Well, I hate to post this, but maybe I will get some value out of it. I have been successfully trading futures and options, after starting in Feb of this year, applying TA and swing/day trading. This "success" is a bit of a surprise as I was expecting to lose money the first three months. (Not that I haven't had losing days, but overall, I am up about 10% a month). My main success is with trading the /er2 ....Well, I think I just gave myself the chance to lose. After selling two GOOG strangles the day before their earnings, and having them expire worthless the next day, with a very nice profit, I decided to go IV hunting. Well, I found a wonderful little biotech stock, you may have heard of it, DNDN I figured, heck, if I am getting good at this, surely I can sell a few DNDN strangles, and watch the IV fall after a few weeks. Well, here i am, $2,500 down, and losing money each day... I thought Theta and Vega were supposed to help a seller over time! I was doing some analysis and it looks like, if the FDA announces before the 11th, I am really really f***ed. Where I really went wrong, was walking the high risk line. With GOOG, my strangles were 450/510 and 440/500... Well, my DNDNs are a variety, with puts at 17.5, 15, 12.5 and 10 and calls at 20, 22.5, 25, and 30 I legged into the positions, thinking that, if IV went up, I would simply get a higher price blah blah blah. Where I am most concerned, after today's action, is my 20 calls. I was thinking of buying a 20/30 vertical, but have mad seemingly poor decisions with this stock in the first place, maybe that's the wrong decision. I don't freakin know. This is the first time I feel I have put myself in a bad, bad position. By the way, I was valuing DNDN from 11 to 19, depending on the news. It appears as though I was wrong, and many think it will quickly go to 29. But, if I wait out the strangle, then I am profitable if it falls anywhere between 8 and 28... I just worry about news coming next week, instead of the following one. I know, I know, I know
hmmmm hadn't thought about that one, i was just thining of spreading my profit zone by taking a loss on the 20 calls, and selling some 30's to make up for it... I will check that out.
Ratio spread on DNDN? The stock price will express a binary outcome on the FDA. You're looking at $3 or $40. So, by all means sell a backspread and watch your account disappear.
First, short strangles/straddles make money if underlying stays in range (but you know this already). Second, short strangles/straddles start to lose if iv goes UP and profit if it collapses. Third, you're correct in that the passing of time generally helps short strangles/straddles. You admit to not really knowing what will happen (and have already got evidence of predicting incorrectly) and thus I suggest you limit your loss now and close the position before atticus' prediction becomes reality. Remember that any adjustment you try to make now is the same as opening a new position. Just close it, learn from this and move on. Cheers db
Probably a good call Daddysboy I am still learning the mental aspect of short term trading... I am used to using FA and buy/hold. So, I am trying to have the fortitude to stay with my decision, but not the arrogance etc to admit I am wrong. I am also bad at cutting losers, which i here is common for newbies like me. That being said, would it make sense to turn my calls in to calendars? The IV skew is pretty severe. However, I have heard that trading calendars based on IV skew is the wrong thing to do, but I can't remember where/why. Then I would have short puts for May and calendars... I dunno, seems like a lot of jacking around to try and eeke out a profit. Maybe I should stick to selling puts, covered calls, and trading futures for a while.
I don't expect the vol to come down at all, until the announcement. If you noticed today that the stock was up over two dollars and the puts were almost unchanged. The same thing happened to AGIX. Stock would go up, puts and calls would go up. If I remember correctly that vol in agix in some options went over 500. I also would suggest close the position, and chalk it up to learning experience.
1. we're all bad at cutting losses - it's our nature as humans. But it's critical, if you want to be successful over the long term. 2. turn calls into calendars? No. Long calendars benefit from a rise in iv (we predict that iv will fall after the announcement) and the underlying will have to stay in a range (which we don't know but suspect it will make new highs or lows?). Big front month skew implies that something severe is going to happen to the price of the stock, iow it may blow through your short strikes big time. 3. you're right - it's a lot of work to try to 'rescue' a bad trade. If you do convert to calendars and short puts, realise that you still have large risk in the form of short gamma (short puts) but your long calendars are obviously limited risk positions. Believe me, it's a lot better to close and move on - from a financial and psychological perspective. However, you can still follow the trade on paper to see what would have happened if you had implemented your 'rescue' adjustments - excellent for learning. Best db P.S. 1. re iv skew. Vega gets bigger the further out in time you go. Thus a fall in iv will result in a greater movement in vega in the far month option than the near month, i.e. for calendars the far month will lose more than the near month if iv drops. This is why long calendars should be placed when the atm iv is at historical lows (or in the lower ~20% of the last 12 month range, as a guide). 2. volatility generally tanks once the 'news' is out and the extrinsic premium of your option will reflect that.
That's correct. The ATM primium reflects potential binary outcome ; the IV is just a lagging function here.
Implied Volatility doesn't mean shit when there's something like an FDA decision that makes or breaks a company. Shorting strangles on DNDN is suicide. It's just too easy for you to get royally screwed on this.