A New Slant on GLD

Discussion in 'Options' started by optionsmaven, Dec 21, 2010.

  1. Hi Folks,

    Diagonal spreads have long been known as an excellent risk/reward means of net selling options time value (TV). For those unfamiliar with this technique it consists of buying an option in an out month and selling the same type of option, but at a different strike in the front month. It can be done in either puts or calls, depending on your market expectations. The preference is to use puts in ascending and calls in descending markets to reduce exit commissions on successful closeouts. The GLD options are an attractive vehicle for this strategy, due to a large and active market, volatility, underlying directional trend and high TV in front month contracts. At last Friday's expiry (GLD at 134.20), I entered a bullish diagonal spread, buying the Feb 134 and selling the Jan 135 puts for a debit of 0.80 (margin required 1.80). The range of prices at the Jan expiry at which profit will be gained is quite large. Should the market remain at 134.20 (unlikely), the 135 puts would be worth 0.80 and the Feb 135 about 2.40, a profit of 1.60 or 100% before commissions. At 135, the Jan puts would be worthless and the Febs about 1.90. Should GLD rise beyond 135, there would be a net profit at any finish all the way up to about 139, or 4% above the price of GLD at inception. On the downside, a finish at 133 would make the spread marginally profitable and losses would be generated at a diminishing rate starting at 132 with a loss of 0.25.

    The great feature of this technique is that the long side can be rolled up and/or down to protect profit potential when break even levels are approached. For those interested in how this strategy will be managed, you can follow the progress on my blog at: blog.wastingassets.net.

    Good luck and good trading.
  2. om,

    good info in your threads and blog.
    what about some option trades on uso, which now seems to be on a determined run up.
    also how about option trades on vxx which seems to be headed to zero due to contract rolls.

  3. Hi traderlux,

    Thanks for the kudos about my posts and blog. BTW, the GLD diagonal has moved up 15% since 12/17/10 to 0.92, as of yesterday's close. Not too shabby for less than a week's time frame.

    Re your questions, I don't trade either of those contracts for a couple of reasons. First, unlike many so called gurus, I find that diversification tends only to guarantee mediocre results.The old saw 'don't put all your eggs in one basket', IMNSHO is a mistake. I put all my eggs in one basket (or, at most, three) and watch the hell out of that basket.

    In the case of oil, it has the main characteristic of gold, in that it moves contrary to the Dollar, so I might as well trade GLD, which is very active with tight spreads. Oil also has the negative of being able to be manipulated by those 'sweethearts', the sheiks. With gold, even a heavy hitter like Soros can't control prices. It's a case of everybody being stronger than anybody, and I prefer that kind of trading environment.

    The VXX is another matter altogether. It's a little to volatile (pun intended) for my taste. Also, I have not found it to be all that predictive. Currently, for example, the put options are in backwardation. That happens occasionally in the SPX, but only with puts far out in time. When it's possible to buy a Feb/Jan calendar spread for a credit (as one of my clients did last week), that's a little scary to me.

    I haven't been much help to you, I guess, but if you want to talk strategies in GLD, the SPX or FXI, I'm your man.

    Good luck,

  4. josh,

    thanks for the reply, i understand what you say re sticking to what you know and what works and avoid jumping around.

    i have traded slv with options and also gold thru various miners. i will watch your gld trades and i want to try one for myself.
  5. Hi traderlux,

    Again, thanks for your interest in the progress of my GLD trades. You can also get a good understanding of my trading philosophy and results by visiting wastingassets.net.

    Good luck and good trading,

  6. cdowis


    I have a slightly different technique for diag.

    I buy deep ITM calls which are three to six months out, and then sell the front month call. My long call has a small theta, and alot of delta. Basically it is similar to a covered call. I look for calls with about 80 deltas.

    Now there are some features of GLD which make some interesting possibilities. The large moves up and down makes one think of gamma scalping, right? Well, with my option covered call, I can scalp by either going completely in and out of the position, or.... simply move the short call in and out.

    I have a Jan 137 call shorted when it is on the top end, and then liquidate it when the market goes down. As it goes up, I have the advantage of gaining with the long deltas, and then short the 137 (or something else) as it goes back to the top of the range.

    Anyway, with an account size of only $13k, I can own 400 deltas in GLD with enough left over to do a couple of calendars, etc.

    Might be something worth looking at.
  7. Hi cdowis,

    Thanks for your post. Your technique appears to be an excellent approach. You're essentially taking the same directional posture as I am, oriented towards neutral to higher, only with calls, rather than puts. As I mentioned in my original post, I used puts because the exit has less commission expense, assuming a successful close out. I also toyed with the idea of using strikes farther out in time for the long side, as you are doing, but after analysis, I realised that the difference in price between the out months remained roughly constant, rather than lessening, as is the norm in most cases. Thus, no time value (TV) benefit was gained by going further out in time, and it only increased the carrying cost of the trade.

    It's serendipitous that you posted today, since management action is required. GLD has now spiked nearly 3 points above my short put and the position cries out for attention. When the short put gets OTM, further upside movement erodes the value of the long put faster than that of the short, diminishing profit potential. What I will do this afternoon is roll up both sides of the spread with debits and credits roughly the same. That action will renew the condition desired, i.e. faster deterioration of TV in the short than in the long. I'll post the strikes and the prices here and on my blog.wastingassets.net.

    Josh Fry
  8. cdowis, et al.

    Below are the recommendations and executions for the roll-up I mentioned in my previous post.

    Trading Recommendations - Sell a 5 time diagonal spread in the Feb/Jan GLD put strikes, selling the Feb 134's and buying the Jan 135's for a credit of 1.02, or better to close. Also, buy a 5 time diagonal spread in the Feb/Jan GLD put strikes, buying the Feb 136's and selling the Jan 137's for a debit of 1.04, or better to open.

    Trading Executions - Both GLD diagonal spreads were filled, the 134/135 at a 1.02 credit and the 136/137 at a 1.04 debit.
  9. donnap


    Hmmm...let me get this straight. It looks like you have a Jan. vertical put credit spread 135/137 strikes. And a Feb. vertical put debit spread 134/136 strikes - all for about even money?
  10. Hi donnap,

    No, you have to look at earlier posts. Initially, I entered a Feb/Jan diagonal, buying the 134 and selling the 135 for a debit of 0.80. Today's trade was to close that spread at a credit of 1.02 (a profit of 0.22 less commissions) and roll up to a new spread at higher strikes. This was done in order that a diagonal with more time value in the Jan short could be sold.

    #10     Dec 29, 2010