Quote from valpak:
I think market is ready to pop - which directions is anyone's guess. Fundamentals suggest that it will break on upside. Better than expected economic data like Initial Claim today can fuel the move.
Interesting strategy but it's hard to believe that it will work in volatile market. Following can be inferred from the strategy.
(1) Your max loss on one side is equal to the cost of position. Do you adjust in such a case or will take the loss considering good risk-reward.
(2) On the other side, you can make up to 1000 depending upon how much in the money your naked hedge is. You have breathing room of 10 pts for the cycle. How do you adjust in case your naked hedge goes in the money more than 10 pts.
Thanks for the great questions as looking at the market right now I'm facing the delimmas you've mentioned in your two questions. So far volatility has not been too nasty on how well this strategy has worked because typically what you get is giant moves up and down but usually end up in the middle. By this I mean we had days where RUT is down 30 pts and then up 50 pts then down 30 and then down another 30 and then up 10 lets say. So whats actually occurred is lets say to start from RUT 400 you had the following: down to 370, up to 420, down to 390, down to 360, and up to 370. So you had 5 trading days where the market appeared to be volatile and going nuts with all the CNBC people panicing but if you step back and look, the end result was a tiny 30 pt drop for the week from 400 to 370.
Now the past 3 months were real nasty and did generate a sizeable loss as the market just kept falling but the good thing is that since these positions are put on with about 1.5 to 2 months before expiration so usually you do end up getting a nice bounce back. As I mentioned before the paper trading option expirations in October and November generated a total loss of 17% as the market was plunging. But the good thing is that at the sametime I was picking up cheap call positions so that when the market did bounce up the december expiration positions generated a whopping 20% return in one month. So again this was all on paper, now I am trading with real money so there are other factors associated with trading with a live account.
Now to get bact to your questions, I'll use an example of the current dillema I am facing. Lets take a look at the following two positions:
bot jan 460/450 put/short jan 45 iwm put@ cost of $47
bot jan 400/410 call/short jan 41 iwm call@ cost of $117.34
Right now it seems like market is going to go above 500 and most likely the 460/450 put spread is going to expire worthless, so what I can do is right now go ahead and just sell the 460/450 put spread which right now is trading for about $200 and leave the 45 iwm put open or for extra protection I can choose to turn this into a credit spread. For instance, I can buy the 39 jan iwm put so we would have the following:
Original cost = $47
sell jan 460/450 put = $200
buy jan 39 iwm put = $10
Result would be a 45/39 iwm credit spread with a max gain of (200-10-47) = $143. So if the market never comes back to 45 then fine I make a $143 on a losing position. IF the market comes back down to 45 then great because all my other positions will be in AWESOME shape.
Now for
bot jan 400/410 call/short jan 41 iwm call@ cost of $117.34
I have a few choices on what to do with this.
- If I decide to close the position today, as of right now I would get about $115 with commissions taken out so it would be a small loss.
- On the other hand I can simply sell my 400/410 rut call for about $950 right now and then go out and purchase the 500/510 call spread which would result in the following:
Original cost = 117.34
sell 400/410 = 950
buy 500/510 = 450
resulting in the following:
bot 500/510 jan call/short jan iwm 41 call @cost of -382.66 (meaning I received money for this) so if the RUT closes at 500 for instance I would lose $900 on the short IWM and my 500/510 would expire worthless so I'd have a net loss of 900-382.66 = 517.34 which sucks BUT again I have other call positions that would benefit from RUT closing at 500 and which would make more money than the loss on this. On the other hand if it keeps going higher then the 500/510 position gives you some added protection.
Finally the third option is to do the following:
sell the 400/410 call and buy another in the money spread, for instance 450/460. Here I'm basically moving up my call spread and locking in a small gain. Here I could sell the 400/410 for about 950 and buy the 450/460 for about $800 and pocket the $150 which gives me a little bit more protection to the upside.
Sorry about the long response, I'm literally trying to decide which of these three to do. The wrinkle here is that this trading looks like smoke and mirrors to me because of the low volume so if we get another small pullback to the 460-470 range next week I could close out everything for a nice gain, but unfortunately the market has a nasty habit of not doing what I want!
So I've got to base my decision on what I'm seeing and right now what I am seeing is a short term support level at 460 and resistance at 493 (50 day EMA). The EMA is falling and the support trend line is increasing which means the market will breakout of one of these levels fairly soon and it seems like the break will be to the upside so I've got to base my decision on the upside break.....
