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).
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.