OPEN: RUT Oct Iron Condor

Here are some new positions I am back in again as they are more conservative. Please size these small in your portfolios to hedge against the volatility of the financial crisis.

Check out today's news on WAMU. JP Morgan has purchased Washington Mutual to rescue the financial markets yet again:
http://biz.yahoo.com/ap/080926/washington_mutual_future.html

RUT Oct Iron condor opened 9/23/08:
Oct 630/620 bull put spread for $1.00 credit
Oct 800/810 bear call spread for $0.55 credit

$1.55 credit/ ($10 spread - $1.55 credit) risk= 18.3% ROI potential with just the Iron Condor alone

I also added for extra protection onto this condor 15 long Oct 600 puts for $3.00 debit and 15 long Oct 820 calls for $0.65 debit. So now my new profit/risk calculation is as follows:

1.55/(10 margin between strikes + 3.00 debit + 0.65 debit)-1.55 credit= 12.8% ROI potential

Here's what it does to my profit graph. Notice how both the bottom and top (left and right of chart) swing upward so no matter which direction the market takes today, I will profit if it moves dramatically. The white curve represents my potential profit today. The green line represents what the profit would be at expiration.

Testimonial

Hi guys,

I am doing this reluctantly but I promised Mojo (my trading friend & mentor from www.insanemoney.com) that I would write this post this morning since I've avoided it for 2 days. First of all, I need to acknowledge Mojo for having faith in me that trading can happen. Also, thanks for calling me out whenever I don't follow my rules! And most importantly, thank you for your level of integrity with teaching. Rock on dude! Oh and by the way, I just have to interject right here that chic traders DO ROCK! HAHA! I don't know what else it will take to prove you wrong!

Essentially what happened was on Monday around lunch time, I basically liquidated my entire account for a day's profit of around $81,900 (on a paper account that started from $1 million in January 2008. This was a 9.6% on my portfolio from last month that normally would take me 1-2 months to generate, and it happened within a matter of hours. I never thought that much could be made in a few hours! All this even happened after taking a beating through July/August in my account from the energy fall. On Friday, as I last posted under "What a Week" from Whiskeywoman, I wrote that I had legged out of most of my bullish positions to lock in profits. This ended very well for the day so I was not remotely worried come Monday morning when the market opened and the media was panicking the whole nation. On Monday morning, I was ready to start adding bullish positions back in if the market started to retrace upward-and it did. I was just staring at my account and watching the profits increase exponentially within a matter of hours that I thought to myself, "what could be the worst that could happen if I pull out of my account now?" The answer is NOTHING! What's wrong with taking profits and running in the middle of one of the best inefficiencies in the market like now?

The funniest thing about all this is all the articles put out by the media. My favorite one was yesterday's front page article on finance.yahoo.com titled "Angst returns to Wall Street: Stocks dive, oil soars." This just shows you how much fear is bred into the marketplace that's targeted at all the traders without rules and a system. They get eaten alive while the pros walk to the bank skipping and smiling!

The biggest lesson of all of this is not that I profited like crazy in one day...that doesn't teach much to a trader other than make him/her potentially extremely emotional if not careful. The real lesson was that after over a year of trading my butt off, I finally reached a point in emotional trading maturity that I was willing to completely pull out of the market, take profits, and take a step back and breathe instead of trying to chase the carrot and constantly telling myself that I could keep trying to go for max profit.

My biggest hesitation in writing this post on Monday when this happened was this...I thought to myself "well the people on the blog might not see this as any real profit since it's all on paper." This in itself is hard to write for me, but I promised Mojo that I would share everything-the good and the bad. Therefore, this post is dedicated to all the guys that are either beginning to trade or are still paper-trading with the goal to switch over to real money. Understand that over the past year of trading with Mojo and the IM gang, I have ALWAYS treated my paper account as though it was real money so I know that it will "manifest" into real money sooner than I can imagine. I guess you could say that this is the one area where I can add "feeling" to the pot. It FEELS real!

I am a true believer in miracles, even taking religion/faith aside. There really is a lot of power in your thoughts-good or bad. I did the Landmark Forum(thanks to Mojo) back in July 2006 and I watched "The Secret" about 1 1/2 years ago, and since then I have been focusing my mind on trading and eventually making it real one day. Well, I guess that day has come. So i am transitioning into real money now. So for any of you that think that you may never "get this stuff" or that it will take forever to trade real money, THINK AGAIN!

Stick with it, stick with your rules, find a good trading mentor and/or group and share your triumphs and struggles. Also, take criticism on your trading-don't fight it.

Happy trading everyone. Thanks for listening (reading this). Ciao!

CLOSE: AAPL Dbl Diagonal +12.4%

Because of my protective put (Oct 160) I placed on my AAPL double diagonal last week, I have been able to turn a completely losing trade to a 12.4% winner! This a new concept for me (taught to me by my friend and mentor Mojo at www.insanemoney.com.

What's cool about it is that as you see a stock starting to turn in a direction (while you're in a non-directional trade) you can quickly cut losses and neutralize the trade without exiting for a loss by simply adding either protective puts or calls. As you could see on the graphs in my posts from 9/2 & 9/8, my profit curve on the left side swung upward so as the stock were to tank on me, I lock in profits even if the stock is now outside of my breakeven on my double diagonal.

So this afternoon at 2:15pm EST, the FOMC announced that the Fed rate would not change. The market freaked out anyway and tanked for a short while. This helped me with AAPL as it dragged AAPL down with the market. So I watched it and quickly scaled out of each leg in my trade one at a time. I was able to capture $14,292 of profit just today alone.

I am still learning this method so it may not all be perfect, but i just know that for this trade it worked!

DIA Put Diagonal

DIA has been in an overall downtrend over the past 1 year. I bought a deep ITM put and am selling the front month ATM to get the short position to expire worthless. Then each month I will continue to sell ATM to lower my cost basis and increase my ROI.
This puts my breakeven point all the way up to 115.22. Also, since I bought the Dec quarterlys I can get an extra credit for December which further increases my ROI potential.

SOLD -24 DIA 100 SEP 08 110 PUT @ $0.70 credit
BOT +24 DIA 100 (Quarterlys) DEC5 08 120 PUT @ $9.20 debit

ROI potential for this month= 0.70 credit/9.20 cost basis= 7.6%

ADJUST: AAPL Dbl. Diagonal

To neutralize my deltas again, I added:
BOT AAPL 100 SEP 08 160 PUT @ $6.00 debit

What this does is raise my profit curve on the downside so if AAPL continues downward quickly, I can regain profits on the downside. If AAPL heads back up then I would simply remove these protective puts. See the chart below...

ADJUST: AAPL Dbl. Diagonal

On 8/21/08, I started out with a double diagonal as follows:
BOT DBL DIAG AAPL 100 OCT 08/SEP 08 190/160/185/165 CALL/PUT/CALL/PUT @ $3.36 debit

Today, my analyze graph below showed that it has shifted downward on my profit scale and my delta exposure is high:

BOT AAPL 100 SEP 08 165 PUT @ $4.95 debit
SOLD AAPL 100 SEP 08 160 PUT @ $3.05 credit
SOLD DIAGONAL AAPL 100 OCT 08/SEP 08 190/185 CALL @ $1.66 credit

Therefore I "calendarized" 10 contracts of my 160 Sep puts by selling 10 of 165 puts and buying 10 of 160 Sep puts & lowered my upper call diagonal down to 180/185 Sep Oct diagonal. This also lowers delta from 970 to 685 and decreases margin by $1500. This also lowers my breakeven a bit to give me some cushion on the downside.

Here's what it looked like after the adjustments:


Today, I also added the following to center/balance the mark between my breakevens:
BOT +52 DIAGONAL AAPL 100 OCT 08/SEP 08 185/180 CALL @ $1.88 debit