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BookingAlpha Option Trading Advisory

Tuesday, September 21, 2010

The perfect parasite

Hello fellas!!

Wouldn't it be nice if you had money coming into your pocket just like that? Without doing much for it? Everyone would love that! But the point is that if it were possible for everybody the world would be a bigger mess than what it is now. Someone has got to work! So, only those that try to get some education in finances (get educated buddy (stocks, options, Forex, real state, whatever)) and only those with more desire to win than fear of losing have a shot at it. A shot at being the perfect parasite!!

It's been a little busy the last few days, but I have kept an eye on XAU while the market has been going up and up.

After making an adjustment on September the 16th (click here to see that article) our position in XAU remained as follows:

BOUGHT 10 XAU OCT 175 PUT @ $2.55 (-)
SOLD 10 XAU OCT 180 PUT @ $3.80 (+)
SOLD 10 XAU OCT 200 CALL @ $3.00 (+)
BOUGHT 10 XAU OCT 205 CALL @ $1.80 (-)
CREDIT +2.45

And we had received a credit of $2.45 ($2450 for ten contracts). Now in order to turn that credit into actual profit we need to, at some point, close the whole position by using a debit that is minor to the credit we were initially given.

So, today at about 10:32 am our Iron Condor in XAU was closed.
In order to close the position the following was done:

SOLD 10 XAU OCT 175 PUT @ $1.75 (+)
BOUGHT 10 XAU OCT 180 PUT @ $2.10 (-)
BOUGHT 10 XAU OCT 200 CALL @ $2.30 (-)
SOLD 10 XAU OCT 205 CALL @ $1.85 (+)
DEBIT -0.80

As you can see, we used a debit of 0.80 ($800 dollars for ten contracts)

So finally we can say that out of the initial credit of $2450 dollars, we were able to lock in $1650 ($2450 - $800). Very nice trade in my opinion.

Now, we had had a small loss when we made the adjustment back on September the 16th (Click here for that article). It was a $300 loss that we now need to subtract in order to have the final real profit of our whole venture. $1650 - $300 = $1350. Wohaa!! This is what you've gotta love about capitalism. It allows you to be a perfect non-productive parasite in this society. A $1350 profit, Initially risking $1850. We were in this trade from September 8th to September 21th, that's only 13 days. And what did we do in order to win? Simple. We just said that XAU would be moving on a certain range during a specific period of time and we made a bet on that. As days go by we start to make some money because our prediction is closer and closer to being successful.

Specifically we said:
XAU will be moving between 176.85 and $195.66 from here to expiration date in October (third Friday of the month = October 15) Click here for that article.

During the trade we had to make an adjustment because suddenly XAU started to spike up, and we said ok ok ok sorry, Now I don't think XAU is going to be in that range but instead I think it will be between $177.55 and $202.45. So we adjusted our predicted range and we had to swallow a small $300 dollar loss for changing our initial prediction. But this adjustment gave us more room for XAU to move. As days went by and XAU kept moving in our range (XAU trading at $191 as of this writing), our prediction started to have more chances of being finally right because there are less days left for us to be proven wrong!. If you stay on the trade until the end you can get to keep the whole credit received, but I prefer to have just a portion of that credit, and get out of the trade in a few days with the partial win in my pocket. Now I don't care where XAU moves anymore, I made some decent money, I was only stressed for 13 days and not a month, I can have a life or start experimenting with new ideas. And the best part is, I cannot lose! because I am out.

The final picture:

1-Initial position open on September 8th

BOUGHT 10 XAU OCT 175 PUT @ $2.55 (-)
SOLD    10 XAU OCT 180 PUT @ $3.80 (+)
SOLD    10 XAU OCT 192.5 CALL @ $5.50 (+)
BOUGHT 10 XAU OCT 197.5 CALL @ $3.60 (-)

Credit $3150
Maximum Risk $1850
Break even points 176.85 and 195.66
Commissions $69.95

2- Adjusting the position when XAU threatened our upper break even point on September 16th

BOUGHT 10 XAU OCT 192.5 CALL @ $6.30 (-)
SOLD    10 XAU OCT 197.5 CALL @ $4.10 (+)
SOLD    10 XAU OCT 200 CALL @ $3.00 (-)
BOUGHT 10 XAU OCT 205 CALL @ $1.80 (+)

With a 300 dollar loss.
Commissions $69.95

As a result of the adjustment our position was:

BOUGHT 10 XAU OCT 175 PUT @ $2.55 (-)
SOLD    10 XAU OCT 180 PUT @ $3.80 (+)
SOLD    10 XAU OCT 200 CALL @ $3.00 (+)
BOUGHT 10 XAU OCT 205 CALL @ $1.80 (-)

Credit $2450
Maximum Risk $2550
Break even points 177.55 and 202.45

3- Closing the whole position on XAU today

SOLD    10 XAU OCT 175 PUT @ 1.75 (+)
BOUGHT 10 XAU OCT 180 PUT @ 2.10 (-)
BOUGHT 10 XAU OCT 200 CALL @ 2.30 (-)
SOLD    10 XAU OCT 205 CALL @ 1.85 (+)

For a debit of 800$ plus $69.95 in commissions.
We locked in $1650 out of the maximum potential of $2450 in credit received on step 2.

As a final step lets deduct everything from those $1650

Locked in profit: $1650
Adjustment loss: -$300
Commissions: -69.95 x 3 = -$209.85
Final profit: $1140.15

Most people out there don't count commissions when measuring their success on a trade. Based on that we had a $1350 profit (before commissions) and an initial risk of $1850. That's a very good 73% return on investment in just 13 days. No bank will ever give you that!!! Now, some may argue that our maximum risk was initially $1850 but that at some point we had to increase it to $2550. Well then that's fine 1350/2550 = 53% return on investment still amazing!!

It is good to be out of this trade with an initial victory. It is good economically speaking and perhaps more importantly: emotionally.

Have fun!

See the opening of this trade, Trading an Iron Condor position in XAU (September 11,2010)

Follow this trade, Taking care of our Iron Condor (September 14,2010)

Follow this trade, Adjusting the Iron Condor (September 16, 2010)

Go to the bottom of this page in order to see the Legal Stuff

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