Option Spread Trader, New Beginning

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

  1. Hey atticus, thanks for the first reply!

    Did you determine the position will get killed just from looking at the greeks? If not, what then? :)
    #11     Jun 29, 2009
  2. My mistake, I was looking at the long calendar. Aug vols will probably hit 50, but I wouldn't want to short Oct at 35 vol.
    #12     Jun 29, 2009

  3. Oh, okay. What I'm doing right now is searching for a volatility holy grail: long vol, no directional risk. I guess this is what most n00bs do, cause my natural thought process went straight to this: 'oh wow, buy earnings vol, no direction risk, make money!'. Alas, no free lunch.

    Adding more legs to balance greeks keeps popping up in my head, but might just be foolhardy in the end. Damn, I wish I had that Natenburg book already, lol.

    I am backtesting these neutral calendars on AAPL from 2006-present, it works, but you'd need size, like for most strategies I suppose :) It gets 1-2% returns. Losses are similar size; at least you can't blowup.
    #13     Jun 30, 2009
  4. Alright well I'm still working with these calendar spreads, was up all night manually backtesting. Going to expand it out to RIMM and others, and also try the double calendars. It's a lot of fun!

    Out to the broader market, I want to take a neutral/bearish outlook. For the rest of the year, I think 107 SPY could hold as resistance. 107 was in the region of the October gap down.

    I'm going to enter this position with a papertrade Diagonal Bear Put Spread.

    • Buy Long Term ITM Put
    • Sell Near Term OTM Put

    • Buy SPY Dec 09 107 Put
      ~10 contracts at 17.15 = $17,150 Debit
    • Sell SPY Jul 09 90 Put
      ~10 Contracts at 1.27 = $1,270 Credit

    With this strategy you keep selling the near term otm puts every month. I'll keep updating.
    The risk profile looks similar to a bear call vertical, except of course that it is diagonal. If we trade down going into or out of earnings season and the position profits, I guess that would be a good time to offset.

    If the market moves higher, I would expect resistance at 100 and then 105. If we shoot through those levels on some sort of better than expected economic recovery outlook, then offset and reevaluate.

    I''ll post screens in a second, lemme load up quotetracker. Later!:cool:
    #14     Jun 30, 2009
  5. SPY Chart, long term outlook.
    #15     Jun 30, 2009
  6. SPY chart, near term. Note, I don't have much TA skills or anything like that, so you don't indicators, channels, lines, etc. but I'm working on it :)
    #16     Jun 30, 2009
  7. OK, with the strong selloff today the current values are:
    • SPY Dec 09 107 Put = 18.825
      18.825 - 17.15 = Gain of +$1,675

    • SPY Jul 09 90 Put = 1.90
      1.91-1.27 = Loss of -$640
    • NET = Gain of $1,035

    The initial position was $17,150 Debit - $1,270 Credit =$15,880 total Debit.

    So return would kind of be $1,035/$14,880 = 6.52%

    I say kind of because other folks would probably use return on margin, but I don't recall the initial margin required.

    Anyhow, the two AAPL positions are a little bit more complicated (and are losses, go figure, lol), so I'll update those in a second.
    #17     Jul 3, 2009
  8. The short calendar (long August, short October) got hammered today. The greeks were right about negative vega! lol. It's showing a loss of $1,930.
    *Without the delta hedge (long aapl stock), obviously the loss is reduced, but even without it, the position took a loss today.

    I read a discussion between Maverick74, ChrisM and some other folks about earning season calendars (search for a 2003 thread with short calendars in it, i already closed the link sorry), in which Mav said he preferred short calendar's for the vol implosion. Which would directly correlate with why my short calendar got hammered in a positive vol move today, lol.

    Indeed, on the flipside, my original long calendar [delta-gamma neutral, long vega trade] (position quoted above) was up strong today, $827.45. Overall though, the position is down -$1300.74, because the couple days after I entered the position, aapl was up, pushing vol down. Note, I added more calendars to it so its now -43 Aug 145 Calls, and +43 Oct 145 Calls.

    Today was a pretty good selloff. If downside continues into next week and carries aapl with it (meaning higher vol), the position should be able to erase the losses and get to breakeven I think. Even if the market doesn't selloff, I still see aapl vol rising to 50%, so the position should be in good shape. It's still experimental, and I'll only know the results by the latter part of July. Or if I read all of Natenberg's Option Volatility and Pricing by then, I'll have a better grasp on vega lol.

    I'm going to read this journal from 2005, maybe find some good info:

    #18     Jul 3, 2009
  9. Earnings season is coming up. Alcoa (AA) kicks us off Wednesday the 8th. I've been backtesting entering long calendars (short frontmonth, long backmonth, nearest ITM-ATM call) the day of earnings release, and they have all been profitable back to their 11/06 earnings. Didn't go beyond that, probably should though.

    So, I'll be papertrading it next Wednesday with a Thursday offset if anyone would like to follow along :)
    #19     Jul 4, 2009
  10. Kedwards,

    Good luck in your journey. TOS has some fantastic tools to help you learn. My advice to you is make sure your approach/method (I don't like the term 'system') is solid and ordered. Don't get caught "peaking" into the future on the platform and start telling yourself "I would have done this....or that". If you are honest with yourself, you will succeed. Treat the luxury of being in college right now as an opportunity to follow the markets day in and out.

    #20     Jul 5, 2009