Question about Victory Spreads

Q: In your demo video for this spread you say potential losses should be about $50 or so. You refer to favorable pricing. Would you please explain what you mean by favorable pricing? I have tried several scenarios with stocks that I think might be making a move up but in each case my potential losses were closer to $200. Today I reviewed AU (Anglogold Ashantilt) selling the oct 35 call and buying 3 Jan 50 calls. If the stock settled between 37 and 50 by Oct expiration I would lose money with the worse loss being $183. Not bad but more than $50. Am I missing something? Thank you. PS Am really enjoying the course.

A: The amount of loss in a victory spread depends on:

1) volatility at the time of the trade
2) the number of contracts used
3) time to expiration

It sounds like you were using the same example I was as far as contracts go (sold 1, bought 3) so the only differences would be “volatility” and “time to expiration” which would explain the difference in potential loss.

Adjusting a Double Calendar

Q: I’ve bought your online course & it’s really eye-opening to someone like myself who thought he has already known a lot about options.

I’ve gone through all your videos regarding the portfolio selection, the setup & adjustment of the “Double Calendar” and “Sale of an Iron Condor” trades and they were clearly explained.

However, I have this bugging question that I hope you could help me. That is, how do you adjust a “Double Calendar” or “Sale of an Iron Condor” position if the price goes against your position (ie. moved very close to your breakeven point) if it happened during the last 1 to 2 weeks before expiration and options premium have already gone down a lot.

Would laying another double calendar over an existing one or in the case of an iron condor, shifting the whole iron condor still be practical during these final 1-2 weeks before expiration with not much value in the option premium?

A: I mentioned on the videos that adjustments are really only a viable solution in the 1st or 2nd week you are in the position due to the fact hat option premiums are still relatively high.

So if you put a position on 4 weeks to expiration, trying an adjustment in the last week or two would not work due to declining premium.

One alternative is to adjust using the next month out where premiums are higher. There no rule that says your adjustment has to be made in the same month!

A second alternative is to simply close the position out, of course, and move on to the next month. In most cases this is the best option.

Training Videos Question 1

Q: I bought your training videos 3 weeks ago , which appear to be your first version of the training course “trading as a business”, in a hope to learn option trading cashflow secrets regardless of the market move, the videos are great and I am really happy with them, but they were recorded few years ago I believe, but that is ok as according to you , this is an evergreen business as the principles will never change because the markets never change.

the thing is , after I signed to your daily market advantage a week ago , I noticed that some of your comments were based on some techniques that were somehow different than the videos I am learning of , and I am referring at the video of 31/08/09 where you mentioned something about the put spread calendar that is good to trade now and that the iron condor is not suitable at the moment.

- my question is, as a new trader what would be the best strategy that you recommend from your videos to trade the current market for monthly cash flow, something does not need too much of the advanced technical analizes or too omplicated and easy to handle until i pick up the knowledge from your daily market advantage.

A: I appreciate you feedback and your questions.

It’s true that the principles I taught are evergreen in the videos from last year. The ‘greeks’ will never change - but *how* you use them is a different story.

I have slightly revised my strategy to take better advantage of market moves using income trades with technical analysis on volatility as the most important component.

I released 2 important white papers: One paper on the greeks and another paper last November 2008 to take advantage of the volatility. (These are included in the download area for all paid customers)

Iron Condors Question 2

Q: I purchased your course and I’m enjoying it….I’m up to Module 5 right now.

Question for you: How do you choose between selling Iron Condors (credit) and buying Double Diagonal Calendars (debit)? Is there any criteria for favoring one over the other when building your portfolio every month? Or, do you simply try to mix it up?

Thanks!

A: I choose between Iron Condors and Double Calendars by using volatility as a guide.

When volatility is high and coming down I want to add Iron Condors with a slightly positive delta because it means the market is probably rising as volatility drops.

When volatility is low and rising I want to add put Double Calendars to my portfolio because I make money on the ‘vol spread’ between the front month and the back month. Said another way, if volatility is rising I only want to purchase put Double Calendars because the market is probably trending lower.

Pre-sales Question 1

Q: I reviewed your videos and I’m interested but I’m curious why no one is talking about your strategies or even reviewing your methods. I’m new to the trading thing and in fact, I just signed up for a James Smith options course for 6K (August 28-30 and yes I know it was expensive but I need someone to hold my hand while I made some purchases on TOS to see if I was doing it right!) Investools tried to sell me and so have others. I did not buy because strategy was not part of their education. James Smith options course says that is all they do. I have bought and read parts of the Options University 101 and 102. Good information but hard to put together and understand and it was actually like reading a dictionary, a real sleeper.

I tell you that to tell you this. I have been a Detective in a major police department for several years. I enjoy what I do but I have always wanted to work for myself. The system wears me down and I want that freedom with my wife and kids with no overhead (minus the commissions). When I came across your system I thought you were personally speaking to me. I know the time is now to act but there are many companies that make false claims of success. I pride myself on not getting suckered. Please answer me this question. From all the reviews and comments made by “expert” traders, why have you figured it out in such a short amount of time while the experts say they have spent a life time trading with just above average results?

You seem like a personal and sincere guy and I appreciate the information you have already provided.

A: I’m sorry I don’t know who “James Smith” is and my search on the google “James Smith, options course”, and “James Smith +trading” or “James Smith +options”
did not reveal any information at all.

If you have a URL to his seminar/course I’d be interested to see what he’s teaching.

In any case I’m not sure where you got this idea:

“…why have you figured it out in such a short amount of time while the experts say they have spent a life time trading with just above average results?”

I started trading options in 1987! That’s when they still traded options in fractions. I had a hand-made cheat sheet next to the phone that converted the quotes from fractions to decimals and I learned them really well. 1/8 =.125, 3/8 = .375, 1/2 =.50 etc… so that when I called my broker at Kidder-Peabody I could understand what he was quoting in dollars and cents.
He’s say that IBM SEP60CALLS were “bid 4 1/8, asking 4 3/8″
I knew it was 4.125 - 4.375. You had to know how to enter orders on the phone and request quotes. The advantages we have today with technology are truly amazing.

So I have always been involved in the markets but after losing my first fortune in 1987 (before the crash) I went to work. For the next 15 years I followed the market but I had a wife and 4 kids and did not do any trading at all until 2006. I had made a small fortune on the Internet over the past few years and had money sitting in an account at 1%.. I thought there must be a way to generate more income than that and went back to the market.

I decided to go straight to the source of the market and took training from former market makers on the CBOE.

That opened my eyes to the possibilities but I still had mixed results.

Finally it occurred to me that someone must be successful in trading and I needed to find them and learn everything I could. So for a couple of years I studied from the best and came up with my own system. Then I recorded my videos after I had put together a ’system’ that worked for me.

Why do some people succeed in trading and others don’t? It’s the same for just about any occupation: skill, persistence and a love for what you do.

How much dedication is required to trade successfully?

Trading successfully requires the same commitment and skill as a surgeon or engineer or other highly paid skilled occupation.

And the training and eduction required for trading is the same as any of those other occupations but that is not obvious to most people… in fact most people think they can pick up a book or two, attend a seminar in their spare time and be successful.

The reason? Because trading ‘looks’ easy. “Buy”, “Sell”
- what could be hard about that?

That kind of thinking has ruined many people. It’s wrong…

I guess I created my course to help people at least understand what they need to do to stay out of trouble as much as I created it to help them be successful.

Education is the key to success but it’s only the beginning.

I have seen very well educated investors not make a cent as I have seen PhD’s have relatively mediocre lives because they miss one key component to success: the desire to be successful has to burn in their hearts and then they need commitment and persistence.

The reason no one has reviewed my courses is because I do not ask anyone to.

I had something to teach, I thought I could contribute something to the body of knowledge of trading and I will let those who use it decide if I had something worthwhile to pass on.

The only other person who is very much similar to my own style of option trading is Don Kaufmann at ThinkorSwim.

If you ever get a chance to see him teach one of the ‘advanced’
courses at ThinkorSwim in Chicago do it- the course is pretty cheap (I think $200 now) and it’s the BEST training you could ever receive in options trading.

The only problem with Don is he’s almost impossible to understand!
He talks fast, uses terms most traders don’t comprehend and the course has a long waiting list. It takes about 2 years to get an invitation and take the course.

Luckily he did two TOS free webinars that you can watch free too:

Building and Managing Inventory:
http://mediaserver.thinkorswim.com/demos/2008/TOSDemoPlayer.html?vidSource=/transcripts/2008/20080521.swf

Trade Allocation, Position Management and Portfolio Adjustments:
http://mediaserver.thinkorswim.com/demos/2008/TOSDemoPlayer.html?vidSource=/transcripts/2008/20080730.swf

If you want to sign up they have a ‘lottery’ for tickets. Don teaches through RedOption (a Thinkorswim company):

https://www.redoption.com/seminars/3/

I wish you much success and I hope I haven’t discouraged you too much!

Margin Requirements Question 1

Q: I noticed that in the video mod4 trade selection IWM, the margin required before the trade is filled is $488. As soon as the order is filled, the margin requirement drops to zero. Can you please explain how this happens.

A: I haven’t reviewed the video you refer to but I believe this is the reason:

Long options do not have margin requirements - you purchase them - so when the analyze tab shows $488 ‘margin’ it’s not actually margin but a reduction in buying power instead.

That’s why after the trade is placed you do not see a margin
- it goes into your account and the your buying power is reduced by the cost of the option.

Theta Scalping Question 1

Q: Towards the back of the video, you indicated an adjustment of adding 300 shares of QQQQ stock. You had 60 contracts open. If I wanted to know how many shares would be required for one contract, would I divide the 300 by 60, or 30, or 15? I would assume divide by 15, since for the iron condor you used needed a long and short for the puts and the calls, or 4 contracts for one condor.

A: Adjusting for theta scalping positions has nothing to do with the number of contracts in your position, it has to do with deltas.

In the video you reference I was probably ’short’ 300 deltas that’s why I needed to buy 300 shares.

In order to determine the number of shares when theta scalping you need to know your deltas.

The delta will tell you what you need to get back to a delta neutral position

For example if you’re short 300 (displayed on TOS as “-300″) 300 deltas then you would need to purchase 300 shares to be ‘neutral’ and if you were long 300 (displayed on TOS as “+300″) then you would need to sell 300 shares (short) to be delta neutral.

However, and this is important, it is not alway wise or preferable to be perfectly delta neutral. You need to know the bias of the market at any one time. For example the market bias since March 9 has been ‘up’…
you would have done well by understanding the current market bias and trading accordingly by being slightly long (positive) deltas at all times.

The market bias can be either:

1) Long (up trending)
2) Short (down trending) or
3) Neutral (trading range bound)

The bias changes week to week, month to month so it’s important to know the current market bias that’s why the daily market videos I do are so important to all option traders. You need to know the bias.

Hope that helps