Theta Positive - Option Trading

September 23rd

Sometime you come up dry, no inspiration for the blog, no inspiration for new trades.
Risk/reward is not in balance. We move down, we break important levels, but sometime this week Washington signs off on the deal and we are up 40 points. Not a market for a Theta Positive traders.
I wish I had know it in advance, I would have stayed on my Island in the Carribean.

I watch the senate hears this morning. I seems to me that some of those gentleman have really no clue how big this thing is.
The CDS market is like us "playing with option" but then in a system that doesn't hold margins and with only a few issueing counter parties.

In the CDS market it is possible to make good on one end of your spread, while losing on the other end of your spread. Sounds familiar doesn't it. The difference is we option traders, by the rules of the CBOE, are sure the counter parties have the moneys to pay us out when we close the winning side. In the CDS market there is no such thing.

So Company X is in the money for a couple of millions with counter party A and down a couple of 100K with counter party B. Next morning they wake up counter party A is in liquidation. Profit gone and they still hold the IOU for the losing trade to counter party B. If this happens to often company X will fall and here goes the house of cards. Leh could fall, AIG had a lot of naked CDS contracts on the books. To many companies X would have seen their trade go wrong.

Be carefull, no adventures

September 14th

The best way to recognize a "bull market" is to see how the market reacts to bad news. When good news is good news and bad news is good news then you know for sure up is the direction we want.

Last week after the rescue of Freddy and Fannie it seems that way. Now at 8PM EST in market shows a more bearish reaction to the news.

- LEH is bankrupt
- JPM wants to buy WaMu
- BAC might be buying MER

Whoever said that Wall Street people don't work for their money for sure needs to reconsider after a weekend like this.

As always the advice is to plan your action before the market opens. If possible don't trade the first half hour (except for closing call credit spread which have run there coarse). Tomorrow early AM you can check were the futures are, to get a hint how the market will open.

One of the lesson I needed to learn was how to trade hectic markets and how to prep for them.
As Brett Steenbarger writes in his books you cannot expect to think rational when you are under influence of adrenaline. Adrenaline moves your brain power to the flight and fight section and you start acting very instictively.
Two ways to deal with it;
- Prepare all your actions at for hand
- 10' before market open picture how your trade desk will look like with all the alerts firing off. Make a good mental picture and familiarize yourself with the upcoming situation. This will reduce the situation, if any

Be safe, let's hope for moderation in tomorrows market action.

34 days till October Expiry

The market had a little surprise in the last half hour. During the day we were mostly sideways, with the RVX creeping up. In the afternoon the RVX came down and the market ended close to the high of the day.

I pulled the trigger, I am in a 680-720-760 butterfly for 9.60 and I bought 1 extra 780 call to moderate the deltas.

Trader M made a remark on yesterday blog. I am asked this question often.

Let's try to address it. In my experience a Butterfly is not as sensitive to IV moves as the vega makes you initially belief. This has to do with the way IV is skewed over the strikes.
In the graph below you see the IV for all the strikes between 650 and 780.

Two scenarios
1. we go up and IV comes out
If we go up my 720 strikes becomes ITM. The ITM's have a higher IV. So on balance my short strike doesn't profit from the full drop of IV. The 780 doesn't play a big role. I am long vega in the 780, a move up makes it closer to the ATM strike which has a higher IV; again no big loss here. Simular for the 680 stike.

2. we go down and IV runs up
You can work this one out for yourself. :)

Don't get me wrong, I am not saying that butterflies are Vega neutral, they are not. Overtime I have learned that adding a Butterfly to your portfolio because you expect the IV to come down, is not the most effecttive way to 'skim the cat'.

september 10th

Did you recalculate the range for today when the market set its low @ 705 and did you see the market running up till ATR + low of the day (721).
It is not exact science it doesn't work day in day out. The spikes in the histogram above the moving average are proof for that. It is a great tool to set expectation and to be able to assess bigger moves as extraordinary.

The demo butterfly is still in great condition.

Tomorrow we are 35 days out for OCT. Time to started the bigger butterfly. I might wait a couple of days. Next week is expiration week and can have a upward bias. Same is true for the last week of the quarter. I rather have the mid strike a bit higher (if the market gives me that opportunity).

The chart I have today is a more general. Periodically I like to check which SPDR sector are working and which not. In this YTD chart of all the SPDR sector you can see that SPY is down 14% while Consumer Staples is the only one up for the year. XLE, XLF, XLU, XLK are even worse of compared to the SPY.
I don't make any trading desicions on the chart - just one of the ingredients to get a feel for the state of the market.

September 5th (after the close)

I am trying to figure out what news is hitting the wire, after the close the market is jumping up.
XLF, SPY, GS, LEH all up. To moderate my SPY delta I bought some stock in the extended hours. Monday I can swap them for some theta positive credit spreads.

The news must be bond related, my NLY bond funds is also jumping in the after hours.
My best guess is that FNM is being nationalized and that the market risk for those bonds is taken off the table.

If you are new into this style of trading and have a difficult time, believe me you are not the only one.
Trade (very) small, focus on trading right, don't force your results. Your size should be so small that the loses don't matter. Trade correctly and the result will coming.

enjoy the weekend

September 5th

I am sure a lot of people are caught on the wrong side of the market. Break of the 715 level in the futures should have been pretty significant. The bounce of 702 is quite furious.
There were a few tell tail during the day that thing were not as bad as the initially looked.

1. Check the intraday of the RVX. You will see that the RVX turned negative around noon. A definite indication that the market was ready for a swing.
2. check the intraday of the XLF. This crisis is financial but somehow today the financial did not want to give.

In the IWM demo trade I got caught on the wrong side. I really thought it was going to be down from here on. So I made the ultimate adjustment, I sold the 70 calls. When I saw the bounce getting some beef, I bought them back. Not a picture postcard action, some regrets in terms of overtrading, cost $55.

We have two positive events coming up; Exipiration week and quarter end. In combination with the bounce, I will moderate my short deltas a bit.

The graph I will show you today is a simple table. I keep an eye on TRIN, market volume and SPDR sectors. This market view is always on top of the middle monitor. A trin above 1.2 is bearish and below .6 is bullish. At 11.30Am the trin left the bearish area.

September 4th

Today the Russel futures have a range of 26 point, statistically significant since is it is over the MA. At 2.30 PM we bounced of last week low.

Yesterday afternoon I visited my blog on the computer of someone else, I saw that posted graphs were kind of illegible. On my computer the graphs are great, the same as the original. I did not have time to figure out if it was setting related. I hope every one can read the positions I post and the Position Greeks. Please drop me a line, if the graphs need to be changed.

I have two graphs today.
My top monitor and the small IWM demo trade.

The IWM is close to an adjustment point, another sell off and we need to act, for now no worries, we are down the great sum of $9.

The top monitor hold two things a. the movie of the day, b. the EUR/USD future in 15' and in the weekly chart. Plus a daily UWM and TWM. The last two change depending my interest. I have currently both UWM and TWM, one is the inverse of the other one. Sometime you can get so fix in looking at a chart only one way. Looking at the inverse force you to come to the 'same' conclusion, only a double top becomes a double bottom.
The reason I keep a close eye to the EUR/USD is I like big moves in the market to be supported by moves in the currencies. Market down, money flowing out the USD into another currency. I choose the EURO as a proxy. Today we don't see that conformation. The market is down, but money did flow into the USD, although the USD is down compared to the YEN.

The market - currency relationship is not giving any hard trade signals, just a small piece of the puzzle. I force myself to trade mostly indexes and broad-base ETF's so I like to keep an eye on other markets which influence my main trading vehicles.

September 3rd

No comments on the very small IWM demo trade. The graphs tell its own story.

Before we move to my right monitor.
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My right monitor shows clockwise from top left a 15min RVX, a 15' SP500 future, a 15' NDX  future and a 15' DJ future. I like to see moves in my main trading vehicle confirmed by moves in the other big indexes. Over time you learn to see the relationship between moves in the RVX and in the RUT. Sometimes those moves are not in sync with each other, a tell tale to be very cautius. Par example the RUT comes down 10 point in the opening, but you hardly see a spike in the RVX. Time to wait with the adjustment, RUT might just bounce of the S1 or yesterday low.

Waiting till October opens

Back from a great vacation, really enjoyed being away from the screen. No regrets not utilizing the butterfly trade better. Last week the market was en route to nowhere, I am sure the butterfly would have liked that.

We have still 9 days till the October butterfly so I thought to keep you busy with the following two subjects.

1. I have started a IWM butterfly a 5-10-5 lot, costing in total 125.00 plus 20 times commissions. The reason is when someone starts to trade Options or even when you start a new underlying or a new strategy, I think you need to start small. To build up a trading muscle for the underlying or strategy. Quite some people argue that commission are prohibitive for a small butterfly. It is my goal to proof that we will be able to make a decent profit, even with such a small trade. The rules for the small trade will be the same as for the larger sized RUT. Let's see where this adventure takes us.

2. I would like to walk you through my graphs. So every day I will post a graph with TA to show you what I take inconsideration. I am using a computer with 4 monitors. So I can concurrently look a 4 graphs. Some of the graph I take inconsideration are hidden behind another. Today we start with my left monitor.

What you see is;
- the Russel 2000 continuous future. I like to keep an eye on the future instead of the RUT, for the reason that the RUT gaps and the future trades 24/7. Like today the range from 1:45AM low to the high of 10:00AM was already outside my average true range, so continuation above 755 was not likely. If you only look at the RUT you don't see that so easily.
- You see 4 different time frames, 15min, 4hrs, days and weeklies. Looking simultaneously at 4 time frames gives me a better understanding of the LT and Short term trends.
- You see John Person's pivot points. On the top two charts calculated per day, on the daily chart calculated as weekly pivots and on the weekly calculated as monthly pivots.
- And 2 moving averages a 3 period SMA of the close and a 5 period sma of the Highlowclose/3. Read John's book to learn how to trade these.
- Volume

You can argue that my charts are too full of 'crap'; I am the first to agree, but keep in mind I don't day trade. I don't make split second decisions. I am happy for legability to enlarge a subchart or temp. remove a study.
My conclusion from these charts; The weekly chart starts to confirm the downtrend (Xdown of sma's)
The bounce from last week has given the daily chart a temp. uptrend. The R2 of the daily turned this mornings uptrend. While I am writing this we bounce of S2, quite a day.

28th days to September expiry

Just bought myself a relaxing vacation, instead a laptop bound beach chair alternative.

Closed the butterfly (see result page) and closed a directional SPY vertical call credit spread.

The rest of the portfolio is long term, including some spec plays like long TWM and long SKF. As said before those spec play have a married put attached so I know the max risk involved. I have set a crazy GTC order in the system just in case someone wants to double my investment. Give me call if that happens, I might stay a week longer :)

Sorry to leave you all this early in the trading month, but is time to get a tan in Bonaire.

Cu around the 1st of September.