Taking the unmarked trail

This post may also be read at: http://www.cboe.com/blogs/options-hub/2017/04/19/taking-the-unmarked-trail

Every once in a while I have to try something new, and that means choosing something different from the menu and forgoing that same old tried-and-true sandwich.  What sandwich am I talking about?  My own trademarked "strangle sandwich," which is no one's favorite but my own.  It's a doozy; it's not for all tastes, and it might just fail and make you sick (and sorry you tried it.)  Let me tell you what it is before I tell you what I opted for instead, today:

I like premium, so I can't resist the appeal of the classic short strangle.  But who wants to lose on any spread?  This is how I have managed certain strangles in the past (and by "certain," I mean those that appeared they were going to lose me money.  I don't open them to lose money. Does anyone?)  Going short some puts and short some calls is simple, beautiful, and graceful because the option prices decline daily, your premium becomes "safe" from grabbing hands, and your account goes greener with every tick until expiration - if things go your way.  That's the dream scenario:  That your underlying goes to sleep and doesn't budge from its park bench while call buyers are crying and put buyers are fuming and their money becomes yours, more and more till the clock runs out.

But somewhere there in the middle, the middle might not stay in the middle and you might see your strikes in danger of being breached.  As the strangle seller, I have done the following:  Bought the stock as the call strike loomed near, with the intention that those shares get called away.  What a beautiful solution, right?  You still get the full premium received from both legs, and you get a bonus in the form of stock bought and then sold at a profit, as the calls are exercised.  Now, let's not get into whether I've practiced this, exactly.  I've done it, but then closed the calls way up there in the loft, and what do you think then happened to my shares?  I got out of that scrape, still for a profit, but not quite as much as I would have, had I followed the described plan.  If you try to get fancy, you have to realize you're getting chancy as well.  But back on topic:

  The same thing works on the downside, as well:  You can short shares if you believe the lower strike will blow through. Have I done this?  I don't think so.  But I would, if the need arose.  What I am describing is transforming your naked calls or puts into covered calls or covered puts. Is this a fail-proof plan?  Is anything?  Well, this isn't, since you can take on the long or short shares, only to see them go the other way.  I've done this (making my short strangle into naked puts and covered calls) so few times that I can say I specifically remember it and it worked well when I did it.  But could I count on that?  Of course not.
 

Let's move on to the next thing on the menu I have become willing to try.  I love shorting volatility, and I need to leave a lot of unused cash to cushion that.  No position is a good one if it leaves you vulnerable to being wiped out.  So I have to be responsible and leave oceans of unused dollars serving as collateral to my short-scheming ways.  Could you blame a coyote for licking his chops, looking at all the dollars just sitting there doing nothing?  How about breaking out the cookbook (or at least the Acme catalog) and planning something new?

What to do when you'd really like to take a short position but don't want to risk being wiped out, or even if you'd just like to cap the loss you might realize?  Is it worthwhile to pay to cap that loss?  One way to do this is to simply buy calls when taking out short shares.  Today I shorted UVXY at 19.48 and bought one 19.50 strike call contract to go with each block of 100 short shares.  Now, I don't like to take losses (note the .02 difference between my shorting price and the call contract strike) and I don't like to pay for anything, so this wasn't a move I made while smirking and high-fiving myself.  In fact, I had to hold down the nausea from paying 0.98 per contract for this dubious privilege.  And I'm pretty sure I didn't construct this in nearly the best possible manner, so don't take this narration as instruction from me.  Take it as the "cry along with me" tale of how I possibly (not sure yet) messed up, but darn tootin tried, anyway.  To recap, I shorted at 19.48, which is $1,958 per block of 100 shares, and paid 0.98 per contract which is $98 to insure each 100-share block from rising to infinity or even some moderately high price and closing down my whole account in three days.  The idea is that if my short should fail, I could exercise my call and cover my short for just two cents higher than I opened it (or $2 per block of 100 shares), and I'd be out $98 per contract as well.  Not bad, I guess, and that could have been left as is.

But wait!  The story's not over.  I did bring in some salve for the burn:  .62 per contract received from selling puts at the 19.00 strike.  So there's $62 brought in per contract, and should UVXY rise (or even stay above 19) instead of fall, I can set $62 against my costs as detailed in the paragraph above.  So it looks like the worst that will happen to me is that I'll lose the $98 and the $2 and gain $62 and that comes out to booking a $38 loss per contract.  That would happen if $UVXY ends anywhere above my upper strike of 19.50.

Now, there's filling in the middle of this sandwich just as there is with the previously described strangle sandwich, although the filling isn't as delicious.  In this case it would be various degrees of disgusting (since I consider all losses unpalatable) as I might end up selling the calls for some puny price (if I hurry up and do it before they burn up at expiration) and booking an even punier gain on my short shares.  But then again, I did bring in some premium on my short puts, and I keep the full profit on that at every UVXY price over 19.00, so there's some ketchup to disguise the bad taste.  Let's take a theoretical ending price of 19.25 for UVXY on expiration day (Friday, April 21st) and compute it.  (I'm excluding commissions for ease of computation.)  The calls would expire worthless, so there's $98 gone bye-bye. The short 19.00 strike puts would expire worthless to the buyer and my entire received amount of $62 per contract would be retained by me to set against the $98 loss.  So far we're at a $36 loss per contract. I'd close my short shares for 0.23 gain per share, and per block of 100 shares that would be $23 gain. I'd be THAT close to being ahead, but would actually be $13 down, for the trouble of watching this drama unfold and end right near the bulls-eye.

If the bottom strike (the put) is breached, I'd have to buy it back to close (assuming I don't get assigned early and that I want to avoid being assigned at expiration), but of course, the more I have to pay for that, the more my short shares would be working to hand me the money needed to do that, dollar for dollar.  (Alternatively, as just mentioned, if I'm assigned long shares I could just close the position while setting the short shares against them.)  The maximum gain to me on this reverse collar would be UVXY ending lower than the put strike price of 19.00, which is the point below which I'd have to start paying something to buy the put back.  I'd make 0.48 per short share at that price and more, accordingly, at lower prices (although I'd have to spend the gain from those lower prices to defray the put-closing costs), so that after paying to close the short puts, I'd net $48 per block of 100 shares, with the long calls being lost money.  So at the worst case, I'd lose the $98 spent on calls, I'd make enough return on the short shares to offset any costs incurred in closing the short puts, so my maximum profit would be exactly as follows: The short put premium collected of $62 minus the long call premium paid of $98 plus gain made on the short shares which is capped at 48 cents per share because if UVXY ends under 19.00, any extra profit seen on those shares will be needed to pay to buy back the short puts, for a grand maximum total of $12.

I see what I could have done better.  I should have made sure the put premium received was higher, to make the risk on the top side worth my while.  In fact, a rule of thumb would be that the width between my shorting price and the put strike price, plus the premium on the short puts, should stand up against the price of the calls combined with any loss I'd take upon exercising those calls by an amount that I consider worthwhile, as compared to what I'd stand to lose, should the desired direction for the security (in this case, down for UVXY) not materialize as I wish it would.

Of course, there are various methods by which this can be closed out without waiting until the dealer gives out prizes when the hands are turned in.  I could close out any segment of this trade anytime, and reopen (or not!  See third paragraph.)  Follow UVXY this week and check back to see how I close out this clumsily-constructed first try at a reverse collar.

Tales from the cross-VIX highway

This post may also be seen at: http://www.cboe.com/blogs/options-hub/2017/03/06/tales-from-the-cross-vix-highway

While traders of nothing but the Essenpee would find themselves sitting on a gain of 1.5% to nearly 2% from February 14th through today (or through Friday, March 3rd's closing price, thus the difference between quotes), traders like me who favor TVIX or UVXY would be sitting right where they started, whether short or long. See chart below for a short history of UVXY over the last nearly-three-weeks.

My account performance shows a gain of several percent. How did I do that, when trading nothing but UVXY/TVIX? And when taking a large loss on short puts for UVXY at a level that was hardly seen again over a range starting minutes after my entry through the present?

 See the account progress, above.  Now, see the ill-fated set of UVXY puts below.



It's easy to imagine the feelings I had (but you can't imagine the curse words) during the remainder of the day on Thursday, February 9th, during all of Friday, February 10th, and for every minute up through February 15th when UVXY dipped down to 18.49 intraday.   That's a whopping $4.01 in the money on my short puts, when I had only received eighty-four cents each.  Unsure I was getting the best escape-from-punishment price, but eager to end the ordeal, I held my nose and bought the puts to close for $2.00 on February 16th, just one day from expiration.  Of course, the price changed in my favor, but not until one week after the scheduled run of this drama ended, and not for more than a crazed, chaotic UVXY-trading morning.  I was not trading UVXY that day, but it turns out I was in the process of getting some recompense from UVXY's country cousin, TVIX.

Note that aside from the unfortunate UVXY trade, I kept some plates in the air skillfully enough by way of shorting and closing TVIX repeatedly.  First, circled in green, you see four day trades made over the course of three days.  You'll see that I missed out on profit by closing the first short and then re-opening it from a lower price the next day.  But then I "double-dipped" (performing the same trade twice using overlapping price points to get extra profit.)  All during one day, I shorted from 4.18 to 4.12, then got back in once I saw a return to 4.19 and closed at 4.12 again.  Shazam!

The next trade, in which I simply lost $13, served to lighten my holdings so that I could short again from a higher level.  On February 22nd and 27th I established subsequent short positions that were closed later on the 27th (see blue box.)

When prices rose a little higher on February 28th, I shorted some more and closed those shares out on March 1st for some profit (see the orange box.)  Also within the orange box, I shorted some more on March 1st and March 2nd, closing each of those out within the day, one for essentially flat and one for a $62 loss.

Despite all these gains, and enough of them to make up for the bone-headed loss, I still believe I could have managed trades better and raised my account value higher by trading more aggressively (holding more shares short at any given point, and being slower to liquidate so many), but maybe I should look at the prices between the 14th and today and realize that I squeezed what I could out of that stone.  Any other change in value that doesn't seem to be reflected in the above trades has to do with shares in varying number held short from the beginning of this story through the present, which at times was zero shares but more often was and is currently considerably more.

Unexpected and Vicious

This post may also be seen at: http://www.cboe.com/blogs/options-hub/2017/02/06/unexpected-and-vicious

Today's saga starts on January 24th, just two days ago but it seems like last week.  I had just, the day prior, added to my core short TVIX position to raise the number of shares from 2,000 to 2,500 as you see in the portfolio graphic below.  The price for that lot of 500 was $6.26.  This will be revisited later in the post.

First, let's dispose of the TNA story.  You'll see that standing out at the top of the graphic like the subject of a "which of these things is not like the other" song.  TNA is also a little reminiscent of TNT, and that's not a ticker symbol, that's more like:

Just before one in the afternoon, I got it in my head to short TNA because I thought it wouldn't climb higher and I wanted to paid for that failure.  I got one thing right but I didn't get what I wanted out of it.  TNA didn't climb any more that day, but in order to avoid paying for the venture, I had to wait until after hours to get out with a couple of dollars in my pocket.  And a wise move that turned out to be, because the next day TNA kept right on climbing like I thought it wouldn't, to right around 106.50 before cooling off.  I'm glad it climbed without me, because I don't like paying to take a "heck" ride.

The other oddity in the portfolio (above) is the 26 strike UVXY short put.  That same day, close to noon when UVXY was trading at about 26.30 or so, I sold 2 puts for the following week's expiration for the 26 strike for $1.37 premium each.  My plan was to cash those in quickly on any substantial bounce, but UVXY just kept on dropping.  Check the price now (or as of my writing, which is Thursday, January 26th in the afternoon.)  UVXY is now 23.95.

Now see the portfolio graphic above.  This was taken the next day, January 25th, when my 26 puts had gotten substantially away from me, and UVXY was hovering above 24.  I did a repeat by selling two of the 24 puts short for $1.01 in premium each.

Later on January 25th, I saw TVIX hitting a level so low (the same level where it sits at this moment) that I was inspired to bring in that addition to my short made two days prior.  I judged the return to be so good within just two days that a retracement would be likely - if not immediately, then pretty soon.  The chance of missing out on more return seemed expendable in this case (due to what I estimated to be its relative unlikelihood) compared to the benefit of locking the profit in; so, that much -and only that much - of my TVIX short, I booked as such:

As seen in the graphic below which was captured today, the 24 strike puts are no longer my problem; I bought them back to cover at exactly the price I had received for them.  Though they would have been the more logical selection to keep rather than the 26 puts, I wanted to clear some clutter off my table and wanted to lessen my risk exposure.  Next I mulled over a plan to make my short puts less risky, possibly by making them covered.  One alternative was to simply dump them for the loss you see below ($161, and I hate taking losses).  As I cogitated and calculated, UVXY hovered around 24.76 for a good long while, almost as if it urged and beckoned me to go ahead and make my move.  So I went ahead and shorted 200 UVXY at that price, making my two short 26 puts covered, even at a disadvantageous price.  The reason I call that disadvantageous is:

If expiration day comes seeing me refuse to trade in the contracts and UVXY remains below $26, I'll be assigned, which means I'll have 200 shares of UVXY put to me (long) at the contracted price of $26.00 even.  I would think of this (or rather, I'd finagle it to come out this way) as buying to cover my 200 shares short, which obviously I just transacted at 24.76.  This would represent to me a loss of  $1.24 per share of $248 total.  Keep in mind, though, that I received $264.65 for selling the two put contracts in the first place.  This would net out to being essentially flat.  I made this move today, shorting the 200 UVXY, to "lock in" a guaranteed outcome of no money lost to me, should UVXY stay below $26 and should I hold the puts through expiration.  Naked, the puts could cost me any amount of money, limited only by how low UVXY may drop between now and expiration.  Covering them made the downside (meaning: UVXY dropping lower) worst-case scenario outcome known to me.

On the other side, though, having these 200 shares of UVXY short exposed me to more risk, since UVXY could rise above $26 (and to any level higher that it might feel like, especially during one of its regularly-occurring temper tantrums.)  And my only consolation would be the $264.65 pushed to my side of the table for taking on the puts.  In this case it would be great for the puts to be uncovered.  Who wants more ultra volatility shares short than they can handle during an unexpected and vicious volatility spike?  As you can tell, I have UVVS on the mind frequently; I have to keep it in mind to avoid being ensnared in a UVVS to a degree that it'll harm me.

To that end, while typing up this post, I closed out the 200 shares you see above, making my puts, once again, under-dressed for the weather.  I wish I could say I caught the bottom of the UVVD (unexpected and vicious volatility downplunger) that took place from 2:00-2:40 today, but I got most of the move.  I'll try to scalp some more day trades or short-term trades before the expiration of my short puts and see if I can offset any loss I'll incur, should the puts turn around and bite me with the teeth they're showing me right now and have been showing me pretty much since the moment I took them on.

Getting the 2017 Party Started

This post may also be seen at: http://www.cboe.com/blogs/options-hub/2017/01/11/getting-2017-party-started

The cliffhanger last time involved the $6.50 put for UVXY expiring this Friday, January 13th.  I had sold twenty contracts on January 4th for premium received of $0.18 each.  It turns out that I got nervous about this put when UVXY touched 6.57 later that day.  I knew I had time, but I also believed that the nature of UVXY was not on my side, and I began plotting to trade out of these options and eventually replace them with more advantageous ones.

It turns out I didn't have to wait long.  See the dip in option price the next day wherein I and apparently just a few others traded at eighteen cents, thus ending my obligation with this option before the price took off again for higher ground through today.

What happened to the 1,400 shares of UVXY (which, as you'll recall, made these options partially clothed, although uncouthly underdressed)?  After buying back the puts, I witnessed UVXY slide down an intraday hill to the low 6.70 range until I could not stand feeling "out of the action" and I sold 600 shares short at 6.74.  Ironically, this brought me up to the grand total of 2000 shares of UVXY I would have needed to support those puts as fully covered.

Right now, (as I write on Wednesday, January 11th around 3PM), UVXY is 6.17.  So what have I spun from a 57 cent drop in UVXY since January 5th, four trading days ago, when I had 2000 shares short at that time (but, you'll learn, I no longer do)?  Get out your calculator and you'll figure that, had I simply held those shares short through this moment, I'd have an $1,140 profit just on those shares.

The next day, January 6th, I bought the most recent 600 shares back to cover, immediately regretting it, but netting an even $100.  The regret stemmed from the additional gain I could have realized by waiting until later to close the short.  I then shorted other securities as a balm to the pain, but came home with nothing.  I usually don't detail such mundane happenings, but if anyone wants to see it, the combined escapades that day looked like this:

 Before that day was over, witnessing UVXY dip all the way down to about 6.23 and back up, I shorted it again at 6.50, only "losing ground" by about four cents from my last transaction in which I had closed it at 6.54 in the morning.  What happened after January 6th?  Only two full trading days elapsed after that, and today is still in progress, but the transactions were too numerous to narrate full stories on.  Instead, I'll give an accounting, excising another group of failed TNA shorts.  If anyone really wants to see that embarrassing sub-story, it's right here:

Here's the accounting breakdown:

So, with $200 slipping between my fingers there, let's detail the remaining transactions to date, first the UVXY and then some TVIX short I acquired on a few different dates so far this year.  The UVXY:

The green box shows the profit taken on the 600 shares shorted as an attempted continuation of the same short started when I closed the options.  The red-ringed lots represent the closing of shares shorted on the first trading day of the year.  And the remaining lots were opened this week and closed this week, through today.  At this moment I have no short shares of UVXY. What's not shown in that chart is that I was unable to borrow some shares for shorting today, and used TVIX as an alternative, and I also used TVIX intentionally two days ago to add to an existing pool of TVIX shorts I began accumulating before the year started.  The lots sold short this year were transacted at the following prices:

TVIX is currently 6.68, so my unbooked gain on the above is, right now, $560.  Disregarding profits I took on shorts started on the first trading day of the year, I only brought in a little more with all of my shuffling of UVXY shares, and would have been better to just hold the 2,000 shares since January 6th.

One of the goals I achieved today, however, was to lighten my exposure to combined TVIX/UVXY short shares by cutting it in half from a somewhat overweight position at the end of yesterday and a very overweight position this morning as I "doubled down" to try to get out of yesterday's "mistake" faster.  It worked; I got out unscathed, but as of this writing, UVXY/TVIX continue to drop along with VIX wallowing around in the low elevens, so I'm looking at profits missed out on today and feeling irritable.  I have to remember, though that it's essential for keeping my account intact that I make sure I'm out of the way if the train changes directions.  To mix metaphors, I'd like to have fun at the party, but it's more important that I get home from the party alive, even if that means leaving while it looks like the party is in full swing. 

Follow the bouncing... Arrow

This post may also be seen at: http://www.cboe.com/blogs/options-hub/2017/01/05/follow-bouncing-arrow

Yesterday, January 4th, in order to start out the new year with some degree of nail-biting (figuratively) drama, I hatched a little plan involving some short shares of UVXY.  The first thing I did was to buy to close 400 shares, reducing the 1,800 I had opened the previous day to 1,400 in quantity.  My plan was to re-short those 400 shares later in the day or on some upcoming day, along with 200 more which I envisioned as a day trade.

Then, thinking about the 1,400 short shares I still held, plus the 600 more I planned to acquire soon enough, I looked at premium for puts on the 6.50 strike of the same security.  As you can see from the graphic below, UVXY was trading in the $7 neighborhood when I sold 20 puts for the $6.50 strike and the January 13th expiration.

Of course, I was putting the cart partially before the horse, since I hadn't yet made another short sale of shares, so only 14 of these contracts were considered "covered puts" and 6 were plain old stark naked.

See chart below for the timeline of my trading so far this year.

Here is expanded detail of the put trade.  This chart tracks the exact contract.  Last week, trading price was just a few pennies.  This week, prices exceeded twenty cents.  My price received was eighteen cents.

Several courses of action are available to me at this point, particularly regarding the short puts.  I could keep them and hope they expire worthless on January 13th.  This would require UVXY to close above $6.50 on that day.  I could trade my way out of the puts, by buying them to close and making a profit, breaking even, or taking a loss.  I could leave six of the contracts naked, or I could short more UVXY shares to make some or all of the contracts covered.  Of course, I could buy back any number of my existing short shares to make any number (including all ) of my contracts uncovered.

Will UVXY change in price today or in an upcoming day such that I'll feel motivated to close my short puts?  Will it appear safe to leave those puts open through expiration?  Since I received eighteen cents in premium, UVXY could close as low as $6.32 (that's $0.18 lower than the strike of the contract) on expiration day and I'd be able to realize no loss upon covering the short shares just before expiration.

Will UVXY rise enough that I'll decide to re-short the shares I recently closed, and will I want to short even more shares?  Or will it rise so much that I'll want to keep watching it for a higher entry point?  Will it continue to sink, yet I'll decide to short more UVXY shares anyway?  Or will I close all of them?  These are all questions that will be answered in my next blog entry, as the near future unfolds.  If you've read this far, you must be following along, and if you've been doing that, I'm glad!

Whistling over the bridge

This post may also be seen at: http://www.cboe.com/blogs/options-hub/2016/12/05/whistling-over-the-bridge

At my last writing I had taken an accounting-sheet loss by simply exchanging one security for a comparable one and then selling some options against that position with the intention of bringing in some extra return on that position.  Refresher:

Converted to: (shown after just a few minutes as the position immediately resumed producing red ink):

Well, what happened to those during the earthquake that was election night and the days leading up to it?  I said I'd report back on my bag of Halloween goodies (or NOT-goodies), and here is the answer:

The going got rough, but I got going and worked to repair those positions (some repairs handled poorly and some better executed) until my account, as shown below in an entire-year view, bounced back:

What became of the above-depicted positions during the turbulence that transpired over the first several days of November and during the presidential election?  I got nervous about the short puts connected to my short UVXY shares and cashed them in on November 1 for a tidy profit, as shown below:

Then, I did the same thing again on November 7th, also as puts to cover that same position of associated short shares, but closed them out for a loss. (see below)

I don't remember the exact rationale for that move, but I believe I was worried that the puts would limit my profit, and I wanted to close the position and consider opening another one later.  As it happens, my prediction that UVXY would hit the 13.50 strike by the November 11th expiration (an undesired - albeit acceptable and anticipated - outcome in my mind) was somewhat on-target!  On November 11th, UVXY was all over the map but closed the day at 13.54, just pennies above the strike price.  It spent a lot of the day in the 14s, even looking 15 in the eye, and dipped to 13.43 just to freak out traders [of those particular options], before settling on the hairsbreadth gavel-drop of four cents above that option's strike.

I, of course, had long been out of it, making hay while the sun shone for the remainder of November.  Aside from the options trades described above, my trades consisted of short UVXY and TVIX shares (and just one lot of TNA), and the results are shown below.  For some reason too boring to go into, I changed my closing lot selections from LIFO to FIFO and back several times, so some of the profits are on lots opened earlier the same day, and some are on lots opened as far back as October 31st, the day of my last blog entry.  Some are associated with the options discussed above (you'll see the close of the 1,100 shares from in the second graphic, for example.  Just look for the 15.95 entry price to see those two lots; they were bought to cover at an average of about 15.21.)  The block of TVIX closed for a large loss was "converted" to UVXY with the purpose in mind of selling options against it, and we already talked about those.

As enjoyable as it's been to type this up and chop and crop all the screen shots, I must get back to watching the shares I have outstanding, once again with an uncertain fate.  But I returned, as promised, to reconcile my misdeeds with you readers, and you can be sure I'll do it again.  Maybe this time before an entire month has gone by!

Oh, before closing this entry, I forgot to mention that I had to sit through uncomfortable adversity on those shares before booking the nice profits you see above.  It wasn't an intentional glossing-over, but more like something I've put behind me since it was weeks ago (I hope there's no reprisal in the short-term, though.)  Just a little taste of it, if you'd like to see, went like this:

Fun to look back at the chasm-like gorge after you've crossed it on a creaky, fraying rope bridge.  I documented it then so I could look back and laugh.  Until next time, and best trading to you!

Trick now, treat later

This post may also be read at: http://www.cboe.com/blogs/options-hub/2016/11/01/trick-now-treat-later

After having a pretty good week shorting anything with a ticker (no, not really - just a few select names) and getting away with it, I got caught with my shorts up on Friday afternoon.  Who can predict green ticks higher than the Empire State Building that materialize while you're waiting by the microwave for coffee to warm?  So I decided to transmogrify the offending position into a Frankenstein's monster of sorts, fitting for the candy festival otherwise known as October 31st.

I booked a loss as such:

Then opened a new position as such:

To compare the old, closed position with the new, open position, it goes like this:  On Friday I had sold short 800 TVIX at a price of 15.32 and then added 200 more short shares at a price of 16.63 (halfway up the Empire State Building) for an average short position from 15.58.  Today (October 31st as I write this) I bought those shares to cover at 17.46 to close that position at a hefty loss.

Then, trying to waste no time but apparently wasting opportunity ticks anyway, I opened a similar position slightly larger in size in the comparable security, UVXY.  I sold short 1,100 at 15.95, and to go with those shares, I sold eleven 14 strike puts for the November 11th expiration at a price of 0.87 each.  Here is how the position actually looked, value-wise, a few minutes after establishing it:

As you can see, the short position immediately moved against me, and the option immediately moved in my favor.  I had sold the puts for 0.87 and they were going for 0.81-0.83 a few minutes later.  As UVXY moved higher in share price, the puts became less valuable immediately.

Obviously there are only three real dispositions for the options, now that I have sold them.  I can buy them to close for a price higher than I sold them for (taking a loss), I can allow them to expire (worthless or with value), or I can buy them to close for a price lower than I sold them for (making a profit.)   Let's outline the possibilities in relation to my short shares.

For the price of the puts to be higher than my entry price, the underlying would likely move lower than it was at the time of entry.  Buying the puts to cover at a price higher than I sold them for is something I would consider if I wanted to close out the short shares for a profit, set any losses on the options against that, and clear my slate of the entire position.  I'd enjoy less of a profit on the short shares than if I had just shorted and covered the shares with no options associated.

Buying the puts to close for a price lower than my entry price, similarly, may occur if the price of the underlying moves lower than it was at the time of entry, but due to time premium eroding daily, option price may stay lower than  my entry price so that I may not have to take a loss on the options, and may make some kind of profit on them.  So I could profit from closing both the short shares and the options.  The other scenario is that the options price would be lower than my entry as share prices rise above my short-share entry price, so that I'd have a loss situation (realized or unrealized) regarding my short shares, but at least I'd be able to book some sort of profit on the short puts. (See third illustration for a depiction of how this began to unfold immediately after opening the positions.)

The last possibility is to allow the puts to expire (either worthless or with some value) on the expiration date of November 11th.  If UVXY ends above 14.00 I will have ended my obligations connected to the options and, assuming I still have the short shares (I'm not planning, in this instance, to have naked short puts, so I'll still have them if I carry the puts through expiration) I'll be free to keep or dispose of my short position after November 11th; the premium received through the sale of these puts will simply be extra income for me.

But if UVXY ends under 14.00, I'll have 1,100 shares of UVXY put to me. Any value remaining in the options will be of no concern to me if I choose to be subject to assignment.  The result will be a short position and a long position which I can then ask the brokerage to zero out for me (this equals the equivalent of buying my short shares to cover at 14.00, and this caps the profit I'd realize on the short shares.)

In any case, I don't have to trade in my short puts and I can keep the $941.54 brought in by them.  Assignment will result in a nice profit of 1.95 per share on the short shares, times 1,100 which equals $2,145 to add up to a total of about $3,087 on November 11th; remember that I just ate $1,902 so that's about $1,185 I'll be ahead two Fridays from now if all goes according to plan on this.

If it doesn't go as I envision, I'll be on the hook for some unknown amount of loss on the short shares, or I'll take some small or maybe even respectable amount of profit on them, but I'll have the "option" of  keeping every penny of the $941 I didn't have until I decided to sell the puts this morning.

What's it going to be for me - trick or treat?  Or trick, and then treat?  We'll find out and I'll report back on my bag full of goodies (or not!)

A trader's week in review

Last week I traded only two securities, each of them short each time.  The below charts, detail sheets and typed logs represent every trade I made during the week of October 10th-14th.

The drawn brackets show each closed trade.  Most often I trade by opening and closing only one lot at a time, but fairly often I add a lot or two to my original position and then close all open lots at once to bring my account back to all cash.  The chart in the middle of this post (see below) shows a full week for each security with the totals made or lost trading that security for that day of the week.  I also typed up trade logs which are just another way of displaying the data in the detail sheets (above for TNA and below for UVXY). Starting with the TNA trades:

On Monday, October 10th, I sold 200 TNA short at 80.23 at 10:26AM. 
An hour later at 11:33AM, sold 200 more shares short at 80.26.
Covered all of these shares at 1:07PM for 80.22.   P/L: -$18

Also on Monday, October 10th, at 1:22PM, sold 400 TNA short at 80.12.
Covered these shares at 3:59PM for 79.88.  P/L: +$78

On Tuesday, October 11th, at 9:32AM, sold 400 TNA short at 79.02.
An hour later at 10:23AM, sold 200 more shares short at 77.66.
Covered all of these shares at 12:42PM for 76.10. P/L: +$1,449

On Friday, October 14th, at 10:01AM, sold 200 TNA short at 74.70.
A few minutes later at 10:16AM, sold 200 more shares short at 75.04 .
Inside an hour, sold 300 more shares short at 73.43.
Covered all of these shares at 12:34PM for 73.24. P/L: +$674

As for the UVXY trades:

On Tuesday, October 11th, at 1:25PM, sold 500 UVXY short at 16.51.
At 2:36PM sold 300 more shares short at 17.18.
Covered all of these shares 3:35PM for 16.75.  P/L: -$20

On Wednesday, October 12th, at 11:25AM , sold 300 UVXY short at 17.01.
Covered these shares at 11:59AM for 16.97.  P/L: -$9

Also on Wednesday, October 12th, at 12:01PM, sold 300 UVXY short at 16.95. .
At 12.23PM, sold 300 more shares short at 16.66.
Covered all of these shares within a half hour at 12:30PM for 16.48 .  P/L: +$167

On Thursday, October 13th, at 10:01AM, sold 300 UVXY short at 19.03.
Just five minutes later, covered these shares at 10:06AM for 19.04 .  P/L: -$21

Also on Thursday, October 13th, at 10.20AM, sold 300 UVXY short at 18.79.
Less than five minutes later, covered these shares at 10:24AM for 18.62 .  P/L: +$32

Also on Thursday, October 13th, at 10.49AM, sold 500 UVXY short at 18.88.
At 11:00AM, covered these shares at for 18.87 .  P/L: -$15

Also on Thursday, October 13th, at 11:25AM , sold 500 UVXY short at 18.48.
Covered these shares at 12:47PM for 18.09 .  P/L: +$176

Also on Thursday, October 13th at 2:26PM, sold 300 UVXY short at 17.72.
Covered these shares at 3:03PM for 17.67.  P/L: -$3

On Friday, October 14th at 12:41PM, sold 500 UVXY short at 17.35.
Covered these shares at 12:47PM for 17.48. P/L: -84

The TNA trades were more profitable, but I was happy to have the extra return from the UVXY trades, although they were a lot of work.  I can't remember which were more nerve-racking, but if you desire meticulous detail and if you bring up your own charts to see the movements of these securities between the opening and closing points of all trades, you will see that in many cases positions moved against me by a lot (not just a little) before they ultimately became profitable or even more-or-less flat.

My general trading behavior looks something like this:

I try to judge whether to cut losers short or allow some "room to become right," and it seems like the latter pays off many times.  When I need to cut a loser, I make all efforts to close it for flat, whether it has gone against me and come back, or gone in my favor but come back to where it's threatening to start robbing me.

In many cases, I add to winners so that I can amplify any returns should the movement be in my direction and the potential profits appear to be rolling in.  I strive to do this, actually; a day of adding and adding until my account is maxed out and break-even stops are a mile over the current trading price would be my dream come true.

In other cases, when a position goes against me, I short more shares at a higher price (see the paragraph about judging whether to cut losers for a loss) to raise my average basis so that, should the movement of the security resume downward, I can get out sooner and/or with less loss (or a greater profit!  That's right - I don't honor that old saw, "Don't add to losers.")  I probably should have included an enlarged inset showing the instances where I did that, but I'll leave it to any motivated readers to bring up and zoom into charts themselves if they want to wear out their own eyeballs, since every last data point of every single time I hit "order" last week is printed and accounted for two ways here (in the detail sheet and in my typed log).

I don't wait until I'm an expert at something before I start doing it, so don't expect to see perfect trades, exemplary technique, or even trades that you'd consider trying when you see what I do.  I learn as I go and I assume I'm always improving and refining my methods, so what you see is a work in progress, but also an attempt borne out of necessity as I have bills to pay and income that needs generating.  I don't think the week was too bad... Will the next one be better, or way worse?  Can't tell until we get there, and tomorrow's coming up soon, so I'll close with this word to my fellow traders: Goodnight and good trades tomorrow!  Thanks for reading (if you didn't skip all of it and simply read the last sentence.  If you did, go back and read the WHOLE thing - right now.)  ;oD

Present your ticket to exit the ride

What to do when the market resembles a bunch of hills and valleys, and you feel like you're just one in a steady stream of confused, disoriented foot travelers trying not to get robbed along the wooded trail? One idea is to try to pick up the cash others didn't secure carefully while on their hurrying way, and hope you don't get pick-pocketed by those overtaking you who are faster and smarter.

Yesterday (Monday, September 19th), I jumped right in with a mixture of false courage and resolve not to look at the wound as I initiated attempts to capitalize on the fall of XIV that I continue to believe is coming, if not in large, long-range scale, then in a daily scale I can trade in and out of.

The trades detailed on the above daily log are not in sequential order, but each lot is listed along with any additional lot that was eventually closed together.  To make things simple (on myself; I do this for my mathematical sanity), I may "leg in" but I never "leg out."  I just close the trade when I feel I should or must.  Instances of the word "OUT" on the blue chart are five; I closed trades that many times, and in addition, had a UVXY trade not shown on the chart.  All positions were short sales.



The circle denotes the biggest mistake I made all day.  While feeling like a terrible trader (see the grand total for the day being just a bill for $83), I analyzed the day's mistakes and saw that while I booked a few losses, only one of those was really understandable and due to forces I couldn't anticipate quickly enough; the others were due to my own greed and denial (allowing losses to grow because I was tired of being stopped out for even, which happened several times, as shown by the one-digit result figures).  But the biggest mistake of all didn't involve a loss - it involved the failure to take what would have been a very rewarding gain.  To wit:

The encircled area shows the trades, entered shortly after noon and closed at 1:13PM.  My average basis on those was 34.63, and with 1600 shares at work, I closed the trade at 34.29 for a respectable profit of $522.  But I sat and actually watched the lower prices transpire and I did nothing, due to a desire for even bigger profits (understandable, but unwise to be too strongly influenced by); if I had it to do over again, I would have taken some kind of profit on the hike back up the reversal hill.  The low point was 33.58.  I would have booked a $1,680 gain.  Who can time exact bottoms, though?  Most are not so lucky.  Any point along that jagged climb back up would have benefited me: an exit price of 33.70 would have brought in $1,488; 33.80 would have served up $1,328 and 34 even would have given me roughly a thousand dollars.  I'm not sure what went through my head when I finally closed that out, but I know I wasn't very happy to see a positive $500 and a negative $500 mocking me like a pair of profit-eating bookends squeezing my collection of trades for the day into a thin, insubstantial, non-noteworthy gain/loss.

Moving on to the next day (today, September 20th as I write this), I rolled up my sleeves and got to work.  My plan was to keep these three things in mind: 1. Limit sharply any trades that might take off in the wrong direction from the outset, by pre-determining a damage-limiting stop (in my head and on paper. Whether I'd really adhere to that intention or not is an unknown); 2. Set stops to protect capital once a trade has moved a reasonable amount in the right direction (and I did that, and the stops executed an annoying number of times); and 3. Take sizeable profits and not lose them to unreasonable and unrealistic greed.  It is very hard for me to accept that I cannot make maximum profit on every trade, and I feel like someone stole both my lunch money and my lunch when I get out of a trade and think of those fictional "other people" (who exist mainly in my imagination) cheering and making way more money on their trades that started exactly the same as mine did, in the alternate reality world where great traders are cashing in while I got out too soon.

Five times in a row over the course of the long day I was stopped out for what amounted to be a nominal loss on the day before my next trades achieved profitable status.  An XIV short that went against me to the tune of a potential -$780 finally closed for a profit of $229.  A UVXY short that went against me as a painfully proposed -$680 finally came around and presented positive dollars, so I grabbed 980 of them.  (There were better profits to be had, and I let them tick by, but at least I grabbed a big handful before the dessert cart rolled away.)

Food metaphors come from the fact that I hardly ate while monitoring all of this, and eating is all I've done since, while typing this up.  Not detailed above are the uncertainty and second-guessing involved throughout managing these trades.  Lists make it look simple and charts make it look brief but the ever-changing ups and downs caused anguish at times. At the end of the day I was glad to present my final ticket and get off the ride (only to get on again tomorrow, most likely).

Back to VIX specials

This post may also be read at:  http://www.cboe.com/blogs/options-hub/2016/09/17/back-vix-specials

Summer didn't draw to a close without telling us it was doing so.  If any VIX-watchers were sleeping, they're awake now. Most of the summer seemed flat and long as a football field, and while that should've been easy, I made it difficult for myself by trying from July 19th onward to profit from something that simply wasn't happening just because I wished it and staked it out repeatedly:  The return of any kind of volatility or at least the end of the silent, somnolent, stubbornly-immobile VIX.

As a review I noted on this chart the nine times I've attempted to get tickets to the early screening of the VIX show; five of them have already been detailed in past blog entries so I'll describe them only briefly.  The remaining four will be explained.

At point 1 in the chart, I had wrongly closed my volatility shorts ten days prior (and they had been appreciating in value nicely and would have continued, had I not made that blunder) and I was finally determined, fueled by bitterness, to put that yellow blob on the chart and call a bottom to volatility and a top to the related leveraged inverse security.  The chart depicts XIV, but it could just as well show SVXY; since I traded both at different points and since they chart essentially the same way, I chose one to represent both.  The chart starts on July 19th and ends yesterday, September 13th (as I write this.)  It also depicts high trades for each day, so the ups and downs of each day are not shown.

See my previous two posts for details of trades 1-5.  I'll summarize them in broad terms here:  In trade 1 I shorted SVXY on July 29th and also bought calls intended to protect me from any rise the shares might experience.  The trade was intended to run for at least a couple of weeks but when there was a deep intraday dip just two trading days later, I closed the whole thing for a profit.

In trades 2 and 3 I shorted shares of SVXY, first on August 3rd at a price that immediately went against me, and then again near the peak of an intraday high on August 9th the likes of which wouldn't be seen again for half a month.  The peak-shorting mitigated the damage the original shorting had done; I got out the next day with considerably reduced red ink, yet I remember the day of August 10th as being a volatile trading day in which I could have gotten out flat, had I timed it better.  As a footnote, I did take the opposite side of the trade immediately after that by shorting UVXY the same day and bringing in a profit on it the following day.

In trade 4 I shorted SVXY with a matched protective call on August 19th and added to that position on August 23rd with more of the same in trade 5.  On August 26th I closed it all out for a respectable profit.

This brings us to trades 6 and forward which are the September trades I have not blogged about yet.   Trade 6 consists of a day trade on September 1st in which I simply shorted XIV and closed it a while later for just ten cents lower.  (Lunch + gas money was my takeaway.)  I must have lost my nerve.   It's a good thing I did, since VIX visited the 11 neighborhood the next day and XIV took a hike higher up the mountainside.

Trade 7 represents my first real success in echolocating VIX on the ocean floor.  On Friday September 2nd I shorted XIV at 38.57 (see chart below.)  Within a few days the trade had moved against me to an apex of XIV touching 40.59 on September 7th.  At 800 shares, this put me behind by about $1,600.

 

I didn't even think about booking that, though; in fact, I looked the other way and forgot about it until I was awoken on Friday morning by my spouse literally holding a glowing chart over my face.  Our actual first conversation of the day was a whispered "VIX futures are up over three percent."  "Thirty percent?"  "No, three percent."  "Oh, OK, I'd better get up now."  Late in the day on Friday, September 9th, I thought I should harvest the fruits of the quick-growing VIX tree and cash in that short as such:

As you can see on the chart. 33.93 was the final print of the day and it chafes my brain to think that I could have closed the trade a little while later for an oversized dollar lower, but I must move forward and try not to dwell on it, because no pity parties are held for traders whining, "Coulda, shoulda, woulda."

Trades 8 and 9 bring us up to the current week.  See the detail and chart below for my XIV trades; the adjoining chart depicts same-day UVXY.  On September 12th I sold XIV short at 34.91; closed it the next day at 33.56.  A while later I believed I had made a mistake to close the short, so I re-shorted at 32.26.  Chop ensued for the next few hours so I closed it at 32.15.

With UVXY up more than 29% for the day on September 13th, I thought it might be safe to take some of the end pieces off that loaf of bread without being caught.  Sure enough, had I held that short through the present (Wednesday afternoon, September 14th as I write this), nearly two dollars have fallen off UVXY, but I didn't want to risk an overnight unknown so I bought it back just a few seconds before the close (oops - didn't mean to wait quite that long - timestamp: 03:59:47) for 24.58.  Detail:

Well, I started by saying that summer is over, but of course, it definitely isn't.  My favorite season won't be over until the very last day, which, by the calendar, is a week away.  Wait - did I say I like summer best?  It's VIX season I truly look forward to.  Is it here yet?  Can we start?  Can we invent a new season between summer and fall?   I'll be back soon with some tales of sightings of the wild VIX spikes, I hope.  Until then, enjoy the rest of your summer and the start of your VIX-er.

See a profit, pick it up

This post may also be read at: http://www.cboeoptionshub.com/2016/08/30/see-profit-pick/

She sells short shares down by the SVXY shore... Or something like that goes the nursery rhyme.  But does she buy calls to go with those shares?  Probably not. Here's why I did it:

I wanted a chance to benefit from the SVXY downside I envisioned without worrying excessively about the potential penalty for being significantly unfortunate in my timing/prediction.  So, feeling confident that my dream of SVXY put through the macerator would come true, I decided on a price I'd be willing to pay (which would also cap my loss), should my dream waft away in the mist of a sunny mid-September morning.

I looked around for a call I could buy that would guarantee me the right to cover my short shares at a specified price.  SVXY was trading near $74 at the time, but the only near-to-price contracts available right then for my desired expiration were at the $75 and $70 strikes. I decided to pay for the three of the $70 calls, knowing that about half the price was intrinsic (I'd make it back cent-for-cent upon buying my short shares back for a profit) and the other half was time premium.  Then I sold a corresponding number of shares short at the going price which was under 74 at the time.  A few days later I added on another long call and the appropriate number of shares at prices that didn't differ much from the initial position (see second image for individual prices), but improved (raised) the break-even point by a smidgen.  I settled down to wait and watch with my 400 short shares and four long calls.  I now had an average entry point of 73.77 in the short shares and an average cost of $6.75 for the long calls. The outcome at expiration would look like this:  (Three paragraphs will explain three basic outcomes)

Note the horizontal line at the bottom.  Worst-case outcome would be effected by exercising my calls, which I had purchased at a cost of $2,700, to buy the shares back for $70 for a gain of $1,508 on the short, netting out to a loss of $1,192.  Why would I do that?  If SVXY stayed above 70 and I couldn't recoup enough value by selling the calls to make it advantageous to get out of the trade early, I'd do the aforementioned.  SVXY could climb to heaven and instead of being punished for every step of the climb, I'd still be able to buy shares back at 70 by redeeming my call privileges.  I'd consider the whole venture a failure with a known, set price, and I'd be glad I didn't lose more, and I'd move on.  The reason I paid for all this insurance is that I wouldn't want to endure ever-increasing pain, should SVXY climb endlessly. This strategy is labeled by some a "synthetic long put."  It is comprised of short shares with accompanying long calls to cap losses to a predetermined amount, similar to what would be obviously known when buying puts.  What is the advantage of this method to me over simply buying puts?  I could liquidate the calls at any time, or see them expire, and allow my short to run indefinitely.  Long puts, on the other hand, have a defined lifespan and action must be taken to close the trade profitably.  So, a hurdle was set for me (by myself) right away; I had to watch the market move either against me or in my direction and make no money either way for a while.  At the time I constructed it, the appeal of this trade was the opportunity to see the outcome materialize over time, and I'd be able to sleep without checking futures in the middle of the night through bleary eyes.  I knew I'd either 1. Lose a set amount of money; 2. Lose a lesser amount of money, or 3. Make something, albeit via a raised profit hurdle I had set up for myself.  Moving on to the other possible outcomes:

Look at the diagonal line above the yellow-blocked area.  It starts at my break-even point, which would be SVXY trading at 67.02 at expiration.  Any SVXY price below 67.02 would represent a profit of better than 6.75 per share on my SVXY short entered at 73.77.  This equates to $2,700+ in profit since I had sold 400 shares short.  The maximum I could lose on the calls would occur if none of the $2,700 I had spent were able to be recouped (and every last cent would be expected to drain out of the calls if SVXY were to close anywhere below 70), so every cent lower than the 67.02 break-even would increase my profit upon closing the short (setting a $2,700 options loss against a greater-than $2,700 share gain), thus the diagonal line going upward in ever-increasing profit projections.

See the yellow-blocked area.  At one end is SVXY at 70; at the other end is SVXY at my break-even of 67.02.  Remember, I purchased for myself the privilege of closing my short shares for a price no higher than 70.  So, SVXY trading at any price higher than 70 would not adversely affect me past my worst-case scenario; I'd be out for my maximum loss no matter how the share price might climb, and if SVXY sunk below 67.02 I'd make increasing profits as described above.  But anywhere in between those prices would represent a loss (at expiration) less severe than the maximum, based on a combination of two factors:  The expected total loss in value of the calls as they expire under the strike price set against a profit realized by closing the short for some price less than 70.00 but greater than 67.02.

All this is off the table if I would choose to close the trade before expiration.  Anytime before that, some value would likely remain in the calls, depending on the interaction between the time remaining until expiration and the moneyness (just made up that term, if it doesn't exist already).  Obviously I anticipated that SVXY might end up anywhere over the strike or instead sink, slither, sneak, descend in an orderly manner or outright plummet below 70 to points so far within the basement you can't hear an answer back when calling to it.  You can tell which one I was hoping for.  My plan was to gladly hand over the $2,700 for the opportunity to run free through the ruins of SVXY during the future-vision fantasy world (that might never unfold for me) in which volatility would spike so high that SVXY would get destroyed and reduced to ashes and embers.  Here's what actually happened:

On Friday, August 26th, I happened to be writing the previous blog post and not paying attention until I captured the heart-shaped snapshot of the subterranean SVXY breaching 70.  Immediately after publishing the post, I turned my attention to the idea of closing the position out.  Realizing that it would be a toss-up between waiting to make a little or a lot of money or waiting to lose money, or booking a little gain now, I decided that instead of waiting several more weeks for the unknown to unfold, I'd subtract waiting from the equation and book the available gain.

Look at the orange arrow in the above chart, which shows where I closed this position.  Then see on the chart how the rest of the trading day unfolded.  By the end of Friday, SVXY was back to 71.45 and those calls traded at 4.32.  How would I have fared, just sitting around watching and then closing this at the end of the day?  For shares shorted at 73.77 and closed at 71.45, and calls bought for 6.75 and sold for 4.32, it would net out to a "now you see it, now you don't" profit, and in fact, a little bit of loss.  Good thing I struck while the iron was hot.  The iron's even colder now, with SVXY currently trading (as of this writing on Monday, August 29th in the afternoon) at 72.99 and the calls trading for 5.16.  I'd be looking at something like a $300 loss to get out of the position, were I trying to close it right now.

Moving on to the next trade, which I'll be sure to document here, but not before I know what it's going to be!  Some ideas are already in place, of course, but I have to watch and see what happens, just like all of us are doing.  Until next time... And - Careful trading!