1. Try clicking on the name of the most recent article in the column on the right. This will remove the "Archives" list.
2. Try right click on the chart itself and open it on a separate window.
I am sorry that I cannot always make the chart small enough to fit neatly on the left column. I want you to be able to see the details I want to point out.
I Hope this helps,
Juan
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Did you ever feel that there was a stock you could not get your attention away from?
Here is what I recommend:
1. Be sure that it is a momentum stock with strong moves up and down.
2. Make sure that it has predictable IV fluctuations before and after earnings.
3. Avoid BUYING the stock, and try to focus on a PCCRC that you can rollover with good profits.
Today, I rollover my AAPL position for $3/share credit. That is I bought back my Aug short options and sold an equal number of Sept options for a credit of $3000. It is very importand to note that I have Oct longs, and Oct is an earnings month. These are options that are likely to increase in volatility as we approach earnings, that is, if AAPL does not rally or tanks $20 points before that.
But one of the beauties of this system is that I can take money off the table while keeping more or less the same change to make money in either direction, sideways or with IV spikes. Clearly we want to be able to take our profits whenever we can. This is why I have the rule that as soon as I have $3000 on the table, I take it. However, when it comes to AAPL, I am comparing this with the alternative of owning the stock, because I am long-term bullish in the company, but I am not fullish enough to risk my hard-earned cash on the odd chance that the company might have to face an unforsee situation, like the current Option's accounting internal investigations in which Steve Jobs himself may be implicated. In fact, should the stock decline from here, and strongly, and with a spike in IV, my position should do well.
Now let me start by showing you my original trade. Pay close attention to the capital in the trade at the time of entry, a little over two months ago:
With this amount of capital, I could have bought 280 shares at the price it was then: $62.5. AAPL is currently trading at $64.13, a difference of $1.63. I would have a profit of $456.4. That is if I had the fortitude to stay in the investment as the stock went down to the low 50's and bounce back.
Instead, I decided to stay with the trade and do the rollovers, as earnings approached in mid july. Here is the complete accounting of all rollovers:
Today, I completed one more rollover, leaving my Oct longs unchanged. The resulting risk graph is this:
You must me unconrotable with the large number of trades in the Platinum page as I am. Clearly, I have accumulated a large number of commissions, but that is still better than tying up capital as you would if you owned the stock. In fact my capital has now been reduced to 40% of the original. The advantages of doing the rollover are clear, as long as you want to say with the stock. I propose that you adjust your debit of your longs with every rollover. Since you get a credit on the call side and another on the put side, you could reduce the debit of the longs, and eliminate closed positions from the risk graph.
To accomplish this, I have a spread sheet. All you need to do is to fill out the details of your rollover, and you will get the number to substitute the debit in your longs.
If you are interested in this spreadsheet, just send me an e-mail. Paperprofit1@mac.com
5 comments:
Juan:
This is my first PCCRC paper trade. I wanted to get your views on how better I could have adjusted it. I would really appreciate it. I used your method to search for trades. I was not sure what I should have done around July expiry. I am including 3 links for same trade.
Thank you for your valuable advise.
Rahul
Trade number: 1
Trade name: RM: PCCRC CC JUN06-OCT06 30 CALL PUT
TRADE LINK:
RM: PCCRC CC JUN06-OCT06 30 CALL PUT
http://tinyurl.com/qxkf6
Trade browser URL:
http://platinum.optionetics.com/cgi-bin/platinumv40/op4email.php?trade_name=RM|PCCRC|CC|Jun06-Oct06|30|Call|Put&trade_date=2006-05-10&sym=CC&num_legs=16&tra0=2:F06:30.000:0.25:CC:2006-06-13:83.228:CCFFCC:0:0&tra1=-2:F06:30.000:2.1:CC:2006-05-10:32.459:CCFFCC:0:0&tra2=2:R06:30.000:2.1:CC:2006-06-13:87.33:CCFFCC:0:0&tra3=-2:R06:30.000:0.7:CC:2006-05-10:33.225:CCFFCC:0:0&tra4=2:G06:30.000:0.05:CC:2006-07-18:141.986:99FF66:0:0&tra5=-2:G06:30.000:1.6:CC:2006-06-13:63.025:99FF66:0:0&tra6=2:S06:30.000:6.3:CC:2006-07-18:180.655:99FF66:0:0&tra7=-2:S06:30.000:3.25:CC:2006-06-13:61.723:99FF66:0:0&tra8=-1:H06:25.000:0.7:CC:2006-07-18:41.198:CCFFFF:0:0&tra9=-1:T06:25.000:1.8:CC:2006-07-18:41.299:CCFFFF:0:0&tra10=2:J06:25.000:1.8:CC:2006-07-18:45.489:FFFFFF:0:0&tra11=2:V06:25.000:2.7:CC:2006-07-18:44.857:FFFFFF:0:0&tra12=4:J06:30.000:3.8:CC:2006-05-10:34.121:FFFFFF:0:0&tra13=-4:J06:30.000:0.4:CC:2006-07-18:40.663:FFFFFF:0:0&tra14=4:V06:30.000:2.05:CC:2006-05-10:35.697:FFFFFF:0:0&tra15=-4:V06:30.000:6.3:CC:2006-07-18:38.286:FFFFFF:0:0
I have examined you trade. There is not much technically wrong with it, but there are some less than ideal items that I want you to be aware of.
First, I like the way CC was moving. Sometimes a couple of days of rally is all you need to get some profits. However, $30/share is not ideal for this kind of trade. I realize that you are trying to make it possible to enter a few contracts, and not the truck load I usually enter.
Second, the volatility of the Oct. options on the first day was above that of the front month options. You really should have waited for that to be resolved, or even abandon the idea to trade this at all. Why? because you are buying high IV and selling low IV. Although not a big deal in this case, could cost you if the IV of the longs begins to decline faster than the IV of the longs.
Third, When a stock is going sideway near expiration, you MUST ask yourself the question: Is there a justification for me to do the rollover? Here again bought back the expensive (high IV) June options and sold the less expensive (lower IV) July options. You bought back June options at an IV of above 80% and sold the July with an IV of 60%. Such high IV only occurs as earnings or pending news are due for release. In such cases, a strong move is about to occur in the stock, or perhaps a sudden decline in the IV could actually be to your advantage. In such cases, there is no point in buying back the expiring options, but rather, it is better to wait until the day after earnings.
I have gone to Earnings.com (I recommend to be aware of earnings) and found out that CC was due to report on the 15th. On the 15th of June, my untransformend trade was showing a profit of 20% as the stock had hit my strike price of $30. At this point I would have strongly considered getting out of the trade. With only 1 day to expiration, which happens to be the day after earnings, and a strong movement likely to occur on that day, and the fact that IV's are well above 40%, I would have not taken the risk of continuing this trade.
Your profit would have been $400 from a $1980 investment. I have said that I would exit with about 30% profit, but considering the earnings situation, I don't want to be caught in a volatility chrush. I have said repeatedly that earnings are a wild card, but they usually result in a deflation of the IV. Remember that once IV has gone higher, that is the time to take profits. A rollover would not increase your chances of further profits.
When you modified the stock in advanced of earnings, you kept the bullish nature of the trade. That was an opportunity to make the trade more delta neutral. If you have had 10 shorts on each side, you could have rolled over to 9 puts and 11 calls for July, this opening yourself to the possibility that earnings were negative.
By rolling over the trade, and apparently after negative sentiment after earnings, the stock began to decline, but also did the IV, which hurt your profits. At that point, you are just trying to find a exit without losses. Remember, our goal here is to take profits as early as possible, and only keep a trade when we believe either IV or Delta wil increase significantly. The worse case scenario is when the stock declines with low IV.
The longer you stay in a trade, the greater the chance for success, but only to a point. accumulating commissions and legs in a trade is not what is all about.
Check the CC trade in my shared folder so you see what I would have done.
Thanks Juan.
I will add the pointers you mentioned in my list. My intention is to do atleast 3 backtests a week (12 a month).
Since I have a small account, I am limiting my initial debit to $2000 or less.
I liked the idea of making the trade delta neutral by selling different ratios of calls & puts.
Another question I have is: What kind of stop loss can one have in this type of trade?
Rahul
TraderR:
If I had a 10K account, I would probably would like to bring it up to 20K before doing PCCRC's, particularly while I am backtesting the method. Directional trades are exceedingly difficult and frustrating, particularly in a confusing sideways market. I have recently shown that you can make money in some trades and keep the losses to a minimum in the losing trades. This is powerful because no one has money to through away. So you may consider some basic strategies like long puts and calls until you can deal with larger amounts of cash per trade.
If you still think that the PCCRC is the best, even with the number of legs and comissions, then be choose on your trades. Make sure you have at least a -3x-3x6x6 configuration so you can partially adjust legs. Try to trade stocks that are >$30/share. Preferably higher. With a lot of backtesting, you will learn to stay within reasonable cash balance, but $2000 is still low for these trades, as your commissions may take a big bite of your profits.
There is no real stop in these trades, just exit points.
1. If IV is high and could reverse (i.e. >40%)
2. Before earnings.
3. Near expiration.
4. After a strong delta move.
5. After a 30% profit.
6. When it is not worth rolling over. That is the second month options have a low IV.
7. When the stock is moving sideways, and you have a Theta profit near expiration.
Juan:
Thanks for the insight. I have not been very successful with directional trades like calls & puts. Maybe I didnt trade enough contracts to make the probablities work.
I liked PCCRC because while directional in nature, one need not really pick a direction.
I will do more backtesting assuming capital per trade of $3000. If we are looking at average profit of 20% ($600) and a commission cost capped at 20% of potential profit ($120), I could afford to trade 80 contracts with Think or Swim. The -3/-3/+6/+6 configuration will allow me upto 5 rolls.
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