samerh

Wondering what people think of this trade idea: A 1-week short butterfly on VXX. with the wings spaced $4. So you are SHORT the 11 call, LONG 2x 15 call and SHORT the 19 call. You would get a credit of $2.9, max loss would be $4 (width of the wings) less your $2.9 credit = $1.1 VXX median move as measured over the last 2 years for Mon through Wed is approximately $1.2 60% of the time it moves >$1 mon-wed The breakeven for the trade by Wednesday (looking at the white line on TOS analyzer) is $0.8 move, and VXX moves $0.8 Mon through Wednesday 70% of the time. With debt ceiling talks etc we might expect much bigger moves this week, and the VIX is effectively moving in response to debt negotiation news. If the VXX moves, say, $1 between now and Wednesday, you make a $0.13 profit (on risk of $1.1 = 10%), if it moves $2 you make a $0.75 profit (68%). Any views, or is my logic faulty?

isn't that market manipulation?

Thanks guys, the excel isn't a problem was more a question of where to source the data. Appreciate it.

Just want to add my 2 cents for what they are worth and also thank Kim for the transparency and everyone else for their comments which read together provide valuable learning.

Great, thanks

Does anyone know how to get a table of historical data on VXAPL from yahoo finance or any other site? for example these work for VIX, but not VXAPL: http://www.nasdaq.com/symbol/vix/historical or http://finance.yahoo.com/q/hp?s=%5EVIX+Historical+Prices Thanks

OK thank you both. So it gets split up and isn't a strict one-to-one.

A question I've always had is around the "zero sum game" concept. When I buy a butterfly or condor, for example, is someone else selling a fly or condor or is ToS etc routing puts and calls in all manner of combinations to give me a fly?

Awesome. Thanks for sharing. I think that is a better way than getting all my profits crushed by excessive commissions on daily trades.

I agree with that. So my question is, given that you never really know what will happen, what do you aim for when you open the short fly, and what max loss do you accept?

On AAPL - $10 spacing short fly. I never held for more than 2 days. In theory if you open on a Monday and held until 3:30 on a Friday you could gain $2.5 or lose close to $7.5 a spread. If you look at AAPL open, high, low and closing prices for the week (easily available) you have roughly an 80% chance of winning and 20% chance of losing. That gives you a $0.5 expected profit bit die to the large loss you would only play with a small amount of capital. Alternatively you could aim for $0.3 a spread intra-day mon, tue and wed and have a roughly 1-1.5% average expected profit each day (roughly 4.5% profit per week) with an average win of $0.3 60% of the time and average loss of $0.2 40% of the time which would be nice except for the commissions. This is a less risky trade as the daily loss is much smaller (unless you put it on just before major IV collapse like day before earnings) and so you could allocate a lot more per trade as a result. So I was wondering if you had an alternative strategy with better numbers?

I've been reasonably successful with it too, except that the commissions eat up too much of the profit. Lets say you do 10 spreads and "chip away at the market" for $0.3 profit Monday through Wednesday. That's $300 profit but at, say, $1 per contract in commissions, that's $80 per round trip trade in fees, which means commissions eat away 25%! Mikael- what's your strategy been: intra-day profits or hold for the week (the problem with that is you win most of the time but 20% of the time you lose $7.00 a spread which wipes a lot of your profits). I've found opening the trade at 10am and aiming for $.25 on Mondays and $0.5 tues and Wed seems to work. You are only successful about 50% of the time but wins are bigger than losses.

It is because options pricing theory uses the lognormal distribution which is "a continuous probability distribution of a random variable whose logarithm is normally distributed". Note it assumes the logarithm of the price changes are normally distributed (vs the price changes being normally distributed). The reason for this is that Normal distribution is symmetrical: e.g. a $100 stock would have the same probability of rising to $210 as it does to dropping to NEGATIVE $10 (in each case a $110 change). As stocks can't go negative, the normal distribution can't be used, instead a lognormal distribution is used which skews the distribution of final prices so that the final price never drops below zero. You can think of it this way, assuming two continuously compounded 10% increases from $100 gives you $121, a difference of $21. However 2 10% decreases from $100 gives you $81 - a difference of $19. => As the move up gives a bigger number than the move down, Calls have a larger absolute delta than puts Lol - just typed this up and saw that Marco had already answered.

Great, thanks for this Kim. At what point do you stop doing adjustments in turbulent markets? RUT can seesaw a lot at times and you can find yourself doing 3,4 adjustments. Is there a limit when you just decide to take it off at a small loss and save on commission expenses?

I agree we want lower SQ numbers, that's what i was saying (I think your spreadsheet was set up to do a buy signal when the sq was larger than hurdle and not smaller) - but it's a moot point as I agree that reversing the signs doesn't change the results much (as we are 50/50) What I meant by "I have to say the SQ numbers are all over the place" was that SQ doesn't seem to be very helpful.

Dustin, Thanks for all the numbers. I sorted the numbers from low to high on column I "P/L%" and eyeballed the results. I have to say the SQ numbers are all over the place, so while on average lower SQ numbers might be better, on individual trade by trade basis there is so much variability that I'm not sure it really helps. Perhaps its because of theta decay and if we factored that in (where theta decay isn't too aggressive) it might improve, otherwise I'm not sure?

Agreed. The only advantage to using the different strikes is that I exclude gamma gains in the selection process (which are a bonus).

Sure Start date: 3/14/2013 Underlying price: $69.09 Nearest strike: $70 Straddle price: $5.56 (midpoint bid-ask) Straddle IV: 0.3099 <---- *this is where the discrepancy is. TOS shows this to be 0.3145. need to look into why this is.* End date: 3/21/2013 Underlying price: $67.91 Nearest strike: $67.5 (note new strike) Straddle price: $5.19 (midpoint bid-ask) Straddle P&L: $5.19/5.56-1 = -6.66% 20 day HV of stock as of 3/14/2013: 0.2138 (Stdev of stock over last 20 days x sort(252) ) Last Move of stock following previous earnings: $63.73 on 11/28/2012 to $59.80 on 11/29/2012 = -6.17% (IV-HV)/LM = (0.3099-0.2138)/0.0617 = 1.56 If I use the TOS number: (0.3145-0.2138)/0.0617 = 1.63

No I wasn't clear. I think my database used the nearest $5 strike, but TIF has $2.5 separated strikes. So your data is probably more accurate. Here's my TIF numbers re-configured to $2.5 strikes. But even so, my numbers still come out a little differently. TIF-Backtest-SQ.xlsx

Are you using ATM straddle prices on earnings date or the original straddle strikes from 5 days before? I use the ATM straddle to try and see the effects without gamma gains. I may have used $5 strike spacing in my TIF straddles instead of $2.5. Will check when I'm back at computer

I'm just taking the average of the call and put IVs. Please let me know if there is a more robust way of doing it.

I updated the last post with the corrected spreadsheet. Can't tell on OVTI until NASDAQ gets fixed TIF: vega-theta is 0.05 (so expected IV increase should overcome theta decay), but volatility quotient is 3.8x and so expensive (slight improvement from a few days ago which was at 4.1x but still high). does that ring true with your read of the situation, should we validate this type of thinking?

corrected, thanks for highlighting the error Kim

Here's the table with TIF and OVTI added. If you play around with it, the vega-theta is an important aspect of the signal. The IV-HV/LM quotient is still quite variable. At any rate, TIF seems a bad play. [Corrected spreadsheet] Workbook1.xlsx

That would be fantastic. I think to start with the ones Kim mentions above. then one could probably expand to the SO hit list (I can't find the link in the forums). Attached is a sample of input data with the column headings. I can do that and put up the results for the community to see. Untitled.xlsx