IBM is doing exactly what I wanted to.

You can read about my bearish play on the stock in my most recent blog post here. As of March 24th, I’ve made $1,728 on the 10 contracts I placed 12 days ago in my paper trading account. When I placed the trade on March 12th, the stock price was at $160.83. Since then it’s dropped down to $148, and my probability of profit has increased to 89%.

IBM’s volatility also increased to 100, which means that the stock is extremely volatile right now – which gives me more opportunity to be right in the trade.

The success of this trade gives me confidence – which is always a scary thing.

This is when it is important to stay quantitative.

I collected $219 x 10 in credit on that trade.

So a general rule, is that you collect you profits at 50% of the credit you originally collect, so that you don’t get greedy and lose out on profit entirely. (However, as my Dad has recently brought to my attention, there is some research to dispute this adage, and I will talk about that in another post)

Continuing with the old method:

50% of $2,190 (the credit I collected) is $1,095. So I need to get out, as I am already at over 80% of my credit collected at $1,729.

This is always a hard thing to do. For me, whenever I get out of a trade, I feel like it gets more profitable as soon as I sell. This is commonly known as “fear of missing out”. But when I stay, I always end up getting burnt (I’m looking at you, Brazilian ETF).

So I’m selling IBM. A really great first trade that put some capital in my account.

I would keep it in my account if it hadn’t been so profitable, as we want to have as many small trades as possible going at one time. I would have kept it until a few days before expiration, unless the trade started swinging wildly.

The Law of Large Numbers is our friend here (many small trades, often).

Image via Wolfram Alpha

The more occurrences of something that we have, the higher the probability that we will be correct. Eventually, everything evens out to one commonality. So the big, large losses merge in with the big, large winners, for a baseline profitability.

Here’s how to get out of the trade:

Short 165 Call: Buy it Back

Long 175 Call: Sell it Back

I am selling the 175 calls that I originally bought. I am then buying back the 165ncalls that I originally sold to get out of the trade. (Kind of confusing but basically, do the reverse of what you did originally to lock in your profits.)

As you can see, I made $2,249 on the calls that I sold at the $165 strike. When you sell a call, you make money if the price is below that strike. I lost $520 (which is what is supposed to happen) on the calls that I bought at $175 strike. I would have made money if the stock price was more than $175. That combination results in a profit of $1,729 minus commissions.

Image via T3 Live

To break that down: I sold the 165 calls for $2.77 on March 12th, the first day.

I bought the 175 calls for 0.63 that same day.

Now, the price of the 165 call has dropped to $0.521, because IBM has decreased so much in price. So I can buy back that call for a PROFIT of (2.77 – 0.521) of $2.249. This results in a total profit of $2,249 for the all the contracts.

On the 175 call, I bought that at $0.63. It is now at $0.109. I lost 0.521, or $521 on that call.

This results in my total profit of $1,728.

Not bad for my first trade. I will post another post with my next trade on Monday, when the market opens.

I will be looking for high IV, no earnings upcoming, and a few other variables that I will discuss in that post.

Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can balance your risk/reward, and trade small, and trade often.