BUPS and BCS, Learnings

Okay, I've been wrestling with these spreads. Yes, I know how to make money on these, but what happens when your position goes against you and at which point do you get out? Since I'm a chartist and mainly do my trading right off the price charts, finding support and resistance is my game.

Let me recap briefly about when to use BUPS and BCS.

BUPS = Stock is bullish, bouncing off support
BCS = Stock is bearish, bouncing down from resistance

That really is the picture and simply when these credit spreads are used.

If anyone has comments, suggestions, insights, feel free to chime in about what I'm writing.

It seems I've been doing more BUPS lately, so let's say for purposes of this blog entry, we'll focus on BUPS.

If it bounces off support, you put on a BUPS at the nearest strike. This could mean that as it bounces off, you are ATM (at the money). As I'm a student of Ryan's, this is typically what he would do and I am his protege. I would be selling the closest strike and buying the next strike down.

Here are some things I've noticed:
  • The more time left, the more premium there is (time decay is on your side)
  • The higher the volatility, the more inflated the premiums are
  • Do not hold over earnings
  • If earnings and expiration are very close together, you may not have time decay on your side as the option makers may continue to hold the premiums in the options until the end

Now, those are obvious things to those doing credit spreads, but this is for the sake of talking things out in my own head and own understanding.

My thoughts are that I DO NOT have to hold until expiration. If I have 60+% of my credit has already decayed with 3 weeks left until expiration, why would I want to wait for the other 40%. Most likely I had gotten a really great premium of 40+% of the money on hold, so even if that ends up being 15-25% of the marginable money, that is STILL a great return. That frees up my money to jump into another spread OR another play period.

That 60% figure is something that a friend of mine does, and Ryan also says something similar. So, 2 people whom I greatly respect do this and are successful at it, why would I want to reinvent the wheel?

So, when are times to get out of my position?

  • When it reaches resistance and falling back down
  • Allow it to go ITM, because much of the time, it will go back OTM and with time decay (unless volatility is high), you'll be able to get out for less and hopefully still keep some of your credit or this will at least cost you less. However, if you have the stock put to you, this is a different story, so this is probably a fairly dangerous move.
  • At any point it's >60% of your premium has decayed.

Do you close out the whole spread or just the short side?

  • You have to look at how much the short side is and see if it's going to be super costly to get out with just the short side. Maybe closing the whole BUPS would reduce your costs. This really is a case-by-case scenario.
  • If the stock is dropping like a rock, even if it's costly to close the short side, you may still do this and let the long side ride, to make up for some of the cost of the short side. However, this is where good chart reading is beneficial. We never know exactly what the stock will do, but you can see the patterns. If another support is very close by, the stock could bounce off that and where you thought you would be making money on the long side, you may not.
  • Anyway, I don't have a good answer for this, as this is something I'm wrestling with right now.

As usual, this is not advice, rather me sharing some of the process I'm going through to learn to be a good trader as well as consistently profitable amidst the plethera of things I have going on. Never trade with real money until you have sufficiently practiced trading a strategy and are doing it very well. The market does not care who you and I are, and could care less whether we make money or not. It is always right, remember that, and it's best for us to keep our opinions out of the market, and just go with the flow, whether it makes sense or not.

I will be sharing, if time permits, my credit spreads for this month. I've put some already on, and will put more on. These are all real time practice trades I am doing on TOS. I've found it's best to not put on an practice trades size positions that I would not do in real life. What that means if I'm going to use $1K per trade, keep with that and don't put on a trade that is $20K in practice because that is not what you'd do in real life.

You want to be able to seamlessly move between practice and real trading. One will typically do better in practice than in real trading, so the closer you can bridge this gap, the better this will make your real trading. I know it does for me, too.

And, it's important to review profitable & costing trades to see how you could better trade. Document/journal. And, I do continue to practice trade my normal trading because it's very easy to deviate from the things you know you should be doing, like setting stops/managing risk and get caught up in emotional frenzy, both to the good and bad.

I am learning to moderate my emotions in trading, neither getting really excited or really down in the dumps. Not there yet, but working on it.

As for my personal life, there is a lot going on there and it can be rather challenging. So, in more challenging times, I am not putting on any real funded trades, as this is often a surefire way to lose money. Patience in trading. Let trades come to you. EVERY day there are good trades with the stocks I trade, so no need to force myself to trade in conditions that are not good. Hey, everyone may be making money, but if personally you're sick, have a lot of havoc in your life, it's not a good time for you to trade, so stay out. The market will still be there when things have settled down.

I'm learning this from firsthand experience.

In the near future, I may offer some DVDs for sale to help in your own trading that are affordable. No, they won't be for $9.99, but more, but still reasonably affordable for many people, maybe not all people. But, if you're serious and want to learn, you have to spend some money. I basically spent about a year's engineering salary in my formal trading education, and the sacrifices I had to make to do that, as I have a family and financial responsibilities.

3 Responses
  1. Allan B Says:

    another list to have are stocks making all-time highs in hot sectors....i.e. solar. MELI should be near the top of this list. :-)
    happy new year to you and your beautiful family.

  2. Allan B Says:
    This comment has been removed by the author.

  3. Debbie Davis Says:

    Hi Doris,
    For what it's worth, following are the guidelines for selling spreads from a TOS seminar. They're very close to yours, but I also struggle with holding spreads in the money. You can lose as much in one trade as you make in five.
    -Sell spread with at least 23 days till expiration (4-10 weeks).
    -Sell option with 30-40 delta (delta = probability that option will settle in the money in addition to what it normally means)
    -Get out 4-10 days before expiration. They allow their spreads to go in the money and usually don't get out. They say to look at the probability of touching and the possibility is almost always there; focus on probability of expiring.
    I'm with you though, as soon as it gets to the other side of the channel or breaks support or resistance, I'm out.
    They also gave a formula:
    -Total risk = difference between sold and bought option strikes.
    -Real risk= difference between amount you were paid and the spread b/t the option strikes.
    -Real Risk divided by Total Risk= Probability of spread success. (68% =ideal=standard deviation) s/b 50-75%.

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