Long Dated GLD Income

[cwelsh 1,551]

Well finished backtesting another one, and this has moved to number two on the list -- GLD. So I'm going live with it today.

LONG

Jan 159 Call (.79)

Jan 178 Put (.78)

Cost: $22.10

SELL

Weekly 170.5 call (.25)

Weekly 165 Put (.22)

Net: $1.05

Max possible one week return: 4.6%

GLD consistently worked at UNDER .30 deltas. With the recent swings, I did go more conservative, based off some technical analysis I did. However, it also worked at .30 deltas -- with almost the exact same results over any given period. I'll probably bounce between .25-.30 each week. With rolling, I'm targeting an ideal average of 3% per week.

[Hannes Kury 7]

I am playing this with just 1 contract.

Got the long side for 22.

On the short side I was chasing the price from 1.03 down to 0.95. I was bidding the mid and below the mid but newer got a fill. After loosing 6 cents or so I just took what they offered.

[trhanson 590]

I'm going to add this to my paper trades. Probably starting after a full iteration, I'm going to start trading some of this stuff.

BTO JAN 159 C (D .79) 10.45

BTO JAN 178 P (D .785) 11.45

Total cost of long: 21.90

Week1:

NOV 16 170 C (D .29) .66

NOV 16 166 P (D .29) .67

Max this week: 1.33 (6.07%)

BTW, I find these trades to be extremely fun.

[Kelly Park 10]

I've been in the VXX income trade but just watching the others. Getting comfortable enough to trade this one.

In the same positions as Chris, Longs at 21.71, shorts at .91, (net 20.80) for potential 4.2%

[csensen13 1]

FYI - I actually started the GLD long dated trade about three weeks ago because I really like this long dated strategy and GLD has worked well for me in the past with calendars and general theta positive strategies. I started out a little more aggressively than Chris's guidelines in terms of the deltas of the short strangles, but it has really worked nicely with 10% returns the first two weeks when GLD didn't fluctuate too much - this week I stuck to the .30 deltas and have had to roll to different strikes because of the general market swings, but overall it's up 20% in 3 weeks - very nice strategy.

[mcmatterson 3]

I got on board too. Long 159 & 178, Short 165.5 and 170.5 for a net $20.75.

[tjlocke99 18]

Chris and friends,

I was looking at some information from this past week on this trade. Wouldn't this trade have BLOWN up pretty bad this past week of 5-9 Nov?

If in Mid-Oct (10/18) you had entered the Dec 161 call and 178 put for around $19.60 (that is .05 over the mid), the first 2 weeks you'd have a profit of around $20 BEFORE commissions - that is probably break even after commissions and that assumes you are selling the strangles AT the midpoint.

Then last week this trade would have blown up pretty bad.

11/1 You short the 168 call and 164 put.

11/2 GLD is down to 162.60 so you close your put at an around $130 loss. It gets worse. You have kept that 168 call.

11/8 GLD is up again close to 167.98! You pay around .63 to close your short call (you were sweating the days earlier because GLD had been rising anyway). so you barely breakeven there WITHOUT commissions.

11/8 at this point your long straddle is also down around $33!

So in 3 weeks you have lost around $143 WITHOUT including commissions and WITH expecting pretty good fills. That means you are probably really down closer to $180 or close to 1.7% of your original investment. I am estimating the #s without a spreadsheet or calculator now.

Am I missing something?

Thanks!

Edited November 11, 2012 by tjlocke99

[Kim 7,943]

I'm starting this week a similar trade using same strikes for long and short options, which makes it double calendar. The main idea here is 1) to reduce the cost by using cheaper long options 2) to take advantage of low IV. Lower delta long options should benefit more if IV spikes.

[cwelsh 1,551]

Well I ran into the mid-october having entered in September and buying the Nov calls, and here's the week by week. The parentheses is what I bought it back for

Buy the:

Nov 155 c 11.45

Nov 177p 13.60

Total outlay: $25.05

Sept 2 167.5 0.71 ($2.18) 171 (1.03) (almost a four dollar move on friday)

162 .60 (.01)

Sep 3 175 .71 (.02)

168 .66 (.02)

Sep 4 174.5 .61 (.04)

168.5 (.03)

September results: up $1.31 (5.2%)

Oct 1 175 .71 (.35)

169.5 .63 (.06)

Oct 2 176.5 .67 (.01)

170.5 .59 (.25)

Oct 3 173.5 .50 (.01)

169 .47 (.61)

Oct 4 171 .45 (.01)

167 .56 (2.00)

October results:up $1.28 (5.1%)

Nov 1 168.5 .50 (.02)

163.5 .52 (.05)

Net Nov. .95 (3.8%)

Close Nov (2 weeks left) $22.10, loss of $2.95.

Total return: 1.11 (4.4% over 8 weeks)

In two years of backtesting, this was the 4th worst performing 2 month period --- bought the longs in higher volatility and sold into downward. We also probably could have run it one more week since the detlas on the long were both above .95 -- very little value to lose there, but I couldn't test into this week .,

In two years of backtesting, there were only 2 negative eight week periods -- and those were either -4.5% or -5.2%. The average eight week gain bounced between 6-7%.

[tjlocke99 18]

Thanks Chris. I like Kim's idea of a double calendar on this.

Just in eyeballing the data it looks like there maybe be value in closing the long strangle when it is directional and ~0.5% profitable in the first week.

In fact I am considering just purchasing .80 delta long strangles on a Thurs and setting a limit to close the spread as soon as .4% profit is reached which in what I have seen in most of these trades, is usually within 2-3 business days. That being said I am wondering if the much cheaper .20 delta strangle would have a higher % profitability (but the trading transaction costs would be higher)

[cwelsh 1,551]

Thanks Chris. I like Kim's idea of a double calendar on this.

Just in eyeballing the data it looks like there maybe be value in closing the long strangle when it is directional and ~0.5% profitable in the first week.

In fact I am considering just purchasing .80 delta long strangles on a Thurs and setting a limit to close the spread as soon as .4% profit is reached which in what I have seen in most of these trades, is usually within 2-3 business days. That being said I am wondering if the much cheaper .20 delta strangle would have a higher % profitability (but the trading transaction costs would be higher)

ZERO point four percent?? As in buy $100,000.00 and make $400? I would think commissions would kill that type of trade. I just wouldn't trade with a profit target under 1%.

[Rogers 263]

Hi Chris,

What do you think about having this trade on in conjunction with the double calendar just opened by Kim?

[cwelsh 1,551]

Will have to look at it -- after looking this morning, I'll probably wait to roll until tomorrow -- its still fairly safe, and as of right now, waiting a day gets me .35 in theta decay on this weeks and only .12 on the next weeks -- so, as long as things hold equal, waiting should pay off -- of course if it gets too close to the short strike, I'll go ahead and roll.

[cwelsh 1,551]

He's in a double calendar, these are double diagonals - the difference according to Dan Paserrili:

"The raison d'Ítre of the double calendars and double diagonals is the position response to changes in IV; in optionspeak, the vega of the position. Both trades are vega positive, theta positive, and delta neutral, presuming the price of the underlying lies between the two middle strike prices over the range of profitability. However, the double calendar positions, because of placement of the long strikes closer to ATM responds favorably more rapidly to increases in IV while the double diagonal responds more slowly. Conversely, decreases in IV of the long positions impacts negatively double calendars more strongly than it does double diagonals."

In other words -- Kims position is going to be more sensitive to changes in IV than mine -- particularly when compared to the diagonals that are at .80 deltas or higher.

[Kim 7,943]

He's in a double calendar, these are double diagonals - the difference according to Dan Paserrili:

"The raison d'Ítre of the double calendars and double diagonals is the position response to changes in IV; in optionspeak, the vega of the position. Both trades are vega positive, theta positive, and delta neutral, presuming the price of the underlying lies between the two middle strike prices over the range of profitability. However, the double calendar positions, because of placement of the long strikes closer to ATM responds favorably more rapidly to increases in IV while the double diagonal responds more slowly. Conversely, decreases in IV of the long positions impacts negatively double calendars more strongly than it does double diagonals."

In other words -- Kims position is going to be more sensitive to changes in IV than mine -- particularly when compared to the diagonals that are at .80 deltas or higher.

This was my main rationale behind the trade - GVZ which is the VIX of GLD is at 13.60 which is historical low. I don't believe it will stay there for long.

[Kelly Park 10]

Have to be out a bunch the next two days, so I went ahead and rolled my GLD shorts already. Closed last weeks for .65, leaving only .26 (1.2%) for the week. 1.21 credit for next week (5.6% max) Probabaly better tomorrow, but I didn't want to have another gap down take all of last weeks credit away.

[cwelsh 1,551]

Its amazing how much theta impacted and volatility has gone down on this today -- whereas this morning, no way I was closing, but I've already captured most of the theta decay, just today, so I'm rolling now:

Close the 165/170.5 for 0.20 leaving a return, inclusive of commissions of 3.7% on the week

Open the 164/168.5 for 0.93, for a max return of 4.11% on the week.

And yes I know my percentage gains don't exactly match up to the numbers -- the percentage gains are net of commissions (so real world gains or losses) while the prices are what I was filled at.

[trhanson 590]

Last Week

NOV 16 170 C (D .29) .66 (.03)

NOV 16 166 P (D .29) .67 (.57)

Net credit: .73 (3.33%)

This week:

NOV 23 168 C (D 0.3) 0.59

NOV 23 164 P (D -0.27 ) 0.53

Max credit 1.12 (5.11%)

[cwelsh 1,551]

On Friday, I closed out the week 2 position for a 3.8% gain and opened this weeks 166/170 for a max possible gain of 3.67%.

The late action Friday price movement did not have me thrilled (for obvious reasons), so I'm watching this one closely this week. If you think it's already too close to the 170 strike, you can get out right now (or I could) for a 0.05% gain (basically BE). However, with total theta near -.20, I'm going to continue to hold.

Week 1 was a 3.7% gain, Week 2 was a 3.8% gain, (up 7.5% overall)

Current position: 166/170 for a max of 3.67% gain

[Kim 7,943]

Chris, how the GLD longs doing? With GVZ trending down, they should lose value. Do shorts offset the longs losses?

[cwelsh 1,551]

The longs are currently worth $20.10 on a $22.10 investment, or down 9% , and my total short return is 7.5% overall so far. So as of right now the shorts HAVE NOT offset the loss in the long.

However, the maximum possible loss on the long side of the trade is $3.10 or 14% -- which means we're actually almost there, with eight weeks maximum left on the trade. By the end of it, the shorts should easily offset the longs.

Of course we should continuously watch GLZ -- there's a chance in 3-4 weeks it goes up, and we might close early if we can actually gain from the longs. It looks like we should average a 2.5% weekly gain (assumes we stick to the historic trends of averaging about 3 weeks a month of 3.3-3.5% gains and one BE a month). Even if that drops down to 2% you're looking at gains of around 23.5% on the shorts and a max loss of 14% on the longs -- or a 9.5% gain in 8-10 weeks. I'll take that every time.

What would crush this trade is what happened on the VXX -- on Monday you get a huge spike in the price, up to 174 or something (still inside the longs but well above your short) You then get creamed on the short, and still have a possibility for a full 14% loss on the longs on the drop in volatility and being inside the long strike. However, a weekend move of 5% on GLD is a pretty slim probability.

This week should bring us in line with the losses on the longs, and after that should be all profit going forward (that's the goal anyways).

[cwelsh 1,551]

I MIGHT close out the 166 side today before close, doing a technical analysis on it right now. If there's another even small gap down tomorrow, this becomes a loser, where as right now, you can capture some gains.

[cwelsh 1,551]

As a follow up, I stayed in.

[trhanson 590]

As mentioned in the VXX thread, I needed to start my PTs over, and I'm going to continue to do this one

LONG

FEB 159 C (D 79) 9.40

FEB 175 P (D -76) 9.25

Total long: 18.65 (Max loss 2.65, or about 2-3 weeks of credits)

Note, i went for the lower delta put. While the 176 had a D closer to 80, it was only costing my a max of .15 to shave off some cost.

SHORT

DEC 7 169 C (D 28) 0.53

DEC 7 165 P (D-25) 0.49

Max credit: 1.02 (5.47%)

[pgrace0154 0]

Chris,

What is your current pos on GLD is it 159/178 166/170 if so can I get in Mon 12/3

Thanks,

Pat

[cwelsh 1,551]

I'm long the January 159 C and 178 P (If you're entering, I'd probably do Feb at this point of Jan).

I'm short the weekly 165/170 for a max gain this week of 3.98%.

However, IV has dropped today (not surprisingly given the lack of movement). I probably would not open this position today as you're not getting adequately compensated for the risk on the weekly. I'd wait to at least Wed (GLD has multiple weeklies open at once).

[pgrace0154 0]

Thank you Chris

Pat

[trhanson 590]

Ooof, this one sure got busted this week. Right now, you can buy the 165 back for 1.25. At best, we're looking at a 7.5% loss on the week if you close now. I was looking at the wrong values. The question is, do you let it try to come back or take your lumps? I think that we just take our lumps, right?

Edited December 4, 2012 by trhanson

[Kelly Park 10]

I took my lumps at 1.59, when it promptly rebounded. BUT, as a long term strategy, I think you HAVE to take the losses as soon as you can or you could take a major hit. As it is, it cuts about half of my previous gains on this trade, but overall it is still in the black (considering shorts only, factor in the longs and it is down a bit now.)

[cwelsh 1,551]

Yes we do -- I'm closely watching this one today and haven't closed it yet -- pay attention when there's a gap down in the morning -- in this case there was a huge order pending to be filled at the open (over 275K shares), which spiked the price down, almost every time when that happens, there's at least a small rebound during the day, unless sell orders start increasing (which will show up on an RSI index).

We cannot risk another gap down tomorrow, but with how GLD behaves, I can wait today to close it.

This is where a little technical analysis and watching the instruments you trade becomes invaluable. GLD is actually one of the more predictable instruments in intra-day moves. (I'm not a day trader, but I was VERY tempted to on GLD this morning).

Others that get into major trends (SNDK for instance), if there was a gap down in the morning I would be out as fast as I could push the buy button.

Right now GLD is around 1.10, I'm hoping that get out for BE, but we'll see as the day progresses.

However, Kelly is right, as a long term strategy, take your lumps as soon as possible if you have any questions at all -- you cannot let them multiply.

[trhanson 590]

Ended up buying back yesterday for 1.15

Rolled shorts today

DEC 7 169 C (D 28) 0.53 (.02)

DEC 7 165 P (D-25) 0.49 (1.15)

Loss: -.15 (0.8%)

This week:

DEC 14 166 C (D 25) 0.52

DEC 14 161 P (D-25) 0.56

Max credit: 1.08 (5.79%)