Tuesday, December 22, 2009

Christmas Musings and a Trade Journal

Though Christmas is still a few days away and I'm still officially in "work" mode, it seems my mind has taken an early sabbatical. I find myself entirely uninspired on what subject matter I should cover in my next few posts. Some weeks it seems I could drum up content in my sleep, while others prove quite a bit more difficult. Tack on the fact that the markets are in snooze mode and you've got an environment that is rather unconducive to creative thought. One positive development we've seen over the past few weeks is a minor uptick in the amount of chatter in the comment section. As always, I encourage readers to post comments, thoughts, and questions in the comments section at the end of each post. On a side note, sometime before the end of year I plan on posting a recap of my top ten posts of 2009.

As for today's post, I'll offer up another trade journal you can mull over (click image to enlarge).

[Source: EduTrader]
December 14th
Trade Setup: Though small cap stocks exhibited relative weakness in the October to end of November time frame, we've since seen them exhibit relative strength in the midst of a range bound market. On December 14th, the Russell 2000 Index (RUT) broke out of an ascending triangle pattern. Based on upcoming holiday and quiet market, options remained overpriced, thus a sell.

Strategy: Sell a short term, OTM January 550-540 bull put spread.

Net Credit: $1.00
Max Reward: $1.00
Max Risk: $9.00
Probability of Profit: 1-.16 = 84%

Target: Close the spread @ $.20 or better (currently it's trading at $.35)
Trade Management: Close the spread if RUT breaks below support (570)

So far so good. Following the breakout, the RUT has continued to exhibit strength. This places the 550-540 put spread further out-of-the-money aiding in reaching the profit target quicker. Implied volatility (RVX) also continues to drop which helps to quicken the decline in value of the spread.

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Rene said...

Hi Tyler - do you prefer using index options versus the options on the ETF for the index? If so, why? What are the similarities and differences that one should be aware of when using index options? Thanks!

Tyler Craig said...

Great question Rene. I'll tackle i in tomorrow's post.


Now thats a great target.