New Trade: RMBS Short FEB 19 Puts

On Tuesday 1/25/11 near the close of trading I sold short (10) FEB 19 Puts for .40. Cost average/risk is $18.60. That's over 2% return (.40/18.60) for less than a month, and I have 9% downside protection (1.86/20.46) to my break even point. Unfortunately this wasn't on my radar a few days ago. I could have entered at essentially the same spot near $20.46 but with 3 more days theta and a higher IV. I'm still comfortable with my entry point, but being around at the right time has advantages. This is a name I've played in the past and feel comfortably taking a long position should it be put to me at $19. Earnings are tomorrow after the bell so there is risk associated with that. However, IV is pretty high at the moment near 50. I don't care if earnings are terrible and the stock plunges as I'm willing to own. The worse case scenario is the stock does plunge, IV collapses, and there aren't any attractive covered call scenarios available for MAR expiration. That is the risk I'm accepting.

5-day chart showing entry point

1-year chart showing channel range, break even point, and possible support level near $17.50

IV at the higher end of the range for last six months

Comments

WOW! I think that sums it up

Many of you have been reading this blog may have noticed that my blogging frequency has increased over the past few weeks as I got short the market. As you can imagine I am down money since getting short the market, this is the time when most people pull away from posting. But my goal is to stay active and involved and show you that trading is not always rainbows and butterflies. It is times like these that the things I have been sharing over the past couple of weeks are so important. You need to trade small relative to your account. I have a decent short position in the market and my portfolios are set up to make some awesome returns if we finally turn lower. But something I would like to point out is that my account is 70% Cash. I learned a long time ago how important it is to live by the rules you preach. Because of my discipline I am able to continue to hold my positions, I have time and capital on my side. I can't stress enough how important it is not to get to big....

Stay Small, Stay Out of Trouble

To expand on my post from yesterday about patience. I want to talk about a very important element that allows patience in a position, and that is staying small. If you trade too big RELATIVE to your personal account size, you are likely to be forced to exit the trade before the trade works in your favor. Many trades myself included have all experienced the pains of trading a position way too large given our account size. There is this predisposition out there that the only way you are going to make money in the financial markets is if you are trading 10 lots of options and 1000 shares of stock at the time. This is not the case, and if this is your mentality you will likely ensure yourself trouble. We have all read the stories of traders blowing up their account. I personally think a good rule of thumb is to not risk more than 5% of your account value on any one position. Good Luck Trading! In The Money Trades And 1 favor that we ask: If you like the hard work w...

more good news from FXStreet : Tom Fitzpatrick, senior technical analyst at Citibank in New York. Monday, July 15, 2002 "Parity is a psychological, not a technical level...and whether we pause around parity or not, we are likely to see significant further dollar losses...Our initial target is $1.03 to $1.0450. If that level is taken out, it actually casts a question mark against the whole of the dollar's rally of the last seven years, and could open up a full-blown bear market for the dollar." Julian Jessop, chief European economist at Standard Chartered Bank. Monday, July 15, 2002 "The dollar is under pressure from everything from economic problems to asset reallocation away from the U.S. and corporate accounting problems. It's difficult to see any positive factor for the dollar at the moment. The root of the problem is the U.S. current account deficit. If the U.S. doesn't have to attract an enormous amount of foreign capital, people wouldn't have to wor...

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