Hey britkid, you and Ron should start a hedge fund together and call it 99 squared, his returns are amazing, I know he is very experienced but his returns are better than any hedge fund. May I ask I believe you returned 23% last year, would you say you took a risky approach to trading or conservative. Was there anytime during the last year where you almost blew up. I will be starting next month and just want to get an insight thanks .

Guys, there is a death in my family. I'll be busy the rest of the week. I'll answer questions this weekend or next week.

There was only one position where I was too close and was forced to close out for a loss. My positions were more aggressive than Ron's but I don't think they were risky either. I have documented several of my trades on this thread so search through and look at them for more details.

One thing I have noticed is that premiums seem lower at the moment, I put that down to lower volatility in general.

Brit

Hi Ron,

First a quick explanation of why I chose this trade. My broker IB uses 1.5x margin within UK pension accounts. So for Crude I am looking at around $2000 margin per contract. Then I am looking for around 10% ROI, so $200 per contract per month.. At the time of the trade Oil was around $100 and I was looking to go 20% OTM. I am biased to the long side on oil.so sold the following using the layering technique suggested by the Liberty guys.

Date 9th April 2012
AUG12 80P for 0.52 $520
SEPT12 77.5P for 0.64 $640
SEPT12 80P for 0.87 $870
OCT12 77.5P for 0.94 $940
OCT12 80P for 1.22 $1220

Then to create a margin free strangle I sold the JUN12 120C for 0.23 or $230 on 11th April. As many as possible without pushing up margin. I chose the next month as it had only 6 weeks remaining and offered a reasonable premium. I was of course concerned about the geopolitical situation with Iran but talks were starting so I felt OK about it.

Over the 3 weeks duration of this trade so far, Crude has maintained a narrow range of $100-105. This has greatly aroded all positions and on Friday I closed out half of my AUG12 80P for 0.22 generating a profit of $300 per contract (minus commissions). This was a return of 15% in 3 weeks!

As of Friday the JUN 120C were 0.08 so up $150 per contract with 20 days to expiry. Depending on what Crude does today I may start to thin these out to reduce risk

Brit

Hi Brit,

Interesting. I would have done a few things different, but this has worked for you so far.

I would have sold lower strikes on the puts farther out in time. Maybe try to keep the premium the same as your Aug puts when you moved to Sep and Oct by moving to lower strikes. If the market goes against you the Oct would feel the most heat. Currently the delta on the Oct is twice as high as the Aug 80. 0.0348 Delta for Aug vs 0.0691 for Oct.

So if today crude dropped $3.00 then the Aug 80 would move at least 0.10 (3.00 times 0.0348) while Oct 80 would move 0.21 against you. The Oct 80s are twice as risky as the Aug 80. An Oct 72 put is the same risk as an Aug 80 today. On Apr 9th it settled at 0.58.

What percent of your account are you using for margin? Cordier mentions 50%. I have found that 66% works better. You are pushed out of positions less quickly with more excess. By being able to ride more positions out to expiration you are able to make up for the less contracts put on by having less losers. Of course if the market has a major fundamental reason for going against you, you need to get rid of the positions and not try to ride them out.

Just so everybody is clear, I'm guessing you are calculating the ROI by just using margin and not the excess you are carrying for the trade. Right?

If you are worried about the 120 calls, you could buy a call above the 120 to turn your possible unlimited loss into a limited loss. That will also reduce the margin required to put on the 120s. It also makes FCMs happier.

I sell further OTM options than you did. After a couple of blowups in 14 years of trading I learned that lesson the hard way.

Be aware that crude has crashed hard in early May the last 2 years. While what it did last year isn't always a good predictor of what it will do this year, keep that in the back of your mind and use that to determine whether to bail or not on positions.

I suspect that this Friday's monthly employment number will have a strong bearing on where crude will go later in May.

I need to get back to my own trading. Good luck.

Ron

Wheat thoughts....

March contract: Looking bearish. Breaking the support at around the 760 level could put the next target at the 740 area. Will consider selling calls again if this follows through.