A Lesson In Staying Consistent And Persistent

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High probability trading: Tonight, we’re going to go over all of the trades that we made on Wednesday, November 19th. We’re about a day out from expiration, so it's about that time where we start closing out trades that haven't gone our way. And really, the title of this video is all about staying consistent with what you’re doing.

And I wanted to, before we actually get into the losing trades that we had for this month, and not that these weren’t the only ones because we’ve closed out a couple of others as well, but we’re the only company I know that’s out there that’s going to show you guys all of these losers. And I think that’s a real distinction between what we do and what some of the other companies out there do, and especially some big-name companies that don't show you any of their real wins or actual losses.

And the reason I show you guys this is one because it’s just transparency. You guys should see everything that we’re doing and everything that we make, good, bad or indifferent every night. That’s why we do this video. But also two, because it's times like this that we can learn from these opportunities not necessarily that bad trades were made, but the whole point of trading and especially when you’re doing options, is to stay consistent with what you’re doing. This whole belief and this knowledge base that over time, you make the same high probability trade, over time, you’re going to win.

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And this is an excellent example of when the market just goes completely against you. And there’s nothing that we could've done to prevent it. You can’t impede the market from making a two standard deviation move, a move that it makes maybe 3 out of 100 times. But that’s exactly what we find ourselves in, is a move that the market made was well beyond what anyone could’ve expected the market to make.

Now, does that mean that we should stop trading? 100% not! We should continue to make the same types of trades that we’ve made time and time and time and time again. And as I go through this tonight, going in USO and SPY and XLF and some of these things, I would make the same trade, and I plan to make the same trade that I've done to start all these positions even though they’re losers because that's what high probability trading is about.

It’s about consistently making the same type of trade over and over and over again, so that over time, you have those probabilities that work out in your favor. And if you don't do that, you don’t have enough occurrences; you can’t find that rhythm in probability trading. It’s obviously tough to take losing trades, believe me.

I don't like to lose money any different than anybody else. But I think what's different is that we recognize and know that losing trades are a part of this business and sometimes you’re going to have full losers, but you got to keep going. And that's the whole name of the game and what the title of this video is all about.

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Before we get into our opening trades and then any adjustments, we had a pretty active day mostly in closing some trades, taking off a couple of little profits, but also in closing out trades that just were completely in the money, so we had to buy them back for a loss. The first one that we closed out of is USO, and we went ahead and bought back our November 34/32 put spread that we originally sold, bought it back for a max loss at $2.

Now remember, if you have an option spread that is in the money at expiration, it is cheaper to buy it back and pay the commissions to buy it back at max loss than it is to usually let the options go into the money and get assigned and then you have to exercise your other side of the trade. It just becomes a little bit cheaper as far as commissions and margin and all that stuff.

Just go ahead and get it closed out, buy it back for max loss, bite the bullet and get out of the trade. That’s exactly what we did with USO and SPY and XLF. USO, we bought it back for a 200 debit, so we took a 664 loss on those contracts. The whole idea here with USO was… I mean, you can see that oil has just made a huge move well beyond what anybody would've expected oil to make and continue to go down.

But we’ll still continue to trade this. We’ll be adding some more positions for December because, over time, it’s going to bounce back, that’s what always happens. We have market cyclicality come in and you just have to continue to make high probability trades. Now, you'll see where our position was. It was up here at 34/32 and nowhere close to where the market is. And this is a great learning opportunity because there's no chance that we could’ve rolled this trade to next month. I got a couple of emails from people saying, “Why don’t we roll it to next month?”

Well, it's worth $2 now. Next month, it would have to be worth more than $2, so we’d pay to roll this trade to next month. And frankly, that's not what we want to do. This is an excellent example of you just have to take what the market gives you. In this case, it moved completely against us, and we didn’t have an opportunity to hedge.

It moved too far, too fast to the downside, never recovered at all, and you have to take the loss, and you have to then reset the next trade for the next month. If you want to continue to be bullish in oil which we are bullish in oil, then we’ll reset this trade by selling another put spread way below the market. We’ll continue to sell put spreads against oil, but we’ll do it just well below the market and keep our position size small as always.

Same thing with SPY. SPY is fascinating because we had sold the November 194/196 call spread, bought it back for a max loss of a $2 debit, so a 450 loss on the SPY trade. But what's really interesting with SPY is that when we made this trade, it was almost virtually the bottom when we made this trade, so it was right around here, one of these two days here and I don’t know where we were in the grand scheme of things.

But when we made this trade, and it was 194 was our strike price, at that time, there was only about I believe it was about a 17% chance that the SPY would close above that level by expiration. This was our line in the sand. We’re looking at better than 83% chance of success. Now obviously, the market has more than doubled and eclipsed that number.

What does this mean? It means that the market is 100% cyclical and sometimes does make irrational moves in both directions. Most people will think that when the market makes those kinds of big moves in one direction, it's usually to the downside. But it can also be to the upside, and it could make a huge move higher well beyond what anybody had expected and what probabilities expect.

But this also means that it gives us an opportunity to continue then to do the things that we’re doing, make another high probability trade and continue to reload. And that’s what we’ve already done by trading short DIA which is a little bit of a profitable trade already. But I’m still short the market. I think generally; it’s a little bit overbought, and I believe that some selloff is due and is warranted and naturally will happen. It just might take some time to actually realize.

EFA is one that we did end up closing out at a small profit. That was an international ETF. We had the 64/65 call spread, so EFA continued to move lower. We bought it back for an $.8 debit, so a $48 profit. Not a big one there on EFA, but the whole idea here is that we did have a couple of ones that offset it.

We had trades on both sides which helped out, and you can see that even though EFA continued to move higher with the broad market, it didn't crack our 64 price level right there. It just came very close but didn't crack that price level. And more importantly, implied volatility dropped, so that did give us an opportunity to go ahead and close that out at a profit.

XLF is very similar to SPY and USO. We had the November 23/24 call spread. We bought it back for a little less than the max loss at a $94 debit, so lost 244 on that trade as a total. But you can see here with XLF, virtually the same thing as with the S&P, it's pretty much the same chart, it just made a huge, huge move higher. And even though our long strike was at 24, our breakeven was much closer to around 23.30 or so.

We had quite a lot of distance to cover between ourselves and the market if we were going to turn this trade around, and just really didn't have an opportunity to do that. It's interesting. You look at XLF even more so than just the broad market, and you’ve got a very, very nice upward trending line, but it's had some cyclicality. It made its moves up and made its moves down and it’s just getting more violent in its nature, so it’s just making longer bigger moves in either direction.

But you can see that there are a very clear consistency and cyclicality to something like XLF which is going to be interesting. We’ll see how it plays out in December because prevailing thought here, we might assume that we continue to move back down maybe in December just to keep this cyclicality going. A fascinating chart is XLF and obviously, still a good play. But with volatility as low as it is, now we have to start turning the other option strategies if we want to take advantage of it.

FXY was a pretty good trade. This one is a trade for December that we ended up closing out early just because it’s made the vast majority of the money that it’s going to make. As the yen continued to move lower, we want to take advantage of that and play a continued move lower in yen. And we got that with FXY. We sold the December 87/88 call spread initially, bought it back today for an $.8 debit, so a $51 profit on that small trade.

With FXY, you can see that as the yen gapped lower, what we did was we sold a spread right here at 87/88 anticipating that it could just continue lower after the gap which is exactly what it did. This thing has absolutely been crushed and annihilated, and we actually might start coming back in here now with implied volatility as high as it is up in the 94th percentile, starts actually going long yen just a little bit here and see if we can get a little bit of a cyclical move in yen at some point over the next two months.

Don't discount charts like this. When everyone is running for the fences, it may be just the right opportunity that we need to get at low prices and very high implied volatility with FXY. We’ll see what the pricing is. The pricing hasn't been stellar in the options, but I think once we get past November because everyone is focused in this November contract month rightfully so, it’s moved down from 92 to 82, so it’s had a huge move. I think once we get past November and people start focusing and trading more of the December contracts, we’ll start to see pricing come back up in some of these options trades which make it a little bit more appealing for guys like me.

As far as adjustment trades go, let’s go over those real quick. And I want to make sure that this is scrolling down for you guys. I don’t know how it slid over. Adjustment trades today, the first one that we’re going to talk about is PBR. We'll skip gold because we had an adjustment in gold in GLD and an opening order. PBR is a Brazilian oil stock, and we decided to roll our strangle that we have in PBR out to December.

The way that we did this has we facilitated that roll strategically by selling a calendar. Remember, when you sell a calendar, you are selling that back month, and you’re buying that front month which is November. Well, in this case, we had a strangle, and we had the 15 puts and the 12 calls, so it’s an inverted strangle, and by buying the Novembers, we closed out of our November short options, and by selling the Decembers, we re-executed a short option in December.

Think of a calendar just as a vehicle to get you from one contract month to the next. We still have the same strategy; the inverted short strangle, but now we have it for December. And for our put spread, we were able to roll this at no cost, so there’s no cost to roll it, we just took the next month, gave us some extra time to be right and that’s the whole idea with this.

And for the call spread, we got a $.12 credit on the roll which just helps just a little bit because we got paid to roll and take a little bit more time. For me, the whole idea here with this spread is that at some point, the market is going to be cyclical. And you guys have heard me say this time and time again. You can go back to the video archives.

I said it when the VIX was up at 25 and 30. I said the VIX is coming down and the market is going to go back up, and it did. You know that it's going to be true for everything. Everything that’s high right now is going to come down. Everything that’s low is going to start to revert up. It’s just a matter of time, and we don't know when it is, but it always happens.

With PBR, it’s the same thing. Our target in PBR is between 12 and 15. That's ideally where we want the stock to land. Now you can see, it made a huge move outside of that range, but if we just closed out the trade right now and cut off our timeline right now, we would emphatically bank a loss. And I'm not of the opinion of doing that.

If I can extend my trading deadline by rolling from November out to December, that gives me more time to be right. Now sure, PBR can continue lower, but we didn't add any more to this trade, we didn't add any more risk to this trade, we just extended the timeline. As far as I'm concerned, it’s still a small trade in our portfolio; it's not going to kill me if this thing goes lower and I’ll keep rolling it and rolling it until it turns around and makes a profit.

But this is a good example and something a little bit more advanced that traders don’t do, is they don't take the time to understand why we roll it to the next month. And it's only to get more time to be right. We need more time, so that if in fact, PBR does rally higher, then we have an opportunity to take a profit at that point. And the whole goal here is that we didn't pay any money to roll, we got paid a $.12 credit to roll, and more importantly, we extended our trading timeline another 30 days which might allow us to turn a profit in this trade.

The last one that we’re going to go over is GLD. This is the adjustment that we made to GLD. We originally have a beautiful wide iron condor in gold, but gold has started to move higher, and that's okay, and it hasn't breached our upper call spread yet. What we decided to do is not only take advantage of the higher implied volatility that’s in gold already, but we also wanted to add to this position because I feel like it's still an excellent position.

And we decided to add put spread below the market. As gold is moving higher, we wanted to add put spread below the market, so we sold the gold vertical 110/108 put spread for $.36 for each of those, so we added that extra credit. Now, what that additional credit does is that additional credit moves out our breakeven point to the top side to counteract the move that gold is making right now.

And let me just go ahead and get rid of on this our short straddle that we did because we’ll talk about that next. But here was our original position in gold. And I’ll just get this out. There it is. This is our original iron condor in gold, and you can see it was more neutral initially and now gold has shifted higher. And it hasn't moved a lot higher, so it’s not even close to breaching that upper boundary at 18.

But implied volatility is extremely high in gold, so we got to take an opportunity when we get it to sell some additional premium in here. What we did was we added an extra spread below here on this side of the trade. What that's going to do is that’s going to move out this breakeven point even further by adding in that additional credit. Here you can see once I activate this spread that we added today, there is the additional spread that we added, the 110/108. Now, it puts the middle of our iron condor range right around 110. It re-centers the trade over the recent gold move.

Now we’ve got a little bit more room to the top side. You’ll notice that breakeven point slid out just a little bit further on the top side, on the call side of our trade and we now have a bigger possible window of opportunity to make even more money on this trade. Now, we have a chance to make about $282 if gold stays inside of this range. That's the adjustment that we made to the iron condor.

Now on top of that… And I did send out the alert that this is definitely a more advanced and riskier strategy, so if you do not understand the straddle or if you don’t have enough margin to carry this under the thresholds that we talk about, that 1% to 5% of capital usage, please do not execute this trade because I don’t want to get emails saying that, “Hey, you told me this…”

I never tell you to perform any of these trades. These trades are all for education purposes; they’re not an advisory to buy, sell any security. We have this right here on the website. Make sure that you understand these trades before you enter them. And if you need to email me and say, “Kirk, I just need to know it a little bit more.” Watch one of our video tutorials. Please do that. I did that ahead of time because I just don’t want to get a bunch of emails from people that enter a trade way too large for an account size that doesn't quite handle that.

But what we did with gold is took it up just another notch. Because implied volatility is so high in gold right now, it’s up in the 100th percentile, meaning that it’s higher right now than it’s been in the last year, that gives us a great opportunity to sell just pure premium and one of the ways that we can do that is by the sale of a straddle.

A straddle is a selling of a call and a put at the same strike price. What we did is we went ahead and did that for December, we came in a little bit closer and you can see we sold the 114 straddle. We sold the puts at 114, and we sold the calls at 114.

Now, this may look a little bit risky because you’re thinking to yourself if you sell the straddle at 114, that means you need gold to trade at 114. That's the ideal position for gold to trade in. If GLD traded right at 114, correct, we would make a possible money in that situation. But by selling this straddle for an immense credit of about $5.91, so almost $6 of credit, that moves our breakeven point plus or minus $6 on either end of 114.

That drives the breakeven point out to 120 on the top side and then moves the breakeven point down to 108 on the bottom side. That straddle credit acts more like an iron condor because you have wider breakeven points. That’s what it looks like. And let me show you guys just what the straddle sounds like by itself right here in Thinkorswim. You can see right here on our platform; this is what the straddle looks like.

It's got that pyramid shape right over 114. But like I said, that credit that we received moved the breakeven points on this trade all the way out to 120 and 108. Now, it’s a little bit more of an aggressive strategy because you have more capital that you have to put up in margin to actually carry this position because you’re naked two options, but as far as credit is concerned, it's actually one of the more profitable trades you can consistently make if you have the ability to do it.

And it doesn’t mean that you should do it on every single stock that’s out there, but I usually like to do them on maybe one or two a month. And I haven’t been doing a lot of them because implied volatility hasn’t been that high and we've had other positions on. I like this trade in gold. The whole idea with a straddle in gold is that we don't want to keep this position for the entire month.

We’re not looking to keep this straddle in gold on all the way through December expiration. Ideally, all we want to see is we want to see a drop in implied volatility back below the 100th percentile. The sooner and the quicker that implied volatility decline regardless of where gold moves, the quicker we’re going to realize a profit. We’re not trying to take a lot out of this trade, maybe $100, $200 out of this trade.

We’re not looking to take the full $600 credit out of it, so just be aware of that in advance. That’s why you take in a bigger credit, to begin with so that you have some room to make a profit and leave a little bit of extra on the table just in case something goes crazy. But the range here that we have with our credit is very, very wide. It’s off the screen to the bottom and up here at 120 on the top side.

If gold does continue to rally, it's likely that even though it rallies that we’d see a drop in implied volatility which would lead us to make a nice little profit even in the face of a rally in gold. We’ll see what happens, but we like that trade in gold. But just make sure that your account size can handle that. And if you have questions about that, please just shoot me an email. That's what I’m here for, here to help as always. I hope you guys enjoyed this video.

I know it was a little bit longer, but we had so much information to go over with a lot of the closing trades, the adjustments, and then the gold straddle. As always, if you guys have any questions or comments, please add them right below this video in the comment section. I’ll get back to all of those tonight or tomorrow before the open. And happy trading!

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.