If it looked like the SPX was going in that direction, you'd have to take the loss before it got there. But being that we had a good buffer, it was highly unlikely that that was going to happen. So, I knew we'd make it on this trade no matter what.
It's in times like Nov where the market usually runs that you only look at bull put spreads and bear calls.
I've been trading a new strategy lately that I think many here could not only easily trade because of the no margin required, but because many here I know don't want to daytrade and want a simple and flexible way of making consitent money.
I posted that AAPL collar trade a few days ago. That's a winner already. But there's another way to do trades like that. It's a constantly changing trade that you play by changing as the market changes with you. You're going to buy a specific stock as your asset to short options around, like a covered call that you constantly adjust. As the stock moves lower from your buy price, your shorted call makes money. But as that happens, you 'roll' the call down by buying it back to cover at a profit, which in essense lowers your stock purchase cost basis, and then short a lower strike call against the stock.
What the net effect is, is that you are using your base stock position to profit from shorting calls. If you get into a situation where the stock runs to a peak - based on peaking indicators and oscillators - then you buy a put to profit which will then lower your cost even more on the basis stock.
It's called a rolling collar. I'm doing it now on MRVL. The worst case is that the stock craters, in which case you are left with the premium of the shorted call to lower your stock cost, but have to deal with the overall loss on the stock. The trick to that is to pick profitable companies that are movers. I think MRVL is a perfect candidate because of both the high volitility of the option prices and the market they are in is the most dynamic right now (wireless semis) and they're very profitable.
The basis is this - buy MRVL right now at market ($58.60 to $57) in 100 share blocks - whatever you can afford.
If you look at the chart, it's come off it's high in Jan in the $80's. It currently has price targets ranging from $70 to $95. So, it's a pretty safe investment here.
Then, short the May $57.50 calls ($3.20 each) in the amount of stock you have. Each call is 100 shares, so you'd short 5 for 500 shares of MRVL, etc.
That's the first leg of the trade. It's a pure covered call. At May expiration, which is about 5 weeks away, if MRVL closes above $57.50, you get called out at $57.50 by your shorted calls which will net you a .65 or so profit based on current price. That equals about a 1.1% profit. No biggy. But when you add that $320 premium you got for shorting the calls against the stock, you now are lowering your cost on the overall basis to ($56.85 - $3.20 = $53.65 - .65 = NET $53). At a called out basis of $57.50, your net profit per share equals $4.50, or 8.5% profit in one month.
You double that if you buy the stock on full margin.
But let's say the stock closes at $50. You lose on the stock about $3.65 per share because you get to keep your shorted call premium which again, lowered your basis from $56.85 to $53.65. But instead of it working like that, what I'll do if the stock looks to break $55 - which is support - is I'll buy an equal amount of $55 puts at that time to blunt the down move. The profit on those puts combined with the shorted calls will lower the basis even more.
Then, the next option cycle comes along and we short more calls lowering our basis again. This time under $50. If MRVL then starts to sprint, we cover the calls for a most likely small loss and run with the stock higher. Or, what I'll most likely do is short calls 2 strikes higher on the next cycle ($55) which will double my % return to make up for the missed profit this month. If the stock guns higher, then we're called out for a big profit with our new lowered basis and we wait for the stock to gun the indicators to hopefull extremes and then buy and short the calls and also buy puts at the same time to catch a good pullback and profit again on the shorted calls and long puts that lower our basis substantially and repeat the process over and over.
The beauty of this is that you only have to play 1 stock and never need to worry about margin requirements unless your buying the stock on margin. The only thing you need to know how to do is read a chart and how to have an idea as to how oscillators peak or bottom to time your call and put trades effectively. Pretty easy stuff. And, you can consistently make 5% + a month, and most likely much more. You never really have to get called out of a position because the only way a shorted call is going to be priced higher than your short basis is if the stock is that much in the money. So, you can simply buy the shorted call back the day before expiration and profit from it and then roll it into the next option cycle. The profit from that option will lower your cost on the stock position.
I think this is way better than spread trading because the overall profit potential is much greater being that you're profiting from the stock itself and the options, not just the options spread.
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