Theta Positive - Option Trading

21 days till August

No regrets, indeed not closing and pulling out would have been a great move. Making money with stupid trade is one of the most dangerous things in the business. In that case you get rewarded for bad behavior, which only creates bad habits. So closing was the right action.

I own you some numbers; the 630-680-730 butterfly cost me $2036 including commissions. Currently the 620-670-720 is down $200.- Let's take a peak at the graph of the debris which used to be the 670 butterfly. As you can see I maximized my risk to $900, and left myself with a fighting change to become whole. The trade is negative theta and directional biased, not directly a trade out of a instruction book, but within my risk and reward rules. The trade is managed based on technicals, so any strength in the market I will start tweaking, or pulling it off.

The new 680-720-760 butterfly is $20 down, but well within it boundaries.

22 days to August

Working hard in sweaty New York and making no money, that can be the hardest thing in trading. Connecting your psychics with doing the right trades, whether they pay off or not.

As you understand from this intro it ain't gone be a happy post. I made major adjustments to the butterflies.
Let's talk about the why and the what.

WHY

Check the following graph (Courtesy of Dan Sheridan Mentoring). It is the RUT probability cone of July 9th, the day I enter the first part of the August Butterflies. A probability cone is a projection of the 1 standard deviation move calculated with the ATM Implied Volatility. 68% change that the prices would have stayed within the barriers. The action of the last couple of days proofs that all statistic are off. We are getting close to a 2SD move. This is a clear signal to move on to the next month.




WHAT
I pulled the butterfly 630-680-730 for a loss. Yes, I am expecting a pull back, as I was expecting a pull back yesterday and the day before. The pull back will come, but I can't run down my t-0 graph and dig a bigger hole. So adjusting or pulling. Based on the 2sd move I decided to pull.

Secondly I closed the vertical credit spreads 670-720 and 710-720. So of the butterfly 620-670-720 there is only left a 5 lot vertical debit spread 620-670. Extremely directional. To limit the directional risk and to bank on a at least 15 point pull back, I bought 5 670 puts. Now I have three legs of a box. I bought those puts for $3.20 right at the top of the mornings turn. Now I am waiting for a nice run down and I will sell 5 620 puts. Hopefully for $2 or even more (that is wishful thinking though).

What else,I set a new butterfly around the 720 strike (680-720-760). A bit risky I admit. Only 22 days left, not a very proper thing to do, but what's the risk? Another 2sd move up, think not. So my risk is to the downside. Butterflies start of with short delta's. So the downside is pretty clean for now.

For now I am in the hole on this trade. We will see what recovery value of the box is and how much the new butterfly will contribute.

I blame myself for one thing. I did not fully tune in to last weeks news, "to end the short selling on some of the financial". I thought it was a plan and that it was not yet in effect. Now I would not be surprise if this was one of the main reason for the jump. See this article courtesy of John Mauldin;

23 days till expiry

As you can imagine not a happy day here in NY. Lucky enough on an account level things are not a completely disastrous, but for sure a down day. Some of my long term holdings reacted to this positive market sentiment and crawled back from their lows.

As for the butterflies I have come to the first adjustment for this month in the 620-670-720. Buying 2 670 and selling two 710's. This moderate the deltas and flattened the T-0 graph. Flattening out the T-0 graph buys me a little time, if the market continuous to run up from here it will not cost me a lot of moneys. Of course if it falls down again not much to gain either.

The second butterfly is still intact, although the late afternoon 2nd rally has put this trade beyond it expiry break-evens. A day with a positive sentiment tomorrow will force me to act.

This morning I was contemplating adding a third butterfly on the then ATM of 700 or 710. For now I am happy did not act on this thought.

Let there be no doubt, I hoisted the RED BALL. I am not enjoy myself here. A 10% move in the market in 6 days is not the market for a non-directional trader.

For me two principals are taking over;
1. Do not loose more than I make in average good month
2. Be very careful with day trading this market and calling a top.

#1 is just good business, #2 is my personal Achilles heel.

If however I do see a top, my action will be buying puts on the 670 strike.Allow the market to come back a bit and selling the 620 put. Draw this out for yourself, and read up on a trade called "BOX".
The debit spread of the 620-670-720 has a value of 46.20 right now. The max value is $50.00. Going up the debit spread will max. contribute an additional 3.80*5*100=$1900. Going down it can lose 46.20*5*100.

as said from here on let's be very careful!

24 days till August

I am asked quite often for my rules for the butterfly trade. I am sorry but on this public forum I don't hand them out. They are ready available for my fellow Sheridan student.

The reason is three fold;

first the obvious one; it took me time to figure them out, and although there is nothing proprietary about them, I will not publish  them here. Keep reading the blog and over time we will hit all aspects of the rules.

Secondly; for me the question is similar to learning you how to drive a car via an internet course.I can teach you the difference between the gas pedal and the break, but how to parallel park becomes difficult without actually being there.

The third reason has to do with personal style. My rules fit my personality and account size. I have fellow, very capable, Sheridan Traders who can't stand my butterfly and swear by their enourmous size Iron Condors. Others do the butterfly as an Iron butterfly. A fellow trader down south plays with different strike widths. All of these traders are profitable for a long time. You will never become free from others if you don't develop your own style. Take a professional mentor, give yourself a year to trade really small (1-5 lots). Study as many traders as you can, not to copy them, but to get in their mind to find out how they think. I guarantee you after a year you will be able to hold your own, if you meet the last condition. You need to LOVE it, just having the wish to make money is not enough.

I enjoy writing (it is a good practice since English is not my first language) about options and the comments give me input for future posts, so please keep coming!

27 days till August

I completely forgot that this week is July expiration week. I had closed all my July trades just before I went on my trip to Ca. Coming back, I started with August. This morning I realized that July still had to expire. This is a very good explanation for the upward move which started Wednesday. Quite often expiration weeks have a bullish bias. I think we need to write this down as one of the disadvantage of only being in the market 17 days a month, you loose track of time :)

I made the graph for the current position a bit earlier. So that we don't run into problems with closing prices on TOS.

The overall position is still in good condition. The delta's are definitely asking for a down day, but nothing dramatic. Room for either way. Since this is longer term bear market, I only hope that can avoid an upside adjustment. But as said multiple times before; let's trade the market we get and not the market we wish for.

Enjoy the weekend, here on the East Coast it will be a very hot weekend,

28th days to August expiry

That hurt, still got the tears in my eyes. The position is down close to $700 and the position hangs now in a way that going further up, both butterflies will hurt me more. Ergo both butterflies have short deltas.

The adjustment points are still 'far' away, although what is far in this market.

Let's hope Citi does not disappoint tomorrow, that is disappoint me, which means does disappoint the corps of Wall Street analysts.

I am happy that last Tuesday, I resisted all temptation to start tweaking on the down side. That really saved the day today.

I can't show any pictures. TOS shows some abnormalities in the closing data and the graphs is very much incorrect. I will try to add a graph tomorrow before the open.

29 days till August

I am short words describing this massacre. So I will stick to some numbers.

Yesterday low 646
Today high 686
Difference 40pnts.
6% up from yesterday's low

I am out of breath just watching the screen; can you imagine how out breath the market must be.

We will see the remainder of the week.

30 days till August Expiry

What a volatility today the RUT futures had a True Range of 646.20 - 674.50, which is over 28 points. That is a big move I truly hope my fellow Sheridan Traders made it safe through out the day.

I have two graphs for you.

The first simulates the butterfly 630-680-730 after I (simulate) the close the debit side of the trade. This heavy directional trade would still have a profit potential of $5,800.-. It was this trade potential that gave me the patience to sit on my hand during this mornings sell off. I am "only" looking for a profit of 15-20% ($2000). $5,800 would be a profit of over 50%. I still had some "spending" money and could afford to let the trade work against me a bit more.
It is this aspect of the butterfly which makes it a favorite trade. The high potential of the butterfly gives room for error and patience. Do get me wrong; in my portfolio you will also find condors, strangles and even some naked calls and puts. All for proper diversification and distribution of risk.

As you may have observed yesterday I did not buy extra call to moderate the deltas for the 620-670-720 trade. I bought them today; 98ct discount (compared to yesterday) This little bonuses are just to make me feel good. They are not part of my official trade plan - but always welcome since they pay for lunch :)

I leave you today with the second graph which is the P/L of both the butterflies combined. The trade is above water approx 5% taking into account commissions (in and out).

32 days till August Expiry

As promised, here are the ThinkorSwim analyze page prints. The prints are from after the close. I have a difference in the TOS P/L and my spreadsheet. Probably a false print after the close.
In my spreadsheet the original is just underwater and the second one is up $150. Making the total trade a wash for now. We will have at least till 650 before I start working on an adjustment for the 630-680-730.
The 620-670-720 is nicely centered for now.

As for the general market. Today gave me a better feeling than Friday's reaction. It becomes a bit scary when after the FNM and IndyMac news the market was able to run up (inter day). I thought I understood a thing or two :) It proofs again and again trade what you get, don't trade what you think.

32 days till August Expiry

Back in NY.

Xmas came early this year. This morning at 11AM I added a butterfly to my trade (620-670-720). The mid for the butterfly was 15.85, the National 16.90. I was not in a hurry to get filled so I enter my order for 15.60. Instantly I had a fill on 15.53. My order was a decent size, for sure it was not an other retail trader picking up the opposite of my order (long theta, long delta, long vega). Wonder why the MM's were so eager. During the next 15' the mid for my trade stayed way above the fill.  This one goes in the journal as a good fill.

With the increased volatility I decided to widen this butterfly a bit. Up till now my 30days butterflies were 40 wide. I am giving myself a bit more room.

After trading, later tonight I will publish my analyze pages.