NFLX @ 2 Yr low for IV 30

[Mikael 31]

IV30 is at around 36. I feel like a calendar will be a good play right about now.

Edited August 17, 2013 by Mikael

[Mikael 31]

also there is a IV skew edge on aug/sept. the IV is higher for the 280 strike onwards aug 4 call than the sept calls right now. 

[PaulCao 51]

Hi, 

 

http://www.ivolatility.com/options.j?ticker=NFLX:NASDAQ&R=1&period=12&chart=2&vct=

 

Looks like there's a huge IV crush after earnings, combined with low HV after earnings. Would be similar to Kim's IBM and GS double calendar spread?

 

Best,

PC

[Mikael 31]

Pretty much. I'm too scared to sell strangles on a stock like NFLX. IV is actually at a 2 year low right now so I couldn't resist opening another calendar. I did a single ATM calendar aug 5 / sept

Edited August 15, 2013 by Mikael

[Mikael 31]

Paul the reason i mentioned livevol is because i was recently tipped off by another member:

 

http://www.livevolsecurities.com/stock-options-trading-pricing

 

Pros:

- 0.65 per contract, no ticket fee

- IB execution/fills

- Awesome platform (check out the livevol X video)

 

Cons:

- need to fund with at least 35k USD

- backtesting tool not as good as ToS

[Mikael 31]

btw for the NFLX calendar, i'm very close to BE point at expiration so i will adjust tomorrow if the stock continues to dive. I will be adding another calendar to the strike closest to  the BE point, which is the 250 strike. 

 

even though the stock moved quite a bit and the calendar has only been open 1 day, the +IV offset some of the loss so it's actually only about 1.4% down right now.

 

looks like the 250 calendar costs about 4.25 debit right now, but will check the cost tomorrow. so this will essentially double my allocation. (original calendar was 4.40 debit) 

[Mikael 31]

NFLX decided to cooperate and go back up to 259 so no adjustment needed 

[Mikael 31]

I hope Icahn doesn't tweet about NFLX LOL 

Edited August 16, 2013 by Mikael

[PaulCao 51]

Hi, 

 

I've entered a 245/265 August 23-Sept 9 NFLX double calendar with BE at 242 and 268. 

 

Best,

PC

[Micahjw 3]

Paul, help me understand your thought process on this one. I haven't been much of a double calendar trader so I'm trying to learn more about them especially after the higher success rate of them over this summer here at SO; what do you look for when you think a set up looks attractive? Low hist IV? wide range on the BE?

[samerh 6]

Paul, help me understand your thought process on this one. I haven't been much of a double calendar trader so I'm trying to learn more about them especially after the higher success rate of them over this summer here at SO; what do you look for when you think a set up looks attractive? Low hist IV? wide range on the BE?

I saw a presentation on calendars by Himanchu Raval (learned from Dan Sheridan, apparently one of his best students on calendars).

Some of his criteria:

◦ Low Volatility environments – preferably the IV of the underlying should be in the bottom one-third of the range of the last 6 months.

◦ Initiate these trades after a couple of up days when the IV has dropped a bit.

◦ The trade can be started anywhere from 45 days to expiration down to 7 days for the weeklies

◦ The back month option need not be the very next month. It can be up to 4 – 6 months further out in time.

◦The Skew is the difference between the IV of the front month strike and the back month strike. Want this to be positive (but not too much) or we want this to be more or less flat (close to zero). If the back month is more than a month away, then the skew should not be less than -4

[Mikael 31]

Another tip.

For any time spread (calendars. Diagonals) Make sure you buy back your short position before it expires. For put calendars because the short might be ITM and you get excerised on then you have to buy your counterparty's stock. But your long position is further out and since trading stopped you can't cash out. Your broker is going to go nuts since you won't have enough money in your account so you have to borrow money from them at margin interest (which can be pretty high so check what's the margin interest they are charging).

 

Ontop of that stock can move before Monday during the weekend and you might cash out a lot less than you thought. If it is confusing think like this. Expiration friday comes, you are thinking oh well i'm just going to let my short option expire so i can keep that 5 or 10 cents of time value remaining and just pay the intrinsic on it. well now your short put option is ITM, counter-party is going to exercise his right to sell you his stock. then your thinking well i have enough money to buy the stock anyway, so i'll just get assigned and sell it monday. well what if on Sunday, some news come out and NFLX just happened to be faking the subscriber numbers. guess what the stop opens 100 dollars lower on Monday. the good thing is at least you have a longer dated long put option that you can exercise and sell your stock to some poor soul, but if you didn't have that long position on you'd be screwed. Also don't assume your broker is just going to sell your stock on Monday automatically, especially if you had enough money in your account to buy the stock outright. 

 

ALSO you can be exercised on anytime with american style options, so this would apply to any equity option if you are short a contract. for instance i have the 260 put calendar. well i'm short NFLX at 260, now the stock moves to 250 (which actually happened on thursday), so guess what, guy decide to exercise his right to sell me his stock for 260 (normally people won't do this because they still have time value left and plus they can just sell to close their position, but you never know what they other guy is thinking or he just might want CASH NOW because he wants to buy a Ferrari, so who knows but he has the right to exercise his option at any time he wants). now i'm screwed because i have to buy 100 shares at 260 (and i'm short 10 contracts) so i have to buy 1000 shares of NFLX from him at 260, that's 260k i have to come up with. obviously you can exercise your long put and sell your stock to some other dude, and everything comes out to be a wash but it's still a big risk. Then you need to pay the exercise fee and assignment fees etc. and it's alot of trouble and your broker is going to call you so you have to deal with them as well. so it's just a big hassle. so don't be cheap and try not to pay the 5 to 10 cents to close your short because you never know what can happen over the weekend. 

Edited August 17, 2013 by Mikael

[Mikael 31]

Also if you are doing a CALL calendar, and you are short a call on a stock that's about go ex-Dividend, you got to watch it very closely or just close your position. because let's say NFLX is paying a $5/share dividend on tuesday. and i have the 260 call calendar. then all of a sudden, the stock rises to 270. and the person you sold your call (who also happen to have tons of cash in their account) might exercise the call so they can own the stock and collect the dividend. 

[PaulCao 51]

This is just a question for everyone who has ever sold options? 

 

Have you guys ever been assigned? Meaning your counter party to your short options have exercised and you have to deliver shares.

 

In my experience, it has happened to me only once when I was testing out some dividend capture strategy, where I sold some options on a ticker that paid out 10% dividend after ex-dividend date; thinking there might be a chance my counter-party might not exercise and the short call will be worthless after the ticker pays the dividend. Sure enough, like clockwork, my counterparty exercised and my strategy failed. 

 

There was another time when I decided to be "smart" and sold a naked strangle against an expiring biotech ticker whose FDA approval decision was suppose to come out at 5:30pm on expiration date. I figured that I was being "smart" since IV was huge, like 150 and the stock was halted while FDA committee was convening. So there would be no movement and none of the strangle would be assigned automatically unless my counterparty wanted to make a bet by 4:00pm which way the committee was going to vote and exercise one of his/her put or call. Luckily, my counterparty decided to not to take the bet and I collected the premium. But I decided that I'd never do that again, as I was nervously following the FDA live meeting and not being able to do anything as everything was halted. 

 

Also, Mikael, isn't your NFLX example a good thing? I mean besides having to come up with 260K margin on a weekend, the guy is basically sacrificing his time-value on his option; so assuming NFLX stays flat from Friday to Monday (big assumption I know), you can basically just go to the open market buy NFLX at 250 and sell it to him at 260, making 4% in the process and get out of your position? I think you could call on your wealth friends/relatives and ask them if they'd like to lend out a high interest and extremely short-term loan. 

 

Micahjw, for my specific NFLX trade, here are my thoughts, 

- NFLX had just reported earnings; so on the volatility charts, its IV has been crushed while 30 day historical vol is also at a lull. If you read the explainations on Kim's threads on his IBM and GS trade. Basically he is working on the assumption that IBM and GS will be boring for the time period of his short calendar spread, not move around much; so you get to collect insurance premium. At the same time, he is hoping that his longer dated option which contains the next earnings report date for IBM will slowly rise during the course of the trade. 

- NFLX has no significant catalyst for next week, as far as I know. So I'm hoping that it'll be boring. At the same time, I'm hoping since IV on the options are at a low, that it'll slowly rise and my longer-dated option will rise. 

- I plotted out my P&L graph on Think or Swim Analyze tab; to see where my P&L will be on expiration day or several days before it, and how much it'll vary as the price of NFLX moved around. I always go to the edge of the P&L chart to see what my max. loss and set my position allocation to 10%. I highly recommend anyone to plot out their P&L graph on their options trade and play around with scenario, say next week on a Wednesday, what'd happen if NFLX is up 5% or down 10% from the current price, to my spread? It'd give you a feel for your trade in advance instead of playing Monday Quarterback the day of a big move. 

- I also make a note where my break-even point is, my peak point where my profit is, which is at the strike of my double calendar or the 'tent poles' of the double calendar tent, 245 and 265. 

- Now the most important thing IMO, is plan for adjustment. I work on the assumption that I'm not very smart and just entered a bad trade. So I need to have a plan in place to adjust to protect myself from myself. My plan for adjustment is when NFLX hits is about half-way or 2/3 way near my tent-poles, so say at 263-264 or 248-247. I have to move my tent-poles in such a way that the current NFLX price sits comfortably in the middle of my tent, 

 - Example let's say NFLX spikes up on Monday/Tuesday to 263.5 or more, then I'll have to sell my half of my NFLX 245 put spread (since the price has moved so far out of that tent pole) and open the equivalent number of contracts at NFLX 270 contracts. I'll take a loss on that sell but I have also extended my breathing room. 

 - Vice versa, NFLX spikes down on Tuesday to 248; I'll have to sell half of my NFLX 265 call spread and open up the equivalent size of NFLX 240 put spread. 

 - You can play around with all of these scenario's with the ToS analytics or whatever other option analytics software to get a feel of how much your P&L will take a hit on an adjustment vs. how much more breathing room you get from it by adjusting the day step on the tool and also set a price slice. 

 - Everytime I adjust I take a realized loss and have less potential max. profit; but I'd rather flee and live to fight another day. 

- Perhaps the visuals and scenario's presented in this video by Dan Sheridan would help instead of my text in how to adjust. https://www.tradeking.com/education/videos/adjusting-calendar-spreads; just skip the first half as he goes through some really basic stuff,

 

Anyways these are my thoughts, others may and probably have better ideas than me. So please correct my incorrect thinking or feel free to add anything else, 

 

Best,

PC

Edited August 17, 2013 by PaulCao

[Mikael 31]

Yeah the risk is the margin risk. so assuming you can't come up with the money and you need to either borrow it from your broker and pay interest or somebody who's willing to do a short term loan.

 

Also you are at the risk that the stock is going to move before monday.

 

well the NFLX example i gave was you are short the 260 call. and the stock rises to 270. then he is going to exercise his call (which he bought from you) for $10 profit. but then YOU have to go and BUY the stock at the market price which is now 270 and sell it to him at 260. 

 

You'd think most people who own a long call would just sell to close their position but you NEVER KNOW what people will do. He could be thinking, well i want the stock so i'm going to exercise my option. he/she might not even think about the remaining time value. OR on the put side, they may exercise so they can GET CASH since they own the stock, even though it doesn't make sense but they can still do it!

 

but whatever you do DON'T EXERCISE YOUR LONGER DATED LONG CALL OPTION (we are talking about a CALL CALENDAR here), i had seen people do this before because they got scared because now they have an obligation to sell shares to someone but they don't own ANY of the shares, and they automatically exercise their longer dated option so they can BUY the shares at the SAME price they sold it for (because they don't want to take a temporary loss since the stock went up). If you think about it, this is STUPID because you just exercised a call which you paid TIME PREMIUM FOR, why would you do that? it's much better just to SELL YOUR LONG CALL, that way you don't lose your time premium. AND THEN USE CASH (OR MARGIN MONEY) TO BUY SHARES

 

for Put calendars, let's say you get assigned shares. DON'T EXERCISE YOUR LONG PUT EITHER, YOU CAN JUST SELL THE SHARES AT MARKET PRICE (get cash). AND JUST SELL YOUR PUT SEPARATELY SO YOU DON'T LOSE THE TIME VALUE (get cash gain).

 

so pretend you own a 260 NFLX long put expiring in a month. and you are short a 260 NFLX put expiring in 2 days. and all of a sudden NFLX drops to 250 and you get assigned shares at 260. So some people panick and is thinking, oh no i got assigned shares at 260 but now the stock is 250, i'm down $10 a share, i should just exercise my long PUT and sell it to someone else so i can break even. WELL THINK ABOUT IT, WHY WOULD YOU TRY TO BREAK EVEN WHEN YOU CAN MAKE A PROFIT? THE CORRECT THING TO DO IS JUST SELL THE SHARES AT MARKET PRICE, 250. THEN SELL YOUR LONG PUT SO YOU WON'T LOSE TIME VALUE ON IT WHICH YOU ALREADY PAID FOR.

Edited August 17, 2013 by Mikael

[Mikael 31]

This is just a question for everyone who has ever sold options?

Have you guys ever been assigned? Meaning your counter party to your short options have exercised and you have to deliver shares.

In my experience, it has happened to me only once when I was testing out some dividend capture strategy, where I sold some options on a ticker that paid out 10% dividend after ex-dividend date; thinking there might be a chance my counter-party might not exercise and the short call will be worthless after the ticker pays the dividend. Sure enough, like clockwork, my counterparty exercised and my strategy failed.

Paul if you sell a call and it's DITM going to ex-dividend you will certainly get assigned every time. Because the option premium is adjusted so it's much lower than actually receiving the dividend. because everyone knows the stock will drop in price by the dividend amount.

and DITM options have very little time value in them. so in this case the extrinsic value < dividend amount. you will always be assigned. all you do is pay your broker commissions.

think about it, the market makers will not allow people to

a) buy a bunch of stock

then sell a bunch of DITM calls

c) collect the dividend AND time premium for selling

then everyone will be doing this and we'd be all rich!

Edited August 17, 2013 by Mikael

[Mikael 31]

Also, it's pretty unlikely that someone long the call you sold would exercise early, because there's no advantage for them. why would they do that? they are going to lose all the time premium they already paid you for. so they would almost always want to sell to close their position hence collecting intrinsic and extrinsic value on their option.

 

On the other hand, if you sold someone a PUT. they may exercise early on you. ESP if it's really DITM and there's very little time value left. Ask yourself, would you rather get cold hard cash TODAY or in 2 WEEKS if the time value is very small. I'd rather get cash today earn interest on it, than wait 2 more weeks to collect 10 cents in time value. Especially if they bought a covered put and was planning on getting rid of the stock already.

 

make sense?

 

 

Edited August 17, 2013 by Mikael

[Mikael 31]

I agree with Paul's trade analysis. 

 

My approach was a little different. I started with a single calendar with a half allocation. If the stock moves to one of my break even points, i will add another calendar at the closest strike. so instead of starting off with a double i start with a single. that's the only difference. 

 

adjustments afterwards will use the same approach as Paul's. And that video on tradeking is excellent. 

 

 

[Mikael 31]

in hindsight if i was to enter the trade now i would use a longer dated back month. probably oct.

 

rationale: IV was at a 2 year low, there's no harm in taking more IV risk since it's not likely the IV will drop further before going up. (vega of your calendar positions increases as the time difference between your short and long position increase).

[Micahjw 3]

Great info guys, thanks

[PaulCao 51]

Hi, 

 

NFLX rose 5.2% today on the news of an exclusive content licensing deal with Weinstein Company; I had to adjust today twice from my original 245-265 DC to 245-265-270 triple calendar, then finally to 255-275 calendar. I took a 6% realized loss on my margin including commission and so far 0% unrealized P&L.

 

Needless to say, this trade has def. gone against my original position and I may lose even more. I reduced my margin on this trade by half as the I'm not sure where this stock is going now. My prerogative now is to get out of this trade by expiration breaking even or taking a small loss, 

 

Best,

PC

[Mikael 31]

Hello,

 

here's what happened with my trade: 

 

I opened a single 260 put calendar (sep/aug 5) on the 14th for 4.40 debit. BE @ expiration on the 31st of Aug is 245 and 275. 

 

I was actually up on the trade until the big rally today. Now it's 4.59 debit to close and the stock is trading right below my adjustment point of 275 (273.29). my plan is to add another calendar at the 275 strike if NFLX trades past 274 tomorrow. 

 

my plan hasn't changed from the entry point. i will continue to adjust at my BE points as soon as they are reached. IV is still at the lower end of the range and the trade will continue to benefit from any increases in IV. 

 

the next adjustment will depend on which BE point is breached. but instead of opening a triple calendar, i will simply sell the unthreatened calendar and open a new calendar at the threatened BE point. 

Edited August 20, 2013 by Mikael

[Hannes Kury 7]

Thanks for sharing Mikael and PC.

[Mikael 31]

Hello, my GTC sell order was filled today for the NFLX calender. I made no adjustments because my adjustment point was never reached. 

 

entry debit: 4.40

exit credit: 4.95

 

12.5% profit before commissions

 

profit target was reached 9 days before short expiration

Edited August 21, 2013 by Mikael

[PaulCao 51]

Hi Mikael, 

 

Thanks for replying. You are a bigger man than I am. 

 

I reduced to half of contracts yesterday and I haven't adjusted and so overall unrealized + realized P&L is a 4-5% loss, 

 

Best,

PC

[Mikael 31]

I think for calendars adjustment are definitely necessary but in my experience (and also talking to friends who are pro traders) keeping things simple is also important. for instance, i never open double calendars at the outset. why do that? i'm neutral anyway so i will open a single calendar to give myself a chance at higher profits, and when (and if) it gets to my adjustment point (for me it's BE at expiration), i will just open another calendar. if the moves again, i'll completely close one calendar and open a new one at the new BE point. i never have triple calendars open. why pay more commissions to your broker? 

 

sometimes it's better just to stick to a simple system and let the trade breathe a little bit before adjusting. 

 

just my 2cent.

 

 

*just note adjustment we are talking about is for price movement only, please make sure you understand the volatility risk you have with calendar positions.

Edited August 21, 2013 by Mikael