Theta Positive - Option Trading

TLT short

In the long run the Bond market has to come back to normal conditions. Currently the bond market yields 2.68% for 30 yrs. The question you need to ask is; Are you willing to lent your Uncle Sam for 30yr @ 2.68% fix?

Your answer will be very short - no, never - why do you even dare to ask!

My choice of trade vehicle is TLT - I am still looking for additional vehicles.

The position I have currently is graphed below. I started the trade a some days ago, building up as the TLT starts showing sign of rolling over.
My goal for the TLT is at least 80 - if inflation picks up in equal terms as early 1970's then 80 might even be to high. The trade is a longer term and directional. I try to make my directional trades with a Theta positive edge, hence the short puts and calls. Shorting the TLT means that I have become responsible for the 4% dividend. So effectively I borrowed 120.22*200 for 4% per year from the market - not bad since I pay more interest on my margin @ my brokerage.

SPY calculated in Eur/USD value

Please check the enclosed graph and Think Or Swim Study code.

The graph shows you the SPY divided by the EUR/USD rate. This is how an European Investor who is not hedged for the currency risk is looking at his Oct 1999 investment - it did not even come close to a new top.

I added the study code to give you the opportunity to "play" around and replace the EUR/USD with your favorite currency or commodity. Go to town as they say in my host country.

def factor = close("eur/usd") ;
def spider = close("spy");
plot Data = (spider / factor);

December 23rd

Flat - closed the butterfly - the result page is updated.

Enough is enough I hit the 20% profit on the whole trade. My Greeks were still very neutral - I could have milked it a bit longer - maybe even over Xmas. But things are getting a bit hectic here with the Holidays thing - I am not that concentrated, hence the closed.

I am currently reading "Jeff Augen, The volatility Edge". I am working on chapter one and I am intrigued.

Most probably blogging will be lite till after the NY,

Merry Xmas and all the best for 2009

ET

December 22nd

Nicely centered in the middle of the trade. A day of sit on hands trading. I was tempted to adjust the "top side" butterfly for the downside move. Of course congratulating myself when the 3:30pm bounce of the low happened that I had been patience.

In a non - public account the first butterfly came off with a nice 22% profit in 6 days. If this market behaves I will try to milk the public "double butterfly" a bit longer. I hope to carry it over Xmas to pick up the extra theta. No promise though.

As expected the volume for the day was on the low end of the scale.

December 19th

Late afternoon action makes me doubt my short term positive attitude. We are under expiration rules - so difficult to draw any conclusions. Let's see what the shorted week will bring next week.

That's it folks - no more for this week - off to California

December 18th

When I twittered @ 12:20 that I saw weakness in the DIA I did not expect a move of 200 points down. I was forking on a burger so I was not able to catch any of it.
I definitely did not like the break of the 884 in SPX - that trigger me to expand the RUT 370 Jan/Jun calendar. A move I might regret on the short term - at least if you consider the market action after the bond market closed @ 3:30pm. The market bounced back into the range. The down move and the up move was with good volume.
All in all the vix is down for the day, that is a positve signal combined with the bounce back in the range - this makes me not completely bearish. But definitely extreemly alert.

The butterfly did get an extention today - I entered an second butterfly 460-500-540. The significant break in the VIX (morning hours) let me to the conclusion that we have a bit more upside. I consider two options for the first butterfly - adjusting, or adding.
The disadvantage of an upside adjustment on the first butterfly is the fact that I open myself for down side problems. I might be "not so bearish" for the short term - for not even an second do I trust this market. There is still to much optimisme in the market. Below you find my current graph.

Tomorrow we are under the spell of expiration - Normally that would be a high volume day with moderate price action. We will see.

I am packing my suitcases - Saturday we are leaving for Costa Mesa, CA - our annual track to the inlaws. Anyone in for coffee - just drop me a line.

As a little side note; I am currently listening to Radio Veronica, memory lane. They are closing up on a top 1000 ever - Currently they are play Sting "I am English man in New York" , I can relate "I am a Dutchman in New York"  feeling like an allien at times as Sting sings. If you are into music this link will give you a top selection for the next 24 hrs. "Stairway to heavens" is the #1 if I am not mistaken.

December 17th

This morning you saw me doing my worst trade in public (so far) - doing the voodoo magic of closing the short @ the low and closing the long while the stock trades higher - not something I should do, not something you should copy. The calendar had a max (total) loss of $120, by trading out of the short the max (total) loss became 270. I was lucky as opposite to skilled making my profit.
If confession time comes I have to admit it doesn't always work out like this.

Here is the butterfly graph. We are camping outside the expiration break evens. Theta is still positive, over time at this spot theta will become negative, just not as yet. Delta is under control as is gamma.
I have an order in to take the whole butterfly of for 25% profit. For the rest patience.

I am very tempted to add to the LT RUT calendar, haven't done it yet - will twitter when I decide to do it.

I entered a spec play on the premises that the gold will have some future. Short JOYG Jan Put 20 and long Jan Call 30. Even money - no money down - the short paid for the long. It is a long shot but what is an annualized profit over an $0 investment :). All these little trades are made small and after ample research - if the world falls apart I don't mind owning JOYG @ 20.

December 16th

One directional trade is working out for me. I entered some Euro futures Friday morning that end up being a nice profit.

If you going long one e7 future than you effectively change $62,500 into euro's. The margin is $3000 per future. When deciding on the trade size don't think about the margin. Think about your account size and which part of it you want to hedge. It is hardly never wise to hedge 100%. Think of it - when you hedge 100% and you are wrong your account will be stationary. The original position will gain and you hedge will lose the same amount.

The butterfly is approaching the edge of the profit area. One of my learning point from Oct. was to give the trade more room in the first week, which is what we are going to do.

Speculative trade

For educational purposes I suggest you put the following trade in your paper money account.

GIS call calendar 60 Dec/jan pre market priced @1.15

GIS will announce earning tomorrow before market open (BMO).

Due to the upcoming earnings release the front month IV has raised to 77.75% while the back month is 46.90%. Tomorrow after the market has digested the news the front month IV will drop and come more in line with the back month IV. This drop in IV can be profitable for this trade. Can be profitable - the drop in IV will cause profit - but you can only bank it if and when the move in the underlying doesn't eat it away. The GIS atm straddle/strangle predict a price move of $1.75 (either way).

If the market prices the straddle/strangle correctly then the trade will work out. See the graph.

This is a speculative trade - equal to rolling the dice (although with slight better chances) - do size your trade even on paper accordingly to the risk.

January Butterfly

In the morning hours the market tried to break down and up - both moves did not follow through. After the lunch put buying stepped up - as you can see in the moves in the vix. We took out the low of the day and (now at 3:30) are moving to a softer closes. (I got to run @ the close, hence an earlier post).

Check out the bookstore (in the right column) and give yourself a good trading book for Xmas, who else would give you a trading book? :) I am getting good feedback on the books from Steenbarger, Passarelli, and Rob Booker.

As promised we will start again with the butterfly graphs. The January RUT butterfly is showing a little profit.

With all the market volatility - I will be a bit more patience before I make the first adjustment. Which means I will let the market run beyond my expiration break evens. In the first week of the trade I have at least room for 20 more points.