In my previous post, I went over the basics of our calendar-spread income strategy. Now let's look deeper into how we adjust for underlying price movement and changes in implied volatility, starting with an upside move. Suppose we bought the SPY June/July 131/136 double-calendar on May 26, as described last time. Now imagine that SPY was trading over $135 yesterday (wishful thinking, I know)...
Monday, September 13, 2010
The S&P looks toppy, but we can’t afford any upside surprises—so we’re rolling our entire position at the 108 strike up to 114, with the following order: Day limit order Buy to close 2 SPY Sep 108 puts Sell to close 2 SPY Oct 108 puts Buy to open 2 SPY Oct 114 puts Sell to open 2 SPY Sep 114 puts for a net debit of $0.18 or better. Note, again, that 2 contracts…
Wednesday, January 7, 2009
We’ve mentioned before that our preference is to close out short option positions before the dynamics of expiration week have a chance to kick in. In a nutshell, while it’s true that theta declines more quickly as expiration looms, tempting option shorts to hold on as long as possible, it is also true that gamma rises more quickly closer to expiration, as shown below. There is no one right answer about how to trade expiration. But if…
Monday, December 1, 2008
Traders tend to pay a lot of attention to expiration week, and for good reason. There are also some post-expiration phenomena worth noticing: in particular, unsophisticated options sellers often allow their front-month contracts to expire before selling the next series. There’s an apocryphal story about a big SPX condor seller who always used to wait until the Monday morning after expiration to route his single monster trade for the month. But we’ll leave discussion of the disadvantages of that…
Thursday, August 28, 2008
Quick, somebody sell Tim Knight some option premium! There’s something wrong with the picture at left, but nothing wrong with these markets if you’ve been a premium seller for the past couple weeks. On the other hand, even deft swing traders are getting whiplashed around. Everyone is betting on a breakout or breakdown after the holiday, and they’re probably right. Until then, it pays to get paid to sit on your hands. To be fair, the phenomenon pictured here is…
Tuesday, August 12, 2008
There are plenty of ways to put on option trades that have a neutral outlook: straddles, strangles, condors, etc. Whereas stock and futures traders are limited to whatever price action the market gives you, options let you take a view on implied volatility (vega), the passage of time (theta), and the rate of change of the rate of change of the option per unit move in the underlying (gamma). Okay, that last one isn’t so obvious, but the idea is…
Sunday, July 13, 2008
The Striking Price column in this weekend’s Barron’s features John Marshall from Goldman, who suggests an “opportunity to buy volatility” in the S&P Materials sector via the tracking ETF (XLB). He makes the bearish case for XLB, arguing: 1) that the materials sector is particularly vulnerable to any slowdown in global growth, 2) that the ETF components include some less resilient names, and don’t feature the best of breed like POT and MOS, and 3) that hedge funds are…
Saturday, April 26, 2008
What should you do when the underlying moves against an iron condor position you have open? (For example, if you’re a member, you may have noticed that one of our DIA trades for May expiration is looking threatened by the recent price action in the index.) Any time this situation arises, people will always write in to ask about how they can “adjust” or “fix” the trade if the market continues to be uncooperative. It’s an understandable impulse to want…
Monday, April 7, 2008
Fun little graphic via the Times this morning showing the signals a NYMEX trader uses to basically print his own money (seriously, has there been any easier job since January 20, 2001 than walking into the NYMEX and loading up the boat on long oil contracts?). We’re getting our own signals from the markets this morning: S&P futures are up 11 points, and Dow futures are up 82. So the bullish shift of the past two weeks is…
Jared Woodard is a registered commodity trading advisor who specializes in trading volatility as an asset class. With over a decade of experience trading options, futures ... Read More
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Thursday, June 2, 2011
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