We’re getting into a little day trading so I figure it’s a good idea to do the occasional autopsy report on a trade so we can see how everything went.
We started our new Day Trading Virtual Portfolio (DTP) yesterday with $100K, taking the cash from the very boring Bargain Basement Virtual Portfolio and killing the Old $25KP so we could quit while it was still over $45K. This is a very important thing with profits – they are not profits if you don’t take them off the table!
There are rules to day trades: Rule #1 – Always sell into the initial excitement. Rule #2 – When in doubt, sell half. Those should sound familiar. Another big day trading rule is try not to lose more than 10%, 20% at most. You can lose 10% 9 times and one double will get you profitable but if you lose 20% on two trades and just 2 others for 10%, you need 6 10% winners just to get even. That’s a lot of work to make no money!
So we enter day trades with very specific goals. Like yesterday, I took 20 BA Apr $85s for $1.75 in the DTP. Had I thought it was going straight up, I would have played March but I didn’t trust it (and for good reason it seems). Committing $3,500 to this position is 3.5% of the virtual portfolio. I’m usually willing to go to 20% with my day trades as I’m generally only working a few at a time so this one has a long way to run. Today BA went down but so did the market so I just didn’t want to change it today but the call is already down .45. That’s a $1K loss and is about a quarter of the most I want to lose on a full position (20% of $20K out of a $100KP).
At this point we could either walk away or move it. I’ve decided to buy another round at $1.15, today’s low so we’ll hope for a nice low open tomorrow and pick that up. That will lower our basis to $1.45 and, at $1.15 we are down .30, just about 20% but of "just" $7K, which is 1/3 of a full position so we are under our 10% rule. Unless we get some kind of great market rally I’ll be out of this trade even as it already failed it’s mission and it’s not the timeframe I was looking for. We were playing this for a snap back to anything close to Friday’s close of $3. Which brings us to Rule #4 of day trading – If you let a 20% profit slip through your fingers I WILL KILL YOU!
Again, making 20% just 4 times and losing 10% 6 times is a 20% gain for the week. Assuming they were all $10K trades it works out to net $2,000, which will double us up over the course of a year. That’s all we aim for, sometimes we get lucky and score big but our goal is to have some cash around for when we hit those jackpots so slow and steady wins the race on the day to day grind. So, when you make 20%, you defend it with your life. You have to WANT to cash that position out so badly it hurts as soon as you make 15% and at 20% you should be having to come up with a good reason not to sell it pretty much every 5 minutes.
Oh, for my own sanity, I’m not going to log trades that open and close the same day within 5% of strike (ones we "give up on"), like the QIDs on Friday (.10 loss), it’s going to create massive clutter if we do and there’s really no point. The idea is to learn from trades we stay in… Also, I pay a flat, low fee per trade, no quantity limits and you should not be paying more than $15 per trade or you can get killed on fees. Optionhouse offers $10 flat standard and most brokers will at least attempt to match that. If you make 10 trades a week with 2 adjustments to each trade, that’s 160 trades a month (in, out, roll, DD) and that’s $1,600 a month at just $10 a trade so you are down 20% for the year just by deciding to day trade!
Also, THIS IS NO JOKE, the most important advice on day trading is what I said at 12:42 on Friday: "By the way, if you want to be a better day trader than me, skip the first round of every play I make and only take the ones I keep after. I wish I could do that myself but it never seems to work if I don’t put my first placeholder down (too many things to keep track of without worrying about phantom entries)."
Anyway, more philosophy in later posts, let’s examine the Google trade:
Fri 11:24 – "GOOG $480s at $10.50, I like them because you can cover with $470s, now $14.80, on the way down or $490s, now $7.50 on the way up over the weekend. This is a test of next week’s new virtual portfolio so the set up would be take 10 for $10, and sell 5 $470s IF our $480s fall below $9, then we’ll reevaluate."
At 11:36, I gave up as they wouldn’t come back to my target. My 12:04 comment was: "In the case of GOOG – once I miss a bottom call I don’t chase and, if it comes back to my price, I very likely don’t like it any more as it showed me weakness I didn’t want to see. This is why chasing is not usually a good idea."
I made the cardinal sin of buying into the excitement at 1:23 and picked up 10 $510s, which came in at $5.40 and then decided to cover with the $450 puts at 1:30, which came in at $6.20 with GOOG at $472. This works because if we are going to buy into the excitement, which we know is stupid, it makes good sense to either sell to someone else (and my 1:23 plan was to cover with 8 $500s if we couldn’t take out $480) or to buy beaten up puts to cover!
At 1:50 we rolled them down to the $500s for + $2.20, so we were in the $500s for $7.60. The logic to rolling down $10 for $2.20 should be obvious. Whenever we get a chance, we want to improve our positions at better than $3.50 for $10 so, logically, the positions I take are the first ones that CAN’T go one lower for $3.50. I said on the roll post "Goal is to spend $2.20 5 more times (whichever side gets a cheap roll) until I’m in a strangle for a total entry of $25."
Very unfortunately, on Monday I got too excited and let the $450 puts stop out for just $8.50 (now $17.80). The original plan was better and I forgot that was why I entered the trade! This is why it’s good to review, you try not to make the same mistake again. Nonetheless we made $2.30 on the puts (37%) and rolled the $500s to the $480s for just $5 (9:48 comment). That put us in the $480s for net $10.30 ($12.60 less the $2.30 from the caller) and I sold the $460s for $16.50 to cover on the way down (10:39, GOOG at $459).
We took out the caller for $13 at 2:08 on Monday and rolled our $480s down to the $460s for $7, which put us in the $460s for a net of $13.80, just .80 down! We held that overnight naked, which was a mistake not to cover 1/2. I let myself get caught up in the end of day rally and went off plan. This is why GOOG is bad to trade, it’s too exciting and makes me forget to follow very basic rules like ALWAYS sell into the initial excitement (GOOG went from $450 to $460 into the close) and When in doubt, SELL HALF!
Tuesday at 10:00 I set a DD on the $460s at $8, giving us a $10.90 net basis with the stock at $8 on 20 contracts (down $5,800). Rule #5 is you have to be willing to break rules 1-4 but it usually gets you in trouble so we generally ignore Rule #5 but here it proved useful. The problem with being 20% invested and down 25% is that you lose your flexibility so I decided to cover at 11:08 by selling the $450s, which put $10.30 in our pockets and allowed us to roll to the March $440s for +$8.20.
Now the play had turned into a bull call debit spread where we were in the $440s for $19.20 and had collected $10.60 from the $450 caller. It isn’t pretty as the best we could do is make $1.10 on expiration day but it had to be done to stop the bleeding. GOOG shot up and really bummed me out as the trade is much easier to roll on the way down than up and if it ran away it would tie up that $8.90 (x 20 contracts) for 3 weeks.
Still, while that does suck, it sure beats what would have happened if we had just spent $7,600 on the $500s and done nothing. Google is a MASSIVELY volatile stock and this is what you can expect to happen when you play it. Much like surfing, my expectation is to spend most of the day looking like a fool and hopefully avoiding rocks and sharks on the off chance I catch just one perfect wave.
As I’ve been doing this for 3 days now, I’ve decided to just post a trade and THEN explain it as explaining it takes too long so at 11:20 I got around to saying: "I’m still looking for a really big volume move down on GOOG, taking out my callers for $2 profit hopefully, then rolling to $450s myself. If it heads up, I roll below my caller and buy the $470s for $5 giving me a sort of 1:1:1 butterfly."
That happened pretty much right away as GOOG headed higher. Adding the $470s gave us a chance to make some money on a breakout but I immediately warned that they had become a momentum play (12:35) as GOOG looked toppy at $445 so we ended up selling the $470s at $6, reducing our basis on the $440s to $7.90, now tolerable if we got stuck with it for the month ($2.10 gain would be 16% for 3 weeks).
We finally got our chance to buy out the $450 callers on the second spike down and I had expected the callers to go lower and we were lucky to take them out even at about 2. That was a good sign though as it indicated that interest was picking up, or at least that volatility was… The bad part of that equation was we were sitting on 20 naked contracts at $18.50 each, very uncomfortable.
We didn’t break $450 on that run so I got 1/2 out at $20 and 1/2 out at $19.40 for a not too sexy $1.20 gain on 20 contracts but, as I said to Windy at 4:06: "A small gain every day is all we should ever aspire to."
Was it worth all the heartache to make $2,400? Not that time, not with $30,000 tied up in a very risky stock. What started out as a lighthearted put/call spread turned into a major pain in the ass because I went off plan. A lot of it was because I was too busy trying to organize the trade for posting and I made the mistake of thinking those would be my notes (usually I make them on my spreadsheets) but since I can’t look at all my chat days at once I lost track of what we were doing.
Had I just left the damn $450 puts on with the $510 calls, it would have been almost a double on $12,000! My problem on this trade was that I only wanted Google to go up and lost sight of how great it would be if it went down too. Had I made all the $2.20 rolls I could have, I would have made it all the way down to the $460s at a net cost of $16.40, now $9.10 while my $450 puts that I bought for $6.50 are now $18.20. That would be a pretty tight 3 week strangle that’s already 20% up.
Well, I had thought that would be a good example as it has a lot of moves but we’re going to stay away from the super volatile stocks like this as it’s just too many damn trades to keep track of. Of course, I can’t make any promises though, as I will take an opportunity when I think I see one but think how great it would have been if you had just waited until I DD’d on the $460s at $8 and skipped the other 2 days of drama!
