SPY Jun-Aug put Calendar
This spread is placed with the following assumptions in mind:
- This market has strong opinions on whether if should fall through the floor or shoot through the roof. Hence, there should be volatility to profit from.
- I’m biased towards the downside since this market has not been able to stage a proper rally for a while now.
- Although I’m biased, I don’t have a clue as if I’m correct or not, so this is placed in a market-neutral position.
It seems to me that a market-neutral, put calendar covers these assumptions. So here it goes:
Order placement
BOT +10 CALENDAR SPY 100 AUG 11/JUN5 11 133 PUT @1.70 ISEMARK=132.53 IMPL VOL=17.74
Again, this market has very liquid option trading, so I got filled in a pinch. I chose to build it with puts because of their bearish nature or bias. The strike was what the market was trading at the moment I placed the order. The options series I selected where in the same succession as the last trade. Two series in advance, then one series in between, like so:
|May |Jun|Jun5(Quarterlies)|July|August | |now | | -10 133P | |+10 133P|
This allows me to to place one roll (if/when needed) and turn this trade into a July-Aug calendar. We’ll see.
This is the P/L Graph:
This spread cost me $1700, for a theoretical profit of close to $1600 (at this time, this changes constantly). There’s roughly a 40% probability that the price will make this setup profitable by the 1st of July.
Risk
I sold 10 JUN5 133 puts; somebody bought them and acquiring the possibility to sell SPY stock @$133 anytime before July 1st, 2011 (these are quarterly options).
If I get assigned, I’m bound to buy SPY stock @$133. This is extremely unlikely to happen if the stock is over $133 by JUN5 expiration; conversely, it’s almost certain to happen if the stock is under $133 by JUN5 expiration. If the price is inside the tent on the upside, I have no risk of assignment, if the price is on the downside of the tent I could get assigned.
Exit points
The winning exit points:
- Roll to a JULY-AUG when a) the +JUN5 -JUL 133P spread is very close to $1.70, and/or b) it’s the first week of June.
- Close with 30% profit: $1700*1.3 + 60 (commissions): $2.27
- Close with 50% profit: $1700*1.5 + 60 : $2.61
- Close with 80% profit: $1700*1.8 + 60 : $3.12
If I decide to roll, this trade has to be almost perfect, meaning that the price needs to hover very closely to $133, and really reduce my risk to almost zero. Roll for it’s own sake it’s not a good idea.
The losing exit points should be:
- 30% loss $1700*0.7: $1.19 ($510)
- 50% loss $1700*0.5: $0.85 ($850)
- 80% loss $1700*0.2: $0.34 ($1360)
There’s another consideration to closing this trade. Exit only the JUN5 (or JULY) leg, and keep the ultra-bearish AUG 133 puts. If the market does not rally by June or July expiration, I might keep the puts and hope for a market meltdown before AUG expiration. We’ll see.
How to follow
I need to record what is my methodology for following the trades. If I get it in writing, it will be easier to replicate. My platform is ThinkOrSwim, so I’ll refer to how do I use it and tweak it.
tab: Monitor->Activity and positions. This is the real P/L. I used to use the Analyze tab, but all thos numbers are theoretical, and this is the real deal.
tab: Analyze->ThinkBack. Here you can see the evolution of your trade in time. EXTREMELY useful, but kinda chokes with recent and/or losing trades. UPDATE 7/jun. I reported to support that the platform does not show Thinkback info on quarterlies. They said that yes, it was a bug.
tab: Analyze->Risk Profile. P/L graphs, current spread prices and greeks.
tab: Tools-> Widget 360. Graphical info for the option series of my choosing, and a host of other useful visualizations. I go for the default IV on top and Open Interest on bottom.
Trade log
24/may/2011: Trade placed today. Closing price: $1625, trade losing $75
25/may/2011, midday: The option volume on the puts is 10 to 1 over the calls. The open interest is 3 to 1. This is bearish, I think.
3/jun/2011: There has been a non-stop flow of lousy economic data for the bears to feast on. Really, it’s so bad it’s ridiculous.”Massive collapse in the American employment situation: May NFP at 54K, down from 244K, and not only below consensus of 165K, but below the lowest economist prediction of 65K. Private payrolls increased just 83K on expectations of 170K. Manufacturing payroll dropped 5K on expectation sof a 10K rise. The unemployment rate was 9.1%, although U-6 declined from 15.9% t 15.8%. The absolute number of unemployed increased fom 13.747 million to 13.914 million. For the third month in a row the Labor Force Participation rate remained flat at 64.2%.” (vía Zero Hedge)
For example, check this premarket PL graph. Massive vol crush on my options
And the price action (premarket)
This is quite bad, and I’m trying to wrap my head around it. The option series I chose for this trade are no different than the others. The IV has dropped like a stone across the board, why? Last trade when the market fell, the IV raised automatically. Trade losing close to $150 at the opening bell . Ouch!
7/jun/2011: This trade is losing big time. The bearish sentiment is quite strong and there’s a distinct lack of good news. The trade is losing a lot: $365 and getting close to my first exit point, which is $510. I’m not quite ready to bail, since I still believe that this trade it’s not busted yet.
I’ve seen this a lot of times. The sentiment is so strongly on one side, that it feels.. manipulated. There, I said it.
This massive bearishness it’s not organic. The numbers are not as bad as when Lehman or Fukushima, yet the blogs and news outlets are painting a very bleak economic picture.I hope I’m right. If not I’ll swallow my words and close my trade, or at least half of it.
We’ll soon see.
This is the Analyze tab. It shows the price of the current position, the roll trade (should I choose to use it) and the JUL-AUG calendar.
and the latest price action
I added a VIX comparison line to the weekly chart. As you can see, it’s not that bad!.
10/jun/2011: This trade is still underwater, but not that much. Last Wednesday the trade close exactly at my first exit point, $1.19 ($510 loss) but I decided not to close based on the following criteria:
- The VIX has not spiked.
- Everybody seems to believe this is the beginning of the end, Apocalypse, total global meltdown
- No good news of any kind.
I kept the trade and yesterday the market rallied for a bit reducing my loss. As I’m writing this the market is falling again, and going back to the first exit point.
Am I completely wrong?. There are a couple of more indicators I’m beginning to use, one is the P/C ratio (put/call ratio) and the other is charting each option separately and tracking it individually. Here are them:
That 1.814 means that at this time, there is 1.814 puts for every call in SPY. this number has been oscillating between 1.5 and 2.
Here is the JUN30P chart.
Here the blue line is the open interest on this option. It’s dropping fast, Could this mean that the traders are fleeing?
10/jun/2011. midday: Well, it seems like the last few paragraphs where written at the top of a cliff. This thing keeps dropping like a freaking stone; IV is increasing but real slowly. The first exit point is getting smaller in my rearview mirror, and things do indeed look bleak. Would I keep thinking that this is “a contrarian indicator” for long?
Drawing a line from the top of the day I placed this trade to the bottom on today’s candle, pone can see a quite scary -4.35% price drop. Last time I was really worried on a 2% price drop, Maybe I got complacent and smug this time? what would be the signs of smugness? maybe the “this market is manipulated” and “it does not feel organic”, “been there I know what this is all about” . Yeah, I said all that a few days ago 
Good thing I’, writing this down, so I can’t deny my own words.
13/jun/2011: Today the IV went up both in the underlying and my options. I’m, losing less than last friday but still deep OTM. Trade losing $655.
Here are the pretty pics:
VIX is increasing steadily, and this market did nothing but whipsaw for most of the day. I’m really worried and my mindset is how to come losing the least. I don’t think I can make money on this trade anymore, but I’m not walking away just yet since maybe this trade could come closer to the break-even line. Also, I already passed the first exit point, so I’m between exits right now 
I’m not rolling since there’s no incentive, 1.70 – 0.26 = 1.44 for a trade that’s worth 0.83? I don’t think so. As it stands now, I’m losing 38%, but rolling will put me at 42% loss and still have 1.44 on the table. So no reduced risk or loss, and no lock in profits.
14/jun/2011: Happy day! somehow the market staged a steady rally and I’m losing less than yesterday!. Losing $310. I don’t know what will happen next, but the VIX dropped almost 7% and the P/C ratio on SPY also dropped to 1.5-ish.
This is the closest leg, the JUN30P:
I’m not quite sure how to interpret the open interest here. This option increased it’s value almost 280% between 01/jun and 10/jun! the sellers (like me) where a quite sad crowd.
16/jun/2011 midday: Things are staring to heat up, I’m experiencing wild swings in this trade price. I’m losing badly, but sometimes I’m only losing . Let me illustrate with lots of pics:
This is the price of both options:
Then, the underlying:
Then, the P/L graph and watchlist:
VIX increasing A LOT, P/C ratio not saying much, maybe that’s not important at all. The PL graph shows that this trade is worth less than the theoretical price indicates, and that with all the increased IV in the last fews, days, the ideal maximum price for this trade is now close to $2K!.
Other than that, I’m quite screwed. The VIX increase is getting me really nervous. It sits right af Fukushima levels, which is ominous at least.
17/jun/2011 midday:
About IV.
I think I’ve acquired some more insight regarding Implied Volatility, at least as I can see from the Thinkorswim platform.
Every morning there is an IV crunch because IV readings and the theoretical models that rely on those readings, get reset with each trading day. That’s why everything changes so drastically between yesterday’s close and today’s open. That also means that all the information that one might gather, have a strong component of the hour of the the day! It’s not the same thing to place a trade on opening readings, than to place it at the close, when everything has already happened.
About expiration day.
Who’s the belle of the ball? JUN2011 Calls and Puts! all the other series have no volume at all and so the IV gets all screwey.
This two pieces of information point to :
a) Buy your options on expiration day, they might be cheaper (other that the one expiring that day, of course)
b) Sell your options BEFORE and AFTER expiration day, they might collect more premium.
Since I (and everyone else I know) trades option spreads, then you might want to place them accordingly to your intrinsic bias. A put calendar is bearish, a call calendar is bullish, even if they where placed market-neutral. Why? because the most expensive leg of the trade is the one setting the tone, and you’re buying it. The leg you’re selling is to reduce the price of the spread and to reduce the directionality.
Iron condors, on the other hand, are more neutral, since they already use calls and puts at the same time. Butterflies are also constructed with calls or puts only, so they have a bias.
Maybe all of this is academical, since you place a spread trade, and all this differences cancel each other out.
20/jun/2011: This is a very interesting day. Today is the first trading day after JUN expiration but his market (SPY) has a whole bunch of different option series, regular, weeklies, quarterlies, etc. The weeklies get issued on thursdays and expire the following friday, but no weeklies get issued for monthly expiration week. Read all bout it here in the CBOE website.
This means that for JUN5 Quarterlies expiration, there will be an overlap and the volume (and hence, the IV) will be split since traders will place their bets on either series. That is bad for IV.
Here is a big picture of the market at closing today:
Things to note, highlighted in the pic:
- The VIX dropped 8% today only, indicating that whatever the situation is, the option traders believe that it’s ok. VIX @20 or below is widely regarded as complacency with the current state of things.
- Because of the overlap with weeklies, my JUN5 133P got no volatility today causing an extreme vol crunch on my position. IV for the AUG 133P is screwy in the platform, but it’s different from zero
- Shows no volume on JUN5 133P
- shows some volume on AUG 133P
In other news, the underlying staged a mini-rally, here are the rest of the pics:
Trade losing $515.
23/jun/2011: Closed the trade with a huge loss. The reasons seem to be:
- Smugness and greed: I could have lost much less than I did; The losses where pared a few times but I kept the trade open. Yesterday this trade lost $200 ish Today I closed at $790 plus commissions. All this was my mistake and could be prevented.
- Bad trade: There’s no way I could have known this beforehand. This was not my mistake. This market went against my trade, and kept going for a long time.
I bought @ 1.7, sold @0.91 = ($0.79 x 1000 ) + $60 (commissions) = $850 total loss. This represents a 50% even.
let’s take the loss and move on.
—-
Update, Jun quarterlies expiration day:
30/jun/2011: Event though I closed this trade a qhile ago, I wanted to update with the last pictures of it:
the watchlist: SPY rallied just after letting me behind. VIX dropped, all signs of a strong rally.
The price shows how it dropped and shook me out, then rallied without pausing for breath to close very near my sweet spot.
The options I had at the moment show the effect of expiration day. The volume on the last trading day of the JUN5 spiked, but as the past volume bars show in the weeklies, not that much. The open interest graph is quite interesting. It shows more speculation on the JUN5 and more steady accumulation on the AUG.
The analyze tab shows that today the spread closed @$2.23, when I bought it @$1.70 and had to close it @$0.91.
