"Tight spreads" (atm, itm, slightly otm) trading
- Thread starter conduit3030
- Start date
Can you post a current spread trade and your rationale?
Sure. Here's TLT on 12/3:
12/03/2014 16:36:44Bought 4 TLT Dec 26 2014 120.0 Call @ 1.6
-654.05
12/03/2014 16:36:44Sold 4 TLT Dec 26 2014 123.0 Call @ 0.5
199.89
See attached pics. TLT moves inversely to yields ie a bond fund. Long term yields go up, TLT goes down. Yields go down, TLT goes up. I do a ~3 week out spread that costs $420 and max profit of $790.
Rationale:
A. TLT is in a long term uptrend (see the weekly in the bottom right chart) and has pulled back as it keeps doing, over and over. I am bullish on yields and thus bearish on TLT over the long term, but for the next 2 weeks I assume the status quo. I.e. the trend continues of yields dropping.
B. Should the Fed announce rate hikes sooner than expected (ie in the next 2 weeks they announce say early 2015 is their target) I am protected from this black-swan like event. I'm spread the most I can lose is $400. This position is definitely robust.
C. Assume the current trend of good news in the US economy continues --> rates are still dropping regardless based on the recent trend. Assume this continues for the next 3 weeks. If bad news comes out --> rates likely drop -- TLT goes up. If inflation fears rise --> rates up, TLT drops, I lose. This is unlikely given inflation continues to remain low, why would that change over the next 3 weeks?
D. I must be right approximately 35% of the time on this trade, a little less actually as it could be in the middle of the 120/123 strikes and I make money (or at least don't get max loss). I believe I am right about this uptrend continuing 40-50%+ of the time, and believe in the next 2 weeks price will rebound as it has continually done. Thus, the risk reward vs. probability structure here indicates profitability.
E. The price of TLT however must rise given the spread structure; if it remains where it is I'm close to max loss. I accept this risk for the reasons given above and thus can justify putting on the TLT debit spread here.
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Future choices: since it's a debit spread, I have the option to cover the short call position and be long outrights. I will likely have to roll this position as there are only 3 weeks to expiry, should I choose to de-leg. If the price remains strong and near 123 as it is today on 12/9, this is a definite possibility. Thus I'll be left long TLT outright 120 calls should I decide there's more momentum to the underlying. This option to de-leg adds further value to the trade.
Attachments
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GLD Call credit spread 11/24/2014
11/24/2014 17:50:45Bought 4 GLD Dec 5 2014 118.0 Call @ 0.61
-244.10
https://invest.ameritrade.com/cgi-bin/apps/u/History#
11/24/2014 17:50:45Sold 4 GLD Dec 5 2014 115.0 Call @ 1.66
649.93
GLD is trending down and has pulled back about 50% from its recent swing low. Short 115 call, protect with 118 call. Rationale:
A. While I want to be bullish on SLV/GLD due to it tending to go up when recessions hit (and we're in the sixth year of the business cycle and prone to downside risk at this point), it's more important not to fight the trend. GLD remains weak and it's more likely to re-test the lows over the coming month than to make some rabid rallly back up. Thus, I'm only playing the downtrend.
B. Should gold go up, I am long the 118 call and can close out the short position if I absolutely feel that the trend has changed, but that's a rare de-leg here.
C. Risking $700ish to make $450ish, factoring I could be partly wrong and still do okay I need to be right about 60% of the time. Over the next 1.5 weeks I believe the downtrend continues or at least gold is flat during this period, 60-70% of the time. Thus, there is a rather slim edge here if that assumption is correct.
Note: I won't go much lower RR than this for my trades because it's very difficult to gauge probabilities of being ITM when you have to be right 80% or more of the time. The edge just seems very small in those scenarios.
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End: See attached. It was a very close call here to at least not having max profit. Gold ended around $114.40 and thus made $420ish. However in the future I would make the spread a bit looser and try to up my risk reward, shooting for more like $500 on $700 risked seems a bit better. That would mean about a 114 strike instead of 115 short strike.
11/24/2014 17:50:45Bought 4 GLD Dec 5 2014 118.0 Call @ 0.61
-244.10
https://invest.ameritrade.com/cgi-bin/apps/u/History#
11/24/2014 17:50:45Sold 4 GLD Dec 5 2014 115.0 Call @ 1.66
649.93
GLD is trending down and has pulled back about 50% from its recent swing low. Short 115 call, protect with 118 call. Rationale:
A. While I want to be bullish on SLV/GLD due to it tending to go up when recessions hit (and we're in the sixth year of the business cycle and prone to downside risk at this point), it's more important not to fight the trend. GLD remains weak and it's more likely to re-test the lows over the coming month than to make some rabid rallly back up. Thus, I'm only playing the downtrend.
B. Should gold go up, I am long the 118 call and can close out the short position if I absolutely feel that the trend has changed, but that's a rare de-leg here.
C. Risking $700ish to make $450ish, factoring I could be partly wrong and still do okay I need to be right about 60% of the time. Over the next 1.5 weeks I believe the downtrend continues or at least gold is flat during this period, 60-70% of the time. Thus, there is a rather slim edge here if that assumption is correct.
Note: I won't go much lower RR than this for my trades because it's very difficult to gauge probabilities of being ITM when you have to be right 80% or more of the time. The edge just seems very small in those scenarios.
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End: See attached. It was a very close call here to at least not having max profit. Gold ended around $114.40 and thus made $420ish. However in the future I would make the spread a bit looser and try to up my risk reward, shooting for more like $500 on $700 risked seems a bit better. That would mean about a 114 strike instead of 115 short strike.
Attachments
Current Trade: FXI
12/04/2014 17:03:17Sold 7 FXI Dec 12 2014 41.0 Call @ 0.92
625.36
12/04/2014 17:03:17Bought 7 FXI Dec 12 2014 42.0 Call @ 0.51
-357.17
Short the 41 call, long 42 call for around an ATM credit spread. China has been moving differently than GLD, TLT and other stocks shown; it's not trending.
Rationale:
A. FXI tends to be a whippy, non-trending stock over the past few years. It makes a new high, then gaps out to the downside. Makes a new low, Gaps up and so on. For the next 1.5 weeks there's no reason to assume that will change. So fades of the extremes are the name of the game for FXI.
B. IV is about 80 percentile and it looks like a decent price for a spread that's almost ITM. The RR is about .8:1(300 gain vs 400 loss) and I need to be right net around 55% of the time here. That seems reasonable given FXI's tendency to drop out after a sharp rally. It's particularly notable that it pops, doesn't move much and then gaps in either direction. In this case it's probably 65/35 that the move reverses (as it has been doing) and FXI drops out over the next week. If these assumptions are correct, the trade will be profitable
12/04/2014 17:03:17Sold 7 FXI Dec 12 2014 41.0 Call @ 0.92
625.36
12/04/2014 17:03:17Bought 7 FXI Dec 12 2014 42.0 Call @ 0.51
-357.17
Short the 41 call, long 42 call for around an ATM credit spread. China has been moving differently than GLD, TLT and other stocks shown; it's not trending.
Rationale:
A. FXI tends to be a whippy, non-trending stock over the past few years. It makes a new high, then gaps out to the downside. Makes a new low, Gaps up and so on. For the next 1.5 weeks there's no reason to assume that will change. So fades of the extremes are the name of the game for FXI.
B. IV is about 80 percentile and it looks like a decent price for a spread that's almost ITM. The RR is about .8:1(300 gain vs 400 loss) and I need to be right net around 55% of the time here. That seems reasonable given FXI's tendency to drop out after a sharp rally. It's particularly notable that it pops, doesn't move much and then gaps in either direction. In this case it's probably 65/35 that the move reverses (as it has been doing) and FXI drops out over the next week. If these assumptions are correct, the trade will be profitable
Attachments
VIX long calls - 12/8
12/08/2014 20:16:11Bought 4 VIX Dec 17 2014 14.0 Call @ 1.3
Bought the 14 calls on VIX after it gapped up to about 14.4. Poorly structured trade for multiple reasons...need to improve on VIX trades as I'm net down on them over time.
Rationale:
A. VIX is spiking intraday despite little bad news on the economy - this is a sign of general market weakness and if mediocre/poor news follows after the recent run-up, there could be follow-through.
No. This was somewhat of an impulsive trade. Yes you can see the VIX tends to follow this pattern of spiking with follow through near new market highs, but you can also see that it fails most of the time. Buying the 14 calls 8 days out means the price is likely (probably around 2/3 the time) to end up below the strikes. This means you need to capture at least 2:1 on the trade to break even. In other words, you're buying at the likely high here (2/3 the time).
B. IV on the vix is low.
Yes. This is one advantage here. Ironically as the vix gets higher, IV gets higher usually, inflating call prices before it typically drops out sharply. So you're much better buying calls at 14 than 17, even though around 17 your probability of success might go up.
Note also that the VIX trade has reduced options-on-options value as the cost of adding to the position is dramatically higher due to IV rising.
C. Buy calls, don't spread.
Yes. VIX is a rare situation to avoid spreading here as the prices above (say 18-20) are very cheaply priced and thus you're not getting much by selling the calls above. If you're going to make this trade, stick to the outrights and get ready for a higher RR (but lower probability) trade.
D. Buy the 14 x, not the 12 x
Yes. Similar to (C), this is a lower probability trade and there's little sense in trying to change the break-even price. Just acknowledge it's a lower prob trade and if the scenario justifies that trade, then take it.
E. Sold out of 2 calls almost immediately - too much risk was put on for the trade given my parameters.
Yes...risking $550 is above what you want to risk, particularly on a lower probability trade.
F. Sold 1 call for about $200 profit at around 18.3 on 12/10
No. See C and D above. To make this trade profitable, you have to commit to it for a bigger move.
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Currently long 1 call on the VIX @ 14 strike, 8 days out
12/08/2014 20:16:11Bought 4 VIX Dec 17 2014 14.0 Call @ 1.3
Bought the 14 calls on VIX after it gapped up to about 14.4. Poorly structured trade for multiple reasons...need to improve on VIX trades as I'm net down on them over time.
Rationale:
A. VIX is spiking intraday despite little bad news on the economy - this is a sign of general market weakness and if mediocre/poor news follows after the recent run-up, there could be follow-through.
No. This was somewhat of an impulsive trade. Yes you can see the VIX tends to follow this pattern of spiking with follow through near new market highs, but you can also see that it fails most of the time. Buying the 14 calls 8 days out means the price is likely (probably around 2/3 the time) to end up below the strikes. This means you need to capture at least 2:1 on the trade to break even. In other words, you're buying at the likely high here (2/3 the time).
B. IV on the vix is low.
Yes. This is one advantage here. Ironically as the vix gets higher, IV gets higher usually, inflating call prices before it typically drops out sharply. So you're much better buying calls at 14 than 17, even though around 17 your probability of success might go up.
Note also that the VIX trade has reduced options-on-options value as the cost of adding to the position is dramatically higher due to IV rising.
C. Buy calls, don't spread.
Yes. VIX is a rare situation to avoid spreading here as the prices above (say 18-20) are very cheaply priced and thus you're not getting much by selling the calls above. If you're going to make this trade, stick to the outrights and get ready for a higher RR (but lower probability) trade.
D. Buy the 14 x, not the 12 x
Yes. Similar to (C), this is a lower probability trade and there's little sense in trying to change the break-even price. Just acknowledge it's a lower prob trade and if the scenario justifies that trade, then take it.
E. Sold out of 2 calls almost immediately - too much risk was put on for the trade given my parameters.
Yes...risking $550 is above what you want to risk, particularly on a lower probability trade.
F. Sold 1 call for about $200 profit at around 18.3 on 12/10
No. See C and D above. To make this trade profitable, you have to commit to it for a bigger move.
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Currently long 1 call on the VIX @ 14 strike, 8 days out
Attachments
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Regarding this VIX trade and prior VIX trades.
I really need to learn a lot more about trading the VIX, as it's very specialized and the options pricing is different from that of other instruments. (Help in this regard would be appreciated). Nevertheless, I still trade it for several reasons.
1. Opportunity. The structure of options on the VIX is far from fitting a black scholes/normal bell curve. Of course, other traders know this too and probably account for it somewhat in the pricing (for instance the value of the otm strikes I imagine might be more valuable in the short term options b/c it can spike up so fast). It's the perfect 2-fold black swan catching security - it doesn't move at all like a bell curve would imply and it also does very well in black swan events by its own.
2. Movement pattern. Most the days VIX pricing is choppy and trendless. On these days, the VIX is outrageously hard to trade. However, on the days when it trends, it trends very clearly and predictably (it's like something out of the 1970's moves). This has value IF you can identify the likely trend days from the normal days.
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I have prior lost on VIX net-net because the market has been grinding up, in a nutshell. This results in a. lower pricing and fewer spikes and b. need very exact timing to get the full value of the calls b/c the vix spikes down from its highs so fast (at least in the last 2-3 years). So net net it's been a very difficult trade. Some thoughts on how to improve VIX trades.
1. Identify the days when fundamental news is making the markets move, ie important days.
2. If the VIX is at the lower range where it tends to sit the past few years, start off with intraday calls (but no spreading as that's not the point of this trade its not a higher prob trade). If the VIX moves in your direction (namely up) substantially after the entry point, there's more likely to be follow-through.
3. If you commit to the trade past an intraday perspective, you MUST a. hold through for a larger move and b. acknowledge and don't fret over the fact it's going to fail 50%+ of the time. Again, it's a lower probability trade no matter what way you spin it.
I really need to learn a lot more about trading the VIX, as it's very specialized and the options pricing is different from that of other instruments. (Help in this regard would be appreciated). Nevertheless, I still trade it for several reasons.
1. Opportunity. The structure of options on the VIX is far from fitting a black scholes/normal bell curve. Of course, other traders know this too and probably account for it somewhat in the pricing (for instance the value of the otm strikes I imagine might be more valuable in the short term options b/c it can spike up so fast). It's the perfect 2-fold black swan catching security - it doesn't move at all like a bell curve would imply and it also does very well in black swan events by its own.
2. Movement pattern. Most the days VIX pricing is choppy and trendless. On these days, the VIX is outrageously hard to trade. However, on the days when it trends, it trends very clearly and predictably (it's like something out of the 1970's moves). This has value IF you can identify the likely trend days from the normal days.
---------------------------------
I have prior lost on VIX net-net because the market has been grinding up, in a nutshell. This results in a. lower pricing and fewer spikes and b. need very exact timing to get the full value of the calls b/c the vix spikes down from its highs so fast (at least in the last 2-3 years). So net net it's been a very difficult trade. Some thoughts on how to improve VIX trades.
1. Identify the days when fundamental news is making the markets move, ie important days.
2. If the VIX is at the lower range where it tends to sit the past few years, start off with intraday calls (but no spreading as that's not the point of this trade its not a higher prob trade). If the VIX moves in your direction (namely up) substantially after the entry point, there's more likely to be follow-through.
3. If you commit to the trade past an intraday perspective, you MUST a. hold through for a larger move and b. acknowledge and don't fret over the fact it's going to fail 50%+ of the time. Again, it's a lower probability trade no matter what way you spin it.
Here's where I currently stand, see attached image. Would appreciate any input on the greeks or the way I'm looking at my net portfolio, as this has been a weak point in performance in the past.
1. First off, I am almost delta neutral according to greeks here. This is outrageously misleading. I am long TLT which should have the inverse delta to stock market exposure (not quite but definitely negatively correlated with teh market right now). I am also long VIX, same thing here so I'm really guessing my deltas are about -100 to -150 right now. This has some implications:
A. We are still in a lively and likely hard to break uptrend. Not only are we likely to see a rebound over the next few days given the past 2 years' action, we are also unlikely to see even the 10% drop we had several months ago.
B. Given this, I need to watch my downside exposure. I don't care for being delta neutral for the sake of being delta neutral, but I am in a riskier position right now should the market do a sustained rally (note that I'd be even more risked right now had I held onto the 4 vix calls rather than the 1 I currently have, substantially so).
C. However, I want to have some exposure to a black swan negative event occuring. I have several choices here:
a. De-leg the TLT position to be outright long calls
b. Roll the VIX position before expiration
I choose (b) as TLT is going well right now and seems the higher probability play as it currently is structured. So I'll be rolling the VIX early next week, most likely. (But I also need to add to it should the situation sour on the market as my current exposure is very small)
C. I am substantially long vega with my VIX position. I'm okay with this currently but will note that there's a good likelihood the VIX drops back down (and maybe sits around 10-13 as it has consistently done for years).
D. Theta - While I don't believe in "income" and treating theta as "income" (ex. I'm making $3 per day in "income" lol....) it is good to know I'm not bleeding premium.
Summary: Roll the VIX early next week, keep positions light until we see what the market does for the next few days ie one more spread at most.
1. First off, I am almost delta neutral according to greeks here. This is outrageously misleading. I am long TLT which should have the inverse delta to stock market exposure (not quite but definitely negatively correlated with teh market right now). I am also long VIX, same thing here so I'm really guessing my deltas are about -100 to -150 right now. This has some implications:
A. We are still in a lively and likely hard to break uptrend. Not only are we likely to see a rebound over the next few days given the past 2 years' action, we are also unlikely to see even the 10% drop we had several months ago.
B. Given this, I need to watch my downside exposure. I don't care for being delta neutral for the sake of being delta neutral, but I am in a riskier position right now should the market do a sustained rally (note that I'd be even more risked right now had I held onto the 4 vix calls rather than the 1 I currently have, substantially so).
C. However, I want to have some exposure to a black swan negative event occuring. I have several choices here:
a. De-leg the TLT position to be outright long calls
b. Roll the VIX position before expiration
I choose (b) as TLT is going well right now and seems the higher probability play as it currently is structured. So I'll be rolling the VIX early next week, most likely. (But I also need to add to it should the situation sour on the market as my current exposure is very small)
C. I am substantially long vega with my VIX position. I'm okay with this currently but will note that there's a good likelihood the VIX drops back down (and maybe sits around 10-13 as it has consistently done for years).
D. Theta - While I don't believe in "income" and treating theta as "income" (ex. I'm making $3 per day in "income" lol....) it is good to know I'm not bleeding premium.
Summary: Roll the VIX early next week, keep positions light until we see what the market does for the next few days ie one more spread at most.
Attachments
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GG trade - 12/8/2014, potentially delegging to puts tomorrow.
12/08/2014 15:59:40Bought 4 GG Dec 20 2014 20.5 Put @ 1.43
-586.05
12/08/2014 15:59:40Sold 4 GG Dec 20 2014 18.5 Put @ 0.33
131.89
Entered this trade after a pretty standard pullback in the downtrend. On the 8th, price gapped down a bit and continued to push further, providing a potential minor catalyst for entry.
Rationale:
1. IV is very high and it looks like I'm getting decent premium on the ~atm strikes.
Check. You are risking $450 to make $350 whereas in a low vol environment this is looking more like $250/300 on $450 risked. This is a significant difference here. Given that the price is in a downtrend it does represent a "bargain" since trends tend to continue. In other words, the IV is mispriced.
2. Buy the 20.5, but make sure to go below the current price for the 18.5 sell.
Check. Take advantage of the downtrend's momentum and give yourself a better RR than a typical credit spread. Note also that buying the puts is the correct move, rather than selling calls for de-leg potential (see below).
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Tomorrow (12/12) - should GG continue to show weakness despite the rally in it the other day, deleg 2 of the 4 puts (sell 2 puts leaving you long 4 puts, short 2 puts). This gives more exposure to the downside as we're seeing it's more likely to hit the low over the coming weeks.
The only issue I have with this decision is that GG doesn't seem to correlate much with the SPY (which kind of makes sense). So tomorrow and the next few days if there's a selloff....that doesn't mean GG is much more likely to sell off w/ it.
However I still am planning to deleg half the position should there be more weakness tomorrow.
12/08/2014 15:59:40Bought 4 GG Dec 20 2014 20.5 Put @ 1.43
-586.05
12/08/2014 15:59:40Sold 4 GG Dec 20 2014 18.5 Put @ 0.33
131.89
Entered this trade after a pretty standard pullback in the downtrend. On the 8th, price gapped down a bit and continued to push further, providing a potential minor catalyst for entry.
Rationale:
1. IV is very high and it looks like I'm getting decent premium on the ~atm strikes.
Check. You are risking $450 to make $350 whereas in a low vol environment this is looking more like $250/300 on $450 risked. This is a significant difference here. Given that the price is in a downtrend it does represent a "bargain" since trends tend to continue. In other words, the IV is mispriced.
2. Buy the 20.5, but make sure to go below the current price for the 18.5 sell.
Check. Take advantage of the downtrend's momentum and give yourself a better RR than a typical credit spread. Note also that buying the puts is the correct move, rather than selling calls for de-leg potential (see below).
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Tomorrow (12/12) - should GG continue to show weakness despite the rally in it the other day, deleg 2 of the 4 puts (sell 2 puts leaving you long 4 puts, short 2 puts). This gives more exposure to the downside as we're seeing it's more likely to hit the low over the coming weeks.
The only issue I have with this decision is that GG doesn't seem to correlate much with the SPY (which kind of makes sense). So tomorrow and the next few days if there's a selloff....that doesn't mean GG is much more likely to sell off w/ it.
However I still am planning to deleg half the position should there be more weakness tomorrow.
Attachments
TWTR Chronology
06/23/2014 14:54:43Bought 1 TWTR Sep 20 2014 36.0 Call @ 5.7
-578.73
Overall I'm about flat on TWTR despite several spreads/adds to it as it was grinding up (currently grinding down lol). Entry trade rationale:
1. TWTR could emulate FB post-IPO. It stages a sharp rally, drops out due to uncertainty about its prospects, then can rally back to the highs and potentially go further.
Meh. The thing is TWTR has a different business structure from FB, it's less established and less dominant in the market. This has come back to bite my trades as many negative catalysts have centered around revenue concerns. So a miscalculation here.
2. TWTR has the potential to be explosive to the upside, offering additional adds and an excellent RR potential for calls.
Check. TWTR has already shown it can move faster up even than it can move down. This offers solid RR potential should TWTR start to gain momentum.
3. IV is low, and can climb.
Check. TWTR's explosive nature means IV can climb even to the upside. This will benefit the call enormously should the price begin to gain momentum.
4. Buy the itm calls.
Check. Should the move fizzle out, which it will a good percentage of the time, you have at least a little buffer from max loss.
5. 90 days out
Check. This is a good way between too far out (and making less if the price spikes rapidly due to gamma) and having the ability to roll (should you choose to) before theta eats the entire position.
Overall it's a solid entry. The potential for a higher RR trade here is high, and equally important the add potential is high.
06/23/2014 14:54:43Bought 1 TWTR Sep 20 2014 36.0 Call @ 5.7
-578.73
Overall I'm about flat on TWTR despite several spreads/adds to it as it was grinding up (currently grinding down lol). Entry trade rationale:
1. TWTR could emulate FB post-IPO. It stages a sharp rally, drops out due to uncertainty about its prospects, then can rally back to the highs and potentially go further.
Meh. The thing is TWTR has a different business structure from FB, it's less established and less dominant in the market. This has come back to bite my trades as many negative catalysts have centered around revenue concerns. So a miscalculation here.
2. TWTR has the potential to be explosive to the upside, offering additional adds and an excellent RR potential for calls.
Check. TWTR has already shown it can move faster up even than it can move down. This offers solid RR potential should TWTR start to gain momentum.
3. IV is low, and can climb.
Check. TWTR's explosive nature means IV can climb even to the upside. This will benefit the call enormously should the price begin to gain momentum.
4. Buy the itm calls.
Check. Should the move fizzle out, which it will a good percentage of the time, you have at least a little buffer from max loss.
5. 90 days out
Check. This is a good way between too far out (and making less if the price spikes rapidly due to gamma) and having the ability to roll (should you choose to) before theta eats the entire position.
Overall it's a solid entry. The potential for a higher RR trade here is high, and equally important the add potential is high.
