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cwelsh

SPY Ratio Diagonal

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Chris, could you calculate if I should roll more or less SPY puts. I have:

300K worth of ETFs

42 long puts for September 2014 at $176

5 long puts for September 2014 at $168

I rolled 22 short puts for Nov 8 at $176

and 4 short puts for Nov 1 at $172.

The idea is to blend Anchor with your SPY diagonals (both 4:5 and 1:5).

Thank you very much in advance.

QZW

Edited by QZW

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Ok, well it would take 17 September 2014 176 puts to hedge the $300K (176 * 17 * 100 = $299,200).  Not knowing what you paid for those, it's impossible to know for sure how many of your "extra" puts are for paying off the hedge.  I would anticipate though (using the same 10:4 ratio) that seven of them are.

 

So if you allocate 24 of your September 2014 176 puts to the anchor strategy, that means you have left:

 

18 September 176 puts

5 September 168 puts

or 23 total to use on the SPY Diagonal strategy.  At a 4:5 ratio, you'll have 18 or 19 two weeks out and 5 or 4 one week out.

 

 

So if that's true, then you should have the following short positions:

 

Short 7 two weeks out (or the Nov 8 176 puts) for the Anchor strategy

Short 18 or 19 two weeks out on the 4:5 ratio

(or a total of 25)

And short 4 or 5 one week out (the Nov 1 at 172)

 

So it looks like to me you're not quite short enough to be doing both the Anchor and Diagonal. 

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Ok, well it would take 17 September 2014 176 puts to hedge the $300K (176 * 17 * 100 = $299,200).  Not knowing what you paid for those, it's impossible to know for sure how many of your "extra" puts are for paying off the hedge.  I would anticipate though (using the same 10:4 ratio) that seven of them are.

 

So if you allocate 24 of your September 2014 176 puts to the anchor strategy, that means you have left:

 

18 September 176 puts

5 September 168 puts

or 23 total to use on the SPY Diagonal strategy.  At a 4:5 ratio, you'll have 18 or 19 two weeks out and 5 or 4 one week out.

 

 

So if that's true, then you should have the following short positions:

 

Short 7 two weeks out (or the Nov 8 176 puts) for the Anchor strategy

Short 18 or 19 two weeks out on the 4:5 ratio

(or a total of 25)

And short 4 or 5 one week out (the Nov 1 at 172)

 

So it looks like to me you're not quite short enough to be doing both the Anchor and Diagonal. 

Chris, thank you for this precise advice. I'll do exactly as you indicated. QZW

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Today is Friday Nov 1, 2013 and we are doing our weekly roll:

 

SPY is at: 175.61

 

On the 4:5 ratio

 

BTC Nov 8 176 Put @ 1.24

STO Nov 15 176 Put @ 1.68

 

Net credit of: 0.44

 

On the 1:5 ratio

 

BTC Nov 1 172 Put @ 0.01

STO Nov 8 172 Put @ 0.25

 

Net credit of: 0.24

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SPY is currently at

 

4:5 Ratio

 

SPY is currently at 176.09

 

BTC Nov 15 176 Put @ 1.10

STO Nov 22 177 Put @ 2.00

 

Net Credit of 0.90

1:5 Ratio

 

BTC Nov 8 172 Put @ 0.01

STO Nov 15 172.5 Put @ 0.25

 

Net:credit of 0.24

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Guest Peticolas

Can you describe the risks here Chris? This seems like an extraordinarily safe trade. The iterative theta decay of the shorts seem bound to outweigh the longer term theta decay of the LEAP. Even in a strongly up market like this year, this seems to be doing really well. It seems like the "risk" is not hitting your target profit, but not making breakeven seems incredibly unlikely. 

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Can you describe the risks here Chris? This seems like an extraordinarily safe trade. The iterative theta decay of the shorts seem bound to outweigh the longer term theta decay of the LEAP. Even in a strongly up market like this year, this seems to be doing really well. It seems like the "risk" is not hitting your target profit, but not making breakeven seems incredibly unlikely. 

 

The risks are very similar to those with the Anchor strategy -- the biggest of which is whipsawing, particularly after a small gain in the markets.

 

For instance, if I own the Feb 2014 175 Puts, and I then sell the first week a weekly 177 Put and the market jumps to 180.  Well I have lost significant value of the long position (way more than $5), while probably only gaining around $2 (at most) from selling short.  We're now in week two, and I sell the 182 puts (again probably for something around $2.00 or a little less), if the market drops back to 175, I lose $5 on the short in intrinsic value, but also will not gain all $5.00 back because two weeks have gone by.  Again, if this is just two weeks, fine.  But if that pattern repeats (up to 180 back down to 175) for two months, well we're losing $3.00 each week and in February if the market is still at 175 -- well ouch.  (Yes I know that's somewhat of a simplification due to extrinsic value and things won't be THAT bad, but it gets the point across). 

 

However, markets rarely trend like that for long periods of time (months on end), and that is somewhat offset by selling the FOTM puts on the 1:5 ratio.  However, that is a risk.

 

The second largest risk is margin risk.  If we own the 175 puts and the market is at 180, and we want to sell the 182 puts, we need $7.00 of available margin per contract, depending on your interest rates, margin requirements, and portfolio, you may get a margin call at some point.  This can be dealt with by rolling from 175 to 180 or 182 -- but that extends the time frame on the trade.

 

But, I think you are correct, over an extended period of time (several years), this ought to average out as a very positive trade.  I am doing it in a small account, that is cash margin only, and it's up 22% since starting as of today.  (If anyone is curious, the account started with $5,000.00 and its current value is $6,124.00 and the first trade was on June 24).  Yes we're way off our 5% weekly target, but we did get whipsawed fairly badly initially -- and we are still averaging 5% per month, which I'm ok with. 

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Guest Peticolas

Thanks Chris for the vivid explanation. It seems like your theta advantage would be greatest at a 1:1 ratio. Is the 4:5 ratio aimed at smoothing your equity curve over time?

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Guest Peticolas

Thanks Chris for the vivid explanation. It seems like your theta advantage would be greatest at a 1:1 ratio. Is the 4:5 ratio aimed at smoothing your equity curve over time?

 

Never mind. I went back and read the history where you explain that it's for protection in down markets,

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Never mind. I went back and read the history where you explain that it's for protection in down markets,

 

Yes, when the markets go down, your shorts lose value faster than your longs can gain.  If we're not at some sort of ratio, you can really get hammered in the short term. 

 

Why the 4:5 ratio?  That's the risk level I'm comfortable with.  A 3:5 is even safer, but will take longer to "pay" for the longs and reduce returns.

 

I know one member has a laddered model, where you do the following:

 

1:5  1-2 strikes ITM

1:5 ATM

1:5 1-2 strikes OTM

1:5 3-5 strikes OTM

1:5 DEEP out of the money

 

I have not compared those returns historically to the 4:5 ITM / 1:5 DOTM model, it could work better (and is on my list of things to review).

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Thanks Chris. I value simplicity. The more fine-grained approach would need to show a decided advantage before I would move to it.  I suspect, as a professional portfolio manager, you would move to it if you were convinced it would improve your performance by basis points. 

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Thanks Chris. I value simplicity. The more fine-grained approach would need to show a decided advantage before I would move to it.  I suspect, as a professional portfolio manager, you would move to it if you were convinced it would improve your performance by basis points. 

 

It would probably have to be at least 1-2% return over risk increase as the other increases trading costs (instead of two trades a week I have five). 

 

This diagonal spread is not part of any fund I run, rather I just trade it in my own account and recommend it to a few option oriented clients. 

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SPY is currently at 180.15

 

On the 4:5

 

BTC Nov 29 180 Put @ 0.72

STO Nov Dec 6 180.5 Put @ 1.50

 

Net Credit of 0.78

 

On the 1:5

 

BTC Nov 22 176 Put @ 0.01

STO Nov 29 Put 177 @ 0.15

 

Net credit of 0.14 (less than normal but volatility is way down and we don't want to be too close to the strike)

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With volatility as low as it is, I am actually also going to increase this position by doing the following:

 

SPY is at 180.23

 

BTO Feb 2014 182 Put @ 5.62    (5 contracts or a multiple thereof)

STO Dec 6 181 Put @   1.67               (4 contracts or a multiple thereof)

STO Nov 29 177 Put @ 0.14

 

There are 13 weeks left until expiration of the Feb 2014.  On a 4:5 ratio we would need 0.54/week to pay for the position, that should easily be doable.  To make 5% per week (our unrealistic goal), we need right around 0.98/week.  If our goal is the more realistic (and what we've been getting) 5% per month, then we need 0.62/week. 

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Interesting. I do like this trade. It seems much more conservative than most option trades. If you have an overnight black swan event, and the market gaps down 15% the next day, your iron condor is decimated, but you're fine with this. 

 

So why February instead of something longer dated? 

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Yes, when the markets go down, your shorts lose value faster than your longs can gain.  If we're not at some sort of ratio, you can really get hammered in the short term. 

 

Why the 4:5 ratio?  That's the risk level I'm comfortable with.  A 3:5 is even safer, but will take longer to "pay" for the longs and reduce returns.

 

I know one member has a laddered model, where you do the following:

 

1:5  1-2 strikes ITM

1:5 ATM

1:5 1-2 strikes OTM

1:5 3-5 strikes OTM

1:5 DEEP out of the money

 

I have not compared those returns historically to the 4:5 ITM / 1:5 DOTM model, it could work better (and is on my list of things to review).

 

 

Is that 5 different price levels of short puts against the normal ATM block of puts i.e 10 long puts and 2 each short puts at the different strike levels specified?

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Is that 5 different price levels of short puts against the normal ATM block of puts i.e 10 long puts and 2 each short puts at the different strike levels specified?

 

Yes, (again I DO NOT do this, but some people do), so it might look like:

 

Long 10 Feb 2014 180 puts

Short 2 Dec 6 182 put

short 2 Dec 6 180 Put

short 2 Dec 6 179 put

short 2 Dec 6 177 put

short 2 Dec 6 173 Put

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Chris, did you roll the diagonal on Nov 29? I am rolling 4:5 SPY diagonal these days, along with the Anchor strategy, but am considering structuring the short puts roll to separate the Anchor from the 4:5 diagonal. I need about 45 cents weekly on the diagonal to pay off the long puts early. The thinking is to soften the impact of any weekly decline of the SPY.

I have September 2014 long puts at 176 now for both the Anchor and the 4:5 diagonal. 

Thank you.

QZW

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Chris, did you roll the diagonal on Nov 29? I am rolling 4:5 SPY diagonal these days, along with the Anchor strategy, but am considering structuring the short puts roll to separate the Anchor from the 4:5 diagonal. I need about 45 cents weekly on the diagonal to pay off the long puts early. The thinking is to soften the impact of any weekly decline of the SPY.

I have September 2014 long puts at 176 now for both the Anchor and the 4:5 diagonal. 

Thank you.

QZW

 

Yes I did, but had to do it via mobile phone over the holiday, so I dont think the post got updated -- I did just mirror the anchor this week.

 

Right now I'm short the 182 two weeks out and the 176 one week out. 

 

I would be careful about lowering it to much - remember this is not a hedge, rather a profit center.  So if you ONLY make your .45/week then you ONLY break even.

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Yes I did, but had to do it via mobile phone over the holiday, so I dont think the post got updated -- I did just mirror the anchor this week.

 

Right now I'm short the 182 two weeks out and the 176 one week out. 

 

I would be careful about lowering it to much - remember this is not a hedge, rather a profit center.  So if you ONLY make your .45/week then you ONLY break even.

Thanks Chris. I am at 181.5 two weeks out for both Anchor and 4:5 diagonal (0.64 extrinsic when sold last Fri). Sold only today on the dip for 1:5 diagonal. Looks like we are taking a loss on Friday, unless you wish to wait till next week to roll. Look forward to your posts.

Best, QZW

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Sorry I missed everyone, I was without power and internet basically from Friday morning through last night.  That said, I did roll last week -- sold the 181.5's on Friday and rolled into the 183's on the 4:5 for a gain and rolled the weekly's to the 177's.

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Welcome back, Chris. Hope you are doing fine, with all this bad weather.

I unwound the 4:5 diagonal in the past few days. Moved ITM short puts OTM. Have extra long puts for protection-they do not work that well; volume is low and 50% of the traders are afraid of the taper, so we drift lower. 

QZW

Edited by QZW

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'm rolling today (Friday December 20):

 

On the 4:5

 

SPY is currently at 181.21

 

BTC Dec'27 181  @  0.80

STO Jan 3 181.5 @  1.51

 

 

Credit 0.71

 

Net Credit

 

 

On the 1:5

 

BTC Dec 20 173  @ 0.01

STO Dec 27  @ 0.20

 

Net credit: 0.19

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Hi Chris,     Unless I missed a roll,  I'm still in the Feb long puts.     At what point would you roll those out?     Thanks, Rob.    (Merry Christmas!)

 

I'm still in the February too -- and you would roll them out this week or next week, if you want to keep the trade on.  If you don't want too, then I'd keep trading to they expire. 

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SPY currently @ 183.74

 

on the 4:5

 

BTC Jan 3 182.5 @ 0.48

STO Jan 10 184 @ 1.50

 

net credit : 1.02

 

on the 1:5

 

BTC Dec 27 178 Put @ 0.01

STO Jan 3 Put 180.5 @ 0.19

 

net credit of 0.18

 

Low volatility is making the further DITM part less profitable -- but its not worth the risk to be trading at 182 or so.

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I'm still in the February too -- and you would roll them out this week or next week, if you want to keep the trade on.  If you don't want too, then I'd keep trading to they expire. 

Right - thanks.    May I ask if you plan to stay in the trade and roll out?   I was thinking to stay with it.   If you would be so kind to suggest a roll out strategy that would be appreciated.       Thanks, Rob.    

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oday is Friday January 3, 2014, and it's time to roll.

 

 

 

SPY currently @ 183.36

 

 On the 4:5

 

BTC Jan 10 184 @ 1.44

STO Jan 17 184 @ 1.89

 

On the 1:5

 

on the 1:5

 

BTC Jan 3 180.5 Put @ 0.01

STO Jan 10 Put 189.5 @ 0.25

 

net credit of 0.24

 

net credit : 0.45

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Right - thanks.    May I ask if you plan to stay in the trade and roll out?   I was thinking to stay with it.   If you would be so kind to suggest a roll out strategy that would be appreciated.       Thanks, Rob.    

Happy New Year of course!     Any thoughts re rolling this trade out and keeping it going?     Or are you waiting to see how the beginning of the year is going to shape up?       Thanks, Rob.

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BTC Jan 17 184 @ 1.16

STO Jan 24 184 @ 1.50

 

net credit : 0.34

 

BTC Jan 10 179.5

STO Jan 17 180.5

 

net Credit 0.19

 

I am not rolling out to the next position yet (April strikes) as I'm quite nervous about the markets.  I will either roll or close next week.

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Hi Chris, 

 

Just wandering if you can elaborate. Do you feel market does not know where it wants to go? Or do you expect a correction? Or Further run up? 

 

I feel like the market wants to go down, but I don't think the FED will let it -- so you have two forces pulling opposite of each other.  With the way things have traded since the new year (low volume very flat), it seems like the market is waiting to decide where it wants to go.  If that's a sharp downturn, then this trade won't play well (unless we eliminate the DITM portion of the trade). 

 

That said, I'm not going to stay on the sideline forever and will make a decision on rolling or closing this week.

 

If I had to make a decision today, i would roll out at least two months (probably to April options) and try to reduce the entire trade to about a 3.5 / 5 ratio and eliminate the DITM portion of the trade.

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Thank you for the comments Chris. 

 

My trade is slightly different than yours, and I been going closer to the money (on shorts), and rolling up my LONG (now 182 Dec 2014). I am also using it as a volatility hedge for my MIC positions...... 

 

Trade was much less profitable than yours, but I like being NET long VEGA in this environment....  I amy even considering making my ratio a bit more defensive for market drop.... 

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Barring a large market drop the rest of today - Friday, I will be rolling to April.  However, the trade will no longer be structured as a 4:5 ratio ATM and a 1:5 slightly OTM.

 

Rather, it's simply going to be about a 3.5/5 ATM, thus becoming more defensive. 

 

The Apr 185's are currently trading right at $5.00 and will have 13 weeks before expiration.  If you do this trade with 10 SPY contracts, it would look like:

 

Buy 10 Apr 185 @ 5   

Sell 7 Jan 31 185 @ 1.72

 

Cost of trade: $5,000.00

Need 0.55/week to break even.

Goal: 2% per week in profit (or $100.00 per week for 13 weeks), which would take 0.69 / week.

 

At current volatility levels, that's a VERY ambitious goal.  However, if we were to only gain 1% per week, we would only need $0.62/week, which is much more manageable.  Given the fact that I think volatility is going to go up some over the next couple of months, this is entirely possible.

 

If there is a downswing, the trade is reasonably protected as well, given the 3 extra long puts.

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SPY is currently @ 184.30

 

BTC Jan 24 184 Put @ 0.70

STO Jan 31 184.5 Put @ 1.45

 

net credit:  0.75

 

I am not rolling the other 1/5 (the Januyar 17 expiration) and am just letting it expire. 

 

I will be rolling the entire long position later today.

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Ok:

 

I'm rolling the long to the  Apr 2014 184

 

Depending on what your long position is (feb 175, 182, or something else), your net price will be different.

 

By me rolling to the Apr 184, I actually LOWERED my needed per week to hit my 2% goal.

 

Don't forget, I'm also somewherer between a 4/5 and a 3.5/5 ratio on the short/long -- and I'm not seeling any further out of the money.  Right now the risk/reward isn't worth it.

 

In other words, if I go only 3% down (to around 178), I can only get .05 for a week -- that's not worth the risk and downside protection you're giving up.

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Just wanted to give everyone heads up that we will be moving this topic to Anchor Trades forum and it will be part of the Anchor service, available to Anchor members only. We also plan to offer to auto-trade it as a separate strategy.

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Hopefully everyone understands why this is a ratio trade now.  If you were in a 4:5 or 3;5 ratio this week -- you still made money even though the market went down (make money when it goes up and make money when it goes down -- the best of all worlds).

 

HOWEVER, there is a new risk now introduced into the trade, which means it might take more management.  The risk now is being whipsawed on the move back up.  When the market rebounds (if it rebounds) we HAVE to capture intrinsic value -- this means if the market moves up, we will likely be rolling up.  So if the market bounces to 179 monday morning, we'll roll up to keep capturing as much intrinsic and extrinsic as possible.

 

If you don't understand why this is, please ask questions.

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Today is Friday January 31, 2014 and its time to roll

 

SPY is currently @ 177.65

 

BTC Feb 7 182.5 Put @

STO Feb  14 179 Put @

 

net debit: 2.05  (range of fills from 2.03-2.09)

 

Notice as volatility has increased, we can go further into the money and still get the extrinsic value we need -- which is good in market rebounds as we capture more intrinsic value.

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Today is Friday January 31, 2014 and I'm rolling AGAIN

 

SPY is currently @ 179.09

 

BTC Feb 14 179 Put @

STO Feb  14  180.5 Put @

 

net credit: 0.69

 

Notice as volatility has increased, we can go further into the money and still get the extrinsic value we need -- which is good in market rebounds as we capture more intrinsic value.

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