Active-Trader - In Fed We Trust - Part 2

Welcome back Active Traders and Wealth Builders.

Back in my prior post In Fed We Trust , the US Federal Reserve had just announced its plan to create billions in reserves (out of thin air of course) to buy financial assets in an attempt to stimulate the economy.  That was back in November of 2010.  Now fast forward to nearly 3 years later and the Fed has added many billions to their balance sheet and US Stocks have added 40% to their value since then!

Expectations were high this past Wednesday that the Fed would "taper" or finally ease back on its ultra-aggressive monetary stimulus plan.  Bernanke himself signaled such a move earlier this year and the market widely expect a taper of between 10 and 15 billion per month dropping its purchase of financial assets to a mere 65-70 Billion per month.

So all eyes were on CNBC this past Wednesday Sept 18, 2013 at 2PM.  We all expected a generational low in easy money policy and a signal that the economy had improved enough to stand on its own and without further extraordinary monetary stimulus.   And what did we get?  No Taper, or continued easy money policy!

The markets loved it of course and immediately took off like a shot sending stocks and my net worth up to new all time highs once again for the 3rd separate time this year.

As for individual stocks,  I added shares to my existing position of call contracts in social media company Facebook (FB) which is now my largest single position.  I also started a new position in social media company Yelp (YELP) and I'm also looking to start a new position in real-estate media company Zillow (Z).  Aside from that, I am trying to keep my power dry since we still are in a period of negative seasonality.

As for my TradeStation account, I continue to struggle.  I'm still up for the month, but lost some equity this past week and still have not eclipsed my equity high achieved 3 weeks back.  In last week's post My Trading Plan I laid out my ground rules for entering and exiting positions.  So let's briefly go through my trades for the week and see if I followed my plan.

CMG- 9/21/2013 - 905/910 Put Credit Spread

Put on this trade for a credit of 1.90 back on 9/9 and closed it out for a debit of 0.40.  So took a profit of $150 on this trade but left $40 on the table and did not follow my trading plan.

BIDU - 9/21/2013 - 41/43 Put Credit Spread

Put this trade on for a credit of 0.70 on 9/17 and it expired worthless so I collected the entire $70 with no closing transaction.  Plan was followed, good job Chris.

MW - 9/21/2013 - 35/36 Put Credit Spread

This was part of an Iron Condor I put on for an earnings play back on 9/11 for a credit of 0.25.  I closed it out for a debit of 0.99 and therefore lost about 0.74 times 2 or about $140 on this trade.  This only positive is that I took nearly a complete profit on the opposite leg (40/41 CCS) which I sold for 0.30 and bought back for a debit of 0.04, total profit of $56.  I followed my plan on the PCS since it was clearly in the money, but did not follow my plan on the CCS which I should have let expire worthless since it was way out of the money.

TSLA - 9/21/2013 - 165/170 Call Credit Spread

I put on this trade on last Friday 9/13 for a credit of 1.80.  This was a bearish position and all the stock had to do was close the week below 165 for me to take the entire credit.  Unfortunately, the stock shot out above the short strike at 170 on an analyst upgrade.  I closed it out for a debit of 4.58 (somewhat short of the max loss of $500) on Thursday

I followed my plan on the exit, cutting my loss once it was obviously a loser.  But I did not follow the plan on the entry and I look the trade because the chart was in a bearish distribution pattern.  However there was not a clear setup on the daily chart.

NFLX - 9/21/2013 - 300/305 Put Credit Spread

Put this trade on for a credit of 2.10 back on 9/13.  This trade gave me a lot of grief and at one point went completely against me and in the money trading down to as low as $298.  I stuck with it through that process but closed it out on Thursday 9/19 for a debit of $1.89 which was a small profit.

My thinking at the time was that I was in the hole for so long on this trade, that I was relieved to get out of it at a slight profit.  However I did not follow my plan, and had I done so, I would have collected the entire $210 since the stock closed the week at almost $314, nowhere close to my short strike.

CBOE - 9/21/2013 - 45/46 Put Credit Spread

Put this trade on for a credit of 0.40 back on 9/9. For a good part of the time, the stock was above the short strike and looked like it would go out at max profit.  But I could not realize the full profit until expiration due to time decay and instead the stock came back against me.  I close this out on on 9/19 for a credit of 0.50 so took a 0.10 loss times 2 ($20).  Plan more or less followed on this trade.

FB - 9/21/2013 - 44/44.5 Put Credit Spread

Put this trade on for a credit of 0.25 back on 9/14 x 4 (4 contracts).  Since it was a 50 cent spread, it would be either a loss of $100 or a gain of $100, a nice easy 1 to 1 risk to reward ratio.  I closed this trade for a debit of 0.05 so I took an $20 profit per contract for a total gain of $80.  However, I did not follow my plan since the trade was no where close to being in the money.

PCLN - 9/21/2013 - 995/1000 Put Credit Spread

Put this trade on for a credit of 1.80 in part as a revenge trade on 9/19 for having close the NFLX trade to early.  My thinking was that if the stock closed above $1000, I would keep the entire $180 credit as profit. I closed the trade at about mid-day on Friday for a debit of 0.8 so I took about a $100 profit on this trade. So I did not follow my plan on this trade.

AAPL - 9/21/2013 - 460/465 Put Credit Spread

Put on this trade on 9/11/2013 for a credit of 1.80.  This trade took me on a wild ride trading down as low as $447 during the week which was completely in the money against me.  But I held on and closed it out on Friday for a debit of 0.03 with just minutes before expiration.  I mostly followed my plan on this trade, but left about 5 bucks on the table due to my own nervousness.

So I added it all up, and had I followed my plan, would have made an extra $331 which was the total amount I left on the table due to closing winning trades out at a small debit rather than letting them expire worthless.

Lessons Learned

1) Wait until Tuesday to put on Weekly Credit spreads.  Much of anguish I experienced this past week could have been avoided had I waited for better entry points.  Plus less time until expiration means faster time decay and left time to sweat out positions going against me.

2) Don't take a trade unless you get a solid signal on the daily chart.  I could have avoided badly timed entries in AAPL and TSLA instead of simply trading because the stock is "close to support" or "in a distribution pattern".

3) Give your credit spreads a healthy chance to expire worthless before closing them out at a profit.

Regarding this last one, the psychology of spread trading makes this difficult because you have to hold on for a smaller profit while leaving the table a chance for a much larger loss.  Consider PCLN - if you could take a $100 profit and avoid the chance of a $320 loss would you do so?  My risk-averse personality says reduce risk and take profits.  But doing so is the opposite of what you need to do to maximize profits.

Overall, I think I am on the right track but I still have a lot of work do to before I achieve consistent profitability.  I also have to work on my ability to "take heat" as positions go against me and still remain objective.

Enjoy your weekend and have a great trading week ahead.