Recently I discussed my options trading strategy that limits capital risk yet allows for solid percentage gains. This will be a quick update on how the strategy has done for me over the past three weeks. It is important to note that only 6 trades have been used in this analysis, so it is a small sample size. I will be using Excel to display the recent success from the option strategy.
Small Dollars, Big Percentages
Right now as I continue to test out the strategy, the position sizes will remain small. The largest position I have taken thus far has been $80, and it also happened to be the only loss in the 6 trades. I’m with you, know is in the market looking to make, 15, 29, or 11 dollars, we want the big money wins. However there is a time and a place for that, and right now is not the time as we continue to test the strategy.
If the strategy continues to be a success, we will begin to look into taking on two or three contracts in the same. In this case of two contracts, everything would be double so if you paid $30 for a contract you would now be paying $60, and if you profited $20 before now its $40. Taking two contracts gives a trader freedom to sell one contract and keep the other.
What’s more important to note is the percentage gains the strategy has yielded thus far. Gains of 32%, 82%, and a crazy 170% aren’t very easy to get in high capital trades. In terms of investing as a whole, making 10% a year is usually the benchmark for investments. Right now the strategy is averaging a 50% return! If it holds this level for a whole year, it will outpace the market by a wide margin. With more and more trust built through trades in the strategy, the amount of money made will surely pickup.
What Stock Will I Use Next?
When picking stocks for the strategy, I sometimes look at higher capital stocks and pick stocks cheaper that move similar. For the most recent trade, I actually spent the majority of the time researching looking at Royal Caribbean ($RCL), before buying the Carnival Cruise Line ($CCL) call. Usually stocks in the same industry are going to move the same, and Royal Caribbean just finished a week of dropping kind of hard and touched a support of $80, making me believe it could have a decent bounce today. I then went right to Carnival, and got a $26.50 strike ending Friday May 14th, and this morning it was well over that strike price. I wasted profit theorizing if it could go higher, but still managed to leave with an 18.64% gain.
Right now I am currently looking at the marijuana ETF ($MJ) for a potential next play in the strategy. I believe the marijuana market can really get moving with another piece of positive news, and MJ is at a nice price right now of $21.36. It is currently up almost a $1 today though, so I will wait to see how it does on Monday before I look at it again. With Monday starting a new week, I will most likely try get contracts ending on May 21st to give myself ample time to watch how MJ moves and not feel pressured by expiration.
Important Note: It is a coincidence all the trades have been Calls this far, success from the option strategy has the same concepts for puts!
The Common Trader 