Trade Plan: Week of Feb 22nd

On Thursday or Friday of every week, I will sell a strange, straddle, or just a put or a call on the ES. I still trade ES futures, but given the volatility over the past 6 months or so, I find it easier to manage the swings with options and the premiums are pretty juicy. Also, if I sell a weekly option for 1% of the ES contract value (about 18 points, or $900) and it goes against me, it would have to go against me more than 1% by expiration in order for me to lose money. So this gives me much more flexibility in managing the trade.

So will we break through the top of the recent range this week? Who knows…I certainly do not, nor will I try to predict what the market will do. I just have to go with the flow and take what Mr. Market gives me.

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Last Friday I sold a 1900/1930 ES Feb26 strangle for 29.25. This means that I sold one put option with a 1900 strike price, and I sold one call option with a 1930 strike price. Both of these options expire on February 26th. If by this Friday(Feb 26th) the closing price of ES is above 1900 and below 1930, I will keep all 29.25 points ($1462.5). Also, my breakeven prices are 1870.25 to the downside, and 1959.25 to the upside. Right now ES is at about 1920, so it would take a 2.5% move down or a 2% move up to put me in the red. The probability of this happening is very high given recent weekly ranges, and I consider it a certainty, so the question is, how best to manage this? Anyone can make an entry call, as most people who sell subscription services do, but how many subscription services out there tell you how to manage your exits? Almost none, and this is by far the most important thing you need to know. You need to know what your next move is going to be if the trade goes against you, and then what the move after that is going to be if you are wrong again, and so on and so forth. So what will I do if the trade goes against me, as one side of my strangle will inevitably be in the red before the end of the week?

This week I will likely be in a situation where I will roll out in price on one of my legs as the price moves against me. Rather than roll the first time, I will close the position if the loss equals 100% of the sale price. This would be 9.25 points ($462.5) on the 1930 call, and 20 points ($1000) on the 1900 put. At this point I will close the winning leg, sell a new option on the same side as my winner, and then sell one option on the losing side. I will then be in another strangle with one call and put contract. That is just the first move. The second move I will have to choose between taking a loss and initiating a new strangle as I just described, or moving out in price and doubling the contracts sold on the losing side. Next weekend I will post another wrap-up explaining in detail my trades and how I manage the positions as price goes against me.

Also, at some point in the near future, I will be posting stock trading ideas using options.

Have a great week!

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