New Trade - SMH

Here's the chart on today's new trade:

Looking at this chart you will see the blue box where I entered today's trade.

I entered because we recently had a temporary break above resistance (the horizontal purple line above). We didn't stay above that resistance long, but it tells me that we have some buyer's strength. Also, if you look back a few weeks you'll see a low near support, then there's the temporary resistance breakout, then the stock went to a HIGHER LOW.

Today we closed ABOVE THE HIGH OF THE HIGHER LOW - i.e. our entry signal.

You'll see the indicators below the chart are a bit mixed. The Stochastics is going lower, but it is about 1/2 way between the highs and lows that it makes - so I'm not too worried about that. However, the MACD lines are moving up, so that's good.

But, indicators aside, the main reason is because of that entry signal of today's close.

So, today's trade is BULLISH.

I entered a November Bull Put Spread. I sold the November 26 Put and bought the November 25 Put for a credit of $0.35.

Now, if you just look at that number $0.35 I know that it doesn't seem like a lot. But there is one HUGE DIFFERENCE with this trade, the strike prices are only $1.00 wide. This means that the margin that must be set aside is only $0.65 per contract. This is huge!

Let me make this easier with a theoretical example on SMH:

Today I sold the 26/25 Put Spread for $0.35, my margin requirement is $0.65

I could have instead sold the 25/20 Put Spread for $0.41, my margin requirement would be $4.59 (typically on less liquid stocks the strikes are $5 wide instead of $1 wide).

To figure margin: Take the difference between the strike prices and subtract out your credit.

So, in the:

first spread above my broker holds $0.65 to make me $0.35

second spread above my broker holds $4.59 to make me $0.41

As you can see, getting the liquid stocks and ETF's with $1 wide strikes are much more advantageous than stocks where strikes are $5 wide.

The reason that the strikes are only $1 apart is that this stock is actually an ETF. SMH is a Semiconductor HOLDR and has tons of open interest with it.

Check out the open interest on these:

I highlighted the 26 Put Option that I sold - it's open interest is approx 9,000. The 25 strike that I bought has an open interest of approx 46,000. That's just an AWESOME amount. The more liquid it is, then the tighter the bid/ask spread and the easier it will be to get out of the trade.

So that's it for now for this trade. I'm really looking for it to move up higher soon. If it just wanders around this general area for awhile then great - I'll let Theta knock it's value down.

**TRADING STYLE NOTE:

I'm going to start focusing more on these ETF's for trades. This is because I can really start loading up on the contracts while keeping my margin low.

Most BIG MONEY TRADERS will use these for the same reason. They can sell tons of options and get the most leverage for their money.