Theta Positive - Option Trading

7days till Expiry - What a week

Based on the RUT you would say nothing happened this week. We closed Friday 3th on 725 and yesterday the close was 720. Reading the headlines on Burma you would never come to that conclusion. Human beings are a very strange species. How on earth can the current regime stop us from helping their people. 100.000 people dead and missing, numbers which go beyond any form of imagination. I am not easily open to any invasion of sort; but come on, lets just go in and help a couple of people.

As for my portfolio I am still working my main Rut position, delta's are flat, gamma is under control, theta is high and becomes higher. That is one of the very nice benefits of a flat market.

I bought back the last of my May covered calls for 5ct. I am holding off for selling the Junes for right now. Normally an expiration week has a little upside bias, if so I could use that so sell the June covered calls a bit higher.

My public portfolio will come back live the week after expiry. So a little patience and then we start making some (public) money again.

Two weeks to expiry

10 more trading days till May expiry. The market seems to have hit the top of the trading range. My non-public portfolio is in good shape. It consists of several butterflies and calendars. In the last week I have been adding quite some time spreads. My main focus is still on the May expiry. My May delta is under control, gamma is still not too crazy. I am safe between 690 and 740. Break of 705 level will trigger some adjustments.

I added an interesting RUT trade to my overall portfolio; long the DEC 700 Put and short the Jun 660 put. This gives a nice long vega exposure and  23deltas short. The plan is to keep selling the front month covered by the Dec back month. Market going down will allow me to sell further OTM in Jul and Aug. Market going up will allow me in the end to calendarize this position. Jun-Dec will allow for 6 rolls. This trade is pretty safe, I expect another sell off somewhere this year. The trade will profit from the raise in the RVX and from being short delta's. If I'm wrong, a bull market will not rip my head off.

16 days to expiry

16 days to expiry and 14 days into the trade. This morning  I closed the butterfly with a profit of 1761 USD taking into account the payment of commissions.
Closing the butterfly was done out of precaution, we are up nice money, tomorrow is FOMC and I am under the impression the market is building up a spring. When that spring jumps we can easily see an 20-30 point move.

Our profit is over 17% on the invested capital and 4% on the reserved capital taking into account that the original butterfly had a profit of 230USD.

Now here comes the part which is great about trading the butterfly. As for this part of the portfolio my money is out of the market. Tomorrow when Uncle Ben speaks, we can go up or down, it does not matter for the lions share of my trades.

The unpublished part of my portfolio will still keep me busy for the rest of this week and probably well into next week, so you don't have to be completely jealous.

17 days to expiry

17 Days to expiry. To alter the phrase "Weather Permitting" into "Market Permitting" I expect to run this butterfly trade at the maximum, another 9 trading days. At the latest, Friday the week before expiration day, the butterfly will come off.
So maximum, another 9 days of nurturing a butterfly.

The position Greeks still look good -40d, -3G, and 126T. As you can see in the Analyze page the market is currently a bit away from the middle of the butterfly. Still enough  potential in the trade to stick with it. Trade rules don't allow me to loose the already captured profit. We are up 1600USD in the trade, it would be foolish to let that slip through our fingers.

20 days

Sorry for posting so late; it is already Monday morning. I had a great weekend, we had family over from Holland, whom we hadn't seen for quite some years. Very good to see them.

As for our trade. Friday morning I hit an adjustment rule. In this case a very positive adjustment rule, which allows me to take some profits of the table. When I hit 15% profit of the invested capital; I will reduce the trade size with 20%. Ergo I would sell one (1-2-1) butterfly 670-720-770. In this particular case I closed 40% of the trade (2-4-2). This is my discretion as a trader, over seeing the actual market I can deviate from the rules, as long as I don't do this in any extremes.
The market are at a tipping point. It is at the top side of long term downward trend. Based on all the economical news you would say time for a down turn, based on market action (price and volume) I am a bit more bullish. This split which will have the effect that if the real move shows its hand, a lot of traders will jump, making the move potentially a forceful one. Good enough reason to peel 40% of the trade instead of the normal 20%.

21 days

What did we say yesterday about flat days and liking them? :)
Whoa what a day. Perfect for the delta long side of the portfolio.

Horrible for anything else.

The Rut opened weak, and then around 10:15 started to pick up and move all the way from 699 to 720. That will move the ATR up again.

The butterfly which was centered around the 690 strike needed an adjustment. A pity, around 10AM it was up 14% of the invested capital, close to a point were I start taking some profits off the table. Sadly we never go to that point. I always have an order in to take off 20% of my original trade when we hit 15% profit. No takers today.

A couple of hours later the 640-690-740 butterfly needed an adjustment. The trade was still up 215USD. Adjusting the butterfly leaves  you with a rather steep t1-graph on the down side. I did not want to expose myself to that in this market. So I decide to take some chips off the table. I closed the 640-690-740 butterfly for a 215usd profit and am left with the 670-720-770 butterfly. That one is up 1275USD. All in all not a bad result.

Position Greek d22, g7, t238

22 days till expiry

What happened to the Rut that we are tempted to call a day with a 10 point range a rather flat day. All in all an inside day. According to TA, this is a continuation of the trend. Let's hope so, not for the blogged position, but my overall position is still rather short deltas.

Ultimately flat days are what we like.

Position Greeks are still great. d7, g7 and t307. Current profit is 1200USD. Already a nice profit in terms of a percentage. 2% if calculated from the reserved 50K and 6% from the invested capital. We are only 8 days in the trade.

23 days till expiry

Always great when a trade starts paying the bills. The down draft in the market brought us back in the middle of our "landing zone". The original butterfly is back in the middle, the second one is still contributing. 690 is the downside adjustment point for the second butterfly. The overall trade has happy Greeks. D15, G7, T277. Not bad at all.

I added an updated bell curve graph. As you can see, the Rut came back within the 1SD lines.

24 days till expiry

As hoped for and expected the market cam down a bit. This helped both of the Rut Butterfly positions.
Right now no adjustments are necessary. Overall Theta is 245, Delta is 92 nicely within my rules.

As for market analysis I would be surprised if we don't get another small move to the upside. But as usual I am glad my cash flow does not depend on my market opinions.

4th day April 18th 2008

Saturday morning, 65F sitting in the sun in the beautiful home of our host JD. Yesterday I had to leave the office a bit early to catch the 4pm train to the Hamptons.
 
The market has been on a tear the last days. Who expected an expiry of the RUT at 719! I am happy that last week I closed my 720 April shorts for 30cts, keeping them till expiry would not have been a good decision. Always close/buy back your shorts when you have a chance.
With that rule in mind, yesterday I closed quite some short puts in my portfolio. Most of my May puts were between 10ct - 15 ct. With this enormous run up, time to expect a little reprieve.

As for my butterfly trade, from now on we need to refer to them in plural. I bit the bullet Friday morning and put an order in for a second butterfly center around the 720 with longs on the 670 and 770. I probably could have done a 40wide, taking into account the drop in volatility, but the 50wide gave me a little more  room.

Attached you find 3 PNL graphs, one for the original, the new, and the combined position. The original butterfly is due for an adjustment. We are approaching 100delta short and the expiry break evens. Also the theta has become reduced. So if Monday is a bullish day, step one in the adjustment plan needs to be executed. Buy back two 690 and sell two 730.

I am prepared to make this adjustment, but I expect (and hope) the market will turn down a bit after all this expiration action.