(DISCUSSION) SPY July 2012 straddle

[Kim 7,943]

I'm going to take advantage of the falling IV - VIX is down 10%, below $18 and open a July 135 SPY straddle. It is delta positive to hedge the RUT IC and the 135 calendar. If the rally continues, it should make some nice gains. If SPY pulls back, the IV will increase helping to limit the losses.

[jr1221 12]

it has dropped almost a dime since Kim got in, so you all have a chance to get an even better price than he did. he's spotting all of you a head start! :-)

[Kim 7,943]

And the reason? VIX is down another $0.50. But if the rally continues, we should see some nice gains from the calls since the delta becomes larger.

[temper 1]

Tried similar idea Aug strangle, but market got out of my limit price in last minutes of trading. Hope Monday volatility stays low still.

Kim, in that environment would July be better choice over longer term options?

[BillP 0]

I just received the alert at 500 pm central time. Must be having trouble with email

[BillP 0]

Kim, what would suggest for a entry on Monday? Thanks

[Kim 7,943]

Tried similar idea Aug strangle, but market got out of my limit price in last minutes of trading. Hope Monday volatility stays low still.

Kim, in that environment would July be better choice over longer term options?

It depends what is your goal. July has larger negative theta, but it will be offset by the calendar and IC. But it also has higher gamma, so it will benefit more if SPY continues higher, and this was the goal.

[Kim 7,943]

Kim, what would suggest for a entry on Monday? Thanks

Unless SPY has a large move, the price should not be very different.

[temper 1]

Do not have other trades open as of now,

If volatity stays low Monday would opening calendar September/July be a good option?

That would be additional position to a straddle.

Original idea was to take advantage of SPY movement and eventual volatility increase. Keeping August strike seemed to be safer from negative theta point of view.

Calendar seem to be good idea though.

[Kim 7,943]

Opening a calendar is usually a good idea when IV is low. Sep/July will be more conservative that the weekly we have with much low negative gamma.

[BillP 0]

Have read a couple of places that straddles are extremely risky? Thoughts

[Kelly Park 10]

When you say it is good to open a calendar when IV is low, are you referring to the general low volatility environment that makes staying near the strike more likely? Ignoring movement in the underlying, what is the difference in carrying a calendar from low to high IV versus from high to low IV? Is there a major advantage either way?

[Kim 7,943]

The major risk of this trade is that the underlying will stay unchanged and IV will go down. In this case, we are likely to have a loss that will be more than offset by the gains in the calendar. Increasing IV will benefit the trade. General low IV doesn't necessarily make it likely that we will stay near the strike. We can move higher and IV might actually decrease.

[Kelly Park 10]

So you meant that opening a calendar when IV is low was good as a hedge to the straddle, not that a sstand-alone calendar trade should be opened when IV is low, right? I'm still curious how a calendar would behave in low to high IV versus high to low IV, al other things being equal.

[BillP 0]

Cheaper now

[Kim 7,943]

So you meant that opening a calendar when IV is low was good as a hedge to the straddle, not that a sstand-alone calendar trade should be opened when IV is low, right? I'm still curious how a calendar would behave in low to high IV versus high to low IV, al other things being equal.

Both trades (calendar and straddle) are good as a standalone trades because we opened them when IV was low. But they should work even better as a couple. If IV spikes, both will benefit.

[jay 1]

135 straddel is down arount 3.85. Has environment changed significantly or is it a bargain at this price?

[Kim 7,943]

I think the weekend had some impact, plus SPY is slightly down and IV has not increased enough. I think it is a good deal now, especially coupled with the calendar.

[jay 1]

with the price around 136, perhaps a 136 straddle makes more sense? gets complicated for me because my calendar is at 133, not 135 like most of the rest of you. Any thoughts?

[Kim 7,943]

I think in your case, 135 makes even more sense since your 133 calendar has more negative delta than 135 calendar and you might want to balance it.

[jay 1]

As the time runs out on this straddle, any thoughts on turning it into a RIC?

[Kim 7,943]

Yes, I'm actually considering it. It served its purpose as a hedge, now we have two options: close it for a loss or try to mitigate the loss and reduce the negative theta. I'm going to sell the 136 strangle, turning it into RIC.

[jay 1]

So a 136/134 strangle?

[Kim 7,943]

Yes, 134/136, just sold for 2.35. It reduces the cost and the theta.

[Victor 5]

In the trade alert it says 136/136

[Jesse 315]

Yeah that confused me too, I just sent Kim a message to make him aware.

[Kim 7,943]

Yes, sorry about that. It should be 134/136, the price for 136/136 would be completely different, hope people noticed that.

[Hannes Kury 7]

Yes, I'm actually considering it. It served its purpose as a hedge, now we have two options: close it for a loss or try to mitigate the loss and reduce the negative theta. I'm going to sell the 136 strangle, turning it into RIC.

Yes, I'm actually considering it. It served its purpose as a hedge, now we have two options: close it for a loss or try to mitigate the loss and reduce the negative theta. I'm going to sell the 136 strangle, turning it into RIC.

Kim,

Closing the original straddle now would result in a loss of about 20%. What do you hope to achieve with the conversion to a RIC?

[Kim 7,943]

I want to reduce the negative theta and use the volatility to close the short strikes later. The trade is still delta positive and serves as a partial hedge to the RUT IC and the calendar, but we reduced the negative theta from -$12 per day (3.6%) to almost zero.

[DERSIDC 0]

Kim, any idea why TOS won't let me execute the transaction to turn this into a RIC. I have the 135 straddle on the books now. It say that the order will create a "prohibited position with BP: Illegal -1 shares".

If it's a level authorization issue, can you advise whether I should just close out the position?

[Kim 7,943]

If you were able to trade RIC before, It should not be an issue, but maybe it is worth to talk to them. With the stock very close to 135 now, I would probably wait another 2-3 days before closing it, you might get better credit with SPY $1-2 away from 135. Of course the risk is it will stay around 135 and theta will continue eating the trade.

[DERSIDC 0]

Kim, thanks for the explanation. I was able to trade this so all is well...Thanks again

[xpresstalk 3]

I am one of those that didn't pick up on the alert change. Instead of 136/134, I'm in a 136/136. Any suggestions on a correction here? I am thinking I should roll the 136 Put to a 134 Put. Would cost me about .70

[xpresstalk 3]

I just checked, I got a $3.18 Credit for that. (Guess I need to pay closer attention next time). This definitely gives me some room to make the adjustments. Any thoughts? Of course, I am basing this off of Friday's closing numbers. Monday morning, who knows!

[Kim 7,943]

If you want to be more delta neutral, then rolling to 134 put makes sense.

[Cyprinus 1]

Newbie – this is my first discussion entry. Kim, thanks for sharing your methodology.

Ok, no more Mr. Nice Guy .

1) I do not understand this trade. As a stand-alone trade all we had going for us was a relatively low VIX. But 17-18 isn’t real low. 14-15 is real low (in recent months). And unlike earning straddles we had no known upcoming event that would impact IV. This seems very risky to me. (Or are you saying that since July is “earnings” month we should expect increasing IV?)

2) I especially don’t understand the conversion to this “tight” RIC. Doesn’t that result in locking in losses? The way I read it, we’re currently at $1.77 debit with no real expectation to get out at more than $1.00. What am I missing?

This is in no way a criticism. I know that Kim is making me money. But, I just don’t get this one.

[Kim 7,943]

Cyprinus, those are really good points, let me address them.

The major rationale behind this trade was to hedge the RUT IC and the 135 calendar. Since both were delta negative, the straddle was initiated as delta positive.

I probably would not do it as a standalone trade. And if I did, I would probably cut the loss around 7-10%, after 3-4 days. You are correct that 17-18 isn't the absolute low, but it is pretty close to the lows of the recent range which is 15-27.

Now regarding the conversion to the RIC.

When I did it, the trade was losing ~20%. If I didn't convert, the loss would grow to 28% today with SPY dancing around 135. By converting, we reduced the theta to almost zero. If SPY remains around 135, the trade will continue losing money but at much slower page, but the 135 calendar will continue making very nice gains. If SPY makes a move, we can close one of the short legs and wait for a reversal. In any case, we should be able to limit the loss to ~20% while the calendar is currently sitting on 40%+ gain and the gains will continue to accumulate.

In my opening post, I specifically mentioned that this is more a hedge than a standalone trade, and should be viewed as a hedge.

[Rogers 263]

Kim,

Is there a way to have a page on the site that shows your current portfolio? A lot of the trades suggested here are dependant on other positions existing in the portfolio.

[Kim 7,943]

http://steadyoptions.com/forum/topic/23-open-trades/

Currently the straddle is the only position which I wouldn't do as a standalone trade, and when this is the case, I specifically mention it in the discussion forum.

[Bill 0]

Hi Kim,

I agree with Scott, a single page with all open positions would be very helpful.

[Kim 7,943]

Hi Kim,

I agree with Scott, a single page with all open positions would be very helpful.

Open positions are listed in the link I gave.

[Rogers 263]

Thanks Kim. I don't follow your trades verbatim but do use them as a reference. I just noticed some members seem to lose track of what is going on.

[Xfanman 9]

Kim I've been on vacation and trading from my iPad is less than ideal but I converted this into a RIC when you did last week but I had already traded out of the SPY calendar that this was originally a hedge for (I couldn't even tell you what I was thinking at the time). Is there any reason for me to continue holding this (I still have the RUT IC) or should I just take my lumps?

Thanks much...Scott

[Kim 7,943]

It doesn't provide much hedge right now, I would close it. I might do it by myself soon.

[Xfanman 9]

Thanks Kim!

[Xfanman 9]

Kim I'm showing a loss on that position if I close it now of around .86-.87 does that sound about right?

[Kim 7,943]

yes. that's about 21% loss on the original cost. I might close it gradually: cover the 136 call first at about 0.20-0.25 and then wait and see.

[Xfanman 9]

Got out at - .84, I'll pay more attention to the hedge positions in the future.

Thanks again for the help...Scott

[DERSIDC 0]

yes. that's about 21% loss on the original cost. I might close it gradually: cover the 136 call first at about 0.20-0.25 and then wait and see.

Kim, not sure I understand. You entered the original 135 straddle at 4.12 and then sold the strangle for 2.35 for a net cost of 1.77 so if you can close the entire RIC now at .84, that's over 50% loss. What am I missing?

[Kim 7,943]

The P/L is always calculated on the maximum investment during the live of the trade. I'm doing it the same way for the ICs - if I got a credit and then rolled, increasing my margin, I will always calculate the P/L of the new cost. Same with calendars - if my original cost for the calendar was 2.25 and I got 1.40 credit, I will not calculate the gain on the new cost, always on the original (or the maximum) cost.