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.