RUT Fly adjust

Boy, didn't see that coming. SPX futures down about 24 points at today's open. That kinda sucked, mostly on my August trades that I'm still carrying. But let's move on.

I had said that I was going to add to my RUT fly when RUT moved +/- 20 points from when I put it on (570), or if it was calm like last week, that I'd probably add to it later this week. Well, we moved below 550 this morning, so I waited a little to see if there was going to be a quick recovery, and when I didn't see that, I added my second RUT fly, 20 points below the market. Upon further thought tonight, maybe I should have only put it 10 points below the market. Here's the reason. The original Fly was about 17 delta long. If the new fly would have been put on 10 points below the market, my resulting combined delta would have been -3. The 20 point below the market fly made me -11 delta. Good if the market keeps falling, but not so good if the market bounces. Oh well. It's not the worst thing, so I'll keep it. The single fly was 34 theta, now I'm 71 theta. So -11 delta and +71 theta. Nice. Next adjustment will be to add a third butterfly if the market moves +/- 20 points or so (530-570). Goal will be to neutralize delta, and of course, increase theta.

All of my other Sept trades are doing well and still in the black, although if we have another -2.5% down day soon, I may need to look at adjusting the double diagonals (MNX was -2.9% today, XLE -3.2%).

Trade update

August expiration:
I'm still trying to claw my way back to profitable. My SPX calendar, which I rolled up 3 times and then turned into a double calendar, is now profitable. I'll probably take that off on Monday or Tuesday. I still have some pieces of the MNX double diagonal on, with no hope of profitability, but trying to recover some losses. I'm around -8% on that trade. And I have what started as a couple butterflies in RUT. That trade is still underwater, but I have a relativily low delta with theta >300. I'll try to hold that for another day or two to collect that theta and get out.

September expriation:
I liked that XLE DD that I put on so much, I doubled my position. XLE had moved up a little when I decided to double, so I chose 1 point higher on the call side. I'm currently up 7% and still perfectly centered. Max gain (in the saggy part) is 25%, so I'd be looking to take profits around 15%.

My MNX double diagonal is also fairing well, almost perfectly centered and up about 4%. Max gain (sag) is about 15%, so will look to take profits around 10%. This trade has developed a little tilt. I'll have to watch that, maybe purchase a Oct call to help with the fast slope on the up side.

The RUT fly is going well also. I'm up 9%, but I don't have any plans to take profits any time soon. In fact, I'm looking to double and most likely triple my position. My plan is to add another fly when RUT hits 550 or 590, but RUT has been behaving well and hasn't gone there yet. If we don't hit those points by Thursday, I'll probably add another fly ATM, just so I can get the capital in use.

I put the second tranche of my RUT iron condor on. Since RUT didn't move much since the first tranche, I ended up using the same strikes. The first tranche collected $1.48, whereas the second one netted $1.35, 5 days later. I sold the second one on 8/11, on a 10-point down day, to take advantage of the higher vols on that day. Vols dropped about 2 points the following day, as RUT recovered with a 10-point gain. Even the large drop on 8/14 didn't cause vols to climb much. Not much theta has ticked out of this trade yet, so I'm up only ~3%. Max yield is 12% and looking to get about 10% out.

Watches:
As previously mentioned, I'll probably add another RUT butterfly this coming week. I'll most likely add a SPX Sep/Oct calendar. Possibly a OEX butterfly.

XLE Double Diagonal added

Can you believe it? An honest to goodness down day. I hope I'm not jinxing myself by saying that (Bob D and I have a standing joke about whenever we comment on direction, it reverses...unfortunately reverse psychology doesn't work in this case). This really helped all my positions since they were all delta negative and gave me a rare positive P/L DAY number.

I guess I was in the mood for more action (is there a Traders Anonymous?), so I couldn't help myself and I added another new trade today. This time it's on XLE. Unlike most indexes, XLE isn't trading at recent highs, which made it more attractive to me. The trade of choice was another double diagonal to add to yesterday's MNX DD. I also looked at OIH, but decided to go with XLE. So I started to look at some strike choices, found a setup I liked, and was about to place the trade when I noticed that the back month that I modeled was the Sept Quarterlies. Oh, that's not what I wanted to do. But the Oct isn't available yet. And, quite honestly, the Sept/SeptQTRY trade looked decent. Open interest in the Quarterly looked decent. Not much volume. Bid/Ask spread for the entire double diagonal didn't look to bad, so I went for it. I tried getting filled at mid for about 2 hours. Caving in 0.02 I was able to get filled. I was happy with that fill for a 4-legged trade, especially since I was the only volume on my Quarterly strikes today. Trade is pictured below. Adjust when slightly past the short strikes. Consider taking profits if up about 20% and a stop loss around 25%.

Chart of where my adjustment points are.

Whoa. I almost forgot that I entered another new trade today. I put half of my RUT iron condor on today. I'm short the 480 and 630 strikes, and I bought some extra longs (460 and 640) as "insurance" against fast, big moves. I sold about 10 delta on both sides and collected $1.48.

New MNX Double Diagonal

Well, isn't this run up exhilarating? That's a code word for "sucks for a delta neutral trader". I have most of my positions off (at a loss, mind you) and am still hanging onto a RUT multiple butterfly (if that's what you can call it after so many adjustments) and a SPX calendar at 980 (after several rolls up). Both are struggling to come back from the losses from the previous rolls, and both are still delta negative. The slight pause in the market has finally given me a day with a positive "P/L DAY" finally. Can you believe that RUT had a reasonable down day for the first time in over two weeks? (-0.9 points on 7/29 doesn't count)

MNX/NDX has had some minor form of consolidation the last five trading days, whereas SPX and RUT kept climbing. I took this so-called opportunity to place a new trade in MNX, a double diagonal. This trade is similar to last month's MNX and NDX double diagonals, but I'm hoping that this month is actually profitable. (NDX exited at -20%, MNX is clinging by a thread at -9% with hopes of clawing back to at least break even.)

Trade strategy is to exit with about $500 profit (9%) or roll the short strike to the next strike out if MNX goes past the short strike by 0.50. Simple trade, simple adjustments. Contingent GTC orders already resting.


I also tried getting into a RUT iron condor, 470-480-640-650, for $1.25 - $1.30 credit, as much as a nickel worse than mid price, but didn't get filled. Will try again tomorrow.

Playing catch-up

Well, I guess I've caught my breath now...I came out from under the bed and have started breathing again. This "crash up" has toasted most of my delta neutral positions.

My NDX double diagonal went through several adjustments to the upside, nearly every other day, until I finally threw in the -20% max loss towel. Have you looked at a NDX chart lately? From 7/13 to 7/23, NDX had an up range of 15% in 9 trading days. Not good for the delta neutral, market neutral trader.

I have a similar MNX double diagonal with embedded calendar trade on. It too has had some adjustments but isn't quite out of the game yet. (Read: I'm not at max loss yet.) Actually, I'm only down about 6%.

My normal 36-day RUT high prob iron condor was wiped out only 9 days into the trade. Luckily, I had "call side insurance" (extra long calls, in case of a big/fast move up) and it allowed me to stay in a little longer, but with so many days in a row of higher highs, it wasn't enough. Instead of waiting until my -20% max loss, I pulled the plug a little earlier, with "only" a -13% loss. My stop loss exit points are -20% loss, or 10 points from the short strike, whichever occurs first. In this case, I was within 10 points of the short strike, which allows me to escape with a little less loss. This trade was started on 7/14 with RUT at $496, and exited 7 trading days later on 7/23 when we went past $540, 10 points from my 550 short strike. That's >9% move up in 7 days. Crazy. Some people would reposition their entire trade up at that point, but when the max yield is only ~12%, and you took a 15-20% loss, you're only going to get close to scratching. Granted, scratching is better than a 15% loss, but you also have a chance of turning that 15% loss into a 30% loss. I'm taking the position of keeping my powder dry until next month...what's left of it. I'm also afraid with such a strong run up, that we could retrace fairly quickly too, so repositioning, especially the puts, isn't appealing to me at this point.

I still have a SPX calendar on. Originally, it was a bearish bias 900 strike, and 7 days into the trade I rolled it up to a 930 strike, still bearish. Now a couple days ago I added a 980 strike to make it a double calendar, give me a little more theta, and cut my delta a hair (not much). My new break evens are aroun 915 - 1000. The last couple days have been kind to me as vols crept higher, helping this vega positive trade. I'm currently sitting at around a 3% loss, even with the previous roll.

Last but not least, I have several butterflies on RUT. What started out as a single butterfly with a second one added a week later has morphed into butterflies at several different strikes and for the most part, I'm now managing the entire trade by the greeks, trying to keep delta relatively low (but no where close to zero) and theta high and positive. I'm still very leary of a downward move, so I'm still leaning a little negative delta.

Overall, a pretty rough month for delta/market neutral trading.

IBM adjustment, pre-announcement

As mentioned in my earlier post, IBM was on it way up to $110 before the close. I decided to close the 105 calendar and just leave the 110 calendar, as IBM was over $110. In fact, it reached a high of $110.97 before closing at $110.64.

It looks like it was a prudent adjustment, as IBM reported great earnings. "The earnings per share results were the highest for any first, second or third quarter in the company's history", reporting $2.32 EPS with the street's expectation of $1.98. IBM hit $114.48 after hours, which is beyond my upper breakeven. Looks like it's settling around $112.5. We'll see what tomorrow morning brings, along with housing starts report and a few other earnings announcements BMO.

IBM Earnings Play, Modelling IV changes from earnings

Decided to put on a IBM earnings "spec" play. IBM reports earnings today after market close (AMC) and tomorrow is July expiration. What that does is jack up the vols (premium) of the July options, and tomorrow nearly all of that volatility will be gone. In buying a calendar, you sell all that front month volatility and will buy it back tomorrow after the vols have fallen. Normally, falling IVs are bad for calendars, but that's when the back month vols fall. In this case, the front month (July) will fall a TON, and the back month (Aug) will only fall a little.

Here's my trade as I put it on. I've also modelled an ATM straddle, which gives you a rough idea of what the market is pricing in for a earnings move. It's currently priced at $3.33, so the market thinks that the price of IBM after earnings will be within $108.40 +/- $3.33 (3%), or roughly 105 - 111.70. You can see that my break evens are outside of this range.

But with a horizontal (time) spread, you need to take into account volatility, and even more important, volatility skew and what will happen after earnings. That is, the difference of the vols from the short month to the back month. If you look at the IV of a far out (time) chain, such as Jan 10, you'll see that it's roughly 29%. You can expect the front and back months to lose some vol to approach that figure. Because it's expiration tomorrow, you won't see the front month go all the way to 29, but it's currently in the 60's and you might expect it to come down to 40-ish, shedding about 20 points of volatility. Similarly, the back month is slightly inflated due to earnings, so it too may come down, but not nearly as much. Maybe a couple points. Some stocks will have the back month come down a bit further, as much at 10 points or more in IV. So, how do you figure out what the trade will look like after expiration? thinkorswim has the tools to do so.

In the simulated trades page, to the top of the trades on the right, click the wrench, then click on the More drop down. Doing so will allow you to change the volatility of each month separately. In this case, I modelled a -20 point drop in the front month, and a -2 point drop in the back month. I also moved the date forward one day. You can see that my break even points are pulled in a bit, mostly from the -2 point drop in the back month. Be careful when doing this trade on stocks that you expect the back month to drop much more than 2 points, as the breakevens will be pulled quite a distance in. In this case, it still looks good...within the predicted range from the ATM straddle.

Since putting on this trade, IBM has climbed from $108.40 to $109.50, stressing my upper break even after pricing in the ATM straddle. IBM and the market was flat all morning and is now making a little run up during lunch here. It's possible, that at close, a simple 110 calendar could be a better play. Only time will tell.