Lately I have been selling a far out of the money put in S&P futures. The past two weeks they have done very well. Well, on Wednesday I sold a put while the market was tanking but it kept falling. I was assigned the futures contract as the market fell well below my strike price. So Thursday morning I was down a significant amount and sold a call against the position. Today I was able to close the position for a very nice gain. If I wouldn't have sold the call against the position it would have been a huge gain, but I will take a small profit any day.
Thanks much Grant!
I love hearing about these trades of yours, especially the ones featuring selling calls/puts.
For others:
There are alot of different strategies that one can use to enhance the chances of making money on a trade using options.
Selling the option in combination with actually owning or shorting the commodity or stock or just selling the option.
One could buy a stock at $9 for the dividend for instance and sell $11 calls.
If the stock goes lower, you collect 100% of the premium on the calls, along with the dividend to minimize any losses on price depreciation. If it goes higher, you still collect the dividend, and partake in the move up to a price appreciation of $2(so you limit the upside).
After it gets above $11, your long position and short call offset but you still make $2(the difference $11-$9 from where the call went into the money/went against you) + the dividend.
With the stock market crashing lower on Wednesday, you had to take defensive actions to minimize potential losses and that can sometimes mean using some creativity but always a well thought out plan ahead of time.
Some of the best trades are those that have a drawdown and come back to a profit...........just because it "feels good" after experiencing some temporary pain for it to have a positive result.
What I used to always ask myself when facing a drawdown is:
If I did not have this position on right now, would I be putting it on for the same reason that I did earlier?
If the answer is yes, then you stay. They say never add on a drawdown because it means that you were wrong but it often means that you were just early.
If the answer is "yes" if I was flat and thinking clearly, not facing the emotions caused by the market going against me, I would clearly want to put this position on at this price because of a well thought out strategy, then I would stay with it.
That's not to say you should hold on forever/get married to a position because commodities have 20 times more leverage. On just a few contracts, you can take a big hit if things go the wrong way(like corn did earlier this week for the bulls for instance earlier this week) At some point, we all have to admit we were wrong and define beforehand how much we will risk before the market tells us........"you were wrong dude! time to cut your losses.
Each situation is different. Some advice stops. From 1992 to 2009, I never traded with a stop. I traded the weather and got out when the weather maps changed against me. NOt a good idea for most people.
Grant,
I get the impression that you are just taking a ton of high probability trades without enough size to cause major pain on drawdowns, which are easily manageable.
One contract at a time. I will not risk too much. I also have a spot that once it drops below, I get out. Not a stop loss, I just watch. Keeps me engaged.