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.