Not Frightening
Over the weekend, the Collar trade was assigned on its QQQQ calls, meaning that my QQQQ position was closed out at 58. After the events over the weekend, and the markets today, that ended up being a great trade all by itself (QQQQ closed today at 57.03, down 1.70 on the day).
The QQQQ Collar trade has been one of the few that I have been running with real money, and it has been going for about 18 months now. Over the last 18 months we have had, overall, a pretty significant up-trend to the market; and a limited-profit trade like a collar is going to underperform during strong up-trend periods. Sure enough, I've made some pretty good money in the collar trade: just under 16% in 18 months. But if I had just bought QQQQ and held it, I would have had a much better return: close to 39% over the same period. Despite this drastic underperformance, the trade is a success - it is a super-long-term trade, and in losing years, its losses are much more limited than a simple buy-and-hold. If it had not underperformed, that would be a signal that something wasn't being hedged correctly.
This trade is not without its problems, however. First, there is a great deal of subjectivity about what strikes to use for the covered calls and the protective put - I tried to solve this problem by setting some range parameters. Next, I have been running this trade in an online broker that is geared more toward stock traders than option traders. As a result, its commissions for options are terrible: $10.75 for a one-way one-lot option trade, vs the $1.50 I negotiated with thinkorswim. When I'm doing 14 option trades a year, plus the fairly frequent assignment fee of $25 followed immediately by the need to repurchase the QQQQ outright for $7 flat, it gets expensive fast. Finally, I have noticed that the time value on the about-to-be-front-month options drains significantly over expiry weekend. But since my online broker is very touchy about naked short options, I have to choose between an expensive fee-to-price ratio rolling trade, or letting the premium disappear over the weekend.
Since the collar essentially closed itself out over the weekend, I decided now would be a good time to transfer its required capital to thinkorswim and run it there. I may retain the stock/call/put configuration, or I may run an equivalent position of a simple bullish vertical option spread. If I do that, I lose the calendar component of the 6-month put vs the 6 1-month calls, but I'm not convinced that component is valuable anyway. In any case, I have some research to do before the money transfer settles.
Frightening
Back to fake money, the CiG trade lit up like a Christmas tree today, thanks to those crazy Libyans. S&P futures sold off 28 points or about 2%, which signalled a Buy at the close. I have been bearish S&P for about 6 months (it has gained 300 points during that time) but this is a mechanical trade -- my viewpoint doesn't figure into it. Have you ever tried to make yourself buy something when you don't believe in it and it has just sold off by 2%? It isn't easy.
The gold futures trade last month wasn't easy, either, but it turned out fine; by the law of single-datapoint-patterns, that means this one should be just fine too. Nevertheless, NeighborTrader and I did have some vertiginous fun imagining that we were each managing million-dollar accounts and thus had to buy 100 futures knowing that each point would make or lose $5000. That would make today a $140,000 losing day for that account, had it been long that amount. I think I'm happier in fake money for now.
I also had a preliminary Sell signal setting up in Ten Year Note futures... we'll see what tomorrow brings on that one.
Somewhere in Between
Rounding out the flurry of activity today, the sudden market downturn made the volatility indexes pop about 4 points. Everyone has heard of the VIX, which measures implied volatility in options on the S&P 500. Since my iron condor trade is on Russell (RUT), I use the VIX's cousin: RVX. Anyway, the 4 point pop in the RVX was just what I needed to get a better price on opening an iron condor position, since it is a negative-vega trade. I put on the 760/770/900/910 April Iron Condor, for a credit of $3.25/share. Pretty respectable, considering the low-IV environment we've had the last few weeks. If the RVX is predictive, however, I'll be in for a roller coaster ride this month.
Showing posts with label greeks. Show all posts
Showing posts with label greeks. Show all posts
22 February 2011
15 December 2010
Now I Can Afford That Operation
The CiG trade, which bought Eurodollars on an entry signal a week ago, finally gave an exit signal on Monday at the close, so I exited the position by selling GEH1 at 99.59. That gives a $75 profit. Since I trade this in paperMoney, I wasn't paying a great deal of attention to how much I should trade, but this one really brought that home. The risk of one Eurodollar contract is not equal to the risk of one S&P contract - not even close - and the margin requirements reflect that. Eurodollars carry a margin requirement of $877.50 per contract, while S&P futures require $5625 per contract. In order to take the same amount of risk, I should be trading 6-7 Eurodollars for every contract of S&P I'm willing to commit margin for. If I had, this $75 profit would have been $450-525... very similar to the $500 I made on the S&P signal.
In other news, one of my Iron Condor exiting orders also filled on Monday, closing out my remaining 660/650 put spreads. This leaves my protective debit put spreads on with nothing to protect, and it also tilts the delta into the negative territory again: -20. With December expiry coming this weekend, and with implied volatility near its 52-week lows, it seems best to close this one out. I'm working orders to close the two call spreads - the original 810/820 and the kite-component 830/840, the naked long 820-call of the kite, and the protective 630/640 put debit spreads. Since my current position still has positive theta, though, I see no reason to rush things. Either way the market moves it will approach my exiting limit orders, so hopefully over the next week or two we'll get a little end-of-year waggle so I can squeeze out a few cents per contract on the way out. If not, I have a month before I have to make a final decision. Once theta goes negative, or if delta gets uglier, the pressure will be on to make that decision a bit sooner.
I've had a limit-sell order working on Microsoft for a few weeks now, and it filled today. I'm still a believer in the stock, but I bought quite a few shares of it when it was depressed, so I'm just rotating some capital out to bring my position value back down where I want it to be. Readers of my facebook notes will recall that I had 5 "units" of capital in Microsoft. This sell brings me back down to 5 units of capital in position value.
I'm expecting another increasingly bullish (for me that means bearish) sentiment survey this week, released tonight sometime. If that's true, CS|MACO will still stand by and watch the Fed Cheerleaders... er, I mean Stock Market... without getting involved itself.
In other news, one of my Iron Condor exiting orders also filled on Monday, closing out my remaining 660/650 put spreads. This leaves my protective debit put spreads on with nothing to protect, and it also tilts the delta into the negative territory again: -20. With December expiry coming this weekend, and with implied volatility near its 52-week lows, it seems best to close this one out. I'm working orders to close the two call spreads - the original 810/820 and the kite-component 830/840, the naked long 820-call of the kite, and the protective 630/640 put debit spreads. Since my current position still has positive theta, though, I see no reason to rush things. Either way the market moves it will approach my exiting limit orders, so hopefully over the next week or two we'll get a little end-of-year waggle so I can squeeze out a few cents per contract on the way out. If not, I have a month before I have to make a final decision. Once theta goes negative, or if delta gets uglier, the pressure will be on to make that decision a bit sooner.
I've had a limit-sell order working on Microsoft for a few weeks now, and it filled today. I'm still a believer in the stock, but I bought quite a few shares of it when it was depressed, so I'm just rotating some capital out to bring my position value back down where I want it to be. Readers of my facebook notes will recall that I had 5 "units" of capital in Microsoft. This sell brings me back down to 5 units of capital in position value.
I'm expecting another increasingly bullish (for me that means bearish) sentiment survey this week, released tonight sometime. If that's true, CS|MACO will still stand by and watch the Fed Cheerleaders... er, I mean Stock Market... without getting involved itself.
09 December 2010
Such a Slacker
I've been distracted most evenings lately from the four Xbox games I picked up during Black Friday madness, and so it has taken me even longer than usual to record thoughts, trades, and rambling nonsense. As if that weren't enough to eat up my attention, the Bintgoddess and I just received our HTC Incredibles we ordered through Amazon Wireless, and I at least have been spending more time than I should customizing and moving into my new phone. I had intended to switch from AT&T+iPhone to Verizon+Android when my contract ran out in August, but the Bintgoddess' pre-pay plan ran out of minutes, and we could save more money to switch us both to a family plan now, despite the early termination fee from AT&T. With nearly free phones (1 cent each from Amazon Wireless) and free 2-day shipping, the choice was pretty clear. And yes, Amazon did charge my credit card $0.02. Silliness.
Iron Condor
The January 2011 Iron Condor position has required some adjustment to keep it close to delta-neutral recently. Recall that I opened a 650/660/810/820 iron condor on Nov 8, and then adjusted it Nov 16 by buying a 630/640 put spread. Since we're into December, I'm now erring on the side of closing positions rather than opening them - but I'll still increase a position if it's the right thing to do for the risk or the greeks.
The stock market had been rallying pretty hard the last week or two - in fact, it has been rallying pretty hard ever since the day after I put on that downside protection. This is not a surprise - it's just how I roll: don't believe me? watch me play poker on Full Tilt sometime. But I digress. With the stock market rallying and delta going pretty negative, it was time for some upside protection.
First, I bought back about half of the 810/820 call spreads for 1.40: a very reasonable 10c loss. This moved the delta up about halfway to where it needed to be, but gamma was still pretty negative. Another up-move and the position would be in trouble again, so I beat the rush and put on a Wolfinger Kite Spread. Specifically, I bought back an extra 810 call for 3.70, and financed that by selling four 830/840 call spreads for 50c each. Not only did this bring delta to a nice manageable level and give me some much-needed upside protection, it also significantly improved my max-loss on the upside. Of course if MDW is reading this blog, he's probably seething that it isn't a perfect Kite Spread - I should have sold the 840/850s, or reduced the sales by 1 contract. Tough. I am convinced this was the right trade to make, whether it can rightfully be called a Kite or not.
The next day, I took advantage of another rally to buy back a few of the 660/650 put spreads for 45c. This lowered delta a bit again, but like the previous day's adjustment, it really helped out in the max-loss department. The total position now has a nice flat S-curve to it, and theta miraculously is still 13. So a sideways market for the next 30 days should net me about .25 per contract - that may not sound like much, but that's 2.5% margin-return on a monthly trade.
It's also about time to be looking for a February trade, but I'll learn my lesson from January and wait for volatility to come up a bit. Using paperMoney is nice, because I have so much fake margin in there that I can make trading decisions without having to be concerned about margin. If I want to put on February before taking off January, so be it. Doing that with real funds would take some very careful money management... or more money than I have.
CS|MACO
Still very bearish signals (53% are bullish as of last night, way too many for my taste) from investors, who happen to be right this time about the market as it sustains an uptrend, and bullish signals from the trend following MACO component. As a result, it still waits in (fake) cash.
CiG
Eurodollar futures (GEH1) gave a bullish entry signal on Tuesday, so I bought them at the stock market close for 99.56. Trading Eurodollar futures is similar to watching a bad horror movie: long periods of mind-numbing boredom punctuated by moments of pure terror. So far I'm in the boredom phase - two days after buying them, I'm up 3 ticks. W00t! No exit signal yet, so I wait.
Iron Condor
The January 2011 Iron Condor position has required some adjustment to keep it close to delta-neutral recently. Recall that I opened a 650/660/810/820 iron condor on Nov 8, and then adjusted it Nov 16 by buying a 630/640 put spread. Since we're into December, I'm now erring on the side of closing positions rather than opening them - but I'll still increase a position if it's the right thing to do for the risk or the greeks.
The stock market had been rallying pretty hard the last week or two - in fact, it has been rallying pretty hard ever since the day after I put on that downside protection. This is not a surprise - it's just how I roll: don't believe me? watch me play poker on Full Tilt sometime. But I digress. With the stock market rallying and delta going pretty negative, it was time for some upside protection.
First, I bought back about half of the 810/820 call spreads for 1.40: a very reasonable 10c loss. This moved the delta up about halfway to where it needed to be, but gamma was still pretty negative. Another up-move and the position would be in trouble again, so I beat the rush and put on a Wolfinger Kite Spread. Specifically, I bought back an extra 810 call for 3.70, and financed that by selling four 830/840 call spreads for 50c each. Not only did this bring delta to a nice manageable level and give me some much-needed upside protection, it also significantly improved my max-loss on the upside. Of course if MDW is reading this blog, he's probably seething that it isn't a perfect Kite Spread - I should have sold the 840/850s, or reduced the sales by 1 contract. Tough. I am convinced this was the right trade to make, whether it can rightfully be called a Kite or not.
The next day, I took advantage of another rally to buy back a few of the 660/650 put spreads for 45c. This lowered delta a bit again, but like the previous day's adjustment, it really helped out in the max-loss department. The total position now has a nice flat S-curve to it, and theta miraculously is still 13. So a sideways market for the next 30 days should net me about .25 per contract - that may not sound like much, but that's 2.5% margin-return on a monthly trade.
It's also about time to be looking for a February trade, but I'll learn my lesson from January and wait for volatility to come up a bit. Using paperMoney is nice, because I have so much fake margin in there that I can make trading decisions without having to be concerned about margin. If I want to put on February before taking off January, so be it. Doing that with real funds would take some very careful money management... or more money than I have.
CS|MACO
Still very bearish signals (53% are bullish as of last night, way too many for my taste) from investors, who happen to be right this time about the market as it sustains an uptrend, and bullish signals from the trend following MACO component. As a result, it still waits in (fake) cash.
CiG
Eurodollar futures (GEH1) gave a bullish entry signal on Tuesday, so I bought them at the stock market close for 99.56. Trading Eurodollar futures is similar to watching a bad horror movie: long periods of mind-numbing boredom punctuated by moments of pure terror. So far I'm in the boredom phase - two days after buying them, I'm up 3 ticks. W00t! No exit signal yet, so I wait.
16 November 2010
Big News for Boring Trades
It's been a busy few days. The CiG trade finally fired a signal on Friday, but I was in Colorado all weekend so I didn't have time to write it up. Then I came home with a head-cold just in time to support a major roll-out at the office that went pretty wrong. By the time I got home last night all I wanted to do was sleep. So now here we are. Excuses excuses.
Saving Money While Asleep
First the CiG trade on Friday. You may recall I decided to run it on S&P futures as well as treasury note futures, because I feared that treasury notes would bore me to death. On Friday, it signaled a buy-on-close on the S&P, so I did. Things were looking good Monday morning, but not good enough to reach the target exit signal. By this morning, the whole world was fleeing from risk again and the stock market opened significantly lower. Since there are no clearly-defined stop rules, I decided to sell the position for a loss shortly after the stock market opened. I felt that what we were seeing was not a momentary blip but in fact a setup for a selling day. I was right: I sold the position at 1188 at 9:00. At the 3:00 close, ES was down to 1176.
Because CiG tries to buy on dips, though, it had another buy signal come out on ES today. Pleased at my ability to dodge at least some of the sell-off today, I decided to get back in with a new long position at the close. So I'm still long from Friday, but I took a 12-point ($550/contract) hiatus. That's almost a winning trade all by itself. Not a bad money-saving siesta.
No joy in treasury note futures yet. Yawn.
Insert Spy Pun Here
CS|MACO, another boring trade, is finally starting to see some life. It has been locked flat while SPY has rallied over the last 3 months, due to the bearish signal coming out of the contrarian investor sentiment component and the bullish signal coming out of the moving-average-crossover component. One of those two opposing forces was removed today when SPY closed below its 25-day moving average, breaking the SPY>25MA>200MA relationship that has been in place since October 4. That's not a sell signal yet, though, because the terms of the trade state that I won't enter a position on the removal of a signal. I need the CS component to affirm its bearishness tomorrow after the close before I can short this puppy.
A Boring Iron Condor is a Good Iron Condor
Unfortunately, this one is starting to get a little exciting. When I opened the position I groused about my poor judgment a little bit regarding the low price I was paid to initiate. Sure enough, the VIX almost immediately rallied while RUT flagged, causing my delta to increase as I rode the curve down toward my put spread. Delta of +16 this morning, so time to adjust already.
It seems ridiculously early to be thinking about exit orders, but I could buy back my call spreads for only 60c already; so I put in some limit orders to buy back at 20c. That doesn't help my delta, but it does lock in a profit on half the trade - and with some careful adjustment the other half might not cost too much.
As for the put spreads, I looked at the mouse-ear like I used last month and decided it was overkill: RUT was 710 or so when I was adjusting, and my put spreads are 660/650s. A mouse-ear would throw my delta so horribly negative that I would have to buy back most if not all of my call spreads to contain it. Plus it was crazy-expensive, at $21.
The next thing I looked at was simply reducing the call spread position. That would certainly help the delta and the feel of the position, but I felt the cost was a little high. A variant of this is to roll the call spread down a few strikes, also increasing the position a bit to finance the roll. This increases risk, and I wasn't happy with the outcome or my perception of the risk-reward trade-off.
I also looked at Wolfinger's Kite Spread, which involves a naked long OTM put and a credit put spread even farther OTM with 3-4x the size on it for financing. That had some real potential, but it really hurt the theta. Ultimately I decided I could achieve my delta goals and flatten the value graph best by putting on some 630/640 debit put spreads. I bought just enough (at 1.90) to get the delta under +5. By the close, the delta was back up to +5 again, but that's within my parameters.
Boring News for Big Trades
I'm still not holding GLD calls, and I'm glad. I'm looking for bargains in some of the mining companies right now, but I haven't had time to look very hard yet. Earnings season is upon us, and if I can capture a couple of positive earnings surprises before the event-driven IV goes through the roof, I'll be a happy camper.
Saving Money While Asleep
First the CiG trade on Friday. You may recall I decided to run it on S&P futures as well as treasury note futures, because I feared that treasury notes would bore me to death. On Friday, it signaled a buy-on-close on the S&P, so I did. Things were looking good Monday morning, but not good enough to reach the target exit signal. By this morning, the whole world was fleeing from risk again and the stock market opened significantly lower. Since there are no clearly-defined stop rules, I decided to sell the position for a loss shortly after the stock market opened. I felt that what we were seeing was not a momentary blip but in fact a setup for a selling day. I was right: I sold the position at 1188 at 9:00. At the 3:00 close, ES was down to 1176.
Because CiG tries to buy on dips, though, it had another buy signal come out on ES today. Pleased at my ability to dodge at least some of the sell-off today, I decided to get back in with a new long position at the close. So I'm still long from Friday, but I took a 12-point ($550/contract) hiatus. That's almost a winning trade all by itself. Not a bad money-saving siesta.
No joy in treasury note futures yet. Yawn.
Insert Spy Pun Here
CS|MACO, another boring trade, is finally starting to see some life. It has been locked flat while SPY has rallied over the last 3 months, due to the bearish signal coming out of the contrarian investor sentiment component and the bullish signal coming out of the moving-average-crossover component. One of those two opposing forces was removed today when SPY closed below its 25-day moving average, breaking the SPY>25MA>200MA relationship that has been in place since October 4. That's not a sell signal yet, though, because the terms of the trade state that I won't enter a position on the removal of a signal. I need the CS component to affirm its bearishness tomorrow after the close before I can short this puppy.
A Boring Iron Condor is a Good Iron Condor
Unfortunately, this one is starting to get a little exciting. When I opened the position I groused about my poor judgment a little bit regarding the low price I was paid to initiate. Sure enough, the VIX almost immediately rallied while RUT flagged, causing my delta to increase as I rode the curve down toward my put spread. Delta of +16 this morning, so time to adjust already.
It seems ridiculously early to be thinking about exit orders, but I could buy back my call spreads for only 60c already; so I put in some limit orders to buy back at 20c. That doesn't help my delta, but it does lock in a profit on half the trade - and with some careful adjustment the other half might not cost too much.
As for the put spreads, I looked at the mouse-ear like I used last month and decided it was overkill: RUT was 710 or so when I was adjusting, and my put spreads are 660/650s. A mouse-ear would throw my delta so horribly negative that I would have to buy back most if not all of my call spreads to contain it. Plus it was crazy-expensive, at $21.
The next thing I looked at was simply reducing the call spread position. That would certainly help the delta and the feel of the position, but I felt the cost was a little high. A variant of this is to roll the call spread down a few strikes, also increasing the position a bit to finance the roll. This increases risk, and I wasn't happy with the outcome or my perception of the risk-reward trade-off.
I also looked at Wolfinger's Kite Spread, which involves a naked long OTM put and a credit put spread even farther OTM with 3-4x the size on it for financing. That had some real potential, but it really hurt the theta. Ultimately I decided I could achieve my delta goals and flatten the value graph best by putting on some 630/640 debit put spreads. I bought just enough (at 1.90) to get the delta under +5. By the close, the delta was back up to +5 again, but that's within my parameters.
Boring News for Big Trades
I'm still not holding GLD calls, and I'm glad. I'm looking for bargains in some of the mining companies right now, but I haven't had time to look very hard yet. Earnings season is upon us, and if I can capture a couple of positive earnings surprises before the event-driven IV goes through the roof, I'll be a happy camper.
05 November 2010
Iron Condor: December Adjustments
The upside protection I added to the December iron condor on October 15 has proven to be a profitable adjustment. As the market wandered higher, I was able to bleed off theta while keeping the position pretty close to delta-neutral. I've had some low-ball exiting orders working for a while, since getting out is still in front of me, and yesterday one of those orders filled, closing out a portion of my 620/610 put spread and locking in a nice profit on that portion.
My work schedule yesterday was weird, so I didn't actually notice the fill until this morning before the open. When I came in this morning, I discovered that between the closing of part of the put spread and the traveling of the market down the curve toward my call spread, my overall position was -20 delta. That's a lot more delta-negative than I want it to be, so I started looking at ways to adjust it again.
My original plan was to bring the delta back to nearly 0 without turning the theta negative or increasing the overall risk, since after all I have only a little more than a month before expiry, and increasing position at this stage would be kind of dumb. But the more analysis I do, it seems the best choice is to just close the position entirely. From where the market closed today, net liquidation value on the position is about 82c per contract. That's pretty close to the 1.00/contract level that I said made me "thrilled", so that's just fine.
I had already started working orders to adjust the delta before the close, and when I do that I always make the position-decreasing orders more aggressive than the position-increasing orders. Today was a good example of why I do this, since only one of my orders filled and I didn't have a chance to adjust my other orders to make sure they filled on the close. As it turns out, that's just as well, since I think I want to cancel my position-increasing orders anyway.
My original plan was to roll the 770/780 call spreads up to 790/800, also decreasing the position. This costs a fair amount of cash, but it also brings my delta up to +4 again, and makes theta a very healthy +9. But what am I really gaining by opening that 790/800 position? My thinking was that I needed to partially finance the 770/780 call spreads, but if I can make 82% of my "thrilled" level just by closing the position, there's no financing I need to do.
So here's my current position, which reflects the partial closing the 770/780 call spreads, but nothing else. Delta is all out of whack the other way, at +17, and theta is right at 0. I've got orders working to close the rest a little behind the market. Once it's open on Monday, I'll adjust everything around to be just about at the market, and put this December iron condor to rest.
Then I'll start looking at opening a new January position.
In other news, I was at the FIA Futures and Options Expo on Wednesday and chatted a bit with the people at the Think or Swim booth about why they're so mean about screen shots. I actually talked to a young lady who works with Scott Garland, and she indicated that everyone there is nervous about overstepping their bounds with TD Ameritrade, the recent purchasers of Think or Swim. So far TDA has more less left them alone, but the concern is that they'll get a lot more involved in the day-to-day business instead of just treating ToS like a profit center.
I understand their perspective, but I'm still a little steamed that I can't accurately depict my current position value here because of their concerns about intellectual property.
My work schedule yesterday was weird, so I didn't actually notice the fill until this morning before the open. When I came in this morning, I discovered that between the closing of part of the put spread and the traveling of the market down the curve toward my call spread, my overall position was -20 delta. That's a lot more delta-negative than I want it to be, so I started looking at ways to adjust it again.
My original plan was to bring the delta back to nearly 0 without turning the theta negative or increasing the overall risk, since after all I have only a little more than a month before expiry, and increasing position at this stage would be kind of dumb. But the more analysis I do, it seems the best choice is to just close the position entirely. From where the market closed today, net liquidation value on the position is about 82c per contract. That's pretty close to the 1.00/contract level that I said made me "thrilled", so that's just fine.
I had already started working orders to adjust the delta before the close, and when I do that I always make the position-decreasing orders more aggressive than the position-increasing orders. Today was a good example of why I do this, since only one of my orders filled and I didn't have a chance to adjust my other orders to make sure they filled on the close. As it turns out, that's just as well, since I think I want to cancel my position-increasing orders anyway.
My original plan was to roll the 770/780 call spreads up to 790/800, also decreasing the position. This costs a fair amount of cash, but it also brings my delta up to +4 again, and makes theta a very healthy +9. But what am I really gaining by opening that 790/800 position? My thinking was that I needed to partially finance the 770/780 call spreads, but if I can make 82% of my "thrilled" level just by closing the position, there's no financing I need to do.
So here's my current position, which reflects the partial closing the 770/780 call spreads, but nothing else. Delta is all out of whack the other way, at +17, and theta is right at 0. I've got orders working to close the rest a little behind the market. Once it's open on Monday, I'll adjust everything around to be just about at the market, and put this December iron condor to rest.Then I'll start looking at opening a new January position.
In other news, I was at the FIA Futures and Options Expo on Wednesday and chatted a bit with the people at the Think or Swim booth about why they're so mean about screen shots. I actually talked to a young lady who works with Scott Garland, and she indicated that everyone there is nervous about overstepping their bounds with TD Ameritrade, the recent purchasers of Think or Swim. So far TDA has more less left them alone, but the concern is that they'll get a lot more involved in the day-to-day business instead of just treating ToS like a profit center.
I understand their perspective, but I'm still a little steamed that I can't accurately depict my current position value here because of their concerns about intellectual property.
18 October 2010
Assorted Trades
Iron Condor
On Friday, I decided to add a little up-side protection to my December Iron Condor. I'm trying to act when delta starts getting out of whack, and after a few days of stock market rallies the Dec IC was looking at a delta of about -20. Sadly I can't be more precise on this because I forgot to jot it down (mental hand-slap). Anyway, I decided the adjustment that made the most sense was to buy a Dec 760 call. With my IC strikes at 610/620/770/780, this puts the naked-long call just one strike below my short call. This adjustment brought my delta up to about +4 as of now, and didn't hurt the theta too much - still nearly 21. It cost me 9.50, which is a big chunk of change, but I expect it to be the only upside adjustment I'll need to make to this position.
Until I come up with a better solution than Excel, unfortunately I can only display value-at-expiry. Trust me when I say that current portfolio value is a lot curvier and much more attractive than this.
QQQQ Collar
Also on Friday, my October covered call on QQQQ as part of the collar trade expired in the money and I was assigned on the call. Pursuant to the rules I set forth in September, I bought QQQQ back this morning at 51.50 and sold calls against it with a strike price of 53 for 56c. Here are those rules again, since I keep having to search Facebook Notes for the numbers:
1. Monthly calls to be about 3%, and no less than 2.5%, out of the money.
2. 6-month put to be 8% out of the money.
3. No rolling prior to expiry.
Gold Leverage
I am still long-term bullish on gold, and I express that by being long GLD, GDX, and AEM. I also currently have some Dec calls on GLD that are so profitable that I have sold off enough to cover my original investment and the remainder are worth almost twice what I paid for the whole stack. Nevertheless, I'm becoming concerned with the borderline irrational expectations for QE2 lately, so I'm ready to take some profits. I started working a fairly distant sell order on the rest of my GLD calls this morning. Hopefully it will reach my target price and I'll exit there, but I also have a time limit on this trade; I'll exit when that time limit expires regardless of the price action.
On Friday, I decided to add a little up-side protection to my December Iron Condor. I'm trying to act when delta starts getting out of whack, and after a few days of stock market rallies the Dec IC was looking at a delta of about -20. Sadly I can't be more precise on this because I forgot to jot it down (mental hand-slap). Anyway, I decided the adjustment that made the most sense was to buy a Dec 760 call. With my IC strikes at 610/620/770/780, this puts the naked-long call just one strike below my short call. This adjustment brought my delta up to about +4 as of now, and didn't hurt the theta too much - still nearly 21. It cost me 9.50, which is a big chunk of change, but I expect it to be the only upside adjustment I'll need to make to this position.
QQQQ Collar
Also on Friday, my October covered call on QQQQ as part of the collar trade expired in the money and I was assigned on the call. Pursuant to the rules I set forth in September, I bought QQQQ back this morning at 51.50 and sold calls against it with a strike price of 53 for 56c. Here are those rules again, since I keep having to search Facebook Notes for the numbers:
1. Monthly calls to be about 3%, and no less than 2.5%, out of the money.
2. 6-month put to be 8% out of the money.
3. No rolling prior to expiry.
Gold Leverage
I am still long-term bullish on gold, and I express that by being long GLD, GDX, and AEM. I also currently have some Dec calls on GLD that are so profitable that I have sold off enough to cover my original investment and the remainder are worth almost twice what I paid for the whole stack. Nevertheless, I'm becoming concerned with the borderline irrational expectations for QE2 lately, so I'm ready to take some profits. I started working a fairly distant sell order on the rest of my GLD calls this morning. Hopefully it will reach my target price and I'll exit there, but I also have a time limit on this trade; I'll exit when that time limit expires regardless of the price action.
06 October 2010
December Iron Condor
In another of my paperMoney trades, I experiment with iron condors. Today I opened a position on my next month's iron condor, expiring in December, on RUT. RUT is the Russell 2000 index, and options on it are European-style and cash-settled. This means they cannot be exercised early (very important for spreading), and in-the-money options at expiry won't cause securities to change hands - just money. Settlement at expiry is weird, though, so it's best not to take them to expiry in any case.
WTF is an Iron Condor?
An iron condor is a market-neutral option strategy that is short volatility but with limited profit/loss ranges. It consists of two vertical spreads: a put spread below the current index price, and a call spread above the current index price. The long options in the spreads are both farther OTM than the short options, so opening an iron condor position generates a credit. The farther apart the short option strikes are from each other, the lower the risk that the iron condor will lose money, but the less credit it generates on opening.
A picture is worth a thousand words. Luckily for you, I have both. Check out this page from Option Trading Tips: Iron Condor Description. I'm working on getting permission from ThinkOrSwim to include screen shots from their software. In the meantime, this is the best I can do, sorry.
Terminology does not agree on how to refer to iron condors that generate a credit when opened. They consist of two short vertical spreads, but many (including the website above) call that combination a Long Condor. To me, selling means that I get money; buying means that I give up money. So throughout this blog I will rightly or wrongly refer to iron condors like they're short: I sell them to open them and I buy them to get out. So today I sold an iron condor, opening a short position, and I generated cash. Questions? No? Excellent.
Where To Begin...
Here I have to give Mark Wolfinger props again, because about a year ago I looked at iron condors briefly when a co-worker (not a professional trader, in this case) told me about how he was making a guaranteed 10%/month on them. This seemed too good to be true, and after analyzing them a little I decided that it was: the probability-weighted return on his capital was far too low for the risk of ruin he was taking. I dismissed iron condors as hardly better than naked option selling, and was ready to leave it at that. In the process, however, I ran into Mark Wolfinger's blog Options for Rookies, and I started reading it regularly. Over the next few months I realized that there was more to iron condor trading than I first assumed. Guaranteeing 10%/month was indeed too good to be true, as I suspected. But there was nevertheless a viable trade there for someone willing to put in the time and effort to build experience. A firm believer that nothing worth doing is easy, I set out to learn. I'm just getting started on that journey, and though it will never end, I hope that soon I will have made enough progress to begin profiting from it. I don't know when that will be, but I know it isn't now yet.
I've followed MW's lead in a lot of respects, because I am more of a learn-by-doer than a learn-by-reader. As I try different approaches and find my own comfort zones and style, I start to diverge from him; this is natural. But some aspects of his trade are relatively arbitrary from my perspective: he trades RUT because he feels that its volatility is not-too-high but not-too-small; he trades options with 60+ days to expiry because he feels that is the right mix of risk (gamma) and reward (theta). Never having traded iron condors on any index, and never gotten burned in either direction in time-to-expiry, I figured 60+ days on RUT was as good a place to start as any.
My Own Trading Style
My current behavior pattern is to start looking for a new iron condor position around the first of the month two months before expiry. This gives me 60-80 days or so before expiry. Also like Mark, I look to get out of the condor early if the market is willing to let me buy back pieces of it at good prices. I don't try to choose a low-risk / low-reward condor that I never have to adjust, but I try to give it enough room to move that I can make adjustment decisions after work for trading on the open the next day. Taking some of his lessons to heart, I try not to increase my position in the course of adjustments; however, I will do so if I have previously reduced the position via cheap buy-backs. I try very hard to evaluate what the position is now, instead of whether I'm up or down from my entry point. This is a lot harder than it sounds, but Mark harps on it so much that it is starting to sink in.
In Theory, There Is No Difference Between Theory and Practice
A perfect situation in my trading style is to find a new iron condor on, say, October 1 for December expiry that I can put on generating 3.50 or so in premium while keeping the two short options a good 15-20 strikes apart. For this situation to remain perfect, the market needs to move up and down some so I can cheaply (like 20c or so) get out of the two spread legs, but not so much that I feel I need to adjust to protect my position. The perfect scenario ends about 30 days before expiry when I exit the last position without ever having to adjust. Net profit when perfect: nearly $3.00 per contract, or about 30% on margin risked.
But In Practice, There Is
In reality, that scenario never happens. I always have to adjust, I always agonize over how much insurance to buy and when, I seldom pay as little as 20c to buy back my spreads, I frequently enter the position for less than 3.50 credit, and I often find myself still trying to dump some position off with only 2 weeks to go.
I often have two condors on at any given time: one that I'm adjusting and working my way out of, and one that I'm watching eat up theta prior to its first adjustment. If I end up with over 1.00 per original contract profit, I'm thrilled. Note that because of adjustments, 1.00 per original contract is a lot less than 10% margin profit, because the margin gets bigger and the profits get smaller with insurance. If my net cash flows are positive at the end of a condor run, I'm satisfied. If I learn something along the way, it's all worth it.
I'm slowly starting to get a feel for what values of delta make me nervous, and I'm better at choosing adjustments that don't give me a negative theta, since that would negate the whole purpose. I'm always massively short vega, since that's the nature of an iron condor; and gamma doesn't really affect me too much 60 days out. It is nevertheless always the shadow in the corner, and I keep an eye on it more and more the closer to expiry I find myself. Experience has come very slowly, but it is starting to click. That's a cool feeling.
Current Situation
Right now I have a heavily-adjusted November position on. It's too complicated to explain without charts, so I won't try. But despite the drop in volatility the past couple of days as the market rallied, I was able to put on my December iron condor position for my target price of 3.50. It's a little tighter (short strikes are closer together) than some previous months, but I'm also getting a little more comfortable with adjustments; this lets me generate more premium credit at the start without so much fear. My new RUT December condor is a 610/620/770/780, meaning that I am long the 610 puts and the 780 calls, and short the 620 puts and 770 calls. Max profit: the 3.50 credit it generated. Max loss: 6.50.
WTF is an Iron Condor?
An iron condor is a market-neutral option strategy that is short volatility but with limited profit/loss ranges. It consists of two vertical spreads: a put spread below the current index price, and a call spread above the current index price. The long options in the spreads are both farther OTM than the short options, so opening an iron condor position generates a credit. The farther apart the short option strikes are from each other, the lower the risk that the iron condor will lose money, but the less credit it generates on opening.
A picture is worth a thousand words. Luckily for you, I have both. Check out this page from Option Trading Tips: Iron Condor Description. I'm working on getting permission from ThinkOrSwim to include screen shots from their software. In the meantime, this is the best I can do, sorry.
Terminology does not agree on how to refer to iron condors that generate a credit when opened. They consist of two short vertical spreads, but many (including the website above) call that combination a Long Condor. To me, selling means that I get money; buying means that I give up money. So throughout this blog I will rightly or wrongly refer to iron condors like they're short: I sell them to open them and I buy them to get out. So today I sold an iron condor, opening a short position, and I generated cash. Questions? No? Excellent.
Where To Begin...
Here I have to give Mark Wolfinger props again, because about a year ago I looked at iron condors briefly when a co-worker (not a professional trader, in this case) told me about how he was making a guaranteed 10%/month on them. This seemed too good to be true, and after analyzing them a little I decided that it was: the probability-weighted return on his capital was far too low for the risk of ruin he was taking. I dismissed iron condors as hardly better than naked option selling, and was ready to leave it at that. In the process, however, I ran into Mark Wolfinger's blog Options for Rookies, and I started reading it regularly. Over the next few months I realized that there was more to iron condor trading than I first assumed. Guaranteeing 10%/month was indeed too good to be true, as I suspected. But there was nevertheless a viable trade there for someone willing to put in the time and effort to build experience. A firm believer that nothing worth doing is easy, I set out to learn. I'm just getting started on that journey, and though it will never end, I hope that soon I will have made enough progress to begin profiting from it. I don't know when that will be, but I know it isn't now yet.
I've followed MW's lead in a lot of respects, because I am more of a learn-by-doer than a learn-by-reader. As I try different approaches and find my own comfort zones and style, I start to diverge from him; this is natural. But some aspects of his trade are relatively arbitrary from my perspective: he trades RUT because he feels that its volatility is not-too-high but not-too-small; he trades options with 60+ days to expiry because he feels that is the right mix of risk (gamma) and reward (theta). Never having traded iron condors on any index, and never gotten burned in either direction in time-to-expiry, I figured 60+ days on RUT was as good a place to start as any.
My Own Trading Style
My current behavior pattern is to start looking for a new iron condor position around the first of the month two months before expiry. This gives me 60-80 days or so before expiry. Also like Mark, I look to get out of the condor early if the market is willing to let me buy back pieces of it at good prices. I don't try to choose a low-risk / low-reward condor that I never have to adjust, but I try to give it enough room to move that I can make adjustment decisions after work for trading on the open the next day. Taking some of his lessons to heart, I try not to increase my position in the course of adjustments; however, I will do so if I have previously reduced the position via cheap buy-backs. I try very hard to evaluate what the position is now, instead of whether I'm up or down from my entry point. This is a lot harder than it sounds, but Mark harps on it so much that it is starting to sink in.
In Theory, There Is No Difference Between Theory and Practice
A perfect situation in my trading style is to find a new iron condor on, say, October 1 for December expiry that I can put on generating 3.50 or so in premium while keeping the two short options a good 15-20 strikes apart. For this situation to remain perfect, the market needs to move up and down some so I can cheaply (like 20c or so) get out of the two spread legs, but not so much that I feel I need to adjust to protect my position. The perfect scenario ends about 30 days before expiry when I exit the last position without ever having to adjust. Net profit when perfect: nearly $3.00 per contract, or about 30% on margin risked.
But In Practice, There Is
In reality, that scenario never happens. I always have to adjust, I always agonize over how much insurance to buy and when, I seldom pay as little as 20c to buy back my spreads, I frequently enter the position for less than 3.50 credit, and I often find myself still trying to dump some position off with only 2 weeks to go.
I often have two condors on at any given time: one that I'm adjusting and working my way out of, and one that I'm watching eat up theta prior to its first adjustment. If I end up with over 1.00 per original contract profit, I'm thrilled. Note that because of adjustments, 1.00 per original contract is a lot less than 10% margin profit, because the margin gets bigger and the profits get smaller with insurance. If my net cash flows are positive at the end of a condor run, I'm satisfied. If I learn something along the way, it's all worth it.
I'm slowly starting to get a feel for what values of delta make me nervous, and I'm better at choosing adjustments that don't give me a negative theta, since that would negate the whole purpose. I'm always massively short vega, since that's the nature of an iron condor; and gamma doesn't really affect me too much 60 days out. It is nevertheless always the shadow in the corner, and I keep an eye on it more and more the closer to expiry I find myself. Experience has come very slowly, but it is starting to click. That's a cool feeling.
Current Situation
Right now I have a heavily-adjusted November position on. It's too complicated to explain without charts, so I won't try. But despite the drop in volatility the past couple of days as the market rallied, I was able to put on my December iron condor position for my target price of 3.50. It's a little tighter (short strikes are closer together) than some previous months, but I'm also getting a little more comfortable with adjustments; this lets me generate more premium credit at the start without so much fear. My new RUT December condor is a 610/620/770/780, meaning that I am long the 610 puts and the 780 calls, and short the 620 puts and 770 calls. Max profit: the 3.50 credit it generated. Max loss: 6.50.
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