The jargon of options trading sometimes turns people off, and maybe “volatility skew” is one of the biggest hurdles. So I’m going to explain the concept in a straightforward way, and then explain why volatility skew is something you should care very much about.
Volatility skew usually refers to the difference between the implied volatilities of options at different strike prices in the same expiration cycle. For the majority of stocks and indexes, options with high strike prices have low…
The S&P has gone nowhere since Friday, and the VIX is flat as well—but the position we opened Friday morning is showing a moderate unrealized loss. The culprit, quite simply, is a half-point drop in the average implied volatility for SPY options. The premium in both the March and the April contracts, both on average and at the strikes used for our one open position, has fallen, with the drop in implied volatility reflected more in the price of our…
We’re entering the following position this morning for March expiration:
Day limit orderBuy to open 2 SPY April 139 callsSell to open 2 SPY March 139 callsBuy to open 2 SPY April 134 putsSell to open 2 SPY March 134 putsfor a net debit of $2.85 or better.
Note that 2 contracts is our base position for double-calendars. Trading whole-number multiples of the base-position size ensures that adjustments will not result in unbalanced positions. In…
Last week we booked a substantial profit on both of our core trades for the February cycle, with only a small loss on the hedge position. Here are the results for each trade:
SPY February/March Double-Calendar #1 – 8.54% gain on total capital risked;
SPY February/March Double-Calendar #2 – 19.75% gain;
SPY February/March Calendar Butterfly Hedge – 0.52% loss.
The average return per trade was about 9%, and the relatively small size of the hedge position meant that…
As of about 1:10pm Eastern, our portfolio of open positions was showing an unrealized loss of approximately 2.7% on total capital at risk, for a Model Portfolio return of about –1.6%. Delta is neutral, and vega is up slightly from Friday, at about 6.4% of capital at risk. Considering the fact that we’ve been through one of the steepest four-month sustained drops ever recorded in the VIX (perhaps the steepest, depending on how you measure it), our continued ability to…
We’re reducing our upside risk to adjust for this afternoon’s rally by rolling our position in the Feb/Mar 125 put calendar up to a call calendar at the 135 strike, with the following order:
Day limit orderBuy to close 2 SPY Feb 125 putsSell to close 2 SPY Mar 125 putsBuy to open 2 SPY Mar 135 callsSell to open 2 SPY Feb 135 callsfor a net debit of $0.08 or better.
Note that the…
Last week SPY-options implied volatility dropped by almost 15%, which, along with the share price climbing above the center of our risk curve, was a drain on both unrealized return and projected profit at expiration. However, following the strategy rules for managing volatility risk with our entry trades is paying off: at Friday’s close, the unrealized return on our February trades was up from the week before. In post-session options-trading, we were showing about a 3.8% unrealized return on total…
Since we closed out our January positions this week, the lede for this Update normally would be a quick review of the month’s results. I stopped posting stand-alone monthly performance reviews a long time ago, in an effort to help members stay focused on what’s important: long-term risk-adjusted returns. But as I thought about how we handled this cycle, and how that compares to last month’s trading and results, I saw a number of valuable lessons about risk-management that are…
We’re adding to our February portfolio by opening a second double-calendar, as follows:
Day limit orderBuy to open 2 SPY Mar 135 callsSell to open 2 SPY Feb 135 callsBuy to open 2 SPY Mar 129 putsSell to open 2 SPY Feb 129 putsfor a net debit of $2.38 or better.
Note that 2 contracts is our base position for double-calendars. Trading whole-number multiples of the base-position size ensures that adjustments will not result in…
The media narrative at the moment is that U.S. investors are happy to ignore all things European for as long as modestly positive domestic economic news keeps trickling out. The headlines today about stocks being up “on” news from Alcoa were silly enough,* but this does seem to be a real theme – slight reductions in the odds of a 2012 recession mean it’s time to pile into stocks, apparently.
The smarter parts of the market qua options and volatility traders have…
Friday, February 24, 2012
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