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.