Kelly Park

Richard: Actually, we started with DITM longs and OTM shorts. There was discussion of going to OTM longs also, but the conversation sorta died there. To me, the longs are just a way to "allow" us to sell shorts without being naked, so we are just looking for the cheapest longs possible, factoring in theta decay, purchase price and margin. But I'm not sure which deltas of OTM is best overall for the longs. Another issue that is coming up now: There are opportunities to roll the longs out a month for no cost or even a credit. I would be interested in others thoughts about when to roll and how much credit makes it worthwhile.

Regarding PSE, I just sold two contracts on VXX, as part of the VXX income trade. Identical contracts and bids, one filled on CBOE2, the other on PSE. The commission on CBOE2 was 0.69 per contract, 1.51 per contract on PSE. Everything was the same about the contracts except the exchange.

Scott, I got busy and also dropped earnings plays for the last few weeks (when they have been doing better, of course!). I like the decreased management time, but not the lack of gamma exposure in my portfolio. I think the goal for us is to find a gamma positive trade that doesn't take so much time to baby sit.

Chris: Seems like the DD discussions have gone a bit cold lately. I'm still in the VXX and GLD trades and following a couple of different approaches. To catch up, I think we were discussing using OTM longs instead of ITM. Have you reached any conclusions about best deltas? I have been fiddling with this and by my reasoning (possibly faulty) it actually looks like ATM works best. Here is my reasoning: It seems to me that the purpose of this trade is to sell time value, choosing short deltas that balance credit received with the likelihood of getting hit. So, choosing deltas that will only get hit, what, maybe 1/2 to 2/3 of the time? Even if we get hit 3/4 of the time on one leg, but set stop losses so we retain SOME credit for the week (and we get whipsawed for losses very infrequently) then it works out. I have lost track of what deltas should be working best, since they change with each underlying. A recap would be helpful, if someone could provide it. BUT, we don't want to risk of holding naked shorts, so we buy longs. The trick here is to find the longs that are the cheapest in the long run (i.e. least cost including both initial investment AND theta decay). With DITM, we don't have much theta, but the upfront cost is high, so lower ROI overall. With DOTM, basically same theta, and the lower initial cost is offset dollar for dollar by margin requirements. I think I would rather have the margin requirement, as I could put that money in something safe but still mildly profitable and increase my overall return a bit. However, I have been fiddling with the numbers (so far, only on GLD) and it appears to me that ATM works best. If you plot the theta decay from week to week, out about 3 months, it doesn't vary much for OTM, ATM, ITM, DITM or DOTM as long as you sell them 3 weeks before expiration. With DOTM and DITM, you might be able to go another couple of weeks closer. (For GLD, the weekly theta decay averages about .17/week ATM, about .19 DITM or DOTM and .21 OTM or ITM) So if theta losses are similar, then it comes down to total initial cost, which is lowest ATM. I haven't tried this with real money yet, but it appears that the DD trade has the highest ROI with ATM longs. Then it is just a matter of choosing the best shorts. Chris, please shoot holes in this reasoning before I am tempted to think I have learned something meaningful. And let's continue the discussion, as I think this is a very viable trade option.

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.)

Chris: I've kinda lost track of the deltas we are targeting for our weekly shorts, since it varies by each underlying.

I think you are right, Chris. I think of trades like calendars as single trades with a targeted total profit and the weekly sales bring the basis down. But these are intended as income trades, where the weekly income is the target. I know it is really two sides of the same coin, but I think of the two differently, and so it makes sense to me to adjust my basis in trades like calendars, but not on steady income trades.

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.

Chris: A question about calculation on the DD trades. How are you calculating your max potential gain each week? comparing your credit to the original cost of the longs, or against an adjusted basis, factoring in all losses or gains to date? I have been tracking both and can't decide which is most useful.

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.

I've been thinking about stop losses on these for the same reason. I haven't quite sorted out how to do it on IB, so if anyone has any suggestions, I'm all ears. Been wondering if the stop loss should trigger with a set price on the underlying, OR with a percentage of the credit received. Leaning toward the latter, but not sure where to set.

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.)

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?

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?

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.

I think we need to be careful when thinking that we are in a high volatility environment now. It has come up a bit in the last couple of weeks, but VIX is still well below 20. I am hoping that at some point we will be getting back to a more consistent return on our pre-earnings trades. But I am concerned that these double diagonals, which are working quite well now, may go south as volatiltiy returns. We haven't seen that yet. In your backtesting, Chris, are you using times of higher and lower VIX, to see if these trades hold up under different volatility conditions? I don't want to get excited and start increasing allocations, only to find that conditons have changed and it doesn't work anymore.

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?

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.

Things bouncing around alot today. Ended up rolling the 32/37 shorts to 35.5/39.5 for net credit 1.07. So far, that is 4.7% first week, only 1.0% second week, and with 1.53 credit to start week three. Rolled at the right time, this week could have been about 2.5%, at other times, it could easily have been a loss. If 1.0% is a bad week, I'm gonna like this.

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%

Chris: How is 1.14 over 10%, on a 16.30 long? Or are you adjusting your basis somehow?

Wow. Very dense book. Serious statistical analysis. This will take awhile to get through. Let's get our resident statisticians to check it out!

If VXX opens about were it is now, choosing strikes for a roll could be interesting. 33 and 27 delta available on both sides, big difference in credit, especially with still significant time value left in this week's 37 call. I guess the plan would be to wait for some of that to come off, or roll if it gets hit?

Was out this morning and missed the VXX spike above 37, so didn't close. Good example of whipsaw that CAN happen, even if not typically.

Chris: What with all the other trades going on, I never got in on this one last week. Generally speaking, how much difference do you think it would make to enter one of these trades late? Seems like you would lose the credit from any week you missed, of course, but also a small amount of theta on the longs. I would tink that entering a week or two late would decrease but not eliminate the value of the trade. After that, opening the longs another month out would seem to make more sense. Any idea how much flexibility there is with how far out the longs are at opening?