Theta Positive - Option Trading

Turkey Day Research

I am doing a lot of research to figure out what will be the next hottest sector if and when this market turns around.

We all repeat each other calls for biomedical,  health and alt. energy. They might become hot but I would like to draw your attention to the Education sector.

I think we will see some good upward moves in this sector. Here are some names to help you kick start your research. You read a lot on APOL - compare the PE of APOL with high flyer STRA. If APOL gets a simular PE as STRA (and not the other way around) APOL could move another 80%.

Symbol	Last	Volume	52High	52Low	Yield	PE	EPS	Front Vol	Back Vol
EPAX	9.17	108776	20.8	7.42	5.02%	9.86	0.93
LTRE	11.48	26863	27.71	8.39	0.00%	10.07	1.14
LRN	18.45	204480	31	16.4	0.00%	16.77	1.1	106.33%	69.50%
ESI	89.89	1375333	117.08	42.24	0.00%	18.88	4.76	59.92%	67.82%
NLCI	14.57	1300	16.21	11.45	0.00%	21.42	0.68
LINC	14.14	108802	15.79	9.85	0.00%	21.42	0.66
CECO	17.91	1439650	30.69	11.57	0.00%	22.11	0.81	82.59%	78.22%
APOL	76.85	3473794	81.68	37.92	0.00%	26.78	2.87	65.63%	79.53%
DV	57.37	804837	61.57	39.25	0.28%	31.18	1.84	61.80%	55.13%
EDU	51.08	1290123	91.77	39	0.00%	31.93	1.6	86.95%	88.68%
CPLA	58.76	619600	75.34	34.78	0.00%	38.16	1.54	65.99%	53.90%
COCO	15.86	1802481	18.25	6.45	0.00%	38.68	0.41	86.86%	107.91%
STRA	237.7	256228	239.09	142.14	0.84%	44.76	5.31	49.43%	60.16%
APEI	39.79	237596	53.24	27.56	0.00%	51.68	0.77	81.60%	68.62%
UTI	19	1039898	20.68	6.71	0.00%	59.38	0.32	113.00%	95.93%
LOPE	16	438930	16.06	9.49	0.00%		0

Be careful with the carving knifes - count the indexes and make sure you end the evening with ten.

ET

November 24th

As I said this morning to Trader K; "I feel like a Summer Sport Journalist, in winter". Maintaining a non directional blog in this market has become difficult. I try to stay serious and make use of educational opportunities the market tosses in our direction. So bear with me, the market and the blog will improve.

I did some analyzes on my covered calls, here are some results.

JAVA and PRU are closed trades both with loses. Both cases I contribute the loses to lack of trust in my original home work. The analyze look great - till the market turned against me  and I started to doubt this work. What do we learn - 1. Size, could have been smaller for the risk; 2. Both should probably not have come through my initial screening. JAVA because they sit on good cash, but I lack information on their business plan. PRU because they are a good company, but in every sell off you wonder if someone knows anything you don't know regarding their investment portfolio.
The first sell off in PRU I managed to trade very well (profitable) the fierceness of the second sell off has caught up with me. Both positions are closed.

The other covered calls/naked puts are still in the market. I rolled all Novembers to Decembers.

MSFT valued @ 22.11, I am short the 22 put and 23 calls
PCU  valued @ 11.27, I am short the 15 put and calls
CHK valued @ 19.09, I am short the 15 puts and 20 calls
CNH valued @ 13.78, I am short the 12.50 puts and 15 calls
HAL valued @ 18.36, I am short the 20 calls

Take CHK as an example. I originally bought the stock on 22.97, selling in the 25 calls for 2.45 and the 22.5 puts for 3.10. Taking all trades into account I paid 19.09 for the stock. CHK had quite a range during the last month. Not always comfortably, I have to admit, but I am convinced the Natural Gas fields are worth their value - so I am happy to sit with a little pain. I made good use of the moves by closing the puts when we moved to 25 and moving the original calls down, when it lost support.

All in all - originally the trades came on because I expected a sideways - upward market for a couple of weeks. As you know we did not get that, we had two or three major sell off in 4 weeks. With the exception of JAVA and PRU I am not dissatisfied with the current holdings. If assigned on the short calls I will bank some profits.

My favorite candidates for another set of Covered calls would be; JPM, ERF, HTE, HAL, INTC, HPQ.
I would leave MSFT out, since the (possible) YHOO merger could round up some volatility. I left CNH out because lack of Option volume, it was difficult to get fills in CNH.

I personally will not add to my portfolio this month. I have enough going as is, plus I have a week off coming - next week it will be Bahamas and beach time. So I need less excitement not more.

November 19th

Just a few observations; no real insights

- EUR/USD had a big swing, resulting in dollar strength
- Treasuries had a big day see tlt, getting close to the top of their channel
- Stocks reversed Yesterday's upbeat close.

The DIA 65 Put shorted this morning for $1 is now priced for 1.64.It seems that we need prepare ourselves to defend this position.

November 19th

A quiet day at the office, only 41 points of range in the SP futures.

I like the volume as it step up after 3pm, that is encouraging for the delta long side of the portfolio.
I rather would liked to have seen a big volume spike around the days low as a sign of capitulation.

Try to find some conformation for yourself that the VIX trend for the coming period is down. If you can confirm that conclusion, then consider selling some puts and put spreads. Right here and now. The premium is rich and if you do it skillfully the risk is reduced.

As said before I like the PUT DIA Dec 65 for $1.00. The market will have to go down other 25% to get that put in the money. Do it with a moderate size. The plan is if we break todays low to buy some ATM Put Dia  to compensate for the naked shorts.

Extremes

We need an extreme to turn a trend; spike in VIX, spike in Volume, spike in Range, Spike (in low) price.

Today's graphs shows you the trend in the Average True Range of the SPY. In the good old days, for those who can still remember, the SPY would have a range of average $1.00. Last month the AVERAGE range was over $7.00. Currently we see the Average True Range declining a bit. Indeed a bit, but as always it starts with a bit. The ATR is now $5.22.

Beside truly trading the swings it was very difficult to make money in this market. This holds true for us retail traders but also for the "big" boys. In the end this will lead to more normal conditions.
By now about a third of the SP 500 has a price under $15.00. I can't plot this on a graph with the software I have, but as I said jokingly when the RUT hit 430 - another 430 points and we for sure have the bottom. This same holds for the amount of stocks under $15. At a certain price you don't even bother to sell your stock - you just sit with the pain and wait for better times.

This week the door will close on our December trades. Decisions has to be made to move in and if so in what size. My plan is to move in - on a very small scale, probably less than 20% of my normal size. I already have some December profits in the books, due to some "lucky" sell and close of some RUT put and call verticals. Adding a small Iron Condor will satisfy the most basic level of my monthly goals.

November 14th

No comment :)

cu on the other end of this weekend

November 13th

Speculative earnings plays; as promised a bit more on this subject today.

The primary goal for these trade is to make use of the difference in front month and back month volatility (skew) and the drop in volatility in the days after the earnings announcement. Normally the skew will lessen - both IV will come down, the front month IV a bit more than the back month.

The above IV moves are to most clear closer to the expiration date, hence my preference to do earnings trade in the last two week of the expiration cycle.

Select your equity; for instance by looking at www.earnings.com - you want stock with good volume - the kind of stock that if they miss earnings even non financial newspaper will write about it.

The expected move till the expiration date equals the price of the the at money straddle. If a stock is not exactly at a strike you can average out.

1. Check if your strategy (calendar, butterfly or iron condor) will be safe if the expected move materializes
2. Check the last couple of years of earnings how well the stock behaves compared the ATM strangle
3. Read up on any last moment company and sector news to see if extraordinary circumstances are in play.

All plays out - you're good to go.

The research you do is reusable. Every 3 months your IBM's etc will comeback for an earnings cycle. if you stick with a couple of favorites, you will get to know them better and better.

This is the kind of speculative trading you can do - while using defined risk strategies. Your risk is limited - your results are limited - but you are not waiting for a specific move up or down - as long as the move stays within the brackets you will profit.

As for today's market - whoah should be enough - if you didn't watch interday action - check the SPY on the hourly. Great volume - nice spike in the VIX.

November 12th

One aspect of Theta Positive trading we have not yet discussed are "Earning Plays".

Earning plays are speculative Theta Positive trades and should be made in a "gambling" size. Ergo you are willing to loose all or most of the trade.

Tonight we have AMAT coming out with earnings. The excitement of the earnings gives the front month an elevated IV. Nov IV is 117 and Dec IV is 88. So by setting up a Nov - Dec calendar you make good use of that IV difference.

Tomorrow when the earnings are out the difference between front and back month IV will moderate and the calendar will become more expensive. I bought the calendar for 38ct.

The closer the earnings event is to the expiration date, the quicker the front month IV will evaporate. Earnings plays in the last 10 days of the expiration month are relatively low risk speculative trades.
You can check the prior earnings to see how the market has predicted past earnings moves.
More on how to read the predicted market move tomorrow.

November 11th

I closed that experimental trade; the VIX butterfly for a small profit 6% in 1 days, nice enough.
The reason for closing was, the more I studied the strike and the bid/ask price the more I understood I need to learn a bit more about VIX options. Hence the close and the move of the trade to the paper trading platform.
I send TOS an email requesting a special Wednesday chat (segment) on the VIX options, the answer was promising. Lets see if it makes the schedule.

Market action conformed my work as published yesterday. Break of the trend-line started a sell off. Around 11AM I twittered and signaled a bottom for the morning - That proofed to be a bit earlier but not far off.

I managed to close a part of my RUT IC around the low of the days for 20ct. The market was not eager to take a vertical spread. I had to give them the individual contracts. Within 30' or so I managed to close both legs of the spread (640/650), originally sold for 1.10

What's next for the market? Next week is expiration week - normally a week with a bullish bias. The market has not much of a support line between where we are and Oct 27th low. The afternoon saw good volume on the way up. Today's low is around the 68% retracement of the Oct 27 low and the Nov 5th high.

check the /ES future on a hourly scale and you will see how confused the market was this afternoon. Shooting star and a doji - both very long tails - a lot of indecisiveness

Are we holding here?

Draw a line under the Thursday low, the Friday low. Use the SP500 futures. See how nicely today's 3pm bounce is off this trend line.

Beware the day this line breaks, tested three time now.