Long Dated VXX Income

[cwelsh 1,551]

I reiterate my earlier post on a different thread, while the rule is "generally" roll on Friday, close otherwise -- use an option calculator each time. The goal is to BE where a short gets hit. If we can roll on Monday or Tuesday for, lets say for a net .70 credit), and if that short gets hit again the next day, but only cost us .65 to buy back, then we roll. Otherwise close.

Option calculators are your friends -- use them.

[cwelsh 1,551]

Just looking at today, lets say you messed up and did not do ANYTHING yesterday. Well, VXX is down more today -- O CRAP. EXCEPT, you can close the entire position for $1.45 ( a net .02 gain) and then still sell the 33/36 for .76.

Why would we sell for .76? Doesn't that break our rules? No -- not if you use the option calculator. Or in this case, you don't even have to do that -- the current ATM positions cost only .80 -- so even if we get whipsawed today, you still only have a tiny loss. It's looking like VXX might be a strong candidate for late week adjustments (well Monday or Tuesday anyways).

[Kelly Park 10]

Well, I had that Oh Crap Monday. Was out most of the day and couldn't respond to my alert as VXX approached my 35.5 put. By 3:30, I could have closed it for all of the 1.53 credit I had for the week OR hope for a rebound. Looking at the charts, I really felt that VXX would bounce back, at least for a couple of days, so I waited and got lucky when VXX opened with a gap up. It didn't last long though, so I bought back the 35.5 put for .90 and SOOO glad I did. Moral of the story, I got lucky, but I won't count on that again. next time, I close it, even if it makes the trade BE for the week. What I really need is to figure out how to place a conditional order on IB, so that when the price of one of the short legs gets UP to a set price, I buy it back, leaving myself 2 or 3% of remaining credit for the week.

[trhanson 590]

NOV 17 39.5 C .83 (.10)

NOV 17 34.5 p .68 (1.04)

Net credit: .37 (2.33%)

In line with what Chris said, I would sell the 33/36 since if it hit one of the strikes, I would be ok to buy it back for between 88 and 98 cents making the week still above BE.

NOV 17 36 C (D 31.8) .36

NOV 17 33 P (D -26) .35

For a possible .71 or another 4.47%

[Hannes Kury 7]

Chris,

In the general thread you said """The VXX is what I'm keeping the closest eye on, as not being right at .80 delta or better on the longs might bite us in the end. If so, we'll just have to fix going forward. Right now we are still up, even with the decline. but again, bears watching."""

My longs are 28C(0.84) and 39P(0.54). Can you explain how it could bite us? And what are your thoughts about fixing it?

[trhanson 590]

VXX apparently did some wacky crap last evening when I wasn't watching it, but caught a break in that it came back below. I will probably be rolling this today.

[trhanson 590]

And this is why perhaps not a good option to roll mid week. Closed the first trade for 2.3% win, close the 2nd trade for .92c debit making a .21 loss.

NOV 17 36 C (D 31.8) .36 (.90)

NOV 17 33 P (D -26) .35 (.02)

I couldn't jump on it quick enough.

This week overall up .16 or about 1%, but decay on the longs is pretty rough.

Overall, we bought for 1590, can sell the longs now for 1465, have made 178 in the trades for a total (without comissions) of $53 after 3 weeks (3.33%). If you throw in standard TradeKing comissions (4.95 ticket + .65 per contract, no comission on buying back shorts less than 5c) and assume 1 contract, you've made $11.60 after 3 weeks (0.73%).

In order to make this a viable solution, the initial longs need to be better placed. I don't have access to historic options records, but if we went for a higher delta on the put (somwhere where the total trade cost us $20), I think we wouldn't have so much erosion on the longs.

Anyway, this week

NOV 24 39 C (D .29) .65

NOV 24 35 P (D .28) .56

Total Credit 1.21

[cwelsh 1,551]

Im beginning to agree on the longs and am strongly considering relaunching this trade with more aptly priced strikes --- Ive been backesting both since lunch.

[Hannes Kury 7]

Closed my position (long and short) for a 11.4% gain after comm. - just 1 contract to get familiar with the strategy.

Bought the 28C/39P long for 15.15

Got 1.7 (11%) for the short 35P/39C, I never rolled

Closed the short today for 0.23, -1.4%

Closed the long today for 15.45, 1.8%

I will wait to open a new trade once Chris knows how to improve the long side. I look forward to the next trade. I will stick with 1 contract for at least a couple more weeks.

[Kelly Park 10]

Im beginning to agree on the longs and am strongly considering relaunching this trade with more aptly priced strikes --- Ive been backesting both since lunch.

So, what's the verdict, Chris? Should we close this for minimal gain, or keep rolling as is? Or adjust just one of the long legs?

[cwelsh 1,551]

Ok, well the answer I came up with was a happy medium. Don't go all the way to .80 delta, but we do have to increase it going forward to around .70 on the puts.

Now that said, I looked at all of the scenarios of closing and rolling to the more ideal deltas (anything from as far out as 48/29 all the way to inside where we are now) -- and the sad truth is, with the lost that we've already incurred on the longs, rolling, in any scenario I could come up with, only compounds the potential loss.

Except in one scenario --- increasing our current position size at the current strikes. That has the effect of "lowering" the basis on the long. Anything else increases the basis slower than it increases the max potential loss.

For instance, right now I bought the 41/30 for $16.30 (max potential loss of $5.30 or 32.5%).

We could "roll" to the 45/32 (.70 deltas) for a cost of $2.00. So now our "cost" is $18.30 -- we still have a max loss of $5.30, but now that's down to 28.9%).

What if we roll to the 46/32? That cost us $2.80, now our cost is $19.10, max loss is down to $5.10, or 26.7%

What if we roll to the 47/32 for $3.85? Our cost is now 20.15, max loss is $5.15 or 25.5%

BUT, what if we just increase our current holdings? We can do so at $15.15, dropping our cost to 15.75, drops the max loss to 4.75, or 30.1%.

So YES, if we roll we're "reducing" the max percentage loss, but we're not really reducing the dollar cost -- and at the same time we're reducing the weekly percentage gains.

In this case, I'd rather average down my cost, because if the gains continue as they have been, that'll easily be covered by the time it comes to close the trade.

Is that the right decision for you? I don't know -- I do know in the future I'll be using higher deltas, but it doesn't make sense to take the loss on this one while at the same time increasing the cost without reducing the maximum loss in absolute dollars..

[Kelly Park 10]

Let me see if I understand. By "higher deltas", do you mean closer to ATM? I think of higher as closer to 1.0, but you seem to be saying "increase" delta from .80 to .70.

Also, our 30 call is still close to .80, but our 41 call is already well under .70 (about .56 as I write this) But about .70 on eac leg would be better?

So, your recommendation is to "double down" on the existing longs and continue to sell weekly OTM .30 deltas, right?

I am not fully grasping why this adjustment is better. By moving the longs closer to ATM, they should have a greater time value and, therefore, lose more value over the duration of the trade, right? Wouldn't moving closer to 1.0 give us less loss in the longs over time?

[Hannes Kury 7]

Just a thought. I actually had a short term gain (1,8% after comm.) on the long mainly because, I think, the IV of the VXX increase between buy/sell. Therefore, I think I will not want to buy the long side when the IV of the VXX is increased. Please correct me if I am missing something.

[cwelsh 1,551]

Let me see if I understand. By "higher deltas", do you mean closer to ATM? I think of higher as closer to 1.0, but you seem to be saying "increase" delta from .80 to .70.

Also, our 30 call is still close to .80, but our 41 call is already well under .70 (about .56 as I write this) But about .70 on eac leg would be better?

So, your recommendation is to "double down" on the existing longs and continue to sell weekly OTM .30 deltas, right?

I am not fully grasping why this adjustment is better. By moving the longs closer to ATM, they should have a greater time value and, therefore, lose more value over the duration of the trade, right? Wouldn't moving closer to 1.0 give us less loss in the longs over time?

Well if you remember we did NOT use .80 deltas when entering the longs -- that was prohibitively expensive, particularly on the puts.

At the time we entered the 41/30 for $16.30. The MAXIMUM loss you could suffer on this is $5.30. It does not matter what the deltas do, the underlying price does, its a mathematical impossibility to lose more than that (not including commissions). Work through why that is first.

I was advocating increasing deltas from where we started (around .60) up to a current value of .70. That means we could sell the current call (which as you noted is near .80 now) to gain some credit to use toward offsetting the moving of the put to a delta near .70. I might not have been clear I was referring to increasing our "original" deltas -- not necessarily their current position (because you would be decreasing the current call delta).

However, if we do that, we're not really helping ourselves on anything other than a percentage loss basis. You still have the same max potential loss, but because you increased the cost, you reduce the max percentage loss. In other words, we increase our trade allocation without improving our chances for making more real dollars.

However, by "doubling down" (which puts me up to a max allocation on one trade on this one), we REDUCE the max possible loss on the long position. Given we still have the potential to make $1.00 or more a week in this trade, reducing the dollar of a max loss to me makes sense as the trade "pays for itself" sooner. Essentially, if the trade does exactly what its supposed to, by this time next December it will be "free." (At which point we'll have to look at, do we keep playing weekly for free, or does it make more sense to capture the value of the longs and roll).

Hope that helps, if not, just ask more questions and I'll try to clarify.

[cwelsh 1,551]

Just a thought. I actually had a short term gain (1,8% after comm.) on the long mainly because, I think, the IV of the VXX increase between buy/sell. Therefore, I think I will not want to buy the long side when the IV of the VXX is increased. Please correct me if I am missing something.

If your longs are MORE expensive than when you entered, you absolutely would not want to increase the position size -- you'd be increasing your costs then. (You got a much better fill than me if that's what happened).

[Kelly Park 10]

Chris:

I just followed you in on this one and I guess I didn't pay attention to the actual long deltas then. I just had .80/.30 in my head. Each trade is working differently, so I need to get these various deltas in my head better.

That cleared up, it makes sense now that we need to go out farher on our longs (higher delta) to have more intrinsic, less time value, so they hold up better. I guess it only seemed "too expensive" at the time. Wasn't the original thesis, based on the backtesting, to go .80/.30? Shouldn't we stick with what worked best from backtesting? (That is kindof a general comment, too. I sometimes think when we are trying new trades on SO, that we deviate from our original thesis too quickly, start making adjustments that SEEM to make sense at the moment, but take us away from the long-term premise we started with.)

[trhanson 590]

Had to roll my 35 short put today. 5% swings in a day being the norm, I really don't know if this strat is going to be ok for VXX. At least not at 30 deltas.

ROLL NOV 23 35P to 33.5 P for .73 debt. Yuk. Could have saved some but I was in meetings all day and didn't have a chance to roll it earlier.

[cwelsh 1,551]

We don't do VXX at .30 deltas -- only at .25 or below, and closer to .20 is better (that's discussed in this thread somewhere). I had to roll from 35 down as well.

[trhanson 590]

I totally missed that ahead, which makes sense now. I'm probably going to shift down into the FEB longs next week and restart on my PT.

[cwelsh 1,551]

Just looked at the feb longs -- might actually do that as well -- heck I can go another month forward for .50 per strike? (so $1.00?? -- that SHOULD get paid off in a week, and certainly should in four -- which is how long we'd be adding)

[cwelsh 1,551]

this clearly is not going well this week, I've been looking at options this morning, I'll try to post ideas

[cwelsh 1,551]

Well this was the single worst trade in the DD strategy so far. If we had followed the rules, and on Friday just closed the position that got hit, we actually would have still had a small gain. But Monday morning the trade gapped against us, leading to a big loss (just over 15% for me). But, live and learn, and that's why we diversify our positions.

I still am in this trade, and as can be seen from the summary post, opened the 28.5/33.5 for this week -- a wider gap, but a lower return possibility.(max 2.44%). I really didn't like ANY of the prices Friday morning -- I think they were all underpriced, so I went wider, as opposed to taking not enough for a riskier position.

[Kelly Park 10]

Same here, Chris. I thought VXX would rebound some from its gap down, and ate an 18% loss when it didn't. But I'm still in this becasue it is a learning experience primarily. I sold the 32.5/29.5 weeklies for .85. When VXX continued to go lower, I tried the opposite strategy and bought back the 29.5 before it was hit, for .42, leaving me with .43 (2.4%) for the week, if the 32.5 holds up.

[cwelsh 1,551]

I'm not sure what you mean by the "opposite" strategy, unless you mean you just exited early? If you did, there's nothing wrong with taking profits and heading for the hills -- I'm in the 28.5, which is at .18 right now, and am watching the markets close too.

[Kelly Park 10]

Last week I held on too late, waiting for a reversal. By "opposite" I mean closing early, before getting hit, because I could do it and save about half my credit. So far seems to have been the right choice, since the 29.5 has risen further.

[trhanson 590]

So last week, I ended up getting crazy busy and couldn't roll my paper trades. Now that I understand the strat better, i've decided to push the reset and start over. Still PT, I want to make sure I can go a full cycle on a paper trade before doing it with real money.

LONG

FEB 16 24 C (D 80) 5.95

FEB 16 40 P (D -76) 12.25

Total in long 18.20

SHORT

DEC 7 31.5 C (D 25) 0.41

DEC 7 27.5 P (D -25) 0.37

Max Credit: .78 (4.29%)

[Rogers 263]

are we looking at changing the long strikes on VXX and SNDK to get them closer to .80 delta?

[cwelsh 1,551]

VXX yes -- SNDK no because we opened it near .80 deltas we still have that one valued where I want

VXX I'd like to roll strikes this week sometime, with IV so low right now, probably a good time too, but it may be Monday before I can get to it