I have finished my Options class last Thursday. Learning Options is really challenging. I wondered if my age was a factor in my learning progress. The class provided me the confidence in using Options as an instrument to trade the US stock market. Options was really a very challenging subject when I was first introduced by Conrad in his pattern trading course in Jan this year. I was completely lost. Chen Pang provide the fundamental insight of Options in a very systematic style, making it easier for us to understand. This learning of Options trading instrument alone shock my confident and literally took me almost 8 months. Learning to trade from scratch, is a journey that I would not forget.
Ok. Now that I have learned Options, I set myself a target to practise it. As recommended, as a novice I should start trading Options on the SPY, which is the ETF of the S&P500 index.
My teachers Conrad, Brian, Chen Pang always remains us to have a trading plan before we start to trade.
So where should I start.
August & September is known to be bearish month. Ah… I did the programming for seasonal probability, but I am not so confident on my programming as it is not verified yet. Then I remembered that I have brought a large pile of trading books call “Stock Trader’s Almanac 2016”. Ok, I think I should start to base my trading of SPY base on this book.
Flipping to page 83 for the month of Sep 2016. Reading through the month, it seems that Sep is a bullist month. So many bull heads.
Base on the technical analysis and the outlook of the economy, I know I will be more comfortable trading the bear.
From the Almanac summary, it seems that the Sep starts up strong, and has been usually ending weaker. This seems good for a bear position.
Janet Yellen has just indicated on 26 Aug 2016 (Fri) that the market fundamental is good and indicated that the Fed rate hike odds have strengthened. Interest rate increase will be likely for the next month, and another one before the year ends. This can a good news for the economy, but we will not for sure knows how the market reacts. As a precaution, I have to wait 3 days before making my first entry. Friday’s (26 Aug 2016) market starts up strong, and starts to lost points after noon. I will not trade on Monday. Tuesday will be a good day to begin with.
From the Almanac, Tuesday (30 Sep 2016) is also known to be a bearish day with S&P down 15 of the last 19 years.
1st of Sep which is a Thursday is a bullist day. I will be selling a call vertical spread, so it probably ain’t going to affect much as I am aiming for the month’s end bear result.
Labour day will be on the 5th of Sep (Monday). Market will be closed. I happened to come across on the Almanac page 88, talking about the market statistic for the 3 days before/after a holiday. Two days before labour day, there is a significant chance of market going down. This would probably be 2 Sep 2016 (Fri). The day before 1 Sep (Thu) could be a bull, and a bear on Fri may just make sense. I will probably look out for a entry opportunity for this 2 days.
During the read, I can see that the second day after a Thanksgiving is a very bearish day. A day before Thanksgiving is a very bullist day. It is too significant in probability and I shouldn’t miss it. This year the Thanksgiving will be on the 24 Nov 2016 (Thu). So 23 Nov 2016 (Wed) to 29 Nov 2016 (Tue) is an opportunity to look out for a bear entry. 30 Nov 2016 (Wed) is the last day of the month, and is indicated in the Almanac as bearish. This is also similar for Chirstmas and New Year Day.
For Sep, there are many bulls in between. 16 Sep 2016 is a September Triple Witching, Dow up 10 of the last 13. Seems very bullist. Triple Witching is a day when many Options & Futures expire on the same day.
Bearish days on Sep are 21, 22, 23 where institute are doing portfolio restructuring. FOMC meetings is on the 20 Sep. 21-23 Sep will make sense. There is a chance that there may be a Fed hike. This will means that the 3 days will be quite wild. Must avoid.
Market has been climbing higher highs, and has been hovering at this peak for quite sometime. Base on the odds, it make sense to make my intended bear entry in Sep period. The following entry date are identified. I will look out for a chance for a minimum-risk-entry. MRE will be base on market internals and S&P500 index/price gap.
The Options to trade on will be the Sep, Oct, Nov, Dec expiration contract, selling a call vertical spread as a means to collect the Options premium.
A check from the historical chart for the past few years shows a high probability that Sep will ends up lower/sideway which is suitable for a short call vertical spread. Crossing over to Oct, need to be careful as it tends to move up for the pass 4 of 5 years.
Possible entry day to look at for
- 30 Sep 2016 (Tue)
- 1st/2nd Sep 2016 (Thu, Fri)
- 21, 22, 23 Sep 2016 (Wed, Thu, Fri), be careful as FOMC is on the 20 Sep (Tue).
Oct is known as the jinx month. Major crushes happens on this month. Earning season also started.
Dairy of my first executed trade
Questions starts streaming in just as I am wondering when I should place my entry. I was wondering if I should wait for the MRE (minimum risk entry). But then it doesn’t seems logical because I am going to to a short call vertical spread which is a long term strategy (1-3 months).
Chen Pang has confirmed that MRE has little significant.
Me: “Actually does MRE really matters (or make a difference) if we are doing short vertical spread options? Short vertical spread is a 1-3 months duration trade, right?”
Chan Pang: “If your trade time target is 1-3 months, then MRE does not really matter.”
Then it makes me wonder if monitoring of market’s internal, trade entry after lunch time, etc… makes sense.
Me: “Selling Options when volatility is at the high give us more premium to collect. I am thinking this should be the same for selling vertical spread. And I am thinking now to take entry when VIX is at a high. Does this thought my mine make some sense?
Chen-Pang Wong. How do you normally take the entry, when you are doing such a long term trade (using vertical spread)? Since short term fluctuation doesn’t make too significant difference, MRE, monitoring algo day or not, making entry after lunch, monitoring market internals, don’t seems to make much sense to me now. How do you execute your order (short vertical spread) after your trading plan is firmed?
Thank you for your sharing.”
Anyway, I proceed to look at the market internal and think that today is perhaps a good day for entry. It is a very bullist day as predict in the Almanac. So today might be a good opportunity for entry as tomorrow is a bearish day (Last day of the month).
What I have posted on Options group facebook:
“Short Vertical Call spread:
Short SPY 217 Oct(21) $4.17
Long SPY 218 Oct(21) $3.52
Max Loss = $175
Max Gain = $325
Short leg delta = -0.56 (I think it is about 0.56, don’t know where to look for this value)
Hot now. I was really sweating, because I was placing my first real Options trade. Waiting for a limit order on the spread to maximise the premium, but it never seems to hit. The chart seems peaking and it is getting late night, I lower down my limit, and ding I hear that sound. Base on Almanac, today is a bullist day. Like a divine book, so accurate. Tomorrow high chance bearish, due to month end. Next month’s probability of a down side is between -0.2% to -0.5%. The S&P already reach a new peak. There is probably no major event which can let it peak further.
Hope for the best, there is little I can do now. Losing money now as S&P 500 is climbing higher. I did my first options trade, I did my first trade on the US market. Can go to sleep now.”
After this trade was done, I am wondering if waiting for the S&P500 to move up to a higher price would be helping in my position of selling the same vertical spread strike of 217/218. Should I just continue to wait for the S&P number to go higher, or should I just execute without worrying so much. What is the difference it would made if I waited for the same strike pair?
After looking at the Options chain, I do notice that the spread premium is going to increase as the strike gets more and more into the money. So much so that it may be going into the next strike, which means that I will be able to short call a vertical spread at a even higher strike collecting a similar premium. Which this will provide me a better chance of getting the direction that I wanted.