Theta Positive - Option Trading

April 30th

Happy Birthday to the Dutch Queen.

That was a scary move up this morning - my RUT position was a large amount of delta's short - I was ready to give it another big swing if we would break 500 with any conviction - but sit on hand trading work well enough.

My RUT condor has no downwards risk anymore all the puts are off - today the last 390-380 put spread came off. Going down is a save route for this trade.

The butterfly is still full of potential. The two butterflies consist of the left-over 380-430 debit spreads, the other side 430-480 is off. Butterfly two is still largely intact.

I started to box in the 380-430 spread by buying a ratio put spread 430-380. Buy 1 430 and sell 3 380 cost 60ct. This way I have locked one 380-430 call spread in for a max profit of $50 minus the 60ct. Over the next days I will try to lock the rest in a similar fashion.

In the above mentioned box I have of course accepted the risk of 2 naked 380 puts. I can offset that risk against not having to worry about 20% of a very expensive 380-430 debit spread.

If you don't know the concept of a box - check an option book - it is a legitimate strategy. Normally used by market makers to square off a messy inventory. I do it here because closing the full 380-430 for currently $48 leaves per 5 lot $1000 on the table. The 430 strike is further than 1sd out, this make you believe the $1000 is easy to gain. Nothing is easy in this market hence I try to collect a big chunk of the $1000 by being creative.

Tomorrow is 1st of the May - Since we have become a socialist country (at least according to Fox News) we might want to sing the International together at market opening. I grew up in what you would call a socialist country - I can assure you guys the US is very far from getting close to be a socialist country. But feel free to practice the lyrics maybe Obama will make the song mandatory very soon.

April 29th

Need to run - so a short post with a couple of pointers

- I miss the volume in this up move - have we set a temp. top?

- In my Rut IC I moved my Rut 510 shorts to 530, for the reason if this is not a temp. top those 510 became a drag on my overall position

- VIX did not set a new low - again argument for a temp. top?

- the butterfly got one adjustment - again I bought a 430-480 spread. I will post the graph's tomorrow.

- TLT broke the 100, sorry I got stopped out on the /zb earlier this week

April 28th

As boring as a boring day will come; but this is how we like our Theta positive days - smooth sailing.

As some of you know - for several years I have done some ocean sailing crossing the Atlantic in all possible directions. Sometimes I had guests on board and they were without exception surprised how boring ocean crossing is (or should be). Think of it if you somewhere between NY and the Azores - 5 days South of Novia Scotia - how much excitement do you really want. Same with theta positive income trading no excitement is good - and that can be a problem at times. If we are trading for a trill or if we enter a trade because we are bored (guilty) then we are trying to find some kind of satisfaction in trading which should not be there. At least not in our income trading portfolio.

I have been mid Atlantic a couple of times - in what you would call severe weather - never life treating though, but that came from preparation not due to the conditions. I presume that for most of the readers of this blog those circumstance would have been life treating. Here is another parallel with trading - learning this style of trading with small size trades - make sure that a mistake is not life treating. Make sure that a error is just what it is an error, but you should never give it the power that it is able to get you out of this game.

Within the Sheridan community we have a phenomena called max loss. On every trade we enter, this is a number we calculate (at forehand). That if reached, we pull the trade off and accept the lose with grace. Yesterday during the help-desk I was ask if I ever ignore the max loss rule. I have to admit that I do - but - never without setting a new definite max loss, never without consideration for the  market, never when the only reason to stay with the trade is a 'deep religious hope' that if the market turns the trade will work out. I don't think traders in there first year have the insights to make this determination skillfully, so if you hit your 'max loss' get out and come back next month to play ball.

I finish up with a last sailing story. In Dec 2003 I had to sail a racing yacht from the UK to the Caribbean. Crossing the Bay of Biscay in the winter is kind of an adventure. The owner of the yacht had two choices a. to pay us for the delivery or b. to pay the English IRS 20% import duty. He choose to pay us a very generous fee. I arrived in Plymouth on Tuesday evening inspected the boat - thought her to be good enough for the trip. By Thursday the rest of the crew had arrived and a very rare winter storm from the East force 10. Normally winter storms in the Biscay are from the West. The East was perfect for us - setting us away from France. So with wisdom we decided to leave Thursday evening. 2 days later we had Finister across and we were out of the Biscay. That had been a very adventurous trip not a trip you would make with paying guest. Nothing was dry on board and I mean nothing. Sleeping bag, underwear, socks everything was wet, cold and salt. But we made it. The wind died and it took us another 4 days to get to Lisbon for a very much deserved espresso.
This story has no parallel with trading - other then you take risks based on your experience - and early on in your education you don't know, what you don't know. Finding out mid ocean in a storm that you miss a essential skill is not very advisable.

April 27th

No changes in the RUT butterflies - 14 more days like this - and we will have reached the finish lines with a nice profit :)

Till noon it looked liked the market was still in a upward bias - to me sentiment changed after 12 o'clock - my usd/cad and my /zb trade both came back to their entry points - both had been nicely profitable - for both I had had longer term intentions - both came out for a scratch since I had put stop orders in, just better then the entry price. No regrets on the closing orders since both run further in the 'wrong' direction - also no regrets no not taking profits earlier as said I entered them as for a longer term trade.

I am waiting for the long inflation, fall of the dollar trade to start. My vehicles of choice are short /zb, long /6c, long DBA, Long DBC, long UNG, short cash covered puts on CHK, PCU and GS.

/zb and tlt because the long term interest rate will go up before FED moves the short rate
/6c because Canada is a good energy and gold play
DBA and DBC - with inflation the commodities will come in play
UNG and CHK because one day the US have to start using more natural gas
PCU - copper commodity trade
GS - because they will find a way to make money from the next trend - even if its not long inflation, short dollar.

I will wait very patience for this trade to materialize. I have TLT short since 122 and am writing short puts on the position to pay for interest and difficult to short fees. DBA and DBC are not yet in play - I am considering some time spreads on DBA - need to study that a bit more. CHK has been part of my portfolio since Oct '08 - nicely profitable. UNG is underwater - own it for around 24. GS is underwater even with the big up move we recently had - missed part of the up move due to a short call on the position.

April 24th

What a week - the initial sell off was very well received at least on my end - with amazement I watched the whole Monday sell off being taken back and a (little) bit more. The week ended in green.

The VIX started Monday on 33 moving up to 40 - it settled on 36 on Friday afternoon. So while the market retraced, the VIX stayed in the middle of the move.

My overall RUT position is in the need of a sideways - bearish move. A 1sd move up till May expiration is currently not covered by a profit area. For now I concentrate on reducing my short deltas. Although I'll maintain short deltas.

The last couple of days I have managed to close some credit put spreads. I had orders in to close put spreads for 20ct, but the market was not very eager to hit me - although the mid on those spreads had been 20ct for some days. I started to what I call wiggle me out of those spreads. If I see the market on a short term chart on a top - I will put a order in to buy back 20% of my short strike around the mid. If you're lucky you will get filled, then I put a order in for the long put 20ct under the just paid price for the short. While the market comes down - MM's become more interested in your put and you might get filled. Because I do this in small steps, I don't run the risk to destroy a good trade. So far I managed to close 50% of my put credit spreads.

April 22nd

I made the a first adjustment to the 380-430-480 butterfly - I peeled off one 430-480.

April 21st

Short post - no action in the butterfly trade other than banking some theta (banking is hard work :)

Looking at NYSE volume - Yesterday the volume was 18M which is above average and for sure that made yesterday a distribution day. Today the futures started very weak - and I was very much ready to enjoy myself with some more downside trade. Very quickly it became apparent that the downside was not the side of choice. You just need to see the action in the VIX after this mornings open to see that the fear was subsiding. I never take a short trade - other then a very quick scalp if the vix is not indicating rising fear. At 10:30 you got conformation in the /zb and even a little earlier in the TLT. Both vehicle are currently good indicator for fear and risk aversion. Today the NYSE volume end just under 17M which I think is quite impressive considering all the imagined weakness.

All in all I would be surprised if this week would show bullishness to the degree that we take out Friday's high - I anticipate a lower vix, sideways action with a slight upward bias - as always I right till proven wrong and by then I reserve the right to turn on a dime.

Cu all at the other end of the coming evening

April 20th

That was a nice move for all the Theta positive trades - most of them were hanging short deltas and could use a downward move.

For the  butterfly I closed the extra 500 call - leaving the rest of the trade intact. By the time I decide that I did not need those deltas any longer most of the value had run out. I closed the 500 call for a $80 profit per one lot.

Below you see both the butterflies. The last fly still holds the profits - the first fly is currently break even. If break tomorrow, today's low then I will a bit more aggressive maintaining negative delta's - by closing the 440 - 490 spread.
Remember in the weekend we had a worry about the upside of the trade - now the 1SD till May 8th is outside the lower break - evens; how ironic.

April 18th

I will make up for not posting a couple of days. A lot of graphs and some thoughts.

Above is the current position with the two butterflies. Greeks under control, we are making some money. One week - one SD move brings us between 450 and 510. 450 would be super, 510 not.
The SD lines you see on the graph are set on 1 week before May expiry - I am aware that 1sd move up from here part of the move is not covered by my profit area (512-531). For now I not worried but I am very mindful.

The 2nd graph shows the first butterfly - displayed with 4 plot lines one for every 2 day - the P/L lines cover the time till next weekend. You can clearly see that we are on the edge of loosing our positive theta. We're down $747 including the extra 500 call. If the rut moves further up the red 4/26 line is below today lines presenting us with a negative theta.

Third graph is the first butterfly with what I call the ultimate adjustment - removing the loosing side and closing of the insurance. This show that I still have time to "ignore" the problem as this directional trade stands to make $1783 which is 23% of my original investment. I exchange future profits for time/risk. The later I make the ultimate adjustment, the better. The earlier I make it in small steps the better. Both statements are true - I weight my final decision based on my overall rut position (and a little bit on market opinion).

The last graph doesn't need much clarification - it is the last butterfly I added to the position. It is nicely up 23% and is carrying proudly the profits for the trade.

Sit on Hands can be very difficult at times - I was tempted to make a first adjustment Friday afternoon in the first butterfly - fighting that urge has as much to do with trading skills as it has to do with psychology.

I leave you with a review on Jeff Augen last book 'Trading Options at Expiration'. As great a book as his other (see my bookstore on the right).This book focuses completely on the last two days of the expiration cycle. I don't recommend the book for novice traders - first learn the basic - but if you want some 'day trading' execitment and want to use miss priced options on expiration day, I recommend this book.
Yesterday, I applied lessons learned on AAPL by buying directly in the open ATM 120 Straddle - Gamma scalping - I still need to optimalize the way I aproach this trade - I only captured 1/3 of the possible profit. But the book is paid for 15times so that is a good return on investment.

April 15th

During the afternoon while the market moved down the vix hardly reacted, giving a clear signal that we were setting an interday double bottom - open ourselves for the way up. I however did not expected that we would take out the Day High and manage to move beyond yesterday close. The last 30' were quite surprising.

The good thing is most of my trades for May are in decent condition. They can endure some more up moves. IWM, XLE, EEM, WMT all double diagonals - the RUT has morfed in a ugly beast a larger Iron condor built up over four weeks and in the middle two butterfly. The position breakevens embrace a 1sd move till May 8th. Lets hope for a quiet boring three weeks.

Below you'll find the butterfly part out of my RUT beast.