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Hello, tradeologists. So, how do we actually determine when to close out positions? This is a very good question.
We have already closed out a couple of positions in our current May trades. Let’s take a look at the numbers, because we manage by the numbers. Well, here is one way to take a look at it. This is a very simple way. Just take a look down at your Theta column.
Now, Theta is the amount of money that we collect on a daily basis from open positions. If we take a look at our Diamond position right now, we’re only collecting $1.31 from that position, on a daily basis. Is it worth the risk to keep those positions open, if we are only collecting $1.30 a day?
Remember, these are only 1 or 2 contracts at a time. However, let’s consider that for a second. We are in the business of collecting premiums. Insurance premiums are basically from people who are taking directional bets. They think the market is going to go down, or the market is going to go up.
We sell them those options. We take those premiums. It’s our job to manage our business based on the amount of Theta that we actually collect on a daily basis. If you take a look at this position here on the Diamonds, we can only collect $1.32 on those positions on a daily basis, going forward. There are only 4 days left until expiration.
Remember, in the last week of expiration, price is the most important determinant of where our position is going to end, and whether or not we are going to have a profit and loss. If we’re only collecting $1.30 in Theta, does it really make any sense to keep those positions? Probably not.
Also, on our SPY position, we are only receiving $2.96. Now, out of the $93 in Theta that we can collect going into expiration, the majority of that is in the EEM position and the IWM position. Does it make sense to close out this Diamond, if we’re only going to be able to collect 57 cents of Theta? Yes, it does.
In the SPY position, we can only collect another $3 a day of Theta. That’s not a lot of money. Even on 1 or 2 contracts, I don’t think I would be tempted to keep those kinds of positions, if the market goes against us. That’s a risk, at that point. What we want to do is collect as much Theta as possible. Once Theta gets down to these levels, it doesn’t make any sense to keep those.
We’re going to be closing out those 2 positions today. We will keep the EEM and the IWM, because we still have pretty good Theta on those. We’re collecting almost $90 a day on those.
We did pare back a little bit on the SPY. That’s the free call video. We also pared it back a little bit on the Diamonds, because we also had a short position on the Diamonds here, at the 132 level. We closed those out for 4 cents.
Basically, that gave us a long call on the Diamonds as well, at 2 cents here. We can’t lose much more than 2 cents. That’s all we can lose on that position, going forward. We might as well keep those 2 cents. If the market does rally, as we expect it to do here, we could get a little bit more profit out of that.
If not, it’s no big deal. Our current profit position – because we did take off those short calls to the upside – you’ll see that the white line will continue to rise higher. However, we’re pretty close to the center of our profit graph. We did take about $600, $700 in profit already.
Going into expiration with about 4 days left, we only have just a little bit over $1000 in profit to grab out of these positions. Once we do, we’ll be close to our maximum profit for the month. I think our maximum profit at any one time in this position was $1800.
If we continue toward expiration, it will continue to go up. We should grab another $600 – $800 in this position. We’ll have close to the maximum, at least 90%. If we do $1600 in profit with $3600 in margin, what kind of return of margin is that?
It’s pretty high. It’s close to 50% return on margin in one month. Remember that we only trade 1 or 2 contracts. This is a very small position. You have to paper trade before you begin to trade these positions. I know how excited you are about getting into this business, because it really is a very interesting business, and a very profitable business.
However, you have to trade slowly. 1 or 2 contracts. I’m going to prepare for you a plan to show you exactly where, when, and how to begin increasing your size in these positions. But if you’re doing live trading, stick with 1 or 2 contracts, at least for the first 3 months, until you get used to this platform and get used to understanding how your positions are managed correctly.
That’s it for today. Trade with confidence, guys.