Option Spread Trader, New Beginning

Discussion in 'Journals' started by Kedwards, Jun 14, 2009.

  1. Hello!

    Well, the first thing I'd like to do is reference you to an absolute treasure and one of the best threads to exist on ET "SPX Credit Spread Trader".


    If you are new to option spreads there is a wealth of information shared over 2 years about managing option spreads. If you have TOS, IB, or other software where you can see historical data back to 2005, it's a gem because you can actually follow along all their trades as if in 'real time'. You can input the trades in TOS thinkback and digest the criteria they were using (rationale, market forecast ,credits/debits, etc.)

    I spent the last couple weeks reading all 346 pages of the thread. The first year and a half are great, where the great optioncoach provided insight into his own methodology and other trader's provided input. They covered everything from options, Jessica Alba, foreign languages/living abroad, you name it.

    I'd just like to thank:
    Optioncoach, momoneythansens, rdemyan, piccon, maverick74, riskarb, richardrimes, sailing, dagnyt, cache landing, rallymode, ryank, and the others for all their contributions from 2-4 years ago!!!! It's funny being able to look back in time, when they started the journal I just finished high school and was goofing off for the summer. Now I'm trying to take what they did and move it forward a couple years!!

    I would also like to thank 'huh' for pointing me to that thread and for starting the only current live option journal!

    Anyhow, to me. Well I'm 22, in college, Finance major, wannabe a trader, act like a rockstar, LOL.

    What I plan to do here is paper trade (ahhh shuxxx, where's the real cash at???) verticals, calendars, diagonals, etc. on indexes/etfs.

    I wouldn't put real cash behind this right now because, well, I don't know jack. I still need to understand and speak greek/volatility fluently, for one. I just have ideas on different P/L risk profiles, but I have to add more than that to my arsenal.

    In combination with TOS/IB, I plan to keep a good reference for my trade ideas and be able to look back and see if my judgment was sound. If I am consistent with my updates, hopefully other options traders will chime in with their opinion.

    First trade will come soon, I have a finance summer course final on Wednesday.

  2. OK so my final went well, got an A- in the class! Summer is looking good so far. Hung out with my boys on Friday at the casino, Saturday went to a house party, it was kinda wack though. Maybe later this week I'll take this cheerleader breezy to get some Dairy Queen.

    I've been reading options stuff all day, and right now I'm trying to come up with a long vega play for APPL going into earnings in late July. A traditional long vega play is a long straddle, but I was reading some archives and came across the 'delta-gamma neutral, long vega' position. I will papertrade it in TOS, and post my positions when I'm done with it.

    I guess the tedious part of it is continuously adjusting your gammas/deltas, raking up your commissions costs. Thankfully, it is a papertrade :)
  3. Just saw Transformers 2, GO SEE IT!!!! Great action, Megan Fox is hot, just overall great! Long as heck though, make sure you use the bathroom beforehand, or at least don't drink too much of your coke during the previews (yeah, i did).

    Anyhow, so here's my position. Delta-Gamma Neutral, Long Vega. Despite reading old posts, I still don't know if this position actually works. In fact, just selling a normal calendar seems to do the trick in regards to long vega (for AAPL earnings, this would be selling Augusts, buying Octobers). But hey, I would like to follow the greeks closely, and, it's a papertrade.

    The premise behind this trade is that Apple's volatility, currently between 39-41% (depends where you look!?!?), will move to at least 50% by earnings release by end of July.

    I'll attach images for reference.

    The position has many legs, so when you factor in commissions I guess this is why it's only suitable for market makers. Here goes:

    • AAPL STOCK QTY: -520 shares
    • Aug 09 145 Call QTY: -36
    • Aug 09 155 Call QTY: +14
    • Aug 09 180 Call QTY: +1
    • Oct 09 145 Call QTY: +36

    • Delta: -1.04
    • Gamma : 3.51
    • Theta: -13.40
    • Vega: 567.19

    The original position was a normal calendar as stated before, short august 145s/long october 145s. Then I added the 155 and 180 Calls as the day progressed to get gamma neutral.
    With the original position I was long 520 deltas, which is why I shorted 520 shares of aapl.

    I should have wrote down the commissions to initiate the position. I will do this from here on out with the adjustments. It may well prove to nullify any profit. I will post the positions risk profile in regards to expiration, then I will post the risk profile with Vol Step +5.00% - in other words, what the risk profile will look like at 45% and 50%.

    image attachment:

    This image, thanks to ivolatility, shows the implied volatility around aapl's earnings releases (April 22, Jan 21, July 21). I didn't circle the Oct 21 release because volatility was crazy at the heart of the turmoil we saw last year.

    Because the general market volatility has decreased the last month or two, perhaps that means aapl's IV may move only marginally higher, say 45%? At 45% there is still a profitable risk profile, but again, when factoring in commissions from delta/gamma adjustments I will do from here to the end of July, profits may be null.
  4. this image is the risk profile at expiration.
  5. this image is the risk profile with volatility at 45% (green line) and 50% (blue line). The date is 7/20, because I am assuming aapl will release earnings on the 21st/22nd, so I would exit this position just prior to that.

    *okay the risk profile images are shitty as hell, sorry. I used mspaint.
  6. Something I'm pondering:

    I am short 520 shares, and short the Aug 145 Calls. If aapl shoots to the moon (maybe if they give a pre earnings press release about better than expected iphone 3gs sales, steve jobs is 100%, etc.), perhaps these will get called away.

    I dunno if ToS papermoney simulates calling away shares/options? Guess I'll find out.
  7. Ok the more I look at this, I think the position is fubar. Although the overall greeks are long vega, individually i'm short vega in august (when I want it to go up), and long vega in october (which shouldn't see much of an increase).

    Yeah, so, think I'm going to just take the whole position off, lol. More later.

    update: I really don't know how overall greeks relate to individual position greeks. Although the risk profile shows profit with an IV increase, will the chart 'break down' once the augusts calls rise and octobers stay flat?

    I think I'll just leave the position on and watch it anyway.
  8. Hey there!!

    So, I ordered Natenberg's Volatility book on Amazon yesterday. This should be a blast to read!!

    Funny how before I read on volatility, I'm trying to trade it lol.

    OK, so I don't think my previous position will hold up. The overall greek numbers make 'sense', but maybe only to a novice like myself. It seems you actually have to dig down deeper into the individual options greeks, not just slapping them on to get preferred numerical outcomes. I guess, if it was that easy, everyone would do it?

    That position was short Augusts and long Octobers, in a ratio to get gamma neutral and then using the underlying for delta neutral.

    For a new position, I'm going to put on the inverse pretty much. Long Augusts, short Octobers. I guess I would prefer to short Septembers but they aren't available yet.

    I still see aapl volatility rising into earnings, but this time I am buying vol in August, and selling vol in October, hoping that a sharp rise in August vol brings profit.

    AAPL is trading at 143.xx so I'm going to use 150 strikes. I would use 145 strikes but my old position is using them and I don't want to get the two confused.

    On ToS, if you put on a Long AUG 150/Short OCT 150 calendar, and set the plot lines to +5% vol step, your risk profile loses money as volatility goes up!?!?!?

    I'm hoping I'm just interpreting it wrong. You would expect the risk profile to go up as vol rises? Again, I'm just going to put it on and let it play out until the end of July and evaluate. Good mental exercise I suppose.

    So, the position is:

    • LONG 100 Aug 09 150 Calls
    • SHORT 100 Oct 09 150 Calls
    • LONG +533 AAPL Stock

    Credit on the calendar was 3.15. The AAPL stock was avg price of 143.175.

    • Delta: -4.11
    • Gamma: 56.53
    • Theta: -186.15
    • Vega: -991.41

    The position is overall negative vega. But I am long volatility in Aug, short Oct. Long August vol, short Oct vol. OK, well now I gotta go to the gym and do some other stuff. Later!
  9. note for reference:

    August 150 Vol: 34.84%
    October 150 Vol: 34.80%
  10. Your going to get killed on the position in the few days leading up to AAPL's report.
    #10     Jun 29, 2009