Theta Positive - Option Trading

Weekend reflexions

First let me say that the last two days removed any misgivings I had for closing my butterflies 'early'. Thursday's move up would have triggered an adjustment and Friday's move down would have given me problems. You never know for sure, for me it is better to stick to my trade plan. Deviating  opens the door to fear and greed.  When those two start taking hold of my trades, my account balance always pays the price.

Over the last 10 days or so I have bought some longer term calendars. I bought the back months August and September, selling front month June and June quarterlies. I use the underlyings Rut, DIA, SPY and  XLE. Trades like these are triggered by a relatively low VIX. The strikes I use are always a couple of points under the market. I take into account the time premium of the front month (it has to be worth it) and I check the chart for some support levels.The trade becomes profitable in two ways; underlying moves to the strike and the IV increases. With a little luck these trades pay off over 50%. The final analysis I do before firing the order to ThinkorSwim, is determine  roll values and my risk (if and when wrong).

Here is an example which I got from Tom Preston (ThinkorSwim).
June Quarterly 82 put, Sept 82 put, I paid $2.90. This trade has 3 possible rolls. A roll is buying the front month and selling the back month (think about this), so the last roll will close the September. For three rolls  to break even, I need to be able to roll for $1. Using the adjustment function for the theoretical price, I learn that the XLE can move $3.5 up and  $8 down. Bigger moves will lead to rolls under $1. From here on,  it becomes more of an art. Looking at the chart and at the roll values above and under the break even points,  I determine my risk, and allocate a trade size accordingly.
My adjustment plan is short and sweet; there is none. Just let the trade run its coarse. I will close if it hits my profit target.

Enjoy your weekend, I truly hope your trades are safe in this volatile market.

Exit June

Today I exit my butterfly trade for a nice profit, see the result page on the right bottom corner.

I met my profit target with this trade and market action gave me not much reason to milk it a bit longer.

Overall June has been a good month. In total I exceed my profit targets in the accounts under management. Not bad at all.

I am lightening up my blog schedule till mid next week when we are 37days till July expiry.

19 days till June

Yesterday I made an adjustment.

As I said Thursday evening, I became less content with my Delta's. Here is my thought process which led to the adjustment. At first the market was turning down a bit between 8AM and 10Am. Around 10Am it found support on the pivot point. For me it was crucial that we moved down from there. The Average True Range for the Russel Future is 16 points. At 10AM I can either see the 8:30Am top of 747 as the top of the day give me a range down to 731. Or I can see the 10AM 742 low as the low of the day and have a 'statistical normal' expectation of 758 high for the day. So when we found support on the pivot point and at 10:30 AM we broke upwards with good volume, I felt that I had no choice but to reduce deltas.

I had two choices.

1. Adjusting the butterflies per my rules. Buying back some of the shorts and reposition them at the current ATM level.
2. Taking off the lower butterfly.

I chose the last option. I closed the lower butterfly for a little profit (taking into account my commissions). So we are back in having one butterfly center at the 740. That butterfly is over 20% up and has okay delta exposure. The size is 3-6-3 plus one extra 790. As you might recall the extra 790 was bought when we set up the position to smooth the deltas for the first week. Now we have reduced the position size, the extra 790 weighs relatively on the position. Hence the little upswing in my t1-graph.

21 days till june expiry

What are they smoking? Are they smoking the newspapers I actual read? Is that why they ignore all the news on the US consumer increasing its debt? Ignoring news on CDS's and more important the EPS cycle.

I can truly say I don't understand why we had a second accumulation day at these levels.

Luckly long time ago we choosen to trade in a non-directional style. So we don't have to understand.

This morning our 1st butterfly hit a 20% profit target. So we peeled another 1/5th of the trade.

The original buttefly is now a 3-6-3 on the 690-740-790 strikes.The other butterfly is still a 5-10-5 on 690-730-770.

I still like the greeks of the combined position, but I will not tolerate another day like this without an adjustment. My gamma is 7 and 10 points up in the RUT would give me a delta close to 200. That gets out of my comfort zone.

22days to June expiry

A short post. Nothing happened to the position. Market proofs me wrong again! The butterflies getting close to getting another 1/5 off. The order is in we hit it today but we did not get filled as yet. Maybe tomorrow. Cu all AM.

23 days till expiry

I was wrong! On Sunday the 18th I wrote: "I think the market will be stationary with an upward bias". I wrote this with the RUT on 741. Today's close was 734, and in the meantime we have seen 719. If anything; I should have written "the market will be stationary with a downward bias".

The reason I come back to this is that having a market opinion is not vital in a non-directional trade. We set the trades up according to plan and are willing to make the adjustments as the market shows its hand.

So I was wrong and we made money - not too bad at all. We are up $2151 taken into account the commissions paid.

As for today's market action, take a close look at the RVX and the RUT. The RUT made a good move up while the RVX gapped up at the open and only very slowly gave some ground. Let's try again - my market prediction: I say down! Based on the Rvx and the lack of volume. Don't take me too serious with my market predictions, I don't do that either :)

Today I have three graphs for you. The two individual butterflies and the combined position.

25 days to expiry

Sunday evening of a long weekend. Just logged onto my trading platform ThinkorSwim to set some alerts on the Russel 2000 Futures. Tomorrow we are closed but we all remember the last time we were closed and Asia dropped an enormous amount of points. Better safe than sorry. So I set alerts under the 715 and above the 735 level. Room enough for an undisturbed day.

Friday at the open, my profit taking order got hit. On the first butterfly I have taken off a fifth of the original size (1-2-1) for $22.45. Not bad, a little over a week and already on the 15% profit level.

Position greeks are 50D, -6G, 200T and -553V. I don't mind the Vega too much as explained in the post on the IV skew. Plus I have other positions in my portfolio which are long Vega.

Enclosed is my P/L graph for the total position.

28th days to June expiry

Sorry for be off line for a couple of days. We have friends in town from Porto Alegre (Brazil). I had to run off directly after the market closed.
We have a lot to catch up on.

It is Thursday evening now. Tuesday morning I added an extra 5 lot butterfly on 690-730-770 strikes.
As written earlier I wanted to give you experience on how to enlarge your trade size. I decided not to double up on one day, but to spread my trades over several days.

The original butterfly is here . We are 13% up ex-commission, not bad for 8 days. When we hit 15%, I 'll start to peel off a 1/5 of this trade (1-2-1). It is always nice to take a little profit, this make the trade and your mind more stable.
















The new butterfly is here , up 170usd or 2.5% in 2 days :)


















The combined position looks like this . I hope you can see the smile on my face. Invested capital right now $16.700. current profit $1500, a little under 10%. The smile on my face comes not so much from the profit. It comes from my combined position greeks.

31 days till June Expiry

The butterfly starts to pay off. We are up $350.-, always better to be up early in the trade. That way we don't have to fight for a profit in case we are forced to make an adjustment.

It is difficult to read the current market action. Volume is up. All index are slightly down or are have formed a doji. As said earlier happy to be a non-directional trader.

As you might remember I am in a AAPL position. Today I bought a long term put to cover my AAPL; JAN09 185. For quite some days I don't like the action in AAPL. With this put I reduce my delta's without significantly reducing my theta and I get a little more vega exposure. If we don't go down , well then I will pay for the put by writing some calls on top of AAPL. Currently I am short the JUN 210 call.

For the first time this month I started to use BBH as an underlying. I setup a calendar JUN/JUL at the 165 strike. The calendar is profitable between 160 and 170. The plan is to sit on it and if neccesary I will add the 160 or the 170 calendar. I started small, to get a feel for this underlying and its options.

Hope everyone it doing well!

32 days to June Expiry

Market going up or market going down. You tell me. At the moment I have no real indication.
If I need to make a bet, I would say stationary with a upward bias for the next week.

One day we will wake up and find that the market can no longer ignore inflation, oil price, lower earnings, underfunded retirement plans, deficit, fall of an empire and war. Till that day we are happy making our non-directional trades and accept with a smile (sometimes wary) what ever we get.

The butterfly is nicely centered. I will see what the market give for the next couple of days before enlarge the butterfly position.

Have a great week!