Due for a downswing -- a put credit spread on SDS

I think we are overdue for a couple of down days.   Sold 20 Jan SDS 35 puts at 1.17 and bought 20 Jan SDS 34 puts at .62, for a net credit of .55.  SDS was at around 34.5 at the time.   I tried initially at .56, which split the spread, but it didn't fill after around 15 minutes, so I bumped the credit down a penny.  Then it filled within a couple of minutes.

Taking some profits in Oil

From a chart standpoint USO is up around a 38.80 resistance point.  I wouldn't be surprised to see a traceback--although the fundamentals for oil could easily override this.  Since I only had about 0.33 of time value left on my Jan 37 calls with more than two weeks before expiration I closed out that covered call position, hoping to buy back in at a cheaper point.   I did a net credit order at 36.66, about half the spread.   USO sold at 38.99,  the calls at 2.32.  My net profit on this position was 1.00 per share.

click to enlarge graph

AGG dividend capture close out --ugly

AGG goes ex-dividend tomorrow, with an estimated payout of about $0.32.   I was still holding onto my AGG position from my attempted dividend capture at the beginning of December until today.   I was hoping for a little pre-dividend run up today, but macro forces related to interest rates were stomping about, and AGG ended up off .56 to close at 103.31.  I sold with about 10 minutes to go in the regular session at 103.27.  My break even, including the dividend from the 1-Dec distribution was 105.17, so my net loss was 1.90 per share.

This result points out the dangers of a straight up, unhedged dividend capture scheme.   The potential gains from collecting the dividend can be rapidly wiped out by forces acting on the underlying security--even on something as staid as an intermediate term bond fund.

  The only strategy I have found that seems to work consistently, not requiring holding onto the security for an inordinate amount of time,  is to sell deep in the money calls that expire relatively quickly after the ex-dividend date. The calls should be sold with enough premium to make the trade worth-while, even if the calls are exercised before the ex-dividend date (which is usually the case).     Since most ETFs with monthly dividends go ex-dividend early in the month, this leaves an uncomfortable ~3 weeks of exposure to the market if the options are not exercised.                                

Time for a correction

The S&P 500 has been up for 5 days in a row. Most of the time it looks like there has been a small sag in the afternoon.   Time for a little correction.  Bought SDS  (2X short S&P) at 34.34 the  time was 1:37PM  EST.

click to enlarge

It looks pretty minor in retrospect, but I took the bump up in VIX at around 1:00pm as an indication that S&P would come out of its flat-line mode and fear would have the upper hand for a while.

Sold at 34.53 @ 2:26PM  EST

The supply and demand for Gold

Normally I don't pay too much attention to gold, but since I have some skin in the game right now I'm am paying a lot more attention.  This is an interesting article about the demand picture for gold, and how "scrap" gold (cashing in that jewelry you don't care about) influences the market.

Ante up on my Gold prediction -- GLD dropping to 104

I have been predicting that Gold (GLD) will continue dropping until it hits resistance at 104. This morning I put some money down on that bet (actually got some money, for at least a while) by creating a bear spread.   Sold Jan 104 calls at 4.91 and sold Jan 112 calls at 1 for a net credit of 3.91.  GLD was at around 107.95 at the time, so I got almost $1 in time value on the 104 call.  Something I wouldn't have got if I had simply sold short and bought the 112 calls to limit my exposure.  Of course I gave up any advantage of GLD dropping below 104 in order to get that premium.

Click to enlarge the chart

Covering up the rest of the oil

I sold Jan 37 calls (UBOAK) at 1.13 to establish covered calls on the rest of my USO.  USO was at around 36.80 at the time.

Long on VIX

Turned my bear spread into a long position by buying back my Jan 24 calls at 1.80 (sold at 2.18).  The VIX index is at 20.56 right now, and the Jan futures looked to be around 23.55.

For an overview on going long on VIX see this post

Covering up some oil

All of my USO options expired worthless.    I covered 50% of my long position with Jan 38 calls--sold to open at .92,   USO was at 37.06 at the time.

Assignment / non-assignment of SPY December calls

The market was unusually obliging last week.   My Dec 110 calls were not assigned Thursday night when SPY went ex-dividend, because SPY closed about $0.20 below 110, but then on Friday SPY closed above 110, so my calls were assigned on Saturday.  This combination gave me the unexpected dividend of .59 and the maximum possible profit of 1.60 on the covered call position.

Not surprisingly my quarterly SPY 109 options, expiring on the 30th did not get assigned on the ex-dividend date either.   With the $0.59 dividend my break-even point on that position drops to 107.95

Bearish on VIX -- putting some money down

Created a bear spread on VIX:  sold to open 40 Jan 24 calls at 2.18 and bought 40 Jan 25 calls at 1.85 for a net credit of 0.31.  The best case profit on this position is $1240, and the worst case loss is $2760.  With VIX in its downward long term trend this felt like a reasonable bet.

Out of Gold--1 parts profit and 2 parts frustration

An hour after the market opened Thursday GLD was off 2.44 at 109.10 from Wednesday's close of 111.54.  Fear clearly had the upper hand--for me as well as the gold bugs.   My 108 call options were set to expire Saturday--their time value eroding away rapidly.   Even though I had correctly called the top within 10 days my position was still not profitable.  Time for some action.

I sold the calls at 1.50 and hoped that the blow off would continue--which it did, touching bottom at 107.28--a  single day drop of almost 4%.   I covered my short position at 107.91, resulting in on overall profit of 0.95 per share.   While I expect GLD to continue falling to at least 104 before it finds some support, I also expect it to bounce up tomorrow after a drop of today's magnitude, and I am not comfortable holding a short position of that magnitude multiple days without some sort of protection.    I thought about a stop loss order, but my experiences with stop losses have almost uniformly been bad--for example getting blown out of positions by single day perturbations, etc.

While I was happy to escape with a profit, I am not happy with the overall result.  To make more than risk free returns requires us to predict the future--something I know I won't always get right.  So when I get it right I need to make enough to more than cover for the times I get it wrong.   Certainly I would have done better if I had been willing to take more than the 0.64 maximum loss I structured into the position, but when I created the position gold was on a bull run that continued from114 all the way up to 120.

Right now the only think I can come up with is to wait for the simple moving average, maybe 3 days, to signal a turn-around.  It would require moving quickly, but the position become profitable considerably sooner.

Click to enlarge.

Shifting strikes on oil--with three days to go before expiration

The nice little bump up in USO today to over 36.85  knocked the remaining time value on my 35 December calls that I sold-to-open yesterday from  0.32 to .04.  Since I'm feeling bullish about oil, I decided to try and harvest some more time value by moving from 35 strike calls to the 37s.  I did this with a debit spread order of 1.54, buying to close the 35 calls (at 1.89) and selling to open the 37 calls (at .35).   I normally don't like to do this sort of a move because I'm investing additional money that will just go away if the price falls before option expiration, but as I said, I'm feeling bullish.

 If I transacted the two operations independently I would be dealing with the spreads of each option. Doing this transaction with a spread order enables me to set the price I will pay to the penny with a single offer.  To set a price I figured out the worst case price from my perspective (ask on 35, bid on 37 = 1.57), and the best case (bid on 35, ask on 37=1.51) and split the difference.   The order took a couple of minutes to fill, so that indicated that I got pretty close to the lowest possible price.  Too high an offer would have filled immediately,  too low wouldn't have filled at all.

December settlement value on VIX options: 20.84 (Symbol VRO)

December VIX options settled at 20.84 today (Symbol ^VRO Yahoo, $VRO Schwab, VRO Fidelity).   The VIX index opened at 21.50.  The difference of -0.66 is on the high side, but not significantly out of line from  previous months' settlements.  Overall the VIX index is strongly down trending (last month's VRO was 7.5% higher at 22.54), and as the market seems to be shifting into a narrow trading range, I expect it to decline even further.   Click on chart to enlarge

Going long on Oil

I went long on USO at 36.27, not a covered call, which is unusual for me.  I just can't see much downside in oil in a recovering economy.   Click on chart to enlarge.

December SPY dividend capture -- with quarterly options

SPY goes ex-dividend this Friday, with an estimated payout of about 0.50 per share.   I bought SPY at 111.46 and sold RDQLE to open (109 calls, expire 30-Dec) at 2.92 for a net investment of 108.54.  These calls will probably be assigned Thursday night, but if not my breakeven point drops to around 108.

Oil taking a beating -- is it the bottom yet?

Oil has been on a serious downtrend since late October.   I can see a couple of support points for USO, one at 35, another at 34, and 32 of course.

 Since my Dec 40 calls were nearly worthless at .03, I bought them back and sold Dec 35 calls at 1.01 to harvest some more time value this week.    During the last 6 months, when USO hits a bottom it tends to bounce back pretty quickly, but I think we'll have at least until the end of the week before things start heading back up.   Click on chart to enlarge.

S&P 500 -- trendline or trading range?

Eventually the trendline that the S&P 500 has been on will be broken, it is just a matter of when.    On the chart below things look like business as usual on the trendline, albeit noisier than before...     Click to enlarge charts: 

However looking at a finer time resolution, things look really different.  SPY in this chart looks like on the 16-Nov, things shifted into a narrow trading range between 111.25 and 109.25.   Which is it, trendline or trading range?

VIX option vertical spread close-out

Although this position expires next Wednesday, and the VIX index needs to drop below 20 before I get less than the maximum profit, I decided to close out the position at 85% of the maximum profit.   The VIX index is on a long term downtrend and I wouldn't be surprised to see the market uptick pretty strongly in the next couple of days.   I created this position with a debit of 9.65 and closed it with a credit order of 9.95--which was a halfway split of this morning's bid/ask spread.   The Dec 10 calls were quoted at 12.20/12.90 and the Dec 20 calls at 2.50/2.70.   The actual close out values for the calls were 12.57 and 2.62.

At least one provider that has their VIX Option greeks right...

Chris McKhann commented on a recent post of mine, that  LIVEVOL provides free delayed quotes that include correctly computed greeks for VIX options.  This site is much better than my approach which requires you to laboriously compute the greeks for  VIX options one at a time.

Thanks Chris!

Close enough to the bottom trendline --back into SPY

It seemed close enough to the bottom of the trendline channel to jump back into SPY.  Bought at 109.70,  sold Dec 110 calls (FYNLF) at 1.30 for a net investment of 108.40.   Click to enlarge chart.

How to go long on VIX

    See my new blog post on this subject for an updated version.

The Gold Bugs experiencing fear

The chart for GLD looks like a bubble has burst.  It is amazing how fast things can fall when the mood swings.   Of course the "$2000 right around the corner" camp might regain control, but right now I'm betting on fear.   My position is showing a small profit, but I'm not bailing out now...

Click to enlarge.

The news wasn't that good...

At opening yesterday, SPY was up almost 2 points from Thursday's close.  The overnight news was that unemployment increased less than expected.  While good news, this didn't seem to me the stuff of an exuberant breakthrough from the current trading range around 111.25.  The VIX was still dropping in early action, so I waited until it has bottomed and bumped back up to 20.70 before I bought SDS (double short S&P) at 35.05.  I sold about an hour later at 35.45.

I was too quick to sell--another 30 minutes would have given me 36.30, triple the profit, but this is classic retrospective thinking.  I had more than achieved my target profit from the position.  However, I should have thought about putting a trailing stop or similar in place because the market still was in a pretty fearful mode.

VIX and VXX as leading indicators in a sideways market

Today I noticed that SPY had been an almost horizontal line for over two days, stuck at 111.25.  It seems like this is often a setup for a fairly sharp sell-off when it appears a rally has run out of gas and fear gets an upper hand.   The S&P value was going nowhere, but fairly early in the day today, around 10:00, the VXX started climbing.  Intraday the VXX gives a pretty good indication of close in VIX futures action.  The VIX doesn't start to move up until quite a bit later, but look at 2:30 on the intra-day SPY chart.   SPY rallies a little, but the VIX isn't buying it--it's going up too.   In this case anyway it appears the VXX signaled that traders were getting nervous, well before the decline started.

I was very tempted to buy some SDS -- double short SPY in the early afternoon, but chickened out.
Click to enlarge.

Computing the correct greeks for VIX options --volatility, delta, gamma, ...

Check here for an updated version of this post.
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Where are we on the SPY trendline--Fear or Greed?

If you were quick on the trigger last Friday or yesterday you could have jumped into SPY as it crossed the low bound of the trendline at 108.  However, I'm not convinced we have really gone through a typical down cycle.  The Dubai meltdown was a random event that triggered the decline, but it seems to have been discounted fairly quickly--I guess a 80 or 90 billion dollar default seems like small change right now...   And even though there were pretty big drops in the market for those two days, things closed higher than they opened, not typical for a fear cycle.

I've stayed pretty conservative the last two weeks--about 2/3rds in cash.  My current positions:  covered calls on Oil with USO, a pseudo covered call on VIX, a dividend capture play on AGG, and a so far uninspired covered short bet on Gold.  Click to enlarge.

Bottom line, my guess is that we will head for the bottom line of the trend "channel"  in the next couple of days--but I will be totally unsurprised if I am wrong.

AGG dividend capture -- ex-dividend update

When I bought AGG a couple of days ago, I put in a sell order at 105.84 -- this would have given me the dividend amount of gain before the dividend was distributed.  The stock went as high as 105.83 yesterday--close call!   The stock opened at 105.35, off .12 from its dividend adjusted close of 105.47 yesterday.   My break even point of this position with dividend is now 105.17.  The dividend amount was .35, and uptick from last month's .32.

Ex-dividend Dates for Schwab's new commision free ETFs 23-Dec-09

Please go to this post in sixfigureinvesting.com  for the latest dividend information.

ETF ex-dividend information AGG, IEF, JNK, TIP, TLT and more

Please go to this post in sixfigureinvesting.com  for the latest dividend information.

Back into Oil 27-Nov-09 Buy-Write at USO 38.20 / 1.49

USO has been on a pretty negative trend recently.   The big question is whether it will drop through the resistance level around 38, or will it start trending back up.    With the general economy on an uptrend I doubt that oil prices are really going to drop much, so I bought USO at 38.20 and sold to open Dec 38 calls at 1.49 for a net investment of 36.71.    If USO just stays where it is the gain at the option expiration would be $3.5%  for a 3 week investment.

Click to enlarge

AGG dividend capture - 1-Dec 09

AGG goes ex-dividend next Tuesday, the 1-Dec.  Last month's payout was .32, and expect about the same for this next distribution.   I looked at IEF, but it has been on a very strong upward trend that looks peaky, so I decided to go for AGG, which has been pretty stable.  I bought AGG at 105.52.

Ex-Dividend DIA, JNK, BIL, ITE, TLO, IPE, LAG, TFI, CXA, INY, SHM, BMX, , WIP, MBG, ITR, MWZ, LWC, CWB, VRD

Please go to this post in sixfigureinvesting.com  for the latest dividend information.

Covered short on Gold

I'm not a gold bug.  Unlike oil, which people use whether they want to or not, gold is generally a optional purchase.  Certainly there are some industrial uses for gold, but at over $1000 an ounce people are pretty motivated to use as little as possible, or develop alternate solutions. So I'm not that impressed with the long term prospect of a big pile of metal locked somewhere in a fortress that is expensive to hold, doesn't generate dividends, and doesn't create value.

I think the current rise is a speculative bubble--but knowing when it will burst is always a challenge.   I'm very willing to give up any up-side on gold, in order to make money on the downside.  I sold GLD short at 114.44 and bought 108 Dec calls at 7.08 for a net credit of 107.36 per share.  If gold continues its upward trend I can only loose .64 maximum per share, but if things turn-around the trade will turn profitable well before the 108 level is reached.   In retrospect I probably would have been better just buying 109 Dec puts, but for some reason I have always felt more comfortable with calls.

Dividend capture in December

 Most ETFs with monthly payouts (e.g., AGG, IEF) go ex-dividend 1-Dec (week from Tuesday), so I will be looking at some dividend capture plays for them.    Last month's IEF dividend capture took over 3 weeks to play out, and some days I was a point or more in the red. Even though the position ended up at the maximum profit I'd rather not repeat that level of exposure--I do expect interest rates to start going up pretty soon.

AGG  recent price 105    last dividend  .32
IEF    recent price  92     last dividend . 26

I will also be looking at a JNK dividend capture with an inverse SPY (SH or SDS) as a hedge.  I've noticed that JNK is surprising well correlated with the S&P 500 index.

JNK  recent price 38  last dividend  .38

In addition I'll investigate buying DVY in late December (ex-dividend 23-Dec) with an inverse DOW as a hedge.  It had a $0.39/shr payout last September (it closed Friday at 42.67) - and effective annual yield of  ~3.8%

December pseudo covered call on VIX

In the next couple of weeks I'm expecting a slight correction in the markets, so I expect VIX  / VIX futures to jump up a bit from their current 21 / 23.20 levels.   I bought 30 Dec 10 (VIXLB) calls at 13.19 and sold 30 Dec 20 calls (VIXLD) at 3.54 for a net debit of 9.65.   I will put a close out order in place around 9.90, hoping to cash out early if the markets switch into fear for a while.  Any serious uptick in the VIX should drive the time value in the short options towards zero, while the long 10 calls should closely track the underlying December VIX futures.

As usual, I found that you can buy/sell VIX options at prices that split their bid/ask prices plus .05.  So for example if the 10 Dec call  quote is 12.80/13.50  -- a large .70 spread, the call can be bought for about 13.20 and sold for about 13.10.

Covering up oil and consumers

Sold December 40 USO calls at 1.60 this morning to cover my long USO position.  My breakeven on this investment is 38.07.

Nice 1.5% bump in XLY (consumer sector)  this morning--sold December 29 XLY calls at .75 to cover my long position.

November equity option expiration aftermath...

As expected my SPY (position 1, position 2) , IEF (dividend capture) , and USO (position 1)  ITM covered call positions were assigned this weekend.   My Nov 42 USO calls expired worthless, so I still hold USO in that position.  I'm hoping for a bump up in oil prices, hopefully enough to get USO back near 42, before I sell calls against that position again.

  I also still have my XLY position, it closed Friday at 28.69, so the Nov 29 calls I sold last week zero'd out.

I expect the market to have a couple more down days, plus I prefer to not be invested in calls with 4 weeks to go before expiration, so I plan to primarily be in cash this week.

Not done yet...

Based on the trendline shown below, this downswing isn't done yet.   I'm looking for this fear phase to break 1080 on the S&P 500 before we start back up again.  Click to enlarge.

VIX option expiration and VIX option payout

For an updated version of this post see Trading VIX options.

November 2009 VIX options expiration value = 22.54

The November VIX options expired with a print, or settlement value of 22.54.   This is recorded as the symbol VRO.  Lookup symbol:   ^VRO (Yahoo),  $VRO (Schwab).   The cash VIX opened this morning at 22.35.

The SPY trendline comes through again

After a head fake on the 12th, the S&P 500 came through again, breaking through the high range of the trendline.  All my SPY buy-writes are well in the money, but my Nov 41 USO calls are currently about .5 OTM, so I'm hoping for a little more pop there to get the maximum profits out of my USO buy-writes there.   Assuming the market doesn't tank in the next couple of days all of my positions will be closed out with assignments (assuming USO goes over 41).   I may roll-over the USO positions to December calls. because I don't see much downside risk there.    Click to enlarge the graph.

Some "long" house cleaning -- before we go back into fear mode...

It appears that we are close to finishing the latest greed phase on the SPY trend line.  In anticipation of this I am cleaning out some long positions I have had for a long time:

MWTRX   Mutual Fund Intermediate Bond fund

SSAIX International Stock fund

XLY  Consumer ETF  -- wrote a $29 November  ITM covered call to close this out

XLE   Energy

IJH  Midcap  S&P 400

Of course, the market might decide to go on a big upswing instead of going back into fear, but I really am expecting the market to go into a more lateral, higher volatility mode pretty soon.

Close out of my November VIX position

I closed out my VIX bear spread position for a net debit of .10, giving a profit of .35 per option.  Given the behavior of the market yesterday I was going to cancel my GTC order and hold on a bit more, but the order filled. Still a  nice profit.

Early Christmas present from IEF--or give and take?

I have not so patiently waited to close out my IEF dividend capture position.  I am still short IEF 91 Nov Calls and long IEF.  The calls have been showing IVs that have moved from really high to outrageously high.   They have been marked as being adjusted, and today I found out why--IEF declared a long term capital distribution of 0.51 for shares owned before the 2nd of November.  This was certainly not a routine distribution, unprecedented in at least the last 5 years.   As near as I can tell this surprise distribution will be extracted ($50.90 per call) from the short call holders who held the short positions before the distribution if the options are called.

With this information the premium price for the calls makes sense. Since I own the underlying this doesn't hurt me--I've already collected the distribution, but it seems like it could be unfair to traders with net short positions on call options.

If my interpretation of this modified contract is correct, ITM options will carry a .51 premium at expiration in addition to their intrinsic value.

VIX quotes, VIX option quotes, greeks

You can get delayed VIX quotes on Yahoo with the symbol ^VIX

You can also get VIX option quotes here.  Go to here for the correct expiration dates (always last trading on a Tuesday, expiration on a Wednesday morning)

You can get free delayed quotes for VIX options on LIVEVOL that also provides correctly computed greeks for these options--something none of the big brokers gets right. .

VIX--the third dimension of monitoring the market

The market was pretty nervous today, but didn't seem too panicky. I was wishing I had been a little less demanding on closing out my bear VIX spread.  I have a GTC order in with a debit of .10 that probably came within a few cents of filling a few days ago.  If I had settled for .15 I would have been out with 66% of my maximum profits.  Then I could have gotten back in at least a credit of .30.  Oh well, it is always so easy in retrospect.

  I like to monitor the minute by minute intra-day charts of  SPY, VIX, and VXX.   It feels like the volatility indicators add a third dimension of visibility into the market.  Not only can you see the price movement over time, with the VIX you can see the nervousness of the market in real time too.   The VXX, being driven by the VIX futures feels more like the medium term view--the trader view, rather than the emotional gauge.

  It would be interesting to know primary and secondary forces driving the moves in VIX on a day like today.  My guess is that the main driver increasing the VIX on nervous/ strongly down days like this is demand for protective puts, and secondarily arbitrage, or just market maker compensation on the call side.  I wonder if anyone has ever figured out how to get data on this topic.          

Round trip time from fear to greed and back = 22 days

The SPY trendline continues to provide reliable buy and sell signals.  If only we had known this ahead of time we would be insanely rich by now.   Of course this must end, probably pretty soon, but I think it is a beautiful illustration of human psychology.  Click chart to enlarge.

I looked at the trading days between the peaks and the valleys from mid August until now.  My somewhat subjective data is shown below:

Cycles of fear and greed

Timeframe (mode)	Trading Days	Summed days: fear+greed
Mid August --valley to peak  (greed)	9
		12 (valley to valley)
Late August --peak to valley (fear)	3
		17 (peak to peak)
Early September --valley to peak (greed)	14
		21 (valley to valley)
Mid September --peak to valley (fear)	7
		22 (peak to peak)
Early October --valley to peak (greed)	15
		22 (valley to valley)
Mid October --peak to valley (fear)	7
		12 days so far (peak to peak)
Early November  --valley to peak (greed)	5 so far

Some observations:

• As we have all seen, things go down a lot faster than they go up.  In this case about twice as fast
• This fall the full cycle from fear to greed and back again has been around 22 trading days -- about a calendar month.  In this black and white environment -- doom and gloom galore + a raging bull rally, is this our natural rhythm? 
• The cycles have been on the high side part of the cycle when options expire each month. Coincidence?   Certainly a happy alignment for covered call writers like myself. 

As I have said, this trendline must end before too long.  My prediction is that the S&P will hit 1160 and then move into a trading range.  Why 1160?  Because looking at the longterm chart the only reasonable resistance point is at that level -- from back in 2004.   Economically it makes no sense that a trading pattern 5 years ago should matter, but humans look for patterns, experience fear and greed alternately, and trade according.

VIX Options and Equity Expiration Dates Nov, Dec, Jan

The next three expiration dates for VIX options are:

November 18th
December  16th
January 20th, 2010

The next three expiration dates for Equity options are:

November 21th

December  19 th

January 16th, 2010  (week before VIX option expiration)

Source:  

  2010 OCC Calendar

USO Covered Call -- Hedging the price at the pump

There aren't many opportunities to hedge our market positions with our personal finances.  It's nice that if I bet wrong going long on USO, that I will be paying less at the pump the next time I fill up, and if I'm right I've more than recouped the extra cost.  

 Doubled up on oil, buying USO at 40.97 and sold-to-open Nov 41 calls at 1.30 for a net investment of  39.67.   I did sequential market orders because I have not been getting quick fills on combo orders on USO.

Confusion about the VIX and VXX continues

It is possible that the confusion about VIX, VIX options, and the VXX will be permanent.  This article is typical.

One quote: "The recent market action has pushed the 30-day historical volatility up to 20 percent, but clearly the VIX continues to price in far more volatility than there actually is."

People seem to want the VIX index to reliably track the historic volatility.  While this is an interesting comparison, the VIX is tied to current (minute by minute) SPX options premiums.  Do people really think that options traders give a rip about historical volatility?   The premium (usually expressed as implied volatility) of these options is about supply and demand together with fear and greed.    On a fearful day like today people are willing to pay a premium for protective puts--hence the VIX goes up.  The maximum volume on a specific strike was more than 2X for puts (23000 at a strike of 1000) compared to calls (8465 at a strike of 1050).   The VIX index is not a market, you can't buy or sell the index--it is a metric! Like the temperature gauge on your car it just measures something.

Another quote: "But when the VIX is above the VIX futures, as it is now, then the VXX becomes a great way to play a further pop in volatility. The VXX is based on the futures trading at 28, and the VIX is above 30. The futures are pricing in a lower VIX, but if the VIX continues to climb, the VXX will actually outperform."


Huh?   Outperform what?  When the VIX index is strongly up VXX  and VIX options will always be below the VIX,  because they are based on VIX futures--which inherently lag compared to the computed, realtime VIX index.   The VXX, being a mix of the nearest, plus the month out futures has no real potential to out "pop" the VIX options, which themselves will always be out popped by the VIX index itself.   As far as I can see the only advantages the VXX has is that it is not a confusing thing like a future, or an option, and you can actually buy it.

Still in IEF -- Dividend capture

My IEF calls did not get called over the weekend, so I will collect the .2609 dividend per share on my position.  It's not profitable to close out with the current premiums on the options, so I am holding onto the position.  With the dividend my break even point is now 90.55

Back into Oil -- November chapter

I'm not convinced that USO won't settle back into its old trading range of 34 to 38, but it has been hovering around 39 to 41, so it could be establishing a new support level..    I tried some combo buy-write orders this morning, but didn't fill--the market was pretty active.   Ended up doing market orders, buying USO at 39.91 and selling to open  Nov 39 calls (UBOKM) at 1.97 for a net investment of 37.94 per share.

After the SPY trendline breaks, then what?

The current SPY trend line obviously can't continue indefinitely.   Although I don't think charts predict the future, they do show previous psychology, so I took a look back at 12 years of data.   A couple of interesting things stood out to me.   In that time span there have been three fast recoveries after significant corrections.   The one in Sept 98 through May 99 was after an approximate 20% correction (seems mild now). Bear phases beginning in 2000 and 2008 both ended in March, and then began dramatic climbs--the 2003/2004 climb lasting a full year, and the 2009 bull run with 7 months so far.    With the 1998/1999 and 2003/2004 climbs, steep trend lines both ended with a transition into a trading range,where the S&P 500 traded in a fairly narrow range for quite a while.      Click on chart to enlarge.

Some people are predicting a "W" shaped recovery, with the market going into a sharp correction.  Others, probably gaining in credibility now that we are supposedly at the end of this recession, are predicting a continued bull run, or a transition into a "square root" shape.    My guess is that we will go into a trading range--which works out fine for me if I can figure out the support and resistance lines relatively quickly.

The chart below superimposes the 2003 and the 2009 recoveries on top of each other.  The SPY prices from 6 years apart are absolute (not scaled).  So much for a buy and hold strategy...  On the other hand, the volumes on SPY in 2009 are dramatically higher -- almost a factor of 6.    The 30 day average volume numbers are heavily massaged to get them to fit on the same graph and the first 30 days is not fully averaged due to my laziness.     Click to expand.

There were a couple of things that surprised me in this graph. The 2009 recovery, while steeper than the 2003 event, has settled into a very similar path now.   The capitulation in March 2009 was more severe (with good cause) than the 2003 market--people were incredibly negative.   The shape of the relative volume curves are very similar too, with high volumes as the recovery began, and then dropping off fairly sharply as prices rose.

  If we move into a trading range, then we can reasonably expect relative volumes to increase.    If the 2009/2010 recovery matches the 2003/2004 recovery we will have another 4 months on the trend line.  I'd be surprised if it lasts that long before we go into a trading range.

Gut check time -- time for The correction?

Market is skittish today, VIX above 30.  None of the news looks particularly ominous to me.  Doubling up on the SPY trendline staying in play.    Bought SPY at 104.22,  sold-to-open 105 Nov calls at 2.27 for net investment of  101.95

AGG dividend capture -- in on Thursday, out on Friday

Thursday: AGG goes ex-dividend next Monday, the 2nd, last month's payout was .34 per share.   Bought AGG at 104.45.

Friday: With equities sagging this morning the bond funds are trending up.  I put in a limit order of 104.79, and it filled a couple of hours after market open.  If I wait for the dividend there will be an inevitable wait for AGG to recover back to my starting point.   I don't care how I get my .34 per share--the faster the better.

Trading the trendline -- ready for the next round?

I'm wondering how many traders are watching the S&P 500 trend line these days.  I'll bet a lot are.  Becomes a self fulfilling prophecy--for a while...  Click to enlarge.

Did a Buy-Write of SPY at 105.59, sold 106 Nov calls at 2.19 -- net investment of  103.4.  Given our position on the trend line I went a little bit more aggressive, selling an OTM call.

Bearish on VIX, bullish on the market -- worst case loss, best case profit

I like the odds of  VIX staying below 26 for much of the next 16 days until the Nov VIX option expirations.  Did a bear vertical spread, selling 30 VIX Nov 26 calls and buying 30 Nov 27.5calls for a net credit of .45.  Tried .50 for a while without success.   The 0.45 order took about 5 minutes to execute.   The quoted net on this spread was 0.25.

The .05 difference between my initial and final offer was worth 30* .05 * 100 = $150, so it is worth a few minutes of effort to see if the market will bite.

The worst case loss on this position is 30*100* 1.5 (the spread between the 26 and 27.5 options) - 30*100*.45 (the net credit when opening the position) =  $4500- $1340 = $3150.  The best case profit is keeping the initial credit of $1350 -- if the November VIX options settle below 26 on the morning of the 19th.

Out and back into IEF

The recent downturn in equities has been accompanied by bond prices increasing.  My IEF position had already given 80% of its maximum profit, so I closed it out for a net value of 89.93.   With only 3 trading days left, it doesn't feel too risky to re-establish the position with 91 calls--again, hoping for option assignment, but ok if I get the ~.25 dividend.  Net investment was 90.81 per share.   If I had been thinking I could have just rolled the options up a $1, but with the combo orders I used the commission is not much different than a straight option order.

SPY Buy-Write

Did a covered call with SPY (105.51), selling to open Nov 105 calls (2.26) for a net investment of 103.25.

Trading the SPY Trendline -- 27-Oct-09

SPY has been on a classic trend line for several months.  My observation is that the stock market is no respect of  charts, but lots of people follow the charts and trade accordingly--so I use charts as a psychological predictor.  According to the trend line, SPY should bottom around 105.5 in this current cycle and then start making its way back up again.   I plan to jump into SPY at around that point.

Click chart to enlarge.

Historic Volatility for ETF and ETNs

I recently created a Buy-Write position in IEF as a dividend capture/ early option premium capture strategy.  One of the things I am interested in is the behavior of the  implied volatility of the 90 Nov call option relative to its historic volatility.  The CBOE has a nice feature that gives the volatility for stocks but it doesn't cover ETFs (like IEF, AGG) or ETNs (like VXX).   The Option Trading Tips website offers a free spreadsheet that does a great job of providing this historic volatility for any symbol you select.   You fill in the ticker and the time period you want and it accesses the Yahoo site to get the data.

This is the YTD result for IEF  (click to enlarge)

For IEF the historic volatility for the last 50 days (one of the spreadsheet settings) is 8.28%, which maps closely to the current  (27-Oct) implied volatility of IEF of the 90 Nov calls, which is 8.7%.  I'll be watching the IV in the next few days before and after the ex-dividend date of 2-Nov.

VIX option symbols, free delayed quotes, exercise styles, and "below intrinsic" prices

 This post has been updated here.

IEF Dividend Capture--or more likely, early option premium capture..

IEF goes ex-dividend next Monday, with a payout of about 0.25 per share.  Unlike AGG, the option market for IEF has reasonable ask/bid numbers.  I did a covered call of IEF (90.84)  with a sell-to-open on  90 November calls IEFKL (1.11) for a net investment of 89.73 per share.  These calls will probably be assigned over the weekend because of the dividend payout--in which case I will get an early payoff of the .27 premium on the calls.

 If the options aren't called then I will collect the dividend, which will lower my breakeven point to around 89.48.  I expect the Implied Volatility (IV) on these options to jump up next week to pretty much cover the amount of the dividend payout (the avg IV is currently 8.7) --there is no free lunch on Wall Street.   If this scenario plays out I will watching how quickly this dividend driven IV bump decays.  This in itself might be an interesting trade possibility if the ex-dividend bump in IV decays quickly.

I did a combo order to create this position.  Initially I offered 89.70, which didn't execute.  When I offered 89.73, which was 0.05 less than the asked side of the option, the order filled immediately.

Update on October 16th Pseudo Buy-Write on VIX

The October VIX options settled on the Wednesday the 21st with a VRO settlement value of 20.82 -- which gave me a net loss of 1.18 per option pair on my position  (my net investment was 22).  Just to rub it in a bit, the VIX ended the settlement day above 23.

 This scenario points out how useful a true VIX underlying would be for this sort of investment.  The 22.5 short call would have expired worthless on Wednesday morning and I could have sold the underlying for what I bought it at or better that same day.

  I investigated using the VXX as a surrogate for the long side of a VIX Buy-Write a few months ago, but I found that  the VXX's imperfect tracking with the VIX makes it unsuitable for these sort of trades.

November VIX option expiration date

In November we are back to VIX options expiring the Wednesday before (Nov 18)  the Saturday (Nov 21) that equity options expire.   The last day of trading for the November VIX options will be Tuesday the 17th.

The November VIX options closed at  22.54   see this post for details on the expiration process.

Pseudo Buy-Write on VIX -- Long 10 Oct calls, Short 22.5 Oct calls

A bull vertical spread with the long end deep in the money is the closest thing I have found to a covered call with VIX.   The Oct VIX options expire next Wednesday (last trading on Tuesday).   The October VIX calls have the Oct VIX futures as their underlying, rather than the "Cash" VIX which is computed off of SPX option implied volatilities.   A couple of observations:

1. Wednesday morning, at expiration, the VIX futures and quoted VIX come together with the VRO quote that is used to settle the expiring option
2. The VIX tends to close low on Fridays -- anticipating the time value loss over the weekend
3. The market has been on a long bull run, a little profit taking seems in order
4. VIX futures are at approximately 22.95,  The VIX is at  approximately 22.4
5. Since the VIX futures are near the 22.5 strike point the premium is attractive  (implied volatility of ~75) 

I created a vertical spread with VIX 10 Oct options ( 12.70/13.20 bid/ask) as the long ITM portion, with VIX 22.5 Oct options (.90/1.05)  as the short side.  I put in a debit order at 11.95 which did not fill, and then changed to a 12.00 order which filled at 12.97 / .97.   This fill re-enforces my observation that the VIX option orders will usually fill at split the ask/bid + a few dollars in the market maker's favor.  This fill  is much better than the quoted net of (long asked) 13.20 - (short bid) .90 = 12.30.  The difference in best case profit for this 4 day maximum investment is  .5/12 (4%) vs .2/12.30 (1.6%) -- so obviously playing the spread is important.   The break even of this position is at a Oct VRO of 22.00.

I put in a limit order to close out the position at a credit of 12.40.

Buying fear in the morning (update)

The VIX is at year lows, and I think a small correction is fairly likely--SPY down to 104 perhaps.   I bought Oct VIX 22.5 Calls at 1.20 -- only 8 days to go before expiration.   Bid / Ask spread was 1.05 / 1.30 and the order took a couple of minutes to fill.

Update -- only a couple days to go bailed out at 1.00. Friday morning

Trading the Trendline -- Ready for a correction?

We are almost halfway through the ill-fated month of October without a major correction.  The trend lines below suggest we are ready for a down cycle.  My covered call positions (1 2 3) are sufficiently in the money that I have decided to hold out for expiration at the end of this week, but I did close out a long position in SPY today as well as close out my VIX bear spread yesterday.   It is tempting to bet on a correction, but that goes against one of the time honored rules of trading -- don't fight the market.

A break-out on the upside is certainly a possibility.  I think there are still a lot of people on the sidelines, earning next to nothing on their cash and watching the market run away from them.  It is about time for them to jump in...

Click to enlarge the graph

Closed out VIX vertical spread--expecting fear to increase

The Oct VIX options still have 8 days to live and I expect  the market to have at least a small correction in the next couple of days,  so I decided to cash out of my VIX option spread and take my profits.   Tried debit orders to close out the position, starting at .08.  It finally went at .11.   At fill time the VIX 27.5 had a .20/.25 bid/ask, and the 30 was at 10/20.  The actual fill prices were .24 and .13 respectively.

Given the volatility of volatility (which you should understand if you are going to trade VIX options) I am wondering if in the future, in similar circumstances, if  I should take larger positions and plan a profit exit point that doesn't try to wring so much of the potential profit out of the position.   In this case I only left .11/.75  -- 15% on the table, but exposed myself to substantial risk that the market would go against me.

Next Ex-Dividend (24-Dec-09) OEF IVE IJT ISI IJK IJR IVW IJH IJS IVV IJJ

Dividend information (ex-dividend, record date, pay date) for IShares S&P domestic ETFs from their  Distribution Schedule

EX-DATE: 25-Mar-09 23-Jun-09 23-Sep-09 24-Dec-09 29-Dec-09

RECORD DATE: 27-Mar-09 25-Jun-09 25-Sep-09 29-Dec-09 31-Dec-09

PAY DATE: 31-Mar-09 29-Jun-09 29-Sep-09 31-Dec-09 6-Jan-10

iShares S&P 100 Index Fund (OEF) iShares S&P 500 Value Index Fund (IVE) iShares S&P SmallCap 600 Growth Index Fund (IJT)

iShares S&P 1500 Index Fund (ISI) iShares S&P MidCap 400 Growth Index Fund (IJK) iShares S&P SmallCap 600 Index Fund (IJR)

iShares S&P 500 Growth Index Fund (IVW) iShares S&P MidCap 400 Index Fund (IJH) iShares S&P SmallCap 600 Value Index Fund (IJS)

iShares S&P 500 Index Fund (IVV) iShares S&P MidCap 400 Value Index Fund (IJJ)

Next Ex-Dividend Date (29-Dec-09) AGG AGZ CFT CIU CMF CSJ EMB GBF GVI HYG IEF IEI IGOV ISHG LQD MBB MUB NYF PFF SHV SHY SUB TIP TLH TLT

 See this link

2009 / 2010 Options Expiration Calendars

• The CBOE and OCC 2010 calendar links are here

When, not if, will bonds take a beating?

I don't think many people expect interest rates to stay at their current low levels indefinitely--unless you are in the end-of-the-world camp.   


This article: Bond Funds Are Too Expensive. Try Covered-Call Strategies Instead discusses alternatives to bonds, specifically covered calls.  Unfortunately covered call positions get mauled in bear markets (typically they turn into long equity positions that you have lost lots of money on).


It is probably fair to assume that when interest rates start increasing it will be because businesses are doing well--which bodes well for equities.   Bonds will probably take a dive before it's equities' turn again.  


Might be a good time to put in limit orders on bond positions--usually when these trends reverse they go fast. 

Update on two day foray into quarterly options (with update)

The quarterly options with strike price of 106 on this position that I was short on expired worthless on the first of October since SPY had dropped below 106.   The market was looking edgy and I considered just taking my losses, but instead I sold-to-open Oct 106 calls against my SPY position at 1.28.  Actually I had to create a bear spread position, because my brokerage account believed the quarterly options still existed...  This IRA account allows equity spreads, so I bought 120 Oct calls at 0.01 to create the spread position with the short options.     SPY continued to fall and on the next day I closed out at position with the 106 calls at .77 and the 120 calls at .01 for a net profit on the spread of  0.51.   Of course my losses on the SPY position had been more like 2.00 per share.    I felt the market was near to bottoming out, so I just held onto the SPY.  Today SPY hit 106 and I  considered reestablishing the short 106 call position, but I think there might be one more day left in this rally.  We will see.

Update -- Thursday 8-October

SPY is at 106.65, and if you believe the trendline it won't go much above 107.5.  Sold-to-open 106 October calls at 1.76 to create a covered call position.

AGG Dividend capture -- update-- good news, bad news, and dumb news (final)

The good news..  AGG will distribute .342 per share on October 7th,  also good news,  I sold my AGG at  104.90 on October 2nd,  $0.18 higher than what I bought it at on the September 29th.  So far so good.  The bad news, PST, the double inverse 7-10 year treasury bond fund dropped like a rock-- dropping as low as 51.09 -- from my buying price of 52.36.   The dumb news: of course the long 7-10 year treasury bond funds goes ex-dividend on the first of the month also, and the short funds make sure there is no hedge opportunity there.  Its payout was .25.  PST closed at 51.55 today, so overall I am +(.34+.18)*100- .81*50 = +$7 per every 100 shares of AGG invested.  Not too exciting.

The timing of the ex-dividend was interesting.  The market on that day was off pretty strongly, and investors were bailing out of equities and apparently moving into bonds--that sector had a good day.  AGG traded at least briefly at 104.72, which would have gotten me out at my entry price.

The equities market is rebounding, and the bond funds seem to be weakening a bit.  I might hang on a bit and try to get back to my original .33 per share goal.

Final   8-October

   PST dropped  nearly to 51.00 yesterday, and the general trend line is disturbing, so when I saw PST bounce back to 51.66 I decided to close things out.   Final profit  (+.34+.18)*100- .70*50 = +$17.  This is 0.17 cents per share of AGG.   In general this experience reinforced my impression that it is tough to find a good hedge for a dividend capture play--in this case the ex-dividend date synchronization of the various bond type funds on the 1st of the month was my downfall.   Glad to get out with an overall profit.

Trading the Trendline - SPY Covered Call

I don't believe the past predicts the future, but I do believe that investors look at patterns and believe that they will be repeated--creating self fulfilling prophecies.    We'll see...  (click on chart to enlarge)

Did a buy-write of SPY, SPY at 103.10 and sold-to-open 102 Oct calls (SWGJX) at 2.64 for a net investment of 100.46.   To create the position I did consecutive market orders because the spreads were low.

When VIX options expire -- where do they go?

For an updated version of this post see Trading VIX options.

Looking for fear to decline...

I general I expect VIX to continue trending lower.  The sell off these last couple of days has jumped the VIX back up to 27.5, so betting on fear dropping I bought a bear spread, selling the October 27.5 VIX options (VIXJY) at 2 and buying the 30 VIX options (VIXJF) at 1.25 for a net credit of  .75.   Worse case loss is 2.5-.75 = 1.75, which doesn't feel too risky.

AGG dividend capture -- using PST as a hedge

AGG should go ex-dividend on Thursday--last month's payout was .33, so I expect a similar amount.  I bought AGG at 104.72 and bought PST, which is a double inverse 7 to 10 year term treasury bond ETF at 52.36.  I did a couple of quick samples that showed PST moves at about 4 times the percentage move of AGG.  I could be pretty wrong on this--I just checked a couple of random time periods.   I was just looking for something that would compensate for my AGG position if the bond market in general went south.

To set up the hedge I want the dollar changes in the AGG to be offset by the inverse changes in PST.   If I bought 100 shares of AGG, that would be $10,472--since PST moves at -4X the rate I would buy $10472/4 of PST or around $2618.  PST was at 52.3 at that point so I divided 2618/52.3 which gives 50.057 shares.   So for every 100 shares of AGG I bought 50 shares of PST as a hedge.   These ratios have to be refigured each time a position is put in place depending on share prices, it is just coincidence that they ended at a 2 to 1 ratio this time. This hedge is not suitable for a long term holding because of the inherent behavior of ultra-short ETFs but it should be fine for the relatively short time I hope to hold this position (less than a week).  My exit point is an overall $0.33 per share gain on my AGG--with or without the dividend.

PST apparently does not do regular distributions (which is not unexpected it being an inverse fund)--I checked to make sure.  They do capital gains distributions occasionally.   If the hedge is perfect I would hope to exit at the same investment level in absolute dollars on the shares--and collect the AGG dividend.

Two day foray into SPY quarterly options

There are a series of SPY options that expire on quarterly dates:  last day of March, June, September, and December.  Not all brokers offer access to these, but Fidelity does.  Wrote a covered call of SPY with the 106 Sept 30 call options (RDQIB).  Spy was at 106.10 and sold to open the options at .66 for a net investment (debit) of 105.44.  Maximim profit is .56 per share if SPY closes above 106 -- a 0.5% gain.

 I did a combo order--buying the stock and selling the options as a package at a specified combination price.   I have used these to try and beat the spread, but they can take a long time to fill, and the market can move against you.  More recently I have used them when the market has been active, the options prices have been bouncing around, and I don't want the stress of waiting for a options limit order to fill.  I don't recommend using market offers on options--even when the spreads are a penny I will put a limit order in at that price.

These options expire tomorrow night, so not long to wait to see how this turns out...

Doubling down on Oil

Went back in to oil yesterday. Did a covered calls with USO at 35.56 and Oct 36 calls (UBOJJ) at 1.25 for a net investment of 34.31.

Oil is off some more today.   Did covered calls with USO at 34.02, Oct 34 calls (UBOJH) at $1.47 for a net investment of 32.58.  My initial investment yesterday was about half of what I normally do with my SPY buy-writes, so I didn't feel too bad putting some more money down.  Mostly in cash other than the USO and my other static long holdings. The market in general looks soft to me.  I could see S&P 500 (SPY) dropping to the low end of its trend line channel -- which would be around 103.

Oil Dizziness Continues

On Monday I did a covered call with USO.  USO jumped about $1 at opening Tuesday, and my position went up about .5, which is about 30% of the available maximum profit.  Although I'm not entirely consistent with this, when I get a significant percentage of the available profit available that quickly I will sometimes exit the position.   Oftentimes there is a quick retrace after a big gain like this.  If I exit I can take advantage of that retrace.  If I'm wrong, I can re-establish the position with most of the remaining premium still available.

Oil trading making you dizzy?

Back into USO again today.  Price dropped to the $35/$36 range I have been using as an entry point.  Did a covered call -- bought USO at 35.83, sold Oct 36 calls (UBOJJ)  to open at 1.45 for a net investment of 34.38.  Maximum profit is 1.62 per share with USO above 36 at expiration--4.7%. 

September 2009 Ex-Dividend date for SPY: 18-Sept-09 Payout $0.5083 per share

Distribution date is the last business day of October -- the 30th.

All of my SPY holdings were called away on the 17th -- rather than dividend capture, perhaps I should rename the September related posts (one two) -- "Early Option Premium Capture" instead.  In a bull market (and after the fact) it is tempting to just hold the stock and collect the dividends.  On the other hand, watching a ton of stock go down day after day post-ex-dividend isn't much fun.

Out of Oil -- A Day Early

The current market feels pretty frothy,  USO is at ~37.5 and the strike price of my short options is 36, and I will not have internet access on Friday--so I decided to try and exit out of the position.   The maximum profit was a net of 36.  I put in a combo order at 35.96 that did not execute for around 15 minutes.   I resubmitted the order at 35.94 and it filled almost immediately.   I created this position with a 34.92 net, so I gave up 6/108 or  5% of the profit that I would have gotten if held to expiration--and if USO stays above 36.   Painful, but better safe than sorry. 

October VIX Option Expiration 21-Oct-2009

The October VIX options will expire the morning of the 21st.  The last day of trading will be the 20th.

Notes on the September Expiration
The September options expired today.  The VIX closed at 23.42 last night and opened at 23.28 -- not an unreasonable value given the behavior of the market this morning.  My September position closed out with the best case (modest) profit Bull Spread on VIX? -- More like a Bear

SPY covered call using Quarterly options -- Dividend capture part II

Bought SPY at 104.45, sold-to-open RDQIW at 3.96 101 strike Expire 30-Sept  (net investment 100.49). Should collect ~0.5 dividend also. Did Debit combo order because bid/ask spread on the options was significant.

Feeling Bearish on a Friday

Bought SDS at 41.29 at around 10:00 EDT

-- SPY Over trend line

-- 7 consecutive days of gain

--- Weekend coming up, people going into cash

-- News neutral

Sold SDS at 41.72 at around 1:45 EDT Net profit of 0.43 per share (before commissions)

SDS went as high as 42 in the morning, some sort of trailing stop might have made sense

After the holiday weekend, back into IWM

I'm pretty uncomfortable with this market, but my strategy is to not try to pick intermediate trends. I did a covered call (buy-write) of IWM at 57.36 and 37 Sept Calls (DIWIE) at 1.28 for a net investment of 56.08 per share. These calls expire in 9 days...

Delta hedging a theta positive position?

Covered calls are nicely profitable in rising or neutral markets--assuming you are content with annualized profits in the 12% to 20% range, however their dark side is the bear market. Those premiums help a little bit if your underlying is plunging, but as Nassim Taleb says, options sellers: "Eat like chickens, and shit like elephants. " In a bear market your capital can be severely ravaged.

I have tried delta neutral strategies, but what I did not understand is that they are only helpful if you are betting on implied volatility moving one way or another. A "hold till expiration" call writer does not care about IV after they put their position in place, although it certainly impacts the premium they get. As the option approaches expiration, the IV collapses to zero and it only matters where the underlying is relative to the strike price--hopefully above.. For a hold until expire strategy the delta is effectively zero above the strike price and 1 below that.

It did seem possible that if you didn't care about delta, or IV, you might be able to hedge just for theta -- the time decay of the option. But the link below points out that you can't hedge gamma (the change in delta with then change in the underlying) with the underlying movement without hedging out theta too. I think this pretty much rules out any generalized delta neutral strategy.

http://www.optiontradingpedia.com/gamma_neutral_hedging.htm

The only possibility I see now, is hedging over a more limited range. If you write ITM calls, then your upside payoff is fixed when you create this position. This means that any attempt to delta hedge on the upside inherently lowers your payout. One thing to look at would be to write slightly out of the money calls. In this case, there would be some opportunity to give up that upside if the equity goes up, in exchange for some down side protection.

I think this is a long shot though. I think the better protection is to reduce my overall exposure to the market--in staying in cash as much as possible, and staying on the sidelines when the overall downside risk in the market seems much higher than the upside opportunity.

The brainless covered call strategies (e.g., BXM), don't do this at all, they just roll their options at expiration regardless of the situation.

Russell 2000 -- IWM buy-write -- greed wins in the morning, fear wins by noon

9:25AM The market is at a pivot point, will stocks start trending up again or go for the dreaded "W"? My guess is for the uptrend, so I bought IWM at 56.10 and sold 56 Sept calls at 1.26 (net debit 54.84) -- two weeks to go on these options. I thought about going for more downside protection with the 55 calls, but gave up about .4 premium in that scenario. My greed overcame my fear.

11:40AM IWM is now at 57.04 (up .94 -- 1.6%), I've gotten about one third of my possible maximum premium in the last two hours. There is a lot more premium to be had by just hanging on, but it is hard to let that much gain ride on the table. I bailed out with a net credit of 55.24, gain of .4. I can write again another day (probably Tuesday) most of that premium will still be there.

The 3% solution?

SPY has pulled back around 3% in the last few days from about 103.5 to 100. Certainly there is still consderable downside risk, but my philosophy is to stay engaged with the market unless I am pretty confident the market is too high. Bought SPY at 100.17 and sold Aug 100 calls at 1.93 for net debit of 98.24. On the 18th, if SPY is over 100, and I collect the dividend distrubuted this month (ex-dividend date 18-Sept), the overall return will be over 2% for a two week investment.

Back into Oil - for a couple of weeks

Did a buy-write of USO at 36.67, sold Sept 36s at 1.75 for a net debit of 34.92. I tried doing a combo credit order order, but the stock was pretty volatile, so I went to a market order for the stock and a limit order on the option.

September 2009 SPY dividend capture--part one

The SPY ex-dividend date is 18-Sept-09, and I am expecting the payout to be around $0.50 per share.

The downside risk on the market has made me pretty nervious about taking big positions in SPY. However I did pull the trigger on a deep in the money buy-write on 27-Aug, buying SPY at 102.70 and selling Sept 97 calls at 6.21 for a net debit of 96.49. I expect these options to be assigned on the night of 17-Sept, which is fine because my profit should be very close to the dividend value. If the options are not assigned (unlikely unless the market declines substantially) , even better, I collect the dividend too.

Bull Spread on VIX options -- more like a Bear (with result)

For quite a while I have been looking at the possibilities of creating a pseudo buy-write on the VIX by buying VXX, and selling VIX call options. The less than perfect tracking of the VXX to the VIX makes this an iffy proposition, especially if I am trying for a lower risk, lower premium position.

While investigating this approach, I noticed that the split of the bid/ask prices on the deep ITM VIX options tracks the underlying next month VIX futures contract more or less exactly. It turns out this is not surprising because this is the underlying instrument for the VIX options.

Trading the VIX via options has some unusual aspects. The VIX will never go to zero while the market is still standing (a zero value would mean no volatility in the S&P 500), and has not been below 9 in several years. When the VIX does spike up, it is a given that it will not stay up there forever. Life, and the stock market have a way of returning to normal after big scary events--so does the VIX. This returning to normal phase has been playing out in this market cycle since the big fear phase that started a year ago.

I created a bull spread, long on the deep ITM option, and short on the 22.5 options. I looked at the 25 options, but the break even point was the VIX at 23.90, which was not something I was comfortable with. A continued big rally could drop it below that. The VIX 22.15 breakeven value for the 10 / 22.5 spread felt better. The numbers below show the bid/ask spreads and the midpoint between those values:

VIX Aug 10 16.90/17.50 mid 17.20

VIX Aug 22.5 4.90 / 5.20 mid 5.05 BE for bull spread 17.20 - 5.05 = 12.15 equivalent to VIX at 22.15 (year low 23)

VIX Aug 25 3.20 / 3.40 mid 3.30 BE for bull spread 17.20 - 3.30 = 13.90 equiv to VIX at 23.90 (barely a point below the level when I entered the order)

I made the initial offer at a 12.15 debit, which was a 50% split of the current bid/ask prices. That order didn't execute so I upped it to 12.20, and it filled almost immediately. This reinforced my observation that you can usually trade the VIX options around the midpoint of their wide bid/asked prices.

Since the short term VIX usually moves in the opposite direction of SPY, a bull VIX spread really is a bear spread from an overall market perspective. But even more fundamental, this spread is a bet on volatility not dropping too rapidly in the 22 days left on these option when I bought them. The VIX dropping below 22.2 would be ugly.

The initial debit order I put in at 12.15 --and overall 0.35 premium. It didn't go , I changed it to 12.20, and it executed almost immediately.

The overall return is about 2.5%, assuming the market doesn't go crazy--not bad for a 22 day investment.

16-Sept-2009  Sept VIX option expiration 

The VIX opened at 23.28 today, so this position closed out with both my 10 (long) and 22.5 (short) options in the money--as desired.  The recent rally made me a little nervous, but the 22.5 level never seemed at too much of a risk.   The Oct options don't expire until Oct 21st (35 days from now).   Today I'm not comfortable betting that the VIX will stay above 22.5 for that long, so the 20 options will be my focus of attention. 

USO roll over -- money left on the table

I didn't want some of my USO assigned tomorrow so I rolled my Aug 34 calls over to Sep 34 calls. I split the ask-bid prices on a credit order (0.45) and it went through immediately at 4.30/4.75. The speed of execution and the nice round numbers mean I left money on the table... Probably could have gotten at least another 0.05.

September update
Bought Sept 34 calls and sold Oct 34 calls for net credit of .55.   I tried .60 first with no execution.   The quoted net credit was .4.   It definitely pays to do the combined orders on these and start the credit offer near the net debit side of things.

Last week before options expirations--too tempting to resist

After a two day blow-off the market doesn't seem to be panicking. The IV on SPY calls jumped up a little and I found a .5% return on SPY for a 4 day investment too much to resist. Did a buy-write with SPY at 99.28 and 98 Aug Calls at 1.75 for a net debit of 97.53. I did sequential market orders because I didn't want to mess around with a true debit order. The market was very quiet at the time--no surprises.

SPY's September ex-dividend date Friday 18-Sept-09

As usual it's not easy to find the ex-dividend date for SPY. It's September 18th, and I'm guessing the payout will be about .53. See the CBOE website for the official SPY scoop. Don't expect them to make it easy, or predict a payout though.

September is a little far off for me to be thinking about dividend capture ideas (especially with options expiration this Friday), but as usual I'll try to be creative..

A week before expiration -- SPY buy-write

Did a SPY buy-write this morning, SPY at 100, sold Aug 99 calls at 1.93 -- both via market orders for an effective debit of 98.07. Almost 1% return for one weeks' investment is pretty attractive--assuming of course that the market doesn't dive. I could see a correction happening next week, but there is a lot of greed running around right now...

Day trading with buy-writes?

A good friend once suggested that my propensity to do buy-writes was silly (he might have used a stronger word). Since covered calls are a bullish strategy, why not just go long, instead of messing around with options strategies that strongly limit the upside and only give a moderate amount of downside protection?

The reason I don't follow my friend's advice is that if I'm in a short term timeframe, and just long with a stock I turn into a day trader. And I don't have the time, temperment, or track record pursue day trading. With covered calls the pace slows down, and I make better decisions. My other rational is that markets go side-ways a lot more of the time than they go up or down. Getting time premium from being short options is a good deal--most of the time.

Upside opportunity vs downside risk in the market is one of the qualitative measures my brain generates. Right now I see quite a bit more upside than downside, and the market has been making big positive jumps. To try and take advantage of those jumps (without day trading, and with some downside protection) I did a buy-write of SPY with Aug 99 Calls for an overall debit of 96.79. SPY was at 98.86 and the calls were at 2.07. I immediately put a close out order in for a net credit of 92.28 -- a .49 gain. I choose this strike price because it was just a little out of the money. The amount of premium starts dropping off as soon as the underlying increases past the strike price--assuming the IV stays constant. After I put in the credit order SPY moved up to 99.46, a 0.60 move and the resultant available credit moved up .29, very close the .5 delta behavior you would expect from an ATM buy-write combination. A short term move of 1.2 or so in the underlying should trigger this credit order.

Will the financials continue to claw back?

Sold Aug 13 calls for XLF at .24, currently XLF is 12.56 -- I guess I'm feeling a little optimistic about financials.