Another Short term Trade!

So last week, I used the weekly options for the SPY to construct a few calendar trades. As I expected the time premium in the "front week" vanished very quickly as we headed into the holiday weekend and into the last day to expiration. The theta or time decay was really cool to see. But something that I had not expected to happen was how fast the "back week" options lost time value. They lost much more value relative to the front week options than I had anticipated. From what I saw part of the drop which I had expected came from the time decay. But the part I had not anticipated what the huge drop in vol that totally just crushed the profit of the position. For example, at about $102 the position was suppose to make about $1,000 at initiation, by the end of the day on the front week expiration that profit shrunk to $100. Anyways I should had closed that position out on Friday instead of rolling it, but lessened learned and I will move on.

With that said, today I am initiated a short strangle trade for July '10 expiry. I am selling 3 101/107 strangles @ $1.50:

My break evens on this trade are 99.50 and 108.50. Maximum profit is realized between 101 and 107. Here is what it looks like on the chart:

I have highlighted the area of profitability on the chart above. Also take note of where July expiry is in relation to the price range. I have about $4.5 points of cushion on either side.

Here is a shot of the greeks at initiation:

I am relatively delta flat and have positive theta. My gamma is a little large, but I expect that the SPY will not move too much between now and next week so the closer we move to expiration this should start to shrink a bit. I will re-evaluate the market at the extreme end of either side of this strangle and possible trade around the position. Currently my soft stops are at 99 and 109 on the SPY.

Hedging my hedge

At this point the only real potential for gains I have left on the books is a SPY put hedge that can finish anywhere from -420 to +5000. Should the market rally back a bit and thus kick myself in the nuts for closing out a trade at -1620 instead of +840, I'm looking for a way to maybe capitalize off such a move. If we get a bounce tomorrow I'm thinking about putting on a call backspread, now that I know more about them. This is pretty close to the reverse of the SPY put play I have on but opposite. So below is the individual call backspread and the combined position should I put it on. My risk would be if SPY closed higher than 109, I just don't see SPX above 1090 two weeks from now and I'm willing to wager accordingly. I just think there are too many people who would love to get out at even money of anything they put on in the last few weeks. Closing above 1040 at this point would be a victory, I don't see another 50 points on top of that. This call backspread can be put on for 0 out of pocket with a max gain of $3000, average of $1500, and unlimited losses above SPX 1090.


The chart shows the needed trajectory line to reach 109, which is right at the downtrend resistance line. The blue line is a copy of the last bounce off of 1040, so should we see something similar or even bigger, I would lose money. Unless it happens immediately after I put this play on I should be safe. But anything can happen.

Dollar, Euro Break 50-Day Moving Averages

Looks like there could be a new sheriff in town. What I mean is new relationships might be forming in the market place. Equities were trading in lockstep with the Euro, but maybe that does not hold anymore. Will see!

 

 

Sent to you by Dominic via Google Reader:

 

 

Dollar, Euro Break 50-Day Moving Averages

via Think BIG by Bespoke on 7/1/10

The US Dollar and Euro have made big moves today.  The Dollar index is down 1.8%, while the Euro is up 2.29%.  These moves have caused the Dollar to drop right through its 50-day moving average, while the Euro has broken above its 50-day.  This is the first time since mid-April that both have been on this side of their 50-days.  If told of this big drop in the Dollar and rise in the Euro and asked which way stocks went today, most would probably guess higher, but that was not the case today. 

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Reflation/Deflation

When TA fails

Whoops, I'm sure Dennis Gartman and his "famed Gartman Letter" will be on Fast Money today saying how he got out of gold just in time when in fact he told the world two days ago that although he wasn't a gold bug, gold was about to go hyperbolic. It must be tough trying to predict the future. And in fact it is, that's why people try to play both sides of the fence at all times when doing public predictions. Stop listening to talking heads or bloggers and start listening to yourself. That's my free advice for today.

Part Deaux

AKAM close out

Yesterday was touch and go as until the last hour the stock was poised to close within the channel. However, even had it not closed in the channel I had already found myself starting to look for ways to stay in the trade past my trading rule threshold of no more than a 1% of trading capital loss, rather than just admit my planned exit strategy was at hand and exit the trade. Below are just some of the ludicrous ways which I tried to justify my actions. Trading rules are new to me, I never had them in the past and probably because I don't generally like rules. But since this is my capital at hand I understand their importance and happy that I did exit the trade within my rules. Had I not done so I would just be setting bad precedent for the future.

• Redrew lines to be more liberal to give myself some wiggle room
• Justified that only the intra-day move was outside the channel but the closing was not. The problem with this is my channel was drawn with intra-day lines, thus I was trying to redraw lines.
• Yes it's broken the channel, but let's see if the 50DMA will hold as support!! (where did this come from? I made this up on the fly)
• Well I've got a SPY put hedge on that will make up for most of these losses
• We're bound to get a short cover bounce and I can close out then at a lower cost
• Yes my trading rule says to exit, but I'm not quite at the 1% maximum allowed loss so doesn't this allow me to stay a few more days and hope for a miracle?

Trying to play a Vol Differential for a 1 day trade.

7/2/2010 Update: So here is an updated profitl loss graph of the original position as we head into the close:

Take note of the change in the profit potential. At $102 when I first put this on I had a max profit of about $1k and now it has shrank to $100. The vol collapsed just as I thought on the front month, but collapsed a lot faster then I thought on the long options. In the future I will need to find a better way to hedge the short puts sold. That may mean that I have to go a little further out in time to buy the long puts. With that said I did however roll the long puts into vertical spreads before vol completly collapsed this afternoon, and you can find the new P&L chart below:

I really did not want to take risk into the weekend until I saw todays price action. So I rolled in basically a double vertical spread. I start making money below 102 and max out at 99 on the SPY. My thesis is we get there next week. But I don't have much time to be right. So Like I said in my previous comment, I am taking a bit of a gamble on this one.

End of day Greek update:

Above I am trying to keep a record of how the greeks changed with the passage of time. Since I am using weekly's this will be easy to do in a short period. Theta nearly collapsed in half while my Delta exposure quadrupaled due to my Gamma position and how close we are to expiration and to the ATM strikes. My short options lost 60-70% of thier value today and my long options lost about 37-43%. The implied Vol differential also shrank from a spread about 7.5% to a spread of about 3%.

Update: Here are the Greeks on the position. Take notice of the large Theta position.

I bought the 100 and 102 calandar spreads for $0.86 each. The options that I sold expire tomorrow and the options that I bought expire next week. So I constructed this trade with all weekly options. There is about a 7.5% spread on the vol for the short vs the long puts. The shorts have the higher vol.

My break evens by tomorrow are 98.45 and 103.58. I could not help myself, this trade just stuck out to me and I like the RvR for one day.