GLD Diagonal

[cwelsh 1,496]

With the gold crash this morning, the GLD diagonal put looks VERY attractive to me, and I just initiated it:

 

BUY the Sep 125 Put @ 5.25

Sell the June 6/21/13 127 Put @ 1.90

 

Yes that June put expires tomorrow.  I will roll to the next week then.

 

I am treating this similar to the Anchor trade -- only do not own the underlying (so I'm NOT long GLD).

 

There are 13 weeks left to the September put expires.  As long as I can get more than .40 a week selling short, I break even or make money.  With the current short term volatility on GLD, this ought to be fairly easy.

 

For those who follow extrinsic/intrinsic discussions, the short put I sold has .72 extrinsic value.  (At the time I initiated the trade the 128 put had under .40 extrinsic, it now has more -- if I opened the trade as I am typing this, I would have sold the 128).

[Stephen 4]

Similar but you have equal amount of longs and shorts?

[cwelsh 1,496]

Similar but you have equal amount of longs and shorts?

 

Correct -- I have the same amount of shorts and longs, and do not own the underlying (GLD).

 

If you want to be a little safer in the event of a decline (such as what has now happened since I opened) you could make it a ratio trade, something like:

 

Buy 20 Sept

Sell 15 Jun

 

That way the delta skew won't hurt as bad if the market keeps going down.

[Maxtodorov 18]

I just entered a calendar. Sold jun 21 126 PUT for 1.54. Bought Sept 20 126 PUT for 5.90. By the time i got there... the extrinsic on 127 was .36 cents. 

 

I will probably realign tomorrow to follow your trade. I am just greedy... hopefully gold stays under 126 and I can keep most of 1.54.

 

Gold was at 125.04 or so

Edited June 20, 2013 by Maxtodorov

[Stephen 4]

Maxtodorov correct if I am wrong but GLD would have to be above 126 for you too collect/ keep most of the 1.54.

[Maxtodorov 18]

Yes you are correct. What I meant to say, is if there is a big move UP in GLD tomorrow to say 128, I will get to keep the entire 1.54, but my 126 LONG will drop in value. So overall I would keep less than 1.54. 

 

On the other hand if it goes to say 125.80, I will get to keep 1.34, and my long will retain most of the value. 

[Guest Hal]

Okay Chris, you've got a real greenhorn here. I went ahead and bought the Sep $125 Put at $5.55 and sold tomorrow's $128 Put for $3.20 for a net debit of $2.35. 

 

I understand the overall concept of the trade, but what I'm going to need help with is tracking the value of these things. When you update, I'd appreciate if you'd please explain WHY you're doing what you're doing...and speak REAL slowly so that a dummy like me can understand you. 

[Maxtodorov 18]

Okay Chris, you've got a real greenhorn here. I went ahead and bought the Sep $125 Put at $5.55 and sold tomorrow's $128 Put for $3.20 for a net debit of $2.35. 

 

I understand the overall concept of the trade, but what I'm going to need help with is tracking the value of these things. When you update, I'd appreciate if you'd please explain WHY you're doing what you're doing...and speak REAL slowly so that a dummy like me can understand you. 

 

 

Hal, the fist thing to understand is what extrinsic means.....  in other words, we continuously hunt for extrinsic (aka Time Value) in most of the Anchor type of trades. In your trade, the option that you sold 128 PUT (due to timing) has very little extrinsic value by the time you sold it. So you only stand to make any money from it, if GLD bounces up tomorrow. Extrinsic is something that you get to keep no matter what.

 

You need to make sure that you configure the software that you use to continuously display the extrinsic value. 

[Guest Hal]

Maxtodorov,

 

Thank you. I've gone ahead an configured IB to show the time value.

 

With regard to this trade, I see that the time value for tomorrow's $128 Put is about 7 cents or ~18% (bouncing like crazy). But since I'm selling this put against the Sep put I'm holding, what is the kind of extrinsic value I should be looking for? Chris – when you sold the June 21 127 Put, what was its extrinsic value?

 

Thanks a lot for the education.

 

Hal

[Maxtodorov 18]

But since I'm selling this put against the Sep put I'm holding, what is the kind of extrinsic value I should be looking for? 

 

 

Per Chris's original post if we get 40 cent per week we should be able to pay for the LONG  PUT. So we are targeting above 40 cent. But you do not want to be too greedy either. 

 

Rule of thumb --- the more you are in the money, the less extrinsic you typically get. 

[Guest Hal]

Okay, so for the puts we sell – the income we take in against the long put – do we generally want to be slightly ITM or slightly OTM? I know Chris said we're looking for 40 cents/wk on this trade, but in percentage terms, what's the general rule of thumb?

[cwelsh 1,496]

Ok here's how I broke this trade down:

 

The Sept 125 Put was $5.25.  There are 13 weeks between now and then, which works out to $0.403 per week.  So as long as we get at least $.41 per week, we break even (ignoring commissions -- which need to be calculated). 

 

With the current GLD volatility, I'm a greedy bastard, and want to target a 5% return per week.  How much is that?  Well on the original $5.25 cost, 5% per week would be an additional .2625 cents.

 

So my GOAL each week is to make at least $0.68 extrinsically.  If I average that from now to September, I make 5% per week.  As long as I average $0.41 per week, I break even.  Less than that and I lose. 

 

There is a little cushion here because, counting today, there's actually 14 trading periods.

 

Now what we want to be sure of, at least at first, is to buy as far in the money as we can, and still get our extrinsic value.  At the time I launched the trade that was the 127 weekly put.

 

Right now it would be the 126 weekly put.

 

What are the scenarios for this week?:

 

1.  GLD does not move between now and close tomorrow.  In which case, I keep the .72 extrinsic value (ahead of target), buy back the 127 weekly put, and sell either next weeks or two weeks out (will decide tomorrow), needing $0.68 extrinsically.

 

2.  GLD bounces up between the current price and 127.  Well I get to keep somewhere between .72 and the full $1.90.  (If GLD closed exactly at 127, I would keep the entire 1.90).  Of course if it bounces, your long puts become less valuable.  However we don't care about that at the moment because we are WAY ahead of paying (made 1.90 out of a needed .68 -- essentially three weeks in one).

 

3.  GLD goes up above 127 -- well I keep the entire 1.90, but will lose more on the longs.  This is not ideal, and if it happens once or twice, we'll have to adjust the long strikes.

 

4.  GLD drops in value -- well your long puts will go up in value, but you will lose on the short puts.  What will happen is you'll keep the extrinsic value (.72 for me), but then lose $1 for $1 on every point below $127.  So for instance, if GLD closes at 124 tomorrow, the shorts will have a net loss of $2.28 ($3 below the strike, less the extrinsic value).  This means I'm BEHIND what I need per week, by quite a bit actually.  But, this is partially offset by an increasing value in the long positions.  That just means when we roll tomorrow, we'll probably sacrifice a little extrinsic to go a little further in the money to catch any bounce. 

[cwelsh 1,496]

Okay, so for the puts we sell – the income we take in against the long put – do we generally want to be slightly ITM or slightly OTM? I know Chris said we're looking for 40 cents/wk on this trade, but in percentage terms, what's the general rule of thumb?

 

 

Almost always slightly ITM.  If there are 2-3 weeks in a row where GLD continues to drop, we'll start sacrificing extrinsic to go further ITM. 

 

If however the trade does great over the first couple of weeks, we might start going OTM to reduce risk.

[Guest Hal]

Awesome, guys. Chris, that comment of yours is being PRINTED and STUDIED, man. Both of you – this is exactly what I came here for. I'm not terribly concerned about making money at the moment – I'll be fine if I end up breaking even by the time the year's done. But this is giving me exactly what I need to conceive and structure my own trades. 

 

Looks like I'll be way behind when we roll tomorrow, but all things considered, there's plenty of time to make back on this trade. As they say in Australia, no worries, mate.

 

Again, thanks to you both.

[cwelsh 1,496]

Today certainly wasn't a great day for this trade -- I was honestly surprised at the continued sell off after the first big one.  It happens though, and it's why we have the September hedge.

 

There may be a bounce tomorrow and there may not be.  Regardless, we did make the extrinsic value, and we have plenty of time to make this trade profitable.  I'll post what I roll to tomorrow.

[Guest Hal]

When are you thinking of rolling, Chris? Just wondering what kinds of data points you're looking at, with regard to your decision making.

[cwelsh 1,496]

This position does need to be rolled today. 

 

Buy to close the June3 127 Put @ 1.90  (note June3 = June 21, 2013 expiration)

Sell to open the July1 128 Put @ 4.10 (note July1 = July 5, 2013 expiration)

 

Remember we need .41 per week and our goal is .68.  Since we're selling TWO weeks out, that doubles.  We need .82 and our goal is 1.36.  Right now thats the 128 July1 Put.

 

However, I still think GLD might come up more today, so I am going to hold the short a little longer. 

 

If I were doing this trade right now, I would do the above.  It might change between now and when I actually execute -- but I wanted to put this up for anyone following the thread so they could roll now if they wanted.

[Guest Hal]

Thanks for the quick response, Chris. Could you please explain: why would you choose the July 128 instead of 129, which carries a higher premium?

[cwelsh 1,496]

Because of the extrinsic value in the trade. 

 

As of right now the 128 put has 1.35 in extrinsic value and the 129 only has $1.11.  Our goal is 1.36. 

 

Be sure you understand what extrinsic value is in an option when doing this type of trade -- its the premium above the difference in strikes.

 

Right now GLD is trading at $125.05.

 

That means, if there was 1 second left to expiration, the 128 put should be trading at $2.95.  But it's not, it's trading at $4.30.  That extra $1.35 is what wee call extrinsic value (time value).  THATS the premium we're trying to capture.  We're not trying to profit from ups and downs in the price of GLD.  I don't try to predict that, if I do, I typically am wrong.

 

If the price of GLD does not change one penny between now and July 5, 2013, the price of the option we just sold for $4.30 would fall to $2.95 -- meaning we profit $1.35.  Even if the price drops, we still keep that 1.35 in extrinsic value (may lose some intrinsic though).

 

For instance, if GLD drops to $124 in two weeks.  Well our short position, at close, would be worth $4.00 -- so we still profit $0.30, even though the price dropped.  Since our longs go down too, that premium remains profit.  (It's a little more complex than that because the deltas of the longs are different than the shorts), but since we plan to hold to expiration, we can largely ignore that.

 

And if the price goes up -- well if goes all the way to 129, then yes, we'd have been better off at 129 -- but anything below 129 and we're better off in the 128.  I don't like betting on moves, when I know I can capture the extrinsic for profit.  Options should NOT be a betting game, rather a way to predictably earn money.  (That's the idea anyways)

[Guest Hal]

Yeah, I get this conceptually. Now that I'm looking at the option chains for July 5, I'm noticing that the $128 strike is down to $1.19 in time value, while the 127 is around $154. Would you start looking at the $127 in this case?

[cwelsh 1,496]

Yes I would, though I just got filled on the following:

 

GLD @ 125.04

 

Buy to close the June3 127 Put @ 2.00  (note June3 = June 21, 2013 expiration)

Sell to open the July1 128 Put @ 4.25 (note July1 = July 5, 2013 expiration)

 

That's 1.29 extrinsic -- which is close to being too low.  Where prices are as I'm typing this though, yes I would look at the 127 instead.

[Guest Hal]

Okay, since I had the June 128, I rolled it to the July 5 127 Put because the extrinsic on it was around $1.48. My trade:

 

Buy to close the June3 128 Put @ 3.28 (my mistake from buying the wrong puts yesterday)

Sell to open the July1 127 Put @ 3.85.

 

I recognize that I'm still behind on this trade, but I lost a lot when I chose the June 128.

 

Again, my interest in this isn't so much whether I win or lose, but whether I'm applying the right LOGIC to the trade. Please tell me if I did ANYTHING right on this – or just continued to muck it up!    

[cwelsh 1,496]

It seems good to me -- just be sure to update how much you need per week now going forward.

 

For instance, I maintain an excel sheet that looks like the following (assuming 10 contracts and no commissions):

 

Note that 6/28 is the projected price next week, assuming I collect 1/2 of the extrinsic value and the price of GLD doesn't move.  This is obviously unlikely, but since my goal is to collect 1/2 of the two week extrinsic value, for projection purposes, I assume I meet that goal

 

6/20       Buy Sept 126 Put @ 5.25            -$5,250.00

6/20        13 weeks 5% profit                     -$3,412.50

6/20       Sell June3 127 Put @ 1.90           $1,900.00

6/21         Buy June3 127 Put @ 2.00         -$2,000.00

6/21        Sell July1 128 Put @4.25             $4,250.00

6/28        Buy July1  128 Put @ 3.60           -$3,600.00           

 

 

Total:          $-8112.50

Weeks left:   12  (13 less this week, leaving 12)

Needed per week going forward:  .$0.68

 

That's great news, as it indicates we're still on pace. 

 

Note that if GLD does go up to 128 by next Friday, we'll probably only have to buy back the July1 around $1.20 or so -- meaning we'd be WAY ahead of pace then.

[Guest Hal]

Thanks, Chris – I appreciate your patience in explaining these things to a real greenhorn. Thanks also for the record-keeping advice; it so happens I've been looking at Alexander Elder's stuff on record-keeping, and planning a major overhaul of my records this weekend. I'll make sure to add a tab to my spreadsheet to track this GLD diagonal, as per your suggestions.

 

The educational value of this is unbelievable, man. Thanks again.

[cwelsh 1,496]

That's what we're here for, no problems.

[Marau 4]

I got the trade later than you did and sold the Jun125 Put, which is about to expire worthless (cross fingers).

 

But now i have to sell the July 5th. Which strike should I choose? 128 TimeValue=1.20, or 127 TV=1.45? I need 1.31, according to Chris calculations.

[Guest giorgio]

I also trade later when GLD was 123.64.  

 

buy sept 124 put @ 5..90

sell  june 3 124 put @ 1.34

buy june3 124 put @ 0.04

 

sell july1 127 put @ 3.45  with 1.70 extrinsic value

 

GLD was at 125.20  when I rolled. I need per week 0.46 + 0.30 ( 5% profit) = 0.76 /week

 

Am I right Chris ?

 

Thanks for your great job

[cwelsh 1,496]

I got the trade later than you did and sold the Jun125 Put, which is about to expire worthless (cross fingers).

 

But now i have to sell the July 5th. Which strike should I choose? 128 TimeValue=1.20, or 127 TV=1.45? I need 1.31, according to Chris calculations.

If you need 1.31, then sell the 127 -- if you get more than you needed, so what, that just means you made a higher return.

[tjlocke99 18]

Chris,

 

What happens if the price of GLD slowly goes up over time and your long put is deep OTM?  Would you still sell ITM puts against it or adjust?

 

Also these short ITM trades still concern me with a Thurs night assignment.

 

Thanks.

[cwelsh 1,496]

Chris,

 

What happens if the price of GLD slowly goes up over time and your long put is deep OTM?  Would you still sell ITM puts against it or adjust?

 

Also these short ITM trades still concern me with a Thurs night assignment.

 

Thanks.

If GLD goes up enough, you adjust (typically by rolling up and out), and there's a whole post on the short ITM trades -- the odds of assignment with one day to expiration is pretty small, and when we get way out of whack (like is starting to happen today), we can roll one day early (which I probably will do today, I just want to see if things calm down at all).

[Marau 4]

Chris,

 

What happens if the price of GLD slowly goes up over time and your long put is deep OTM?  Would you still sell ITM puts against it or adjust?

 

Also these short ITM trades still concern me with a Thurs night assignment.

 

Thanks.

We should be more concerned about the GLD sinking. I`m afraid our short put is getting too much in the money..

[cwelsh 1,496]

I am making an adjustment to this today, with GLD falling so far, we have basically 0.00 extrinsic value left in our shorts, even though there is 9 days to expiration. 

 

After taking the loss on the shorts, and buying them back, the amount needed per week, to reach our profit target, raises to $1.17. (and to .86 to break even).  I'm doing an in week roll DOWN to the 122 level, so my trade looks like:

 

Buy to close July1 128 @

Sell to open July1 122 @

Net - $5.05

 

I don't like taking that loss, but we need to keep getting extrinsic value, and there's a move back up before our Friday roll, we'll have improved a bad position.  If the market rises some in the next two days, then we'll make up a lot of ground, and if there's a huge spike, well we can always roll up -- right now though I simply don't like getting $0 extrinsic value. 

 

(July1 on TOS = July 5, 2013 expiration on IB)

[Marau 4]

I am making an adjustment to this today, with GLD falling so far, we have basically 0.00 extrinsic value left in our shorts, even though there is 9 days to expiration. 

 

After taking the loss on the shorts, and buying them back, the amount needed per week, to reach our profit target, raises to $1.17. (and to .86 to break even).  I'm doing an in week roll DOWN to the 122 level, so my trade looks like:

 

Buy to close July1 128 @

Sell to open July1 122 @

Net - $5.05

 

I don't like taking that loss, but we need to keep getting extrinsic value, and there's a move back up before our Friday roll, we'll have improved a bad position.  If the market rises some in the next two days, then we'll make up a lot of ground, and if there's a huge spike, well we can always roll up -- right now though I simply don't like getting $0 extrinsic value. 

 

(July1 on TOS = July 5, 2013 expiration on IB)

Don`t you take in consideration the profit we made on 1st. roll?

[Maxtodorov 18]

Followed your Roll. I was at 127. Now same as you.....   I am only worried about a big spike up, where we will lose the intrinsic above 122. 

[cwelsh 1,496]

After the above roll, our profit target is $0.80 a week and the break even point is $0.51/week -- both completely doable still.

[cwelsh 1,496]

If there is a big spike up, I doubt it will be more than $4.00 tomorrow -- if that did occur, or one even close to it, we'd just roll back up -- after capturing some of the gains. 

 

But you're right in the event of a BIG spike up, we could lose on some of the gains.  That said, I received $3.66 for the 122.  Using an option calculator, if the price jumped to 125 tomorrow (so a $7 increase), we'd capture about $2.70 of that.  $2.70 is WELL ahead of our per week goal (more than triple actually), so that would be a good result.

[tjlocke99 18]

Are you sticking with the long sept 125 put or going to adjust that too?

[tjlocke99 18]

Chris,

 

Are you considering ever trading that long far dated strangle, short weekly strangle trade you started last summer?  If you recall we had started that trade by purchasing deep ITM strangles and selling weekly OTM strangles.  However after some discussion and leveraging some old incite from Marco, we discussed that the ITM strangle had the same P/L graph as the equivalent OTM strangle except the ITM strangle tied up alot of unnecessary capital.  You had at the time wrote you backtested with the long OTM strangle and the results were superior.

 

GLD was one of the underlyings we were using.  Its similar to what you are doing here, except we did it with strangles (so a diagonal on both the call and put).  Could offer better protection.

[Mikael 31]

 chris is it too late to get into this? 

[cwelsh 1,496]

No, this is the type of trade you can get into anytime -- just do the math on it.  (And after more research,I actually think I like the ratio to start, and if the price falls, convert to a straight diagonal).   Please note I ignore commissions in my calculations because everyone's are different, please include them in yours.

 

For instance, the price of GLD is currently 115-116, and the Sep 116 Put is trading at 6.05 (12 weeks to expiration).  Let's say we want to do an 80% ratio again (like we did on SPY).

 

So 5 contracts of GLD will cost $3,025.00.  A 5% per week profit is $151,25, so for 12 weeks, $1,815.00.  That's a total of $4,840.00.

 

So how much do we need per week on an 80% ratio?  Well that's just = $4,840 / 100 / 4 / 12 = $1.01 per week.  Is that possible?  EASILY at the current GLD prices.

 

To further protect our shorts (just in case the ratio does not fully), we're going to go further out, to two weeks on our shorts, to the July 15, 2013 expiration.  Well the 118 strike gives us a $2.02 extrinsic credit -- which is just perfect. 

 

So if were to open this trade today I would:

 

-  Buy to open 5 SPY Puts Sep 116 @ 6.05

- Sell to open 4 SPY July 12, 2013 118 @ $3.80

 

Then in one we week we roll to the July 19.

 

What adjustments need to be made during the week?  Well if on Monday - Wednesday there's a BIG spike up (probably over $4-$5, I would consider rolling the July 12's up, we just have to look at the extrinsic values.  If things go down -- we don't worry about it.  The 20% ratio, and extended theta, will help cover the paper loss on the short.

 

The risk to the trade is a prolonged runup in the price of SPY, as that will drop volatility, lose value on the puts, and make getting our weekly premium's harder.  We can always roll up and out though.

[cwelsh 1,496]

Chris,

 

Are you considering ever trading that long far dated strangle, short weekly strangle trade you started last summer?  If you recall we had started that trade by purchasing deep ITM strangles and selling weekly OTM strangles.  However after some discussion and leveraging some old incite from Marco, we discussed that the ITM strangle had the same P/L graph as the equivalent OTM strangle except the ITM strangle tied up alot of unnecessary capital.  You had at the time wrote you backtested with the long OTM strangle and the results were superior.

 

GLD was one of the underlyings we were using.  Its similar to what you are doing here, except we did it with strangles (so a diagonal on both the call and put).  Could offer better protection.

 

It's on my list to research this weekend -- but the sharpe ratio of this trade right now is pretty good -- particularly as a ratio trade.

[Maxtodorov 18]

Chris, 

 

Are we rolling Jul 5th (122 put) today or waiting till next week?

 

it still has about  .45 of extrinsic....

Edited June 28, 2013 by Maxtodorov

[cwelsh 1,496]

Well I actually rolled EARLY this morning, as was about to put up the alert (I rolled to the July 12 119) , but since then the price has gone up and I was considering doing a vertical up to 121, but was going to watch for price movement until after lunch.

 

But yes we ARE rolling today, just decide what you're comfortable with, and I'll post what I finally decide on.

[tjlocke99 18]

Well I actually rolled EARLY this morning, as was about to put up the alert (I rolled to the July 12 119) , but since then the price has gone up and I was considering doing a vertical up to 121, but was going to watch for price movement until after lunch.

 

But yes we ARE rolling today, just decide what you're comfortable with, and I'll post what I finally decide on.

 

 

Could someone help me a bit on understanding the business rules as to when you probably roll that long put?  I am sorry.  I am sure it has been covered somewhere, but I haven't read all the old anchor trade posts.

 

Thanks!

[tjlocke99 18]

Well I actually rolled EARLY this morning, as was about to put up the alert (I rolled to the July 12 119) , but since then the price has gone up and I was considering doing a vertical up to 121, but was going to watch for price movement until after lunch.

 

But yes we ARE rolling today, just decide what you're comfortable with, and I'll post what I finally decide on.

 

Has anyone who has been doing any trade with DITM shorts ever been exercised?

[Maxtodorov 18]

I rolled. 

 

[tjlocke99 18]

i'll have to lookup the sharpe ratio this weekend.  however, this seems like the type of trade that you could probably allocate a % of your portfolio to year round right?  extremely large moves up or down in the underlying up would be the largest short term action that would hurt it.  Large moves up mean that the long put would lose alot of its value (more than the ITM shorts).  Large moves down and the high delta of the ITM shorts makes for short term losses (yes I know you say these can be recovered long term).

 

if we basically turned this into a strangle with both sides that would not be an issue.

 

i have no idea how you do this and keep up with you law practice!!!!

[tjlocke99 18]

I rolled. 

gld6-28.jpg

So you are always rolling the short out 2 weeks but holding it for one week?  e.g.  today you short the 12 July but next week you roll that to the 19 July?

 

Thanks!

[Maxtodorov 18]

Could someone help me a bit on understanding the business rules as to when you probably roll that long put?  I am sorry.  I am sure it has been covered somewhere, but I haven't read all the old anchor trade posts.

 

Thanks!

 

Do not touch it, until GLD price is above your long PUT. Example: I have Sep 126 PUT Long. I am not doing anything, until GLD goes above 126. If GLD goes above 126, I will start rolling it up and out at that point.

[Maxtodorov 18]

So you are always rolling the short out 2 weeks but holding it for one week?  e.g.  today you short the 12 July but next week you roll that to the 19 July?

 

Thanks!

 

That has been Chris's most resent approach. But that may change.