I’m back! …

Hello again friends, I’m back.

As I mentioned in my last blog post in October, 2010, I’ve been very busy with two new projects recently. I’ll tell you about them in a bit.

As my regular readers know I usually prefer to trade bearish. Well, I picked a good 5 months to start my new businesses and not trade as the market has been going straight up since December, until now.

I like to use exponential moving average cross overs on daily and weekly charts of the S&P futures in order to guess (predict?) general market direction. As you can see below the 5 day moving average has been above the 20 day moving average since December. (Click any picture to make larger)


Interestingly, you can also see above, in the November – December pull back the 5 day MA never went far below the 20 day.  The recent pull back is much more severe with the 5 day well below the 20.

Monday I decided to get a little short delta and long Vega. Good timing considering Tuesday’s big decline. I put on an OEX May back ratio spread: short 10 May 580 puts, long 20 May 540 puts for a net credit of $3.35 per one by two spread. The P&L looks like this as of today:


I’m already out of most of this. From 20:10 to 6:3 left. I sold portions for credits of $2.80 and $1.80. My remaining 6:3 is bid at $0.25 and I have an order to get out of the rest at $0.05. Net profit so far is $1,585. Not bad for two days.

Going forward if the market decline continues will be looking for more OEX spread and some individual equities.  I’ll keep you posted.


The first business is up and running with new clients already. in April 2010 I decided I wanted my podiatry practice to be at the top of the Google Maps Search. Along with a web developer friend of mine we worked and worked and got me there.

I started seeing new patients right away. A year later, I’m up to about ten new patients a week from it. It worked so well, we decided to start a business to help get other businesses to the top of the local search engine results pages. Check out our site: www.bestmarketingnyc.com and try it for yourself. We are currently accepting new clients. We offer two months for free with a commitment to pay for just the third month and then it is month to month. If not happy, quit the service at any time. Feel free to ask any questions and contact me at bestmarketingnyc@gmail.com

The second new business is a topical medical for nail fungus. Being a podiatrist, I’ve tried every topical medication for nail fungus on the market with my patients. None worked that great so I set out to make my own. I took all the active and inactive ingredients that I thought worked best from other products and formulated my own medicine. I’ve tried it on dozens of patients, and while it doesn’t work for everyone, it worked on many more patients than anything else I’ve tried. I’ve also used it for non-fungal nail problems and it works there too. The medicine is made and I’m just waiting on my web site to be finished and the labels and packaging to be finished at the printer. Any day now… I’ll post the website here when it’s done!

Thanks for reading and I look forward to getting back to trading and sharing all my trades with you.

See you soon, Lawrence

Skip strike unbalanced butterfly spread in EXC

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

How I like to structure a bearish trade based on the Greeks

Today I’ll tell you about a trade I often do on equities that I’m bearish on.

First, I scan for bearish chart patterns.  Once I find one I look at the skew curve.  I like to see a relatively flat vertical skew for at the money strikes.  (Vertical skew is the skew from strike to strike in the same month).  For this trade I’m not trading skew but rather direction and I’m going to take advantage of the skew that forms when my underlying moves down pushing up OTM put IV. (Skew chart below from LiveVol Pro) (Click any picture to enlarge)


As you know, when the underlying goes down the IV of the puts is driven up as the longs buy puts for protection and the speculators buy puts to speculate.  As the underlying goes up, the IV is driven down when the longs sell their protective puts.

With this knowledge it makes sense to put on a trade this is long Vega to the downside and short Vega to the upside.  This can be accomplished by selling a combo.  Long put, short call.  The plot of Vega is a beautiful sight, see below plot of Vega (Y-Axis) vs. Underlying price (X-Axis).  


The only problem is you have unlimited upside risk.  See below P&L chart of short combo.


So, I have identified risk to the upside.  I want to hedge this trade but keep my advantageous Vega profile.  I could add long calls to protect the upside but that will make me much more long vega which is not what I want to be if the underlying moves up. 

We could use a bullish call vertical spread to hedge the upside some.  We’re all taught that vertical spreads are vega neutral.  However, the more you widen the strikes the move Vega you get because the options closer to the money have a larger vega than the farther OTM.

In my example I’m going to look at an OTM call vertical which looks like the below plot of P&L and Vega respectively:



So, by adding this call vertical I hedge some (not all ) of my upside losses and maintain my very favorable Vega structure.

Here’s the trade:

Underlying is LFC $58.55 (China Life Insurance Co Ltd) which is in a downtrend since it peaked in Dec 2009.  See the two year daily chart below.  (In my opinion) It has broken out of a trading range dating back to Apr to the downside.  There’s a gap down to the $55 level.  This is a beautiful chart example of what happens when there’s a gap, even a long time ago.  Look at the lack of volume from $59 to $62 and how fast it fell through this range.


Short combo: –20 Oct $60 calls / +20 Oct $57.50 puts for debit of $0.20

Long Vertical: +10 Oct $57.50 calls, –10 Oct 62.50 calls for a debit of $2.10

The combined trade P&L looks like this:


You could modify this by buying the long call vertical with 20 contracts instead of 10 to get a better upside hedge but it also reduces downside profit a little.  That looks like this:


The plot of Vega (Y-Axis) vs. Underlying price (X-Axis):


Exit Strategy:

On the downside, I’m comfortable with the underlying moving up to around the $62-$63 range.  At current IV and today, this equates to a loss of around $4,400 but we know that as time goes on and IV drops I will have a smaller loss.  On the downside I’ll look to take some profit one spread at a time as the underlying moves down.  Vega will be working in our favor and theta will be working against us.  The nice thing is that Theta is not that great of a factor.  You can see in the below plot of theta at 14 day intervals that theta is very small in the beginning and then gets more and more as we get closer to expiration.


I’ll post updates as this trade progresses.

*Education purpose only, not a trade recommendation!

Earnings trade management post earnings, an update on OTEX

So, last I reported OTEX was up in the PM after reporting good earnings.  As I predicted my short SEP calls lost their extrinsic value but unfortunately gained lots of intrinsic value as the underlying moved up. 

My plan was take a loss if OTEX moved above it’s opening high at 9:35am.  Well, not all things go as planned.  I was busy with my regular job seeing patients and by the time I checked the price near the close OTEX had made new highs and was heading down into the close.  I held…

The next day, Friday I was in surgery at the open.  After my surgery I check the price and figured I’d hold and see if OTEX would go down to fill the gap.  I was in surgery all day and when I checked at the end of the day, the gap was not filled and OTEX was pretty much even all day.

Today, Monday, I decided to use my upper end of the opening gap on earnings as my stop out.  OTEX was flat all day and I’m still holding waiting for either a stop above the earnings gap, $43.14 or a move down to take some profits.  At this point there’s little theta effect so holding isn’t terrible.  I’m very long Vega so a move down will benefit me more than the current P&L chart below shows.  (click any picture to enlarge)

I’ll keep you posted on this trade.  As you probably can tell from reading my previous posts, I’m always more comfortable in the current market being bearish.  I am still (still still still – it seems) bearish on this economy.  If this trade were positive delta I would have taken it off already.


Short naked put vs. short put vertical spread, open for discussion.

Today, I’m going to try a new format. 

I received an email from a reader that I wrote a relatively quick response to. 

What I am going to do/try is to post his question here and my response and open the comments up to discussion.  Please participate….  – Lawrence

PS: I’ll post a continuation to the OTEX (losing) earnings trade later too…

Note: the reader’s name has been changed for privacy, it was not Elwood Blues writing…


08/23/2010 Elwood Blues sent in via email:

Hi there,

I am trading mainly stock options and usually short sell out-of-the-money puts. The strategy is doing fine, but I am currently thinking about my risk management:

– Usually I follow the double out rule (i. e. as soon as an option reaches the double premium I got for it, I close it to limit my losses). But this rule kills you in a volatility spike – you are stopped out, even if the stock is still far out of the money, sometimes even moving in the correct direction.

– A friend of mine advised me to look only at the intrinsic value. This of course protects me from being caught in volatility spikes, but the losses are much higher.

Do you have any good idea?

Best regards,



8/23/2010 Lawrence “VolTrader” wrote via email:

Hi Elwood, to answer your question completely would require a pretty long options education, rather than just an answer but I will do my best to give you a simple explanation…

You are right when the underlying moves against you the vol spike will increase losses.  This works in your favor as the market goes up, vol goes down and your short put benefits, a double edged sword.

A simple fix to this is to sell a put spread instead of a naked put.  This means sell your OTM put and buy a further OTM put as protection.  This limits your losses, reduces your margin requirement and protects against vol spikes.  As your short put gains in value due to the underlying going down (delta effect) and gains in value due to vol increase (vega effect) your long further OTM put also gains in value due to delta and vega…  Also, because these are limited risk (not unlimited like short naked put) you can hold them longer and see if your underlying moves back in the favorable direction and allow time decay (theta effect) to work in your favor as both options lose value over time, the closer to the money short put faster.

Elwood, can I post this conversation to my blog and open it up to discussion through comments?  (I’ll just put a fake name for you)



08/23/2010 Elwood Blues sent in via email:

Thanks a lot for your quick reply! I thought about this strategy as well – the minus is only that it will also limit my possible profits…

Sure you can put it to the blog!



Thinkorswim missing feature? a work around!

I have zero complaints about Thinkorswim, BUT there is one feature that I’ve asked them to implement and the answer was that they’ve tried and for some reason that I didn’t comprehend, they cant implement it into the analyze tab due to how it works internally (or something like that, I told you I really didn’t understand the answer). 

What could possibly be missing from the best options, futures, and stock trading platform ever?  (Tom, I left out Forex b/c I have not traded that and thus have no comparison)

When I use the analyze tab I like to track my P&L for positions that I have closed previously along with my still-open positions.  Currently, there is no way to do this in Thinkorswim’s analyze tab.  I’ve found a very simple work-around for this.

Let’s say 3 weeks ago you put on an iron condor in SPY.  You sold ten contracts each of the $110c / $112c / $106p / $104p spread for a credit of $1.37 which looks like this: (Click any picture to enlarge)


Three weeks later the market has not moved much and due to theta decay you’re up a few hundred dollars and you decide that you want to exit the put spread as you feel there will be a fall in SPY.


You close the put vertical taking a few dollars in profit.  Originally, the put vertical yielded a net credit of $0.63 per spread.  You buy back the spread for $0.50 for a profit of $0.13 or $130.  Additionally, you’re up $360 on your call spread.

You still have your short call spread open but the Thinkorswim analyze tab no longer shows you the profit form your put spread.


If you want to see your total profit for your call spread and your closed put spread you have to do this simple work-around:

I add a single OTM option to buy one contact and sell one of the same contracts.  In this case I’ll add one sale of the 45 put for $1.30 and add one buy of the 45 put for $0.00 yielding a hypothetical $130 profit.  If there were a realized loss, I’d buy for $1.30 and sell for $0.00 for a hypothetical $130 loss. Below is the P&L for the call spread and the work-around with the $130 included both at the current price, white line, and the expiration price, red line.


Note the strike price, month and whether it’s a put or call are completely arbitrary as long as they are the same.  I like to use the farthest OTM strike I can find so I do not confuse it with the other simulated trades I’m looking at.

Hope this helps… Lawrence

UPDATE OTEX trade management after earnings release

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.

MCK – out of the rest – an earnings trade gone well

Click here to see my MCK earnings trade setup and trade management.

This morning at the open I closed the remaining spreads for a debit of $0.14 for each 3:2 spread.  On 7/29/10 I entered this trade for a credit of $2.70. 

This trade went exactly as planned.  My prediction were spot on for IV and direction.  (click picture to enlarge)


DIS – Managing this earnings trade that has become short Theta

So, yesterday I didn’t get to exit my DIS trade like I had hoped to.  My regular readers know that when a trade moves in the desired direction I often take my time to get out in small increments, however, with this trade I’m anxious to get out.  Most of my trades are theta positive and with time working on my side I don’t rush to exit.  This trade is theta negative and time is working against me.   I am long back month options and short front month options but still theta negative.  This is because there’s so little extrinsic value left in my short Aug options due to OPX being only 8 days away and because of the Vol Crush that occurred after earnings.

This trade is very short delta and the futures are showing some weakness pre-market and so is DIS (on very light volume).  I’ll monitor and start exiting today. (click picture to enlarge)