What’s your Bias?

by Jeff on June 25, 2010

If you have been Bearish, you’ve done quite well this week. While you were not looking (meaning I didn’t post anything about it) I opened a very Bullish long vertical on BIDU at 80 – figuring the stock would continue on it’s merry way past that point. Maybe I should have waited, but I exited on the 24th for a $860 loss, taking quite a bite out of the June profit.

Overall my bias is still Bearish and still looking for SPX to hit the 1,000-10,025 support level. Recently the market was acting like it wanted to reverse and move higher and some people were calling a Head and Shoulders pattern. Maybe, but the Flash Crash sure messed things up. For a real reversal we need to look for two higher highs and two higher lows – not there yet – we have only one higher high and still looking for the next low.

Because of the movement of the market this week, the big winners are the Bear Calls I have on AMZN, GOOG and GS. My AAPL Bull Put is still hanging in there mostly based on Apple’s strength. CME made such a huge down move yesterday that I thought I may need to make an adjustment to the Put Calendar, but today’s rally brought it back into line with my wishes.

I did open a JUL Double Butterfly on IBM that cost $1,020 that could return $980 if it stays between $123 and $132 at JUL expiration. A picture is worth a thousand words, so check out the risk profile and price chart below. I constructed this with both Calls and Puts so I wouldn’t have any overlapping options and end up with a Condor, as was pointed out by DD on 6/14. When I adjust the Implied Volatility, the $980 profit point does not change – unlike a Calendar where I would have to be concerned about volatility collapse.

Based on the chart, it looks like it could be a very good trade – but only time will tell.

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My test (actually, more of a confidence builder) of the weekly ETF’s turned out rather well. My trade was on SPY with a 110 Put Calendar that I opened on Friday the 18th and closed it yesterday for a gain of $40. Don’t laugh, a win is better than a loss and it did gain 60% on a risk of $66. To that end, I opened 4 -110/+113 Bear Calls for next Friday and collected a credit of $172. Why not another Calendar? I just feel that right now the market is moving too fast and due to the short expiration cycle, I would not have a chance to adjust.

◄ Jeff ►

Tagged as: bear call spread, bull put spread, Butterfly Spread

  • PilotMike

    I'm intrigued by your double butterfly paragraph (BTW, I don't see this position on the “In Play” tab). Maybe you can help me understand a few things about what you've said/implied.

    — “I constructed this with both Calls and Puts so I wouldn’t have any overlapping options and end up with a Condor, as was pointed out by DD on 6/14.” —

    This implies to me that you didn't want a condor for some reason. What is that reason? Also, my understanding of how to construct this similarly with a Condor would be to BTO (4 ea) 120 Puts, and 135 Calls while STO (4 ea) 125 Puts, 130 Calls. I don't see any “overlapping” and it is constructed with both calls and puts, so I don't understand your sentence differentiating the two strategies based on those two points. As of tonight (Sat 6/26), the B/E price(s) on that Condor are also 123 and 132. The condor would cost $1172 and potentially return $828 while the double butterfly would cost $1204 and return $796. The condor would require commissions based on 16 contracts and 4 legs, while the DB would require commissions based on 32 contracts and 6 legs. (I'm with OptionsXpress, so I know that my incremental cost would be different than yours with ToS). It seems to me like the higher ROI and smaller commissions on the Condor would make it the better choice. What am I missing?

    — “…unlike a Calendar where I would have to be concerned about volatility collapse.” —
    Is this a big enough advantage to the D-Bfly strategy over the D-Cal that you might use it more often, or is there something better about the D-Cals that will keep you coming back to them? I don't know the potential ROI on the same stock using either method, so maybe that's the difference.

    Thanks, as always, for your help and great blog.

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

    Mike,

    I can understand why you would be intrigued – I am too, now that you mention it. This wasn't one of my cleanest posts since I had a lot of distractions going that whole day. I apologize to you and the rest of my readers for the confusion.

    What I really meant to say rather than reference the Condor was simply avoiding the overlapping options.So you didn't miss anything and thanks for keeping me honest. The only thing I might add is a Condor by ToS definition is either all Call or all Puts. When I build this trade as a Condor in ToS I come up with similar numbers and I would save a lot in commissions by doing that rather than the Double Butterfly. Thanks for calling that to my attention.

    One of the advantages to trading several strategies is being able to apply a spread that meets the current behavior of the underlying. For instance, when the price is in a consolidating (tight) range and it's not very wide, the Condor would be appropriate; whereas if the stock is in a wide trading range a Double Calendar would probably fit better since is gives wider breakevens in exchange for a variable return scenario. If the stock is in a bull or bear run, then the vertical spreads are appropriate. So in answer to your second question: yes. I will apply the spread that I think is most appropriate for the current price action. One last item: I know how to adjust Calendars, but I haven't had to adjust a Butterfly yet, so stay tuned and I stumble through this.

    Thanks for your comment and special thanks again for keeping a eye on me.

    ◄ Jeff ►

    PS: I updated the In Play and Closed tables.

  • PilotMike

    Thanks for getting back to me, Jeff. No apology needed for any confusion (I've got that on my own before reading your posts, you help to alleviate some of it!)

    After reading your reply, I dug around on the internet and came across a few interesting articles about “Condors” vs. “Iron Condors.” I actually didn't know a “Condor” existed… I thought they were all made of iron. You are correct in the definition of a condor being constructed of only one type of option and my example was actually of an iron condor.

    Here are the most relevant links I stumbled across;
    http://blog.mdwoptions.com/options_for_rookies/...
    http://www.optiontradingpedia.com/free_iron_con...
    http://www.optionszone.com/learn-more/josip-cau...

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

    Mike,

    As a life-long student of trading, I looked at all the sites you referenced. As always, having the knowledge to know when the use a particular strategy in a particular situation means a better chance of success. Thanks for the information and as a bonus, watch me apply additional strategies in the future.

    ◄ Jeff ►

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