Today the market was weak again for most of the day. We took advantage of that weakness to increase our short cash covered put vertical on XLP. We sold another single contract spread, so our position is now “short four XLP 50/48 Feb Put Verticals”. We have sold them at an average price of .675 and the price to buy the vertical back is now at .625. The position has begun to go profitable as time decay increases a little bit every day. If XLP is weak again tomorrow, we would place orders to increase it to 5 contracts. The trade is working and XLP continues to remain at the top of our relative strength ratings. It’s OK to buy on any weakness.
Remember, when you start a new trade, you have a 1 in 3 chance of being right. Your trade will either go profitable, stay at break-even, or become a loser. If it immediately goes profitable then you picked the correct 1 out of 3. Odds are that you didn’t pick the correct 1 out of 3 and your trade will need adjustment at some point. Using options, there is no limit to the creative ways you can add or subtract risk in order to correct your opening position. The best way to learn is to actually trade some small positions. Our XLP is a position that can be traded in any size account. We are trading the put vertical in our $3600 IRA account. The margin requirement for our 4 contract spread is $800, so we still have $2600 in available cash that can be put to work. NEVER allow your account to run out of cash! A market move in the wrong direction can quickly result in a margin call on your account and forced selling. We always control our risk and keep in mind that no one can see the future. Our account value can go up or down much farther than we expect, so we try to be prepared for the unexpected. Start a new trade small, and increase and adjust it so it becomes more and more profitable.
Options trading is work. There is no set-it-and-forget-it system.
Stay Optioned, My Friend!