"Tight spreads" (atm, itm, slightly otm) trading

[conduit3030]

TWTR spread (add) - 6/26


06/26/2014 16:55:05Sold 2 TWTR Jul 19 2014 45.0 Call @ 0.47

93.94
https://invest.ameritrade.com/cgi-bin/apps/u/History#

06/26/2014 16:55:05Bought 2 TWTR Jul 19 2014 40.0 Call @ 2.22

-455.00

Spread w/ about a 2:1 RR 40/45 calls to add to a working position in TWTR. Rationale:

1. TWTR continues to grind up at a steady pace.

Check.

2. Spread, don't buy more outrights.

Check. The reasoning is that w/ the 40/45 calls you're getting a cheaper price but a good RR. I plan to cash out on the add should the price go up anyways ---> may as well spread and make it cheaper.

3. 25 days out

Check. Given TWTR's current pace this is ample time for the add.

4. I must be right 1/3 of the time on this position.

Check. I am pretty confident in this scenario that's the case.

Overall a solid add to a working outright

 

[conduit3030]

TWTR add (2) - 8/18/2014

08/18/2014 18:31:16Bought 1 TWTR Dec 20 2014 43.0 Call @ 6.15

-623.73

TWTR is now going substantially in my direction after a positive response to earnings, has been accumulating around 40-44 for around a month.

Rationale:

1. Recall that TWTR can be an explosive stock, and get exponential.

Check. TWTR is a prime candidate for the quicker and quicker move up. Need to be levered up for this scenario occuring

2. Buy the 43 call, not lower calls.

Check. If the assumption is right that TWTR continues to gain momentum, you want to risk less as it moves up. Don't buy another 35 strike call b/c that's just too much risk (really what it means is it reduces your RR for only a little increased probability).

3. Buy the 4 month out call

No. If TWTR add is based on the price moving faster up, it makes more sense to save some $ and buy a closer call. Also note $600 was over the risk limit at the time.

Overall a decent add and no regrets here (though as we'll see in teh aftermath I'm out the full $600 on it)

 

[conduit3030]

TWTR current and aftermath

09/19/2014 18:07:54Sold 1 TWTR Sep 20 2014 36.0 Call @ 14.3

1,421.23

10/07/2014 15:19:44Bought 1 TWTR Nov 22 2014 52.5 Call @ 5.75


10/10/2014 15:25:37Sold 1 TWTR Nov 22 2014 52.5 Call @ 4.35


11/26/2014 15:53:36Bought 2 TWTR Dec 20 2014 40.5 Call @ 1.72

-353.50






Sold the TWTR original call for a $1400 profit, bought a new call on Nov 22 with a much higher strike (but atm at the time), sold that call for a $150 loss, bought 2 atm calls a month later in december.

1. Close the original TWTR call for a $1400 profit. (arrow 1)

Check. You've made about 3:1 on the original risk and stand to gain maybe $500 more based on the target price. Therefore, protect your profits and sell the call for a substantial profit.

2. Buy the Nov call @ 52.5x for 5.75 (arrow 2)

Check. You're looking for momentum in a final stretch here, don't risk more than you have to. So buy an atm call in this case.

3. Sell the NOV call for a $150 loss. (arrow 3)

Check. TWTR got murked the days following this add and clearly was losing momentum to the upside. Take your loss.

4. Buy the December call on 11/26 after TWTR has dropped out substantially post-earnings. (arrow 4)

No. This was one of my worst trades so far. The plan was to add into momentum, not to try to get a "bargain" on twtr calls after a poor earnings reaction and a clear change in the trend. It's a money loser and I'm not sure what my expectations were.


-----------------------

Summary: I think I played TWTR very well to the upside over the past 4 months...it just hasn't been as explosive and stuck up there as I thought it might (note that this is going to happen a lot on these pyramid trades so don't sweat it too much).

My worst trade was the recent one in which I bought calls into weakness. This isn't trend trading and is definitely a. not my style and b. a loser for me.

 

[conduit3030]

GG de-leg Friday 12/12/2014

12/12/2014 20:14:43Bought 2 GG Dec 20 2014 18.5 Put @ 0.39

-87.50

Ok so I delegged half the GG position posted earlier. I am now long 4 puts and short 2 lower puts for a ratio spread or whatever you want to call it. This gives me more exposure to the downside in a stock that looks like it's getting very weak.

1. GG is getting weak, and stocks in this position CAN crack under pressure.

Check. GG has no "support" below it anymore, for lack of a better term. It looks like a decent probability that it plummets next week and so I want more exposure than my .8:1 RR synthetic credit spread I'd made prior. So de-leg.

2. Don't roll yet the 2 extra long puts yet.

Meh. I am not sure baout this. I'm expecting a hard and fast move down, so I want to get the max gamma I can on the trade by holding onto the puts that expire next week. But at the same time, theta is going to eat me if I hold through and GG goes up/doesn't move. So maybe I should have rolled the 2 puts also? Input is appreciated here.

 

[conduit3030]

Summary for the week - 12/13. very solid week, both in terms of performance and executing good trades. I definitely made a few mistakes though (see below) in trade structures. See attached for where I currently am at in positions pnl etc.

Positions:

1. VIX - I had originally planned to roll the VIX call out but ended up selling it and closing the position. There's less than a week to expiry and frankly I think we could see a rally next week, based on the last 2 years the VIX hits 20 and drops out fast. Note that should the VIX get to 25, I'm going to put on puts on it (see next post for discussion about possible structures here.

2. FXI - Max profit on FXI. The dropout in the overall indices certainly helped, but I think my main assumption that a non-trending market such as this one would revert back down after a significant move back up. Note that I would have rolled this position 2 weeks further should it have not gone well.

3. GG - I partially de-legged GG on friday (see above trade) and am happy with it so far. My main concern here is that it doesn't move with the market. So should the market tank next week, rally, whatever any edge i get in discerning likely SPY direction won't help me to manage this position.

4. TLT - This is the difficult one. The spread had a value of $700 profits (out of a max $790 by expiry) on Friday. I tried to take off the position on a limit order but couldn't quite get hit. Hopefully this doesn't come back to bite me. A note here: when you've made 700 on 790 max early on into the spread like this you can definitely consider taking off the profits. Note that if you had made like ~400 on it, you couldn't usually. That's because the original trade was based around making a 2:1 RR and if you don't do that when you have the opportunity to do so, you're not capitalizing on the trade and/or following your rules for the trade.

5. TWTR - TWTR is just killing me but im near max loss here, so nothing to do. I have Dec 40.5 and Dec 43 calls here. I'm thinking I'm going to roll the 43 calls as IV is low and these now-otm calls will be cheap. However I don't just roll and pray, so the 40.5 calls will expire worthless next week, unless TWTR gets a really lucky break and moves up.

------------------------

Portfolio:

A. I'm net short on the market, but once again this is misleading. I'm actually very light on positions in either direction. Since GG doesn't correlate that much with the SPY, those - deltas are essentialy meaningless to the overall portfolio risk. TLT has +50 deltas which should be -30-40 deltas really. And TWTR is net long deltas, a little. So really I have very little risk either way coming into next week (which means I can open up a lot of spreads next week should I find potentially good ones).

B. Theta - Theta is slightly negative, FXI is now expired and max profit, so ignore that theta.

Conclusion: I am open to more risk next week as I now have very little on. I just need to figure out my market bias (or lack therof) and structure some new spreads.

 

[conduit3030]

So let's talk about the potential VIX puts, should the VIX get above 25 next week. Note that there's a good chance this doesn't even happen, and my absolute paramater is that VIX gets above 25 or I don't take the trade. This is based on the prior VIX spike going to about 30 and then crashing.

1. The US economy is still strong, and the strongest in the world. This makes it a safe haven and less prone to crashing right now.

Mixed. I absolutely agree with the 1st statement and $ flowing into the US for that reason, providing some downside buffer. however I'd note that we're once again near all time highs and we have seen the VIX continually trend up in terms of the size of its spikes. At some point, the VIX is going to stick up there and we're going to see a real black swan.

2. Given the last statement above (regarding black swans), assume the status quo continues (no black swans) but be ready to adjust should something start to unfold.

Check. This is the right approach IMO. The next VIX spike is likely to fail, just because it keeps failing pretty much. But it could stick up there or shoot to 40 or something, who knows? In this scenario with buying vix puts there's not much to be done on the individual trade but rather I need to adjust my aggregate portfolio as the situation unfolds. In other words, my puts will expire out of the money and I will lose on this trade. Ideally, though, since I embrace volatility, I'll be in other positions that will more than make up for the loss.

3. Which strike?

I'm going to go for a lower prob but higher RR situation here. However I don't want to gamble and say buy a 13 put (lol....for like 20c hehe). SEE ATTACHED PIC FOR CHOICES ON STRIKES, WOULD APPRECIATE INPUT HERE (but note that this is w/ the VIX at 21, at 25 all strikes on put side will be much cheaper).

Thus, I think I'll go with the 18 strike. Currently at about 2.30, I figure if VIX spikes to 25 it'll be around 1.3-1.5 cost.

4. Which expiration?

This is actually a pretty straightforward answer. The assumption on the trade is a return to normalcy we've seen in the last 2-3 years. Thus, I want to give about 30 days on the puts rather than say a week out. Yes, this means my gamma is lower should the VIX go my direction, but lets say it goes to like 13. I've made about 2:1 on what I risk and need only be right 33% of the time here. Should the price settle in the 10-14 range again, I won't be so quick to cover. I'll let increasing gamma do the job. Should VIX remain wild and go to 13, then spike up again, then down again, I cash out. The point is that any way I look at it more time is an advantage here, thus about 30 days out.

Conclusion: Should the VIX get to 25 next week, I'm automatically buying the 18 otm put on it about 30 days out. See attached images for where vix currently stands

 

[longthewings]

Good to see you emphasize tail-hedging. However, you say that you "embrace" volatility. How do these spreads benefit from increased vol?

 

[conduit3030]

Good to see you emphasize tail-hedging. However, you say that you "embrace" volatility. How do these spreads benefit from increased vol?

Hey Longthewings,

The short answer is spreads don't much benefit from vol increases (even the debit spreads here), but the delegging of spreads absolutely does. Here's my rationale:

1. About 1/3 to 1/2 my positions are debit spreads. They could be standard debit spreads (TLT) or debit spreads structured with a lower RR much like credit spreads (GG), but these spreads are easily delegged should there be momentum.

2. Momentum is the basis of de-legging. If I only trade in trends, and those trends start to accelerate (for instance to the downside), my rules say I deleg the position to catch a bigger move.

3. I'm a short term trader (<1-3 weeks) and even black swans take time to unfold, barring literal flash crashes. Should momentum build to the downside, I have plenty of time to be spreading to the downside.

4. So though I currently only am long TLT and short GG for spreads, there will be more opportunities to spread as I trade actively. These constant positions offer plenty of opportunity to deleg should thing actually go south.

Disclaimer: Odds based on the past 3 years favor a continuation of the uptrend currently, so odds favor no black swan, as is usual. But ideally I'm ready for an event should it come, notably with TLT.

Note: I do embrace tail hedging, but would note that just putting a long strike under a short put isn't tail hedging. What I mean is if you're placing your spreads 2-3 standard deviations out, and have multiple spreads like that, you may as well be naked puts in terms of net portfolio exposure. When an "unlikely" event comes, it's going to wreak havoc on those deep OTM credit spreads.

 

[longthewings]

"Odds based on the past 3 years favor a continuation of the uptrend currently."

How are you defining the odds?

 

[conduit3030]

Here are some stocks with weeklies coming into Monday, all high IV:

Uptrends:

FDX
WMT
BBY


NEUTRAL:

JPM
AGU
ORCL
POT
GPRO


DOWNTRENDS:

IBM
T
LNG
CHK
HAL

NOTE: Many very weak, high IV energy stocks right now but if there's a strong rally these otherwise solid companies have a risk of rallying, so likely going to avoid energy stocks.