Profit $9,602.40. A 50% return on risk for February.

If you’ve been around here lately, you recall I’ve tossed up a few entries about my trading activities in the market. Well, I’ve decided to hold myself accountable and post a report card each month at options expiration. February options expire today.

Sometimes I may spend some time explaining and describing the month’s actions. Today, we’ll see.

OK, my first trade of the month was to sell the 1285 Call and buy the 1295 Call for February on the SPX, which is the trading index for the S&P 500. The difference in price between the two was $5.50 per share. I traded 10 contracts and contracts have 100 shares each, so, I sold an option for $21,487.05 which gives the buyer of that option the right to force me to sell him 1000 shares of the SPX for $1,285.00 per share. Of course, so long as the actual price for the SPX remains below 1285, I’m sittin’ pretty, just waiting for time to expire where I walk away with the 21k. One the downside, if the SPX goes above 1285, the owner of that option can still force me to sell to him at 1285. So, if it goes up to 1300, for instance, then I would have to buy at 1300, only to sell to him at a $15,000 loss at 1285. So, in order to limit my risk, I buy an option that gives me the right to acquire the same number of shares at a given price. In this case, 1295. There’s a $10 per share difference, which means that the very worst I can do on the trade is to lose $10,000. To buy the 1295 cost $16,012.95, so my net credit on this transaction was $5,474.10.

Here’s how it all shakes out. Note that I’ve separated out each option pair that constitutes a complete trade.

You’ll notice that in each case except one, the black number is greater than the red number, meaning that each time I execute one of these trades, the difference between the two numbers is immediately deposited into my trading account as cash. This is called a "credit spread." You’ll notice that the trade I talked about at the beginning, the 1285/1295 Bear Call Spread, is at the bottom of the list. At the top of the list is sorta the same trade, but in reverse. I bought back the 1285 option and sold the 1295. That was yesterday morning, 6 hours before close and expiration. Look at the difference in prices. I entered the trade on Jan 9, 2006. That’s the value of time, laddies and gentlemen.

Why did I close down the trade? Because the SPX was knockin’ at the door at about 1283. I got out of it for a debit of about $1,500. I then rolled right into a March position further away in price and time (1300/1310) for a credit of $3,000. NEVER LOSE MONEY. I turned a $1,500 loss into a $1,500 gain. More than that: since the SPX settlement price was 1288.99, had I not bailed on the trade at a $1,500 loss that I turned into a $1,500 gain, I’d be looking at a $8,899 loss. Making up for that would have required a lot more contracts a lot "closer to the money" than the position I sold at 1300 on the roll out to March with lots more time value.

The other thing is how risk is calculated. You see calls and puts on the chart. The calls are above where the index is trading; the puts are below. Only one side is at risk. You don’t know which, of course, until later, but whichever it is, the other side is essentially infinite return, as there’s no risk.

Finally, this is not a typical month. I just started the "Report Card," but had I done one for January, it would have shown a loss of $4,244.40. Combined is a return of about 20% over both months, or 10% per month. What’s key here is that I was able to take some losing positions in January and roll them into winners in February, except for the one I described above, which I rolled into March. Don’t lose money. Just don’t.

Next month I’ll try to introduce some graphs.

By the way, anybody can do this. It may sound complicated. It’s not. It’s also not hard. I’m not doing this to brag, but to engage in some good will, in hopes that people who read my blog find something that improves their lives. Money may not buy happiness, but poverty doesn’t buy a damned thing.

I am not an expert at this. A novice, at best. To learn it, get hold of my buddy Craig right over here. Get the trading guide. Have him coach you. Get the daily newsletter. Profit. I honestly don’t know what size of trading account would be considered minimum because of the minimum commissions. I’d guess in the area of about $20,000.

Update: Oops. I made an error in reporting the potential loss on the 1285/1295 Feb Call had I let it go to expiration. It wouldn’t have been $8,899, but $3,899. That’s what would have been withdrawn from my account at settlement had I just let it go. Instead, I rolled to a trade that added about $1,500. Also, I took a peek at March, since all but one of my planned trades have been executed. I’m leaving 40% of my account equity out of play in order to defend a bad trade–if I need to–and/or to get in on April options prior to my March positions expiring and freeing up the maintenance dollars necessary to place more trades. Anyway, should all my March positions expire OTM (out of the money), I’ll post profit of about $8,100 or 22% return on risk. If I can my order for 10 contracts of the 1190/1200 Mar Put at my desired $0.60 credit per share, it will add another $550 after commissions and boost my return on risk to 24% for the month.