Theta Positive - Option Trading

And now what?

2009-11-08T15:08:50-05:00

Quite a week - with a VIX over 30 going into last weekend - and now at the close of Friday the VIX was again 24.

So the question is was I too early with my shout out - or is my VIX of 30 a lame warning signal. In the end it is up to you - I don't think I will change much in my reaction when I see the vix again run over 30.

I lost my sense of direction - so I you expect me to tell you if it is up or down for the coming week - you can stop reading.

How did I trade this week - as said last week I would enter some delta20 strangles - the moment I thought the VIX was topping. I did and had some profitable trades. I rolled some of my long term index calendar - which are set under the market - from Nov to Dec. A bit early but the governing thought was to make good use of the elevated Volatility in the back month. I (re)entered - a bit late, since we are getting already close to expiry - a butterfly on the RUT using a 590 center strike (that is my second fly for Nov).

Over the weekend I read a lot of my favorite blog's and I read a lot of doubt. We all seem to be impressed by the price action and we all notice the lack of volume. The NDX seems to be taking a lead (up) - while the Rut seems to be a laggard. I read about a call for quality - that makes sense to me - I am already focus on quality US for sometime now - My favorite value manager is Jeremy Grantham of www.gmo.com - he is very generous in sharing his views and research. In their asset allocation they expect US Quality to gain approx 8.9% annually over the next 7 years - they expect their stock picking to add another 1.8% to that result. 65% of the US quality holding consist of the following equity.

Microsoft Corp.	6.6%
Johnson & Johnson	6.3%
Wal-Mart Stores Inc.	5.6%
Oracle Corp.	5.4%
Procter & Gamble Co.	5.3%
Coca-Cola Co.	5.1%
Pfizer Inc.	4.8%
Cisco Systems Inc.	4.1%
Exxon Mobil Corp.	4.0%
Chevron Corp.	3.8%
PepsiCo Inc.	3.6%
Google Inc. (Cl A)	2.8%
QUALCOMM Inc.	2.5%
International Business Machines Corp.	2.4%
Abbott Laboratories	2.2%

Source GMO -

So when writing cash covered naked puts in retirement accounts - I keep a close eye on this list.

Lite week - Wednesday the Fixed Income market will be closed - don't except any fireworks on Wednesday.

Keep an eye on the VIX - cu all next week

Sharks - Sharks - Sharks!!

2009-10-31T11:27:44-04:00

The Vix over 30 equals a "Sharks, Sharks, Sharks" call from the Beach Guards at Martha Vineyard.

I stopped my business as usual attitude for the non directional trading.

A vix over 30 is a signal that anything can happen in the next couple of days/weeks - up 2 standard deviations, or down 2sd's. Since my non directional trade is based on the presumption that a normal trading days stays 66% of the time within the brackets of 1sd - it is time to accept the fact that normal trading rules will not apply.

What did I do the last couple of days;

- I closed all non directional positions which were profitable. To me it makes no sense to maintain market risk while profit taking would reduce that market risk. Some position I closed were only up a couple % while their potential was multiple times more - so be it.

- I closed all non directional positions which were hurting me and which need a market up turn to become healthy.

- I still have a RUT IC and a RUT Iron butterfly working - I reduced the delta's so Monday morning can not give me any big surprise. If I am forced to make a downside adjustment I will not do it by rolling the downside position down to the next delta 20 or delta 10. Making x% on my capital at risk is not the goal anymore for this month. My main goal is giving myself a shot at getting out of this month for a scratch without risking my ability to "play" December.

- As long as the Vix is above 30 I will not enter December trades in any size.

- In the long-term side of the portfolio I closed a lot of long positions and took profits over the last month. We are blessed our Roth/401k side of the portfolio is up 15% since July 2007. I like to keep it that way. So I accept the risk of missing reading the market signals and missing out of a "big up move".

How am I playing the downside;

(some of these trades are in for some weeks now, I am not advising you to enter my trade at this point in time).

- Long BGZ covered by a Mar10Puts

- Short cash covered BGZ puts

- Short cash covered SDS puts

- Under the market SPX calendars running from Oct to Mar10 (strike 950 and 1000)

- Day trading short spy

- smaller in size short call verticals in the main indexes.

What will be my first trade to enter when I think we might have hit a "bottom"

- SPX Strangle both sides around a delta 20 - creating a delta-neutral position, which is hugely Vega Negative. My enter signal will primarily be based on the intra day vix.

I close with a last word of warning to all new traders - I truly understand the pressure you are under to proof to your spouse, family and friends that making trading your new business venture was a good step. A Vix over 30 happens twice maybe three times in decade. This not the time to take the new boat for a tour - this is imminent hurricane risk. Sit down with your spouse explain that the smartest decision is to stand to the side. Taking out 3 months of living expenses out the trading kitty will proof to be cheaper then trying to make a buck or two in this period. I write this on Halloween, I am not trying to be the bogeyman - but over the years I have seen some very disturbing things in peoples trading accounts - I am talking about 6 figure loses in just a couple of weeks.

Happy Halloween,

Ernst

Open Letter to ThinkOrSwim

2009-10-25T18:09:50-04:00

Scott, Tom and Tom,

Via private email I have asked you several times to investigate my claim that the TOS Theta Calculation hold an error.

I have been informed by Tom that indeed you are aware of errors in the Theta calculation but that correcting the software will have to compete with features other clients request.

In an attachment to this post you can see the size of the errors in the Theta Calculation. At times TOS will present a theta of $200 for a position which has a true value of less than $25. My observation of errors starts 3 weeks before expiry and become very visible in the expiry week.

The effects of the calculation errors are wrong assessments of current position health. At times this will benefit the trader, at times hurting the trader. In addition it gives a faulty basis for the use of the analyze page.

I request the following;

- open a web page which lists the known errors in the platform so traders can take these issue into account.

- correct the Theta errors and treat it as an emergency release

- investigate if all other TOS Greeks calculations are up to standards.

Tom(s) and Scott, I am very surprised with the magnitude of the error - your platform is in production for 8 years, how is it possible that an error like this is not discovered and addressed earlier. I am even more surprised that while corresponding on the issue in private for 3 months - we have not found common ground.

On the legal side I wonder about compliance issues - Can a broker who is aware that information he provide real-time to his client is erroneous, absolve himself for the consequences.

I am very sorry that I need to go public with my grief - I have tried via email and phone conversation but never met a listening and understanding ear. All your correspondence seem to do is to try to reduce the size and the impact of the error.

As said in private emails - I think you are the only real option broker in town - your colleague's don't even come close. So while I express my grief and frustration in this letter- at the same time - no option trader should read this email and draw the conclusion that your business offer is not competitive or essential.

Regards

Ernst Tanaka

Download TOS_Theta_errors

Oct 19th

2009-10-19T16:00:52-04:00

It has been a long time - Trading is going well although I find the market challenging. Every time we are forced to make an upside adjustment we do so with regret.

This post is to share a trade which I just entered

short Nov $10 PUTS in TZA 50ct - if not assigned they give you 5% in 32days.

If assigned you can turn around and sell the Dec 10 calls.

This trade will for fine as long as we get a sell off before the TZA is so low that selling calls is not longer interesting.

Your risk management is your trade size -

What worked in July / What did not

2009-07-23T09:31:11-04:00

I realize I am a bit absent from the blogosphere - Great summer in NY, tonight I gave a presentation at the ISE "How to become a professional trader", clean the house for a old time friend coming over from Holland next week, working on a new website - those are the little tidbits which have kept me busy.

I just finished my July administration so here is my monthly what worked and what did not work post.

Worked
Earning trade: AA
Long Term Calendar: AA
Directional vertical: AAPL, AMZN, AU, AXE, BA, FCX, FSLR, GMCR, KO, LLL, MT, VPRT
Calendar: CL, RUT, XSP
Double Diagonal: DIA, IWM
Iron Condor: NDX. RUT
Butterfly: RUT
Pairs trade: FDX/UPS
Directional; TLT

Did not work
Directional vertical: BHP, BTU, CAT, DE, KOL, SNDA
Speculative straddle: BGZ, FAZ
Cash Cover Puts: PCU

BHP run away from me - should have kept it tighter

All in all July was a good month - I did not hit it out side the park - but close to a 2nd base run - 12 times July would satisfy my appetite.