January 2010 Results

by Jeff on February 5, 2010

It wasn’t as bad as I had previously thought. I am still learning how to download and correlate data from TOS so I ended up counting some losing trades from December into my January summary that I posted a few weeks ago (You can find all the details on my Closed 2010 page.) Overall, The Option Guru beat the S&P 500 for January in both the Spread Account and the Conservative Account:

S&P 500: -3.7%

Spread Account: -3.21%

Conservative Account: -2.14%

Don’t get me wrong, I am not bragging! Let’s look at a few things here…

Double Down Danger

Back in December I opened a Bull Call spread on GOOG because it was in a well-defined upward trend. In January I opened a Bear Call on BIDU because of its down trend. On 1/12 (the very day I entered the BIDU Bear spread), GOOG announced their change of policy regarding the censorship in China after the market close. BAM! GOOG drops and BIDU shoots up – burning me in both trades! Usually I like to keep more diversified and I let this one slip through – mostly for greed! So it cost me almost $2,500, where if I had stayed diversified it would only have been $930.

Conservative Account

Not much activity in this account – it was intended to be that way. I was assigned T last month and I should have purchased some insurance in the form of a protective Put, but I didn’t. Now I am waiting for a price recovery in order to start writing Calls.

I bought another 200 shares of TZA when the price was down at 9.32. TZA is a Direxion 3X Bear on the Russell 2000  that I am using as a hedge for a possible bad stretch. Turns out to have been a good idea so far. If that gets above $13 and starts to pull back, I will sell some Calls.

The Option Guru also closed KFT and LTD for a profit and used the money to do a Naked Put on DUK. There is still a nice chunk of cash sitting on the sideline waiting for a Bull move on something – anything!

Outlook for February Expiration

Right now it’s looking good! The Guru is in mostly Bearish trades and he hopes to have the opportunity to close some early.

The PCLN Double Calendar and its associated adjustment is working out quite well right now. In the Risk Analysis below, this is what it will look like next Friday (2/12) all things remaining the same. I have until earnings on the 16th to hang on to this – and if it stays in the fat part of the profit tent the Guru would be very pleased!

CLF is a FEB/MAR Put Calendar that I entered on 1/28 with the intent of entering another Calendar spread to increase the profit tent. Right now it’s in the profit tee pee and I will wait a few more days to optimize the next trade for the price direction.

I did enter ISRG on 2/1 with a 310/320/330 FEB Butterfly. I will do the same thing as CLF as soon as I have a good trade for a high probability double Butterfly.

Thanks for your time, and the Option Guru welcomes any comment or questions.

- Jeff

Tagged as: bear call spread, Butterfly Spread, Calendar Spread, Diversification

  • Bruce

    I know the Theta is amazing. I may add to it for a weekend trade.

  • http://theoptionguru.com/blog Jeff W

    Bruce,

    The market is closed on Monday and I am hanging on to PCLN until Tuesday to capture the additional 3 days of Theta – which will almost double my profit from today's level.

    - Jeff

  • Bruce

    PCLN really moves around. I really need a tracking sheet on IV to understand it. I think I will keep it until Tuesday (Market closed on Monday?).

    Would it be too greedy to stay in until Tuesday AM since earnings aren't until after bell? Maybe if it moves more to the middle of the tent on Tuesday.

    RIMM is looking pretty good lately. Even is up today when everything else is down.

  • gbusticz

    Jeff,

    I completely agree with you. Anybody who thinks he/she can predict a direction in this current market is just joking. Good to see higher volatility coming back. Bodes well for us net premium sellers. I am also doing calendars and butterflies in addition to ICs (not legging in). Also waiting to do a GS Calendar for Mar/Apr.

    Jay

  • http://theoptionguru.com/blog Jeff W

    Bruce,

    Glad your PCLN is working out well – so is mine!

    I have been drifting away from Credit Spreads and ICs mainly because of the market. It's hard to determine direction right now and Calendars are easier to adjust if conditions change. Volatility is high (well, at least higher than it has been) and prices appear range bound and consolidating with wild swings up and down. So for now, Calendars/Double Calendars are a first choice.

    I am still holding off on Goldman. I am lining up potential MAR/APR trades right now.

    - Jeff

  • Bruce

    Jay and Jeff:

    Well Goldman is up giving you an entry close to strike.

    Beside you can always split the difference by splitting your buy between the strikes. ie: 2 at 150 and 2 at 155.

    I don't really understand the neutral strategy, like Jeff I also usually have an opinion and would rather slightly lean that way. To me the Calendar, especially the double calendar is more about choosing a range rather than a neutral approach.

    The other problem with indexes (not that I don't like and use them as well) is that their premiums can be lackluster.

    As for PCLN it is working out very well upover 10% in just two days with Theta ready to give me a big jolt tomorrow.

    Jeff, are leaning much more to calendars now, I don't see you doing any Iron Condors?

    -Bruce

  • http://theoptionguru.com/blog Jeff W

    Jay,

    You make a very good point about GS, which is why I wanted to wait a day or two so that I can determine the short-term trend and/or closer to the strike price.

    I'm also a directional trader (just my style that I can't seem to suppress) so I frequently like to bias calendars towards my anticipated price direction. Theoretically, as it gets closer to expiration and theta is increasing, the price is moving towards delta neutral.

    - Jeff

  • gbusticz

    The issue with a GS single Calendar (legging in) right now is that the price is midway between strikes. If you choose one of the strikes, you are no more neutral, you are now playing a direction. That's why I prefer the stocks/ETFs with $1 increment strikes. They just make neutral strategies a lot easier to trade.

    Jay

  • http://theoptionguru.com/blog Jeff W

    Bruce – I agree with the entry date. I am going to wait a day or two to see how the financials and the market are doing. I am also keeping my at risk down to a minimum and not doing any more than 2-3% at risk.

    - Jeff

  • Bruce

    I took a look at GS. No earnings, no large negative skew on month to month volatility.

    The 155/150 Dbl Calendar puts the current price ($152.62) right in the middle of your tent.

    If you do ten of each (about $4,700 at risk) you could generate $37 of Theta a day. Of course that would increase to $47 a day a week later and $63 a week after that.

    It sure beats leaving $15,000 at risk with 100 shares of GS, especially if you can be three weeks in and skadattle .

    I like the idea of legging in because if start with a single calendar tent you can let the market tell you which strike to select for your second leg.

    My undecided factor is what is the correct entry date. Tomorrow would be 37 days before March expiration…seems reasonable to me.

  • http://theoptionguru.com/blog Jeff W

    Bruce – I closed my short calls today on a few FEB credit spreads I'm looking at Double Calendars (I may leg in) on GS, AAPL and APOL for MAR/APR. If the market continues to range then IC's and DC's are great choices.

    - Jeff

  • Bruce

    I already pulled the plug on my previous trade (Murphy's Law: of course it continued up).

    But my calendar is working nicely and will generate great Theta daily. I am trying to line up Calendars and Condors for next month. I think that is going to be my concentration. I dabled with some this month and they worked out inspite of extreme turbulence.

    Instead of paper trading this month I did with minimum capital. My S&P Iron Condor is up 20% and I might close today. My calendar is working out well after adjustments (I adjusted late it would have really worked out well if I had stuck to plan. I will try to be regimented this month.

    Bruce

  • http://theoptionguru.com/blog Jeff W

    Bruce,

    I feel you pain on that Bull Put…

    This is not professional advice and it's all up to you, don't take it off and morph it by plugging a FEB/MAR 200 Calendar on top of your 210 Bull Put and see what you think. It still could make you a nice chunk of change as long as the price is above 194 on the 16th.

    - Jeff

  • binenmail

    My situation is I need to do something about my vertical spread.

    I currently have a FEB -210/+200 PUT spread. I don't want to stay with this and need to either roll, take it off and morph to a different trade.

    I am leaning toward closing my current trade and doing a 210 Feb/March Call Calendar.

    But your 210/175 Double looks interesting. Either way I plan to be out by Feb. 15 or 16.

  • http://theoptionguru.com/blog Jeff W

    Bruce,

    Yes, 210 Calls and 175 Puts. Yes, the 65/day is the theta from the slices based on 'live' price. The point of adjustment makes sense to me. One thing to keep in mind re adjustment: I like to look at how the stock price is behaving before I just blindly make an adjustment. Fir instance, if it looks like it is beginning an trend or if it might just be a bad or good day.

    FYI – I hope your first one will be in a paper account and not a live one. Safer that way. There will be plenty of opportunities on these in the future.

    - Jeff

  • Bruce

    To be clear the 210/175 Dble Calendar we are speaking of is made up of 210 Calls and 175 Puts, right?

    And your $65/day is that simply taking the theta number off of the slices bar on risk profile? And the increase is found by moving the trade ahead a day?

    According to Dan Sheridan adjust double calendars when you are halfway between short strike and breakeven. So on 210/175 I don't need to adjust until 219 on upside or 169 on downside.

    I appreciate your help with this Jeff. I think this is starting to make sense to me.

    Best regards,

    -Bruce

  • Bruce

    I checked out your 210/175 double calendar. It looks incredible. My actual reaction is it looks too good.

    There must be something missing. Some way that a change in volatility can bite us. The risk profile shows that I can’t lose money on this from 160 to 220 on PCLN. How can that be possible?

    The inversed IV (March lower than Feb) is unusual, but doesn’t that usually happens to options around earnings? I know people always warn you to stay clear of earnings season with calendars… maybe this is why. Maybe this is a false sense of security.

    But for the life of me I can’t see how it goes bad. If the volatility gets sucked out of Feb then it would also happen in March. Is that it, just when I want to sell my debit spreads the price drops dramatically? As well as a return to normal Vol levels (Feb Vol lower than March).

    • Jeff

      Bruce,

      IV is usually high around earnings – nothing new there. A drop in IV begins to deflate the tent and collapses it completely around 6-7% decrease – not likely to happen in today’s market and with this stock. What I have seen is huge volatility drops as soon as the day after earnings – another reason to get into these early enough to capture the Vega and exit before earnings. These are not good to try and get greedy with.

      The wide base is due to the IV of FEB (68%) being so much higher than MAR (54%). Selling high IV and buying low IV is exactly why Calendars are good in this situation. They don’t work nearly as well when the IV ratio is reversed, then consider Butterflies.

      What you are seeing is correct. My PCLN trade makes $65/day and increases about $5 each day, but I do have $1,600 at risk. My breakevens are at 170 and 242. It does seem too good to be true – but here it is right in front of me making $$$ everyday. Listen Priceline, stay within the breakevens and I will be very happy!

      - Jeff

  • Bruce

    I too am looking at PCLN and the Feb 200 call has 62.3 IV vs March 200 48.7.

    Now I know that is because of earnings on 2/17. But it makes a pretty nice Tee Pee
    for FEB/March 200 Call Calendar if I hold it to 2/15.

    Am I reading this right, should the IV discrepency play in my favor? Anything I am missing that I should look out for?

    • Jeff

      Bruce,

      Yes, the IV is with us. You always want to sell high IV and buy low IV, which is what is happening with your PCLN calendar. You might want to turn your trade into a 2-pole tent by buying another calendar now while the IV is with you. See what it would look like with, say a 175 Put if you think the price will continue to sink (with the rest of the market) before earnings. If you haven’t made the trade yet, consider a 210/175 double calendar to give you the lowest delta and widest base.

      If IV on the front month is low and the back month is high, then consider Butterflies for a similar effect.

      - Jeff

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