SPY Trade update

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

On 4/21 I posted about a trade in SPY that was long Vega, short delta, along with a short straddle to offset theta.

With today’s downward move and VIX spike, our trade is doing quite well.  See the Thinkorswim analyze tab below. (Click any picture to enlarge)

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Note: If you are unfamiliar with the Thinkorswim platform, usually when I post analyze tab screenshots, the lighter color blue is the one standard deviation move in the underlying by expiration of the front month options in the position.

So, now I’m thinking of adjusting this trade.  I can take off the whole thing for a quick profit or modify it.  I’m thinking the market has more to decline and thus higher VIX.  So, I want to reduce my risk and exposure to the opposite happening, i.e. reduce my short delta, and reduce my long Vega.  How is the hard question.  There are many ways to do this…

Positive delta, and negative Vega.  If you thought short put that would be right.  I also considered selling an OTM call straddle.  Both of these give me long theta. I’m going to choose the short puts to keep it a little more simple. 

The higher the strike put, the more short delta I get.  I chose to sell 5 contracts of the Jun 120 put.

This changes my short delta from –1067 to –761, still very short.  My Vega changes from 128 to 48.  This way if the market rallies and the IV collapse from today’s spike peak, it won’t hurt as much.  The new analyze tab looks very similar to the above.

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Still short delta and long vega.

Below in the LiveVol Pro software, 6 month chart of IV, you can see the front month and back month IV of SPY continues to climb with today’s selloff.  It has not been this high since the major selloff in January.

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As usual, I’ll keep you posted on status of this trade.

AUXL – Vol is crushing as I write…

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

As you can see from the 5 minute chart below, AUXL dipped down in the premarket to $34.50 and is currently trading at $35.63, down $0.03. 

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I am watching the chart of Implied Volatility in LiveVol Pro software, pictured below.  I can see right before my eyes the IV dropping and concurrently seeing increasing profit in my Thinkorswim platform.  The horizontal line is the IV on Friday around 45%, and just above 43% this AM. 

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End of day Friday we were at a $500 loss.  As of right now we’re up $812.50 for a total of up $312.50.  The conference call is scheduled to start in less than 10 minutes.  The conference call may move the underlying which is currently not moving much, but it may also remove more unknown and be another ‘Vol Event’ and help our trade.

My decision: I’ll sell half now and let the remaining half stand for now.

Stay tuned.

AUXL – Earnings update

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

Friday morning we sold an Iron Condor on AUXL in anticipation of their earnings release this morning (Monday) before market open. As of 7:43 AM Monday morning the underlying has not traded any shares pre-market.  Reuters is reporting, “Q1 loss narrower than expected” at loss of $0.18 vs. an estimated loss of $0.32.

When you’re short an iron condor ‘no news is good news’.  The fact that no shares have traded premarket is a good sign to me but we’ll wait for the open to count our [drop in IV] money.

Here’s an interesting note on this trade:  Friday I checked the status of this trade between surgeries.  (Yes, I look at the market between surgery patients. No, it doesn’t affect the surgeries.)  Mid day this trade was losing over $1,300 because IV went up significantly.  We entered the trade for a credit of $1.05 per spread.  On Friday, I tried to sell an additional 25 contract spread for then current mid-price of $1.60.  That would have increased my credit to an average price of $1.325 per spread but it never executed.  Oh well, that’s part of the price for using a less liquid underlying.  At the close the spread was trading $1.25 at the mid-price (-$500).

I’ll update you some time today on the status after the market opens.

Testing, testing, 123

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

Sorry for the corny title, but I’m testing a strategy in my Thinkorswim paper-money account. I’d love some feedback and discussion of my trade logic, so please comment!

My idea is as follows:  I want to get short delta and long vega for what I think is the inevitable market crash that is coming. I’ve been saying this since the short term correction in mid July 2009, so please do not let my idea influence any of your trading decisions.  Let this be a lesson in the greeks, rather than market direction.

So, short delta and long vega, what is the first thing that comes to mind?  If you said a long put, you be correct.  The problem with naked long puts is time decay works against you.  You can only be right if the market moves down and does so right away.  If it goes down slowly you lose.  If it stays the same you lose.  If it goes up you definitely lose quickly, not only from delta but also from Vega as IV generally goes down with market rallies. 

I want to get long vega and short delta by purchasing puts.  I chose to buy OTM Jun 115 puts for $1.55 with SPY trading at $120.16, 50 contracts.  (The simple facts: These are .25 delta, so they have a close to 25% chance of expiring $0.01 ITM which of course means I lose the full $1.55.  In order to break even I need them to be $1.55 ITM or SPY at $113.45.  Any lower than that is profit.)

This is what the naked long Jun $115 put looks like at May Expiration below in the Thinkorswim analyze tab. (Not Jun Expiration, I’m going to add May options to this trade and the plan is to be out by May expiration.) At May expiration and at the current price and IV the max loss is around $7,700, and breakeven is around $117.

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In order to offset theta, I decided to sell a Jun ATM 120 Straddle 25 times. Adding the straddle actually makes the theta slightly positive (close to zero) at the current price. The naked long put has a negative theta of around $150 / day.  Now, combined long put, short twice as many straddles leaves me with risk to the upside because I’m short naked calls from the straddle.  The short puts from the straddle ore more than hedged due to twice as many long puts.  The comparison of the two trades are below.

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You can see the naked put does better if the market falls below $115 but the combined trade does better up to around $125 but this chart is not showing something, the effect of vega. 

Below is a chart of Vega on the Y axis and underlying price on the X axis.  The combined position clearly has an advantage to the upside.  It is short vega above $117.50 whereas the long put is always long vega.  Remember, as the market goes up IV generally goes down. 

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The last adjustment is to address the upside risk.  I’m net short 25 June calls.  To offset this I will buy 25 May OTM $123 calls for $0.68. Call these the cost of insurance.

Now, I have less risk to the upside than just the naked long put.  In the below chart you can see the combined position has a max loss at current IV of around $4,400. I sacrifice downside profit, but I significantly reduce risk.  Plus, If the market crashes I will be long Vega and should do really well to the downside.

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Below is a year to date chart of SPY on the top and 30 IV on the bottom from LiveVol Pro.  You can see IV is at a low of 13.81% right now.  If we have a major pull back to where we were on 2/5/2010 you can assume IV will be at least the same, but probably much higher than 23.77% that it was then.  this 10% increase translates to $1,200 profit on the combined position with Vega currently at $120. Remember from the chart of Vega, Vega increases as SPY drops too, so the profit from Vega should be much higher.

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After all this, I’m considering putting this position on in real money tomorrow in a much smaller quantity…

Remember, nothing on Voltraderblog is a trade recommendation but just an educational forum…

Bonus: Why does IV go up as the market go down and IV go down as the market goes up?  — When the market goes down longs buy puts for protection.  Remember option pricing is controlled by supply and demand. Demand goes up and the market makers having to take on more risk being short options increase prices of puts.  The only variable that is unknown in option pricing formulas is IV, therefore, as option price goes up, IV has to go up as well working backwards from option pricing formulas. 

My First trade posting: (FDO)

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

For my first blog post I’ll attempt to post a trade I put on yesterday and exited today in FDO, Family Dollar, an earnings trade.

The vertical skew in LiveVol Pro looked like this before earnings:

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As you can see the [red] April options were trading at a significant premium to all back months.  I sold the Apr $38 straddle naked 20 times for $2.20 credit in anticipation of the volatility crush after earnings:

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As you can see below in the LiveVol Pro software, after earnings Vol in FDO crushes and historically the ATM straddle loses.

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FDO announced earnings of $0.81.  Premarket shares rose from a prior close of $37.76 too a high of $41 and opened at $39.20.

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As you can see from the below LiveVol Pro skew chart IV collapsed immediately.  (The red Apr IV moved back down in line with the other back months:

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Nine minutes into trading I closed the Straddle for a debit of $1.70 for a $0.50 profit on a 20 contract spread, or $1,000.

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My first blog trade was a profitable one!