MCK earnings trade, a quick update

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

(Click here to see the prior post with the Earnings trade or just scroll down)

So, MCK had a pretty volatile day.  It was up pretty big in the AM which allowed me an excellent entry point.  Originally, last night when I found this trade the credit for the spread was $2.37.  With the AM spike I was able to get $2.70 per 3/2 spread.  See chart below: (Click any picture to enlarge)


Around 14:00 EST I was up $538 and put in an order to take off 2 spreads (6/4 contracts) but it didn’t fill.  Then MCK went up and is still up as I write (15:55) and you can see in the above chart. Looks like I’m holding the whole thing into tomorrow AM earnings.

As you can see from the Analyze tab below I’m looking for the underlying to go down but staying the same or a very small increase in price will be good too.  A large rally will produce losses but that should also converge IV and I’ll lose less.


I’ll keep you posted.


An earnings trade MCK

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

I’d like to present an earnings trade today.  I’ve been so busy with my regular job as a Podiatrist that I have not had time to write (or trade). 

I found MCK in the LiveVol Pro software (  LiveVol has a nice calendar of earnings and dividends.  One click on the symbol brings the underlying up to all the tabs where you can then assess the skew, read the news, see the fundamentals, chart the underlying, chart the many volatilities, see the historic volatilities as a response to earnings, see the options chains, see all the options trades and so many magnificent things that help to trade options.  (Okay, infomercial is over.  I just love this software so much that I will give them free plugs whenever I can.  My secret agenda: I just want them to have lots of clients so they stay solvent and never go away.  Oh, and with the same motivation in mind, trade at  Thanks!)

So, MCK, as always, I want to buy low Vol and sell high Vol. With earning coming before the open on 7/30/2010, the August IV is elevated compared to back months options.  Looking at the LiveVol Pro software, historically, the near options lose IV much greater than the back month after earnings as you would expect them to.  The front month straddle loses value about half the time and gains about half the time.  This means I don’t want to simply sell front month straddles with only a fifty percent chance of success.  See below (click any picture to enlarge) : (What to look at: The bottom set of lines is the IV of the front and back month options. Red front month, blue back month.  The red collapses more than the blue after the earnings ‘E’ symbol)



I want to sell high Aug volatility and buy lower Sep volatility. Using the LiveVol skew tab below you can see the Horizontal (Aug higher than Sep) and Vertical (steep line with lower strikes having much higher IV) skew exists.  So, I want to sell high Vol Aug lower strikes and buy lower Vol higher strikes. 


The trade: buy 30 Sep $67.50 call, sell 20 Aug $62.50 call for a net credit of $2.68.  MCK closed last night at $64.02.

Trade logic.  First, by looking at the LiveVol 3 month chart of IV30 vs. IV60 (See below),  I make an estimate on future IV of Sep and Aug.  My conservative estimate is after earnings Aug will drop by 6% and Sep will drop by 2%.  I put these numbers into my Thinkorswim analyze tab by clicking on the wrench and then ‘more’ which allows me to change the IV of Aug and Sep separately (picture below). 



The Thinkorswim analyze tab looks like this now and at Aug expiration:


Before adjusting for IV changes, I’m risking around $800 if MCK moves up to around $69 to make $2300 on the downside.  When I adjust Aug and Sep IV –6% &-2% respectively, my risk reward is around $1000 : $2300.

Exit strategy:  If MCK moves up to $68 I will get out and take my losses.  If it moves above $68 I’ll most likely still get out but if there’s a monster rally, I may hold as I have upside profit potential.  If it moves down, I’ll start taking off 3/2 spreads one by one taking profit.  As usual, if it moves down I will not be in any rush to take off spreads as theta will be working in my favor. 

Again, sorry for my absence lately.  I will update this trade as it plays out.

Thanks for reading, Lawrence

PS: if you’re live in NYC and need a good podiatrist click here:

PCP – how I adjust a long stock position

Posted by: Admin: "The Vol_Trader"  //  Category: Trade strategy

There’s many articles written on how to “repair a broken stock” out there.  Click here for a good recent example from The Motley Fool.  They instruct you to buy one ITM call (one for each 100 shares you’re long), and sell 2 OTM calls.  The only problem with this strategy is that it still leaves you with lots of downside risk.  The above mentioned article states if the underlying goes down all options expire and you lost just your commissions, try again and unfortunately your underlying’s value has lost even more.

I like to protect myself a little more than that to the downside, even if I’m bullish (why else would I own the stock?).   The easiest way to protect a stock from downside risk is to buy a put.  Buying a put makes me short theta which I hate.  I feel there is only one thing that is guaranteed in the market, time will pass.  I want to be long Theta whenever possible.  So, how do I offset the cost of my put and get short theta?

First I want to make my predictions as to where the underlying will go. Second, and equally important, I predict what IV will do.

Looking at the daily and weekly charts (click any picture to enlarge) with volume profile, I’m predicting PCP will stay in a range with support at 102 and resistance at 120.  Earning are on 7/22/10 and historically, it has not made major moves after earnings.  Volatility has also been in a range for some time and historically, Vol drops but not much after earnings. 



Using the above predictions, I want to create a trade that profits if PCP stays in a range, and if Vol stays the same or drops.

Here’s the trade. 

  • I own 100 shares of PCP, currently trading at $107.79. (My price is $121.40)
  • +1 Sep $105 put.
  • +4 Sep $120 call.
  • -5 Sep $110 call.

The P&L looks like this for the long stock (obviously) below:


The P&L looks like this after I added the options, below: Notice that this trade is ‘profitable’ in the range that I anticipate.  If the underlying stays in the range as I predict, my trade that is currently around -$1,400 will be -$300.  Then in Sep, I can put on a similar trade again as long as my predictions have not changed.  I now have a limited risk trade that I can manage or stop out if PCP should rally hard.  Synthetically, you’ve created a broken wing butterfly (long stock and long put is long call +1 $105call / –5 $110 call / +4 $120 call).


Also, the Vega is pretty neutral.  At first glance at the chart of Vega it looks exactly the opposite of what you want.  It’s short Vega to the downside and Long Vega to the upside, however, with further examination, you’ll notice the largest value for Vega is +/- only $26.  See below:


As usual, I’ll keep you posted as to adjustments and management. 

* Here’s an idea for discussion based on the above.  You can use this strategy to put on a bearish synthetic broken wing butterfly and own shares of your favorite dividend paying stock.

*this is not a trade recommendation, education only.

An update on V and ASML trades:

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

Sorry for my absence lately.

After Jul expiration I wanted to update you on two trades, V (Visa) and ASML. 

V update:  This trade turned out to be a good example of my management and trade adjustments that I regularly do, and ended with a little good old fashioned luck…

As you know, this trade was placed on 5/21/10 with a bearish bias (Click here to see). 

image Four days after I put the trade on, I took off 3 of the 10 contracts for a small profit.  Often, if the trade goes well right away, I’ll take off a small portion for a quick profit and let the rest go for additional profits.  In mid June V went up and I had an unrealized loss with Jun expiration approaching.  6/14/10 produced a nice down day and although I was still at an unrealized loss, I was able to take advantage of the down day to produce a favorable roll, buying back my short Jun options and selling up and out Jul options. (Click here to see roll) Immediately after this, V rallied and then dropped back.  On the drop back, I was about breaking even and I decided to let this trade continue expecting a further drop in V and the market in general.  I was wrong and the market and V had a strong rally into Jul expiration week. I like to roll my shorts by Tues prior to expiration.  I analyzed rolling my short Jul options out to Aug or up and out to Aug but nothing looked good to me.  At best I would have locked in a smaller loss than I currently had.  My two choices were to close for a loss or hold on a few more days hoping to get lucky with a drop into expiration as my trade was purely a directional gamma play now.  Normally I would not hold a trade and hope for a lucky ending but in this case I didn’t see much risk to the upside and my alternatives were not good as I described above.  Additionally, since I was able to take some profits on the first three contracts, I had a little bit of a buffer.  Well, I got my wish and expiration Friday turned out to be a great day.  Right at the open I took off five of the remaining seven contract spreads for a nice profit, and later in the day, I took off the remaining two spreads for an even larger profit.  In total, I ended up with a $1,442 profit. 


ASML update: I’ll jump the conclusion and then tell you how I got there.  As of Friday’s close I’m down $246 on this trade.  This is not bad considering that this trade is bearish and long Vega.  I put this trade on with ASML at $30.28.  Friday ASML closed at $30.92.  Clearly my short delta didn’t help this trade.  When I put on the trade I was long Vega and this trade remained long Vega throughout the whole time.  Implied volatility dropped from 42.38% when I placed the trade to 36.08% at Friday’s close.  So how did I (about) break even when delta and vega moved against me?  A few things helped.

  • First and most important, SKEW.  Click here to see my initial post where I described putting on trades that have ‘a slight advantage based on volatility’ skew.  By selling higher Vol options and buying lower Vol options, when the skew reverts you benefit. 
  • Second, trade management:  I took some early profits similar to the V trade.  (Click here) Note: the long calls I bought as cheap protection ended up worthless.  Had the underlying moved up a lot more they would have come into play, but the small rally didn’t affect them.  I lost a small amount on them.
  • Third and final reason, time decay.  I almost always like to start with time decay working in my favor, negative gamma trading.

Just like the V trade, I had considered rolling my short Jul options to Aug but again there was no favorable roll and I would have locked in a small loss at best.  I decided to close the trade for a small loss on expiration day.  As most of you know, trading a liquid underlying’s options on expiration day it is difficult to get advantageous pricing as the market makers (and their computers) know you need to get out.  In ASML case, it’s not so liquid so that makes it virtually impossible to get out with good pricing on expiration day.  With that said, I’m currently long Sep puts naked as my short Jul I closed for $0.05 (Commission free to close short $0.05 options, thanks Tom at Thinkorswim) and I couldn’t sell my long Sep puts for a price I wanted. I now have upside risk.  I’ll close these remaining Sep puts at the open Monday unless ASML is going down, then I’ll monitor them and perhaps get lucky again. 

Note, these are not trade recommendations, click for legal disclaimer.

A long Vega trade in OEX

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

It’s rare that I am completely or mostly ‘out of the market’ but this is one of those times.  I tend to travel a lot in the summer and when the market cooperates I like to take profits and leave the city with small to no positions on to worry about.  On vacation I like to log on to Thinkorswim no more than once or twice a day.  With the recent downturn in the markets I have done very well and took off lots of profits…

However, going into the Independence day holiday vacation for a week, I can’t resist having some short delta trade on.  I really think we are going to give back a few more months of gains from the previous year long rally.  As my friends and readers know I never believed in the rally from March 2009. 

So, I want a low maintenance trade that I can look at once or twice a day on vacation that requires little to no work.   I would have liked it to be Theta positive but it starts off short Theta. 

Trade logic:

  • I want to be short delta but have protection to the upside. 
  • I want to be long Vega but not get hurt too badly if the market goes up and IV drops.
  • I want to have a limited risk trade.

I like trading the OEX.  I get good fills, often better than theoretical prices.  It has good liquidity with 100’s to 1000’s of contracts of open interest.  It requires 1/10th as many contracts as SPY (hence 1/10th the commission, sorry Tom Sosnoff).

Here’s the trade:

First I put on an Aug / Sep $425 / $470 put diagonal.  (+10 Sep $470 puts / –10 Aug $425 puts).  This gets me long Vega and short Delta with a small positive Theta.  It has limited losses to the upside but is sensitive to a drop in IV.  It looks like this: (Click any picture to enlarge)


Next, I put on an Aug / Sep $475 / $480 ratio call reverse diagonal. (+10 Aug $475 calls / –5 Sep $480 calls).  This gets me long delta and long Vega and is short Theta.  Being long vega is a double edge sword here.  If the market moves in the desired direction, down, the long Vega will make this hedge lose less, but it also makes it a less hedge than it first appears.  However, it is very long delta so that lessens the long Vega losses on the upside.  On the downside it has limited losses and becomes more of a long vega play than long delta. This part of the trade looks like this:


The combined trade looks like this:


I like to use diagonal spreads more than calendars.  I often find that I’ll put on an OTM put calendar and I’m correct and the underlying moves down very quickly.  When a calendar moves too quickly you don’t make anywhere near maximum profit.  For a calendar to make (near) max profit the underlying needs to be at the short strike at expiration week, not right away.  With the diagonal spread there isn’t that change in delta after you cross past the short strike price. 

I also like the above ‘ratio call reverse diagonal’.  It’s positive delta outweighs the long vega on the way up and as time goes on, it becomes less long vega and if the underlying moves down the long vega offsets some of the short delta. 

Exit strategy: Obviously I would not hold this trade past the Aug expiration despite owning Sep options.  I’ll look to take profit or small losses if the underlying moves up quickly.  I’ll also take small losses if it stays in a tight range and suffer from the short theta.  If if moves down past $450, I’ll start taking off one or a few contracts at at time to lock in some profit but I will not be in a rush to do so b/c I’ll be long theta at that time and presumably benefitting from my long vega.

Have a nice Independence day, and hopefully enjoy your long holiday theta!

* Not a trade recommendation for education only. Legal Disclaimer, click here.