AAPL Trade

Just before the close I added an AAPL Ratio Butterfly. I believe that there is not much risk on the downside. The RB is designed to be profitable above 575. I don't expect it to go in that direction and am rather looking to harvest profits as we hit first 10% and then 15% on a journey upward. I love butterflies. They can be structured to fit a scenario while at the same time giving enough protection when my view is wrong, mostly still making a profit.

Taking my Profit

The pic below shows a trade I have on: a double butterfly. You can see details of the trade on the pic. There was a long call as part of the trade but I have taken profit on it. The position is showing a profit of almost 10%. The problem is SPX is more difficult to get fills in than RUT and I can't get out without giving some profit back.

While ETFs are easier to get fills in, the commissions are too high. The problem with SPX is that it's still pit traded and has high volume - usually from big players. My small size seems to be ignored. I don't seem to have the same problem with the RUT. While I'm an ex local, getting rid of the pits couldn't happen soon enough for me. Even with the technological aids that didn't exist when I was in the pit, pit traded instruments are a lot less efficient for retail traders than the electronic traded instruments.

Finding Trades

I'm flat on all my trades except the SLV which I'm trying to close. I got out of the calendar part of the trade and now just have the butterfly. I'm trying to sell it at 1.50 which will put me into profit of about 1%+. This recovers the loss on the calendar. Still not a fan of calendars. It's partly me and partly calendars. They are just not as good a risk/reward as butterflies.

Trading options is either keeping all your eggs in the same basket and watching it carefully which is what I did mostly on the floor - I had two guys working for me and each traded just one market. The other way is to create a diversified "portfolio" of trades. Somehow, off floor, I'm not comfortable carrying anywhere near as large a position as I used to carry when I was on the floor. Here I feel like a retail trader when on the floor I was the market, or at least one component of it.

My butterfly trades have been very solid but a black swan is always hiding in the bull rushes so I decided that diversification was the way to go. I day trade futures for a couple of hours and then want to do other things away from my computer. The technology is there to do that with option trading so the challenge was to find enough trades on a regular basis.

After trying a lot of things, I decided to turn to the technology I know. I've set up an algo to look at a list of stocks, ETFs and indexes against which I do option trades. I have two live algos: one uses daily data and the other uses bars drawn every 3 hours. I can do this on both TradeStation and MultiCharts.

I have a strategy live that finds the trades. OptionFlo. The trades are on the underlying and don't get executed automatically. What happens is that I get an email alert when there is a possible trade. It can only happen on the US open and at set 3 hour intervals so I know when I could expect an email if I'm not on a PC.

When I get a mail, I jump onto my iPad or laptop and have a look at the chart on my VPS in the cloud. If I like the chart I put on a trade - a vertical credit spread, Iron Condor or Butterfly. This process can take about 6 minutes as my morning prep gives me a heads up of the possibilities - alerts are not a surprise. I also get emails if the market hits milestones on positions I may need to protect. All exit orders are in the market GTC after a trade is initiated.

I'm using both MultiCharts and TradeStation for OptionFlo. The big advantage with this methodology is that I have a structured and consistent process for finding trades that have been back tested as both high win rate and profitability. The pic below shows the RadarScreen that looks for trades. There are two screens: a daily and a 180 minute. When I get an alert, I click on the symbol which is linked to a chart and I make my assessment on whether to take a trade. The shorter term trades are either a Vertical Credit Spread or a Directional Butterfly. If the markets look like they are staying in a range then an Iron Condor is my trade of choice.

State of Play

Here are a couple of the positions I have on at the moment: a butterfly and an Iron Condor. These, I guess, are bread and butter trades. I'm looking at putting on some bear cll vertical spreads now that there is some topping indications. AAPL is quite hard at this level in case it does break the psychological $700 convincingly. But somehow I think it's all in the price unless iTV or a mini iPad rear their heads.

Below is a learning trade, for me, at least. I trade Calendars badly. I think it's because I never liked trading them on the floor and I usually only made markets in the front month where the volume was in those days.

This SLV position started off as a -10/+10 calendar that went negative. I wrapped it in a butterfly which I do like to trade so I could get to break even on the trade. The way I trade calendars at the moment is to require almost instant gratification. This one went negative too quickly so I did the butterfly adjustment. It's a tiny position as I'm still trying to find a better way of trading calendars but I'm showing the trade as an example of the adjustment.

Rally, Rally, Rally!

See my "I told you so" here in the day trading blog.

Covered All Open Positions

I covered the SPX Iron Condor position at -1.25 after buying it at -2.30 making a profit of over 10% for the trade. I also covered my RUT Butterfly at 2% profit. I am waiting for the ECB announcement tomorrow before I take any more swing trades. I'm smelling a possible rally from here. I say "smelling" because there are only the earliest of technical signs that may not result in the rally coming. However, due to the uncertainty, I'm sure I'll be able to put on bigger size at a better price when I'm confident in what I'm seeing.

Time is on My Side

I try and develop option trades that give me plenty of time to make decisions. Option trades can be much more forgiving of timing and that means not being stopped out unnecessarily - one of the main reasons people lose trading.

My RUT trade is a perfect example. I took some profit yesterday but ended up with a delta/theta ratio that was unfavorable. I saw it and knew it and remarked upon it in yesterday's post. But the good thing was that I could wait until today and see if the market co-operated before I had to make an adjustment.

Well, the market did co-operate and I sold the second butterfly right at the ES support. The total trade made almost 10% on my max Reg-T margin of $102,000 since August 6.

My "problem" now is to get re-invested by finding another trade with a high win rate. Well, no problem really because I just put on a new RUT butterfly for the October expiry. As you can see in the pic, the delta/theta is normal around 1 to 1. If the market moves down to my level, I take profit and if it rallies enough I add another butterfly to the position to make my teepee into a marquee. Having a very specific trading plan for the trade makes it easy to manage in less then 5 minutes a day.

The SPX Iron Condor trade is still cooking. I'm up about 3% at the time of writing this.