Theta Positive - Option Trading

16 days to expiry

16 days to expiry and 14 days into the trade. This morning  I closed the butterfly with a profit of 1761 USD taking into account the payment of commissions.
Closing the butterfly was done out of precaution, we are up nice money, tomorrow is FOMC and I am under the impression the market is building up a spring. When that spring jumps we can easily see an 20-30 point move.

Our profit is over 17% on the invested capital and 4% on the reserved capital taking into account that the original butterfly had a profit of 230USD.

Now here comes the part which is great about trading the butterfly. As for this part of the portfolio my money is out of the market. Tomorrow when Uncle Ben speaks, we can go up or down, it does not matter for the lions share of my trades.

The unpublished part of my portfolio will still keep me busy for the rest of this week and probably well into next week, so you don't have to be completely jealous.

17 days to expiry

17 Days to expiry. To alter the phrase "Weather Permitting" into "Market Permitting" I expect to run this butterfly trade at the maximum, another 9 trading days. At the latest, Friday the week before expiration day, the butterfly will come off.
So maximum, another 9 days of nurturing a butterfly.

The position Greeks still look good -40d, -3G, and 126T. As you can see in the Analyze page the market is currently a bit away from the middle of the butterfly. Still enough  potential in the trade to stick with it. Trade rules don't allow me to loose the already captured profit. We are up 1600USD in the trade, it would be foolish to let that slip through our fingers.

20 days

Sorry for posting so late; it is already Monday morning. I had a great weekend, we had family over from Holland, whom we hadn't seen for quite some years. Very good to see them.

As for our trade. Friday morning I hit an adjustment rule. In this case a very positive adjustment rule, which allows me to take some profits of the table. When I hit 15% profit of the invested capital; I will reduce the trade size with 20%. Ergo I would sell one (1-2-1) butterfly 670-720-770. In this particular case I closed 40% of the trade (2-4-2). This is my discretion as a trader, over seeing the actual market I can deviate from the rules, as long as I don't do this in any extremes.
The market are at a tipping point. It is at the top side of long term downward trend. Based on all the economical news you would say time for a down turn, based on market action (price and volume) I am a bit more bullish. This split which will have the effect that if the real move shows its hand, a lot of traders will jump, making the move potentially a forceful one. Good enough reason to peel 40% of the trade instead of the normal 20%.

21 days

What did we say yesterday about flat days and liking them? :)
Whoa what a day. Perfect for the delta long side of the portfolio.

Horrible for anything else.

The Rut opened weak, and then around 10:15 started to pick up and move all the way from 699 to 720. That will move the ATR up again.

The butterfly which was centered around the 690 strike needed an adjustment. A pity, around 10AM it was up 14% of the invested capital, close to a point were I start taking some profits off the table. Sadly we never go to that point. I always have an order in to take off 20% of my original trade when we hit 15% profit. No takers today.

A couple of hours later the 640-690-740 butterfly needed an adjustment. The trade was still up 215USD. Adjusting the butterfly leaves  you with a rather steep t1-graph on the down side. I did not want to expose myself to that in this market. So I decide to take some chips off the table. I closed the 640-690-740 butterfly for a 215usd profit and am left with the 670-720-770 butterfly. That one is up 1275USD. All in all not a bad result.

Position Greek d22, g7, t238

22 days till expiry

What happened to the Rut that we are tempted to call a day with a 10 point range a rather flat day. All in all an inside day. According to TA, this is a continuation of the trend. Let's hope so, not for the blogged position, but my overall position is still rather short deltas.

Ultimately flat days are what we like.

Position Greeks are still great. d7, g7 and t307. Current profit is 1200USD. Already a nice profit in terms of a percentage. 2% if calculated from the reserved 50K and 6% from the invested capital. We are only 8 days in the trade.

23 days till expiry

Always great when a trade starts paying the bills. The down draft in the market brought us back in the middle of our "landing zone". The original butterfly is back in the middle, the second one is still contributing. 690 is the downside adjustment point for the second butterfly. The overall trade has happy Greeks. D15, G7, T277. Not bad at all.

I added an updated bell curve graph. As you can see, the Rut came back within the 1SD lines.

24 days till expiry

As hoped for and expected the market cam down a bit. This helped both of the Rut Butterfly positions.
Right now no adjustments are necessary. Overall Theta is 245, Delta is 92 nicely within my rules.

As for market analysis I would be surprised if we don't get another small move to the upside. But as usual I am glad my cash flow does not depend on my market opinions.

4th day April 18th 2008

Saturday morning, 65F sitting in the sun in the beautiful home of our host JD. Yesterday I had to leave the office a bit early to catch the 4pm train to the Hamptons.
 
The market has been on a tear the last days. Who expected an expiry of the RUT at 719! I am happy that last week I closed my 720 April shorts for 30cts, keeping them till expiry would not have been a good decision. Always close/buy back your shorts when you have a chance.
With that rule in mind, yesterday I closed quite some short puts in my portfolio. Most of my May puts were between 10ct - 15 ct. With this enormous run up, time to expect a little reprieve.

As for my butterfly trade, from now on we need to refer to them in plural. I bit the bullet Friday morning and put an order in for a second butterfly center around the 720 with longs on the 670 and 770. I probably could have done a 40wide, taking into account the drop in volatility, but the 50wide gave me a little more  room.

Attached you find 3 PNL graphs, one for the original, the new, and the combined position. The original butterfly is due for an adjustment. We are approaching 100delta short and the expiry break evens. Also the theta has become reduced. So if Monday is a bullish day, step one in the adjustment plan needs to be executed. Buy back two 690 and sell two 730.

I am prepared to make this adjustment, but I expect (and hope) the market will turn down a bit after all this expiration action.

3rd day

I write my blog around 3pm. So yesterday my impression of the market changed a bit in the last hour. Volume had been minimal till 2:30pm EST. In the last 90' the volume stepped up, making it an accumulation day on the NYSE.
I find all this bullish market behavior kind of unbelievable taking into account what is happening in the financial world. But then again, I don't get paid for my opinion, I get paid for trading the market I am being handed.

Today's market action was down, RVX came up about half a point leaving the RVX at 26.30. Market action for the last hour seems bullish again. There are still some people around who want to take this market home.

This morning I had a little fun with IBM. Yesterday before the close, I entered a speculative earnings play; an April/May Calendar to make use of the volatility drop after the earnings announcement. Worked out nicely, gave me some lunch money for the coming week.

As for my butterfly trade, we are down a little over 300. The Greeks are still nicely in balance and the RUT is still safely away from expiration Break Even points. Conclusion: sit still and collect some theta.

I am very tempted to put another butterfly on at the 710 level. A butterfly starts off with short deltas, so a run down would be good for the additional position. For a further run up the new butterfly would be safe till the 745 level. That seems to be a long way from here. I need to make my mind up before tomorrow at the close.

It is time to publish a disclosure; I publish this blog for educational purposes and as a personal means to reach out to the professional investment industry. Do not act on my blogged trades, they are part of a portfolio of trades. Don't trade options without a formal education.

2nd day in the trade

Yesterday, sitting in my favorite local lunch place (www.saurinparke.com) the Rut moved across the pivot point 688. That had been my line in the sand, a break above triggered my alert. Using my PDA, a HTC 8925, I added 1 extra 740 call to my position for a net debit of 3.90. This reduced the deltas, without having a big effect on the theta.

Today April 16th around 3pm my analyze page looks like this. My current Greeks are 48D, -1G, 95T and -180V. For now a nice balance. Upside adjustments will be planned around a short delta of 100 or when theta reduces to 45. We are now down more than 600USD. The IV has come down 2 full points, The Rut moved over 17 points. The ATR over the last 60 days is around 16; todays move is significant. Volume on the NYSE is also significant but not extraordinary. It seems that the big boys are not yet committing the farm to this uptrend.

Looking back at yesterday's bell curve, it shows that for now we are outside a SD move for 2 days. 700 had been our upside. While writing this post the RUT blows to a new high in the last 45' of trading. It looks like we getting another active month.

(ET, 3PM)