February Expiration Wrap Up

by Jeff on February 24, 2010

You can see from my last post that PCLN took a lot of my ‘hoped for’ profit off the table. Like I mentioned, I was counting on the 3 day weekend to load up on time decay – but volatility took all that and more away. I am currently up $130 for February – so far.

The winners were AMED, SPY, JOYG, CREE, ISRG and part of my PCLN triple calendar. The big winners were SPY and CREE. The losers were CLF, BIDU (again), ANF, PCLN (the other two calendars) and FSLR. See my Closed 2010 page for details.

Since I am trading much smaller lots, the profits aren’t up to what I forecasted, but I’m not worried about that at this time – it’s improving my technique, analysis and winning percentage that I’m most concerned about. Right now the winning percentage is 54.5% – not all that bad (60-65% would be better). The bad part is from a $$$ perspective, the winners are 55% of the losers, and that’s a number that I have to improve on. I have been working on limiting my loses and making the number smaller, but 2 events prevented that: 1) is the PCLN move and I won’t rehash this here, and 2) FSLR Bear Call gapped up against me unexpectedly. Sure, then right after I bail it gets downgraded :(

March Expiration

A lot of stocks on my watch list seem to be directionless and AMZN is one of them. I opened at MAR/APR 115/120 Double Calendar on it.

On 2/22 I added the Put side to the AAPL MAR/APR Calendar. I had intended on doing that at some point and the recent down move in the price provided incentive for that. The tent has quite a sag in the middle, but if the price moves to the mid-190′s or around 210 it should work out well. Regardless, I have a really nice wide base.

I also opened a FEB 120 Bear Call on FSLR. It seems their fortunes continue to allude them as their earnings were OK but a few analyst downgraded them. Check out the In Play page for details.

Conservative Account

AT&T (T) refuses to get out of the 24.75-25.50 range it’s in. That’s too low to sell any Calls that make sense without risking an assignment below my cost basis. Since it’s hanging in that range, I bought a MAR/APR 25 Calendar spread. To me that still qualifies as a conservative play and a way to lower my cost basis even if I only make $50 on it (max gain is $134.17) and the risk is only $90 (that’s much less risk that a Covered Call). The breakevens are 24.26 and 25.64. I plan to exit early.

◄ Jeff ►

Tagged as: Calendar Spread, Covered Call, credit spreads, Volatility

  • Bruce
    I have also been doing more Calendars and Iron Condors. They have been working out really well.

    I especially like the way their breakeven points lend themselves to sounding alarms when it is time for adjustments (as opposed to my previous buy hold and pray strategy with stocks and covered calls).

    Today (at the close) I opened my first double diagonal which I view as a cross between a condor and a calendar.

    Jeff, take a look and tell me what you think of this. The risk profile looks really nice. The SPX just needs to stay within 1058 and 1150.

    BUY +2 DBL DIAG
    SPX 100 MAY 10/APR 10
    1140/1070/1130/1080 CALL/PUT/CALL/PUT @14.10 LMT

    Thanks,
    Bruce
  • Bruce,

    I would say that the prices are good, but I worry about how far out the expirations are. Also the Call poll is much shorter than the Put poll on the tent - maybe it wasn't when you placed the trade. I plugged your trade in and it's telling me it's now up $590 (14.40 to 20.30) - that is if I entered it right. Here's what I did
    -APR 1070 Put
    +MAY 1080 Put
    -APR 1130 Call
    +MAY 1140 Call
    Let me know if I did it right. Again, let me know why you picked APR/MAY.

    ◄ Jeff ►
  • Bruce
    Jeff:

    You transposed the PUTs. It should be April 1080, May 1070.

    March seemed to short (20 days) April at 48 was a bit long, but just on the cusp of an acceptable time line for me. It clinched it for me when I saw $20.55 of Theta a day going into the weekend. Plus I thought the time spread helped diversify my holdings a bit even though I have other S&P 5oo trades.

    I am leaning more and more toward indexes and away from stocks. The advantages of indexes are obvious. What do see as the benefits of stocks for calendars and condors? My AAPL calendar is giving me neck strain like a ping pong match. I guess I should throw in the towel and make it a dble calendar. Instead I switched it from a 210 to 200 and may need to make another adjustment next week.

    Another alternative I passed on due to unfamiliarity was March quarterlys which have 33 days left. Are there any reasons not to use these?

    The PUT is longer because I always worry more about the down side. I see it as insurance.

    Best regards,
    Bruce




    ________________________________
  • Bruce,

    Thanks for correcting me - the tent looks much better now.

    Regarding your selection of expirations: I don't mean to knock what you did; I'm sure you have your reasons. I just wanted to compare what you did and what I would have done (and still may do on Monday) using the weekly (MAR1) and the MAR expiration dates. Use this link to view the risk graphs: http://bit.ly/cl1gnz
    -MAR1 1100 Put
    -MAR1 1125 Call
    +MAR 1075 Put
    +MAR 1150 Call

    Your Trade: 47 days to expiration
    Alternate Trade: 5 days to expiration
    Your Trade: Theta as of 2/27 = 10.61
    Alternate Trade: Theta 71.83
    Your Trade: Risk 2,440 Max Gain 1,320 Debit 1,440
    Alternate Trade: Risk 2,555 Max Gain 736 Debit 55

    Personally, a lower entry and shorter holding time make up for the narrower breakevens, of which there is only a difference of about 30 on the down side and 60 on the up side. You will notice also that the alternate trade is biased on the bullish side, which is where I would want to be for next week.

    There are advantages to indexes and ETF indexes, but I still like to play stocks for 2 reasons: 1) I follow several of them and like to get intimate with the companies and price actions and 2) simply for additional diversification. What I did with AAPL was after buying the 210 Call, I bought a 195 Put a week later. This gives me a nice wide tent.

    Regarding quarterlies: it's just like the weeklies - just make sure you watch the volume/open interest and the bid/ask spreads.

    Man, this was enough for a whole post...

    ◄ Jeff ►
  • Frederic
    Jeff,
    Since you were pretty successful at CC writing, why don't you try deep ITM diagonal spreads to simulate CC but with deep ITM Leaps calls instead of the stock? I found that it could yield up to 8-10% per month.
    Frederic
  • Frederic -

    Do you mean buy a JAN Call deep ITM and the sell a near month ATM or OTM Call? Can you give me an example?

    ◄ Jeff ►
  • Fred
    Correct. A Jan 12 or 11 Call Deep ITM for example with a delta of .90 min. It doesn't have to be JAN but a month a good while away. The month in which you buy the call must have an IV < than the month in which you write your call = IV advantage.
    Then you sell an ATM, preferably slightly ITM, call in the near month. The time value in the call you write should be roughly 10% of the price of your long call.
    Example: I have such trades on MELI, IMAX, X, NUE, PBR, KMP (only 8%), NOV, INTC, SOHU, APOL, BKE, JEC... You've got to like the stock and be confident that it's going to be higher in the future, but the goal of this type of trades is to roll out and up for a credit if possible at the end of each month until it isn't possible anymore, in which case you sell the diagonal. If the stock drops, then you may want to average down by buying another diagonal. It's pretty flexible... MELI, APOL, SOHU have been pretty good to me so far.
  • Fred,

    What this is, then, is a Calendar with the Long Call several months out. I think is has great potential and may be suitable for testing out in my Conservative account.

    ◄ Jeff ►
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