Jeff Augen Weekly Strats

[Marco 221]

Here is the chart of SPY long butterfly initiated last Thursday with SPY around 141:

It could be initiated at 2.25. The price fluctuated between 2.05 and 2.30 on Friday, went to 2.35-2.40 on Monday, was as low as 1.85 on Tuesday (18% loss) and then started to climb. It reached 2.85-2.90 on Wednesday and 3.20-3.25 on Thursday. So if deadline to close is Wednesday, it was 25% gain, and on Thursday it could be closed for 45% gain. I personally would not wait till Thursday - the negative gamma becomes too large.

I think holding it past Mon it becomes a very different trade. From taking advantage of the accelerating WE time decay to hoping the underlying doesn't move before expiry and as you say the losses get bigger once you get a move the longer you hold on to it as gamma kicks in. So I for my part would be looking to get out by out Fri afternoon no matter what.

[Dawajmeister 43]

Aapl is sitting right in the middle of my 660/665/670 at 664 and I am pretty much even right now.

[Kim 7,456]

I think holding it past Mon it becomes a very different trade. From taking advantage of the accelerating WE time decay to hoping the underlying doesn't move before expiry and as you say the losses get bigger once you get a move the longer you hold on to it as gamma kicks in. So I for my part would be looking to get out by out Fri afternoon no matter what.

Holding beyond Friday definitely becomes higher risk higher reward play. But here is the problem.

Yesterday SPY opened slightly above 141. The 137/141/145 fly was around 2.10. Currently the mid is around 2.35. That's 12% gain. Not bad for one day holding, BUT:

1. SPY is 141, so this is basically a perfect scenario.

2. Those are mid prices, you would have to shave probably at least 2-3 cents. This reduces the gains to under 10%

3. Commissions will shave another 2-3%.

So your maximum net gain under perfect conditions is around 7-8% (maybe a bit more by the end of the day, we will see). Is it worth the risk? I doubt it.

When I was doing it, I was holding till Tuesday-Wednesday. I think even then the loss could be limited to 25-30% but the gains can be in the 30-50% range.

[fieldydwb 31]

As a sampler: I opened a 1 contract AAPL 655/665/675 long call butterfly at 1.6 and sold it at 1.85 just now.

[cwelsh 1,497]

I was VERY excited about this trade to begin with -- but that is quickly cooling as I'm watching my three. There just is virtually no movement in the price, and essentially all we'd be doing is capturing tiny movements in the spreads as they coast around -- and that's not a strategy I've been successful with over the long term.

I'm going to look over all of the data, but right now, on AAPL, LNKD, and GLD, its not looking pretty. The spreads are large and the prices just aren't going to move much.

I think the short might have more promise to it.

[cwelsh 1,497]

Backtesting more last night, I actually got much better results right before expiration instead of right at the opening....(just a note)

[K. Miller 3]

I think most of the movement is supposed to be late in the session Friday, when the weekend time decay gets priced in to the options.

[fieldydwb 31]

Yeah, I'm watching 7 right now. More then half have hit the bottom strike and the price of the long butterfly isn't changing much. The market in general has been strange today so it might just be an off day.

I've now got a subscription to OptionVue so I'll start putting in sometime into more detailed backtesting.

I was able to get out of AAPL long butterfly with a profit.

[tjlocke99 18]

I was VERY excited about this trade to begin with -- but that is quickly cooling as I'm watching my three. There just is virtually no movement in the price, and essentially all we'd be doing is capturing tiny movements in the spreads as they coast around -- and that's not a strategy I've been successful with over the long term.

I'm going to look over all of the data, but right now, on AAPL, LNKD, and GLD, its not looking pretty. The spreads are large and the prices just aren't going to move much.

I think the short might have more promise to it.

I think conceptually the ITM long should be deeper ITM because the idea is that this position won't decay much because there isn't much extrinsic value to decay away. Perhaps structuring these butterflies a little differently is better. For example on AMZN you could have done this yesterday:

+1 635/ -2 645 / +1 650

Or some variation on this like

+1 630 / -2 640 / +1 650

or

+1 630/ -2 640 / +1 645

The key here is on the ITM call, if the extrinsic value is low that when the trade is flat you won't lose much. I can't test intraday, so I don't know how this would do, but I would submit this as a possibly variation. Also part of the analysis is how expensive the OTM call you are buying is. Sometimes the 645 could be a better deal then the 650 if it cuts your risk down and only costs a few cents more.

Sorry I can't be more help!

R

[dwilliams8649 4]

This is my understanding of the trade.... The point of the trade is to take advantage of decreasing IV towards market close on Friday. This usually starts to happen from 1pm, but can start to happen earlier. For example if theta on AAPL for a 10 contract butterfly spread is at $25 a day, then IV would have to decrease (i.e. through a forced decrease in demand [by MMs]) towards the end of the session to cover the 2.7 days that the market is going to be closed for the weekend. So basically all else equal, this trade should make a profit of at least $67 (hopefully more). The best strategy to take advantage of this is the long butterfly as it's well hedged on both sides and tends to have a very low delta.

[Dawajmeister 43]

So with aapl sitting in the middle of my bfly this should start to make money as we get closer to close today

[cwelsh 1,497]

that's the theory, but with the spreads this big and the prices this low, I'm worried -- we'll see though, still watching.

(Spread is still exactly where it's been since opening yesterday -- between .15 and .80)

[dwilliams8649 4]

that's the theory, but with the spreads this big and the prices this low, I'm worried -- we'll see though, still watching.

(Spread is still exactly where it's been since opening yesterday -- between .15 and .80)

The bright side is that if this doesn't happen, meaning that the markets were not efficient, then time decay would have to take hold over the weekend. If this is the case, then we would simply hold the trade over the weekend (and hopefully close it out Monday morning[?] for a profit [hopefully]).

[cwelsh 1,497]

It's not that they aren't efficient -- it's more that the market makers are scalping you on the spreads

[dwilliams8649 4]

Both PCLN and SPY are doing quite well. Especially my PCLN butterfly.

[dwilliams8649 4]

It's not that they aren't efficient -- it's more that the market makers are scalping you on the spreads

Good point, I am sure the MMs do some gamma or reverse gamma scalping to compensate for their possible weekend losses. But then I suppose that would imply that there would be no change in the spread's value (barring a large movement in the underlying and all else held equal) from Thursday to Monday afternoon. If that was consistently the case, then no one (figure of speech) would want to buy/sell these options on Thursday or Friday, they would wait until late Monday or Tuesday morning. This decrease in demand (bringing down IV), would of course decrease the price of the long options and increase the price of the short options, and thus increase the value of the long butterfly. So I think that over the long run, this strategy has to work. The main problem is that will the profit from this trade be enough to compensate us once we include commissions.

Edited August 24, 2012 by dwilliams8649

[Kelly Park 10]

I'm curious what Augen meant by:

"The foolish retail investor who tries to sell time decay on weeklies in order to make the quick buck"

Does that mean he would think the calendars we do are foolish? Or the folks that do the same weekly trade with covered calls? I'm not certain what aspect of that trade he feels is foolish.

[dwilliams8649 4]

I'm curious what Augen meant by:

"The foolish retail investor who tries to sell time decay on weeklies in order to make the quick buck"

Does that mean he would think the calendars we do are foolish? Or the folks that do the same weekly trade with covered calls? I'm not certain what aspect of that trade he feels is foolish.

An iron condor on weeklies (weekly options that expire in 8 days) would be a "foolish" trade according to Augen.

[dwilliams8649 4]

Basically he's saying that sellers are not compensated for the amount of risk that they must take upon themselves during that one week period. Part of the reason for this is because weekly options are not used when calculating the VIX. So actually volatility might be higher than the number the VIX states. The higher the VIX the higher the price of options. So normally you want to buy cheap sell high. But people who sell time decay on weekly expiring options are selling "cheap". So Augen says that we should take the other side of the trade and buy from the "foolish" sellers who are trying to sell time decay through weekly expiring options.

[Kim 7,456]

Here is what I think he meant:

There are some services that suggest doing weekly options only. They can make very nice gains (7-10% per week) for few weeks or even months, but then one bad week erases all the gains. The problem is that many traders handle those strategies as safe and conservative and ignore proper allocation. Those trades have its place in a balanced options portfolio with proper allocation and attention to risk.

[cwelsh 1,497]

Basically he's saying that sellers are not compensated for the amount of risk that they must take upon themselves during that one week period. Part of the reason for this is because weekly options are not used when calculating the VIX. So actually volatility might be higher than the number the VIX states. The higher the VIX the higher the price of options. So normally you want to buy cheap sell high. But people who sell time decay on weekly expiring options are selling "cheap". So Augen says that we should take the other side of the trade and buy from the "foolish" sellers who are trying to sell time decay through weekly expiring options.

With all due respect to Augen, I think this is right a large part of the time. However, I REGULARLY sell weekly ICs to capture, what I view as, mispriced risk. I just did such a trade on AAPL today, and I've been very successful doing it.

However,I do run my only STD calculations, as well as do an overall market risk analysis. If I can't get at least a 10% return (my guideline) on a MORE than 2SD trade, I won't do it.

If risk on the weeklies was really that mispriced, we could make a killing just buying ATM straddles or ATM RICs -- but we can't -- that's a consistent loser.

[Dawajmeister 43]

Well we're getting close to market close and my 660/665/670 bfly is sitting pretty much breakeven. We'll see what Monday brings.

[dwilliams8649 4]

With all due respect to Augen, I think this is right a large part of the time. However, I REGULARLY sell weekly ICs to capture, what I view as, mispriced risk. I just did such a trade on AAPL today, and I've been very successful doing it.

However,I do run my only STD calculations, as well as do an overall market risk analysis. If I can't get at least a 10% return (my guideline) on a MORE than 2SD trade, I won't do it.

If risk on the weeklies was really that mispriced, we could make a killing just buying ATM straddles or ATM RICs -- but we can't -- that's a consistent loser.

When you said you did such a trade on AAPL, do you mean you opened up an iron condor that expires next week? or was it expiring today?

[Xfanman 9]

Chris, my data is in your PM inbox. I tried to attach it as an Excel spreadsheet but the forum has those blocked apparently. I sent it as a PDF but if you want it in a different format just let me know or shoot me your e-mail address.

Thanks for compiling all this for us....Scott

[cwelsh 1,497]

Next week.

And as far as "holding to next week," that was not the strategy, the strategy was to get out on Friday before the weekend risk.

I can say right now the trade did NOT work on AAPL (never moved in price really, would have been a BE, minus slippage and minus commissions)

Did NOT work on LNKD (actually resulted in about a .50 loss, not counting commissions or slippage)

Did NOT work on GLD (actually resulted in a loss, and was so lowly priced, commissions would have made it impossible anyways).

And these were in "Ideal" conditions -- the price barely moved over the two days.

I really need to go watch his video, because either I'm missing something, or this is not reliable. I was NOT expecting to go 0-3, and in a major way.

[cwelsh 1,497]

Further update -- it did work on AMZN and did not work on GOOG

[fieldydwb 31]

I followed seven or so trades. RUT was profitable, AAPL for me was also ..but I used different strikes.

The rest were not. I'll provide updates to you via PM

[chemfire 0]

Is it due to broad market low vix that makes this strat not working well this week?

[Xfanman 9]

Chris I somehow messed up the Opening Bids on the very top. Corrected version coming to you now. The data itself was correct however for the 9:30 timeframe.

Thanks -- Scott

[tjlocke99 18]

Basically he's saying that sellers are not compensated for the amount of risk that they must take upon themselves during that one week period. Part of the reason for this is because weekly options are not used when calculating the VIX. So actually volatility might be higher than the number the VIX states. The higher the VIX the higher the price of options. So normally you want to buy cheap sell high. But people who sell time decay on weekly expiring options are selling "cheap". So Augen says that we should take the other side of the trade and buy from the "foolish" sellers who are trying to sell time decay through weekly expiring options.

I don't get that analysis though. The long butterfly opened on Thurs at 1000 and closed before the Friday close IS selling the weekly and making money off decay. Exactly what he is saying is foolish.

[tjlocke99 18]

Next week.

And as far as "holding to next week," that was not the strategy, the strategy was to get out on Friday before the weekend risk.

I can say right now the trade did NOT work on AAPL (never moved in price really, would have been a BE, minus slippage and minus commissions)

Did NOT work on LNKD (actually resulted in about a .50 loss, not counting commissions or slippage)

Did NOT work on GLD (actually resulted in a loss, and was so lowly priced, commissions would have made it impossible anyways).

And these were in "Ideal" conditions -- the price barely moved over the two days.

I really need to go watch his video, because either I'm missing something, or this is not reliable. I was NOT expecting to go 0-3, and in a major way.

If you read Jeff Augen's books, like his Excel book, he says that strategies that exploit anomalies exist temporarily until many people figure them out and then that causes the anomaly to go away. He seems to advocate a style of learning how to analyze and then figure out on your own what will be profitable for some period of time.

Now the point would be that this butterfly strategy is now published, and I would wonder if it WAS but is no longer a viable strategy.

Additionally my point earlier was that if your ITM position is only 5 points out that it still has alot of extrinsic value. That extrinsic value will also decay along with your ATM shorts and OTM long. Therefore it may be better to structure that ITM long deeper ITM, like 10 points.

[Kim 7,456]

Well, SPY 137/141/145 did make money - it went from 2.10 to 2.35. See the attached chart. But those are mid prices, and we got full cooperation from SPY. So 12% before slippage (probably 2-3%) and commissions (3% in this case). Not sure if it's worth the risk.

[dwilliams8649 4]

I don't get that analysis though. The long butterfly opened on Thurs at 1000 and closed before the Friday close IS selling the weekly and making money off decay. Exactly what he is saying is foolish.

Well... As I was explaining in previous posts... the strategy makes money off of IV collapse from the market makers efforts to price in the weekend time decay into the option prices. Market makers do not want to hold onto a position that's going to loss value my Monday morning (all else held equal). Let's say the long butterfly is trading for $1.40 (about 4 hours before market close on Friday) and the weekend time decay is worth .50c. Then by market close on Friday (and all else held equal) the option should be priced at $1.90 or greater.

[ykotowitz 18]

Further update -- it did work on AMZN and did not work on GOOG

Report on AMZN and GOOG Trade.

My understanding of the trade is "Buy Aug. 31 fly centered at ATM on Thurs. morning when the Price of the shares is closest to the relevant ATM. Sell just before the market close on Fri."

Neither trade was profitable last week.

Time Price Option Option mid price

AMZN GOOG AMZN GOOG AMZN GOOG

10:15 240.3 671.5 230/-2*240/250 660/-2*670/680 3.99 2.20

11 243 (high) 4.10 1.95

12 679 (high) 4.00 2.00

13 239.1 (low) 4.17 2.00

14 4.20 2.00

15 4.24 1.65

15:50 4.24 1.90

09:35 243 (low) 675(low) 4.0 1.95

10 3.70 2.10

11 647H 3.05 1.90

12 680H 3.10 2.00

13 3.05 1.95

14 3.20 1.85

15 3.33 1.95

15:50 3.40 2.10

[ykotowitz 18]

sorry. The table was transposed in transit. Anyway, both trades would have posted a loss although the share prices did not move very much.

[cwelsh 1,497]

Well, I'm going to check these one more week, by going wider (instead of 5 pts, going to 10). However, I no longer have boundless optimism for this trade -- as virtually every single one of them would have lost money.

SPY did not, and AMZN did not -- though both of those could have depending on your entry points (that's always the case though isn't it?)

The fact that we had "perfect" conditions for this trade on AAPL, GOOG, PCLN, GLD, LNKD, MA, NFLX, and MNST -- and would have lost money on all of them is not that inspiring.....

(However this does not mean I did not learn anything -- there was some very interesting option price movement in AAPL, NFLX, and GOOG over the last 4 hours of the trades, I'll elaborate in another couple weeks when I have more data).

[Xfanman 9]

Thanks for the update Chris. I wasn't too excited either as I monitored GOOG and AMZN. I'll be curious to hear your analysis when you have time. If you need help with anything this week let me know, IB makes it very easy to chart combos without having to watch it every second.

Thanks -- Scott

[cwelsh 1,497]

And for those who held the AAPL butterfly...and not on paper....ouch

[dwilliams8649 4]

And for those who held the AAPL butterfly...and not on paper....ouch

Actually I was able to get out at .52 this morning... went in at .42.

[dwilliams8649 4]

For

Well, I'm going to check these one more week, by going wider (instead of 5 pts, going to 10). However, I no longer have boundless optimism for this trade -- as virtually every single one of them would have lost money.

SPY did not, and AMZN did not -- though both of those could have depending on your entry points (that's always the case though isn't it?)

The fact that we had "perfect" conditions for this trade on AAPL, GOOG, PCLN, GLD, LNKD, MA, NFLX, and MNST -- and would have lost money on all of them is not that inspiring.....

(However this does not mean I did not learn anything -- there was some very interesting option price movement in AAPL, NFLX, and GOOG over the last 4 hours of the trades, I'll elaborate in another couple weeks when I have more data).

In Augen's webinar he did mention that he would hold some positions until close Tuesday. I really think that we are giving up on this strategy too soon. Another thing that I think we're forgetting is that the "perfect" condition would be a decline in IV rather than a dormant price (although it helps). For example, I was able to close out AAPL long butterfly (660/665/670) today (live trade) at .52, I went in at .42, even though the stock jumped $17 from Friday's close. Next time I will most likely do a 10 point strike spacing, as too much is taken up in commissions with a 5 point spacing.

Edited August 27, 2012 by dwilliams8649

[Kim 7,456]

I think that every strategy needs some tweaking, and one week is definitely not enough. I think that closing on Friday in most cases will not be profitable, or at least profitable enough to justify the risk, the slippage and the commissions.

[Xfanman 9]

The AMZN spreads I tracked are around Breakeven for the $10 Spread and losing about 19% after commissions on the $5 at the moment. The GOOG spread however is up 64% after commissions on the $5 Spread and up 19% AC on the $10 if anyone's curious (I'm calculating commissions at .75 per contract).

Edited August 27, 2012 by Xfanman

[Dawajmeister 43]

So my AAPL closed today.. I was in at .45 out at .55.. I had a very small position so with comms. on TOS it was basically a $1 gain. I am going to try with the 10 pt spreads Thursday.

[Dawajmeister 43]

Actually I was able to get out at .52 this morning... went in at .42.

It was interesting I started showing gains, after it was well above the outside bfly.

[Dawajmeister 43]

waiting until friday speech to enter this week.

[Tradervic 0]

Volley, do you know what time is his speech?

[Guest listolyman]

10am edt i think.

[Dawajmeister 43]

Small position in the 655/665/675 for 2.17...

[Tradervic 0]

Kim, dwilliams, cwelsh and all, help me out here. I went through Jeff's presentation on the short butterfly and it doesn't seem to make sense to me. The example he used is to sell the butterfly at 1 pm, getting a credit of $3.54. He chose the 615/620/625 strikes for AAPL, meaning that he is short the 615, long the 620, and short the 625. An hour later, the credit becomes 3.8, and 2 hours later it becomes 4.15. If he entered at a credit of $3.54, and it moves to $4.15, thats a loss of about $0.59. Is he saying that he wants the price to move outside the short strikes in the last hour???? I must be missing something here.

[Marco 221]

Kim, dwilliams, cwelsh and all, help me out here. I went through Jeff's presentation on the short butterfly and it doesn't seem to make sense to me. The example he used is to sell the butterfly at 1 pm, getting a credit of $3.54. He chose the 615/620/625 strikes for AAPL, meaning that he is short the 615, long the 620, and short the 625. An hour later, the credit becomes 3.8, and 2 hours later it becomes 4.15. If he entered at a credit of $3.54, and it moves to $4.15, thats a loss of about $0.59. Is he saying that he wants the price to move outside the short strikes in the last hour???? I must be missing something here.

he does it all with calls (buy the 95 call, sell 2x 100 call, buy 105 call) so the net is a DEBIT trade and you want the price to go up to make a profit.

You can structure is as a credit trade (buy 95 Put, sell100 Call, sell 100 Put, buy 105 Call for example) then you end up with a credit and want the price to go down. Other than that its the same thing though (same payout profile)