Market “Physics”

Hey, long time, no blog.

As I have watched the broad market continue to float higher, and as I watch debacles like $AAPL gapping 50 points down back in January, I of course try to make sense of it all. WHY is it happening? For a trader, the answer is “I don’t know, I can’t know, I don’t care”. A trader just goes with what is happening. This has always been a difficult mindset for me. Still, I am always trying to improve my understanding of how the market really works so I can better take advantage of it.

Take the $AAPL case. One day the company is worth $500+, according to market prices. The next, it gets slashed by more than 10%. Did the company REALLY change value that much, intrinsically? No. It was the same company yesterday as it is today. Does the new post-dump share price represent a fair valuation of the entire company? Possibly. But what has really happened? A small subset of owners of the company with a small subset of the total outstanding shares decided (or were forced by margin calls) that they needed to sell at this price for any number of reasons. Did every share outstanding get truly revalued in a market transaction? I would say NO. Every share outstanding got marked-to-market based on these few transactions. If you try to think of stock price as a proxy for what people think a company is worth (i.e. market cap) then none of the day in, day out price changes you see in stocks really make any sense at all. In the past this has caused me to stand by in a stupor in the face of strong uptrends without joining in. It just doesn’t make sense from a market cap and company valuation perspective. As I was thinking it through, I realized something. Basically, money is created and destroyed in the stock market each and every day. There is no law of conservation of money, nor is there any such thing as “price work”, meaning trading energy applied to the stock to revalue it. Thinking of the markets in terms of physical processes (like momentum, work, energy, force) is inherently flawed. Let me explain.

In physics, things have intrinsic properties. A tank full of jet fuel contains a certain mass. It has internal energy defined as temperature. Each and every particle in the tank has these attributes in basically an equal distribution. If you wanted to heat that tank of fuel from 50F to 200F you would need to apply heat energy to the entire system. You would have to apply enough heat to each individual particle to raise its temperature from 50F to 200F. We then sum up all the heat needed for all the particles and that is the total energy required to heat the whole tank. (This is not necessarily how you would do the math, but physically it’s an accurate description of what happens in reality.) If you wanted to heat half that amount of fuel from 50F to 200F, it would take half the amount of total energy to do it.

Now, if you think of stocks in this way, your brain will turn into greek yogurt quicker than you can say “austerity”.

Say that we start with a “tank” full of stocks, such as every single share of AAPL outstanding. If the market price is $400, then we determine that all the shares in the tank are “worth” $400 each. The tank as a whole (the entire company) has an ‘energy state’ called market cap. Total number of shares * $400 = the “value” of the entire company. Now you would think that to raise the market cap by 25%, you would need to apply monetary buying pressure to each little share until they are all up by 25%, so that the whole is equal to the sum of its parts, just like in physics. NOPE.

All it takes is for a few traders to take a tiny fraction of those shares out and revalue them through transactional work in the market outside of the $AAPL tank to a new level of say $500 per share. Then the magic happens: all the rest of the shares in the tank are instantly revalued, without ANY action performed on them at all!! This may be obvious to most people, but it’s an immensely important realization. It’s like taking 1 gallon of JP-8 from a 10,000 gallon tank at 50F, heating that 1 gallon from 50F to 200F, and then dumping it back in the tank. In physical reality, the 1 gallon cools a lot and the rest of the fuel heats a tiny bit as the extra energy is diffused to all of the fuel. That is intuitive. However in the stocks case, as soon as the 1 share goes from $400 to $500 and is thrown back in the tank, suddenly by simple declaration the entire rest of the tank is at $500 as well. A miracle: wealth has been created. If this was physics, then it would mean that heat energy had been created. This is one reason why I say my science background is a disadvantage on trading. I have a fundamental worldview that is not applicable to the trading world. In the markets, wealth can be and is created and destroyed all the time through this multiplicative effect of mark-to-market. (As an aside, it’s also easy to see why they suspended mark-to-market pricing during the housing meltdown. Valuing the whole of the banking system at the depressed price that a portion of the garbage loans were trading at would have destroyed all the wealth in the world, at least monetarily, and for no real physical reason. It couldn’t be allowed to happen, so they bent the rules. At the time this made a lot of the idealistic “Blue Blazer” types very angry, including myself, but was absolutely the right call for them to make in hindsight.)

So when you see a stock chart, and you wonder “How can everyone think AAPL is worth $700 per share!?! Are they crazy?!” make sure you stop yourself and think again. In reality, a relatively few people think that a small fraction of those shares are worth that $700 right at the moment of the transaction. All the rest of the shares outstanding are marked-to-market based on this tiny sample. That is why company valuations can be so whacked out for so long.

The key is to predict how traders may react en masse when this financial alchemy happens. Besides just the revaluation of all of the stock, I think that this effect is also highly magnified by the derivatives market. Increasing the value of a million shares by $1 can result in a huge magnification of hundreds of millions in the options contracts. The tail wags the dog.

These thoughts help me to align my market paradigm closer with auction theory and away from physical analogies. The difficulty for me is turning this knowledge into actionable trade ideas.

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53 Responses to “Market “Physics””

  1. Greg P Says:

    What a complete load of crap. You have officially let the market get to you, and gone nuts. The market is not out ot get you. The market is not a tank of gas, and a few shares do not magically move the entire market.

    You have cracked and need to stay away from the markets until you get your self psychologically evaluated and helped.

    The above diatribe can only be described as the ranting of a madman. Get some help, or get committed, and do not come back to the markets until you can grasp the fact that the market is just a herd of individuals making decisions and that groupthink does not work, it just results in excessive irrational moves.

    Get over it. Trading is just a numbers game. A game of probabilities and statistics and money management. It is not a physics experiment !!!

  2. Prospectus Says:

    Did you even read what I wrote?

  3. Greg P Says:

    “Increasing the value of a million shares by $1 can result in a huge magnification of hundreds of millions in the options contracts. The tail wags the dog. ”

    YOu totally do not understand the basics of the markets. For every long derivative, there is an equal and opposite short position. You can not buy a call option without someone selling that call option to you !!!

    There is no magnification and the options market rarely has any influence on the stock, unless it is just an outsized bet that is noticed by others and then causes an indirect effect.

    You are playing the conspiracy game, and there is no conspiracy. No one is out to make you lose, or get you, or punish you.

    You are losing consistently, because you are not thinking irrationally, like the market needs you to. Mathes, probabilities and asset allocation is all that matters. Not your messed up mind.

  4. Greg P Says:

    yes, I read it, and like I said. It just reads like the ranting of a mad man who has been broken by the markets !!!

  5. Greg P Says:

    Here is a trade for you to put on. Analyse it if you want, or not.

    sell to open JO Sept 2013 $27 put options for approx $0.95 (162 days to expiry). Allocate 2% of your worst case drawdown risk in the account to the position. If by bad luck you get put JO shares. Sell monthly covered calls on the position until profitable. Otherwise keep the $0.95 premium and reallocate the money. You will not lose on this position as coffee will not go to zero, and worse case you get to sell covered calls on it until you are profitable, however long that takes.

    Thank me in 1 year from now. Good luck.

  6. Prospectus Says:

    Ok, I’ll look at it. My first thoughts:

    Say I open the trade as indicated. The stock trades down to 24 and I get assigned shares at 27 in Jun. where would I sell the call? At 27? If the stock keeps dropping to 20, then the front month calls at 27 are going to be basically worthless, so how do you break even from selling them?

  7. Greg P Says:

    OK, at $24, coffee would probably be selling at less than $1.00 on the C contract. That wold be dire for coffee growers, and hence supply woudl be affected. But nevermind, just for arguments sake, if you have been allocated the shares in Sept then you can sell each month the 2 month out front month calls in perpetuity until breakeven or profitable, as it is highly unlikely the call option premium would be less than the loss in the ETF due to roll over of the underlying contract and highly unlikely that people stop drinking coffee and growers keep growing coffee at a loss.

    If you were allocated JO now, then you could sell the MAy $31 for $0.38 and each 2 months to reduce your cost average until it was breakeven or profitable. Just for example, as you have to use judgement which calls to sell.

    I am not guaranteeing this will work, but the odds of it working are greatly in your favor.

  8. Greg P Says:

    If you manage to sell covered call premium of $0.38 every 2 months for 1 year, you could collect about $2.20 in premium, enough to bring your average down to $23.80 from the original $26.05. If you are really unlucky, it will go to $20, and then you have to sell a lot of premium for it to work, but I would rather at that price sell more put premium, as coffee will not go to zero. The bet at this stage is that coffee will go sideways, slightly down or rebound higher. If it dropped considerably to $20, that would have made this a bad bet, and you could stop out for a loss as usual.

  9. Prospectus Says:

    The Coffee futures contract is trading at $136, nowhere near $1?

  10. Prospectus Says:

    Oh, it’s denominated in cents.

  11. Prospectus Says:

    I sold one Sept 27 put at $0.95, so we’ll see how it goes. The JO chart looks in a severe protracted downtrend though. It’s picking a bottom here to make this play.

  12. Greg P Says:

    yes, one contract is 37,500 pounds of arabica coffee. You think about how much work is required to grow 37500 pounds of coffee and harvest it and deliver it to market and think about how much you would be willing to sell it for after you had done all that work, and then think if you would grow coffee next season or whether you would give some other crop a go? If the price gets to $1 from $1.36 then growers will be switching to poppys, cocaine or weed.

  13. Greg P Says:

    well, you are effectively agreeing to buy coffee at $1.15 on the contract if it gets to $26 and you are breakeven. 15% discount to todays prices. You only start to lose in Sept if prices drop more than 15%, then you get to claw back any losses after that by selling the covered calls.

    Here is the 25 year chart.

    good luck. I have a similar trade on.

  14. Prospectus Says:

    Looks like we’re well on our way to being put $JO shares

  15. Greg P Says:

    You have a breakeven price of $26 and time out to Sept and you have only had the trade on for 1 day … what are you even looking at the position for? Give the trade time to work. At this stage you are far from needing to worry about being put anything. You collected the cash upfront, if an adjustment is needed you have plenty of time to do that in the coming months.

    For myself, I do not look at it, I have many other trades that expire sooner or require adjustments. Coffee trade does not require any work, just give it time to work. I have had this trade on for 3 months, and profitable on it even though coffee still trades down. Let time work for you and make the adjustments when you need to, for now just give it time to work.

    You can turn this naked put into a vertical spread, or a calendar spread or a butterfly or many other things to make it work. There is plenty of time to adjust it to make it work.

  16. Prospectus Says:

    Ok, thanks. That’s good advice. I’ll take it off my watchlist for now.

  17. amadeuzzz Says:

    “Here is a trade for you to put on. Analyse it if you want, or not.

    sell to open JO Sept 2013 $27 put options for approx $0.95 (162 days to expiry). Allocate 2% of your worst case drawdown risk in the account to the position. If by bad luck you get put JO shares. Sell monthly covered calls on the position until profitable. Otherwise keep the $0.95 premium and reallocate the money. You will not lose on this position as coffee will not go to zero, and worse case you get to sell covered calls on it until you are profitable, however long that takes.

    Thank me in 1 year from now. Good luck.”

    Hi Greg,intersted in your methodology.How and where can i get more study on this?


  18. gregpastik Says:

    sorry, I don’t blog. Simply collect cash on things you want to own anyway, and don’t give the cash back. Adjust until you get to keep it all. I would not normally go so far out to Sept, but I think prospectus needed the extra time and buffer to follow through the process of collecting cash upfront, time decay and making adjustments. You have to let the price action determine what adjustments to make over time. One contract is fairly trivial, but Prospectus has $95 extra in his account, now he has to make sure he keeps it.

  19. Greg P Says:

    The December options are available now, so you can start looking for ways to morph the single short put into something else. There are lots of possibilities, and the best thing is to play around with them and see what will work (analyse tab in TOS). It is important to not take a directional opinion on where the underlying market goes, as you want to win regardless of where it goes, however you can still have a bias. As long as your position is profitable above $26 you are fine, so the goal would be to adjust to get the cost price lower, not bring it higher. With the Dec options available, you can look to lock in any profits by looking at diagonals, calenders, adding vertical spreads (call or put), turning the naked short into a butterfly(e.g by legging into a short put spread at the same strike). With the long duration and the expiries either side of your position you have lots of possibilities. The goal is to decrease risk and make sure you keep all the cash, so the adjustment would be to lock in any profits, or increasing the rewards while keeping risk the same.

    Of course the best action at this stage for you might be to do nothing and continue to let the position work for you for another month. You have long duration and the position is small, so you have lots of time to think about adjusting still.

    Let me know what is the outcome of your research and what you end up doing. I do not want to tell you what to do, as then it becomes my trade on your account, rather than your trade on your account. No one ever learnt anything by having someone else do the work.

  20. Prospectus Says:

    I’ll analyze the options.

    3% drop today is concerning though :/

  21. Greg P Says:

    Why is it a concern? You still have the $95 in your account, the daily noise is irrelevant.

  22. Prospectus Says:

    Coffee is going to zero apparently

  23. Greg P Says:

    This move today is not pretty, but you have plenty of opportunity to make sure it is a winning position still.

  24. gregpastik Says:

    I thought you would have documented some of your research on what you can do to improve the trade. What have you looked at so far? What options combo’s have you looked at? Calendar, vertical, butterfly, etc … Use the price action to determine how you adjust the trade, if it keeps dropping you can not leave it as a naked short put unless you want to get allocated the stock. Adjust until continually until you are right and make it a winner.

  25. gregpastik Says:

    I am not saying this is what I would do necessarily, Just as an example of what you could do. A back/ratio call spread at $28, could give you better coverage to the downside, but cap your upside. See chart. Then if the ETF turns and seems to bottom before getting to the new breakeven at $25, buy back the short options and turn it into a long call vertical, otherwise if i conitniues down as you feared you then have to re-adjust to protect the downside at $25.

  26. gregpastik Says:

  27. gregpastik Says:

    OK, embedded images do not work on your blog. See TOS PnL chart.

  28. Prospectus Says:

    I haven’t looked at modding the position yet, but I like the way the stock is acting so in just sitting on it anyway.

  29. Greg P Says:

    Forget looking at the way “the stock” is acting, as I have said that is mostly noise that you need to block out. Look at the strategy statistics such as time decay, the probabilities of the position moving to a losing position, ways to increase reward and decrease risk, lock in profits/losses etc … at this point your position is trivial, your maximum profit is $95 and your risk of losing on the position is less than 5%. The probability of the position being a 100% loss on a 1:1 risk.reward basis is less than 3.5%. You have to be adding to it, or making adjustments. Don’t touch the original position, just add to it to make it less risky or more reward or preferably both. Paper trade the position on what you think you should do at least. Waiting until the July contracts are available might make some sense, since the Sep duration I told you to sell, means that the Dec contracts are definitely too far out to play with.

  30. Murph Says:


    I’ve been interested in your commentary and discussion with Prospectus.

    I noticed in your last post, you had a comment that read:

    “The probability of the position being a 100% loss on a 1:1 risk.reward basis is less than 3.5%”

    I’m wondering how you came to that final number of 3.5%?

    Is that specific to this position in JO or is that a probability that’s common across trades like these; selling premium and having a 1:1 risk/reward?

    Any information is appreciated.

  31. Prospectus Says:

    Looks like the whole coffee industry is going out of business

  32. Greg P Says:

    Seems I can not post here anymore.

  33. Greg P Says:

    Murph: At the time I wrote that, the probability of the stock going to $25.01 (a loss of $0.95, which is equal to the potential reward of the trade as he has it) was approximately 3.5%, this is calculated using standard probability maths which you can find all over the internet. I use a proprietary system to get the number, however TOS has it built in to the platform as “probability of ITM”, and you can find software that can calculate the same number here. This probability calculation is standard for all instruments and uses the IV and underlying instrument prices.

  34. Prospectus Says:

    Are you having problems posting?

  35. Greg P Says:

    Does not allow me to post a URL
    www [dot] optionstrategist [dot] com/calculators/probability

  36. Greg P Says:

    Personally: I never put on a trade and have a 1:1 risk/reward, I was only using it as an example of what little risk he still had on the position at the time. I will not personally put on a trade unless I have at least a 5:1 ratio [risk $1 to make $5]. 1:1 makes no sense to me, as that is risking blowing your account to zero to try to double it. Nonsensical. The selling of the $27 put was just the first piece of the trade, it is not intended to be the entire trade, otherwise the May options would have been used.

    At the moment according to TOS, the risk of his naked put position at $27 strike getting to the 1:1 level is 28.5% and the risk of it becoming a losing position at 42%. I would never have let it get that far without an adjustment. There are no reasons at this stage that this should become a losing trade given the possible adjustments that can be made. This is not like stocks where you only have the choice to buy or sell.

    I regret not recommending to Prospectus to take the June options [instead of the Sept], as that would have given him more chances to adjust and greater time decay. However I thought that giving him more time would make it easier to keep the trade on and more time to make the adjustments. There is still plenty of chances for him to add to this trade to decrease any risk on it and increase the potential reward if he wishes to do that. Probably a slightly more liquid instrument might have proven my point better. Although I am not entirely sure what point I was trying to make as there were so many things going on in his original post that I wanted to address. You don’t have to just bet on buy or sell, you can make trades that win even when you are wrong and make strategies that will ensure you win even when you have been wrong about what the underlying does over time. Predicting the movement of AAPL does not have to be a 50:50 bet on long or short, you can use the probabilities, statistics, IV and options strategies to ensure you win even when the underlying is unpredictable and you are wrong on the (which is what Prospectus was indicating in his post).

  37. Greg P Says:

    I tried for several days to post that, thinking something was wrong on the server with wordpress. Seems that it was just the URL that it did not like. 🙂 oh well, it is there now.

  38. Prospectus Says:

    It’s my own fault for not making adjustments when I was up about $45. I should have done something then. I still don’t know exactly what, though. I understand how all the deltas and thetas work; I just don’t know what I should set them as. At least I’m opening my eyes to a different way of thinking than long/short only, and I see that as progress.

    I’m still short the 27, and will look to adjust somehow if I can. If anybody has suggestions for possible adjustments to make, I’d appreciate them.

  39. Greg P Says:

    I have lots of suggestions, and I even gave you one with the associated chart previously. That adjustment would not make sense now, but I can promise you that if I give you the trade you will not learn anything at all and when you do the next trade you would be looking for someone to give you the adjustments each time or try to apply the same adjustment to every problem.

    The best thing to do it to play around with it in the analyse tab and see how it will effect the PnL/risk when you add a new leg to the overall trade, then post it here to see if anyone has an opinion on whether it is a good or bad adjustment.

    Try adding single legs to turn the overall trade into something else if that helps. E.g A ratio spread and a naked put can be turned into a butterfly, etc …

    Selling the calls on the upper end of range to get another $40-$50 out of the trade would have been what I would have done to reduce the risk of the trade at your strike [actually I did do something like that]. Of course you can not be selling calls or the upside now.

    Worse case is that you get put the stock and you own it at a cost basis of $26.05, and then you start selling covered calls on it or selling more naked puts. However I would much have preferred for you to have been adjusting over time when the December and July options expiries appeared. You have a lot more possibilities now than you did when you first entered the trade with the extra expiries.

    At this stage I do not see any reason that this should end up being a losing position for you, even if it continues to drop.

  40. Prospectus Says:

    Ok, I remember that trade adjustment idea. I passed on it because with my small account I have to have cash-secured naked option positions, so I can’t be short more contracts than I have long to offset. I actually got a margin call on my 27 naked put and I had to buy a Sept 20 for $10 to keep the position open. So I have a 27/20 put spread short at +0.85 now. So the back ratio was out for me.

    One immediate idea is to buy the June $27 put here for ~$0.75/$0.80 to set up a calendar. Then if JO tanks this month I have some downside protection, and if it rises then my position moves to breakeven or so. The thing I don’t like about this is that after June I still have 3 months more of short exposure. So this seems like a poor adjustment to me. Thoughts?

  41. Greg P Says:

    no do not buy a call to make a calendar. You never want to buy a calendar, you always want to be a seller of the front month, and let time work on your side. You would end up with the front month put options going completely to zero and a 100% loss for you. You are better to buy the december and make it a diagonal so that you have some bias/skew to the overall position.

    Try some other combinations where you are getting your risk down by reducing the cost basis [even if it risks capping your upside in the short term], but I must say this is a bit odd now that you have the put spread, as you would not even be put the stock if you still have it in September which was part of the strategy to be willing to put the stock. A $7 wide spread is too wide to be useful. You have to look at your account size, your margin requirements and capabilities and what you can trade. Since you were talking about AAPL I assumed your account size was at least big enough to hold a few AAPL stock positions.

    I will have to give you a better suggestion later when I have more time, but for now do not buy that june put option. Do not worry about coffee going to zero, it is not. Maybe this should be taken offline using email now :-s

  42. Prospectus Says:

    I’m thinking sell the June 27/28 call spread for 0.40, then repeat monthly should we stay sub 27

  43. gregpastik Says:

    I do not think you will get filled on the 0.40 for that spread, but if you can that is fine. I will assume you can only get 0.35 for it. Doing this three times over the next 3 months would be great if you think you can do it, and the price action works out such that you can add them on at the perfect timing and then have the price action settle at an advantageous price at expiry. Realistically it would not work out that way, the probability of that happening is very low. It is fairly close to a 50% probability that the price action would give you a loss on the expiry of each of those spreads, not all of them are going to be winners.

    So the theory of that is fine [ sell the spread 3 times at 0.35 to offset any losses on the original put], however the reality is somewhat different and collecting all the premium while being willing to hold the losing put spread would not work out that way psychologically I think.

    The thing that is now of most concern is the size of your account, the lack of margin and inability to add the appropriate adjustments when required. The margin/capital requirements for selling a single naked put on your trading account should not have caused a margin call, which tells me that probably your account size is too small for doing this type of trading. You need to sort out what type of instruments you can hold for your account size and account type. You are probably quite limited to what stocks you can hold as well in this case.

    Personally I hold different strikes and expiries and I am long coffee in a similar way, except I have managed to adjust my positions where my cost basis is much lower than the 1.20 of the main coffee futures contract, having had the position for over 8 months. I have been wrong on coffee for all of the time I had the position on, actually very very wrong, as I was expecting a bounce way back in March, however I have profited from it still by having the ability to adjust early and dramatically increase the position to allow reducing the risk overall. I am not sure you will have the same ability to adjust to keep this a winner.

    One possibility at this stage is still to cut your losses on it and roll down to another strike or cut your losses and wait for better signs of a bottom to re-enter the trade. However this is certainly not what I had in mind, as I thought you would have the capital to be put the stock and trade around that position.

    One thing I can recommend as you are a TOS user [ I use another broker now due to lower commissions] is to watch these shows [ ] which are available free to you with your funded account. It should show you what these types of strategies are able to achieve. Personally I would not do many of the trades they do, but in terms of learning how to trade such that your probability of winning is much better than a 50% bet, it should help.

  44. gregpastik Says:

  45. Prospectus Says:

    So it looks like sentiment can’t really get much worse here, so that’s an edge to the bulls.

  46. Greg P Says:

    Now if Coffee would give a little rally like sugar has, that would be nice for My June expiry.

  47. Prospectus Says:

    I’m still short the sept 27 put. I have no idea if coffee will turn around or not. So what would be the play to reduce negative delta and increase theta? I could sell the sept 27 call for 1.15-1.20, giving me a short straddle for +2.20 net credit on the entire position.

  48. Greg P Says:

    The answer to your question is difficult as you are not in a margin account and it sounded like you are now very limited to what you can do based on your available cash.

    How do you plan to sell a naked call in Sept when you got a margin call on the $27 put ? You would have to make it a call credit spread and then it would become a really tight Iron Condor. Not the best path to take considering the time left. I think you would end up taking a loss on the position, in which case you are better to tkae the loss now, rather than wait. To get delta neutral you would have to sell the sept $26 or two of the $29. Clearly you would not want to sell the $26.

    In terms of selling the calls, I do not think you should do that. I only sell calls when it looks like you are at the top of a range, or if you have reason to believe that you would stay within the breakeven points of the straddle. I can assure you that coffee is not near the top of a range, and if you look at sugar you do not want to get caught on the wrong side of the short covering move when it happens. It would have made sense to sell a call credit spread at some point over the last months, but not now. Just my opinion. If you really want to collect more premium to offset the short put, you could consider Jul and Aug calls rather than Sep. But be aggressive on buying them back if it looks like it will spike upwards. I would go for two further out call spreads rather than one call spread closer to at the money.

    The sugar move is due to roll over to new expiry, and not necessarily just short covering.

    As I first mentioned, you should have been prepared to be allocated the stock and then sell covered calls on it. Considering you do not have the cash to be allocated the stock and add more positions other than more credit spreads, you are very limited in what you can do now. As I mentioned it really comes down to what you can do in your account in terms of adding positions, available margin/cash. At risk of suggesting something really scary, I think you might have to be prepared to sell more put premium, and wait for the next inevitable bounce to sell the calls.

    What I have been doing is just collecting more and more credit as it has been going down (both on the call and put side) to the point that my cost basis is much lower than the current price. I have also rolled early my puts so that I am not deep in the money on them. However, my positions are on the futures, not just the stock. I roll early if my strike looks vulnerable and I am aggressive on the credit spreads every expiry to make sure I am collecting.

  49. Prospectus Says:

    I bought back the put for a net 1.35 loss. It’s my own fault for not managing it correctly. I appreciate the teaching. I definitely learned a few things.

  50. Greg P Says:

    That is unfortunate, although I would not have recommended such a trade, if I had known that you would not be able to make adjustments to such a small trade. I do feel that you are capitulating at the bottom, rather than getting greedy when everyone else is selling. I am a buyer on these constant down days, but I have the capability to add as my size is small from the start (relative to the account), and I collect enough credit that I had no need to panic on the losses, before they turn to big ones.

    You need to stick with credit spreads. You will have much high probability of success with selling credit spreads than trying to guess where AAPL goes next.

    The position at this point is showing a loss, you are only making a 0.20 cent ($20) loss on expiry, and there is 3 months to go. Hardly any reason to panic sell at a breakdown. The duration gave you the premium and should have allowed you to sit through the swings. You were prepared to panic on every down swing and had no fear when the position appeared to be going your way. The risk of the position never changed since the day your bought it, but you acted like it had changed daily. The risk was always that you owned it at $26.05, that would still be the risk today if you still held it. I guess your account size is too small for these types of positions and you are not thinking about the risks correctly.

    This position still does not have as much risk as you think it does. I actually think you are making a mistake in selling today.

  51. Greg P Says:

    No way would I have predicted Coffee goes down to $1.00 (or $20 on JO). Yet here we are giving a first bounce off $20. Crazy prices for farmers. Of course going back 25 years this is still not the lows, but it must be hitting extremes now to give at least a temporary bottom.

  52. Greg Says:

    I assume that you did not eventually participate in the rewards for coffee after taking your small loss. Sticking with the trade eventually rewarded anyone who completed the trade and now is time to take it off.

    If you had been able to continually reduce your cost basis and had an account big enough to accumulate a big enough position then you could have reduced your cost basis well below $20 over the last year and have gains well over 100%.

    coffee eventually hit the $1.00 mark that I thought it would not get to, but it was clear that there is a point where coffee the price solves the problem. Now the price probably does not justify the current demand/supply conditions and I would be more inclined to short the product.

    I still do not know why you look at stocks like AAPL, and yet you got a margin call on a maximum $2700 potential position in a naked put. If you do not have sufficient cash to be looking at these large trades then why are you looking at them.

    I hope this experience was useful to you and has improved your probabilities of success and therefore hopefully your trading has improved.

  53. Prospectus Says:

    Thank you, yes it was useful. I learned some things from it. My trading is more based on probabilities now and has been going very well the last few months.

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