New Trading range

The market is beginning to behave like it is going to stay in this SPY 74 to 76 range for a while.   Only 15 days left on the March options

Sold one 75 call at 2.82 SPY at 74.63,  sold two more at 3.0 SPY at 74.97   effect debit  71.90

Premium 3.10   60% credit point 73.76

I have been looking a lot at hedging strategies -- the underlying price and time remaining on the option make the delta calculation challenging.   Surprisingly option delta doesn't really start dropping off until about 5 days before the option expires.  The ultra short S&P ETF  (SDS) is pretty interesting because it only requires 25% of the buy/write capital to provide a .5 delta hedge to match the option behaviour.  These ETFs might also provide some helpful delta modulation due to the fact that they carry the "Constant Leverage Trap" -- it actually might work in my favor because it appears to reduce the effective delta on the SPY up scenario.  Selling covered calls on SDS makes my head hurt.  I need to resurrect by Black & Sholes spreadsheet and do some simulations on this stuff.   My intutition is definately not up to the task.

I also need to think some more about taking quick profits.   I have missed out several  times on 30% of maximum profit sorts of opportunities very quickly after I make the trade. I need to consider a guideline there--basically an intraday guideline. 

Cure for the optimist?

 I have definitely been looking for upside in the market since around June 08.  This slow moving disaster of an economy has taken a long time to spill its guts along the roadside.   I think this market is going to go basically sideways for quite a while, but that won't preclude a few (or perhaps a lot) scary drop-offs during that time.  Even though the market has been tracing out a negative ramp since Oct 08 for some reason I keep expecting things to turn around and not go lower.   The November lows were tested out and bested (worsted?) yesterday, but today the market is having a good day, with a lot of volume--a good sign.  

    At this point I would have definitely been better off closing out my equity position last Friday, the option values were near zero.   Being in just the equity position is no worse than my previous strategy, but it certainly doesn't feel good when the market is tanking.    Clearly I was optimistic, gambling, when probably I should have been playing it safe.    

    Thinking about my strategy this weekend,  I think I can summarize my strategy as:

• Basically a bullish strategy
• Take 60% of premium when I can get it (glad I did that this time)
• Maximize premium (generally at the money options) 
• Hold on when the market drops--provides some much needed insurance--rest of portfolio is tanking too
• Try to maintain capital, generate maximum premium, have time be on my side
• Beat straight, no frill call writing strategies by taking short term gains, being on the sidelines for some of the drop-offs. 
• Stagger the trades, don't do it all in one shot, avoid being completely wrong

   Some behavoirs to avoid:

• Expecting the one day turn-around
• Trying to play the down side (time is against me, too much of a gamble, too hard to time)
• Letting the position partially unwind (equity only), very bullish--more risk

Monday's trade  $77.74  SZCCZ ($78 call) 3.45   Debit  74.29  Premium  3.71  60% credit  76.52

Tuesday's trade  $75.84  SZCCX ($76 call at 3.35  Debit of 72.49 Premium 3.52 60% credit 74.60

Gut check time

18-Feb

    Market went sideways today, and ended up mixed, not as panicky as it could have been approaching 3 month lows and a disconcerting down trend over the last month or so.   In retrospect I shouldn't have jumped in yesterday, a big bounce up today after a big drop like that would have been really unusual.  Antied up one more time, in line with my strategy with 300 shares of SPY and SZCBA at a debit of 77.79  The option, barely in the money has 1.21 of premium with 3 days left on the option  (1.5% return) -- pretty amazing.  

    If the market doesn't get back to 81 by the end of Friday, and if I don't close out the buy-writes I will have some interesting decisions to make.   Go for premium at the present level, don't lock in a loss by using strike points above the break even point, or wait for a market rally before re-establishing a option position.   Reminding myself covered calls are basically a bullish strategy. 

Testing the November 2008 lows

When I saw that the Asian markets were down yesterday I was pretty sure we would end up with a down day today--didn't do anything about it before market opening of course.  

The market is down significantly today, inspite of agreement on on stimulus and good news from Wal-Mart.   The overall trend from the last couple weeks looks negative, and I'm sure some people are looking for another drop-off.   The VIX jumped up to 50, 7 points this morning.  

For me it is was gut check time.  Do I stay on the sidelines, in fear mode basically, minimizing the damage of another drop-off, or do I continue on my assumption that the market is going sideways.   On the theory that I would be no worse off than I was before I did another buy-write with  300 shares of Spy  and 79 Feb calls at an 77.37 debit.  I manually executed the order with a market order on SPY and a generous limit order on the calls.   Both filled immediately--nice to not have that be a hassle. 

I looked at the premiums on my existing SZCBC options, with only 4 days to go I thought their premiums might be low enough to suggest closing them out and really bet on a rebound with SPY, but  their premiums are still quite high and I'm sure their implied volitility has upticked (53.45).    

Living in the trading zone

    The one month trading zone for SPY has been 80 to 87.   With my buy-write strategy I have lowered my break-even point down into the 78 to 79 range--maybe 3% downside protection.  The problem with a  trading zone startegy comes when (not if) there is a break-out one way or the other.  With an upside move, my current strategy prevents me from participating on the upside, and I likely leave 40% of the latest premium on the table--but I can live with that.   However, with a strong downside move I take a beating--one bad day could more than wipe out my 3% insurance policy.   My friend Asad's comment comes back to me--if you think you know the direction, why mess around with covered calls., just go with the simpler strategy and buy the equity out-right. 

    With the buy-write strategy I reduce the rewards of being right considerably, due to the counteracting long stock vs short option dynamics, in exchange for some insurance.  Would I be better off buying puts at the next peak (e.g. March 79 probably around $250 each) and then just going long in the next valley?   If the market breaks out on the upside, I've lost my put investment (although I might sell them to reduce the loss if there was a clear breakout up) but I long in enough stuff I'll be happy any.  If the market drops through the floor I'm protected at an effective $76.5 point (strike price - the cost of the option).

    For the down side part of the cycle I could do a similar thing with calls and then much more comfortably short the market. 

  Another issue is my time.  If I am just holding the equity, without the dampening effects of the call it will be much more tempting to take intra-day profits.  Unless I can figure out another way, I run a very real risk of becoming a refresh button slave.       

February end game -- up, down, or flat?

  Some day to day action and tracking.  Less than two weeks left on the Feb options

• 11-Feb
  Traders looking at previous lows-- appears to be a foundation there around 80, ongoing stream of profit drops / guidance revisions is nibbling away at the overall PE ratio. Although I doubt the market will be strongly up tomorrow, I could see it drifting up and reducing the available premium. 

          Buy-Write debit 79.81  300 shares   81 Feb calls

         For a buy-write the debit amount is always the break-even point, the max credit is the strike price.    For short term gains I have been using a 60% of available premium rule of thumb-- in this case the premium is 1.19, so 60% would be .71,   target credit 79.81+0.71 = 80.52

• 12-Feb
  
    Market is strongly down at opening, Asia markets were down the night before.  On the positive side congress seems to be quickly working through the differences between the house and senate stimulus bill, plus retail sales ended up being better than expected.  Nothing suggests to me that the bottom is going to fall out of the market,  support around 80 seems reasonable.  I'm betting that the market is going sideways, so this looks like a good time to double up. 

300 at 82.0

    SZCBC at 2.4 (late trade due to Schwab software problems)

     Effective debit point is 79.6

     Short term gain point, 60% of 1.4 = .84,   target credit of 80.44

Buy on rumor, sell on news

The old adage proved true today.  When the outline of the "plan" came out, people weren't impressed--but really, how likely was that?   I was sorely tempted to short SPY early in the day, but of course I didn't.  I would have spent the entire day glued to the screen!  Would have been a good day for a trailing stop.

      I closed out my bear spread (short SZCBC, long SZCBI) with a debit of 3.34 for a whopping profit of $32 minus commisions.  I was skeptical that the market would bounce back up much, in fact I'm expecting another down day tomorrow, but I didn't like the 7 days of trading left on my long side.   I much prefer having time be in my favor (or owning the equity outright).   Better a small profit than a $500 loss.

     I am doubting that my 78.5 debit order on SPY / SZCBC will happen, even on a down day tomorrow (looks like about 79.3 was the best it did today).  Since there are so few days left I feel better about jumping back in. 

A February rally, or stimulus fatigue?

  I wouldn't be surprised to see another up day on the market on Monday, but I'm skeptical that we will see much market recovery in the next couple of weeks.   I'm planning on buying SPY if it dips to around 82 and writing covered calls on at least some of that.    My bear spread (short SZCBC and long SZCBI) that I bought on Thursday for a 3.50 credit, immediately went the wrong way. Although the market went strongly the opposite way that I guessed the position is only down .95 right now.  As the high side approaches the strike price the delta on it will start rising rapidly.   

Tactics

• Only 10 trading days left on Feb Options
  
• Market order in to close out bear spread at 1.75 debit (worst case scenario is 5.0 debit)
  
• Buy-write specifics for SPY at 82, 10 days left, Debit of 82-3.50 = 78.5,  implied Volatility of  54%, Yield 3%, Break-even with  4% decline.