Theta Positive - Option Trading

14 days till August expiry

And 49 days till September. To early for me to look for September trades. Especially with the RVX lock in the middle of its range. If the RVX was relatively low I would be willing to set up some RUT calendars, but that make no sense right now.

Still working the last lonely RUT butterfly, all in an attempt to reduce some of the loses of 670 and 680 fly. As you can see below the greeks for this position are still under control. In the (short term) dominant market trend I don't have any damage. Trend reversal will allow me to close the 680/720 debit spread and still have a small profit.

Since we all expect a down turn one of these days, I bought some TWM and bought and OCT ATM puts. If the down turn does not come. I will lose the put premium, but not the principal. If the down turn comes, the put premium was a small price to pay. Just a little bet on another leg down in the bear market (before OCT).

15 days till August

2Pm the daily bar is red and the weekly bar is a Doji. We are in the middle of the road to nowhere.

I am very active with Sit On My Hands trading. Making (mental) notes here I would take the market short and here I would go long. I can a sure you, mentally I am getting burned. This market is choppy.

One day my bonds portfolio jumps some very decent money. The next day giving it all back and a bit more. Same but luckily in a lesser extent with my GE position. Bonds and GE are my sizable positions holding my margin money. I appreciate the yield, but the down draft it not so appreciated.

As for my theta positive positions, I cleaned most of them up. Only the reported butterfly 680-720-760 is still on and some naked RUT Calls and SPY calls to keep the whole portfolio balanced.

Here is the graph. Check the T-0 line, not to much pain in the market direction (up). Still pretty good if the market cools its heels and turns around.

As for the longer trend. Check the /ER2 on a weekly basis. Is that a Head and Shoulder forming? Left shoulder Feb 2nd, End May the head and now maybe the right shoulder. That would leave the 645 area as the neck line. For this to play out, we don't want to see a high above the Feb high.

As you noticed blogging  is gotten to the back burner. My theta positive positions are off, September trade will not start before another 2 weeks. I promise to pick it up again and in the meantime will keep you posted on the last butterfly.

16 days till August

This is an extremely difficult month to anticipate any market movement. You have to fall back to your trade rules and find satisfaction in trading well; sadly what ever the results.

I finished the box on the old 670 butterfly, all in all little more than $1200 down. Today's market action showed that a down turn in the immediate future will most probably not happen. That was the reason to close the box.

As for the butterfly centered on the 720. That butterfly is doing well, not as well as it could have been. Yesterday breaking the 700 I made my first downward adjustment. A day like this is hurting me, this morning I moderate the delta's a bit. Easy does it.
I am afraid to follow me in detail for August has become a bit difficult. I will keep you posted a good as possible.

20 days till August Expiry

Not much to report; sideways day. I still read the 727 in the RUT futures as a intermediate top. But maybe there is some positional bias in that analyzes.

Here is the graph of the replacement butterfly.

And that's it for the week. My wife is taking me to away from the home and office for a little weekend getaway. Boston is the destination. First time, never been, looking forward to it.

Enjoy your weekend

21 days till August

No regrets, indeed not closing and pulling out would have been a great move. Making money with stupid trade is one of the most dangerous things in the business. In that case you get rewarded for bad behavior, which only creates bad habits. So closing was the right action.

I own you some numbers; the 630-680-730 butterfly cost me $2036 including commissions. Currently the 620-670-720 is down $200.- Let's take a peak at the graph of the debris which used to be the 670 butterfly. As you can see I maximized my risk to $900, and left myself with a fighting change to become whole. The trade is negative theta and directional biased, not directly a trade out of a instruction book, but within my risk and reward rules. The trade is managed based on technicals, so any strength in the market I will start tweaking, or pulling it off.

The new 680-720-760 butterfly is $20 down, but well within it boundaries.

22 days to August

Working hard in sweaty New York and making no money, that can be the hardest thing in trading. Connecting your psychics with doing the right trades, whether they pay off or not.

As you understand from this intro it ain't gone be a happy post. I made major adjustments to the butterflies.
Let's talk about the why and the what.

WHY

Check the following graph (Courtesy of Dan Sheridan Mentoring). It is the RUT probability cone of July 9th, the day I enter the first part of the August Butterflies. A probability cone is a projection of the 1 standard deviation move calculated with the ATM Implied Volatility. 68% change that the prices would have stayed within the barriers. The action of the last couple of days proofs that all statistic are off. We are getting close to a 2SD move. This is a clear signal to move on to the next month.




WHAT
I pulled the butterfly 630-680-730 for a loss. Yes, I am expecting a pull back, as I was expecting a pull back yesterday and the day before. The pull back will come, but I can't run down my t-0 graph and dig a bigger hole. So adjusting or pulling. Based on the 2sd move I decided to pull.

Secondly I closed the vertical credit spreads 670-720 and 710-720. So of the butterfly 620-670-720 there is only left a 5 lot vertical debit spread 620-670. Extremely directional. To limit the directional risk and to bank on a at least 15 point pull back, I bought 5 670 puts. Now I have three legs of a box. I bought those puts for $3.20 right at the top of the mornings turn. Now I am waiting for a nice run down and I will sell 5 620 puts. Hopefully for $2 or even more (that is wishful thinking though).

What else,I set a new butterfly around the 720 strike (680-720-760). A bit risky I admit. Only 22 days left, not a very proper thing to do, but what's the risk? Another 2sd move up, think not. So my risk is to the downside. Butterflies start of with short delta's. So the downside is pretty clean for now.

For now I am in the hole on this trade. We will see what recovery value of the box is and how much the new butterfly will contribute.

I blame myself for one thing. I did not fully tune in to last weeks news, "to end the short selling on some of the financial". I thought it was a plan and that it was not yet in effect. Now I would not be surprise if this was one of the main reason for the jump. See this article courtesy of John Mauldin;

23 days till expiry

As you can imagine not a happy day here in NY. Lucky enough on an account level things are not a completely disastrous, but for sure a down day. Some of my long term holdings reacted to this positive market sentiment and crawled back from their lows.

As for the butterflies I have come to the first adjustment for this month in the 620-670-720. Buying 2 670 and selling two 710's. This moderate the deltas and flattened the T-0 graph. Flattening out the T-0 graph buys me a little time, if the market continuous to run up from here it will not cost me a lot of moneys. Of course if it falls down again not much to gain either.

The second butterfly is still intact, although the late afternoon 2nd rally has put this trade beyond it expiry break-evens. A day with a positive sentiment tomorrow will force me to act.

This morning I was contemplating adding a third butterfly on the then ATM of 700 or 710. For now I am happy did not act on this thought.

Let there be no doubt, I hoisted the RED BALL. I am not enjoy myself here. A 10% move in the market in 6 days is not the market for a non-directional trader.

For me two principals are taking over;
1. Do not loose more than I make in average good month
2. Be very careful with day trading this market and calling a top.

#1 is just good business, #2 is my personal Achilles heel.

If however I do see a top, my action will be buying puts on the 670 strike.Allow the market to come back a bit and selling the 620 put. Draw this out for yourself, and read up on a trade called "BOX".
The debit spread of the 620-670-720 has a value of 46.20 right now. The max value is $50.00. Going up the debit spread will max. contribute an additional 3.80*5*100=$1900. Going down it can lose 46.20*5*100.

as said from here on let's be very careful!

24 days till August

I am asked quite often for my rules for the butterfly trade. I am sorry but on this public forum I don't hand them out. They are ready available for my fellow Sheridan student.

The reason is three fold;

first the obvious one; it took me time to figure them out, and although there is nothing proprietary about them, I will not publish  them here. Keep reading the blog and over time we will hit all aspects of the rules.

Secondly; for me the question is similar to learning you how to drive a car via an internet course.I can teach you the difference between the gas pedal and the break, but how to parallel park becomes difficult without actually being there.

The third reason has to do with personal style. My rules fit my personality and account size. I have fellow, very capable, Sheridan Traders who can't stand my butterfly and swear by their enourmous size Iron Condors. Others do the butterfly as an Iron butterfly. A fellow trader down south plays with different strike widths. All of these traders are profitable for a long time. You will never become free from others if you don't develop your own style. Take a professional mentor, give yourself a year to trade really small (1-5 lots). Study as many traders as you can, not to copy them, but to get in their mind to find out how they think. I guarantee you after a year you will be able to hold your own, if you meet the last condition. You need to LOVE it, just having the wish to make money is not enough.

I enjoy writing (it is a good practice since English is not my first language) about options and the comments give me input for future posts, so please keep coming!

27 days till August

I completely forgot that this week is July expiration week. I had closed all my July trades just before I went on my trip to Ca. Coming back, I started with August. This morning I realized that July still had to expire. This is a very good explanation for the upward move which started Wednesday. Quite often expiration weeks have a bullish bias. I think we need to write this down as one of the disadvantage of only being in the market 17 days a month, you loose track of time :)

I made the graph for the current position a bit earlier. So that we don't run into problems with closing prices on TOS.

The overall position is still in good condition. The delta's are definitely asking for a down day, but nothing dramatic. Room for either way. Since this is longer term bear market, I only hope that can avoid an upside adjustment. But as said multiple times before; let's trade the market we get and not the market we wish for.

Enjoy the weekend, here on the East Coast it will be a very hot weekend,

28th days to August expiry

That hurt, still got the tears in my eyes. The position is down close to $700 and the position hangs now in a way that going further up, both butterflies will hurt me more. Ergo both butterflies have short deltas.

The adjustment points are still 'far' away, although what is far in this market.

Let's hope Citi does not disappoint tomorrow, that is disappoint me, which means does disappoint the corps of Wall Street analysts.

I am happy that last Tuesday, I resisted all temptation to start tweaking on the down side. That really saved the day today.

I can't show any pictures. TOS shows some abnormalities in the closing data and the graphs is very much incorrect. I will try to add a graph tomorrow before the open.