Long Dated XOM Income

[cwelsh 1,502]

This is a real trade (and again, would have preferred entering on Friday, if you want, wait till Thursday)

XOM Currently 90.44

LONG

Jan 85 Call

Jan 95 Put

Cost: 11.60

SHORT

87.5 Put

92.5 Call

Note I sold the MONTHLY (11 days to expiration), as they were priced significantly higher than I could expect to get from this week and rolling next week

Credit: 0.63

Max Return this week: 5.4%, or 14.8% monthly

[yatnpa 0]

Hello CWelsh,

I try to copy your trades. It would be helpful if you stated that it is a strangle, straddle, calendar, vertical,,,,, the entry would be quicker.

Thanks for sharing.

Edited November 6, 2012 by yatnpa

[trhanson 93]

You should probably read the thread that inspired these trades. what this is is buying a long dated ITM strangle with deltas around 90 80 and selling OTM weekly (or in this case monthly) strangles against it. There are also rules that should be followed. If you don't understand the rules and Chris can't post that he got out, you could be in for a bumpy week.

Edited November 5, 2012 by trhanson

[cwelsh 1,502]

Deltas around 80 for the long strangles on most of them.

[cwelsh 1,502]

And the MOST important thing to remember is, past Friday anyways, if you have a short strike get hit (or go past), just close that side out. Sure it might rebound, or sure you might be able to extract out .05 rolling down -- but over the longer run, that doesn't work. If you get out at the short strike, you're probably ensuring a BE week or just a small loss. And if my BAD weeks are break even, well then I'm as happy as they come.

Of course there are gaps up and down, but hopefully few and far between (which is why we don't sell short during earnings announcements).

[tjlocke99 18]

And the MOST important thing to remember is, past Friday anyways, if you have a short strike get hit (or go past), just close that side out. Sure it might rebound, or sure you might be able to extract out .05 rolling down -- but over the longer run, that doesn't work. If you get out at the short strike, you're probably ensuring a BE week or just a small loss. And if my BAD weeks are break even, well then I'm as happy as they come.

Of course there are gaps up and down, but hopefully few and far between (which is why we don't sell short during earnings announcements).

Chris,

Thanks. When you say "just close that side out", you mean the both the short put and the short call correct, leaving you with just the Guts strangle? Any reason you don't just close the whole trade including the Guts strangle piece and re-open the whole 4 contracts on Thurs again (other than the transaction cost of the trade)?

Thanks!

[K. Miller 3]

I'm in what's essentially the same trade. I closed my 92.5 November short call the other day when it was at $.05, figuring it would not get any lower anyway. Is that a good idea, or is it better to hold it until time to roll? My assumption was that XOM get some resistance at 90, and the call would increase, so it was better to sell early.

[trhanson 93]

Chris,

Thanks. When you say "just close that side out", you mean the both the short put and the short call correct, leaving you with just the Guts strangle? Any reason you don't just close the whole trade including the Guts strangle piece and re-open the whole 4 contracts on Thurs again (other than the transaction cost of the trade)?

Thanks!

He means that if you hit one side of the short strangle, you close out just that side. If you are that far in on one side, chances are, you won't get whipsawed back to the other short side (which probably would have a delta less than 15 at that time).

The reason you don't close the GUTS strangle is because it hasn't made any money. Once the price hits one side of the longs, I think then you can close out that strangle and open a new one (or if you hit 2-3 weeks left).

[cwelsh 1,502]

Most of the people have it correct. Let's say your short put strike gets hit, you only close out the short put. The odds of getting whipsawed are small, and you don't want to give up the premium to buy back the short call. Of course if it's late Wed, maybe you can buy it back at .01, then it might be a good idea, but generally there's some time value left so we don't close it.

As always though, make your own decisions -- this is a relatively new strategy that's only been backtested, if you find something else works better, by all means, do it, share, and show why.

[cwelsh 1,502]

This will NOT be rolled this week as I opened the next week originally.

[trhanson 93]

The deltas this week are fairly god awful, but I'm going to start it this week on my pt. The options this week were to either go aggressive and use .40+ shorts, or go conservative and go for less than .20 delta shorts. I'm going the conservative route, because I would if I was real trading it.

BTO JAN 19 82.5 C (.78) 6.60

BTO JAN 19 92.5 P (-.76) 5.35

Total in long:

11.95

STO NOV 2 90 (.19) .25

STO NOV 2 85 (.17) .26

Total credit this week: .51 (4.27%).

[tjlocke99 18]

This will NOT be rolled this week as I opened the next week originally.

Chris,

If we closed our XOM shorts today because the price went below the short put at 87.5, then it seems our long positions are "directional". Thus if XOM reverses and goes up then our losses compound. Wouldn't it just be better to close the whole trade? For example the whole 4 legs could have been closed today at a very small profit?

Thanks!

[cwelsh 1,502]

This was answered in another thread, but the short answer is no, not really -- for the simple reason that it is pretty unlikely to whipsaw back up to the other end before it expires. If it DOES happen, then yes, your losses compound. However, if you close out the other long early, then you, at the very least, are leaving .05-.10 on the table. Over a six-eight week period, that's a full week's worth of profits.

In backtesting, it was a VERY rare event (only a few times a year) for you to have to close both out on a whipsaw -- and if you cut out trading in earnings, (like we're supposed to) it happens even less.

However, if you are more risk adverse, and don't mind surrendering 2% or so a month, then yes close out both. Each person has to know their own risk tolerances.

[tjlocke99 18]

This was answered in another thread, but the short answer is no, not really -- for the simple reason that it is pretty unlikely to whipsaw back up to the other end before it expires. If it DOES happen, then yes, your losses compound. However, if you close out the other long early, then you, at the very least, are leaving .05-.10 on the table. Over a six-eight week period, that's a full week's worth of profits.

In backtesting, it was a VERY rare event (only a few times a year) for you to have to close both out on a whipsaw -- and if you cut out trading in earnings, (like we're supposed to) it happens even less.

However, if you are more risk adverse, and don't mind surrendering 2% or so a month, then yes close out both. Each person has to know their own risk tolerances.

Thank you for answering. I apologize, but do not believe I stated my question clearly. I mean the LONG XOM Put position has now gained enough value to offset most of the other losses (at least as of 11/8). If you close out a XOM position before the next set of weeklies our out you are left only with the long put and long call. With the long put worth more than the long call has lost and with it having a higher delta you are directional for the days you are not holding a short position. Additionally your long positions remain "directional" if the underlying prices hovers anywhere near one of the strikes?

[cwelsh 1,502]

Thank you for answering. I apologize, but do not believe I stated my question clearly. I mean the LONG XOM Put position has now gained enough value to offset most of the other losses (at least as of 11/8). If you close out a XOM position before the next set of weeklies our out you are left only with the long put and long call. With the long put worth more than the long call has lost and with it having a higher delta you are directional for the days you are not holding a short position. Additionally your long positions remain "directional" if the underlying prices hovers anywhere near one of the strikes?

That is a feature of this type of trade -- at any point during the eight-ten weeks we hold this, one of the longs is likely to be quite directional -- particularly if there's been a slow rise or decline over a six to eight week period. Don't worry about it -- because in that case the detla of the non-directional piece will be .99 or so, so if you get a move back toward the middle, it really doesn't hurt you.

That's why we buy the longs at .80 or above -- we don't want to get hurt by time decay (much), and moves one way or the other have minimal impact on the longs. LARGE moves one way or the other actually benefit the longs.

[tjlocke99 18]

That is a feature of this type of trade -- at any point during the eight-ten weeks we hold this, one of the longs is likely to be quite directional -- particularly if there's been a slow rise or decline over a six to eight week period. Don't worry about it -- because in that case the detla of the non-directional piece will be .99 or so, so if you get a move back toward the middle, it really doesn't hurt you.

That's why we buy the longs at .80 or above -- we don't want to get hurt by time decay (much), and moves one way or the other have minimal impact on the longs. LARGE moves one way or the other actually benefit the longs.

Chris,

With a .99 delta that non-directional long will lose on almost a dollar for dollar basis if the stock moves against, however the directional long will only gain on the .60 or whatever delta it has. Thus I think you end up with a sizable loss in the long strangle you are holding. That long strangle was supposed to be the protection against the short strangle losses or large moves, so what I am saying is you'll lose twice. You'll lose on the short strangle and the long strangle.

Thanks!

[cwelsh 1,502]

Chris,

With a .99 delta that non-directional long will lose on almost a dollar for dollar basis if the stock moves against, however the directional long will only gain on the .60 or whatever delta it has. Thus I think you end up with a sizable loss in the long strangle you are holding. That long strangle was supposed to be the protection against the short strangle losses or large moves, so what I am saying is you'll lose twice. You'll lose on the short strangle and the long strangle.

Thanks!

I must be misunderstanding what you're saying -- the long does provide SOME protection against the short, but only on really large moves -- what it really allows you to do is trade outside of your brokers margin requirements.

In any given week, if your short moves outside the money -- that will be a loser/BE, depending on when you exit and for what price. The longs though, depending on the size of the move, won't pick up that profit -- they're outside your short strikes.

As a theoretical example. Stock XYZ is at 100. So we buy the 140 put and 60 call -- both 40 points in the money, and both at lets say .80-.90 deltas for a cost of $20 (each costing $10). We then sell the .20 deltas at 90 and 110 for a $1.00 profit.

Then on Monday XYZ moves to 110 -- in the perfect world, we can buy back the short at $1.00 or less. But even it its at $2 -- we still buy it back. In that example your call is now worth 50 (well a little more, but in simplistic terms) and your put is only worth 30 (and a little less). Minus the little bit of theta over those few days, the long position should be down slightly.

So in that sense, yes, you are down on both positions. But we DONT close the longs, we just open again on Thursday and earn another $1.00, and repeat the next week. We are not here to profit off the long positions, and hopefully we've picked a deep enough delta position, that regardless of where the underlying goes, the longs will be ALMOST BE with about two weeks left. They might be down slightly. Over that time, hopefully we've made enough credit from selling the shorts to both (a) make up for theta decay on the longs ( cover any losses in the shorts and © make a profit.

But yes, in any one week you can absolutely lose on both the long and the short -- that's to be expected if you have a short strike get hit the first couple of weeks.

[tjlocke99 18]

I mis-typed and miscalculated the %.

The XOM 85 C / 95 P Jan '13 Guts Strangle was up net commissions close to $30 yesterday. Depending on your broker, for holding for around 5 business days you could have close it at around ~2.0% gain. ( .3/11.6 less commissions).

SNDK had been up too. That is all I monitored. Backtesting is of limited effectiveness because it all EOD data on TOS.

[cwelsh 1,502]

Well if you saw the other post you know I'm out of this at a 4.1% loss. I tried to outthink the market, middle east conflict = higher prices therefore XOM will rebound -- it did not, and I had a bigger loss than necessary. Won't do that again.

The deltas available on this weren't great, so I went more conservative and entered the 82.5/87.5 for a max possible gain of 2.8% this week -- way lower than I like, but going closer in I felt the risk was too high. Should have rolled yesterday.

[trhanson 93]

Since I'm paper trading, I decided to try to get closer to .30 on my put, which is a more agressive play.

Last week:

STO NOV 16 90 (.19) .25 (.01)

STO NOV 16 85 (.17) .26 (.02)

Crazy good net credit: .48 (4.08%)

This week:

STO NOV 23 87.5 C (D .29) .30

STO NOV 23 85 P (D-.28) .35

Total possible credit: .65 (5.44%)

I agree with Chris that this is riskier this week being only a buck and change from the short put...

[cwelsh 1,502]

I consider this to be the worst overall performing instrument in the DD strategy -- which is odd because it backetested very well.

On Friday I closed for a 2.49% loss and opened the 85/90 for a max of a 2.44% gain