Calm Before the Storm

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The following was an email communication detailing my successful trading of the RUT with vertical put options.  My biggest loss was yet to come as I was not incorporating enough information into my trading decisions.  I simply was picking a strike 2 sigma away from the price.  This was insufficient, and cost my trading account an incredible reduction in capital.  I personally love the “have I provided enough buffer” question.  The very next week I would break my trading rules, and begin a voyage towards disaster.  It did seem to good to be true.  The trading parameters that are currently set up for the RUT vertical put credit spread (RVPCS) where developed AFTER the loss.  You pay for your education one way or another.

May 23rd to June 27th.  Up $700.  Effectively putting up $10-14K in capital per weekly trade.  One loss trade.  The loss was a test on my part.  The price was no where near the strike and no danger of assignment was present.  My broker sends many false alarm notifications about margin calls.  This is primarily due to clearing of contracts over the weekend.  I didn’t know that at the time and sold 1 contract to determine the effect on margin calls.  It didn’t make a difference.  I lost money.  Oh well.

The -1.6% hurts the average return pretty strongly.  With it incorporated (because, hey, it’s conservative) average return per week is over 1%.  Yeah, that’s ~50% APY.  With out it, the avg. return comes to 1.23% (~64% APY).

These are PUT verticals.  I am awaiting with bated breath for the market to turn directions.  That will be the test of my strategy.  Have I provided enough buffer for the price to move AGAINST my strike?

Also, I have noticed the volume for CALLs is very low in comparison to PUTs.  Interesting.


Disclaimer: The information presented does not consider your personal investment objectives and should not be taken as a recommendation. Further, it shall not be construed as an offer to sell or a solicitation to buy any security mentioned. The risk of loss in any stock, option, or futures trade can be substantial. Consider all relevant risk factors before trading.

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