Sunday, April 18, 2010

OEX Modified BWBs for May

***Disclaimer***
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (the "ODD"). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes. In order to simplify the computations, commissions, fees, and margin interest and taxes have not bee in included in the examples used in this presentation. These costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences. No statement within this presentation should be construed as a recommendation to buy or sell a security or to provide investment advice.


For those who are following this blog, the following example BWB trades can be looked at for the month of May. We are going to follow something different this month in that rather than putting on the traditional 1:2:1 BWB

Let's start with the basics.

After the major markets were spooked by the SEC announcement on GS, the OEX closed 9.19 points down on Friday at $544.68

The VIX moved higher from its previous close of 15.89 to Friday's close of 18.36

There are 20 more trading days till May expiration.

OEX volatility is currently at 17.65%.

Based on these numbers, the OEX Expected Move range for May is approximately $517 to the downside and $571 to the upside.

5% away from the OEX closing price is also $517 to the downside and $571 to the upside.

Let's assume a bearish stance to the market so we will be initiating a Put BWB.

A traditional 1:2:1 BWB can be constructed with the following strikes:

Example 1

Long 1 530 Put
Short 2 515 Put
Long 1 455 Put
Credit: $0.05

Max Profit: $1505
Max Loss: $4495
Lower Breakeven: $499.95

We are going to modify the BWB in attempt to (1) widen the strikes and (2) open the position for more credit to protect ourself if we were totally wrong.

The modified BWB can be thought of as a 1:3:2 broken butterfly but we are going to split the short strikes in a 2:1 ratio. The modified BWB is constructed as 1:2:1:2.

Example 2

Long 1 530 Put
Short 2 510 Put
Short 1 505 Put
Long 2 470 Put
Credit $0.20

Max Profit: $2020
Max Loss: $5480
Lower Breakeven: $497.42

This modified BWB trade in comparison the the traditional BWB is opened with a larger credit, higher profit potential, lower breakeven (more safety) but higher margin held.

If you were looking at maximizing your credit to open the position, you can also shorten the strike widths. This would also allow you to buy a higher strike tail put to lessen the margin held on the position. An example would be:

Example 3

Long 1 530 Put
Short 2 515 Put
Short 1 510 Put
Long 2 485 Put
Credit: $0.70

Max Profit: $1570
Max Loss: $3930
Lower Breakeven: $504.62

-randomjaywalking

Option activities for April 2010

***Disclaimer***

Options involve risk and are not suitable for all investors.  Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (the "ODD").  Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606.  Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes.  In order to simplify the computations, commissions, fees, and margin interest and taxes have not bee in included in the examples used in this presentation.  These costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions.  Investors should consult their tax advisor about any potential tax consequences.  No statement within this presentation should be construed as a recommendation to buy or sell a security or to provide investment advice.

In general, a very forgettable month by any standard.  I don't blame myself if unforeseen events unfold but only for giving profits back due to my own foolish acts.

Summary of option activities for March 2010:

-- No trades for the first two weeks due to low volatility.  The VIX went as low as 15.23.  Basically low volatility affects the premium you pay or sell when you deal with options.  In the $OEX context, it means the call and put strikes do not "open up" as well and it may difficult to get "even-money" for $10 or $15 spread with 4 weeks to go.
-- Traded the last two weeks.
-- Traded 20 contracts of 520-515-490 1:3:2 BWB
-- Traded 10 contracts of 525-520-490 1:3:2 BWB
-- Traded 20 contracts of 535-530-490/485 1:3:2 BWB
-- Offset the short call on C due to massive move upwards
-- Re-collar GS for a $5 move upwards
-- Bought back the GS 185 short call and sold the GS 175 call due to the SEC litigation
-- Total profit is $2,541 on options-related transactions (that excludes stocks and bonds)

-- dream

Tuesday, April 13, 2010

OEX May Positions

***Disclaimer***
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (the "ODD"). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes. In order to simplify the computations, commissions, fees, and margin interest and taxes have not bee in included in the examples used in this presentation. These costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences. No statement within this presentation should be construed as a recommendation to buy or sell a security or to provide investment advice.


The following OEX options trades were executed to limit my overall risk exposure as well as give a wider chance of profit in May.

Closed 12 contracts April 525/520 Bull Put Spreads
Debit $0.10
Profit $0.20 per contract from the initial $0.30 credit received

Closed 6 contracts April 525/535 Bear Call Spreads
Debit $9.75

Open 4 May 510/520/530/540 Iron Condor
Credit $8.70

Effectively I closed 2 contracts of the Deep ITM April 525/535 Bear Call spread that was in danger of early exercise (for a loss) and rolled 4 contracts to May but up one strike.

My position breakevens for May expiration are now as follows:

Upper Breakeven: $538.65
Lower Breakeven: $511.31

This is my large mouse trap should the market sell off in May, but also limit my risk should the market continue its rise - random walk theory.

-- randomjaywalking

Saturday, April 10, 2010

April Adjustments using Convoluted Spreads

***Disclaimer***
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (the "ODD"). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes. In order to simplify the computations, commissions, fees, and margin interest and taxes have not bee in included in the examples used in this presentation. These costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences. No statement within this presentation should be construed as a recommendation to buy or sell a security or to provide investment advice.

With 1 week to go till April expiration, the following position adjustment trades were executed last week. The purpose of these position adjustments is to help partially fund the roll-out of the 6 short 525/535 call spreads to May.


Adjustment Trade 1: 05/04/2010


6 contracts
530/520 BULL PUT SPREAD (short put spread)
Credit $1.00


After putting this trade on I realized that the strikes were a little too aggressive based on the expected move calculation at that time.


Adjustment Trade 2: 06/04/2010


6 Contracts
530/525 BEAR PUT SPREAD (long put spread)
Debit $0.70


After this adjustment, the position became 6 contracts of the 525/520 BULL PUT SPREAD (short put spread)


Adjustment Trade 3: 06/04/2010


6 Contracts
525/520 BULL PUT SPREAD (short put spread)
Credit $0.30


I added more contracts to the position and now became 12 contracts 525/520 BULL PUT SPREAD (short put spread)


What the position essentially morphed to was an IRON BUTTERFLY


Put portion: 520/525
Call portion: 525/535


In order to bring in more credits I also executed an iron condor using the OEX Weeklies. The strikes chosen were based on the expected move calculation for the weekly expiration timeframe.


Adjustment Trade 4: 07/04/2010


1 Contract WEEKLIES
535/530 BULL PUT SPREAD (short put spread)
Credit $0.40


Adjustment Trade 5: 07/04/2010


1 Contract WEEKLIES
545/550 BEAR CALL SPREAD (short call spread)
Credit $0.50


Now the OEX closed at 545.46 on Friday expiration of the Weekly Options, so my short 545 Call was 46 cents ITM. I was watching it all the way to the market close (4AM!) hoping that it would tick down and expire OTM...sigh... Since OEX options are cash settled, there will be $0.46 that I have to pay back from the $0.50 cents credit that I took in for the BEAR CALL SPREAD. However, the BULL PUT SPREAD expired worthless and I was able to keep the entire credit.


More to come next week as expiration for the monthly options approaches and the roll-out to May for OEX positions will be executed




-- randomjaywalking

Friday, April 2, 2010

Wow! Kind gesture from Random Walk Trading

I came back from a fantastic dinner and a round of cigars with some brothers and I received this gift from Random Walk Trading:



Dear Mr. dream:
 
Greeting from Random Walk!.
 
We saw you online at the DTI webinar on Wednesday, March 10, 2010 when we presented " Broken Wings Butterflies", and saw that you were singing the praises of the BWB. We thank you very kindly for your love and support and since this was unsolicited we thought we would reward your loyalty by giving you the access  to Webinar Semester 4's recorded link which you can have access to view until June 15th, 2010. We will also send you a copy of the accompanying text in the mail.  Once again, thank you.
 
Please confirm your delivery address:
123 Good Class Bungalow
Sentosa Cove
Singapore
 
You will receive the access to Webinar Round 4 recorded link shortly.
 
Kind Regards,
 
Random Walk

This is a really a kind gesture from Random Walk.  I was just giving an honest testimony on how much I've learned from the good education and the subsequent profits I've made trading their system.  They appreciated the kind gesture and gave me access to a webinar recording worth $1,499.  That is really nice of them.  Thanks a bunch, Random Walk.   



Sunday, March 28, 2010

Triple screen? Who gives a shit?! How about some cigars instead?

Life is too short to talk about the triple screen system.  How about some cigars with Dr. Elder instead?


Shortly after his conference upon the invitation of SGX, I met him the next day for a private spike trade meeting.


We were supposed to meet at the lobby of Swissotel at 6:25 p.m. but I was late because of work commitment.


I arrived at 6:40 p.m. and had to find my way up to room 5959.  Upon entering, Dr. Elder has already started the meeting with a group of fellow traders whom I have never met.  There were three of them, two gentlemen from Singapore and one who flew all the way from India just to attend his conference and probably his intensive two-day advanced trading course that was coming up in a few days' time.


The gentleman from India was showing his notebook to Dr. Elder and explaining how he has begun tracking the NH_NL index for the India market.  He is a very serious trader who came to the meeting armed to the teeth -- trading notebook, writing pad and of course his full attention.  I suspect he probably have a voice recorder in his pocket somewhere.  I came empty-handed, except for the camera to take some pictures.  The other two gentlemen were more passive, listening and nodding most of the time.


Honestly, I could care less about all these heavy-duty stuff.  I have already an excellent grip on the materials.  I came for some fellowship with the man whose work I spent much time in the past studying about.  It is like making your pilgrimage journey.  I want to meet him in person and spend his time interacting with him as a fellow trader.


In short, Dr. Elder is a very serious trader.  He went through pains to explain the importance of keeping a detail trading diary and even spent some time demonstrating the his AK-47 trading diary software.  He wasn't there to sell anything but to share the characteristics of a good trader.  "Show me a good trading diary and I'll show you a good trader.", he says.  It is just like what my manager says, "Sales is 50% about discipline."


He took in suggestion about setting up private forum for traders within spiketrade as the current site has limited interaction.  He was also gracious enough to share with us the new book that he is currently writing with Kerry.


We proceeded to dinner after an hour or of sharing and white wine.


During dinner, I asked him how he "jumped ship" many years ago when he was a medical doctor in Russia.  He mentioned that in his book and I always wonder how he did it.  He told me that he disliked the Russian system and did it when he was the ship doctor in South Africa.  He planned the move some time back and kept himself very fit by exercising on-board the ship.  When the chance came, he ran all the way into the American embassy to seek asylum.  


Here we have a man who entered university at the age of 16 and graduated with a medical degree at a tender age of 21.  He came to America practically with only his shirt on his back.  He knew nothing also about trading and down the road he became the infamous Dr. Elder that we all know today.


Before the night was over, he gave me one of his favorite cigars -- the Leon Jimenes No. 4 after smoking one with me by the pool side.  This man knows how to enjoy life.  We should do too.  After all, life is make up of different experiences so don't deprive yourself of the good things in life, especially when you can afford it.  It is utterly dumb to do so.


The interaction with Dr. Elder left me only with one thought:  if you have aptitude and characteristics of a successful person, you'll be successful no matter where you are and what you do.  A lot of dudes read few financial guru books and think that they are on their way to financial freedom.  That is really dumb.  You'll still be that same old mediocre dude.  Nothing will ever change.


--  dream

Saturday, March 27, 2010

Using Options to Hedge your Stocks

***Disclaimer***
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (the "ODD"). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes. In order to simplify the computations, commissions, fees, and margin interest and taxes have not bee in included in the examples used in this presentation. These costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences. No statement within this presentation should be construed as a recommendation to buy or sell a security or to provide investment advice.
With no trades this week, I had a lot of time to catch up a couple on a couple of strategies that most beginners and traders know about, but either do not understand well, or apply them incorrectly.


Let me share a few thoughts on the following well-known as well as not-so-well-known strategies.


Covered Call


A covered call position consists of the following:


Long 100 Shares
Short 1 OTM Call


This is probably the first strategy that option beginners trade.


Premium received from sale of short call helps reduce the break-even price for the stock.


There is still unlimited risk to the downside if the stock price drops.


The position is similar to a naked (short) put option.


If the stock price does not reach the OTM call strike price by expiration, we get to keep the premium from the short call.


Married Put


Long 100 Shares
Long 1 ATM or slightly OTM Put


Buying a protective put for your stocks in your portfolio is one of the first options trades that beginners also execute.


Your stock is protected by the long put should the stock price drop.


You have to pay the premium for the put option. It can be expensive.


The break even of your position is higher because of the premium that you paid


If the stock price stays above the put option strike price, the put option will be worthless (you've lost the premium the you paid).


Most people view this as similar to having insurance on your house or car. We are insuring our stocks.


This position is similar to the long call option.


Standard Collar


Long 100 Shares
Short 1 OTM Call
Long 1 ATM or slightly OTM Put


The premium received from the sale of the OTM Call option are used to either fully or partially fund the purchase of the Long Put option.


The breakeven of your position is slightly higher if the cost of the long put option was not fully funded by the sale of the short OTM Call


This position is similar to a long call vertical spread also known as a Bull Call Spread


RWT Collar


Long 100 Shares of volatile stock (e.g. GOOG, BIDU)
Short 1 OTM Call
Long 1 OTM Put


The key for this strategy is the stock selection. The stock must move. The more it moves the better. We are not concerned about the direction of the move, as long as it moves.


Similar to the mechanics of the standard collar however there are strict rules on distance OTM of the long put and short call as well as steps to dynamically manage the position should the stock price rise, fall, or consolidate. In a nutshell:


1. If the Stock sells of (goes down in value), sell the Long OTM Put


2. Use the money to purchase more stock (similar to dollar cost averaging, but using the proceeds of the Long Put sale rather than your own capital)


3. Purchase more OTM puts to protect your increased stock holdings


4. Repeat if Stock Sells Off


5. If stock price increases in value by one strike increment, re-collar using higher strike prices for the Short OTM Calls and Long OTM Puts


6. If the stock price consolidates between the Call and Put strikes, your option positions will expire. If the purchase of the long put option is not fully funded by the sale of the short call option, then you will lose the difference between what you paid and what you sold. You will make a choice to either wait a couple of months for the stock to break out of the range or simply change to a more volatile stock.


Dream's Ratio Collar


Long 100 Shares of volatile stock (e.g. GOOG, BIDU, GS)
Short 1 OTM Call
Long 1 OTM Put
Short 2 Further OTM Put


Similar in mechanics as the RWT collar.


The sale of the 2 Further OTM Puts are used to offset the cost of the long put. This position is in fact a combination of the covered call plus short put ratio spread.


There will be a credit for the short call, as well as a credit for the short put ratio spread.


The credits reduce the break-even price for the stock.


If the stock consolidates between the Short Call and Long Put Strikes, We get to keep the credit!


This however still leaves the position with unlimited risk to the downside and will tie up substantial margin.


PRB Collar


Long 100 Shares of volatile stock (e.g. GOOG, BIDU)
Short 1 OTM Call
Short 1 ATM Put
Long 2 OTM Put


Similar in mechanics as the RWT collar.


The sale of the ATM Put is used to offset the cost of the long put. This position is in fact a combination of the covered call plus put ratio backspread (long put ratio spread).


Similar to dream's ratio collar, there will be a credit for the OTM Call and a credit for the put ratio backspread.


The credits reduce the break-even price for the stock.


If the stock consolidates between the Short Call and Short Put Strikes, We get to keep the credit!


With this position, the unlimited downside risk is eliminated, however the credit received for the put ratio backspread is substantially less than the credit received for the short put ratio spread in dream's ratio collar.


Which collar will perform better? Only time will tell!


-randomjaywalking