Skip strike unbalanced butterfly spread in EXC

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

Sorry for my absence lately.  I’ve been consumed with starting two new small businesses.(Not trading related.)

Today, I’m back with an interesting trade I will call an ‘unbalanced or ratio skip strike butterfly spread’.

The trade is in EXC. My trade logic is:

EXC announced earnings that disappointed.  The stock went down and has continued it’s downward move for the subsequent two sessions. (Trade was placed yesterday 10/26/2010 and it’s down again today as of this writing).  The daily chart is below: (click any picture to enlarge)


You can see a clearly bearish trend over the past year.  The recent down move has broken down below support since mid Sep. 

Interestingly, IV did not move up with this large point decline.  The below six month chart of 30 and 90 day volatility (source: Live Vol Pro) shows that IV only moved up slightly into earnings and was (and still is) well below the historic implied volatility for the past six months.


Below you can see the recent large move down without a corresponding pop in 30 and 90 day implied volatility.


With all of this info I’m predicting a further move to the downside in EXC and an increase in implied volatility over the next 90 days.

The trade: +10 Jan $47.50 puts / –30 Jan $44 puts / +40 Jan $39 puts

The profit and loss chart look like this (Source Think or Swim):


EXC is currently trading at $40.60 as of this writing.  At expiration this trade is profitable above $41.86 and below $36.15. 

Below you can see the chart of vega vs. underlying price.  The trade is very long vega at the money and down to $36ish.  It is short vega above $44.


As I always say, I’m entering trades like this to take advantage of the implied volatility in addition to picking direction.  If the underlying moves up and I was wrong I will become long theta and can wait for decay to work in my favor or get out with a small loss.

If the underlying moves down quickly I’ll profit from my short delta (direction) and from my long vega as implied volatility increases.  This is the result I’m looking for.

My risk in this trade is a slow move to the downside with decreasing implied volatility.  My risk is defined to a maximum at $39 at expiration.  Luckily, markets tend to move down quickly and up slowly. 

Exit plan:  I’m hoping to get a quick downside move prior to expiration and take profits.  An explosive move to the downside would work very well.  If I am given a profit I will sell off a few contracts at a time taking profits.  If the underlying moves up I will likely take a small loss to a small profit depending on what volatility does.  Since it is already low on the charts the volatility may not drop much and I’ll have a small profit.

Thanks for reading. Please send comments.  I have some comments from my last post that I’ll address in the next few days.  Again, sorry for my absence…. – Lawrence

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.


V – update – trade management, a favorable roll

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

As you know from my previous post and update on the V trade (Click here to see), we’ve taken off 3 of the 10 contracts for a profit. 

Since then, the underlying has moved up and away from our profit zone.  (Trade was entered with V at $74.20 on 5/21/2010 and moved as high as $77.49 on 6/10/2010.

Yesterday I rolled the remaining 7 short Jun $65 puts up and out to the Jul $70 puts for a credit of $1.67 (Bought back the Jun $65 puts for $0.07 and sold the Jul $70 puts for $1.60). This moves my upside breakeven price up to around $72.95 at current IV’s.  V is currently trading above that at $74.64 as I write.

Below is the current Thinkorswim analyze tab after the roll. (Click to enlarge)


As when I initiated the trade, I’ll keep $80ish as my mental stop.

This is a good example of a favorable roll at expiration week.  I was able to buy back my short puts for $0.07 and stay in this trade a bit longer.  Since I’m long the Sep expiry, theoretically, I can roll to short August puts as well in the future.  Had I lost faith in my bearish opinion on V, I would have taken the loss and closed the trade.  I’m still convinced that there is downside potential here.  By performing this roll, I stay in the trade.  By moving the short strike up by $5, I’m able to increase my chance of profiting as well compared to rolling to the same $65 Jul strike.

APC: Wow, quick results…

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

…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.

Skew trade in APC

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

Today I was scanning for  “exploding IV30’s’” in LiveVol Pro and came across APC, Anadarko Petroleum.  Headlines said that they were being investigated in their involvement in the BP oil spill causing IV to increase.  You can see the Skew chart below showing the Jun options inflated over the back months and a pretty steep horizontal skew as well. (Click any picture to enlarge).


You can see in the below chart of front and back month IV that the IV spiked and is now trending down for both front and back months.


With the underlying trading at $45.44 I bought a diagonal spread: +20 Jul $45 puts (65% IV) / –20 Jun $42.50 puts (79% IV).

Trade Logic: I’m taking advantage of both horizontal and vertical skew by buying back month lower IV and  selling front month higher IV, and also selling lower strike puts with higher IV.

The Thinkorswim Analyze tab looks like this:


After my entry APC closed down a little today to give a small profit in the trade.  Interestingly, you can see in the above picture that had the underlying not moved all from my entry at $45.44, the white line is above the breakeven line indicating that the volatility differential has closed a bit between back and front months allowing some profit (helped by just a tiny bit of theta).

Exit strategy: I’ll stop out on the upside if APC goes above $47ish.  I’ll take small profits one spread at a time as either the underlying goes down or Theta / Vega work in my favor.  Stay tuned

*note: No posts are trade recommendation and merely for education and entertainment.