Today I set up my new monthly strategy which is a standard 20 delta short strangle. My strikes are 396 for the puts and 431 for the calls. I have 25 days to go and target a premium of about $13000. IV is above 18% with a IV/Hist vol ratio of 138%. As usual I will adjust the strategy as needed rolling the untested side and buying/selling futures.
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Nothing special happened yesterday. Bull rebound occurred with lower volume than previous three days, that means bears are well in control of the downtrend. Meanwhile IV has decreased a bit and price stayed right in the middle of my strangle range. A boring day, that is a good day for a neutral strategy
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SPY has been going up shaping up what we may consider a pullback to the 200 day MA. Price may still go up in the next days or just pause and reestablish the downtrend, nobody knows. As for the neutral short strangle strategy, being a negative gamma strategy, I have been accumulating negative delta in the last days in excess of 700. I have not rolled up the short puts yet as I want to see whether the 200 day MA stops the uptrend or not: based on that I will start doing adjustments.
Note
The bull rebound continued yesterday sqeezing the shorts on SPY and propelling the price to the level of my short calls at 431. This triggered the need for delta management and hedging: I rolled the short puts up to 416 and bought some futures. In the picture above I replicated my new expected profit profile with a maximum premium of $16000 at about 431. When I trade shorting options I do not want to be directional, it is hard for me to be directional and profitable. My trading consists of managing the risk and following the moves of the market while hedging and turning puts into calls and calls into puts.
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SPY had a great week for the bulls. On the weekly chart one can see bears got trapped as price pierced the support line of the downward channel and, along the week, has moved all the way up reaching the resistance line of the channel. Now, price can keep moving up overcoming resistance or just stop and get back into the downward channel: nobody knows. As for my strategy, I got my short calls in the money so I hedged with futures and sold more puts at 416. My total position is slightly delta negative. If price keeps moving up I will buy more futures and roll up the puts. If price goes down I will sell some of the futures to keep a small delta. I am exposed to a quite large negative gamma which is the major risk I carry with my position right now.
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Yesterday was a test day for SPY. Having reached a price zone that looks like resistance we got a small candle with the lowest volume in the last 20 days: a test. Market is testing whether there is incentive with keeping the price push up. It seems like the test failed and possibly the odds are that the price will go down in the next days. Nevertheless, as I always say: nobody really knows what the price will do in the future so the best approach to me is to adapt to what the market is doing in front of you. As for my short strangle strategy, I adjusted the delta slightly to get a practically neutral position delta buying futures yesterday. I will most likely adjust again today (selling futures) if the price goes down. The good news is: I have one day less to go towards my premium and my current setup favors price going down as my maximum premium of $15000 would be achieved at 431.
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Yesterday SPY pushed a little higher on low volume to test a zone of liquidity which should act as resistance. Today, we will see whether we get rejection of these price levels or not. As always, the strategy should react to the market moves adapting to what is indeed happening and not to what we believe it is going to happen. As for the short strangle strategy I put in place about 10 days ago, I finally decided to fully hedge my ITM short calls with futures, turning the short calls into short puts at 431. I sold the short puts at 416 for a profit. Additionally, I sold short calls at 445. So my initial P396/C431 short strangle is now a P431/C445 short strangle. Because of these adjustments and the hedging with futures I had to trim the potential maximum profit which now is slightly below $11000 for the 431/445 range. I lost some potential profit but I gained flexibility as I can now adjust the strangle with my futures using delta and push the potential profit higher.
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The last trading day was the first red day for SPY after several consecutive bullish candles. The red bar had higher volume and engulfed the previous three small spread green candles at a level of previous bullish liquidity (resistance). I had a look at the open interest of the call options for the November monthly cycle and it spikes at 440 (call wall). All this indicates that we may have reached a temporary stop of the bullish trend and a bearish reaction may take place in the following days. Nevertheless, market can suprise us and do the opposite as all this information is so evident on the chart to everybody that becomes basically no relevant information at all. As for my short strangle, I decided to hedge delta based on the market move so I have now less long futures contracts than yesterday, which means I would benefit for the price going down. If the price moves up again I will buy futures. As the week comes to an end I will have two weeks to go to option expiration. I am sittiing on a maximum premium of $11000 at 431 right now, but I can always roll the calls to get more premium following the market move and operate with futures to hedge.
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The week ended with a very bullish candle on relative high volume in a region where the chart indicated we were at a clear resistance. Price moved past and closed above the 20 MA and above the 440 mark, but only slightly, which is a call wall based on the option open interest volume for the November monthly cycle. After hour the price retreated below the 440. As I mentioned yesterday we tend to believe the price will behave according to what we think it is going to happen but reality is another story and the market will just move up or down catching most traders off guard. That is why I prefer to adapt to what the market is really doing on my screen with futures hedging & option rolling. Thus, yesterday, I rolled the 431 short calls up to 435, increasing my premium and bought back some futures for a loss (I bought higher). My strategy has turned into an almost neutral short strangle between 435 and 445: that is pretty narrow with two weeks left. So I will need to stay well on top of my strategy and follow the market carefully in the next days. My maximum premium would be about $10000 right now but will change depending on the delta and gamma hedging I will have to carry out.
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My short strangle strategy survived another day of trading and now it has 9 days to go until option expiration. SPY has been struggling moving past the 440 level which acts as resistance based on the option open interest for the November cycle. Yesterday, volume was the lowest since August: this indicates weakness to me. Taking a look at the ES December futures, one can see that the strong 4433 resistance has not been violated yet and yesterday candle was a doji at resistance. So far for the techcnical analysis. Now, we know that nobody can read the future so we should be prepared for any price movement. I have not made adjustments to the strategy yesterday, I am keeping a somewhat negative delta to reflect that we are at resistance, but I will quickly adjust the delta if the price moves up today buying futures or sell them if price indeed moves down if delta turns positive.
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The lower than expected number for the CPI propelled SPY above resistance on higher than average volume yesterday. I mentioned that when the technical picture becomes extremely obvious on everybody's eyes (like that of these days as far as being SPY at resistance), we need to beware of drawing the obvious conclusions. That is exactly what happened yesterday: a bad CPI number and the obvious resistance around 440 would have pulled the price down as expected; a very good CPI number and the resistance woud be broken, forcing everybody being short to cover. This is excactly what happened yesterday. As for my strategy which is neutral short term, a violent move is never a good move so I needed to buy futures to cover the short call options at 445, but I got filled at relatively high prices so I lost premium there. I bought back the 435 calls with low extrinsic value selling futures accordingly and sold an equivalent number of 452 calls, with higher extrinsic value, adjusting the number of futures contracts. Hence I turned my strategy into a neutral short strangle between 445 and 452 with a potential premium of $5000. I have 8 days to go to increase premium and adjust to the market movements: we can afford being wrong on our prediction based on technicals but never on avoiding reacting to the market move accordingly, evolving the strategy into a more favorable one based on the most recent market events.
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We got a narrow range candle yesterday in a price region that can be considered resistance based on previous highs before the last price downturn. Price may take a breath at these levels and move sideways although bullish momentum is fairly strong and the RSI has not reached the overbought levels yet on the daily scale. I took a look at the call options open interest for the november cycle expiring tomorrow and we still have a peak at 440 and a second peak at 455. I expect some selling pressure until tomorrow from the market makers as the sold calls at 440 are exercised and the long stocks used for hedging are sold to keep neutrality. As for my strategy, I bought back the 445 calls with lower extrinsic value and sold an equivalent number of 452 calls with more extinsic value. I sold futures as well. I have now turned my strategy into a short calls sort of position with quite large negative delta which I have to start to hedge buying futures. My maximum premium as increased to about $10000 at 452.
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Yesterday was another green day for SPY which is hanging on its recent uptrend. We are approaching an obvious resistance price band and moving into week end. Chances are market will try to push SPY towards this resistance price zone to end a happy week for the bulls. If one checks the OI for the options' expiration today we see contrats' volume is highest at 455 and then at 440. But the number of contracts outstanding has decreased at 440 and increased at 455 in the last days. This suggests that short term speculators are hoping SPY will move to or past 455 today. On the other end those long calls at 440 will either get excersised during the day or at closure. This will have a negative impact on SPY price which may be effective early next week. As for my short strangle strategy, I drew the ranges of my strategy from the onset (October 30th) untill now on the chart. All adjustments and hedging carried out were intended to follow the market in its directional move. This caused a shrinkage of the strangle ranges as the days passed in order to keep a positive premium and produced an increase of the strategy risk. Yesterday, I sold puts at 445 and I have short calls at 452. I partially hedged my negative gamma risk buying a bullish call spread (453/455) expiring today. All in all, my current strategy carries a potential premium of $10000, but with 6 days of trading left this number will surely change.
Note
The week ended with a small spread candle on higher volume. The weekly candle is bullish and its the third weekly relative wide spread green candle in a row, indicating strong bullish momentum: daily RSI is becoming overbought. Yesterday we had monthly November OPEX which prevented the price to move much above 450 as 440 and 450 calls were sold and those who initially sold these calls adjusted deltas by selling stocks. My strategy is still active and I have now 4 trading days to go. Being close to expiration, my negative gamma was pretty high and bearing too much risk over the weekend. That is why I decided to partially hedge gamma by buying 453/455 bull spreads and 445 puts expiring on Monday. This tactic will inevitably reduce my potential premium right now, but if price does not move much in the following 4 days I will be able to roll the short calls and squeeze more premium to try to meet my initial target.
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Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.