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TRADE IDEA: VIX MARCH 22ND 11.5/13.5 LONG CALL VERTICALTruth be told, I'm not a "debit spread" guy, namely because I look at them as "one and dones" -- they either work or they don't; rolling these out for duration generally costs more money, and I don't like paying to roll, so I look at them as "one shots." Here, I looked for a risk one to make one metric for the setup ... . Metrics: Max Profit: $105/contract Max Loss/Buying Power Effect: $95/contract Break Even: 12.45 Notes: This is a debit spread, which you pay to put on. What you pay to put it on (a debit), is your max loss of the setup, but you certainly don't need to allow it to go to max loss to take it off, especially if it becomes apparent that it's just not going to work by expiry. As far as take profit is concerned, I would probably shoot for taking it off at 50% max, although the way volatility's been trundling along here (at extremely low levels), I'd also look at taking my money at running at anything north of VIX ~ 15. After all, it hasn't seen fit to break that level since election-time ... .
TVC:VIX
by NaughtyPines
TRADE IDEA: GDXJ FEB 17TH 30/36/37/45 IRON CONDOR/FLYThere isn't much non-earnings stuff out there that has both high implied volatility rank and high implied volatility. This is one of them. Here I'm going with an extremely narrow iron condor, such that it's almost an iron fly ... . Metrics: Max Profit: $338/contract Max Loss/Buying Power Effect: $462/contract Break Evens: 32.62/40.38 Notes: I'm going to treat this as a fly for purposes of take profit and look to get 25% max.
AMEX:GDXJ
by NaughtyPines
TRADE IDEA: SPY APRIL 21ST 209/212/235/238 IRON CONDORGoing out to April for my core index exchange-traded fund position, since volatility "locally" (<45 DTE) blows here. Very close to getting 1/3rd the width of the wings; it'll have to do ... . Metrics: Probability of Profit: 54% Max Profit: $92/contract Max Loss/Buying Power Effect: $208/contract Break Evens: 211.08/235.92 Theta: .67/contract Delta: -5.34/contract Notes: Here, I'm setting up my short options at the 20 delta strike, and the long options three strikes out from those. Looking to manage at 50% max profit.
AMEX:SPY
by NaughtyPines
OPENING: SPY MARCH 17TH 205/208/234/237 IRON CONDORI used to do a lot of SPY, IWM, QQQ, and DIA iron condors as a core position, but temporarily wandered away from those given how sporadic the implied volatility has been in these underlyings. Additionally, they have nonexistent "engagement value" (i.e., they're boring), and I haven't been able to get decent premium out of 45 day setups. Because implied volatility is so low right now, I went out to the first expiry in which I could get something approaching a 1.00 credit for a 3-wide, 20-delta setup. Here, though, I actually went a touch wider (the short options are around the 16 delta strikes). Metrics: Probability of Profit Percentage: 59% P50: 75% Max Profit: $94/contract Max Loss/Buying Power Effect: $206/contract Break Evens: 207.06/234.94 As with all of these, I'll look to manage the setup at 50% max profit.
AMEX:SPY
by NaughtyPines
THE WEEK AHEAD: EARNINGS TAKE THE STAGEYou wouldn't have known it last week with all the inauguration hoopla, but we're in earnings season. Now that the hoopla's in the rear view mirror, earnings will take the market stage (and, yes, a bit of digesting of what all "the hoopla" meant). SPY et al. (Broad Market) From a premium seller's perspective, "SPY and friends" continues to be an unproductive area in which to sell premium unless you're willing to go out farther in time. (See SPY April Iron Condor Trade Idea, below). Earnings There are some "big names" coming up this week (BABA, MSFT, CAT), but not all currently have the metrics that would make premium selling hugely productive (>70% implied volatility rank/>50% implied volatality). I'm keeping an eye on BABA, EBAY, and SBUX, but their implied volatility needs to pop a bit before I'm willing to play. Non-Earnings GDXJ remains the only non-earnings underlying with decent liquidity and the right volatility metrics for a play. I already have one on. (See GDXJ Post Below). VIX/VIX Derivatives Any way, you cut it, VIX is low here, having caved mightily into Friday's opex close to sub-12. Consequently, I'm loathe to pile into further VIX "Term Structure" trades here, since I already have a March 16/19 short call vert on, as well as April 17/20, and I could easily see a modest (or not so modest) VIX rise to 14.0-ish (what the Feb /VX future is currently trading at) if the market gets indigestion processing what exactly "Trump World" will look like going forward ... .
TVC:VIX
by NaughtyPines
THE WEEK AHEAD: SLIM PICKINGS FOR THE PREMIUM SELLERWith VIX at sub-12 levels, broad market implied volatility is low here, and a basic screen run for high implied volatility rank/high implied volatility yields few high quality results. Here's what I'm looking at ... . SPY et al (Broad Market) The first expiry with greater than 15% implied volatility for SPY is in the June expiry. The most I like to go out with these is around 90 DTE, so no play there unless you like to watch paint dry. (The theta decay of a June setup would be painful to watch). Earnings The only earnings play next week with >70 implied vol rank/>50 implied vol is $NFLX, which announces on 1/18 after market close. I'll probably play that with my standard volatility contraction setup, which will either be an iron condor or short strangle, although I could also see just playing it with a 20-delta short put (bullish assumption). Non-Earnings The only playable individual underlying without earnings on the horizon appears to be P, but the only worthwhile setup due to the price of the underlying would be an ATM short straddle, 45 DTE. It looks like that would pay 2.00 or so at the door; shooting for 25% max profit would yield about $50 per contract. Exchange Traded Funds There are literally no sector exchange traded funds out there that meet my criteria for a premium selling play (>70% implied vol rank; >35% implied volatility), unless you count $GDXJ (junior gold miners) and $UNG (the natty gas proxy). With $GDXJ, I'm contemplating the simplest play out there -- a naked short put (bullish assumption). Unfortunately, however, I missed the "meat of the dip," so am hesitant to pull the trigger here against a backdrop of Fed tightening and therefore Greenback strength going forward. I'll post the $NFLX, $P, and $GDXJ plays if I decide to play ... . VIX/VIX Derivatives I continue to keep an eye on VIX "front month" futures. The Feb expiry is currently trading at 14.20-ish; the March, at 15.70. The Feb is a bit low for my tastes on which to base a VIX term structure trade; I already have a March setup on; and VIX is too low for a "Contango Drift" trade in one of the derivatives. My original intention with UVXY was just to slap on an ATM short call vert post split, but the options chains have been somewhat slow to populate for the standard contracts. You will see the chain with both 20's (the nonstandard contract for options that were on when the split occurred) and 100s (the standard contract). Some care needs to be taken not to accidentally enter a trade in a non-standard or a combo of a standard and a non-standard ... .
TVC:VIX
by NaughtyPines
TRADE IDEA/EXAMPLE: A 20/10 DELTA "DYNAMIC" IRON CONDORA creature of habit, I always sell the 20 delta when selling naked puts or setting up strangles/iron condors. Some traders like selling the 16's; some, the 30's; so I'm kind of "in between" ... . Here, I show an example of a setup where I'm selling the 20 delta call (at whatever strike it lies), the 20 delta put (at whatever strike it lies), and buying the 10 delta put and call (at whatever strikes they lie). As compared to a "static" setup where you are making each wing the exact same width, here I'm letting the options' respective delta values dictate where my strikes, resulting in a skewed setup with the short call vert side of the setup being wider (4 strikes) than the short put side (3 strikes). In actuality, this is a fairly good high IVR/IV setup, although I generally like to get at least 1/3rd the width of the wings in credit: POP% 63% Max Profit: $93/contract Max Loss: $307/contract BE's: 30.07/42.93 Notes: The "naked," undefined risk alternative is the body of this setup -- the Feb 31/42 short strangle with a max profit potential of $168/contract.
AMEX:GDXJ
by NaughtyPines
TRADE IDEA: UVXY (POST SPLIT) FEB 17TH SHORT CALL VERTICALI'm doing a little planning ahead here for the UVXY 5-1 reverse split, currently scheduled to occur on Jan 12th. Truth be told, UVXY is not one of my favorite VIX derivatives to play, largely due to options liquidity, which leads to wide bid/asks that you have to putz with in order to get filled for something vaguely approaching a "fair price." Nevertheless, I think splits in the derivatives (VXX, UVXY, and SVXY) are something to be taken advantage of to put on "contango drift" plays in these instruments, (See Post Below), particularly here, where contango is particularly steep. (See vixcentral.com). Since I don't know precisely at this moment what the "split-to" price is yet, I won't know exactly what strikes to use and what the cost of the setup is. However, this is the plan: 1) Post split, buy the long call that is ATM or one strike below. 2) Post split, sell the short call that is 3 strikes below the long call strike.* This will create a 3-strike wide, short call vertical, for which you'll receive a credit and which you'll look to exit for at least 50% of the credit received. If price breaks through your setup running into expiry, you'll roll it out "as is" for duration (to a later expiry), wait, and repeat the process until contango erodes price to such an extent that you can exit the setup profitably. (Alternatively, you can roll the setup down, chasing the underlying's price on its decent ... .) * -- A possible alternative setup is to go deep in the money with this credit spread. You'll get a larger credit "at the door" and experience a smaller buying power effect. However, you'll be stuck rolling the spread out repeatedly for duration until contango erodes the price of the underlying such that price eventually clears your short call. Naturally, a pop in VIX (and therefore UVXY) could occur while you're attempting to do this, leading you to be in such a setup longer than you'd like.
CBOE:UVXYShort
by NaughtyPines
TRADE IDEA: GDX JUNE 16TH 18/FEB 17TH 25.5 POOR MAN'S ...I'm not going to take this trade at the moment, because I'm trying to wind up current trades to move over to TastyWorks (formerly Dough). However, once I finish up that process, this is one of the trades I'm looking at, although certainly putting this on here isn't necessarily the best in terms of timing, since price has come bounced quite dramatically off that sub-$19 mark. In any event ... Here, the long-dated, fairly deep in-the-money long call stands in for what would ordinarily be stock in a covered call situation. As with a covered call, a short call is sold against the stock position not only to reduce downside risk, but to reduce cost basis in the long option (currently priced at 5.98). However, the poor man's covered call is put on for much cheaper than a "rich man's" covered call; if you initiated one here, you'd buy 100 shares at 23.20 ($2320 and sell the same 30 delta short call against for a $63 credit, so you'd be tieing up around $2250 in buying power to go that route). In comparison, the buying power effect of this particular setup would be $535 as of the writing of this post -- about a quarter of what you'd pay to do the "standard fare" covered call. The notion here is to roll the short call month to month (each time to the next month's 30 delta short strike) and then exit the position for at least 10-20% of what you put the play on for. Notes: Ordinarily, I do these using a the 70 delta long in the "back month" and the 30 delta short in the "front month." Here, however, I'm tweaking the play somewhat to use obvious horizontal support around 18 as a guide for the back month strike.
AMEX:GDX
by NaughtyPines
VIX TERM STRUCTURE TRADE: VIX FEB 15TH 16/19 SHORT CALL VERTThe two types of trades I like in VIX/VIX derivatives are (1) a "Term Structure" trade in VIX options; and (2) "Contango Drift" trades in the derivatives VXX, UVXY, and (inversely) SVXY. A "term structure" trade capitalizes on current VIX spot price in relation to VIX futures months' prices which, the vast majority of the time, are higher than current spot price, and operates on the notion that VIX spot and the futures price will converge on one another as the futures contract approaches expiry. A "contango drift" trade is put on in a VIX derivative on pops and capitalizes on contango which erodes these underlyings' price over time in the absence of significant and prolonged backwardation, which is rare. (With SVXY, an inverse, price in the underlying increases over time). (See VXX Post, Below, for an example of a "Contango Drift" trade). Here, I'm using the Feb VIX futures contract price as my guideline for my short call strike. As of the writing of this, it's at 16.02. With the long call strike, I'm choosing the 19 strike to limit the buying power effect to $230/contract, although you can certain go wider, which will bring in more credit, but also increase the buying power tied up by the trade. Here are the metrics: Probability of Profit: 91% Max Profit: $70/contract Max Loss/Buying Power Effect: $230/contract Break Even: 16.70 Notes: With these, I take a wait and see approach with profit taking. The general rule is to take profit on credit spreads at 50% max, but if we get into a prolonged volatility lull, I can see shooting for max profit, depending on where VIX spot sits in relation to the short call strike running into expiry. Should VIX be above 16 rolling into expiry, I'll simply roll the spread out to March to allow it additional time to work out.
CBOE:VIXShort
by NaughtyPines
5
OPTION TIP: IRON FLY INTRATRADE DEFENSEPosted here is a live trade example of a LULU iron fly. I started this out as an earnings trade iron condor, looking for classic volatility contraction post-announcement. I got the contraction I wanted, but not the movement, as price immediately broke the short call side of my setup, after which I rolled to an iron fly. (See Post Below). A week after earnings, price has dipped, skewing the net delta of the setup long.* Currently, the net delta of the setup is 24.92, with the respective strikes having the following delta/dollar values: 57.5 Long Put -11.05 delta/46.50 70 Short Put 65.10 delta/522.50 70 Short Call -34.92/170.00 80 Long Call 16.14/19.50 What, if anything, should I do to "defend" the short put side of the setup? Here are my options, with pros and cons for each: 1. Do nothing. There is, after all, plenty of time** until expiry and "fiddling" with the setup here may unnecessarily complicate exiting the trade and potentially increase risk if I choose, for example, to erect a defensive hedge or roll the short call side down toward current price. Additionally, the setup isn't "hugely" out of skew yet and price remains above my break even for the short put side of the setup. 2. Roll the short call or short call side toward current price in the same expiry. This would add short delta to the setup. Personally, the only time I want to take a straddle and roll into an "inverted strangle" is when the short option is approaching worthless and basically providing little to no protection to the oppositional side. That isn't the case here yet: the short call is at the 35 delta or so and is still worth $170.00. 3. Erect a defensive hedge. In this particular case, the setup is net delta long, so I would look to add short delta to the setup, either with a naked short call or a short call vertical. Generally speaking, I like to erect hedges that are, in themselves, high probability setups, so in all likelihood I would sell the 20 delta short call or as close as I can get to it or erect a short call vert with the short leg at the 20 delta strike, and the long leg above it. The Jan 20th 72.5 short call is worth 24 short delta, so that would just about do the trick to get the setup back to almost completely delta neutral. Alternatively, the 72.5/77.5 would add in -14 delta and bring in .70 in credit to boot. Unfortunately, this adds risk to the setup, namely that price will retrace to the call side, thus amplifying short delta, because I would now basically have two short delta or bearish spreads on (the 72.5/77.5 and the 70/80). * * * My basic approach is to stay mechanical. If the untested side isn't approaching worthless, simply leave the setup alone, as temporarily painful as that may be. One side or the other of an iron fly, after all, is being constantly tested, as there is practically no way that price will stay at your short straddle for any length of time. Only when the untested side is approaching worthless do I look at what can be done, with my first preference being to roll the untested side toward current price. This results in a "goofy" setup (an inverted short strangle), but it also means that I'm not taking on additional risk as I would with a hedge. If rolling the untested side would simply be unproductive (there is too little time to expiry to get anything for the roll, for example), I then look at a purely defensive hedge either in the setup's current expiry (again, if that is productive credit-wise) or, if necessary, further out in time. * -- As price moves toward the put side of the setup, delta "lengthens" or becomes more net positive; as it moves to the call side, it "shortens" or becomes more net negative. ** -- "Plenty of time" is somewhat subjective here and will depend on what's happening with the setup.
NASDAQ:LULU
by NaughtyPines
ROLLING: XLU DEC 2ND 45/48.5 SHORT PUT VERT TO DEC 23RDAfter I pulled off the short call of the Dec 2nd iron fly at near worthless today, I rolled the short put side out to the Dec 23rd expiry to give it a little more time to work out, as well to be able to work the call side of the setup effectively. (I have a setup in the Dec 30th expiry already, so didn't want to roll there; Jan was too far out in time for my tastes). I did the roll for a .05 ($5)/contract debit. Shortly thereafter, I sold a call side against -- the 48/51.50 short call vert short here -- for a .23 ($23)/contract credit, so I'm net credit for the roll. (I could not get enough credit out of the 48.5/52 to bother with, so dropped the spread down a half strike. The resulting setup is pictured here. Ideally, I need price to move back toward the "body" of the setup to get out for scratch or better. If that doesn't happen, I'll naturally take the call side off at near worthless, and then "lather, rinse, repeat" with the rolling/selling an oppositional side against.
AMEX:XLU
by NaughtyPines
SHORT VIX DERIVATIVE PLAYS: GIVE THEM TIME TO WORK OUTAn interesting article on shorting the VIX and VIX derivatives: www.marketwatch.com In a nutshell, backwardation occurs (which only applies to VIX derivatives, not to the VIX itself) and this can "derail" a short VIX derivative play that is not given enough time to play out and for contango to kick in and start its inevitable erosion of the underlying, whether it be VXX, UVXY, XIV (inverse), or SVXY (inverse). And although this only shows contango/backwardation for the years 2007-2012, one theme is evident and that is that the market is in contango the vast majority of the time (on average, >75% of the time): www.cboeoptionshub.com In essence, then, the caveat to shorting VIX derivatives in reliance on contango being a constant on top of VIX mean reversion really should be a caveat against shorting and assuming that it will work out "immediately" or even "fairly quickly" (relative terms, I know). The practical crux of this is that if you short VXX* during a VIX >20 spike with, for example, a short call vertical, and it doesn't break your short call as you approach expiry, well, roll it out for duration to a later expiry and give it more time to work out. After all, history says that for >75% of the time, contango will be on your side, even if you have to wait a little longer than you'd like for it to have the desired effect ... . * -- Alternative plays would be to short UVXY with a short call vert, long SVXY with a long put vert (it's an inverse), or go long XIV (it's not optionable; you'll just be stuck with stock). With XIV, since you'll be holding long stock, you're only option is to "wait it out."
CBOE:VXX
by NaughtyPines
WEEK OF 12/5: WHAT I'M LOOKING AT: XBI AND EWZWith the VIX still hovering in sub-15 territory and an examination of broad index exchange-traded funds therefore yielding less premium than I would like,* I'm turning my attention to sector exchange traded funds for possible premium selling plays. Naturally, VIX levels could change in light of the outcome of the Italian referendum (as of the writing of this, Dec 7th expiry VIX futures are up .125 to 14.40, with Dec 14th expiries up a similar amount to 15.05. www.cboe.com). After having ground through the entirety of "X" series SPDR's, along with a few non-X funds, it appears that EWZ and XBI offer the best implied volatility rank and implied volatility metrics for premium selling, with both being >70% in rank over the preceding six months and >35% in implied volatility, which is generally what I look for to play. Since I already have an EWZ iron fly on, I'll look to get one filled in XBI (See Post Below). * -- Currently, QQQ has the highest implied volatility of the four major index exchange-traded funds, but the Jan 20th 20 delta iron condor yields less than a 1.00 credit for a three-wide, which is what I like to see out of these trades (credit received > one-third the wing width).
TVC:VIX
by NaughtyPines
OPENING: IYR DEC 23RD 68/75/75/80 IRON FLYI had intended to put on a similar setup last week, but got distracted by something else ... . Implied volatility rank remains high here, even though IYR's background implied volatility isn't that great. Metrics: Probability of Profit: 44% Max Profit: $343/contract Max Loss/Buying Power Effect: $357/contract Break Evens: 71.57/78.43 Notes: The probability of profit metric on these always seems to suck hard (45-50%). The trade off between this and an iron condor (which has a higher probability of profit) is greater premium at the door, so a better max profit/loss ratio. This is basically a 1-1 setup; most iron condors I do are 1-2. Look to manage at 25% max profit as you would a short straddle ... .
AMEX:IYR
by NaughtyPines
EARNINGS PLAY: ANF NOV 25TH 14.5 SHORT PUTPutting this on a touch early ... . High implied volatility rank/high implied volatility in advance of earnings. I'm looking for a volatility crush after earnings announcement and, of course, bullish or sideways movement ... . Metrics: Probability of Profit: 74% Max Profit: $48/contract Max Loss/Buying Power Effect: $1402 (assuming the stock goes to 0, and you do nothing); buying power effect is broker dependent) Break Even: 14.02 Notes: I'll watch this closely. If I get bullish movement plus an ensuing volatility collapse, I'll look to take it off near worthless. Alternatively, if it breaks the short put, I'll roll it out for additional credit, as I'm not particularly interested in owning the stock.
NYSE:ANFLong
by NaughtyPines
OPENING: XLU DEC 30TH 42.5/46.5/46.5/49.5 IRON FLYAdding to my core exchange traded fund fly positions here with this high implied volatility rank underlying. (I already have some XLU on, so just adding a "smidgeon" here). The implied volatilty in this isn't great, but then it's almost never "great" ... . Metrics: Probability of Profit: 46% Max Profit: $210/contract Max Loss: $190/contract Break Evens: 44.40/48.60 Notes: Will look to manage this like a short straddle -- at 25% max profit ... .
AMEX:XLU
by NaughtyPines