option price goes up.
Here is the problem of the Tick Size. When the option price goes down, below 50 points, it goes down 1 point at a time, slowly. When the option price goes up, over 50 points, it jump 5 points at time!
A typical premium collected from N225 Credit Spread is about 20 points. To reach the targeted profit of 80% (4 points), it goes down 1 point slowly from 20 to 4 points. However, when your option position goes against you, it will jump 5 points at a time. And 5 points is 25% of your collected premium!
At the point (Delta 25-30) that you need to make adjustment (or cut loss), your option price is definitely over 50 points. Your option price is definitely going to jump 5 points at a time. And because of the Difficulty In Trading Combo Order for K200 and N225 and the Problem In Combo Order Execution for K200 and N225, you will not just loss 5 points. You will loss 10 points due to the Bid/Ask Spread. That is 50% of your collected premium!
As you can see from the above screenshot, at Delta 14-23, the option prices are already above 50. With a tight Bid/Ask spread, you will see 5 point Bid/Ask spread at single option contract. With spread (due to two option contracts), the tight Bid/Ask spread is 10 points. The above screenshot didn't have the fortune of tight Bid/Ask spread, you ended up with 15 points Bid/Ask spread.
My analysis of my trade results show that I always end up losing more than 3X of the collected premium when I adjust (or cut loss) at Delta 25-30.
Even though Option Selling has higher probability (about 80%) of wining, you will still be hit with losing (even if it is 20% probability). Losing trade is certain. You will have to accept that you will have losing trade, about 1 out of 5. Hopefully 1 out of 10.
If you make 64 points in 4 wining trade (4 * 16 points = 64 points) but you loss 65-70 points (3 * 20 points + 5-10 points spread), you will end up losing even though you have higher probability of wining. This does not work.
The total wining must be more than the total losing. The lost trade has to be limit to about 2X, ie 40 points. With that, at least, you will end up wining 24 points (64 points - 40 points) for 1 losing trade out of 5 trades.
Therefore, here ends my option trading with N225. I will only trade K200 from May. I will start to explore commodity future option to diversify. I think trading with just one Index Option is a bit risky even though I know there are people simply trade S&P500 Index Option or Russel 2000 Index Option solely.
Well, let's continue to explore in this journey of Option Trading.
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