OptionPundit

Category: Double Diagonal

  • A Bullish Trade on FFIV

    Ever since F5 Networks (FFIV) announced earnings recently, it has been in a preciptous fall hitting recent low around $92.

    Often, we are faced with the situations where we would like to play swing trades but we also don’t want to take unnecessary risk.  Usually option traders play a swing trade either via selling call/puts or via opening credit/debit option spreads. These directional play, while good, at times provide little to no downside protection. What if our conclusion is wrong?

    Here is another way to play a bullish swing trade on FFIV.

    A Put Diagonal Option Spread which is constructed by shorting Aug 92.5 put and by going long equal amount on Sept 90 Puts for roughly $1.20 debit (plus margin as required by your broker).

    The trade is a Volatility Positive, Theta Positive trade and it will be hugely profitable if FFIV expires at 92.5 on Aug 19th. However, don’t count on that. Instead look for a quick 20-30% gains and move on to another trade. The trade will be profitable if FFIV remain between $88-$101 Aug expiration (and assuming greeks remains similar). As of this writing, FFIV was last trading at $93.5

    Key things to watch-out:

    Currently, Markets are experiencing volatility due to Macro Economic factors i.e. debt ceiling, ISM, unemployment etc and it is news driven. 1-2 std deviation daily move is not unthinkable. So one has to be on close guards on where to book profits or loss. If there is a sudden move in either direction, the trade will lose. However, if FFIV continues to swing, theta accumulation will make this trade profitable. Set your own target to exit.

    Disclaimer: As of this writing, I don’t have any positions on FFIV. I may open/close any time without any notice. Pls do your due diligence before investing even a single $.Православни икони

  • OPNewsletter Oct’10 Up 7.7%, Gear-up for Earnings

    Undoubtedly GOOG earning play was a star trade generating over +800% gains in a day. It wasn’t sheer luck, we prepared ourselves for it. I shall share our exact trade after earning season is over as we plan to use similar strategies for AAPL and later for some more counters during this earning season.

    For the month of Oct expiration, OPN portfolio gained +7.7% on a maximum investment on 63.8% of the portfolio capital. This was our 32nd positive month out of past 34 months despite the worst financial crisis since the great depression. These results exclude P&L from speculative trades or trades mentioned on the OptionPundit blog or on InvesCafe. Here is the tally-

    – POT Income Portfolio: +45.9%
    – NDX iron Condor: +1%
    – Google OPN Portfolio: -16.7%
    – DIA: -2.08%
    – EWZ: +2.9%
    – IWM Portfolio: +10.9%
    – NKE Income Portfolio: +91.5%

    However, as I shared fills for my speculative part of the NDX iron condor trade, the trade generated +37% on the original base of $2K/ spread. That’s a magnificent returns considering that NDX moved over 200 points in one direction only and we didn’t do any adjustment since Sept 21.

    POT This was another star portfolio that generated excellent returns >+45% for less than 1 weeks holding. This wasn’t a speculative trade, but we let it run as the gains were accumulated due to rising IV while underlying didn’t move much. Google Income portfolio didn’t work out as I was expecting. I didn’t use any other combinations of backspreads/verticals/straight calls or puts (like I did in July) to keep it simple. I have shared my perspective about this portfolio. We played NKE earning as part of Income portfolio and within a day of holding this portfolio generated 91.5% returns.

    OP Speculative trades-
    These are bonus trades and are not part of the OPNewsletter and hence the P&L IS NOT part of OPNewsletter performance. We spend only a fraction of the overall capital for these trades and think of it is as accelerators (if we are right) but not as a dampner (if we are wrong). For instance, the Google trade delivered almost $1,500 for each $175 investment (for those who had $10K capital) that alone accelerates the capital gains by roughly 15% on the overall portfolio capital.

    We were stopped out of TLT, TIN was almost break-even. MOS generated +12 to +17% gains for one day holding, JPM generated from -55% loss to +100% profits; then we had great wins/partial loss on USDJPY pair via YUK calls

    OPBlog Trades– Gold, suggested on Sept 2 when it was around 1,250 and since then gold is up almost $100/ounce.

    Invescafe/Twitter Positions– I don’t send alerts for these trades as these are neither part of OPN nor bonus trade alerts and the key reason is because the trade time span can be from 5-10mins to hours and OPN members may not be able to reap benefits as by the time they receive these alerts, it will be too late for them.

    SIGA for +80% for 1 day holding, EQIX for > +50% profits, intraday,  TBT 30/28 BPS > +50% profits, TBT up over 10% since then, AXP +9%, AAPL, NFLX generated +150% and there are many more, check out my InvesCafe updates.

    While reviewing these results, pls keep the overall macro economic environmental context in mind. Sept (usually a bad month for markets) was a record month for S&P500 almost in 50years, a challenging month of non-directional income traders!!! The uncertainty is unusual, short interests are sky high. Yields on both Bonds and Stocks are almost at bottom. The expectations on returns are dismal at best.

    On the other hand, here at OptionPundit, OPN members/readers out of “stocks” since early April 2010, reminded them there is no such thing as “America Won’t recognize itself by the end of 2010” as projected by several top analysts and time and again talked about Feb Low, 10.3k and 10.7K for Dow. We are not taking unnecessary risk yet our returns are still respectable by almost any rationale standard.

    Trading is not about beating the market, always. No one can do that. Just like any other business, trading is a business and needs to be treated that way. We’ll have our shares of wins/losses. As long as we are humble and keep the “ego” at bay, learn from our mistakes and continuously sharpen our craft we’ll develop our own trading style. And if it is indeed a business then it’s not a destination but a journey through thick and thin of varying seasons.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    It was and still is, preserving capital is more important than a potential opportunity. Capital is for real, opportunity is “potential”.

    Congratulations on another successful month.

    Profitable Trading, OP

  • OPNewsletter Aug +8.4% (closed), Sept +4.3% (Open)

    OPNewsletter delivered +8.46% for the Aug 2010 Income portfolio on a 51% portfolio capital investment. As you may know, since mid of April 2010 we reduced our capital allocation to trading as we were anticipating this market meltdown which started around 3-4th week of April. For Sept 2010 opened portfolios, we are up +4.3% and these results do not include results from speculative/bonus trades.

    This is our 31st positive month, out of a total 33 months of Paid Subscription based OptionPundit newsletter throughout the phase-1 and phase-2 and these times include one of the worst market conditions since the 1930s.

    At present, OPNewsletter clients include ordinary part-time traders to professional Wall Street traders (trading their personal accounts) from over 20 countries and their trading experience varies from a few years to almost 2 decades of options trading. The live forum lives to help where community of traders share ideas and comment on other’s trades as well. Not only we do Iron Condor, we also invest Calendars, diagonals, double diagonals, backspread and many more. We have also started reviewing (with real-money) option trades for newly introduced weeklies (currently AAPL is up +24%, AMZN is up +30% and GOOG is almost breakeven). This is how whole trading experience comes to live real time.

    Trade what you know, learn what you don’t know !

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    Delivering consistency isn’t about trading 1 Iron Condor/month for a small size capital account. When you are trading a US$100,000 account that requires patience, discipline, a well defined control over greed & fear and strategies that are beyond just 1 Iron Condor. And there are many traders in OPNewsletter who trade with over US$100,000 capital. Preserving capital then takes higher priority order as opposed to investing every opportunity you see. At times, you will let go opportunities (hindsight bias) in anticipation of major market moves that might derail the portfolios. We place hedges, which sometimes are one of the dampeners for higher results but that’s ok, that’s part-n-parcel of trading life.

    No matter how much marketing blitz would like you to believe, there is no “secret” to trading success; it is the EXTRA DEGREE of perseverance, EXTRA DEGREE of risk management, EXTRA DEGREE of disciplined trading, EXTRA DEGREE of what if scenario planning and EXTRA DEGREE of “Rational Expectations”.

    Welcome to OptionPundit! The EXTRA DEGREE in your option trading.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

  • OPNewsletter Jul 2010 Up +8.3%

    We are on track for our 28th positive month of OPNewsletter phase-2, as of last Friday close OPNewsletter Jul 2010 portfolio is up +8.3% on the maximum investment of almost 60% of portfolio capital. We have started opening Aug 2010 portfolios and our first portfolio is already positive.

    Let’s talk consistency first, especially on trades like Iron condor which is probably the most widely used option trading strategy. OPNewsletter has lost only 1 month of RUT iron condor since May 2008, and the drawdown was only 7.15% while gains have been around 12% on average per month. RUT Iron Condor for July 2010 resulted into +23% gains. If someone has invested US$10K, only in OPN RUT Iron Condor, this 10K would have grown over 5 times to $56K since May 2008. This period includes probably one of the most volatile stock market moves of our lifetime. Of course, I don’t recommend traders to invest all the money in iron condors only and which is why we have portfolio approach at OPNewsletter, to diversify risk/rewards.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    During the month of July, we also opend, for first time, an Income portfolio on Google. Just for perspective, since our opening of this portfolio on June 14th, google moved from $480 to $506 and then from $506 to $434 almost without a pause. This portfolio has provided a great deal of learnings e.g. during this period, one of our backspread we opened for only $0.65 debit moved past to show $10 gains!!! Though it was tough and very volatile move, we still managed to gain 4% gains as of Friday close (still open) and we are in for the earning week and out theta gains are a few % points per day.

    Even though VIX and other implied volatility fell through the cliff in general, our Double calendar resulted into above +20% gains and Double Diagonal in positive (still open).

    These results do not include gains/losses on the speculative trades. It also feels good when I find adding value to subscribers as OPNewsletter members were already warned of the coming meltdown since mid April via constance market updates/projections. Though no one can be perfect or correct all the time, so far OPN has been able to serve well.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    Profitable Trading, OP

  • OPNewsletter April (Open) +9.8%, May (Open) +2.6%

    Though we shifted our option trading strategy in way so that more trading alerts can be sent during “pre and post market hours” vs during market hours to allow even working professionals to benefit, OPNewsletter is still not about “make money” in 5min per day. It still requires one to think and act vs let robots do it for them (at least to begin with). There are no short cuts for making money, consistently. Making money is a hard work and requires one to be patient and to learn and continuously sharpen the craft. OPNewsletter April portfolios are up +9.8% while May portfolios are up +2.6% (both are still opened). If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the wait list as OPNewsletter subscription is open via invitation only.

    Let me use an analogy on why I say making money requires discipline and hard work especially for new traders-

    Before one get to a earn say $5-$7k/month; an engineer need to go through 4 years of professional education including one or two summer projects before he is allowed to be even called an Engineer Trainee. Medical professional is required even much more rigorous training before one is allowed to even touch knives for first surgery. Then why do people think trading is any different if it were to give you $5-7k/month to start? It’s because the “barriers to entry” are almost nothing; give a call to a broker, he can do the paper work for you, set you up with an electronic trading account, help you personally to transfer funds and all set and most novice traders can enticed by the marketing sales pitch that you sign-up for blah/blah and you can make money in 5mins/day. It doesn’t take long before one starts to realize that trading is not easy as it seems on the surface (sadly after either account is wiped out or suffered a major loss) . Making big %  may be fine for small capital account, but when it comes to large capital accounts, it is a completely different game. (How large are the investments via OPNewsletter Portfolio?)

    Let me ask a question, assume you make $10k/month; assume a good job with perfect work life balance; assume you work for 40hrs/week, 4 wk/month, that’s 160hrs/month, and this your monthly profit before tax. Have you spent 160hrs before investing $10K in that “idea/hot tip”? If not, why do you expect results to be different assuming you are not a professional trader/investor and are not equipped with “investment/trading” training?

    More on this later. Let me comeback to OPNewsletter performance.

    One of the ways I manage OPNewsletter is through capital allocation. I use US$10 K as the model portfolio (I invest my real money in those portfolios, and then in some more) which I then allocate across multiple portfolios, multiple option trading strategies to diversify the risk.

    We invested a maximum of 88.15% of $10k this month; and April portfolio is up +9.8% as of Thursday close. I use maximum capital employed as a base for calculating results even though the cash is available through closure of some portfolio; thus my results are conservative. As of Thursday close, we have 28.93% cash from April portfolio; and 95% of this (~27.6% of 10K) is invested for May portfolio which is also up +2.6%; Net, we have 1.26% cash available from $10K and have both April as well as May income portfolios both of which are up as of Thursday close. Option Trading strategies used were Double Diagonal, Iron Condor, Iron Fly, Butterfly Spreads, Credit spreads, Calendar spreads, Vertical spreads and some more.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    We closed some April portfolios and then reinvested the cash into other portfolios for the same month or for the next month thus effectively multiplying returns on our money. To share an example, we opened FDX income portfolio with 9.5% of $10K capital; the portfolio was closed for +27% gains, part of the cash thus generated was redeployed for opening an Iron Condor for Russell 2000 (RUT) for May 2010.

    We had earlier opened Iron Fly of Nike (NKE), ATM butterfly on Pepsi (PEP) which resulted into +24% gains and +62.3% gains respectively and the cash thus generated was used for placing a hedge for our April NDX Iron Condor. The Hedge was placed on Thursday before market close to protect our portfolio against any sharp move might result from unemployment report. Thus by effectively managing the hedge, we are fine (short term) regardless how much NDX moves on Monday.

    To put things into a different perspective, if you were to go for a seminar/workshop to just learn how to trade Iron condor (and some other strategies we use) and how to protect those (theoretically), that learning itself is worth several month’s (if not years) OPN subscription fee.

    Portfolio insurance (aka Hedging) costs money (reduces returns) but that’s always in the hindsight. Just like insurance, you do it to safeguard against any disaster. You spend this money for the things you don’t want to happen.

    Our first hedge was against any sharp downward move that were to happen due to Health care bill being either approved or disapproved. Markets didn’t react thus we lost some money on that, but then we converted into a bullish spread and reduced the hedging expense. We could have still kept it till April expiration and completely eliminate the expense, but I chose to close it to redeploy the capital to open other portfolios for a better risk/reward ratio.

    Our 2nd hedge was against our Nike (NKE) income Iron Fly. This hedge cost us about 19% of the NKE income portfolio; but we still netted with a +24% return on portfolio. Excluding the hedge, the returns would have been above +42%. The portfolio still had potential to double the gains, but I decided to take it off before the unemployment report; when trading is a business, operating discipline is important and one needs to follow a plan to make money consistently. Speculation is fine but that has a separate place and completely different game.

    Not all the portfolios are winners. There are losing ones as well and the returns are net of winner and losers. In order to make money consistently one has to keep in mind that Profit Volume (=Winning Occurrence X $$ profit) should be greater than Losing Volume (=Losing Occurrence X $$ loss).

    I don’t count speculative trade’s returns into monthly returns. Even though we had >75% winners and sometimes fairly large returns than losers, the result probabilities before placing the trade don’t favor investing large amount of capital (more spec updates here)

    So far for the month of April, we have 100% success rate on speculative trades. Our BIDU bearish trade resulted into +17.6% gains for two days holding, SLGN (shared it for free) resulted into +26.9% gains for two days holding and we just opened a straddle on WMB.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    Profitable Trading, OP

  • Did You Notice This?

    US Stock market registered a positive 1st full week for the Year 2010. For background, this is a week that is closely watched by market participants for if as goes the 1st week, so is the year; some say that probability rate is greater than 85% (Feel free to dig past data to see the worth). If only markets were so simple to understand; we all know this surely wasn’t the case last year when Dow closed 15% higher vs. the performance of 1st trading week of 2009.

    The Dow, S&P 500, and the Dow Transports all closed at new high for the year. So technically, from Dow Theory Standpoint, Markets are now in a continued Bull Market phase.

    The most noteworthy news last week was Friday’s December Nonfarm Payroll report which slipped 85,000. It was far worse than economists’ anticipated.  Not all was good. According to Briefing.com-

    However, the details of the unemployment rate are not good. The total number of employed workers declined 589,000. Unfortunately, the labor force declined by 661,000 and negated the drop in employment from the unemployment rate statistics. If the labor force had declined by only 134,000 — the change from October to November — the unemployment rate would have increased 0.3 percentage points to 10.3%… Those that do have jobs saw minimal gains in income. The average workweek held at 33.2 hours in December. Manufacturing and overtime hours also posted no change from last month… Average earnings increased 0.2% over the last month as hourly earnings increased from $18.77 to $18.80. Average weekly earnings grew by $1.00 to $624.16.

    So all is well till it is not. There is, however, some change in the past few months, that requires little extra attention.

    (more…)