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Strategies & Market Trends : Selling Puts: Have Cash Will Travel -- Ignore unavailable to you. Want to Upgrade?

To: Dan Duchardt who wrote (756)	12/20/1999 2:25:00 PM
From: the options strategist	Respond to of 1235

Hi Dan. Let's see if I can clear up what I said. Did not mean it to be complicated. First, the purpose of these plays was to see how I could make a few bucks by taking advantage of options week when the market was not going anywhere in particular (OEX that is) 12/13 OEX 761.92 I checked for support and resistance and decided to place the trades outside of those. Premiums were good and my plan was to get out at breakeven if I could. My watch was on the support and resistance. My risk was low really as long as the market was fairly steady and I stuck to my plan. How I could have lost money on this particular play: 1. getting cute and legging out of one side of the position when OEX was down or up. (I have lost money doing this before) 2. not taking profits when the opportunity arose. Example- one of the days OEX dropped to just below support and if I had not waited until I got to breakeven I would have chickened and bought back the short side of the put spread. OEX 5 min later went back up and had I legged out of one side of this position I would have lost the total credit plus Same with the call credit. If I had not closed out and taken profits a couple of days before expiration day when OEX shot up I would have lost the credit on that. So this is what I mean when I say the risk can be high even on a low risk trade. The major hi risk to this play as I see it is that it was a Dec. play and I had no time for follow up action if needed. And if OEX had decided to get very volatile, one would need to be fast in action to avoid losing everything. The market was just kind to me on this one but I learned that: I need to stick with my support and resistance system unless I have a profit - If I have a profit, don't be greedy waiting until exp. date to keep the whole credit, i.e. I closed out for $565 rather than trying to keep the whole credit of $1,125 (where I would have lost it all on friday when the market shot up). <Isn't the risk here more than what it cost you to get into the positions? Worst case, on 5 contracts with a strike spread of 10, aren't you risking $5,000 on each spread?> Worst case on the put spread was a risk of $4,250 which is a hi risk for a low return. Worst case on the call spread was a risk of $3,875. But unless we had a major disaster or I fell ill and could not get to the market, I would not have allowed it to get this far. Always know my break even point and try to get out at that point. <Can I assume you want volatility to give you an opportunity to profit on both sides (call and put spreads), but NOT want a trend that would push either side too far? Is there safety in playing both sides so that if the stock breaks in one direction, one position will lose and the other will offset the loss?> Dan the way OEX has been moving sideways I did not want a lot of volatility. I wanted it to continue to move sideways and ideally to be above 755 and below 770 at expiration. However, Thur it got up to my breakeven pt but I had already closed out on Wed, hence the ability to profit on that spread. On the strangle that I did was another play. On that one I WANTED a lot of volitality. Since my debit was $9.00 I would have preferred the market to go heavily one way or the other. I thought I was going to lose money on this play but the rally on Fri saved me. Hope this summary is clear to you. I am currently waiting for tomorrow after Greenspan before I place any positions on. Good trading. jj

To: Dan Duchardt who wrote (756)	12/20/1999 3:00:00 PM
From: the options strategist	Read Replies (1) \| Respond to of 1235

Hi Dan. Let's see if I can clear up what I said. Did not mean it to be complicated. First, the purpose of these plays was to see how I could make a few bucks by taking advantage of options week when the market was not going anywhere in particular (OEX that is) 12/13 OEX 761.92 I checked for support and resistance and decided to place the trades outside of those. Premiums were good and my plan was to get out at breakeven if the market went against me. My watch was on support and resistance. My risk was low as long as the market was fairly steady and I stuck to my plan. How I could have lost money on this particular play: 1. getting cute and legging out of one side of the position when OEX was down or up. (I have lost money doing this before) 2. not taking profits when the opportunity arose. Example- one of the days OEX dropped to just below support and if I had not waited until I got to breakeven I would have chickened and bought back the short side of the put spread. OEX 5 min later went back up and had I legged out of one side of this position I would have lost the total credit plus Same with the call credit. If I had not closed out and taken profits a couple of days before expiration day when OEX shot up I would have lost the credit on that. So this is what I mean when I say the risk can be high even on a low risk trade. The major hi risk to this play as I see it is that it was a Dec. play and I had no time for follow up action if needed. And if OEX had decided to get very volatile, one would need to be fast in action to avoid losing everything. The market was just kind to me on this one but I learned that: I need to stick with my support and resistance system unless I have a profit - If I have a profit, don't be greedy waiting until exp. date to keep the whole credit, i.e. I closed out for $565 rather than trying to keep the whole credit of $1,125 (where I would have lost it all on friday when the market shot up). <Isn't the risk here more than what it cost you to get into the positions? Worst case, on 5 contracts with a strike spread of 10, aren't you risking $5,000 on each spread?> Worst case on the put spread was a risk of $4,250 which is a hi risk for a low return. Worst case on the call spread was a risk of $3,875. But unless we had a major disaster or I fell ill and could not get to the market, I would not have allowed it to get this far. Always know my break even point and try to get out at that point. <Can I assume you want volatility to give you an opportunity to profit on both sides (call and put spreads), but NOT want a trend that would push either side too far? Is there safety in playing both sides so that if the stock breaks in one direction, one position will lose and the other will offset the loss?> Dan the way OEX has been moving sideways I did not want a lot of volatility. I wanted it to continue to move sideways and ideally to be above 755 and below 770 at expiration. However, Thur it got up to my breakeven pt but I had already closed out on Wed, hence the ability to profit on that spread. On the strangle that I did was another play. On that one I WANTED a lot of volitality. Since my debit was $9.00 I would have preferred the market to go heavily one way or the other. I thought I was going to lose money on this play but the rally on Fri saved me. Hope this summary is clear to you. I am currently trying to decide whether to trade a straddle/strangle today or wait for tomorrow after Greenspan before I put any positions on. Good trading. jj