Theta Positive - Option Trading

28th days to September expiry

Just bought myself a relaxing vacation, instead a laptop bound beach chair alternative.

Closed the butterfly (see result page) and closed a directional SPY vertical call credit spread.

The rest of the portfolio is long term, including some spec plays like long TWM and long SKF. As said before those spec play have a married put attached so I know the max risk involved. I have set a crazy GTC order in the system just in case someone wants to double my investment. Give me call if that happens, I might stay a week longer :)

Sorry to leave you all this early in the trading month, but is time to get a tan in Bonaire.

Cu around the 1st of September.

29 days till September

Difficult market to read. Big fight going on around this 725 level between Bears and Bulls. The RUT set a new (very recent) low but the RVX did not follow suit. RVX came even down a bit, that can only mean one thing - somebody is selling some puts at this level.

Check the 200EMA, 50EMA and 20EMA for the IWM or RUT. The RUT is nicely resting on top of the 200EMA. 20EMA is above 50EMA.

Conclusion - I am bearish on fundamentals, bearish on my pivot points, but unsure of market direction for the near term.
And here is the problem, I am on vacation next week. I will have internet access and my laptop, but also a beach, sun, a divers paradise and a lot of old friends. Hope you see the conflict of interest.

So what did I do: I closed for very nice profit - the RUT Call vertical spreads and the RUT 710 Put calendar. The put calendar gave me 20% in 9 days!! The verticals 6% for 10 days.

I will not enter  a second butterfly as I did the last couple of months. For the combination of the following reasons; the vacation and my directional plays worked out great. I am getting close to targeted profit for this month. Good enough for me.

The butterfly is helping out nicely. Today several times the alerts went off, passing 15% profit in 7 days. The trade is superbly balanced. So as long we don't get hit by another governmental intervention in the markets, I am free to dream of Spanish Galleons full with Gold.

30 days till SeptemberExpiry

Compared to yesterday volume was up, but still under the 50 Moving Average.

My daily chart confirmed the down trend, still waiting for the end of the week to have the weekly close and possible conformation.

I made a small adjustment to the butterfly. This morning the butterfly delta's turned long. In this market I prefer to have (small) short delta's. I am up in the trade, even if the market turns around I don't kept slaughtered (on the first day at least).

31 days till September

As you can imagine a good day for my trading results.

The RUT calendar is up a 14% within a week. The TWM is not yet contributing to the profit side of the balance sheet. I have been a bit early with that trade.

As for market action; Volume on this down move is moderate, for sure not extreme. Especially RUT volume measured with the RUT futures is low. DJI volume is on Friday levels. I use John Persons method to determine market trends. My RUT 4hour and RUT daily chart have turned bearish. The weekly needs a little more work to turn bearish. We will need a couple of trading days to determine if this is a new consolidation level or the start of a bigger down move.

The butterfly is in great shape, the risk of not buying the additional call has paid off.

 

34 days till September Expiry

Always difficult to read the real market in expiration week. So much powers in action to get the market at the ideal spots. Next week we will see.

Chuck asked my last night why I did not moderate my delta's in the butterfly. I normally do, I have my finger on the trigger. But --- with six green weekly bars in the RUT futures, it would be perfectly normal for a little sell off. That's the risk I take. I played around with unbalance butterflies; like 720-750-790, but decided against it. For the reason that my trade size is to big to skew the trade directionally, if you're wrong, you have to pay the price.

Check the table below. First column is Oct 07 high, then 2008 begin of year, q4 loss, now and p/l since open 2008. The RUT is in positive territory for the year, The small cap are leading, Does this mean the fear for recession is gone? The RUT had the biggest sell off in Q4, did we over do it? DIA are legging, Is the theory that these big corp can profit from better export chance not valid anymore?
Check the weighting of the sectors in the RUT, see if you see a pattern.
I have no answers, just questions!

	Oct/07	01/01/08	Down Q4	Now	p/l
IWM	85	72	-15.29%	75.11	4.14%
QQQQ	55	48	-12.73%	48.14	0.29%
DIA	142	126	-11.27%	116.52	-8.14%
SPY	157	142	-9.55%	130.01	-9.22%

blind chart

Yesterdays blind chart was a weekly SPX over 20 years.

Just to remind you that the correction in 2000 took 2 years to sort out AND had a decline of 48%.

I don't know if the credit crisis should give a correction as big as the Internet Bubble, but the question is why would it not.Especially since all the financial institutions are deleveraging. Which will have two major consequences;
- they need to sell assets (equities and  bonds)
- Proceeds from the sales are not flowing back into the system, like in the case of a sector rotation.

I am still very careful with the downside of this market.
I still hold on to my TWM position and since a couple of days a 710 calendar in the RUT; SEP - DEC.
All my long term holdings have married puts, time decay for the puts is paid for by front month short calls.

off to the races

sidestep from the main topic

Little side step from our main topic.

Check this chart. I removed all Axis, symbols and reference to time frame.

Tomorrow I will tell you what chart you're looking at.

What does your work say; up, down, sideways. Time to catch the bottom or time to hit it heavy with  short?

4 days till Expiry

Thank you for all the emails over the weekend in reference to my Series 65.

As promised, today I will try to evaluate the August trade.
I spent quite some time in OptionVue Backtrader over the weekend to identify errors and possible improvements.

First what did the market present us. 35 days out we entered the trade at the 680 level. Within a week we saw 645, which was the down side edge of the butterflies. A week after that we had a temporary top of 727. 727 was passed the top side edge of the butterfly. After setting this top we had 10 days of consolidation. This consolidation was however quite violent, twice we were made believe that a break down of the 695 was in our immediate future. Then on 8/6 we broken out to the upside and currently we are setting new recent highs.

No regrets;
- I have no regrets entering the trade and pulling the 670 and 680 butterflies off. I still think that was a good decision. The alternative had been skewing the trade around 7/22 to the upside and leaving me open to 'fear and greed' on the two sell off 7/28 and 8/4. Yes, the butterflies would have made profits, but the draw down on the sell off days would have been way bigger than prior month profits. I think prior month profits are a limit of loss in upcoming trade month. To stay in business there has to be a strict relationship between average profits and max draw.
- No regrets for entering an new butterfly on the 720 level. The trade did not work. Again within 10 days the market showed us both side of the butterfly (and beyond).

Regrets;
- Managing the second butterfly did run away from me. At 7/28 breaking the 700 and approaching the 695 I got carried away. I was not longer trading the real market but the market I wished for. Reading all the economic analyzes I expected the market to fall apart and continue down. I made an adjustment to early and got caught. From there on I was hanging on my finger nails. Having cashed in a loss on the first two butterflies, wishful thinking entered managing the 720. The 720 butterfly has been up approx $800, with hindsight I should have taken that present and gone in hiding.

My results for this month are negative. I lost on a my Theta positive trades 75% of my July profits.

Before I close shop till the September options are 35 days out (this Thursday:)) I have a couple of other points to share.

One of my favorite economist is John Mauldin. He has a free weekly news letter, the last two weeks the news letter gave great overview of an important segment of his work. I recommend you read the newsletter dated 8/1 and 8/8. The section on P/E ratios and the section on the Baby Boomers are essential parts of his work. The P/E ratio is also excellently described in his book "Bulls Eye investing". 

Over the last two weeks I "played" with a new piece of software of the Worden Brothers called Blocks. Blocks is the successor of Telechart. The good news is Blocks is free in a limited version with after hours data. I really like the software although for first time users it is not easy. I went to a (also free) seminar to get a head start. What I want to share is a chart I found within Blocks; see below. It is a cumulative volume indicator. In the graph below you see the indicator for several years. Check how nicely it comes down mid summer 2007, a great early warning signal that the Oct high was suspicious

Person John Mauldin

Right click for SmartMenu shortcuts

6 days till Expiry

Expensive day. Found out this morning I was not allowed access to my PDA (could have know that) during the exam. So the 10AM 10 point move happened unobserved, cost the butterfly trade quite some money.
All in all this month trading is a sad, sad story.

At the moment I am in any mood to draw (objective) lessons; so they will have to wait till the Monday evening post.

The butterfly is closed for a loss; the result page will be updated Monday.

The only good news I passed for the exam.