Guest blog post

Posted by: Admin: "The Vol_Trader"  //  Category: Uncategorized

Hello traders,

Today, I’m very pleased and honored to announce that I’ve been asked to post a guest blog-post to Mark Sebastian’s blog:  http://www.option911.com

I’ve been a long time reader of option911.  I have tremendous respect for Mark as a trader, teacher and a good friend.

So, check out http://www.option911.com and I’ll see you back here soon.

Lawrence

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24 hours, like I said…

Posted by: Admin: "The Vol_Trader"  //  Category: Trade strategy, Volatility Trades

So, the power of IV is apparent in the trade from yesterday in MED

I’m currently above my profit target of $250, up $275 as of right now.  Just like I discussed, but even better:  The short Jun puts are up on a drop in IV even though the stock has basically stayed the same ($30.90 – $30.16).  The even better part is that the long Sep $30 puts have gained in price as the Sep IV has increased.

P&L is below: (click any picture to enlarge)

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The Thinkorswim P&L graph is below.  Notice the live price is right where you want it at the short strike.  This trade has little risk now so I just sold half (5 contracts) at $2.98 to lock in $150 profit.  Since I have time on my side, I’ll hold this a little longer and see if I can take more advantage of my theta and vega position.

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Below is the Live Vol Pro (www.livevol.com) chart of Jun (upper line) and Sep (lower line) IV.  Notice the Jun IV has dropped down and the Sep has angled slightly higher, consistent with our returns…

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So, our tiny calendar has more than paid for the $100 / month Live Vol subscription fee… Not to sound too “salesy”, but Live Vol Pro is the best thing I’ve found to help find these trades.  I couldn’t imaging ‘trading vol’ without it anymore…

As usual, thanks for reading and I’d love some feedback, even just to say you’re here reading.  Comments in disagreement with anything I post are welcome and encouraged to start good discussion… Lawrence

Trade Strategy for 24hrs or less, kind of day trading options…

Posted by: Admin: "The Vol_Trader"  //  Category: Uncategorized

Here’s a new kind of post at Vol Trader Blog, a theoretical trade strategy.

I get lots of questions about ‘day trading options’.  Personally, I feel day trading options is very difficult.  Options can be used for directional day trades in order to get leverage over trading the underlying equity but in my opinion in very limited ways.  Since this post is not about directional trades, stay tuned and at the end of this post I’ll add a note my opinion of this topic…

Today, I’d like to talk about a strategy that I’ve found works very well.  Technically it’s not a ‘day trade’ because you hold overnight, but sometimes you get a quick profit and you’re out in less than 24 hrs.

The setup here is very important.  I use the Live Vol Pro software ( http://www.livevol.com )to scan for “Exploding IV30”.  Live Vol Pro defines this scan as “symbols where the IV30 has gone up 30% in the last week”.  I further narrow this down to symbols where the IV30 has surged today or yesterday.

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My trade logic:  Find a stock where the front month IV has surged and buy a calendar just below the stock price.  Usually, when the IV surges it means the stock has made a bearish move.  The longs scramble to buy puts to protect their long position driving up the price of the OTM puts and hence IV. 

If during the next session the stock moves higher the front month IV will drop more than the back month.  This is due to the longs selling their front month put protection.  This is the desired move you’re looking for, however, if the stock moves down again the next session you may still make some money.  Because the back month puts have a higher Vega, a move up in back month IV has a greater effect than the same move on the front month.  Additionally, because your short strike is just below the underlying price, your calendar spread is always slightly short delta.  This may offset any loss due to IV.  This kind of trade seems to work best with 20-30 days remaining in the front month. 

Usually, I hold these trades longer than 24hrs too. The Calendar spread is a very forgiving trade… They are very small delta and gamma in the short term.  This means large moves in price don’t effect them that greatly.  Also, time is always on your side as they are Theta Positive over  a large range of underlying prices.

Here’s an example (not trade recommendation):

Using Live Vol Pro’s scan for exploding IV30, I found MED (Medfast Inc.)  First I check to make sure there is nothing in the fundamentals that may affect it such as M&A, earnings, dividend, etc…

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Here’s the Live Vol Pro chart of IV30 for two months (click to enlarge):

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The trade: buy the Jun – Sep $30 put calendar for $2.68 ten times with the underlying trading at $30.90.  You’re buying 82% IV and selling 87% IV.

The think or swim P&L chart looks like this (Click to enlarge):

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With portfolio margin the requirement is only $750. 

Exit strategy: I’m looking for a minimum profit of 20% of margin requirement or $150 per 10 contract size.  At $1.50 per contract, commission is $30 each direction or $60 total.  I will wait and see what happens.  Usually, I take a partial profit if it’s given to me right away and hold part. 

NOTE: as discussed above, my opinion on directional day trading options:  I really never do this, but the best way I see to day trade options is to buy ITM puts when you feel the underlying will decline.  This way you make money on negative delta and positive vega.  Buying calls is a losing proposition when you’re bullish.  Even if the underlying moves up giving you gains due to positive delta, you will lose on your positive vega as IV drops as the underlying moves up.  Again, as the underlying moves up the longs will sell their put protection causing IV to drop and due to put-call parity the call IV drops as well.  In my opinion, don’t directionally day trade options.  Use the underlying and even better, futures, but that’s a whole other discussion…

Thanks for reading Vol Trder Blog, Lawrence

Volatility update

Posted by: Admin: "The Vol_Trader"  //  Category: Uncategorized

For those of you playing along at home, I just figured I would update you on last weeks trades:

The weekend Theta came out of the market this AM as the weekend proved to be uneventful for a change. 

Despite the ES futures being down big overnight, we opened to the upside today and as of right now at 10AM EST we are selling off a little.  VIX is still down a lot off it’s Friday Highs.

I decided to take my nice profit from my NDX ‘ratio diagonal’.  I also took off part of my OEX ‘ratio diagonal’.  I figure I’ll put them on again at a lower strike if / when I think we’re looking at the next leg down and VIX spike… Tough decision to make however.

VIX update

Posted by: Admin: "The Vol_Trader"  //  Category: Volatility Trades

In my may 5th blog post I commented that the VIX had run up much faster and higher from 27-Apr to 5-May than it did when we had a market correction in Jan-Feb which was actually more severe at that time. 

Well, I spoke too soon about the ‘severe’ part.  If you read that post you saw I was trying to come up with ideas as to why the VIX behaved this way.  Had I put a #5 bullet saying, “tomorrow will be a historic down day”, I would have been a genius (and very rich). 

Conspiracy theorists would say that the GS’s of the world were buying SPX puts the day before the ‘crash’ driving up the IV.  

Moving forward, My 06-May post and 13-May posts both discussed me getting long Vega and short delta.  Boy was I right on both occasions.  06-May was a nice day to be long vega, short delta into the crash.  I took some nice profits then.  13-May turned out to be a great day to get long Vega, short delta in the AM, and it continued Friday, 14-May leading to my best ever two day streak. 

You can see the action in the SPX and VIX here in the LiveVol Pro software.  In the below chart the first candle is 23-Apr-2010.  The recent high is the next day 26-Apr.  The bottom line chart is the 30 day IV. 

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You can see the IV went up and stayed pretty high and curved up Friday, the last candle.

Below is the LiveVol Pro chart of the VIX for the same time period:

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At the end of the day Friday ,15:45 EST, I decided that I didn’t want to carry my very short delta risk into the weekend.  I sold a lot of (expensive) Jun OEX $510 ATM puts to get less short delta and shorter vega.  Looking at the Thinkorswim SPX chart below, you can see I was not the only one getting less short / long at the close… from 15:30 to 16:00 the SPX rallied  +$9.11 from a low of $1126.57 to close at $1135.68. 

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NOTE: Check out the LiveVol Pro software at: www.livevol.com   I  just love it so much that I couldn’t trade without it anymore. 

Hopefully next week, I’ll find some time to post some individual equity trades again.  Please stay tuned! Thanks for reading Vol Trader Blog!

Lawrence