Theta Positive - Option Trading

21 days till July

Well that was a day wasn't it? Are you still smiling?

Here is the news, I closed Butterfly one, the 670-720-770 for a credit of 20.47. Taking commissions into account this butterfly netted 20.15% in 15 calendar days. When and why did I close it? At 10.49AM the futures broken the low of the day leaving me with a target around the 695 level. That would have changed the trade from being nicely up, to just hanging in there. So I choose to close it and to be happy with 20%.

Butterfly II the 700-740-780 is not a butterfly anymore. It is a 6 lot vertical spread 740-780. Up $800. The spread gives 80 delta short per 6 lot. I am okay with this size of a directional trade. As you can imagine the rest of my Theta positive trades have become long deltas. This trade gives a balance to the portfolio (for now).

Tonight I will have to put my thinking head on for the rest to the portfolio. For instance I have a rather sizable GE position. GE pays for 4% dividend and (I thought) I could live with its movements, but today makes me wonder. $1,41 down in GE Grr&rr**.

Having closed the Butterfly I will lighting up on my blog till we are 35 days till August. 4th July and the week after we will be traveling. Las Vegas, Dead Valley, Sequoia and the in laws in Costa Mesa; This will make a great trip away from the daily treadmill.

BTW for my fellow Sheridan traders tomorrow I will have a discussing with Dan Sheridan on the topic of "Vega in butterflies". You can read my May 14th post to have a preview on the direction of the discussion. Lets see what our venerable guru and my friend has to say!

22 days to July

Thanks to the run up back to the 720, we were able to take off another 20% of the 770-720-70 butterfly.
We are up over 20%, aiming for the next step 25%.

After market action is interesting with RIMM missing the mark. I don't see the news spreading out to the rest of the market. Even the NasDaq future is in the after market kind of flat.

In the Russell future 720 is becoming a stronger resistance. Just in the last couple days 720 has been tested 5 time. One time as support 4 times as resistance. On the downside I am looking at 705.

I am worried about the graph of the second butterfly, but for now I am going to sit with it. I have the first butterfly to help me out with my emotions. 
I have my alerts on the future, so if anything happens overnight I will be warned as it happens.


Late addition; while I was ready to save the post I saw the Nasdaq reacting to the downside.

23 days till expiry

Quite some action today.

First of all in the 770-720-670 butterfly we hit a 15% profit. Which triggered an order to peel off 20% of the trade. We nearly hit a 20% profit point, that would have been a first time ever, hitting both on the same day.

This morning market action triggered an adjustment in the 700-740-780 butterfly. Normally I would have sold 2 lot vertical spread 700-740. But I allowed myself some extra bearish temperament. So I sold  a 4 lot. The market gave me enough reason to second guess this decision - what an ugly run up between 10AM and 2PM.

In the remainder of my portfolio I reduced some short deltas to compensate for this larger adjustment. I took some profits on some 'naked' RUT calls and I closed the RUT JUL-DEC 700 put calendar. Those trades came off with nice profits and I did not want my overall portfolio to be hurt if the market would whipsaw back up. I made that decision around 11:30. Check the intraday volume on the Russell Future and the intraday action in the RVX. The move from 706 to 714 was on low volume and the RVX did not react. At 11.30 AM the RVX dropped a full point - proof that some put sell entered the market.

Be carefull out there!

26 days till July and back in NY

I had a great time in Chicago visited a Sheridan Mentoring Annual Reunion. Over 100 retail traders some very venerable some just starting on their path to proficiency. For you reading this blog and who are not a student of Dan Sheridan, it is a bit difficult to understand the camaraderie and the unselfishness we experience in this option traders community. We all follow Dan Sheridan footsteps in his commitment to make everyone a successful trader.

Let' get you up to date with the butterfly. I have three graphs for you the combined position and the two separated.
As said before for privacy reason I publish this trade in 5-10-5 size. This is the only reason you see the trade as simulated trades. I assure you that my original position is done for the same prices and at the same market moment as I post.

The combined position is up $1300, the investment is $14990. We are approaching 10% in less than 10 days. Not bad in this volatile market.

The butterfly centered around the 720 holds  negative delta. The butterfly around the 740 is 26 delta long.
My trade rules allow me 100 delta's long before I need to make an adjustment. Another rule concern the theta. If theta becomes too low, I don't get paid for the risk I am carrying. If the market moves further down from here the 740-butterfly will hit an adjustment based on the reduction of theta and based on the fact that it moves beyond the expiry break evens.

The general market showed the last couple of days that we are not as yet done with the credit situation. The VIX is getting up there again. Since Friday was expiry day, it is difficult to read anything into market volume. It is remarkable that often expiration weeks have a upward bias, this week was an expection.

I can only say be careful out there, don't get hurt.

31 days till July

A picture equals 1000 words.
check the greeks, not to bad!

Tomorrow will be the last day in the office, Wednesday morning I have the first flight out of NY to Chicago. This way I will back on the ground before the market opens. I will be able to keep an eye on my positions via my PDA and laptop.

Did you notice that today we made a little leg up in the RUT and NDX? But the Diamonds are down. Interesting. Did you also see that the RVX and VIX hardly reacted to the move? Volume was also low.
I don't draw a directional conclusion, but there seems not to much commitment into this up move so far. I sense a little difference with the up move of end May.

32 days till July

Easy does it. Here is the RUT butterfly. Since the start, this trade has not been underwater.
Before Tuesday I will add another butterfly. I hope we have a little run up so that I can cover the 700-740-780 strikes. We will see.

To get current on some of the other trades I have posted here.

XLE - I closed for a nice profit (over 10%). The volatility had spiked and the XLE had come down a bit in the direction of my strike. In this market I like to count my blessings and get away when I can. Plus by closing it I could count it in my June profits (HaHa), I am closing the best month ever.

AAPL - Still long aapl, insured by a JAN09 put and covered by a JUL 220 CALL. If the rumors of Steve Jobs recuring cancer are true, then I am covered. If, what I trully hope, the rumors are baseless, then at least I am still long delta's.

RUT - longterm calendar. Long DEC 700 put and short the JUN 700 put. I closed half of the postion for a nice profit and roled the other half of the JUN 700 to July. At July expiry with a RUT above 700, my cost price for the DEC 700 is $23.00. As long as the RVX doesn't go below 20, this trade will work out.

This week I am traveling to a Sheridan Student Reunion in Chicago, a lot of socializing and of course talking options. Due to this my blogging will be lite, however I will keep you posted on the extra butterfly.

Happy fathersday

Start of July

How do you dive into the swimming pool standing on the highest board. You close your eyes and cover your nose. That is the most accurate description of me starting this July butterfly trade ;).

I can't help myself, fear is part of our emotional baggage and I can't deny that fear was part of the feelings while firing this order.

I had a couple of reasons to go ahead.
1. Time of the month. I need to be consistent with timing my trades, otherwise the statistics will start working against me.
2. The trade starts off with short delta's. So even if today we fall another 20 points, my trade will be alright.

You might wonder why in a market environment like this I bought the extra 770 call for $5.80. It is not because I have a bullish outlook. It is because I can not afford myself not having it. Set the trade up in your own analyze page and unselect the extra call. Not having the extra call in case of market turn-around is not a pretty picture. That is the only reason I will always balance my delta's at the start of the trade.

Weekend reflexions

First let me say that the last two days removed any misgivings I had for closing my butterflies 'early'. Thursday's move up would have triggered an adjustment and Friday's move down would have given me problems. You never know for sure, for me it is better to stick to my trade plan. Deviating  opens the door to fear and greed.  When those two start taking hold of my trades, my account balance always pays the price.

Over the last 10 days or so I have bought some longer term calendars. I bought the back months August and September, selling front month June and June quarterlies. I use the underlyings Rut, DIA, SPY and  XLE. Trades like these are triggered by a relatively low VIX. The strikes I use are always a couple of points under the market. I take into account the time premium of the front month (it has to be worth it) and I check the chart for some support levels.The trade becomes profitable in two ways; underlying moves to the strike and the IV increases. With a little luck these trades pay off over 50%. The final analysis I do before firing the order to ThinkorSwim, is determine  roll values and my risk (if and when wrong).

Here is an example which I got from Tom Preston (ThinkorSwim).
June Quarterly 82 put, Sept 82 put, I paid $2.90. This trade has 3 possible rolls. A roll is buying the front month and selling the back month (think about this), so the last roll will close the September. For three rolls  to break even, I need to be able to roll for $1. Using the adjustment function for the theoretical price, I learn that the XLE can move $3.5 up and  $8 down. Bigger moves will lead to rolls under $1. From here on,  it becomes more of an art. Looking at the chart and at the roll values above and under the break even points,  I determine my risk, and allocate a trade size accordingly.
My adjustment plan is short and sweet; there is none. Just let the trade run its coarse. I will close if it hits my profit target.

Enjoy your weekend, I truly hope your trades are safe in this volatile market.

Exit June

Today I exit my butterfly trade for a nice profit, see the result page on the right bottom corner.

I met my profit target with this trade and market action gave me not much reason to milk it a bit longer.

Overall June has been a good month. In total I exceed my profit targets in the accounts under management. Not bad at all.

I am lightening up my blog schedule till mid next week when we are 37days till July expiry.