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THE WEEK AHEAD: EARNINGS AND A PERSISTENTLY LOW VIXIf you're going to play anything next week premium selling wise, it's going to be in earnings, because that's all that's really out there volatility-wise. The VIX remains persistently low here, and running a screen for exchange-traded funds with >70% implied volatility rank, and >35% implied volatility yields absolutely nothing. Here's what showed up on my radar -- some sketchy ADR action (WUBA), a little bit of frisky biopharm (BCRX), and some beaten-down brick-and-mortar retail (M, SHLD, JCP): WUBA (99/56) (Online Retail): It's scheduled to announce earnings on Thursday (2/23) (Short strangle/iron condor). BCRX (98/287) (Biopharm): Earnings Monday (2/27) Before Market Open. (Short puts, short straddle). This is biopharm, which -- in itself -- should serve as a warning. You may want to do a bit more due diligence on this one than you would ordinarily, since they can explode, but also implode. DKS (98/48) (Sporting Goods/Retail): Earnings are three weeks out, but I thought I'd put it out there since it's nearly ripe for play implied volatility rank/implied volatility wise. (Short strangle, iron condor). M (96/49) (Department Store Retail): Earnings Tuesday (2/21) Before Market Open. Because we have a long holiday weekend here, with the markets being closed on Monday, I've probably missed an opp to play this one unless there is high vol afterglow post earnings. (Short strangle, iron condor). SHLD (93/127) (Department Store Retail): I don't see that this has earnings up, but it's in the process of imploding. (Short puts, short straddle). BBY (93/47) (Retail): Earnings 3/1 Before Market Open. We're still a ways out from earnings, so like DKS, nearly ripe ... . (Short strangle, iron condor). HTZ (92/73) (Car Rental): Earnings 2/27 (Monday) After Market Close. Another one that's ripe right now. (Short strangle, iron condor). JCP (88/65) (Department Store/Retail): Earnings Friday (2/24) Before Market Open. Another beaten down brick and mortar retail issue. (Short puts, short straddle). OCN (85/70) (Financial): Earnings on 2/22 (Wednesday) After Market Close. (Short puts,short straddle).
W
by NaughtyPines
2
TRADE IDEA: SPY MAY 19TH 212/MARCH 17TH 224 SHORT PUT DIAGONALHere, I'm looking to add some long delta to my portfolio, although it's also good as a stand alone trade in this low volatility environment. The short-dated put is being sold at the ~20 delta strike, the long-dated one at the ~15, so I'm picking up about 5.00 positive delta/contract from this setup. Unfortunately, with diagonals, we're not able to precisely calculate the max profit/loss and break evens for the setup. However, the net delta for it is 4.83/contract, it's positive theta (1.24/contract), and it will cost a small debit to put on (.60/$60 per contract). Because of the width between the strikes, though, it is a bit pricey to put on -- about $1140/contract of buying power effect (the width between the strikes minus the debit). How to Work It: The vast majority of traders leave the long option in place and work only the short option, ideally taking the short off at or near max profit as expiry approaches or rolling it down and out for duration and additional credit. If taking the option off at near worthless, the notion is to "re-up" by selling a new short option in the next monthly expiry. Some also choose to work the long option, rolling it down intraexpiry (within the same expiry) to lock in any increase in value it experiences while the trade is on. Keep in mind that doing this will generally widen the spread between the front month short and the back month and will increase the buying power effect attributable to the setup if you haven't narrowed the spread by rolling the short put down and out at some point. As far as take profit is concerned, I take a fairly loose approach, since it will depend on what happens during the life of the setup.
AMEX:SPYLong
by NaughtyPines
TRADE IDEA: ATVI FEB 17TH 34/38.5/40/44.5 IRON CONDORATVI announces earnings tomorrow after market close, so look to put on a play in the waning hours of the NY sesh ... . Its implied volatility rank is >70%, and its background volatility is on the cusp of 50% ... . Metrics: Probability of Profit: 50%* Max Profit: $231/contract Max Loss/Buying Power Effect: $219/contract Theta: 11.33/contract Delta: -2.47/contract BE's: 36.19/42.31 Notes: * -- The body of this is so narrow such that it's almost an iron fly; hence, the piss poor POP%. I considered doing the standard 20-delta iron condor here, but just couldn't squeeze out enough credit to satisfy me. I'll basically look to treat it like an iron fly, and look to take it off at 25% max profit.
NASDAQ:ATVI
by NaughtyPines
3
OPTIONS TIP: "CHEAP CALLS" HERE MAY NOT BE "SMART" ... DEPENDINGBad advice in part; good advice in part; hiding the ball in part. finance.yahoo.com The good part: cover your stock/equity positions with short calls. This will smooth out your P&L somewhat and protect you -- albeit not completely -- from down side risk while reducing cost basis in your shares. Unfortunately, they don't want to "share their secrets" right up front about "where" to sell those short calls (strike, expiry), so do some research as to where you should sell those (I generally sell the 20 delta short call to cover in the monthlies; others are slightly more aggressive and sell the 30; to a certain extent, it depends on what you're doing with an individual position (i.e., are you looking to reduce cost basis over the long-term or looking to get called away)). (To be somewhat nit-picky here, though, selling short calls in this environment isn't quite as productive as in a high implied volatility environment. You'll get less than you would were implied volatility were higher. Nevertheless, staying "covered" the vast majority of the time is fairly good advice.) The bad part, depending on what they're saying: buy calls here because they're "cheap." One of their recommendations is to liquidate a portion of your shares and buy long calls instead. As I've repeatedly said here, buying and holding shares is extremely capital intensive as compared to an options position that "synthetically" represents long stock. When I do a play like this article appears to be recommending (but doesn't come out and say directly), I buy deep in-the-money calls somewhat far out in time (>180 DTE). I buy deep and long-dated because I'm looking for calls with as little extrinsic value/premium in them as possible, because I just don't want to pay for premium in an option that will just decay over time. Even when I do this, I "cover" this "synthetic" long stock position with short calls nearer in time (the options lingo for this setup is a "Poor Man's Covered Call."). If that's what they're recommending that people do here in this article, then come right out and say it, for goodness sake. Merely saying: "buy calls" is stupid, uninformative, and potentially destructive. If the article is suggesting that readers buy out-of-the-money calls here just because they're "cheaper" (i.e., made up of less extrinsic value) than usual, well, that's just plain ass stupid advice. The vast majority of OTM calls expire worthless, so you would be throwing your money away on these if you do not get the required movement you need to "make them pay." Long calls may be comparatively cheap here in this low volatility environment; it doesn't mean they're a "smart" play, depending what you're buying and where ... .
TVC:SPX
by NaughtyPines
X EARNINGS SHORT STRANGLE/IRON FLYX announces earnings tomorrow (Tuesday) after market close, and with its implied volatility rank and implied volatility metrics, it's ripe for a volatility contraction play. Here are two possible setups, which naturally might need to be tweaked this way or that depending on price movement intraday tomorrow. Feb 17th 29/38 Short Strangle Metrics Probability of Profit: 68% Max Profit: $130/contract Buying Power Effect/Max Loss: Broker Dependent/Undefined Break Evens: 27.70/39.30 Notes: (1) Here, as is my habit, I'm selling the 20 delta call and put. (2) I went out a little bit farther in time to the monthly, since things are generally more liquid there, so I would be more likely to get a fill at the mid without too much diddling around. (3) Look to manage at 50% max profit or about $65/contract. Feb 17th 25.5/33/33/41 Iron Fly Metrics: Probability of Profit: 50% Max Profit: $392/contract Max Loss/Buying Power Effect: $408/contract Break Evens: 29.08/36.92 Notes: (1) The first thing I did was check to see what a three-wide iron condor would pay with the short options at the 20 delta strikes. It was less than 1/3rd the width of the strikes, so I switched to putzing with a fly. (2) Look to manage this setup at 25% max profit (~$98/contract). (3) While the setup looks "sexier" from a max profit standpoint, you'll also notice that the profit zone is narrower than that of the short strangle. Nevertheless, is defined risk going in, so I know what my max loss is if the thing blows up in my face.
NYSE:X
by NaughtyPines
3
TRADE IDEA: VIX MARCH 22ND 11.5/13.5 LONG CALL VERTICALTruth be told, I'm not a "debit spread" guy, namely because I look at them as "one and dones" -- they either work or they don't; rolling these out for duration generally costs more money, and I don't like paying to roll, so I look at them as "one shots." Here, I looked for a risk one to make one metric for the setup ... . Metrics: Max Profit: $105/contract Max Loss/Buying Power Effect: $95/contract Break Even: 12.45 Notes: This is a debit spread, which you pay to put on. What you pay to put it on (a debit), is your max loss of the setup, but you certainly don't need to allow it to go to max loss to take it off, especially if it becomes apparent that it's just not going to work by expiry. As far as take profit is concerned, I would probably shoot for taking it off at 50% max, although the way volatility's been trundling along here (at extremely low levels), I'd also look at taking my money at running at anything north of VIX ~ 15. After all, it hasn't seen fit to break that level since election-time ... .
TVC:VIX
by NaughtyPines
TRADE IDEA: GDXJ FEB 17TH 30/36/37/45 IRON CONDOR/FLYThere isn't much non-earnings stuff out there that has both high implied volatility rank and high implied volatility. This is one of them. Here I'm going with an extremely narrow iron condor, such that it's almost an iron fly ... . Metrics: Max Profit: $338/contract Max Loss/Buying Power Effect: $462/contract Break Evens: 32.62/40.38 Notes: I'm going to treat this as a fly for purposes of take profit and look to get 25% max.
AMEX:GDXJ
by NaughtyPines
TRADE IDEA: SPY APRIL 21ST 209/212/235/238 IRON CONDORGoing out to April for my core index exchange-traded fund position, since volatility "locally" (<45 DTE) blows here. Very close to getting 1/3rd the width of the wings; it'll have to do ... . Metrics: Probability of Profit: 54% Max Profit: $92/contract Max Loss/Buying Power Effect: $208/contract Break Evens: 211.08/235.92 Theta: .67/contract Delta: -5.34/contract Notes: Here, I'm setting up my short options at the 20 delta strike, and the long options three strikes out from those. Looking to manage at 50% max profit.
AMEX:SPY
by NaughtyPines
OPENING: SPY MARCH 17TH 205/208/234/237 IRON CONDORI used to do a lot of SPY, IWM, QQQ, and DIA iron condors as a core position, but temporarily wandered away from those given how sporadic the implied volatility has been in these underlyings. Additionally, they have nonexistent "engagement value" (i.e., they're boring), and I haven't been able to get decent premium out of 45 day setups. Because implied volatility is so low right now, I went out to the first expiry in which I could get something approaching a 1.00 credit for a 3-wide, 20-delta setup. Here, though, I actually went a touch wider (the short options are around the 16 delta strikes). Metrics: Probability of Profit Percentage: 59% P50: 75% Max Profit: $94/contract Max Loss/Buying Power Effect: $206/contract Break Evens: 207.06/234.94 As with all of these, I'll look to manage the setup at 50% max profit.
AMEX:SPY
by NaughtyPines
THE WEEK AHEAD: EARNINGS TAKE THE STAGEYou wouldn't have known it last week with all the inauguration hoopla, but we're in earnings season. Now that the hoopla's in the rear view mirror, earnings will take the market stage (and, yes, a bit of digesting of what all "the hoopla" meant). SPY et al. (Broad Market) From a premium seller's perspective, "SPY and friends" continues to be an unproductive area in which to sell premium unless you're willing to go out farther in time. (See SPY April Iron Condor Trade Idea, below). Earnings There are some "big names" coming up this week (BABA, MSFT, CAT), but not all currently have the metrics that would make premium selling hugely productive (>70% implied volatility rank/>50% implied volatality). I'm keeping an eye on BABA, EBAY, and SBUX, but their implied volatility needs to pop a bit before I'm willing to play. Non-Earnings GDXJ remains the only non-earnings underlying with decent liquidity and the right volatility metrics for a play. I already have one on. (See GDXJ Post Below). VIX/VIX Derivatives Any way, you cut it, VIX is low here, having caved mightily into Friday's opex close to sub-12. Consequently, I'm loathe to pile into further VIX "Term Structure" trades here, since I already have a March 16/19 short call vert on, as well as April 17/20, and I could easily see a modest (or not so modest) VIX rise to 14.0-ish (what the Feb /VX future is currently trading at) if the market gets indigestion processing what exactly "Trump World" will look like going forward ... .
TVC:VIX
by NaughtyPines
THE WEEK AHEAD: SLIM PICKINGS FOR THE PREMIUM SELLERWith VIX at sub-12 levels, broad market implied volatility is low here, and a basic screen run for high implied volatility rank/high implied volatility yields few high quality results. Here's what I'm looking at ... . SPY et al (Broad Market) The first expiry with greater than 15% implied volatility for SPY is in the June expiry. The most I like to go out with these is around 90 DTE, so no play there unless you like to watch paint dry. (The theta decay of a June setup would be painful to watch). Earnings The only earnings play next week with >70 implied vol rank/>50 implied vol is $NFLX, which announces on 1/18 after market close. I'll probably play that with my standard volatility contraction setup, which will either be an iron condor or short strangle, although I could also see just playing it with a 20-delta short put (bullish assumption). Non-Earnings The only playable individual underlying without earnings on the horizon appears to be P, but the only worthwhile setup due to the price of the underlying would be an ATM short straddle, 45 DTE. It looks like that would pay 2.00 or so at the door; shooting for 25% max profit would yield about $50 per contract. Exchange Traded Funds There are literally no sector exchange traded funds out there that meet my criteria for a premium selling play (>70% implied vol rank; >35% implied volatility), unless you count $GDXJ (junior gold miners) and $UNG (the natty gas proxy). With $GDXJ, I'm contemplating the simplest play out there -- a naked short put (bullish assumption). Unfortunately, however, I missed the "meat of the dip," so am hesitant to pull the trigger here against a backdrop of Fed tightening and therefore Greenback strength going forward. I'll post the $NFLX, $P, and $GDXJ plays if I decide to play ... . VIX/VIX Derivatives I continue to keep an eye on VIX "front month" futures. The Feb expiry is currently trading at 14.20-ish; the March, at 15.70. The Feb is a bit low for my tastes on which to base a VIX term structure trade; I already have a March setup on; and VIX is too low for a "Contango Drift" trade in one of the derivatives. My original intention with UVXY was just to slap on an ATM short call vert post split, but the options chains have been somewhat slow to populate for the standard contracts. You will see the chain with both 20's (the nonstandard contract for options that were on when the split occurred) and 100s (the standard contract). Some care needs to be taken not to accidentally enter a trade in a non-standard or a combo of a standard and a non-standard ... .
TVC:VIX
by NaughtyPines
TRADE IDEA/EXAMPLE: A 20/10 DELTA "DYNAMIC" IRON CONDORA creature of habit, I always sell the 20 delta when selling naked puts or setting up strangles/iron condors. Some traders like selling the 16's; some, the 30's; so I'm kind of "in between" ... . Here, I show an example of a setup where I'm selling the 20 delta call (at whatever strike it lies), the 20 delta put (at whatever strike it lies), and buying the 10 delta put and call (at whatever strikes they lie). As compared to a "static" setup where you are making each wing the exact same width, here I'm letting the options' respective delta values dictate where my strikes, resulting in a skewed setup with the short call vert side of the setup being wider (4 strikes) than the short put side (3 strikes). In actuality, this is a fairly good high IVR/IV setup, although I generally like to get at least 1/3rd the width of the wings in credit: POP% 63% Max Profit: $93/contract Max Loss: $307/contract BE's: 30.07/42.93 Notes: The "naked," undefined risk alternative is the body of this setup -- the Feb 31/42 short strangle with a max profit potential of $168/contract.
AMEX:GDXJ
by NaughtyPines
TRADE IDEA: UVXY (POST SPLIT) FEB 17TH SHORT CALL VERTICALI'm doing a little planning ahead here for the UVXY 5-1 reverse split, currently scheduled to occur on Jan 12th. Truth be told, UVXY is not one of my favorite VIX derivatives to play, largely due to options liquidity, which leads to wide bid/asks that you have to putz with in order to get filled for something vaguely approaching a "fair price." Nevertheless, I think splits in the derivatives (VXX, UVXY, and SVXY) are something to be taken advantage of to put on "contango drift" plays in these instruments, (See Post Below), particularly here, where contango is particularly steep. (See vixcentral.com). Since I don't know precisely at this moment what the "split-to" price is yet, I won't know exactly what strikes to use and what the cost of the setup is. However, this is the plan: 1) Post split, buy the long call that is ATM or one strike below. 2) Post split, sell the short call that is 3 strikes below the long call strike.* This will create a 3-strike wide, short call vertical, for which you'll receive a credit and which you'll look to exit for at least 50% of the credit received. If price breaks through your setup running into expiry, you'll roll it out "as is" for duration (to a later expiry), wait, and repeat the process until contango erodes price to such an extent that you can exit the setup profitably. (Alternatively, you can roll the setup down, chasing the underlying's price on its decent ... .) * -- A possible alternative setup is to go deep in the money with this credit spread. You'll get a larger credit "at the door" and experience a smaller buying power effect. However, you'll be stuck rolling the spread out repeatedly for duration until contango erodes the price of the underlying such that price eventually clears your short call. Naturally, a pop in VIX (and therefore UVXY) could occur while you're attempting to do this, leading you to be in such a setup longer than you'd like.
CBOE:UVXYShort
by NaughtyPines
TRADE IDEA: GDX JUNE 16TH 18/FEB 17TH 25.5 POOR MAN'S ...I'm not going to take this trade at the moment, because I'm trying to wind up current trades to move over to TastyWorks (formerly Dough). However, once I finish up that process, this is one of the trades I'm looking at, although certainly putting this on here isn't necessarily the best in terms of timing, since price has come bounced quite dramatically off that sub-$19 mark. In any event ... Here, the long-dated, fairly deep in-the-money long call stands in for what would ordinarily be stock in a covered call situation. As with a covered call, a short call is sold against the stock position not only to reduce downside risk, but to reduce cost basis in the long option (currently priced at 5.98). However, the poor man's covered call is put on for much cheaper than a "rich man's" covered call; if you initiated one here, you'd buy 100 shares at 23.20 ($2320 and sell the same 30 delta short call against for a $63 credit, so you'd be tieing up around $2250 in buying power to go that route). In comparison, the buying power effect of this particular setup would be $535 as of the writing of this post -- about a quarter of what you'd pay to do the "standard fare" covered call. The notion here is to roll the short call month to month (each time to the next month's 30 delta short strike) and then exit the position for at least 10-20% of what you put the play on for. Notes: Ordinarily, I do these using a the 70 delta long in the "back month" and the 30 delta short in the "front month." Here, however, I'm tweaking the play somewhat to use obvious horizontal support around 18 as a guide for the back month strike.
AMEX:GDX
by NaughtyPines
VIX TERM STRUCTURE TRADE: VIX FEB 15TH 16/19 SHORT CALL VERTThe two types of trades I like in VIX/VIX derivatives are (1) a "Term Structure" trade in VIX options; and (2) "Contango Drift" trades in the derivatives VXX, UVXY, and (inversely) SVXY. A "term structure" trade capitalizes on current VIX spot price in relation to VIX futures months' prices which, the vast majority of the time, are higher than current spot price, and operates on the notion that VIX spot and the futures price will converge on one another as the futures contract approaches expiry. A "contango drift" trade is put on in a VIX derivative on pops and capitalizes on contango which erodes these underlyings' price over time in the absence of significant and prolonged backwardation, which is rare. (With SVXY, an inverse, price in the underlying increases over time). (See VXX Post, Below, for an example of a "Contango Drift" trade). Here, I'm using the Feb VIX futures contract price as my guideline for my short call strike. As of the writing of this, it's at 16.02. With the long call strike, I'm choosing the 19 strike to limit the buying power effect to $230/contract, although you can certain go wider, which will bring in more credit, but also increase the buying power tied up by the trade. Here are the metrics: Probability of Profit: 91% Max Profit: $70/contract Max Loss/Buying Power Effect: $230/contract Break Even: 16.70 Notes: With these, I take a wait and see approach with profit taking. The general rule is to take profit on credit spreads at 50% max, but if we get into a prolonged volatility lull, I can see shooting for max profit, depending on where VIX spot sits in relation to the short call strike running into expiry. Should VIX be above 16 rolling into expiry, I'll simply roll the spread out to March to allow it additional time to work out.
CBOE:VIXShort
by NaughtyPines
5