Long Dated MSFT Income (paper trade)

[cwelsh 1,551]

For these paper trades, I'm NOT using the midpoint, I'm using the worst case fill (ask on the longs)

Long Dec 26 Call (2.08)

Long Dec 30 Put (2.55)

net debit: $4.63

Short Nov1 28.5 Call $0.12

Short Nov1 27 Put $.11

net credit: $0.23

Please note, with MSFT, you need to be trading fairly large blocks or commissions will kill you (probably a minimum of $5K on the long).

Edited October 31, 2012 by cwelsh

[tjlocke99 18]

For these paper trades, I'm NOT using the midpoint, I'm using the worst case fill (ask on the longs)

Long Dec 26 Call (2.08)

Long Dec 30 Put (2.55)

net debit: $2.63

Short Nov1 28.5 Call $0.12

Short Nov1 27 Put $.11

net credit: $0.23

Please note, with MSFT, you need to be trading fairly large blocks or commissions will kill you (probably a minimum of $5K on the long).

Sorry, after looking at this I see its still early in the trade.

Chris,

How did this trade work out for you? Also wasn't the net debit $4.63 not $2.63?

Edited October 30, 2012 by tjlocke99

[cwelsh 1,551]

This has hit the

For these paper trades, I'm NOT using the midpoint, I'm using the worst case fill (ask on the longs)

Long Dec 26 Call (2.08)

Long Dec 30 Put (2.55)

net debit: $2.63

Short Nov1 28.5 Call $0.12

Short Nov1 27 Put $.11

net credit: $0.23

Please note, with MSFT, you need to be trading fairly large blocks or commissions will kill you (probably a minimum of $5K on the long).

Sorry, after looking at this I see its still early in the trade.

Chris,

How did this trade work out for you? Also wasn't the net debit $4.63 not $2.63?

You are correct, type fixed, and see next post for update

[cwelsh 1,551]

MSFT hit the 28.5 strike today, which I exited for .20. Looks like about a BE first week, which is just fine. I'll roll tomorrow or Friday into next weeks short strangle.

[Kelly Park 10]

Chris:

Two questions:

1) If one of the short legs gets hit and you exit it, would it make sense (in the long run) to also exit the other short position. After all, it will be at a very low value, and if the stock reverses, you could end up buying back both short legs at a loss. Or is the likelihood of hitting both shorts too low to matter?

2) If you bought back one short leg, would you roll into two new shorts in one, three-legged trade, or would the spread be too wide that way? (Sorry if that sounds off-color. Trading has such strange lingo.)

[cwelsh 1,551]

Chris:

Two questions:

1) If one of the short legs gets hit and you exit it, would it make sense (in the long run) to also exit the other short position. After all, it will be at a very low value, and if the stock reverses, you could end up buying back both short legs at a loss. Or is the likelihood of hitting both shorts too low to matter?

2) If you bought back one short leg, would you roll into two new shorts in one, three-legged trade, or would the spread be too wide that way? (Sorry if that sounds off-color. Trading has such strange lingo.)

Answer to question 1: you COULD do this, and it is the safer approach, however you are then losing some (not a lot but some) potential profit. When I backtested MSFT, there was only one instance where whiplash forced you out of both positions. Over a 6-8 week period, losing that .10-.15 for closing the other long out early just eats up too much profit, for not much risk reduction. This is a great question though, and a good example of risk tolerances. Each trader has to set their own, and make decisions they are comfortable with. I would never say closing the other short, to capture the gains there, is the wrong decision -- its just not what I do. If I get whipsawed 2-3 times, I'm certain I'll change my mind.

Answer to Question 2: I'm not sure I 100% get what you're asking. If I close one short because the strike gets hit, I do NOT roll to another strike -- I get out. Rolling is a recipe for disaster as you're betting against the trend -- you get less premium as there's less time in the trade, so if your second strike gets hit, instead of BE or a tiny loss, you have a big loss -- roll again and repeat. I tested thoroughly whether I should roll or close, and the answer, every time, was close.

When rolling, I typically use the double diagonal trade feature on TOS. It allows me to close out the two front shorts (buy back) and sell the next two weeklies in one trade (so one commission on four legs).

However, you can't do that when you've closed out one leg because the strike was hit. In those cases I use the calendar trade feature to (in this example) buy back one put and sell next weeks put, then just sell the next week call (so two trades -- two commissions). I have yet to find a feature that lets me put in three (even customizing some of the options they give). If you have one, let me know, I'm all about reducing commissions.

[Kelly Park 10]

Chris:

1) I wasn't advocating one way or the other. To me, it all comes down to probability. If the backtesting shows whipsawing as being rare enough that buying back the second short position reduces the gain with little risk reduction, then it isn't necessary or desirable.

2) Sorry my question wasn't clear. I wasn't talking about rolling at the same time as closing the short. I meant when the next weeklies become available and we would be rolling one or two shorts to the next week. I don't trade on TOS, so I don't know, but on IB you can pretty much do whatever trade you want as a Combo, by just picking what you're selling and what you're buying individually. Sometimes those odd multileg trades get really wide spreads and are hard to get a good fill, though. On IB there is no per trade fee, so it doesn't really affect commissions, but it is like legging into a trade, it might make it better, or might make it worse, depending on movement in the underlying between trades.

[cwelsh 1,551]

TOS does have a per trade fee (though lower per contract, at least in my case).

You can get big spreads -- but I frequently start the trade well off the mid, and get fills sometimes. It's never a good sign when you're closing one strangle and opening another, on 50 contracts, and you enter the midpoint price and it gets filled before your screen clears. Probably left money on the table

[cwelsh 1,551]

The 28.5 was exited already for .20 (good thing to as it's worth $1.00 now). I also closed out the 27 put for .01. That's a net credit of .02, or a 0.4%% (yes POINT four percent) return. Essentially BE.

Sell the next week 29/30 for .34.

(I'm not sure I'm liking MSFT for this type of trade, but I will continue to monitor it on paper)

[cwelsh 1,551]

Well we'd close the 29/30 for 0.14, or a gain of .20, or a 4.3% gain on the week and

We would sell the 28.5/29.5 for 0.41

Note this is a paper trade, and does not include commissions

[tjlocke99 18]

Well we'd close the 29/30 for 0.14, or a gain of .20, or a 4.3% gain on the week and

We would sell the 28.5/29.5 for 0.41

Note this is a paper trade, and does not include commissions

MSFT has an ex-dividend coming up next week. I think its Nov 12th. Doesn't this affect your strategy as you could get exercised on your short call?

[cwelsh 1,551]

MSFT has an ex-dividend coming up next week. I think its Nov 12th. Doesn't this affect your strategy as you could get exercised on your short call?

Absolutely -- and for whatever reason that did not show up on my calendar -- you DONT trade during the week of earnings/dividends, just hold the longs.

Good thing this was a paper trade

Edited November 13, 2012 by cwelsh

[Kelly Park 10]

For earnings, we don't know which way the underlying will move or how much, so no shorts that week. But for dividends, we do know which way it will move, and approximately how much, right? So could we adjust our our short sales accordingly during ex-div weeks?

[cwelsh 1,551]

For earnings, we don't know which way the underlying will move or how much, so no shorts that week. But for dividends, we do know which way it will move, and approximately how much, right? So could we adjust our our short sales accordingly during ex-div weeks?

You could -- but with any "event" there can be unanticipated moves (e.g. msft today) -- which hurts the short positions, generally if I know an event is coming, I'll avoid the shorts that week -- for instance on GLD, I'll avoid major fed policy announcements.

[tjlocke99 18]

You could -- but with any "event" there can be unanticipated moves (e.g. msft today) -- which hurts the short positions, generally if I know an event is coming, I'll avoid the shorts that week -- for instance on GLD, I'll avoid major fed policy announcements.

I have no idea why MSFT stock price got crushed today.