Account details and objectives
To present an example of how to use the TFI information I am going to track a "model" account. For all practical purposes consider this to be a paper account.
Account Details
- The account was initially funded in Jan 2011 with $10,000
Account Objective
- The objective is to focus on positions that present a very low risk. There are 2 types
of risk. The first would be the "odds" that the position could go bad, and the
second is the risk of the dollar amount of the loss. This account will balance these 2
risk factors, and take both into consideration.
This can easily be determined with a "sleep test". If a position causes concern where it interferes with a peaceful nights sleep, then the risk is too high for that position!
Position Types
- Selling premium will be the primary type of position used. The primary focus will be on the 4 main indexes, specifically the ndx and rut. Note, I am also sticking with options that are non-exercisable (European type). The reason for this is that one position I am interested in is a "directional condor" that would not work if part of the position is exercised against you before expiration.
Position Duration
- The normal position will be for approximately 3 to 6 weeks. This is to allow TIME to have the effect of eroding the sold premium.
Profit Goals
- I DO NOT, and WILL NOT set a specific profit goal!
Journal Updates
- I will post an entry or exit as quickly as I can once the order is filled. But I can not
guarantee that the post will be "instantaneous".
I also want to point out that the positions use TIME to generate a profit. For the first 2½ months there have been 5 trades and 1 roll. The shortest duration of a trade was 2 days. The longest was 1 month and 4 days. There was a 3 week period where no positions were entered or exited. This means we can go days and weeks without any new activity, primarily when positions are in place and time is doing the job.
I want to address the profit goals first. Many people feel that it is perfectly fine and
reasonable to set a goal, such as making 7% per month, or $150 per day. Those sound like some
pretty small goals that anyone should be able to easily reach. But what happens is that there
is going to be the inevitable loss, where that person gets a little "behind". So now
not only do they have to still make enough to reach the goal, but they have the additional pressure
of making even more to recoup the small loss. This leads to forcing a trade and by taking on
more risk.
To make a long story short, this is one of the leading causes of traders losing their whole
account. It has been my experience that the focus MUST be on placing a trade that has a good
potential, and also have a low risk that can be tolerated. The position will be closed either
when there is not a valid reason to remain in the position any longer and/or there is a compelling
reason to exit such as either to take gains or to honor a stop.
The results will be what they will be. "It is what it is!"
Due to the size of the account we have the Pattern Daytrader Rules that we must be aware of. Some options brokers will not count options as day trades, but other brokers may. The PDT rules do apply to stocks and futures. Because of this, the account WILL NOT be focused on day trades. There will be a few occasions where conditions will be such that they will be just calling out to be taken advantage of with a short term "quickie" position. The rare exception will be a position entered and exited in the same day. Usually a "quickie" is going to be with expectations of lasting for 1 to 3 days. And these will be basically when a really good situation develops that is very compelling.
The purpose of selling premium is that the whole idea is saying that to sell a call spread you
are saying the price will not move above X. For selling a put spread you are saying that the
price will not move below Y. And the key part of this is that you are saying that the price
will not move above or below those levels in a set amount of time.
TIME is the key factor, and is the key to selling premium. For most of the positions we are essentially
saying that while the price remains below X, or remains above Y that the position is still valid and
good.
I would like to claim that I am perfect, that when I sell a call spread the price will never move
higher and when I sell a put spread the price will never move lower. But I know quite well
that claim can never be made! The reason we use an OTM strike and the monthly ranges is to
build in a "margin of error", where the price can move the "wrong way" for a bit
and still be a good position. This is why the time element is so important.
This also brings up the issue of paper gains and losses. I have seen positions that will be
showing paper losses for quite some time. The position is entered by selling a spread, and
then the price moves the "wrong" way, creating an apparent loss for the account. But
the price never moves past the strike sold, and the position is not invalidated. So by keeping
focus on the reality of the position that you are saying the price will not move past the strike
sold, and by not being emotionally effected by the "instant gratification" of the
"paper balance", the position is held, and as time erodes the premium those
"losses" disappear and slowly become profits.
This brings me to a very important statement. I want to stress that the trades posted
for this model account ARE NOT MEANT AS ADVICE NOR AS RECOMMENDATIONS!
The trades posted are an example of how I use the TFI Charts for a longer term strategy of selling
premium. I want to make sure it is clear that you might not get the same fills that I post for
a trade. There is also the possibility that I might not be able to post about an entry or exit
in a timely manner, so that makes it very difficult for you to follow the trades. One example
would be if I have a power outage, or internet outage and call the trade desk to have the positions
closed I would not be able to update that one the web site so you would be unaware of it. That
is why it is important that I stress that YOU are responsible for YOUR own trades. You need to
make the decisions on any position you enter or exit.
I trust that this journal for the model account will help to show you how I apply the TFI information, and that it helps you to make informed decisions so you to can benefit from it.
Jim.