What Are My Options?

Double Diagonal Time

2012-08-13T12:12:00.001-07:00

Since the VIX is hanging at lows but a sideways to higher environment is quite possible going into the election cycle, I'm going to exploit the situation with Double Diagonals instead of making a direction play.

This trade makes money if the VIX rises or stays flat, and also if there isn't a big direction move in the next month.

The Rationality of Ratios

2012-06-13T13:23:00.001-07:00

Rational minds make distinctions between one thing or another in quantifiable increments, they ration, the rationalize, they make ratios. What is truth? It's the fraction left when you scoop out all the bullshit, and there's no such thing as detergent in this metaphor.

Portfolio management is all about rationing, at least, rational management.

Guess what happens when you hedge positions by selling options when both price and volatility are smiling at you, and then put in a Good-til-Cancel order to buy them back at 60% of the sale price? In this case, and probably in the majority of cases, the market corrects after a stretched run, volatility collapses, and you get those orders filled, booking a profit on the hedges to cover about 50-65% of the unrealized profit that just disappeared from your main position. Then you wait. The waiting can be uncomfortable, but it's definitely not as uncomfortable as seeing your hedges lose money and realize your main trading campaign is missing out on its intended function of making a significant profit over time. Human psychology tends to sweat the pennies and glaze over the dollars, but getting it mostly right just often enough (30-40% of the time) is actually how you accumulate compound returns in this game.

Now today, things have bounced back little, but it's clear that we're in a narrowing-range, lower volatility mini-regime for probably the rest of the week and into next, after a couple of fast moving weeks. Obviously I don't want to lose my position, precious metals still look promising by my charts over the next quarter or two. So I trim and adjust ratios. First, I looked at the relative performance of silver and miners against gold, miners are impressing me, silver is not. I could make a story about the current macro-environment being not a simple QE-fueled inflation party, but one of tenuous liquidity, with stocks teetering in a range and gold basing up. So silver isn't the leader here, miners are, with their input costs (copper, oil) going down in price but their product looking still quite shiny. So I sold my silver calls for a 1% gain on account, and I hedged my GDX calls, selling the same contract I sold the other day, and for pennies more than what I covered it for. Here's why:

Until GDX can score a weekly close over that descending moving average, and until it can base up above the descending moving averages on the daily scale, I'll sit tight with my relatively crappy hedge. As a rule, I hate to sell OTM contracts for less than a buck, I got .75 for this one, I expect to cover it at maybe .50, and maybe not for some weeks. To wit, that price covers my cost basis; the unrealized profits are still very real to me, but a less experienced trader might say that I'm now playing with "house money". Though I have to wonder, whose house?

Usually what makes a portfolio less entertaining to watch is also what makes it more consistently profitable. Ration your fun, don't rationalize your exposure.

Hedge Rhythm

2012-06-06T07:22:00.001-07:00

I didn't update about my trading during the sideways week we had in gold, but I covered hedges, I put others on, I did all these a bit late or early, but it was ok. My current position is August 155 GLD against an August160 GLD, also GDX Jan' 60s and SLV Oct 32s. I also have some TLT puts at the 110 strike, and am short a bunch of iron condors on SPY, which briefly skirted in-the-money against me but are back to flying strong.

I hedged my positions today, looking at the moving averages above, gold is facing some serious resistance. As of today, it overcame some serious resistance, which is now support. This is true more for miners and less for silver, but still more or less true for the lot of them. That means consolidations and bleed-out in implied volatility for the next week at least - when I sell these calls to hedge I also put in good-til-canceled limit orders to buy them back at like 65% of the sale value. Slow cook rhythm.

Raser Blades

2012-05-26T15:26:00.004-07:00

This is a chart of a company I briefly traded in early 2008 when I was just starting out in the markets. I bought it around 7, sold it at 7.85, it went to 11, I was flummoxed - flummoxed I say! Then I left this and any other equity issue alone for a while to learn macro trading in the Forex bucket shops.

Since then, the above happened. Unlike many companies whose share prices bounced back hard in 2009, this company was bleeding money like mad. Obama basically bought their debt with government funds, in the form of a direct loan, right towards the rightmost side of the image.

Golden Wave

2012-05-18T08:25:00.002-07:00

My good-til-canceled limit order to buy the GLD Aug 172 call for .78 was filled, almost right at the low, and I've been riding this reversal raw dog. I decided to sell that August 172 again to hedge my Sept. 180s, this time for 1.78 - and I sold some July 170s for 1.18 to hedge the July 165s. Naked long GDX calls, trading at a .92 offer right now, doubled the position at .48 - somewhat dismayed that my limit order to buy some SLV calls didn't get filled the other day, wouldn't be the first time I missed a good trade for a penny.

Overhead resistance is 1615 and descending on the daily, 1625 and descending more slowly on the weekly, but I did a little wave-count based on the momentum divergence and added up that this 5th wave should be about topped out at 1597, so I hedged. My account has recovered about 15% from its lows. Will add more July calls (probably at the 160 or 162 strikes) and buy back the sold cals on a GLD dip back to 152.50-153.50.

Oh yeah, there's an IPO today, I tried daytrading ZNGA around it and got skiffed when NASDAQ couldn't get the open working on time. Moderately (and I do stress - moderately) entertaining video here.

Golden Sand Trap

2012-05-11T12:41:00.001-07:00

My adjustment criteria triggered when gold failed to break-out on a snap-back today.

Sold some August 172 Calls to hedge out the Sept 180s, holding a couple July 165s without hedge, waiting. The thesis of this trade is valid as long as gold is above the monthly support and between weekly lines.

Little Dipper

2012-05-09T09:24:00.001-07:00

I've learned that whether you're running a portfolio, designing product in a start-up, or trying to maintain a loving relationship, it's best to keep things - as Einstein said - just as simple as they need to be, but no simpler. I think this picture sums up why today I covered my remaining GLD hedges and am now naked long for some recovery. I will be selling June and July options along the way up. If gold somehow violates this recent low, then I'll dump my contracts. That little white dot is where I marked my expected time and price destination for gold to finish its corrective mode 2 months ago.

Golden Age

2012-04-25T08:52:00.001-07:00

Covered my SPY condors for about 65% of the max profit, less commissions (so about 55% net) and picked up some GLD diagonals, selling the 164 June and buying the 165 July, and selling the 179 July to buy the 180 September. I think gold volatility is very cheap right now and that gold will be making a bottom fairly soon, though it won't enter another epic bull market phase for quite a while. I'll adjust the trades into wide butterflies as I see that scenario come to fruition.

SPY Condors

2012-04-11T17:17:00.001-07:00

Sold some ICs on Monday and Tuesday, a little early but so far so good, will cover on a VIX drop to 17.5 and SPY recovering to 139.50 or so.

Liquidated GLD

2012-04-04T07:39:00.003-07:00

Waiting for volatility to break out a bit more before I sell an Iron Condor.

I could have bought a May 170 to keep a six cent credit to earn though expiration in 8 weeks, hah, but I generally don't waste my time with stuff like that.

On News Releases

2012-04-03T11:27:00.003-07:00

I generally don't pay attention to up-coming news, though I will cover how to scalp the resulting forex volatility on Flip FX in an upcoming episode. As an options trader though, I try to manage risk and let the chips fall where they may. Maybe if I had more time to devote to managing my portfolio, and anticipating FOMC statements and NFP reports, I'd be putting in more OTO and limit orders so my shit is ready to react to sudden moves.

But the beautiful thing about the nuances of options trading, is that you don't need to be reactionary, you can have plans for different scenarios, and if the tape is ready to drop or chop or surge, whatever it will do, whatever the news catalyste that spurred it along, you'll be cool headed to react.

Today the FOMC said they were happy to not print money again in the near future, the dollar popped, gold dropped, stocks sagged, I yawned. My UUP calls are up, my GLD calls are down, and my revenue stream has its own cashflow.

That's my ultimate position.

Update

2012-04-03T11:19:00.002-07:00

Well, GLD support got broken... good thing I have a cash hedge!

Waiting to see what materializes over night, may cover and sell closer to the money, and also sell a Put spread, if GVZ (gold volatility) makes a significant recovery on an overnight move.

Buying some GLD Deltas

2012-04-03T07:50:00.004-07:00

I bought back the May 165 Calls I sold against my June 166 Calls at a loss and sold May 168s to lower the cost of that transaction, now I'm showing a loss on those! Yeah! Why should I be happy to take losses? Because those losses are padding gains I'm making on the longer-term contracts I'm holding, and because they're eroding faster. That's spread trading.

Winners add-on at rising support.

I went to answer some mails and file a bug report before I took these images, and the thing already recovered pretty fast.

GLD has tremendous overhead resistance on the daily, weekly and monthly charts, but should it be able to regain to about 168, which is where my short strike is and thus the position of maximum theta-gains, it will be able to consolidate a bit and maybe attempt to break back into the 170s again. I hope to cover this 168 at a gain due to time decay even if it is at the money, perhaps sometime in early May, and have an in-the-money position with some time left to sell further out calls against.

But if it fails to overcome those overhanging resistance levels, I have this cash hedge.

GLD Diagonal

2012-03-29T07:58:00.002-07:00

Put on a GLD Diagonal, sold May 165s and bought June 166s, slow cooker, expect further downside but wanted to take a tentative position.

Back in UUP

2012-03-28T08:27:00.002-07:00

Picked up some June 22's for .34 - EUR/USD hit the target the other day but I waited until there was some kind of move back to reclaim a foothold.

Adjustments

2012-03-20T15:16:00.001-07:00

Dumped UUP calls, will re-buy when EUR/USD hits 1.345 - adjusted AAPL by buying the 640 calls and selling 645 calls, giving me less upside risk. Returned gold position to all April contracts.

War Stories

2012-03-20T08:00:00.003-07:00

I'm afraid of WWIII - today Iran begins trading their oil in non-USD currencies such as the Renminbi, I expect China to make Iran their little Iraq but bomb them with butter instead of depleted uranium, strengthening diplomatic ties to the extent that an invasion of Iran would be perceived by the Eastern Alliance (including Russia and Central Asian countries) as the equivalent of how the US would perceive an invasion of a Central American or Caribbean country.

The onset of WWIII would be extremely inflationary, which may be just what the central planners need to keep the show on for another season (and now, for a very special episode...) and will mean lots of manufacturing jobs in the US for defense contractors since China, unable to slow lest it implode, will respond to trade wars and then shooting wars by plowing tens of millions of people into manufacturing weapons to outfit an army 5-10x the size of the US military. Quite a scenario huh? I would have preferred that they lower defense spending, get the deficit under control, reform the financial system to bank on assets that produce tangible value... but whatever.

To hedge this I'm going to buy some OTM back-spreads on Lockheed, they're pretty well correlated to the S&P so they might do ok in the Goldilocks election-year scenario cooking up, but in the event of war breaking out, they will BREAK OUT, 20-30% gains over a couple of months isn't unrealistic in the event that their revenues will rage up.

I hope I lose money on this one.

Volatility Massage

2012-03-16T11:14:00.004-07:00

I saw Gold Volatility declining so much on a set-up that looked like a short-term base for a move up, so I figured, what can I do here, this is what I did:

What's funny is I wanted to get that adjustment when GLD was around 159.4 or so, thinking directionally, but I actually got filled during the run-up because gold volatility was dropping. Options trading is full of surprises. The adjustment was to buy back the short April calls and sell some closer March quarter calls, the steepness of the drop-off you see is because I'm not short a 165 and long 169 - the long call has benefitted a bit from the pop up in GVZ this morning, while the other one has fallen due to the pull-back and also time decay will be eating this one fairly well. I'll probably cover it at .50, currently ask is .66 and I sold it around .83 - then roll back to the Iron Condor position I had before.

I dipped into trading indivual names because the skew and high IV of AAPL seemed like a good set-up, sold some OTM May calls and puts, more calls to capture the higher call-side skew but further-spaced puts because I think a retrace to 540 or so is the most we'd see in a single move, given the tremendous up-trend. I could be wrong here, this thing could explode 20% up or down, in which case I'd adjust to ride the tiger. My pain threshold here is $250 in unrealized loss which means a break-out above $600 or a break-down below rising support at $550 or so.

IV is 38%, will close this one out if it falls to 33% in the next two weeks.

My Target for Gold "B-Wave" Correction

2012-03-13T12:53:00.004-07:00

Was thinking about selling unbalanced IC's but volatility premium is too shoddy to make it anything less than mind-numbing. Cash, UUP calls and just put on a small Iron Condor in gold.

Pivot

2012-03-07T17:03:00.003-08:00

After gold failed to close above its weekly moving averages, I took my loss and moved on to UUP Calls and SPY Puts. Naked long gamma and waiting for the next shoe to drop. I got into the SPY Puts on Monday and am sitting through this retracement, I actually sold a March Quarterly 131 against my April 129, but covered it at about the same price I sold it at this morning. I missed the chance to let the hedge work during this retracement, but you can't get everything perfect.

Crisis Management

2012-02-29T09:08:00.003-08:00

So gold and its cohorts was hit pretty hard today, and being just just a vertical, minimally hedge, so too was my account.

No matter, weekly and monthly supports are still in, I covered the March 174 and sold a March 170 on the bounce, I also added a March April calendar at the 172 strike.

I was tempted to sell an iron condor but maybe GVZ is breaking out here.

Dollas Dollas

2012-02-27T11:02:00.005-08:00

Here in Argentina, hair-brained, corrupt and belligent monetary policy rendered by a CB that is practically a branch of the populist government has lead to 25% p.a. inflation, and subsidized a liquidity window for a fake exchange rate through a combination of spending the CB's forex reserves and legal intimidation of anyone who wants to buy foreign currency. Smells like Thailand in early '97 or ummm, I guess Argentina in late 2000? We've seen this movie before.

Needless to say, I know what it means for my dollars to be debased. It sucks because I'm not living on the teat of some employment for life company, I'm a consultant and an entrepreneur, I need to make my capital stick. Capital, in late capitalism, increasingly sticks only like spaghetti, rather than some industrial strength adhesive.

I'm liquding some UUP call options I bought the other week - all these petty "people's republics" or whatever they call themselves are only taking a page from the king's of currency seniorage, the US Federal Reserve:

I'm also getting out of that TLT vertical tomorrow morning if it manages a close above the squiggles:

Yes, bonds are breaking out while the dollar sags below daily support - it's almost like the Fed is having its cake and eating it with bacon-flavored syrup.

Meanwhile my GLD vertical is doing well. I guess you learn who your friends are.

SPY keeps making new recovery highs but I'm not playing the game of shorting that anymore.

Pro-tip on liquidiating a spread, instead of putting in a spread order that gets executed "specially" (i.e. shit-ily) put in individual orders for each leg to get out at the mid instead of the bid or ask. The ticket charges are the same, but the money you save on the execution almost pays for the commission to liquidate.

Rolling Vertical

2012-02-21T11:29:00.002-08:00

Today I dusted off an oldie but a goodie, the roll-to-vertical move. I sold a May TLT 106 Put, giving me .70 on the table to gain potentially 3.30 if bond yields are back above 3.5% by May. I had tried to hedge GLD during its chop phase, and was dead on, but the 168 strike made me nervous so I covered those calls for a loss, faked-out by a 4 hour candle that reached above the mess but failed to close above it. I held the naked March 164 through a drawdown of a few % and today am well back up, as the daily and weekly supports suggested was a reasonable possibility. I rolled that one into a vertical as well, sold the March 174. Since I successfully covered the 166 I sold to hedge at 2.25, about a buck below where I sold it, offset by my sloppy attempt to hedge with February options (about a .20 loss, but on twice as many contracts) then the initial purchase of the March 164 back around 158 at 3.35 leaves me with a cost basis of 3.35 - 1 + .40 - 1.55 that I got for the March 174 = 1.22 with a 10-point spread, so that's 1.22 on the table to earn up to 8.78. I made a lot of mistakes in this campaign trading gold's upside move in Q1, but I'm still on track to come out in the black. My exposure is now low enough on these positions that I can relax and move on to other opportunities.

Bottleneck

2012-02-14T06:34:00.004-08:00

So now I trade bond options:

It occurred to me that a big breakout in interest rates might be a theme this year, so I bought a May 110 Put on TLT and sold a March 111 Put to hedge. I'm covering that hedge today.

I covered the short GLD Feb 166 call last week and sold some 168s, and then I figured, might as well make it a butterfly while the thing is correcting sideways:

I'm still long a March 164 around where that support is, I'll cover these short calls prior to expiration if the 4-hour candles can close above the banner of looming moving averages:

I also took an FXY Put postion, buying the Jan '13 125 and selling the June 125, I should have just gone in unhedged, maybe just bought 1 contract. Too successful in that one.

Recap on Throttling

2012-01-25T13:52:00.000-08:00

The past week and a half have not been kind to my account, I lost a few % due to gold volatility falling after re-trying a Double Diagonal, I was looking at covering the near-expiration short options but decided, complacency, to wait to cover the calls, which hurt me pretty bad when the Fed minutes came out and gold jumped $60. Yeahhh...

Meanwhile I've tried to stay short the stock market via Put diagonals and that has been slowly bleeding money as well.

I can attribute some of this to lack of focus, I've been making way more money each day on-site as a consultant and have been wholly occupied with my start-up in the evenings. Other aspects are more procedural, and are grounds for amendment. I have not been following the rule of always covering short options when they fall within a certain % of their sale price, usually I go by 70%. This has cost me earlier, when I left an Iron Condor open during its last week before expiration and went for a near complete profit to jumping out at break-even. Today the calls I could have covered for .30 went to 2.90, I ended up buying them at 2.65 and letting gold rip higher before selling the longer-dated calls.

I'm currently left with core positions, the IWM Put diagonal and a reverse-diagonal in GLD Calls, long March 164, short Feb 166, which I rolled to late today.

I need some more precise rules for when to get long gamma, I've been trying to trade entirely short gamma for the past 7 months and it's reminding me why I used to be philosophically biased towards being long gamma.