Archive for the ‘Trades’ Category
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Jun
21
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 We feel like we’re saying this every month, but it sure feels nice not to have any skin in the game come expiration day. Options expiration surely had something to do with the intensity of today’s selloff, and this was a textbook case of why we never hold positions into expiration.
The fancy-pants phrase for the influence options expiration had today is “negative gamma.” The practical significance of that phrase is that when we gapped down at the open, lots of traders who were short options that they assumed were going to expire worthless were suddenly holding contracts that were now at or in the money. They have to take action to deal with the situation, and all that covering and hedging of those shorts only adds fuel to the fire.
We got a long, low-volume midday pause, but then the selloff resumed after lunch. You know there were some unfortunate souls still holding short puts at SPX 1320 or SPY 132 who were sweating into their turkey sandwiches, hoping we would bounce or tread water into the close. Sorry, guys.
Keep reading for more performance data and trade analysis… Read the rest of this entry »
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May
22
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 Our VIX post from yesterday got picked up by two of the deans of options blogging, Adam Warner (shown) and Bill Luby:
The Big Question for the VIX
VIX Jumping the Shark?
VIX and VIX
(and thanks also to Abnormal Returns for the link)
Not much to add in response to all this, except to agree that the increased coverage of this one instrument doesn’t change the fact that it still definitely serves a purpose. When all you have is a hammer, every problem looks like a nail, right? But just because some people erroneously use the VIX as a catch-all proxy for fear doesn’t mean that that particular hammer doesn’t still have its purpose.
The idea of a VIX hiatus sounds about right - at least in terms of parsing and explaining it. Surely those who have ears to hear will have understood by now that statistical measurements do not exert causal force - that any cause-effect relationship between the S&P 500 and the VIX moves only from the former to the latter.
Finally, what about the other volatility products, you know? RVX, VXD, VXN, QQV - those guys deserve more love than they’re getting.
New complicated products
Two product launches of note:
- Yesterday saw the announcement of the Merrill Lynch U.S. Forward Equity Variance Rolling (FEVR) Index, which “measures the performance of a long S&P 500 volatility strategy designed to be both tradable and efficient.” As to be expected from a press release, they don’t provide much insight as to what’s really under the hood, just the obvious remark that this index “efficiently tracks volatility using a strategy designed to minimize the carry cost associated with owning volatility” while still capturing the upside of being long vol. The claim is that being long 25% this FEVR and 75% the S&P 500 beats being long equities only. No mention of any retail-friendly implementation of this index, either now or forthcoming. But that’s Wall Street for you.
- Felix Salmon notes the introduction of some index ETFs that handle your allocation adjustments for you. His concern is that paying 25bp for a quarterly rebalancing might not be a smart use of your money, and we have to agree. The sponsors (PowerShares) should set the rebalancing back to annual, and cut the fee to 5bp. We’d buy that, or at least might consider putting our cousins and neighbors in such a fund.
Portfolio Update
 A quick note to our members: again today we didn’t get filled on the order we’ve been working this week. Premiums just fell off too sharply today, perhaps in advance of the long weekend, and we weren’t in the mood to give chase.
The good news is that the same premium suckage that kept us on the sidelines has been fantastic for our current newsletter positions. Our IWM trade for June expiration is currently up about 7% after just a week; our SPY position is up 10%, which is our upper target for these trades anyway.
Reversal Readings
DIA - 2.76
SPY - 4.51
XLY - Consumer Discretionary - 0.53
XLE - Energy - 8.53
EWZ - Brazil - 5.52
XLB - Materials - 5.25
IYR - Real Estate - 2.12
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May
17
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 We’re making some changes to our monthly review - hopefully the structure of this new format will make it easier to follow along and compare our strategy with the relevant benchmarks. Going forward, we’ll include the following items in each monthly review: 1) a quick-glance overview of our monthly performance, in the chart at right; 2) a performance comparison of our positions for the month vs. the SPX, DJIA, and RUT, plus BEP, which is an S&P 500 Covered Call Fund. 3) more details about each of our positions, including any comments we may have; 4) links to important (non-trade) articles from the past month, in case you missed any of them.
Performance comparison
Here’s how the major market indexes, the S&P 500 Covered Call Fund (BEP), and the Condor Options trades performed over the past month:
- S&P 500: 2.52%
- Dow Jones Industrials: 1.07%
- Russell 2000: 2.78%
- S&P Covered Call Fund: 7.69%
- Condor Options: 12.62%
- Note: the period measured is from expiration to expiration, rather than from the start of the month.
May Iron Condors
- DIA 116/118/134/136: 30.46% return - This was a no-brainer; we closed out the 188 puts on principle (markets tend to crash down, not up) and let the rest expire worthless.
- DIA 113/115/130/132: (10.56%) return - We closed out this position fairly quickly as the rally gathered steam in order to reduce our overall risk. As part of a larger portfolio, it would have been easier to hold on and make an exit several days later for a small win/breakeven - some readers did just that.
- SPY 128/130/146/148: 17.96% return
May Reading
Here are some posts from the past month that are worth checking out if you didn’t catch them the first time around:
We’re already in two June positions and, if implied volatility picks up next week, may well enter two more. Hopefully this summer will be a bit more lively than usual!
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Apr
26
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 What should you do when the underlying moves against an iron condor position you have open? (For example, if you’re a member, you may have noticed that one of our DIA trades for May expiration is looking threatened by the recent price action in the index.) Any time this situation arises, people will always write in to ask about how they can “adjust” or “fix” the trade if the market continues to be uncooperative. It’s an understandable impulse to want to take action when things don’t go your way, but it’s also important to guard against the danger of overtrading.
Our answer here is the same as the answer we always give: there is no magic solution for “fixing” trades that move against you. Sure, there are actions that you can take to reduce risk or minimize losses, but those actions come with their own inherent risks and downsides, and any added risks need to be recognized as such.
1. Allocation, allocation, allocation
Our official position is always that the best way to guard against the pain of a losing trade is to allocate conservatively. Asset allocation is extremely important. And as we’ve said elsewhere, there’s no rule that says it’s a disaster if the underlying touches our short strike - in fact, the probability of the underlying touching a short strike will always be higher than the probability of that short option expiring in the money. In other words, if you dump a position every time the underlying moves against you, after a year or so you’ll end up with a boatload of stop losses and just a handful of easy wins, for a definite net loss. However, if you play defense by managing your risk and your allocations intelligently (rather than by prematurely cutting off uncooperative trades at the knees), you’ll end up with more winners than you might otherwise expect.
In short: when probability is on your side, it only makes sense to let those probabilities work themselves out. Imposing artificial stop losses or entering expensive or risky hedges can actually worsen the overall performance of the strategy. Instead of putting on one or two huge positions and then having to worry about what happens to them, try putting on lots of relatively smaller trades across multiple underlyings, multiple strike prices, and multiple timeframes.
2. Manage Greeks, Not Trades
The other point that should be made here is that once you’re appropriately allocated, the task of managing your portfolio actually becomes much easier. This is kind of counter-intuitive - shouldn’t it be harder to manage 20 trades than it is to manage just 2? But the secret is that a balanced portfolio of positions can be managed on the basis of aggregate Greek values, rather than on the basis of what each individual trade does.
This means that the events that trigger actions on your part will not be one-dimensional events like the price action of an underlying; instead, you’ll be responding to changes in the overall Greek values of your portfolio. So if you know that you get uncomfortable when your total deltas get above some value n, at n + 1 (or n + 50, say if n > 500), you know it’s time to take off some existing positive deltas, or to enter some new positions with negative deltas. If you know that you like to keep your portfolio generating positive thetas, then you also know that any future hedges or adjustments you make should fit that general profile, which means buying calls and puts won’t be high on your priority list.
With those preliminaries out of the way, let’s examine a few ideas for how you can hedge an iron condor that isn’t acting the way you hoped it would. In part 2 of this article (subscribers only), we’ll offer some specific techniques, using a real-world position.
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Apr
09
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 Does this describe you?
- You’d like to participate in any nice rally that comes our way over the next month;
- You’d like to avoid any and all downside risk in case the rally never comes and indexes stay flat or plunge;
- You’d like to get paid just for hanging around and waiting to see what happens.
Here’s a funky little way to do exactly those things. This trade has all the features that long-theta traders love, including long theta (positive time decay), defined risk, decent odds of success (80%), and a credit up front of $0.20. But wait, as they say, there’s more. This trade has a sweet little bonus range: if the underlying is between the two short strikes near expiration, you can sell the position for an additional $0.80 or $0.90. If the underlying is at the lowest strike (or anywhere below that) near expiration, you just keep the $0.20 and look smart.
The Thesis
The thesis behind this trade is that a moderately bullish short term outlook is justified. With implied volatility getting plowed, selling OTM put verticals doesn’t seem quite right. You could buy calendar spreads to try to participate in any rally if you wanted. But what if we rally hard, and volatility just falls further? On a relative basis, your long-dated calendar contracts won’t appreciate it very much. So something a little bit more complex may be warranted. That’s where our broken-wing call condor comes in.
The Trade
The trade details will be emailed out immediately to our newsletter subscribers and posted on the secure part of the site, along with a graph of the precise risk profile, and some variations to add or decrease risk.
If you’re not a subscriber yet, what on Earth are you waiting for? (Sorry, that’s a bad pun: there’s a short waiting list.)
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