A look inside my process

So as we transition from one month to the next, I thought it’d be a good time to give you guys a rundown of how I do things.

First and foremost the days of risking a large percentage of my capital per trade are OVER! There for a while I was getting lucky, but that all ended in the 4th quarter of 2014

These days I keep it small... never risking anymore than $100 per trade (1% of my current account value). In fact, the risk I have on the table today for each position ranges from $25 to $56. So as you can see I’m keeping my risk VERY low.

Now when I sell credit spreads I’ll ratchet that risk up a bit, but still no more than about $150 per play. 

Alright, so how do I even decide what trades to get in?

I’ve got two main sources... WallStJe$us and Mr. Breakout’s website SharpTraders.com.

This website is a GREAT tool! A few times a week I’ll check out several of his links, like cups with handles, all-time highs, 50 day bouncers, and high tight flags! He’s constantly updating these scans... and it’s all FREE! You REALLY need to check out Mr. Breakout’s website if you haven’t.   

Here are some real-life winners found on his website - AGEN, CLDX, RDWR, and KING. I’ve had the most success using the “cups with handles” scans.

Now to WallStJe$us... this guy is THE MAN! He tweets out BIG option bets on stocks. He calls 'em “sweeps”. If you get multiple sweeps you get #STEAM and that’s #WG (Wise Guy) activity! For an explanation of these terms check out his website

The bottom line is this, he’s looking for a specific type of option activity... the kind that tells you the “smart money” is making a big bet. I don’t know about you guys, but I want to follow the smart money. I’ve had A LOT of success trading his tweets. I know many of the traders who follow him play options off his alerts. I just play common though... it’s what I’m comfortable doing for now.

When I see an alert come through on WSJ’s feed - I usually jump on it right away. Now, that may sound crazy or irresponsible, but I already know how much capital I’m going to put in play and how much I’ll risk. So when I see his alert all I have to do is simply adjust the numbers.

Take for example WBA... WallStJe$us alerted us to some big March 6 call buys on February 23rd. I went to the chart, took a look at the daily candle - it’s important it hasn’t taken off yet, I try not to chase. Anyway, if I like the chart I check for the low of the day. WBA was trading around 78.40 with a LOD at 77.28. So I knew I was looking for a stop around 77.25. And since I’m only putting about $2,000 in play I knew I’d buy around 25 shares, which is what I did. I bought 25 shares at 78.40 with a stop at 77.25, meaning my total risk was $28.75 plus $8 for round-trip commissions. So I’m risking roughly $37 to see if this thing takes off... and it did. Five days later I sold at $82.92 and $83.29.

I do the same thing with Mr. Breakout’s information. The day I buy I set my stop at that day’s low. Sometimes I place the stop at a recent low that was made a few days before, but it's usually very close to the current LOD. 

Stop placement is KEY people! If the stock continues sideways, or drifts a bit, I’ll keep the stop in place. However, once it gets moving I’ll then take my stop up to each day’s low. So as long as the stock makes HIGHER lows each day I’m in the trade! 

I’ll stay in until I reach my price target, or get stopped out. This is the tough part though... knowing where to take profit and when to let it ride for a bigger move. It’s managing THIS part of the trade that separates the best from the rest! 

So far in 2 months I’ve put on 41 trades... 22 winners, 16 losers and 3 pushes. That’s a 58% win rate. I’ve made $572.56 in that time. I’ve also been back-testing my risk/reward ratio and how it works with my win rate. I tell you, it’s been very interesting to see the results. Maybe I’ll break that down for you in a future post.

For now, if y’all have any questions or suggestions - hit me up sometime at theoptionrider@gmail.com

A fantastic february

I’m very happy to report February was my best month in more than HALF A YEAR! I made $737.52... that represents more than a 7% return on my $10,371 account!

Here’s the breakdown of my gains for the month

Stocks - $371.52

Option Spreads/selling covered calls or naked puts - $696

Directional Option Trades - ($330)

Alright, so lets take a closer look at my stock trades. I’ve made risk management my top priority this year. Basically what I’m doing is buying somewhere around $2,000 worth of stock and then risking no more than about $85 per trade. In fact, most trades I’m only risking $35 to $50 bucks. Playing it small time keeps my emotions at bay which allows me to find an ease... a rhythm in my strategy.

So what’s my strategy you ask? Great question! And in the next few days I’ll post more details about that, but for now lets just focus on the results.

In February I had 14 winners, 10 losers and 3 washes - that’s a 52% win rate! Now lets take my TWTR trade off the table because I bought it back in November before I implemented the $2,000 per trade, $85 max risk criteria. This also means I’m going to deduct the $195 profit from that trade.

So when I take TWTR out I’m left with a 13-10-3 record, which represents a 50% win rate! My adjusted stock trading gains for the month are $176.52. This means even with a 50/50 winning percentage I’m still profitable! This is a good sign! It means I’m keeping my losses small while letting my winners run. 

Here’s a look at all my stock trades for the month.

 

Now moving on to my option spreads and covered call/naked put plays. I had a very good month selling options! I booked $696 of profits. 

 

Finally to my directional option trades. These are options bought with the intention of playing a move and then selling the option for a gain. As you can see I had a tough month, but I was successful in cutting my losses! I I didn’t let any run too far against me - something I have struggled with in the past.

A fabulous finish

Wow! 

A great month comes to an end today. Later this weekend I'll bring you all the details of my highly profitable February (more than a 7% return)!

But for now... let me tell you about my day.

WBA paid me well this week! I got in Monday at $78.40 and sold half this morning at $82.92 and the rest this afternoon at $83.29. That's a 6% return in 5 days!

In addition, I opened two new trades today... one in SNDK and the other in NKTR.

And finally, I got stopped out of LOGI and KING - both pretty much at break-even.

Here's a look at my stop placements::

RDN - $15.65

NKTR - $12.70

SNDK - $78.45

KN - $19

FNSR - $20.50

IRM - $35.80

Thursday (2/26) Update

Today I closed out my TWTR $47 weekly put play. As you can see in the table below I sold to open this position last week for a $63 credit. I bought it in today for $6, booking a $52 profit!

Moments later I turned around and sold to open the March weekly $49.50 put for a $101 credit.

Now someone asked me yesterday on Stocktwits if this strategy was really worth it considering the limited upside. It's a fair question, but I'd say take a look at my performance over the last three weeks. I've made $245 selling naked puts - which is about 2.5% of my total account value! (I started the year with a $10,000 portfolio.) Imagine if I can do that each month for a year... we're talking about more than a 25% return! 

Lets move on to my stock trades...

I got stopped out of EOG, BK and GPRO today. The losses were minimal as you can see in the table below.

I also opened a new trade in IRM.

As for my current positions... I moved up stops in RDN (15.60), LOGI (14.80), KN (19), FNSR (20.50), and WBA (79.60).

I'm holding KING the same at 15.70.

Closed out a great winner

Today I closed out the second half of my AGEN position for a 13% gain! I got in this stock back on 2/6 and sold the 1st half last week for an 11% gain. Take a look for yourself below.

Moving on to the other trades I set up today (highlighted in BLUE) - GPRO and EOG. I bought 25 shares of EOG this morning... my stop is 91.25. I'm looking for a move to the $96 range. Then this afternoon I bought some GPRO just before the end of day pop! My stop is $43.50 and my first target is around $47.50.

Next up FB - Today I bought to close my $77.50 naked put booking a $41 profit!

Now here's a look at the stop placement for my open stock trades. The number in parenthesis represents total amount at risk... including commissions.

WBA - $78.20 ($13)

BK - $39.40 ($17)

KING - $15.70 ($47)

KN - $18.95 ($62)

FNSR - $20.45 ($46)

RDN - $15.50 ($43)

LOGI - $14.55 ($36)

Stopped out Tuesday

I started the day by getting stopped out of three trades, AAL, HOT and JRJC.

AAL was especially frustrating because I was THIS close to selling yesterday above $52. BUT... I'm working on staying in trades and not taking profits too soon. Hey, sometimes they run, sometimes they don't... and this one didn't. In fact, AAL got downgraded and gapped BELOW my stop of $50.90. I sold at $50.02 for a small loss.

I took a larger loss in JRJC and basically broke even in HOT.

I opened new positions in BK and RDN. I've got a stop in BK at $39 and RDN at $15.50. 

I moved up my stops in AGEN (5.40), KN (18.50) and WBA (78.20). 

I'm keeping my stops the same in KING (15.65), FNSR (19.97) and LOGI (14.55).

For a list of all my open positions, winners and current P&L stats... click HERE


Making moves Monday

Stopped out - RHT, 2nd half of position - out at $69.10 from $66.94. Sold 1st half at $70.05 on Friday.

New positions (stops in parenthesis) - KING (15.65), LOGI (14.55), WBA (77.25) and JRJC (5.65)

Moving UP stops - AGEN (5.20) Sold 1st half at $5.30, AAL (50.90) and HOT (79.25)

Holding stops - KN (18.40) and FNSR (19.97)

Positions highlighted in blue are the ones referred to in this post


Position review

So far I'm having a good 2015 and great February! I've booked $620 of gains this month and $992 for the year - that's nearly a 10% return already for 2015!

However, I've learned that doesn't mean a whole lot. All it takes is a ONE bad risk management decision to BLOW-UP a full year of gains. 

Been there and done that!

That's why this year my TOP priority is risk management and position sizing - PERIOD! That's it! I'm trying not to worry about making a bunch of money. I simply want to focus on managing my risk. I know if I do that well, the money will follow.

Alright lets move on to my open positions... starting with my option trades. (You can check out all my open positions HERE!)

ESV - Boy this stock right here has singled-handedly DESTROYED my account! Well not the stock, but my stupid decision to try and play a bounce. It started last August when I put on an October put spread. I just knew a bounce was coming, so I put on a bigger position than normal. Well we know what's happened with oil... I got crushed! But instead of cutting and running - I DOUBLED down on a December put spread - another STUPID decision! Again, I got crushed... and that leads me to this March 37/36 put spread. I'm playing 10 contracts - and baring a miracle, I'm gonna get SMOKED again. Luckily, this is the last cancer position I'm carrying from 2014. 

KO - I've got two plays in this name... a 44/43 May put spread, and a 42/41 April put spread. The May play is 10 contracts - which is too many, but I set this play up last November before I cared about position-sizing. The April play is only 2 contracts, which is the proper position size and risk for my account. 

T - This is my last outsized position. I'm playing 10 contracts on a 34/33 June put spread. I set this trade up in December when the stock was trading around $32.50. I love when stocks like this get WAY oversold. It's the perfect time to set up a longer-dated ITM put spread. This allows me to collect a BIG premium, which I did. I got .52 per contracts, so on 10 contracts minus commissions - I got a $500 credit

PM - I'm holding 2 contracts on a June 82.50/80 put spread. Same thought here as the T play. I set this up January 2nd when PM was trading just above $80. 

TWTR and FB - Now to my weekly put selling strategy. I like to find, trending momentum stocks and sell naked puts with the goal of these puts expiring worthless. The thing I like about stocks like TWTR and FB is they pay good premiums because of the volatility. TWTR just had a good ER and the momentum is back. FB has had a TON of bullish call option activity so it looks like this stock is heading back to all-time highs. Both puts were sold slightly OTM of the money, so the probability of them expiring worthless is a bit higher. BUT I still get to collect a decent premium. If the stock were to move against me, then on expiration day I'd simply roll out the position. This is a bit of a risk, but one I am comfortable with.

Moving to my stocks...

AGEN - I've already booked an 11% gain on the first half of this position. Now I'm holding the rest with a stop just under Friday's low at $5.13. My "take profit target" is around $5.50-$5.75

TWTR - I'm holding 50 shares in at $47.35 which I'm looking to unload around $52.

RHT - I got in this trade at $66.94. On Friday, I sold half at $70.05. I'm trailing a stop on the other half just under Friday's low, $69.10. No target here... just letting it ride.

HOT - I opened this position Friday. I'm in at $79.01 and I've got a stop at $78.50, Friday's low. My target is $82.

AAL & KN - Both positions were opened on Friday, and I've stops in - guess where? Just under Friday's low. I like AAL back to $55-$56 range and KN to $21-$21.50 area. 

FNSR - I'm in at $20.87 with a stop at $20.45. My target here is a gap fill to $25.

Booking gains, taking losses and tripping stops

Oh yeah... and I also opened 3 new positions! It's been one helluva busy Friday, so lets dive right in!

Starting with my option plays...

SMH - I closed out my two puts in this trade for a $106 loss. She just hasn't danced for me, and I can't let it run against me anymore.

Sticking with options... My MU credit put spread expired worthless today. I put this trade on back in Mid-January when MU was trading below $29. By setting it up in the money I was able to collect a NICE premium. Two contracts paid me $102 AFTER commissions.

I also closed out my March T credit put spread. I originally got in the trade in December when T was trading in the mid-32's. I played 10 contracts... 5 of which I closed out back on the 3rd of this month. Today I closed the remaining 5. Overall I booked a $235 gain!

Now to my stocks trades... today I got stopped out of BRKR at break-even, CLDX for a nice 8% gain and SO for a small loss. 

I also put on three new trades - HOT, AAL and KN.

I took half my RHT position off the table at $70.05. I'm letting the rest run with a stop at today's low, $69.10. I also moved up my stops in AGEN (5.13) and FNSR (20.45).


New option positions

Today I sold to open a weekly $77.50 FB put, collecting a $52 credit. I fully expect this option to expire worthless next Friday. Facebook has had a TON of bullish call option activity over the last few days. It wouldn't surprise me at all to see it make new highs next week.

Another name that got a bunch of bullish option activity today was KO... I opened up an April 42/41 put spread. I played 2 contracts and picked up an $84 credit. My max loss in this play is $106 - which is less than 1% of my current portfolio.

As for my stock trades... I sold half of my AGEN position this morning for an 11% return. I'm letting the other half run with a stop just under today's low at $5.11.

  This morning I got stopped out of MBLY for a 3.5% loss. 

Moves in NOAH, SO and TWTR

This morning I closed out my trade in NOAH, booking a 3% gain in a day.

Then I turned right around and jumped into SO. The March $47 calls were on fire! (Thank you WallStJesus!) It's safe to say the "smart money" is betting on an oversold bounce. Of course I also like the fact that SO is bouncing off it's 200 day moving average. Additionally, at these levels that hefty 4.5% yield should provide a nice floor in this low interest rate environment.

As for my other positions... Today I moved up my stops in AGEN (5.08), CLDX (21.15), RHT (68.10) and BRKR (18.50). I kept my stops the same in MBLY (35.50) and FNSR (19.95). Oh and lastly, my stop in SO is just under today's low at 45.60.

Moving to options... I sold to open a $47 TWTR put expiring next Friday. At the same time I closed out my Feb $46 put for a nice profit.


Stopped out, moving stops & new trades

Today I got stopped out of BABA and SPLK. As you can see in my chart below... I made a few bucks.

However, the frustrating part is that I didn't respect my stop loss placement in SPLK. Generally, I like to do a "one-bar trailing stop". For example, last Friday, SPLK's low of the day was $62. So that means I would need to put my stop in a few pennies underneath that. Instead, I put a stop in at $62.65 - obviously that got triggered today. In fact, the low of today was $62.50. Which means... if I had stuck to my plan, I'd still be in the trade.

I mismanaged my system and it'll probably cost me as SPLK rebounded nicely and looks to move higher. So yes, overall this trade was a winner, BUT I may have severely limited my upside because of poor stop placement. I've learned in this game you MUST get the most out of your winners, while cutting your losers short!

And speaking of stop placement... I moved up stops in AGEN (4.97), CLDX (20.95), BRKR (18.40), and RHT (67.83).  

I also got in three new trades today (stops in parenthesis)... MBLY (35.50), FNSR (19.95) and NOAH (21.40).

Taking some gains in CLDX & SPLK

This morning I closed out half my positions in CLDX and SPLK for respectable gains. 

My exits are still giving me fits... and I tell you, this week I've had 3 really bad ones. Here's the deal, getting out of losing trades is not the problem - it's knowing when to get out of the winners. So far this year I've been buying enough so that I can sell half at my 1st target and then trail a stop behind the other half. 

So how do I set my 1st targets? It's pretty simple really... I look for moving averages - like the 50 day, or I find prices that represent previous areas of resistance.

Well this week as soon as I hit these targets and closed some or all of the trade, the stock shot right up and continued on with a big move.

It's so dang frustrating. 

For example, DDD - I sold the 2nd half of my position at $30.83, right at the 50 day moving average. Which by the way, DDD had not traded above this MA in MONTHS! Sure enough though right when I sold it, the stock took off.

Similar things happened to me today in CLDX and SPLK. Oh well... I'm learning.

Either way, I booked a 4.83% gain in CLDX and 3.11% return in SPLK.

I did take a small loss today in GPRO, 1.3 percent. 

I moved up my stops in SPLK (62.65), CLDX (20.15), RHT (67.50), AGEN (4.90) and BABA (87.60). These stops are all in the money assuring that none of my trades will be losers, unless of course we get some massive gap down Tuesday.

I did get in a directional option trade today, buying 2 March $55 puts in SMH.


Monday moves

I made four moves today...

First thing this morning I covered my MU short. I definitely closed this trade too soon. You can see I left a decent amount of money on the table. Here's the deal though, I don't short often, so I'm really just trying to get a feel for it.

Secondly, I opened a trade in DDD. I have made GOOD money in this stock over the last 8 months trading in and out of it. Right now there is a pretty defined range between $28 and $30. I'll take half off the table at $30.

Next up, TWTR - I started a new position this afternoon at $47.35.

And lastly I shorted 50 shares of KSS. It's had an unbelievable run the past week or so. I'm looking for a move back to around $68.


Busy Friday

Lets get right into it...

1) I'm going to get my TWTR shares called this weekend. I sold to open the weekly $43 call a couple days ago. That transaction is going to result in a $195 gain after my $5 exercise fee.

2) I started two new positions... one in CLDX and the other in AGEN.

3) I tried to get something going in two others - ATHN and OVAS - however I got stopped out of both for losses.

4) The trailing stop on the 2nd half of my WMB position got tripped, completing a profitable swing trade I opened a week ago today.

5) And lastly I went short MU @ 29.10.  

As for my option plays today... My TWTR weekly $43 call will be exercised this weekend. I sold to open that option for $112 on Tuesday. I'm also going to get to keep the full premium on the TWTR weekly $38.50 put I sold to open yesterday. That option expired worthless today.

So far this month I'm up $230.22, a 2.3% return on my $10,000 portfolio.

2/6 Watch List

Tonight I put together this new "watch list" table! Clearly I'm not going to put on all these trades tomorrow - I may not play any of 'em. This is really just an exercise at planning out my trades better - knowing EXACTLY what my risk/reward is on the front end. 

Let me know what y'all think. How do you guys organize your watch lists?


Right-sizing my TWTR position

So it's actually embarrassing to admit this BUT - I came into the week with TWTR making up more than HALF of my trading portfolio!! Yes, I know - INSANE!

Risk management has been my top priority since the beginning of the year. My goal is to risk NO MORE than $100 per trade - that's about 1% of my total portfolio. I had no concept of this last year and I got SLAUGHTERED! I'm bound and determined to learn this lesson in 2015!

And that brings me to TWTR... to start the week I had 200 shares, cost average around $41 per share. In addition to those shares I also had one March $40 call. So in all, about $8,700 in TWTR. My plan this week was to greatly reduce this holding. 

Tuesday I made two moves... I sold to open one $43 2/6 call, collecting $112 of premium. I figured if we get a beat then I'll pocket the $112 premium AND bank nearly $200 profit on my stock when those 100 shares get called. If TWTR missed and gapped down, then I'd still get to pocket the $112 premium and keep 100 shares - which was fine with me. I'm comfortable holding 100 shares, but that's it. My second move on Tuesday was to sell my March $40 call for a 27% loss, or $129 hit. I could not risk carrying that long call into the ER.

Now clearly I made these two moves 2 days too soon. But either way I made the best decision I could with the information I had at the time. TWTR was trading right at $40 when I made these moves - an area that had proved tough resistance.

That brings me to today... I still had 100 shares that I wanted to get rid off. I sold those @ $41.20, breaking even on that lot. Then right before the bell I sold to open a naked put, the $38.50 weekly expiring tomorrow for a $112 credit. 

So here's how it's all gonna shake out - more than likely. My $43 call will get exercised, resulting in the loss of my shares, BUT I'll make $200 on the stock and get to keep the $112 premium I made selling the call. Then my $38.50 put will expire worthless, allowing me to pocket $112 credit on that play. 

2/6 $43 call - $112

2/6 $38.50 put - $112

Shares called at $43 (cost average $41) - $200

$40 March call - ($129)

Total gain - $295

Yes obviously I bailed right before I could have hit a home run with today's report, BUT that's just not fundamentally sound trading! My plan this week was to reduce exposure and somehow slip out of this trade WITH a gain. Heck, at one point this past three months I was down more than $1,000 in this position. So to come out in the green is a good thing!

I've still got some outsized positions in my portfolio, but I'm working to get those scaled down. Believe it or not my main goal is NOT to make money, it's to better manage my risk. 

If I can do that - then the money will come.