I put on a QQQ credit spread today, sold the Jan 184 calls for 6 1/2, bought the jan 190 calls for 4 1/8, for a credit of 2 3/8.
It is a small position, 4 contracts. My maximum gain is $950 and maximum risk is $2400 - $950 or $1450. This is consistent with the recommended risk/reward in the recent Technical Analysis of Stocks and Commodities article. (Actually, I think the author would recommend a bit more risk than this.)
The only other credit spread I've done was an OEX call credit spread (a couple of months ago) much closer to expiration, where my risk and reward were equal. I let both contracts expire, and collected the maximum profit.
The article suggests that you should take more risk than that, and make sure to close-out losing positions before they go to the maximum loss.
Since it's on the QQQ, I will have to pay commissions to close out at least the short side on the way out.
The NDX options were just too rich for my blood. That is, I didn't want to put on a position that big.
I legged-in to this position, and could have done better, as the market was in recovery at the time. I bought the long side first, but sold the short side just a minute after buying the long side. A 10-minute wait would have gotten me a nice cushion that would have at least made up the bid-ask spread...
I just wanted to get my feet wet, and this was the safest thing I could think of in semi-panic mode. Wasn't sure if I wanted to stick my neck out on straight puts or a debut put spread.
With volatility increasing (30 at the close), and perhaps spiking, I think it make sense to spread-out small credit spreads over a few days here and "average in" to the volatility.
I'm thinking of doing an IIX credit spread tomorrow, and perhaps QCOM. Not sure IIX is the best representative index for the Internets though, as it includes a lot of stocks that are really not core Internet companies. Is there any liquidity in any of the other Internet indices?
BTW, I have just RADICALLY shifted strategies: I'd drifted away from options, and was furiously day-trading long NASDAQ stocks in December. It paid off: I increased my portfolio by almost 75% in December.
I decided to shift, not exactly because of the slip today, but because of the way that stocks have been trading: market makers have been backing-away from my sell orders, just like 1987 (this is supposed to be fixed now, and isn't supposed to happen again :) ).
Whether or not that means a big drop is coming remains to be seen. What it did convince me is that I could no longer make money day-trading long NASDAQ stocks, when the only way I can sell a stock is to become the offer, and step it down until somebody will take it. |
