Ratio Calendar Combo on WFMI

J

JJacksET4

I did the following today using WFMI (it was around 35.70 at the time):

Buy (4) Aug 37 Call - Filled at 267
Buy (4) Aug 35 Put - Filled at 301

Sell (2) May 37 Call -Filled at 149
Sell (2) May 35 Put -Filled at 175

+ 1 extra put - Aug 30 - Filled at 125

Total Long Strangles = $2272
Total Short Strangles = $648
+$125 (extra put)

Total cost = $1749.

The idea here is to hope for IV increase as earnings approaches which is near May expiration. Of course, the May IVs would rise, but as they become very low in time, they might drop in value anyway.

I have attached a picture of a chart from www.ivolatility.com, showing this stock tends to have IV increases as earnings approach. I highlighted what has happened in previous leadups to earnings. Note that IV also tends to fall quite a bit after earnings, so it would be wise to close the position before earnings, unless one wants to gamble.

I have no real opinion on this stock, and thus wanted to keep it more neutral and added the extra long put. So basically it could profit from a large move in either direction, or from an IV increase (like a straddle/strangle, but with less risk if there was no price movement).

I will track this and post some updates when anything important happens.

JJacksET4
 
Just wanted to share one more thing.

I wanted to show everyone a program I made that uses the BS formula and basically is an options P/L calculator. What I like about it is that it's under my control, so I have some features that are hard to find elsewhere.

For example, I can enter the number of days for Expiration date, instead of having to choose a month - that can come in handy sometimes (Month is also available in the drop-downs). Also, I can choose the IV for each leg for the original cost and for the cost at the time to check the P/L. I also have 6 legs, but it wouldn't take much work for me to allow 8 or more legs.

Of course, it is far, far, from commercial and I have no intent on bringing it to that level. It doesn't even have an option to account for dividends or risk free rate yet! (of course, those would be easy to add).

I also added a chart recently after before just having to test using different numbers.

The attachment picture on this reply shows what my program looks like and I have entered the basic data for the Ratio Calendar Combo that I did on WFMI.

As you can see, the profit is shown as minus $33.61 with 10 days til first expiry and the stock at $36. This is using the IV entered as 36 and you see the P/L chart for the trade as well.

In the next reply, I will attach a picture that shows this same position at the same time and same stock price, but if IV increased.

JJacksET4
 

Attachments

OK,

Here is the picture of the same position if IV increased to 42 for all legs - again, I can set the IV for each leg separately if wanted.

You can see the chart makes the position look better now:)

Thanks,

JJacksET4
 

Attachments

Quote from JJacksET4:
----I did the following today using WFMI.....
----it could profit from a large move in either direction, or from an IV increase (like a straddle/strangle, but with less risk if there was no price movement).
More...
For now, the net position appears to be "long" 2 August strangles and the August put. You're gonna need price movement before time and volatility decay begin to hurt you. :(
 
Quote from nazzdack:

For now, the net position appears to be "long" 2 August strangles and the August put. You're gonna need price movement before time and volatility decay begin to hurt you. :(
More...

nazzdack,

Thanks for the comments, but are you sure about that? The idea here is that you buy strangles and finance part of them by selling
fewer, shorter term strangles.

If there is no price movement and those strangles expire worthless or are way down in value near expiration, the gains on the short positions should offset at least most of the losses on the strangles, assuming no large IV drop. Even though there are 4 long strangles here as opposed to buying 2 in your example, in that situation, there is nothing to reduce the loss or even keep it at 0.

I think what you are saying is that the dollar amount of the loss on the 4 strangles would be as much as the dollar gain on the short strangles plus an extra amount that would be about equal to if the position was just 2 strangles in the first place. I'm not sure thats quite right or not (I'm not at my main PC where I could verify any exact values)

Ignoring the extra long put that I bought for a moment, and assuming a constant IV:

If I look at a hypotethical stock XYZ - priced at 37.

Longer (5/6 month) strangles (35/40) are $1000
Shorter (2 month) strangles are $500

If you buy 4 and sell 2, the cost would be $3000 - The same cost as buying 3 strangles outright.

Now, after 2 months, if the stock is still at 37, the prices could be something like:
Long strangles $750
Short stangles worthless

In this case, the +4/-2 position would be a breakeven, but buying strangles outright would be a loss, whether it was 2 or 3 that the person bought - 2 strangles would have cost $2000, but
now be worth $1500.

However, if instead the prices were:
Long strangles $500
Short stangles worthless

Now, the +4/-2 position would be a loss of $1000, and that is also true of buying 2 strangles like in your example, but it seems a bit much that the 5/6 month strangles would lose half of their value in the first 2 months! For example, there would still be 3/4 months left on these and in the original case, the strangles with 2 months cost $500.

Usually with a trade like this I find that the straddles/strangles with 1 and a half or 2 months to go are around 50% of the cost of the ones with 5 or 6 months to go.

In any event, I seem to have had better luck with this sort of trade then I've had with just plain straddle/strangle positions, as the shorts do seem to help even out the time decay of the longs.

Thanks,

JJacksET4
 
Quote from JJacksET4:

Thanks for the comments, but are you sure about that? The idea here is that you buy strangles and finance part of them by s selling fewer, shorter term strangles.

If there is no price movement and those strangles expire worthless or are way down in value near expiration, the gains on the short positions should offset at least most of the losses on the strangles, assuming no large IV drop. Even though there are 4 long strangles here as opposed to buying 2 in your example, in that situation, there is nothing to reduce the loss or even keep it at 0.

I think what you are saying is that the dollar amount of the loss on the 4 strangles would be as much as the dollar gain on the short strangles plus an extra amount that would be about equal to if the position was just 2 strangles in the first place. I'm not sure thats quite right or not (I'm not at my main PC where I could verify any exact values)
More...
The short answer is in your 2nd sentence. You finance part of the cost of the long strangle with sale of short strangles. Or more explicitly, you finance some, possiblyall of the time decay.

The not so short answer is that the two strangles have similar but disparate rates of decay. If you assume them to be equal, then you're net long 2 strangles (ignoring the solitary long put for downside protection).

Right now, b/t the strikes you have a decay problem (long 9, short 4 contracts). A month from now, May options will really start to decay and that problem will reverse and you'll go positive (b/t the strikes). At near term expiration, you'll have a net profit b/t the strikes (technically, a bit wider than the 35-37 range).

I'd rephrase Nazzdack's statement to: You're going to need price movement and/or IV increase now to offset the decay until decay really kicks in a month or so from now.

The above only considers time. Without getting into analysis of the delta/decay etc. of the components, you're going to have issues 3-5 pts outside of the strangle strikes before the extra long legs kick in. How much of an issue will depend on how much WFMI moves and when it moves and what the IV is at that point in time.

One word of caution. If WFMI's May earnings are before May expiration, you may run into IV expansion problems on your short legs, changing the picture, possibly pinning you to an underwater position. The EA may or may not allevaite that since you have the aforemntioned loss areas and little time to wait it out. Later months will also expand but nowhere near the front month in which earnings occur. If earnings is outside May expiration, no problem.
 
Quote from spindr0:


I'd rephrase Nazzdack's statement to: You're going to need price movement and/or IV increase now to offset the decay until decay really kicks in a month or so from now.
More...

Yeah, I'll agree with the statement put that way.


One word of caution. If WFMI's May earnings are before May expiration, you may run into IV expansion problems on your short legs, changing the picture, possibly pinning you to an underwater position. The EA may or may not allevaite that since you have the aforemntioned loss areas and little time to wait it out. Later months will also expand but nowhere near the front month in which earnings occur. If earnings is outside May expiration, no problem.
More...

This is probably the main concern with the given trade - I think earnings are scheduled for just before the expiraton. I agree that it could become an issue. I would have preferred their earnings be just after expiration, but it can be very hard to find a trade where you like all parameters of course.

JJacksET4
 
Update - Apr 9th close - WFMI @ 38.80

WFMI has moved up, but not dramatically. I am updating this
mostly because 2 weeks has passed. Next update planned for either an important move or in 2 more weeks. Note there are still
6 full weeks til May expiration, so plenty of time still left.

Long (4) Aug 37 Call - Value at 430
Long (4) Aug 35 Put - Value at 192

Short (2) May 37 Call - Value at 310
Short (2) May 35 Put -Value at 78

+ Long 1 extra put - Aug 30 - Value at 73

Total Long Strangles = $2488
Total Short Strangles = $776
+$73 (extra put)

Total value = $1785.


JJacksET4
 
Update - Apr 23rd

I decided to close the WFMI position today.
The stock was a bit below $40 at the time of closing.
The option prices changed a bit more by the end of day.

Long (4) Aug 37 Call - Closed at 510
Long (4) Aug 35 Put - Closed at 164

Short (2) May 37 Call - Closed at 376
Short (2) May 35 Put - Closed at 49

+ Long 1 extra put - Aug 30 - Closed at 60

Total Long Strangles = $2696
Total Short Strangles = $850
+$60 (extra put)

Credit for close = $1906.

There was still plenty of time until May expiration, but I wanted to close this to lock in profits and look at other trades.

JJacksET4
 
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