Theta Positive - Option Trading

Jan 30th

Last day of the month - in normal bullish years CNBC would be full of praises to the rules "As January goes so goes the year". I haven't heard that one too often this month.
We opened the year @ 924 and are closing around the 825 level. Down 10% - if the old saying has any value then we can expect some more this year.

The last strangle I entered I took off for a small loss. I decided not to fight it. The main reason to enter the trade was my conclusion the VIX was coming down - now the VIX has reentered the uptrend - time to take it off. As I blogged before I enter those strangles with negative delta's and short vega. If the trade goes against me I get compensated a little by the delta's. My loss was approx a 10th of my potential profit.

I am drawing a support line under the Nov lows and last weeks lows. I don't think we want to see that one break. I will be ready to add to those long term SPX puts.

Jan 27th

Yesterday, when I tried to close the butterfly I had two orders in - one to sell half of my butterflies @ $11.20 on the ISE exchange and because they happily ignored me 5 min later another order for half of the flies on CBOE for $11.25.

Surprise, Surprise the CBOE order was execute quickly - after a couple of minutes - while the ISE found no takers. I canceled/replace the ISE order and routed it to the CBOE were I was executed for a second time after a couple of minutes.

So a few observations;

a. It is good to shop around with your orders
b. Some traders think (mistakenly) that the spread orders are seen nationally - they are not - spreads are routed to the local exchange "Complex Order Book" - the complex order book is not shared over the exchanges
c. Some traders think (again mistakenly) that spread have NBBO pricing - they have not. NBBO stands for National Best Bid and Offer, if you come in with a single order - then the floor trader needs to trade with you within the limits of NBBO. So if Boston has a sharper bid for a contract than the CBOE, the CBOE can not trade on its own bid. It has to honor the better bid from Boston.

An example on NBBO
IBM Feb call 90
Boston bid 1.10 - 1.20
CBOE 1.00 - 1.20
PHLX 1.05 - 1.15

NBBO for this contract is 1.10 - 1.15. Routing an order to CBOE to buy the contract @ 1.20 would automatically execute on 1.15 @ the CBOE. Selling this contract for $1 @ the cboe lead to an execution of 1.10.

Jan 26th

If you followed my intra-day babbles via Twitter then you know I closed the RUT butterfly for 25%. We have been in the market for 12 days - I can take off till March comes close to 35 days to expiry. Well the last part I wish it was true - I have to much other stuff cooking.

Today I entered two opposing trades I added to the SPY Stangle - still seeing some negative movement in the VIX.

I also set step one in the overall reduction of my portfolio delta's. This morning I calculated my overall delta beta weighted to the SPX. I split the overall delta in two parts - part 1 - delta's from short term Theta Positive trading - part 2 - delta's from long term semi "Buy/Hold" stuff. It was the delta from the second part which I wanted to moderate. Like I wrote I am setting step one - very much willing to take a little loss on the insurance and also very much willing to add when this market gives in.

How did I reduced the delta - I bought 825 puts SPX DEC09. It is my plan (similar to the RUT calendar) to sell the front month put deep OTM to pay for time decay. I have 11 rolls and I paid 119.20 - on average I will need to sell for $10.85 per month if  we ride the insurance premium to 0 (which we don't).
Why did I go to DEC, two reasons 1. The RUT calendar ends in June, this way I have them staggered. 2. If the VIX pops up the DEC will give me a big pop in profit based on vega.

Jan 24th

A rare mid weekend post:

I just read two (very) inresting analyzes;

1. the quarterly letter of Jeremy Grantham. Jeremy quarterlies are always a good read his insight for 2009 is I think very to the point. You can find this free letter after registering at www.gmo.com. GMO is money management firm - I try to read whatever they publish for free.

2. The last missive by John Mauldin can not be missed by any index investor - directional or us non directional investors/traders. Sometimes we just take for granted that we trade the DIA/ DJI without truly understanding the true implications of the method which is used to build the index. John's article is very insightfull.

Enjoy your weekend,

Jan 23rd

I am going to be short here (as in just a few lines). I am seeing a supermarket in my near future. The fridge is empty and to be honest I am getting a bit of an appetite.

The butterfly is still nicely centered (how boring) - but that's the way we like it.
During my webex with the Sheridan community I told that I crossed the Atlantic by sailboat (part by myself). Ocean sailing is like trading - when it get exciting something went wrong - it is suppose to be very dull.

Here is the graph - calculate the yield! nice ain't it!

 Have a great weekend,

Jan 22nd

Talking about a liquid product - did you see that the SPY trades close to 9 million shares in the 13:55 5 minute bar. On a daily basis the SPY trades over 400 million share. Incredible numbers.
As I twittered I stopped out of the SPY strangle (95/69) when the VIX broke out of today high. For me the SPY strangle is foremost a VIX/Vega play - Last Friday I had sold the strangle for 1.49, today I closed it for 1.32 - not hugely profitable - but still enough not to call it a scratch.
I reenter a strangle when the low of the day was taken out - so currently the strangle is 91/67 for 1.45.
This trade has slightly negative delta and short vega. So if we go up I will lose on the delta but get paid on the vega - if we go down (against my direction) I will lose on the vega but will get some compensation due to the delta's. In both scenarios Theta is my friend.
Reentering on different strikes gives me the opportunity to recenter - Now I have equal time premium on both side - while in the old one the Call premium had rolled out and was not really helping anymore in the case the market would come down.

Analyzing today volume (intra-day SPY) - you can see low volume till 2pm - after 2pm the market got some conviction.

Those of you with a memory of my covered calls; will understand that CNH did not make me a happy trooper - My current position short FEB put 17.50 are bound to be assigned. We will have to start over again with selling the call on top of the shares. I listened to the earnings call - CNH has two product lines Agriculture (doing well) and infrastructure (not doing well). The covered call trade from Nov till now is down $45 per 1 lot. Selling all the put and call premium over the last months gave a buffer to absorb this set back. After I am assigned I can sell the March 10 or March 12.50 calls without having to fear assignment, since assignment will be profitable.

The butterfly did not  move a lot; BTW check the delta's, talking about being market neutral :)

Jan 21st

Today volume came in on the same level as yesterday volume - sell off and buy back at good volume levels. We are living in interesting time :)

Fear is moving out of the market - my main indicators are the TLT and the VIX. Both fell and both are short in my portfolio. I have the TLT short straight out. While the VIX is short via a SPY strangle.

Did you follow me when I blogged to get long delta's IBM. Hope you did.
How did I trade it? I started of with a combo short the FEB 85 put and long the FEB 85 calls. When the IBM moved up last week I sold 20% of the trade for a profit. Then IBM was giving me the creeps for a day or two. I sold the Long calls for a loss - to reduce the risk in the trade. Leaving me with Short atm puts (naked). The trade was sized that in the event of a further sell off I was going to roll the Feb to March - coming expiration. Today with the pop in IBM I closed the put for a handsome profit.
The trade came on my radar because IBM was up while the market was very soft last week. The put became profitable due to the upward moving in the underlying but also because front month IV drop after the earnings announcement. All in all not to bad.

The butterfly is active for one week as of today. We are up approx $600.- which is little over 13%.
So far no adjustments in consideration - we are nicely centered and the greeks are under control.

Jan 20th

I twittered @ noon time that the internals were improving. I was watching the TLT, TRIN and VIX all were off their most bearish levels. Within a hour - you could observe sentiment to turn and these three indicator to lead the way.

The butterfly came thru this carnage relatively unharmed.

Tomorrow morning is option expiry for the VIX and expiration for the VIX futures. Quite some market force will be working to get the VIX exactly were the big boys want it. Up and UP seems to be direction.
Tomorrow after the open will see how much damage is done - Thursday low was taken out, kind of even without any consideration. We did not spend much time on Thursday low (not a good sign).

Got to run, celebration party for OB's inauguration.

Jan 16th

Short post - going away for a long weekend.

the 10:45 12:30 move in the VIX got me sitting on the edge of my chair. I understood the VIX coming down @ the open, I understood the market selling off a bit, I did not understood a 4.5 move in the VIX during that sell off. I thought compaired to other intraday sell off, it to be pretty steep. Tells you how jittery the market is.

Not sure if I blogged about NLY before. It is a investment company fully invested in government insured bonds. Do your research if you think you like it - this is a trade I am doing.
Sell cash secured NLY ATM put for 1.05 that is approx 7% for 35 days - if you get assigned NLY pays 13% dividend / plus next month you sell the 15 calls.

Here is the butterfly.

Jan 15th

Another ride on the wild bronco, we call the market.

As the market bottoms out (are we???) US Airways 1549 also found a bottom - lets pray that those people can enjoy another evening in NY.

The bounce @ 2 pm is at an interesting point. In the last month this point has been point of turn before.

We all saw the VIX coming down. Still 1.6 point up for the day.

I pulled the trigger on a few trades.
I re-entered a short on the TLT - short call FEB 122 - this meant to be a start when conformation comes I will enlarge size, strikes and probably even short the underlying itself (again).

I entered a Strangle on the SPY short the 67/96 current deltas -31 and vega-125. If the VIX comes down the Vega will give me the profits.

AND we entered the monthly butterfly for the RUT 420/460/500. Starting tomorrow I will show you daily graphs.

Don't forget we have a long weekend coming up. Remember that last year during this weekend we had a sell - off due to the French Rogue Trader. This is one of those holidays that the US markets are closed while the rest of the world react to all news. I will check the futures a couple of time during the Monday. I will be in the Adirondacks enjoying a little winter fun.