Posted by: Admin: "The Vol_Trader" // Category: Earnings Trades
, Trade Management
If you have not already, please read my guest post at Option Pit (Click here) prior to reading this post.
So, OTEX reported, “profit up on higher revenue and cost cuts”. Premarket the shares are up from their close of $37.25 to $41. See chart below: (click any picture to enlarge)
At $41 our trade is suffering the max loss I predicted yesterday to the upside as of this writing premarket. (See P&L plot below) When the market opens I’ll look to close my short puts first and then see if there’s any decrease in underlying price as I think today should be a down day with the terrible jobs numbers…
UPDATE: 09:31 Ok, so the market now is open and OTEX is up around $43.80. I bought back my short $35 Sep puts for $0.10 for a nice profit. Now I will watch to see the price action of OTEX. I predict it will hit it’s highs at the open and spend the rest of the day retracing it’s gains.
UPDATE: 09:51 As predicted OTEX hit it’s high If it makes a new high on the opening 5 minute bar and has come down some. I’ll continue to monitor now. The 5 minute chart and current P&L plot after the short put was closed are below.
I will continue this post later today, stay tuned.
Posted by: Admin: "The Vol_Trader" // Category: Volatility Trades
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.
- 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.
- 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:
- 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.
- 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.