1. Try clicking on the name of the most recent article in the column on the right. This will remove the "Archives" list.
2. Try right click on the chart itself and open it on a separate window.
I am sorry that I cannot always make the chart small enough to fit neatly on the left column. I want you to be able to see the details I want to point out.
I Hope this helps,
Juan
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If you have limited capital or you are expecting a sideways to higher price in a stock, you may want to do a 3/2 ratio CRC. This is not my recomendation, try to always have a 2/1 ratio. However, it is entirely up to you, after all you have +1 contracts on the long side.
Recently a contributor to the Optionetics Advanced board presented this trade:
As you can see, this is a 3/2 ratio CRC. The expectation is that after an initial sideways movement, the stock would eventually take off. Near expiration, however, our friend is confused about what to do. At this point, he does not want to enter more capital in the trade and he has not made much money yet. Perhaps he wonders what would be the point in entering more money in a trade that is not producing much profits. If you are savvy about candletick patterns you would notice the engulfing pattern in the last 2 days. This is bullish, so I DO think that staying in the trade is definetly worth it, and I am bullish too.
You could buy back the 2 shorts and sell 1 next month call, and the trade would be even more bullish, but as our friend said: "I do not want to add further capital to the trade".
The best thing to do is to rollover the 2 shorts to the next month. Doing so not only would preserve the capital on the trade, but actually take some off the table. Notice that the difference between long and short here is $0.70. or $140 for the 2 contracts. This money is removed from the trade. The original charge was $680 and it is now $540 the beginner might be oblivious to the change. That $140 may be used for other trades, of course.
On the expiration of the MARCH options, the difference between the March and April options has been reduced to $0.35, which would have given back $70 to this trade. In my experience, doing the rollover 1 week before expiration has proven to be the best thing to do. However, keep in mind that if you see a skew between front and second month at any time, it may be a good idea to do the rollover to benefit from Vega gains (reduction in vega in front month options and increase in vega in second month options). This may occur as a results of earnings so make sure that you are aware of the earnings schedule for every trade you have.
11 comments:
Gamma scalping. An interesting discussion;
http://www.wilmott.com/messageview.cfm?catid=3&threadid=24761
You have shown on your Blog how to take money off the table in a PCCRC when the stock goes one strike up. This you do by selling half the back month options (Calls) and then buying more options for the back month by buying the options (Calls) one or two strikes further out.
When the stock goes up one strike generally the PCCRC makes money.
DNA has gone one strike down. In fact this scenario is ideal for me, because I have wanted to know about trades that go negative, during the life of the trade. So at the moment we are in a losing position. I recall the comments from a number of different sources about the losing trades being the ones that can knock out all the winning trades. However, I believe there is an opportunity here PERHAPS if we think this one through properly. I MAY BE WRONG AND TALKING TOTAL RUBBISH. **Smiles**
So for DNA, it has gone one strike down. Instead of the Calls gaining when it goes one strike up, this time the Puts gain instead. So the question is this.
Should we not take some of the money off the table for the value in the bought back month Put options when the Stock goes one strike down ($5), similar to when the Stock goes one strike up ($5)?
In the DNA PCCRC starting combination;
+2 $90 Call June06
-1 $90 Call June06
+2 $90 Put June06
-1 $90 Put June06
Stock rises one strike ($5);
Depending on how the risk graph looks maybe change to;
+1 $95 Call June06
+1 $90 Call June06
-1 $90 Call June06
+2 $90 Put June06
-1 $90 Put June06
OR maybe change to;
+2 $95 Call June06
+1 $90 Call June06
-1 $90 Call June06
+2 $90 Put June06
-1 $90 Put June06
OR maybe change to;
+1 $100 Call June06
+1 $95 Call June06
+1 $90 Call June06
-1 $90 Call June06
+2 $90 Put June06
-1 $90 Put June06
OR maybe change to;
+3 $100 Call June06
+1 $90 Call June06
-1 $90 Call June06
+2 $90 Put June06
-1 $90 Put June06
Recalling the DNA PCCRC starting combination;
+2 $90 Call June06
-1 $90 Call June06
+2 $90 Put June06
-1 $90 Put June06
Stock declines one strike ($5), then depending on how the risk graph looks maybe change to;
+2 $90 Call June06
-1 $90 Call June06
+1 $90 Put June06
+1 $85 Put June06
-1 $90 Put June06
OR maybe change to;
+2 $90 Call June06
-1 $90 Call June06
+1 $90 Put June06
+2 $85 Put June06
-1 $90 Put June06
OR maybe change to;
+2 $90 Call June06
-1 $90 Call June06
+1 $90 Put June06
+3 $80 Put June06
-1 $90 Put June06
It was after reading this Gamma scalping discussion, that the thought sprang to mind;
http://www.wilmott.com/messageview.cfm?catid=3&threadid=24761
Food for thought Juan. **Smiles**
Here is the original trade I entered, for those with Platinum. I will show variations as suggested by fortitude, below.
http://platinum.optionetics.com/cgi-bin/platinumv30/op4email.php?trade_name=DNA1™_date=2006-03-17&sym=DNA&num_legs=4&tra0=-10:D06:90.000:2.75:DNA:2006-03-17:31.32099915:FFFF99:0:0&tra1=-10:P06:90.000:3.700:DNA:2006-03-17:26.28000069:FFFF99:0:0&tra2=20:F06:90.000:5.150:DNA:2006-03-17:31.60300064:99FF66:0:0&tra3=20:R06:90.000:5.325:DNA:2006-03-17:27.381000! 52:66CCFF:0:0
Since DNA has fallen as of late, let us take a look at your 3 suggestions:
+2 $90 Call June06
-1 $90 Call June06
+1 $90 Put June06
+1 $85 Put June06
-1 $90 Put June06
Here is my modified trade in Platinum
http://platinum.optionetics.com/cgi-bin/platinumv30/op4email.php?trade_name=DNA2™_date=2006-03-17&sym=DNA&num_legs=6&tra0=-10:D06:90.000:2.75:DNA:2006-03-17:31.32099915:FFFF99:0:0&tra1=-10:P06:90.000:3.700:DNA:2006-03-17:26.28000069:FFFF99:0:0&tra2=10:R06:85.000:4.400:DNA:2006-03-29:28.60400009:FFFFFF:0:0&tra3=20:F06:90.000:5.150:DNA:2006-03-17:31.60300064:99FF66:0:0&tra4=20:R06:90.000:5.325:DNA:2006-03-17:27.38100052:66CCFF:0:0&tra5=-10:R06:90.000:7.200:DNA:2006-03-29:26.83600044:FFFFFF:0:0
You are substituting 1 of the 2 long 90 puts for a long 85 put. This changes nothing on the cash requirements because the short 90 put is protected by the long 90 put you left in. You did not increase the number of puts so your move is bullish, breaking the Delta neutral of the trade. This would imply that you see a bottom here and want to take some profits from the long put, since the 85 put is cheaper than the 90 put you sold. My concern would be: have we really reached a bottom? are we really increasing our risk to the downside prematurely?
My positions usually consist of 10 or more long puts, and 5 or more short puts. In this case I could buy more 85 puts than I sell 90 puts. For example, sell 5 of the 90 puts and buy 7 of the 85 puts. You can make this decisions based on some TA analysis, and the risk graph. Also consider that the options are low IV now, so you are not getting much of a return by doing that. When the time comes you will know for sure, as the move will show its own advantages.
The second suggestion is this:
+2 $90 Call June06
-1 $90 Call June06
+1 $90 Put June06
+2 $85 Put June06
-1 $90 Put June06
Here is my modified trade in platinum
http://platinum.optionetics.com/cgi-bin/platinumv30/op4email.php?trade_name=DNA3™_date=2006-03-17&sym=DNA&num_legs=6&tra0=-10:D06:90.000:2.75:DNA:2006-03-17:31.32099915:FFFF99:0:0&tra1=-10:P06:90.000:3.700:DNA:2006-03-17:26.28000069:FFFF99:0:0&tra2=20:R06:85.000:4.400:DNA:2006-03-29:28.60400009:FFFFFF:0:0&tra3=20:F06:90.000:5.150:DNA:2006-03-17:31.60300064:99FF66:0:0&tra4=20:R06:90.000:5.325:DNA:2006-03-17:27.38100052:66CCFF:0:0&tra5=-20:R06:90.000:7.200:DNA:2006-03-29:26.83600044:FFFFFF:0:0
This is similar to the first suggestion except that you are making the put side of the trade a diagonal, which is a credit spread. I DO this occasionally, but please realize that the buying power left in your account does not equal the amount of cash you have. In other words, you are not really freeing additional cash in comparison to the first option. The resulting Delta is higher than that of the previous trade, so your risk is higher also, to the downside. Again, the assumption here is that you are convinced that the stock is going higher from here.
Finally, the last suggestion:
+2 $90 Call June06
-1 $90 Call June06
+1 $90 Put June06
+3 $80 Put June06
-1 $90 Put June06
In this case, you are going too low on the new puts, so they are OTM right now. Let us consider this alternative of buying 3 $85 calls:
+2 $90 Call June06
-1 $90 Call June06
+1 $90 Put June06
+3 $85 Put June06
-1 $90 Put June06
http://platinum.optionet! ics.com/cgi-bin/platinumv30/op4email.php?trade_name=DNA4&trad! e_date=2006-03-17&sym=DNA&num_legs=6&tra0=-10:D06:90.000:2.75:DNA:2006-03-17:31.32099915:FFFF99:0:0&tra1=-10:P06:90.000:3.700:DNA:2006-03-17:26.28000069:FFFF99:0:0&tra2=30:R06:85.000:4.400:DNA:2006-03-29:28.60400009:FFFFFF:0:0&tra3=20:F06:90.000:5.150:DNA:2006-03-17:31.60300064:99FF66:0:0&tra4=20:R06:90.000:5.325:DNA:2006-03-17:27.38100052:66CCFF:0:0&tra5=-20:R06:90.000:7.200:DNA:2006-03-29:26.83600044:FFFFFF:0:0
In this case, there is still the issue of the cash requirements. This change I would make on a strongly declining stock with a spike in the IV. This would be a way to take profits and still stay in the trade. I think DNA is not there yet. This would be a bearish move in your part.
My plan is: Remain in the trade as is, since volatility is rather low. My phylosophy is not to modify losing trades. Since the trade is still under water, I take an attitude of show me. Is too early to see any Theta gains. Volatility is still low, and it might spike, thus Vega may be favorable to my trade. The Delta gains on the put side have not exceeded the call losses.
Unlike directional trades, like Bull Call Spreads etc. The PCCRC benefits from Delta, Theta and Vega. For DNA none of these are cooperating at the moment, so we have to wait for a better time. PCCRC is a reactive trade as you well note, and you want to take profit from the move down, that is understandable. However, do not burn your protection (hedge) too quickly.
The worse case scenario, that is a decline with lov volatility has developed. for me it usually means a corrective fall. Given the stock's strong move just days ago, suggests that the bias is to the upside, but the stock has not behave accordingly. It would not make sense to increase our bullishness or bearishness for now.
I have made changes in bullish trades when the stock goes up strongly and want to take profit. I had made one such a move today on a PCCRC I have on NVDA. Take a look at this and tell me what do you think:
http://platinum.optionetics.com/cgi-bin/platinumv30/op4email.php?trade_name=X|NVDA|Mar06-Jun06|475|Call|Put™_date=2006-02-21&sym=UVA&num_legs=6&tra0=-12:D06:50.000:2.200:NVDA:2006-03-06:36.01900101:FFFF99:0:0&tra1=-12:P06:50.000:2.75:NVDA:2006-03-06:34.23400116:FFFF99:0:0&tra2=24:F06:50.000:3.900:NVDA:2006-03-07:43.66099930:CCFFCC:0:0&tra3=-24:F06:50.000:8.483:NVDA:2006-03-29:35.20800018:CCFFCC:0:0&tra4=24:R06:50.000:4:NVDA:2006-03-06:36.70100021:66CCFF:0:0&tra5=26:F06:55.000:5.215:NVDA:2006-03-29:36.47800064:99FF66:0:0
The most important thing for me is that NVDA was going up strongly, after several day's rally. Wanting to maintain the neutral character of the trade, I made the change, freeing capital for other trades. I cut the cost in 1/2. My change made Delta higher from that on the day of entry, while Gamma is higher. A continued rally will increase my profits whie a sudden decline will not be bad at all.
Juan,
Thanks, I was using the configurations to illustrate the potential of changing the 'structure' of the trade on DNA and locking in the profits from the decline. I will review the trade more thoroughly in Platinum at some point in time.
I don't check the blog often enough. Catching up with all the discussion was going on. I agree with Juan on DNA. I see an earning announcement coming on April 11, 2006. Probably the stock is not going to move until it gets closer to the date. Money to be made via Vega. From a rational perspective, I don't understand why volatility is dropping when earning is less than two weeks.
On NVDA, Elliottician is showing me a double zigzag which started on Nov 30/2005, with a high probability target range of 59.975-65.1481
When it hits my target or April 7th before the split I will make an adjustment to the trade.
Is there a way to predict how stock will behave during stock split? Any thoughts
Juan,
Your article titled "Should you leave your day job to trade?"
has been one of the most enligtening articles I have read so far. I feel so happy to note that the same hardships I face and challenge as a trader are the same.
Thank you for sharing this information with us.
Nice to hear from you Varum. Please DO visit as often as you can and share your impressions.
NTES just split 4:1, and the volatility has continued to rise. Before that BRCM decreased in volatility after earnigns. The splt was really odd (3:2).
It makes sense to me that volatility would decrease after a split. Many people get in advance of the split because they like to see their number of shares double. However, in the case of NTES, it went from a $90 stock to a $23 stock. I figure some individual trades have decided that the stock has suddenly become accessible. Note that earnings is important to.
I am sure that you want to figure if a split can be a good way to benefit from a PCCRC, to which I say, I DON"T KNOW.
In regards to my article, it was really sincere and heart-felt. TRUST me when I said I have been feeling very stupid when some options strategies announce their seminars as the easy way to riches. I have given the "strategies" de benefit of the doubt for long enough. We don't give ourselves enough credit. Making money with options depends a lot on the markets, and how well you are able to read it. There is nothing easy about that.
Varun,
RE: "I don't check the blog often enough. Catching up with all the discussion was going on."
So you admit you have gone AWOL (Absent without leave)... This really isn't good enough... **Smiles** All this time I have been writing, thinking that Varun was reading... Shucks I don't know...
Welcome back Varun. **Smiles**
Juan,
Re: "In regards to my article, it was really sincere and heart-felt. TRUST me when I said I have been feeling very stupid when some options strategies announce their seminars as the easy way to riches. I have given the "strategies" de benefit of the doubt for long enough. We don't give ourselves enough credit. Making money with options depends a lot on the markets, and how well you are able to read it. There is nothing easy about that."
I arrived at exactly the same conclusions after 3.5 yrs of options trading. Most of my time and money were spend in learning about options strategies until I realised, a few months ago, that "Making money with options depends a lot on the markets, and how well you are able to read it."
I have now decided to concentrate on learning how to read the market and temporarily leaving my options trading on the sideline (except for educational purposes) until I am able to master "how to trade the market". This also involves psychology.
The other element I found to be of great importance is the "money management/position sizing" part of the game. I also need to master this.
OK, so the first thing is to establish the directionality of the market. For this we have to buy low and sell high. To do that we must identify what is low and further deside if those stocks that are low will become high in the shortest possible time. Only later do we decide what option strategy to use. By picking stocks that jump more than 5% in high volume, we have a good chance to hit, among them, stocks that are entering a wave 3 or a double zigzag, the most powerful Elliott Wave patterns. Or job is to select stock that have JUST made a long term bottom. Next, we need to select stocks with a great story. What is a great story? when you read it you will know. Here are some examples that went on to perform verfy well.
May 5th, 2003, AAPL computer jumped more than 5% in high volume after Steve Jobs negotiated with the big 5 music labels to allow the legal download of music through Apple's iTunes music store. The stock went from 16 to 160 (it split along the way). This was one of Peter Lynch's 10 baggers.
June 2005, AMLN jumps more than 5% in high volume after the company receives approval for the compound to fight diabetes. This disease has a huge market and the drug is sure to be a billion dollar compound. What they call a "bluck boster". The stock goes from 18 to 50, and still going strong.
Oct 2005, SLAB jumps more than 5% in high volume. The company reported better than expected result but it also increased revenues forecast from 104 to 108 million. The stock goes from 30 to 55, and it seems unstopable.
But what if you see this growth and are very impressed but feel that you are too late to the party? as long as the conditions of earnings and volatility apply, you can do a PCCRC.
You can also do bear trades PRC's if the conditions apply. This is what my systems are all about. BUT YOU MUST have a detail method to do that.
Juan
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