Theta Positive - Option Trading

Oct 30th

Decision time for some of the December trades. We getting in the time zone of 49 days till the December expiration. Normally for me time to start setting up some longer term Iron Condors. I have not yet jumped to the chime. I will wait till the first couple of trading days in November. We currently could be under the spell of the end of the month trading. End of October is significant since quite some mutual funds will close their books for 2008 on Oct 31st. This could explain some of the positive activity. They like to be seen with winners and they don't want to be seen with some of the bigger losers on their books (difficult this time around)

Next week the market will show its true hand.

As said on my Oct 19th post I am a bit less worried about a sell off now and here. But then the last two weeks have shown me how foolishly mistaken I can be. The covered stock trades I did, are doing well by now - as you can imagine I had some doubts during this bronco ride. The covered calls are with exception of the trade I disclosed still intact - results look promising.

Up till now undisclosed - I did play around with PRU to recapture some of the losses incurred. If we stay between 18 and 40 I will not suffer any losses on this trade. I am naked short the 5 40 calls and I own 200 PRU and sold the Call 20 November. Plan for the defense of the 40 calls is to buy 500 PRU if and when we bounce to 40.00. The plan for the 200 stock and the 20 calls - just endure the pain and come November expiry sell the Dec 20 calls.

Oct 28th

Nice move! I did not participate in a day trade with the futures, I could have, I should have. The thing is as you know I have quite some long deltas with that covered call play for November. This means that I not so aggressive in playing the upside for a day trade. I have enough riding for the upside.

Today is the day that I halved the loss on the covered calls for November. Quite a feat - I will need to go back in the my journal - but this could also easily be my biggest up day ever. As my wife will agree I needed it. For financial reason and for my mood.

Again I invite you to look at volume on a intraday chart for the SPY. I would say a nice level of commitment in this uptrend. The Tvol on the NYSE is while I write this not yet above average volume, the Tvol/Q is.

Yesterday I explained why this is not yet a non directional environment. A day like today proofs it.

You know I am a fan of John Mauldin's newsletter. This weeks letter, which came out today, is an important one. Recommend you find some time this week to get what he writes into your bones or head (whever your memory bank is located).

Oct 27th

We had a great weekend, If you are in the New York area - try to visit Wave Hill Park up in the Bronx the coming weekend. I am sure the fall foliage will be peak. We visited this Sunday it was great. Across the river a view of NJ Palisades with all the bronze colors.

What a crazy day for the markets, All day We trade a little bit in plus territory. To give it all up in the last 15 minutes. I had a "lucky" day trade I pick up big part of the down move with a Rut future. I needed that because this morning I was stopped out on an upside move.

I just check the RUT options. They still price a move of 70 point in till November Expiry. So still a lot can happen. One day things will quiet out - All the bottom fisher getting tiered to get stopped out and for going down we need sellers. That will be the month this blog will turn back into a real non-directional trading blog - till then excuse my directional ramblings.

Did you see this morning article in the FT concerning the state of finance of the US Public Pension Funds. Check the September 17th post (we are getting closer to that point). I am waiting for the moment that we need to move out of a small city just for the reason that the pension liabilities to the Sheriffs, Teacher and librarians have become unbearable. Similar as we move out of an expensive school district when the kids don't need a good school anymore.

Oct 24th

I need to be careful what I write here. I seems Goldman is reading over my shoulders.
Just yesterday, we "upgraded" :) (NDAQ) to  a buy and what do I read this morning;

"Goldman Sachs adds KeyCorp and Nasdaq to their vaunted Conviction Buy List"

Thanks you Goldman for the endorsement.

As for waking up this morning. The first thing I saw was an email on the drop in Asian. You picture yourself in a submarine and the XO shouting "Dive, Dive, Dive". Lucky enough for us we are getting closer to the bottom. Another 440 point in the Rut and we can't go any further.

My currency trades are working nicely. As you can see the USD/JPY broken out of that intermediate consolidation, paying me more than handsomely. Sadly enough I had closed the EUR/USD expecting the (partly) retracement big down move. So I missed the drop from 127 to 124.

As for the Nov trades I reduced risk again by closing (profitably) the strangle on (MSFT) - small profits (350). The main focus here is reduce risk. Closing the strangle takes away the obligation to load the boat with more MSFT at 23. I am sure closing this trade will be one of my biggest regrets in 5 years time, but we live today. I resold the 19/22 strangle for $2.04 this time just a two lot and sold 3 23 calls for $1.

I spent part of the day listening to an analyst meeting on (CHK) I am very impressed with their numbers and business. Don't load the boat but do consider a small buy for the long term portfolio. Analyst seem to think they need to sell some leasehold and are questioning if in this market it is doable. Management is very convinced that it will be no problem - Listening to the 2 hour! discussion my bet is with management. But then I own them in my Nov trade so I could be wearing pink glasses. To reduce risk wait for a close above $24.- or start building a position by selling some puts. Agian with the usual warning on sell naked puts not being a trading strategy but an investment strategy. Let's now wait for Goldman to repeat my call on Monday morning :)

Enjoy the weekend

Oct 23rd

I probably made the wrong call over the weekend. Market flat and up - what a joke.

Again reduced some risk in the trade - removed the (CHK) 22.50 calls and the CHK 22.50 puts. All that action has a profit of $500.00 (including prior day moves). I resold the CHK 20 calls for 2.75. Since I purchased the stock for 22.97 that will lead to a small loss if called away - but we will still have close to $400 profit in total.

(CNH) really disappointed today; the earnings were great (I thought). The pre market action was very promising. Actual earning are 1.06 on a $12 stock and a 3.5% dividend. It seems I am going to be the proud owner of a bunch of CNH for a bit longer than anticipated.

As you know I have not been picking and promoting stocks on this blog often. But check out (NDAQ) P/E  of 7, the integration with OMX is going according plan. No reason to distrust there business model (as long as you keep buying stocks). If you want a stock to sell some naked puts on - this would be a good candidate.
ATTENTION: selling naked puts in not a trading style, it is an investment method so be prepared to be the proud owner of NDAQ at the strike price you choose to sell.

Oct 22th

Check the intraday volume of the SPY on a 10' graph.

Some very serious money is buying at the levels. It is still wait and see how it plays out.

Oct 22th

I made some adjustments to the covered call positions.

Yesterday I closed Java - for a loss of 2186
Today I move the calls for HAL and CHK closer to the ATM - total profit on the calls which I closed 1690. I closed the PRU trade completely for a loss of 1228.

This way I reduced the total risk in the trade with 25%. Always consider the possibility that your initial call was wrong.

Currently the total time premium sold is 18395.

The only trade really working today is my short USD/JPY. The Long USD/EUR holds nice profits but did not generate anything today as it was mostly sideways.

Oct 20th

That was hard work, I entered a lot of trades this morning. As I said yesterday the plan for the coming months was set up some covered calls while also selling the ATM Put. My final selection for the underlying you can see below. The prices are the real prices I managed to get. CNH was very difficult to get a good fill on, with hindsight I should have walked away and take another candidate.

        

	#contracts	calls	puts	stock
PRU	5	7.2	7.8	39.72
CHK	10	2.45	3.1	22.97
CNH	10	1.4	1.55	16.13
HAL	10	1.26	1.92	20.46
NDAQ	5	3	3	32.41
JAVA	25	0.48	0.37	5.64
MSFT	5	1.8	2.07	23.44
PCU	10	1.15	0.8	11.94

That's it for today, I truly hope you had your short deltas under control.

Oct 18 2008

I still owe you the trade results for the October Butterfly. I closed at a loss of $4.500 approx 2 months of profits gone.Of course this doesn't stem me happy, but in the grand scheme of it all - it ain't too bad.
With hindsight the best I could have done was keep making the downside adjustments and not worry so much for the violent bounces of the lows, but then it was the violent bounces of the low which had cost most traders (and me) so dearly earlier in the month.
For me best was to declare the month not suitable for non-directional trading and move on to greener pastures.

What have I been doing the last couple of weeks;
- Trading futures on inter day moves
- Building up a little position in USD/YEN (still waiting for the start of the real trend)
- trying to get a handle on where we can call the intermediate bottom.

I think we have an intermediate bottom here right now. I come to this conclusion for the following reasons;
- All the news is out right now
- Fear was at it highest last week (including mine were it was directed towards my bond portfolio down over 50%)
- Governments have taken enourmous step to solve the crisis.

These three together I think we will see the market to move in a upward direction from here. At least till the next earnings period in Jan 2009. After this 3 month bounces (back to the mid 600 in the Russell) I think we will see more negative news coming out. I feel we are still treating this crisis as a pure financial and are still too hopeful it will not flow into the "real" economy.

The next shoe to drop will be the full realization that US consumer will retreat from the mall's and will become more loyal customers of the local savings bank (hence my long term short on RTH).

An other shoe to drop will the effects of the strong reduction in Cap Ex by large companies, everybody is holding off investments and moving big decisions a couple of months forwards. This will have effect on the order books and revenue stream. I expect to see more downward P/E estimations for Jan and April 2009.

So how are we making some dough in the next couple of months.
For Nov my biggest trade is focus on a reduction of the VIX back into the 50's. I am looking to set up several position were I buy the stock, sell the ATM call and sell the ATM put. I will do this in stock which are fundamentally strong (low PE, high Yield, big cash positions). The risk is that we get assign on the puts and double our stock position. So we can only do this with stock we really really like/love.
A couple of examples (very personal) WFC, PRU, CHK, PCU.

One other thing has kept me busy the last couple days - I removed most of longer term puts I owned on my long delta portfolio. In OCT 2007 I bought on all my long term holdings ATM Leap puts. With the price drop and the raise IV those puts have done their work. Since they are out in 2010, they are vulnerable to the predicted IV drop. Time to close and carry the risk unprotected.

For now I would still say be very careful with non directional trading. The ATM straddle/strangle for the RUT prices in a move of 77 points for the next 32 days. That is close to 15%.

Octorber 1st

By request of Trader M:  A couple of things I learned (needed the learn) from trading.

Trading can be profitable and at times it is not - it is very difficult to keep mood swings unaligned with your account balance. We think the world of ourselves after a record month - are close to depression when we get hit. My method for personal balance are not perfect - studying the subject, actively monitoring once mind and be active outside trading are part of the answers. I highly recommend the books of Brett Steenbarger for more on this subject.

Trading is a highly skilled profession - it does not come to you just by reading a book or by following a coarse. Tiger Woods is a great example as how to hold yourself as self employed professional - continuous efforts to improve his skills - not afraid mid career to change his back swing. Always on the practice greens. It is easy to translate this into trading, it is not easy to really live by this level of commitment.

As for a balance portfolio more and more I think a balance portfolio should hold several trading and investment styles. With a flexible method to allocate money between the styles.
I would distinguish between two trading style and two investment methods.

Trading Styles:
Trend Following (check the Turtle books)
Non directional (www.sheridanmentoring.com)

Investment Styles:
Growth (IBD)
Value

If we had applied this the last couple of months we would have had a successful EUR/USD trade. We had ride the downtrend in the market. Our screens on Growth investing had come up dry and our Value investing screen would be starting to fill. Non-directional trading would have given losses - but easily compensated by the other styles.

I am convinced that all these four methods need their own level of proficiency - each again with a cycle of learning, starting small and building it up.

And as we are all strugling with non - directional trading in Q3 let's not forget that while the world is end outside of our trading room - it is not the end of the world for us. Controle the losses, keep your powder dry - and hope the USA market starts to resemble the Japanese market for the next decade :) That would be a perfect non directional set up.