Thursday, February 24, 2011

(RMBS) Doubling Down on my short 25 strike calls

The stock is down $2 since I sold naked calls last Friday and I was just able to double down on my short call position for one penny less than my original entry. I got .30 on 2/18 and got .29 today. The reason this is possible is the three day sell off put fear in to put buyers and they drove implied volatility up from 49% to 65%. Since put/call parity means IV is distributed almost evenly, even though its the put buyers who are driving up IV, the calls benefit from an increase in price as well. I will gladly take this gift. Here is a link to the original trade last Friday 2/18/11. And here is a link to Put/Call parity in case this is a concept you would like more information on.

I also deleted my technical analysis drawings today and started from scratch. I like to do this from time to time to make sure I'm operating under a just set of assumptions. I found something interesting. In the updated chart you'll notice I added a new set of lines in purple that the original chart did not have. This is exactly why I like to update charts from scratch every now and then. To me there is an obvious short-term trend in gold within an even longer trending channel in purple. Today the stock reacted perfectly to both as the first possible support line that did not hold on yesterday's selling, is now acting as support. My point is that at the moment this stock is trading very strongly on technicals and I'm going to try and trade around this theme. This combined with the dramatically increased IV led me to feel comfortable to double down on my short calls. And of course if RMBS gets a buy out bid in the next few weeks then I'm an idiot, that is the known risk I'm taking.

Implied Volatility chart as of 2/18/11

Implied Volatility chart as of 2/24/11

Original Chart from trade on 2/18/11

Updated Chart as of 2/24/11

Intra-day Chart where previous support acted as resistance three times.

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