OptionPundit

Category: Iron Fly

  • 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

  • How to Play Google (GOOG) Earnings

    How to play Google (GOOG) earnings and how to benefit from Implied volatility crush post google earnings is on the minds on almost every option traders I have met or spoken to. But before I proceed further let me share that earnings are usually 50/50 at best i.e. in-spite of complete detailed research you may still end-up being wrong. The chances of win are 50%. If you go with that assumption and are willing to take increased risks for potential windfalls, Google (GOOG) Certainly offers great opportunities for option traders.

    I have been covering Google earnings for almost 4 years. I also provided 4 different option trading strategies on how to play google earnings. For additional reference, LiveVol has done has done an excellent job on explaining past earings and Google’s move post earnings. You may want to check that out as well.

    So let’s begin the current journey. Let’s first look at the IV skew; There is almost 40+% IV skew between Oct and Nov options most of which will narrow by tomorrow (Chart is from LiveVol.com). So a simple inclination will be to sell the expensive IV and buy the cheaper IVs. That’s a good conclusion except that is not without its own risk. Here are a couple of options that you might look into playing (Ref- GOOG last traded price was $543.3)

    1. Buy straight call or straight put. Based on recent past history you may conclude that Google (GOOG) tends to move say $20. So you may want to buy Straight Out of the Money (OOM) Oct 560 calls or 520 Puts. Last mid quote for 560 call was $5.00, and for 520 put, it was $3.00 either google needs to be above $565 or below $517 before you can make money if you purchased straight calls or puts. But here you are assuming a directional as well as movement risk.
    2. You may choose to buy a strangle i.e. Google (GOOG) Oct 560 call AND Oct 520 Put, thus costing $8.00 combined. In this case google needs to be above $568 or below $512 before you can make money. But at least you are not taking any directional risk.

    I personally wouldn’t want to take #1 and #2 options. If I were to choose, I might then choose even further OOM and that too as lottery ticket assuming 100% capital loss upfront.

    So How can one increase chances of success while still hoping for good yield from Google earnings move. Here are few more examples.

    • Sell Google (GOOG) ATM Oct 540 straddle i.e. Sell Oct 540 Call and Puts, as of the market close yesterday it was $22.65/spread i.e. you will receive $2,265 credit but need to keep about $11,000 for margins. This trade will make money if Google is in between $517.4 and $562.6. The maximum gains are equivalent to the credit you received and if GOOG is pinned at 540 on Friday. Expected yield is 2265/10,900= 21%; the risk is that you might lose all the margins if GOOG moves wildly beyond the break-even points.

    • Well you may think that you don’t like above risk reward, but you still think that Oct ATM is pricing the Google move appropriately and hence would like to keep the same break evens but with a better yield. So how about selling an Iron Condor say Google (GOOG) 560/570 Bear Call spread and 520/510 Bull Put Spread. This will generate $367 credit on a $633 margin thus yielding 58% gains assuming Google remains between 520 and 560. The Breakevens are $516.3 and $563.6. The max loss will be if google is below 510 or above 570. Certainly a better option than #1.

    • Still don’t like the yield but willing to trade-off risk for even better yield. Other ways to play is that you can choose 10 points Butterflies with the mid strike at 540, 530 or 550 depending upon your outlook. Butterflies offer fantastic yield but then Google has to settle within that zone. Here is an example of GOOG $570 Call Butterfly (You may check out past examples here).
      • Buy +1 GOOG Oct 560 call and
      • Sell -2 GOOG Oct 570 Call and
      • Buy +1 GOOG Oct 580 Call

    Google Oct 570 Butterfly

    This can be done for only $83. If GOOG is pinned at 570, this trade will yield $917 that’s almost 1,100% returns. This trade will still make money if google is in between ~561 and 579. The risk is, you will lose 100% of the capital if google is beyond these breakeven points.

    • A little more advance option will be to combine a butterfly with either straddle or Iron Condor. That will result in better gains assuming you are right-on for the ATM strike. But even if you are not then remaining Straddle or condor can still make money.
    • These are just some of the examples how Google earnings can be played. Others include Calendars, Double Diagonals, Backspreads and ratio spreads and many more.
    • If however, you are willing to spend time and make even more educated guess, then don’t forget to check out these articles

    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.

    Happy Googling and wish you all the best

    Disclaimer– This post is for information purpose only. Please do your due diligence before investing even a single dollar based on any of the contents on this site including this article.

  • What is a Butterfly Option Trading Strategy

    A long Butterfly Option Trading Strategy is a limited risk, non-directional options strategy that is designed to earn big (but limited) profits but with a low probability. The long Butterfly spread also wins when the future volatility of the underlying is expected to be lower from the current implied volatility. Just as there are several ways onf constructing a butterfly, there are may ways a trade them for both income as well as speculative/directional option trading.

    Let’s start with the fundamentals of the butterfly spread (following is an example of SPX)-

    1. Buy SPY $115 Calls and
    2. Sell SPY 2x $117 Calls and
    3. Buy SPY $119 Calls

    In simple terms, Sell the Body and Buy the Wings. This is a Debit spread requiring investment of $35 only. However, there is only 22.5% probability that this trade can make money.

    Here is how the risk reward curve for this spread looks like. As you will notice, if someone can accurately predict underlying move, a butterfly spread can be very rewarding (In the below example, the SPY $117 call butterfly can yield over +400% if SPY is at $117 by April Expiration. Why does Butterfly spread make so much money if the underlying remains at short strike by expiration? It’s because At the Money (ATM) option has the highest time premium (aka extrinsic value) and you are selling 2 of those for each butterfly thus making it theta positive.

    Butterfly Explaination

    How about the greeks? Below table summarizes the Greeks, break even points as well as yield of this butterfly spread.

    SPY Butterfly Greeks

    It is delta neutral (at the start), Gamma negative, theta positive and vega negative. To explain it simply, the trade will make money if SPY stays within $115.36 and $118.64 by April 2010 expiration. Before expiration, assuming SPY stays at the same place, it will make money with the time decay as well as implied volatility drop.

    This makes the long butterfly a good neutral option strategy for low volatility, assuming you are expecting stock price not moving much in order to collect maximum profits. It is also a low-risk strategy, since your losses are limited if the stock crashes or climbs unexpectedly. The long butterfly can also be created using all put options instead of all call options.

    The key with butterfly spread is to book profit quickly and move on to the next opportunity. Don’t be greedy to book all the gains till expiration as even a single day’s large move can throw a positive trade into losing territory.

    Broken wing Butterfly (BWB), ATM Butterfly, Iron Fly, Out of the Money Butterfly, 1 or 2 Skip Butterfly etc are several variations based on the similar concept. Later I shall talk about how one can use Butterfly Option Trading strategy for speculation as well as income generation.

  • How to Play Gold, Market Crash

    Since I last shared BYDDF, the stock is up +40%. After a sharp run in a very short span, it is now overbought and may take a breather around $7.5-$7.7 level ($6.3 if the pause is a bit more stretched) before a new surge begins.

    What if there is a market crash? as we are approaching October, this subject is becoming more and more glamorous. If you want to play this low probability event, remember to check out SPX and VIX trade idea (Free). Pls note those trades are “what if” trades meant for a bearish scenario, these are currently losing money as market continues to advance. Those trades are now selling for almost half the price vs. when I opened those (I still own those). In fact similar trades or better ones can now be opened for a better price.

    The other story of the past week is GOLD. It has been a week since gold crossed key $1,000 mark and it has managed to stay above $1,000. We’ll find out next week if $1,000 will be new support level for the major bull leg or is it going to be a new market top which might coincide with a US$ strength triggering a market meltdown.

    Here is an idea on how to play GOLD’s move via GLD, an ETF by SPDR gold trust .

    Before you proceed to read the trade, pls note this trade is for the Gold Bulls (but not a very aggressive one). If you are bearish on Gold then DON’T follow this trade.

    Option Trading Strategy – An OOM Iron Fly coupled with an ATM Calendar spread. This allows benefits of a cheap OOM fly (up move) and Calendar (range bound action).

    Specifics for the trade-

    1. Sell to open a GLD 105/110 Oct Bear Call spread AND 105/100 Bull Put spread (This is similar to a 100/105/100 butterfly). I like to get credit upfront and hence opening Iron Fly. This Iron Fly can be done for $4.24 credit, as of Friday close.
    2. Buy to open a GLD Oct/Dec 100 Put Calendar
    An Speculative Trade for Gold
    A Speculative Trade for Gold

    For this trade to make money, GLD has to stay above $98.28 by Oct expiration and IV to not fall significantly as otherwise Calendar will be losing money. If however, by Oct expiration GLD stays anywhere around $105, the trade has potential to yield above 50%.

    Analysts are divided on Gold’s prices. Currently there are as many bears as bulls. One group thinks that gold is forming a major top and another group thinks that $1,000 will soon be the floor for gold’s major upward move. I belong to the 2nd one with one exceptional scenario and that is, a short squeeze on US$. As US$ has now replaced JPY as favorite for carry trade, almost whole world is bearish on USD. What if USD strengthen? there will be a short covering driving a hard squeeze on US$.

    Whether or not it can stay above $1,000 it is yet to be seen. And hence I chose that level as my lower break even. Due to unpredictability, I also termed this trade as “speculative trade”. If you do decide to follow this trade, pls ensure that you spend only the money you are willing to lose. As a general risk/money management guideline, I shall not invest more than 1-2% of capital in a single speculative trade.

    Interesting week ahead.

    Profitable Trading, OP

  • GOOG Iron Fly : Paper Trade/29% Profit

    Profit from Google options expiration due to pinning, with reference to my earlier post here : As this was my first time to test this, I did a paper trade. I played GOOG via an Iron Fly: sold Jan 07 490call, bot 500 call, sold 490 put, bot 480 put. Overall credit $3.30 at the beginning of the day. After lunch I could have bought it back for $1.30. That is $2.00 return on $6.70 margin. Overall 29% ROM in one day. Since I didn’t capture the screenshot, I can’t share actual prices at opening, but you can check this out in any option calculator. Look at the intraday chart…GOOG continued to play between $486 and $491

    GOOG Pin Jan 2007

    I will play something similar in the next expiration cycle,
    Profitable trading,