This is my first attempt at doing a video for my trades instead of a long write up with screen shots. Please let me know what you think. I already realized one mistake. My chart has is labeled as selling FEB call/puts but those were MAR expiration option. Thank you. Jason
Tweet
Seems like a pretty sound trade. I own some RMBS, just been selling covered calls on it.
ReplyDeleteThe video is pretty slick - did you make it by just putting a video camera in front of your monitor?
S
I made the video with a free software called Jing. Here is the website in case you're interested. http://www.techsmith.com/jing/
ReplyDeleteThat video took less than 5 minutes to make and load on the blog. It usually take much more than that to write it all and include relevant screen shots. This will probably entice me to video every trade for my personal archive purposes. RMBS is up to $21.30 in after hours today from the close of $18.80 today.
Thanks, I'm definitely going to check Jing out, that's amazing that it is freeware.
ReplyDeleteThat's quite a move up in RMBS, you probably sold your options at a very good time, after seeing your video I looked at the IV's and saw that they had come down a good amount from what they were when you made your video.
Should have known that as soon as I say there is a reasonable chance for SPY to trade within a $1 range it trades in a $3 range the very next day. Only good thing to come out of it is that I sold the SPY 126/125 Put spread in the morning, went to sleep, and saw that things had improved a bit when I woke up in the afternoon. Such is life when you play in options expiration week.
Regards,
S
I just downloaded Jing, it is great, thanks for the link. Now I just need to get a microphone.
ReplyDeleteS
Nice video, I'm thinking video is the way to go.
ReplyDeleteSandeep, it looks like the IV on the puts went up today and down on the calls, to be expected given the market today. I hate to be a conspiracy theorist but when I heard about the after hours news that sent the stock up almost 10% I had to wonder if the spike in IV had anything to do with leaking information on this announcement.
ReplyDeleteTrin Cafe, I will do a few more videos and see how it goes. I prefer to type but the time savings is a good trade off. I also took five years to switch over to electronic checking and preferred to write checks, so I'm sure this will be the same thing. I'm just slow to adopt technology in certain areas.
I'm going to take a look at the iron condor version of your trade tomorrow - 16/17 Puts and 26/27 Calls. Shows a 32 cent credit at the moment, but that may be different given the after hours news.
ReplyDeleteS
Let me know how that goes. I found the BxA spread to be pretty wide so I chose to leg in to the strangle sales last month and this month.
ReplyDeleteAs you said the spreads are wide. I just sold the 17/16 put spread 22 cents, took an hour to incrementally fill 10 contracts. The call spread is only priced at 6 cents on the mid, will pass on that.
ReplyDeleteSold another 10 put spreads this time for 24 cents. That's it for me with RMBS, hope it works.
ReplyDeletes
I'm wondering if someone could explain something to me. As I said above I sold the RMBS 17/16 Put spread for average of 23 cents. the short 17 put has a delta of 0.23, so for a 1 point spread that seems like a fairly expected risk/reward. I wanted to make this an iron condor, but as stated above the premiums for the call spread were pathetic. Checking now, you would have to do the 21/22 Call spread to get a comparable premium of 24 cents, but that short 21 call has a delta of 0.42. To get a delta for the short call similar to what we have on the short put, you would have to do the 25/26 call spread, the 25 call has a delta of 0.21, but then you only get 11 cents for that spread.
ReplyDeleteWhat is the reason the the call spread pays so little, is it volatility skew? I'm not sure I understand this because for a similar delta the I.V.'s of the calls is actually higher than the puts, for example the 25 Call has an IV of 91.9% vs 79% for the 17 Put.
Sandeep, I made a video to try and explain your question. Here is the link: http://youtu.be/nGnOJPTGWb4
ReplyDeleteThanks for that explanation Jason. I think I understand you points, but there are still some things I find puzzling. I admit that I was just using delta's as a substitute for probability of expiring as they are closely related. Regarding the IV's, I understand that in our example for the protection you are buying an option with 100%IV or something like that, but at the same time the short option has an IV very close to that, so since the IV is being spread I didn't think it would have a tremendous affect. I'm out of town and away from my computer, but when I get home tomorrow I'll use jing to put up a different example that I still find puzzling.
ReplyDeleteI'm sure you saw in our RMBS example that the same Put spread I sold for 23 cents increased in price 1 day later even though overall market volatility decreased from Wed to Thursday. I was so ticked off by that I sold 20 more spreads for 28 cents, so now I am really done adding to that position.
Cool, look forward to your video. I'm sure we can both learn from each other on this topic.
ReplyDeleteOkay, just put jing on this laptop, let's see if this works.
ReplyDeletehttp://screencast.com/t/FCZHquMOjF
It worked! No video yet, but I ordered a microphone which should arrive in a couple of days, then I will do my first video.
ReplyDeleteSo here is what I find confusing. If you just look at the delta's, both sides of the spread are nearly identical. The midpoint between the short strikes is 127.50, which is about where the SPY is. Now look at probability of expiration. The 123 put has a higher prob. of expiration than the 132 call, so you would think that if you sell this condor, there is a higher likelihood that the put side is going to get you in trouble than the call side. If this is the case, wouldn't you expect to demand a higher price for selling the put spread than the call spread? Conversely, if you use the other argument of just looking at the chart, wouldn't you expect both spreads to be about the same price considering they are both about equidistant from where the SPY is right now?
I just clicked on the link and didn't get anything.
ReplyDeleteStrange, I tried it earlier and it worked. I'll try putting it up again in a moment.
ReplyDeleteTry this.
ReplyDeletehttp://screencast.com/t/IJ0ycsjZi8
OK, that picture works. Here is my take on your first question. You asked about compensation for the spread. Let's look at it another way, let's just say we want to talk about compensation for the strangle and not buy the protection that makes a strangle an iron condor. Looking at it this way, you are correct, shouldn't you be compensated more for the put than the call at equal distances from current prices, given that IV is higher for the put? And the answer is yes, using just the bid price for simplicity, you would get $2.81 for the put but only $2.16 for the call. This is to be expected given differences in IV. Different Risk = Different Rewards.
ReplyDeleteNow your question seems to be, why isn't the net result of the spread higher for the puts than the calls given that there is higher risk of loss. My take on that is that because IV is higher for the puts, you're paying more for the protection compared to the calls, which means your net is lower from a spread. So the differences in IV means there is also a difference in disparity of price between the next available strike price in each direction.
So here is something to think about when selling an iron condor, IF there is skew, then perhaps try moving out the side with the higher IV to further strikes. This will have what I believe is the desired effect you're searching for which is equal compensation for equal probability of loss, NOT to be confused with equal distance from current price. And because of arbitrage and liquid markets, this is always the case. Price and risk are related and disparities don't last for more than seconds, if at all.
Your second question is directly related to the first. Remember that IV, price for the options, and probability of expiring ITM are all related. So my answer to your question is, if IV was the same, there was no skew, then yes I would expect to be paid equally for spreads that are equally distance from current price. But if there is skew, meaning risk is not balanced equally, then no, I wouldn't expect both spreads to be of equal price.
Let's look at this another way, if you as the investor think there is higher risk of loss in one direction, why would you accept equal compensation for higher risk? A rational investor would not. In this SPY example, why would you sell the put spread for .23 instead of the call spread for .40, even though they are the same distance from current price? If IV was equal, you would be a fool for selling the put spread instead of the call spread.
So knowing these relationships, if I wiped out the ticker symbol and the IV's of both and just showed you the current stock price and strike prices of the proposed iron condor, you should intuitively know that if the prices of the spreads are different, then there is IV skew. If prices were equal, you know there is little to no skew.
I left something out that is important and can be seen visually in your slide. When talking about disparity of price, take a look at the IV of the whole call chain compared to the put chain. The IVs of the puts actually increase the further out you go, where as the calls decrease for each further strike price. This means there is really high skew. People are willing to pay a higher IV for a further out strike. On the surface this sounds like it lacks common sense, that tells you that is where the fear is.
ReplyDeleteUsing common sense, I would assume I'm paying less IV for protection (long strike) than the short strike. But in this case I would be wrong.
Jason,
ReplyDeleteI think you nail it in in your observation:
"So the differences in IV means there is also a difference in disparity of price between the next available strike price in each direction."
I alluded to this in my earlier post, but I have usually assumed that in a spread position the IV's would sort of cancel each other out, so even if the puts have higher IV's since you are buying one and selling one it will basically be a wash. However, as you point out, that assumption must be what leads to my erroneous conclusions about expected prices.
Thanks for your insight, looking forward to studying your reply in more detail later tonight.
s
This was a good learning exercise for me so thank you for sharing. I thought of an easier way to look at the disparity and understand the net results of the spreads. Suppose you sold equal distance away from current price as in your example and the IV of the short call was 40, and long call was 38. Well if the IV of the short put was also 40, you would expect to pay 38 for the long put, but with drastic skew you're actually paying 42.
ReplyDeleteTo be honest I normally only look at current IV compared to historic IV, but now going forward I'm going to take a closer look at skew as well. I'm sure it will either open up new trading opportunities or maybe prevent you from making one. These are the types of learning experiences the blog was intended to be all about!! I love it.
Jason,
ReplyDeleteIf you haven't already listen to at least the first 25 minutes of the Friday weekly wrap up (March 18) on TOS. A couple of times Tom Sosnoff talks about the upside volatility being crushed this week and makes some interesting comments very relevant to our discussion.
I tune in religiously every Friday.
ReplyDeleteFirst the videoquality is great with the new software you are using and I think will be a great addition to the blog. Also love the discussion on volatility skew...exactly the kind of conversations this blog was created for.
ReplyDeleteWow, the april 17/16 put spread that I sold for 28 cents just a few days ago is now trading for 14 cents. Thanks for finding this trade Jason.
ReplyDeleteI didn't do anything, you analyzed the trade for yourself and decided to do it. That trade could still lose money. However, things have gone good for us so far in that the IV has gone down, it's moved in the right direction, and we've made some theta. It's still way early in the expiration cycle and I'll consider taking this trade down early if it keeps moving in my favor.
ReplyDeleteJust a little trial run here.
ReplyDeletehttp://www.screencast.com/users/jumnacapitalgroup/folders/Jing/media/2fa847e2-2194-4d15-af94-21355f70eacd
Cool, it seems to work. The only thing I can't figure out is how to post that http thing as a link that would just start up when you click it rather than having to copy/paste it into a browser to be able to see the video.
ReplyDeleteJust checked it out, awesome, what a great way for us to share ideas going forward.
ReplyDeleteI had a GTC order in to close this trade at .06 and it was filled a few hours ago. So this turned out to be a great trade. IV did in fact come down from its lofty levels of 85, the stock traded in a tight sideways range so I collected theta every day, and I captured about 94% of maximum available premium. I'm happy to lock in profits and move on to the next trade.
ReplyDeletestuladZhaere Chris Subramanian click
ReplyDeletesoycedramblips