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Trading ATM RUT Calendar options
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Trading ATM RUT Calendar options

  #1 (permalink)
Elite Member
Kingsport, TN
 
Futures Experience: Beginner
Platform: Thinkorswim
Favorite Futures: Stock Indexes
 
eric73's Avatar
 
Posts: 42 since Feb 2013
Thanks: 16 given, 25 received

Trading ATM RUT Calendar options

I know that futures.io (formerly BMT) is normally a place for trading futures, and also normally on Ninjatrader. I'm trading Options on Thinkorswim. There's probably a better that average chance that this thread won't garner much attention from the masses. But, maybe someone will find what I've been doing interesting.

This thread will be devoted to me learning the craft of Trading ATM (At The Money) RUT (Russell 2000) Calendar Options.

I tried for four years to make sense of doing Technical Analysis on Forex, and never could quite turn the corner into profitability. I had a friend who was doing options trading (mostly Butterflys on the Russell 2000) and he asked that get in contact with Dan Sheridan Mentoring in Chicago. I checked out Dan, and found that he was reputable, honest, and had been a Options Market Maker/Trader before he started his mentoring business...teaching others to feed themselves via their own trading.

I signed up for his online Calendar Lab Class (it wasn't cheap, but the teaching was first rate) and put his teaching into practice. Dan likens learning to trade is like learning a craft, like learning how to build a deck on the back of your house. First you go to Home Depot and take a class from someone that really knows how to build a deck and can give you little pointers where you'll likely run into trouble yourself. Then you go out and try to make a deck yourself. Learn by doing it, not by reading about it. First time out you're bound to make some mistakes. But, by the tenth time you build a deck you should be starting to get an idea about what you're doing and how it's going as the deck progresses. By the 20th time, you should be starting to learn your craft.

A Calendar trade is a Horizontal time option spread that is put on for a debit. It costs you something to put on the trade, but because you put it on for a debit there isn't a maintenance requirement for putting it on. Basically, I short the an option expiration closer to me and go long on and expiration that is a little farther away. The trade is put on with a Day Limit order, and there is always a GTC (Good Till Cancelled) take profit order that goes in with it.

My adjustment to the trade is that I re-position it everyday At The Money. I fully expect that if the trade doesn't close out during the day that it went on, it will close out the next day sometime after the market open. If it doesn't hit my profit target, or price moves to close to my break-even edges, I take it off. There's always another trade coming the next day, why would I keep it on using Hopium that it might drift back into play. Better to take it off and limit the loss.

I try to trade every day of the week, except Friday. Friday is reserved for getting Thursday's trade off before the weekend. I don't hold trades over the weekend. I do hold trades overnight. But, these are Equity Index options, not Futures. And, because I re-position everyday ATM, I don't check any charts, I don't really need too. I don't do any kind of TA hoping that some indicator that is massaging past data points will tell me when's a good time to trade.

This thread is for my benefit, and if you get some degree of amusement reading it, have at it.

Thanks,
Eric.

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  #2 (permalink)
Quick Summary
Quick Summary Post

The allure of trading is that once you learn the craft...it takes no more time to trade 400 contracts that it does to trade 2. You just need a bigger account.


Last edited by eric73; February 17th, 2015 at 03:44 PM. Reason: illuminations
 
  #3 (permalink)
Elite Member
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Futures Experience: Beginner
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Posts: 42 since Feb 2013
Thanks: 16 given, 25 received

Trying to trade every day hones the craft...


To say that Dan Sheridan's teaching turned around my trading (and my future) is putting it mildly. Dan says all of the time that that if you don't want to learn to think for yourself...if you want to be spoon-fed a solution of what to trade, and when to trade...you really want to go someplace else. But, if you want to learn the craft and think for yourself then start listening and doing.

I listened...tweaked what he was saying in a way that made sense to me...and started doing. Dan's advice is that when trying to learn the craft is to just keep putting the trades on and keep you contracts low...like only do two while you're learning. And I'm definitely a beginner and I'm learning this.

One of my friends asked me to explain what I was doing and I told him it would be easier to visualize this if we gathered together a couple of grapefruit (one slightly smaller than the other), a small tangerine, and a couple of sugar cubes. The Larger Grapefruit is the farther away Long option that I'm buying. The slightly smaller Grapefruit is the Short option that I'm selling that is financing the purchase of the large Grapefruit. The small tangerine represents the debit that I have to pay to put the trade on. It's the difference between Long option and the Short option. Now place the sugar cubes on top of the bigger Grapefruit.

I want to make a profit on my debit that it took to put on this trade. But, the profit isn't coming out of what you paid...it's coming out of what you own. I only want two sugar cubes worth of juice out of that Big Grapefruit to make my profit. What's the probability that I can make two sugar cubes worth of juice out of the Big Grapefruit, in one days time?

Here's what I've learned so far for putting these trades on every day.
I like doing Calls instead of Puts. Even though Dan tells me that it doesn't make any difference.
My average entry price is under $400 per calendar, and I'm doing two of them (two options contracts).
My profit target is around $60, figure about 15% of the debit that I'm risking.
As the volatility and decay of each expiration changes over time, the spread widens a little, and allows a little bit of profit to creep in.
If I set the GTC Take Profit order to high (somebody was being greedy) then it may not trigger, and I'll have to close it manually. At that point I'll be fortunate to come away with something other than a scratch trade.

Here is where I've been trading this idea in the last few weeks. Earliest is at the bottom of the image.
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The green lines are where I bought the calendar, The red lines above it are where the GTC triggered and covered it (usually). Subtract the green line from the red line and that's the gross gain. Any sum that looks to be around 20 cents is where I had to close the trade out manually. I am slowly learning how not have to close manually.

Regards,
Eric

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  #4 (permalink)
Trading Apprentice
San Jose Del Cabo Mexico
 
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clarify plan please

Hi, I also took a Weeklys course with Dan. I'm not sure it's the same plan. The plan was to do a 9/22 DTE cal and set the GTC as 12% of margin. At the time the IV as very very low (9-11%) so it usually took 3 days to either get succeed or to need an adjustment.
Are you saying you reposition it every day regardless?

BTW: This is my first thread reply on futures.io (formerly BMT). Hope I don't get slapped for doing it wrong.

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  #5 (permalink)
Trading for Profit
Atlanta GA USA
 
Futures Experience: Advanced
Platform: thinkorswim/Ninja Trader
Favorite Futures: stock options; ES, TF, 6E, 6J
 
Posts: 214 since Aug 2013
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eric73 View Post
My adjustment to the trade is that I re-position it everyday At The Money. I fully expect that if the trade doesn't close out during the day that it went on, it will close out the next day sometime after the market open. If it doesn't hit my profit target, or price moves to close to my break-even edges, I take it off. There's always another trade coming the next day, why would I keep it on using Hopium that it might drift back into play. Better to take it off and limit the loss.

Could you explain what you mean by repositioning it ATM? How exactly is it repositioned ATM?

And you're also saying you normally hit your profit the same day you put it on? Even though I did read later you normally are in over night.

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