Theta Positive - Option Trading

May 12th

I started the June a bit earlier than planed. I was eying Thursday - but this morning it look like we were getting a little sell off in the market - since butterflies start with short deltas - I like to sell them while the market moves down ward. On top of that the MM's were willing to take my order with a price of 'Ohh I am not so eager'
The result is displayed below - a nice way to start a trade.

The market in the afternoon surprised me - Vix came seriously down, market up for the day. I was (profitably) stopped out my short spy and short GE. Both had shown very nice profits earlier in the day - I had to give back quite some.

May 10th - Explanation of the BOX spread

During the May Butterfly you saw me executing a BOX spread without much explanation - let me make up for that now.

Lets say we have the following spread in our portfolio; RUT 450 - 480 debit (a leftover from a Butterfly) currently price @ 27.80. This spread still can make $2.20 extra, since the max value of the spread is $30.00. It is a bit sad to say good bye to this profit potential, on the other hand the risk close to expiration is also weighting more and more every day. Although the 480 put only has a delta of 16 giving us a 84% chance the 480 will be ITM at expiration. Still risk is risk.

For this reason I started to "box" the spread in by using a ratio put spread. I will show you in two step - first the basic box and then the ratio.

The box finishes of the vertical spread and takes all risk away - at expiration the box will pay me 500 times $30.00. In the graph you can see the P/L line flat line. But this box has cost me $2.10 - so a big chunk of the potential I have given back to run away from the risk. If I left the trade as is - I would have been better off just to close the original vertical debit spread.

The next order pays for the box by means of a put ratio. The box now only cost my 90ct - and the risk of my trade move from the 480 to the 450. From where the puts have a delta 16 to where the puts have a delta of 4.
Be aware I add risk to the trade - by having naked puts in ratio in the portfolio - but the risk move further away from the current market level.

Done with May

I closed the butterfly including commision I booked little of 9% in a month of trading. Considering the market ordeal - not bad - The trade had still some potential but here are my thought on why I pulled the plug.

a. we up a good amount
b. nobody knows what tomorrow will be
c. It was as long fight - lets be grateful that we have a profit

As it has become a tradition I will be lite on the blog till Jun is 35 days out - so I'll be back next week Thursday.

BTW I updated the result page

May 6th

I have two graphs for you

the first is the current position (including all the p/l of the first butterfly)

The second one is with the adjustment which is anticipate to fire off today. The trigger is when we hit delta of 70. But if we hit 70 in the first 30 minutes I normally will wait for the market to settle and see if we retrace to yesterday close - depending market outlook I will make the adjustment when we have retraced or wait till we violate that day high.

May 5th

In the graph below I cleaned up all the simulated trades - this is my current position with a correct P/L. The May 630 call is add as a little trick to compensate for already booked losses on the other butterfly.

This way the trade becomes easier to manage. Yesterday I was force to make another upside adjustment in the second butterfly. My delta were approach 80 short - this brought me into reach of my rule to half the delta if the position delta get above 10 times the amount of short strike I have.

This month has become quite a journey - but so far the books for May are looking good. Later in the month I will give an update on what worked and what didn't work for me.

May 4th

Sorry short post - made an upside adjustment to the second butterfly bought one 490-540 spread.

My overall position is getting rather short delta''s I need to hoist storm sails to bring this one home.

Several steps some already a couple of days ago;

- rolled 510/520 spreads to 530
- bought June 530's
- today for the butterfly one 490-540
- today reduced all 530/540 with 20%

I am looking at the future coming off the high @ 9pm est - that is a welcome direction.

May 3rd

We are nearing the end of the May butterfly trade - another week and we should have banked some profits. The trade is to be good shape - if the market will give us not more than a 1SD move for the next 7 days.

The overall Risk Graph.

Butterfly 1 - the main focus is not to loose the profit potential of the debit spread - which pays out at max if the RUT remains above 430. Currently the spread can be sold for $47.70 - this trade still holds a $2.30 additional profit = attractive = but not attractive enough to lose $47 over.

Butterfly II is going to pay the bills this month - The trade is in great shape - 1SD move for the week will not bring it in problems. I like to draw your attention how the loosing Butt 1 still have a positive influence on the overall trade. Butt 2 is not in 'great great' shape if we move 1sd up but butt 1 position improve if we do - so although butt 1 is a drag on the results it is still a help in risk management.

We finish up with the 4 P/L lines in 2 day steps. 1SD down for the week would be okay - 1sd up for the week would not touch the current profit. And just in case we manage to be stationary for the week we would be at 43% profit.