Volatility Trader Blog

On 29-Apr-2010 I posted a trade on AUXL CLICK HERE to see it.

Here’s how this trade played out:

The underlying moved sideways which was desirable however, the IV never went down.  In fact, it went up and I was holding the condor waiting for time decay or a IV decrease. I had a very small window of opportunity to take a very small profit, but I held and waited it out. 

I WAS WRONG.

The underlying quickly moved lower past my lower breakeven.  I put in an order to take a small loss but it never executed at my price and I refused to pay up too much above theoretical pricing.  This is a MISTAKE when trading less liquid products.

I’m still holding onto the spread.  It’s not worth closing now.  I put in an order to buy back the Call portion for a few cents and will accept the max loss unless there’s an explosive move to the upside. 

Below is the Chart and P&L: (click to enlarge)

…but sometimes profit comes too quick…

With calendar and diagonal spreads when the underlying moves to the short strike too quickly you don’t maximize your profits.  In a perfect world these ‘time spreads’ would move to the short strike on expiration day!

APC is down 6% as I’m writing at $41.97, and has blown past my short strike of $42.50.  When these spreads move to the short strike quickly (less than one day in this case) it is my policy to take at least half off for a profit. 

I don’t feel as pressed with a diagonal spread versus a calendar to take my profits as the diagonal usually has more favorable result to the downside whereas the calendar will start to lose money past the short strike.

In this case I took off half, ten contracts, for a credit of $2.80.  I’ll wait and see if either I make some more on the long theta of my Jun options or an increase in IV of my long Jul options. 

As you can see from the below Thinkorswim analyze tab (click to enlarge) at the current price I have a nice profit but I’m also still short delta (white line increasing profit to the downside) that peaks around APC $38. 

Additionally, Theta is working in our favor and so is our long Vega as the long Jul options will benefit from increase IV as the market goes down and the longs buy puts to protect their positions.  (To regular VolTrader Blog readers I probably sound like a broken record when I refer to the longs buying protection )

*Educational and discussion purposes only, not trade recommendations.

At the bottom is an update to the trade… 

Below is my ‘guest post’ that was previously posted on Mark Sebastians’s blog www.option911.com.

I was reading Stock Twits and a tweet got my attention about Visa…  Then I looked at the chart in Thinkorswim: (click any picture to enlarge)

Then I checked out the Live Vol (www.livevol.com) skew tab.  Note the major vertical and horizontal skew:

The trade:  Buy 10 Sep $80 puts (40.65% IV), sell 10 Jun $65 puts (57.75% IV) for a net debit of $9.16 per spread.  V was trading at $74.20.

Logic:

• Selling higher IV than buying.
• Sep expiry includes the 7/2010 earnings cycle.  This should help maintain the IV of the Sep puts or even inflate IV of my long Sep puts prior to the event. 
• I can also roll my short puts from Jun to Jul and then to Aug.
• Also, in theory if the underlying moves up, the Jun should lose IV faster than the Sep as the longs sell their inflated put protection. 

Exit Strategy:

Stopping out:

1. Tentatively, I’ll keep the $80 level in mind to stop out and accept that I was wrong.  At current IV that equates to around a $4,500 loss, however, this could be more or less depending on changes in the skew. 

As for profit taking:

1. I will scale out depending on the price action.  If the underlying doesn’t move much and the skew lessens I’ll take small profits. 
2. If the underlying moves down, I’ll take off one contract at a time but will not feel any rush to do this with positive theta on my side.

UPDATE as of 06/07/2010:

As you can see in the below chart V has been in a tight trading range since my entry on 5/21/2010.  You can also see the both the Jun and Sep IV have dropped around 5% each.

With the underlying not moving much and the IV dropping for both months about the same there’s basically two variables that affect our trade. Vega and Theta.  The Sep options that we’re long have a greater Vega than the Jun so the equal drop in IV causes this position to lose money, however, the Theta is greater for Jun and Sep causing this position to profit.

I’ve closed 3 spreads for small profits as the underlying moved down as below:

5/25/10 credit $9.76

5/25/10 credit $10.16

6/2/10 credit $11.89

I still have 7 spreads open and as stated above, they are currently profitable due to time decay, bid at $10.35.  As stated above in my exit plan, I’m not in any rush to get out unless V has a large upside move…  Stay tuned.

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)

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.

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…

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

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. 

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:

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. 

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