Saturday, February 13, 2010

dreamspeak -- 13 February 2010

*** Notice:  dreamspeak is a special feature in this blog where I get to speak whatever that comes to my mind.  Having your own opinion certainly beats having no opinion at all.  ***

I've never felt a trading month this long and there is another week more to go before option expiration.  It is hard to believe but I already have had 24 transactions involving 147 individual options in the past three weeks.

It all started when Obama supported a new bill to Congress thereby limiting the amount of prop trading (or proprietary trading) and fund activities that entities with a bank charter can do.  The "Volcker rule" is effectively saying, it is either the bank charter or these proprietary activities.

GS, which I have vested interest in, started plunging from an intra-day day high of $171 on its earnings day to $153.93 (closing price as of last night), effectively shaving 10%.  I later learned that prop trading constitute about 10% of GS' revenue.  Market is really efficient in pricing in the downside.  I pulled out all the stops that I know to cut loss and/or to limit my exposure.  When the dust settled, I was staring at a loss of US$4,155.

I had no qualms about cutting my losses short as capital preservation is the most important factor in trading.  Shit happens and everything else is based on hindsight.  But In the midst of this chaos, I did the right thing.  I quickly switched gears to trading ratio spreads on $OEX or S&P100 using techniques that I've learned from my buddy, randomjaywalking.

It was as good as advertised and more.  I have put on 3 trades for the "Front month" (February) and have since recovered all the losses plus a small profit of US$2k plus.  Obviously, the small profit itself doesn't mean much.  It is the potential and the repeatability of ratio spreads (or broken wing butterfly) that excites me.  I can make a good profit on a monthly basis without the need to take unnecessary risk with naked calls and puts.  If you follow the entry criteria carefully, this kind of setup works in almost all market conditions -- you make money if you're totally wrong in your market direction, you'll still make money if the underlying hardly move and you will make the most money if the underlying moves in your direction as predicted.  Realistically, the only time that you'll lose money in this kind of setup is the occurrence of a 9/11 type of market crash.  Obviously, you still have to do your part to monitor your trade and follow the exit criteria diligently.

Simply good stuff.  Enough said.

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