Credit Trades

This post will discuss credit trades.  I will use bull put as an example but the discussion equally applies to a bear call.

Bull puts can be very profitable. The probability of winning is also very high. Often it is > 80% success probability  if you structure it correctly.

However, if there is a down turn, it is usually fast and furious. You can lose 90% of the profits of your last 10 trades just with 1-2 trades!

It has been perplexing to me. I am finding some ways I can manage to profit consistently without suffering big loss once in a while

The usual strategies for bull put is usually as follows:

-        enter the trade 1 or 2 strikes OTM when a bullish signal is given. It could be a breakout, a successful test of support or a bullish candle formation.

-        Make sure the company is fundamentally sound

-        If the direction goes against you, you are ready to assume ownership through the SP and roll the LP out  and in for longer term protection. Upon assignment, add a SC and manage it forward as a collar until you are profitable.

The above are great strategies but it does have 2 problems.

First, you need capital to assume ownership. So you cannot increase the size of the puts as it will take too big a capital outlay if the size is too big.

Also, when the stock falls, normally it is going to continue to a while. Thus, it takes patience and time to nurture  the converted collar to health again. It is certainly possible if fundamentally it is a good company but it takes time and effort.

I like to explore a pure trading strategy to manage bull put.  This means that I am out if I am wrong. I am prepared to take some loss if the direction goes against me.

Strategies

1.  Always enter as a bull put and not a naked put. The protection is always worth the insurance and it does not cost much. 
2. Place the protective put at the below next support.Do not enter a bull put on the month of earnings announcement or anticipation of fundamental event mover of the stock.  The IV may destroy your position.
3. The trade is executed with the issue of bullish signals.  If possible let it aligns with the overall market trend. If the market is bullish, there should have less hesitation to enter bull puts
4. Determine on the exit point. Consider taking profit once the position reaches 80% of ROR.  If the trade is really far OTM and the stock or market has no signs of resistance, you may target to keep 100% of the credit. Remember that this is only a small additional bonus. Do not be greedy.  With any uncertainty, get out.
5. When the trade goes against you immediately, consider adjusting.. If it is clearly bearish, the trade can be converted to a bear put.  I prefer to get out most of the time with a loss.
6. When it reverses and a bear signal is given, get out. You may lose some money or even make a profit if the reversal is not too serious.  The question is what are the bull and bear signals? If depends on your technical system. It really does not matter. Many people can use very sophisticated algorithm and program but I believe a simple system will work just fine with around 60-70% accuracies. I have tested some technical algorithm and the results are not far away.It is important that you stick to the signals used for the trades to maintain consistency.  My technical signal is a combination of support, resistance, MACD and candlesticks. For some trades, I draw Fibonacci retracement lines to gage the support and resistant. For others, a simple trend line will suffice. Any break up or break down above or below these lines from the candlestick will give me the signal. The MACD acts as a confirmation to my decision. It is a very simple system but gives me at least 60% accuracy. 
7. When the SP goes ITM or NTM, an alarm should ring. Never allow the SP to go ITM. If it is NTM, review the position. If the stock drops because of the overall market, wait for until the week before expiration before exiting. The theta of the SP will be working positively for the position. My experience is that SP ITM is the one that gives led me to some of the big losses. The tendency is to hope that it will recover but if it continues to go against the position, it is the route to no recovery.

I intend to try out the system. I will also update this post of any new observations or results