This new clip shows you how I made $3000 in 10 days, profiting from an IMCL volatility skew.
http://www.pathometrix.com/Movies/IMCL1.mov
If you want to see the charts of in this clip in more detail, take a look at each here:
http://homepage.mac.com/paperprofit1/.Pictures/IMCL/IMCL.png
http://homepage.mac.com/paperprofit1/.Pictures/IMCL/IMCL2.png
http://homepage.mac.com/paperprofit1/.Pictures/IMCL/IMCL3.png
http://homepage.mac.com/paperprofit1/.Pictures/IMCL/IMCL4.png
http://homepage.mac.com/paperprofit1/.Pictures/IMCL/IMCL5.png
http://homepage.mac.com/paperprofit1/.Pictures/IMCL/IMCL6.png
http://homepage.mac.com/paperprofit1/.Pictures/IMCL/IMCL7.png
http://homepage.mac.com/paperprofit1/.Pictures/IMCL/IMCL8.png
http://homepage.mac.com/paperprofit1/.Pictures/IMCL/IMCL9.png
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17 comments:
It is such a conincidence that I was reading something similar when you posted this trade.
Danny posted this trade in the optionetics board.
http://tinyurl.com/lf8hl
Potential Catalyst.
http://ca.us.biz.yahoo.com/bw/060522/20060522005184.html?.v=1
Varun,
RE: "Danny posted this trade in the optionetics board."
Please tell us where on the Optionetics board exactly? Thanks in advance.
For those who do not have platinum, Varun shows us what looks like a PCCRC on RMBS starting about 1 month ago, and closed only a few days later. The difference with my trading style is that RMBS was already very high in volatility, so a strong decline in volatility would have crushed this trade. In other words, let's call this a long shot. Note also that it does not give much time for the trade to work. It had a month to become profitable, that is, you are expecting a strong move in Delta or Vega. Theta plays practically no part here. The one thing this trade has going for it is the strong I.V. skew... Remember, we are selling high volatility and buying low volatility.
You would remember that RMBS had a court case being resolved during the next few days. On the day the trade was closed, there was a rumor that the judgment would be delay. That would have been sufficient for the volatility to drop dramatically in both the short and the long. So in a word, the trade was a long shot, and Danny succeeded. We shall keep an eye for this kind of opportunity and see how reproducible they are.
In the case of IMCL, I was also counting on Delta and Theta, leaving several months out for my longs. This is a structure that gives consistent results in my hands. My goal has been to find a way to make money consistently, month after month. Altough I would not say no to any system, the Danny trade does not quite fit mine. Just that simple observation. Thanks to Varun and Danny for sharing.
I was recently in an IMCL trade spanning several months. I had two OTM calendars 30 puts/40 calls while IMCL was trending between them. The trade was somewhat profitable, but the most interesting thing about it was it's reaction to volatility. The stock was trending sideways for months but the value of my position would move up & then down within a matter of days, constantly throughout the life of the trade.
There could be future opportunities to profit from IMCL's volatility skews.
Juan, on your May 13 post you mentioned IMCL entered your system. You asked for our opinion on it's IV. I looked at IMCL's and it was rather high at the time. The volatility of course continued to climb over the last 10 days bringing in profits. My question is, at what point do you determine whether volatility is too high to enter these PCCRC trades?
Thanks Juan!
I can't see here and tell you that after doing thousands of this I have determined that....
Volatility has a life of its own, and can change in seconds. However, here are some basic rules, purely arbitrary that I look at:
1. When entering the trade, the volatility of the longs should be less than 40%.
2. When entering the trade, the volatility of the longs should be smaller than the volatiity of the shorts.
3. IV/SV ratio should be less than one, and on the rise, not declining.
4. If volatility is high (>60%) it is likely to begin to decline. Exit the position if profitable.
We will have more examples in the weeks ahead. Right now it is hard to find stocks with low volatility. I am looking at DNA right now, since it seems to have bottomed.
Fortitude,
Link as requested
http://www.optionetics.com/bbs/search/Topic.asp?topic_id=38526&forum_id=69&Topic_Title=IV%2Bcrush%2Bat%2Bearnings&forum_title=Ask+Alex+Mendoza
Anyone who might find thiss excel useful
http://www.etikr.com
Juan/Bryan
Thanks for your input
Thanks Varun.
Thanks for the posting Juan.
A 19% gain over 10 days.
With regards to what Bryan said;
"There could be future opportunities to profit from IMCL's volatility skews."
You are no doubt right on that.
Juan,
I’ve been doing some more ‘apples versus apples’ analysis… **Smiles**
Reviewing the IMCL trade, I have created a host of different trades as a way of looking at the risk vs. reward. Mainly Butterflies, but with an eye on the fact that after a move of this nature, there is then a pullback in the share price to a Fibonacci retracement line. You have said yourself previously that the share moves sideways. Maybe there is a case for a ‘theta rewarding’ strategy, such as a Put Fly or a Call Fly. In this case the move was just before the expiration of the Options in the front month of May06, which provies a most rewarding position.
http://platinum.optionetics.com/cgi-bin/platinumv30/op4email.php?trade_name=IMCL|Jun06|30-40-50|Call|Fly&trade_date=2006-05-12&sym=QCI&num_legs=3&tra0=1:F06:30.000:12:IMCL:2006-05-12:67.708:FFFFFF:0:0&tra1=-2:F06:40.000:3.65:IMCL:2006-05-12:51.9:FFFFFF:0:0&tra2=1:F06:50.000:0.4:IMCL:2006-05-12:48.581:FFFFFF:0:0
http://platinum.optionetics.com/cgi-bin/platinumv30/op4email.php?trade_name=IMCL|Jun06|30-40-50|Put||Call|Credit|Spread&trade_date=2006-05-12&sym=QCI&num_legs=4&tra0=1:R06:30.000:0.15:IMCL:2006-05-12:65.681:FFFFFF:0:0&tra1=-1:F06:40.000:3.65:IMCL:2006-05-12:51.9:FFFFFF:0:0&tra2=-1:R06:40.000:1.6:IMCL:2006-05-12:48.105:FFFFFF:0:0&tra3=1:F06:50.000:0.4:IMCL:2006-05-12:48.581:FFFFFF:0:0
http://platinum.optionetics.com/cgi-bin/platinumv30/op4email.php?trade_name=IMCL|Jun06|35-40-45|Call|Fly&trade_date=2006-05-12&sym=QCI&num_legs=3&tra0=1:F06:35.000:7.5:IMCL:2006-05-12:60.856:FFFFFF:0:0&tra1=-2:F06:40.000:3.65:IMCL:2006-05-12:51.9:FFFFFF:0:0&tra2=1:F06:45.000:1.4:IMCL:2006-05-12:50.086:FFFFFF:0:0
http://platinum.optionetics.com/cgi-bin/platinumv30/op4email.php?trade_name=IMCL|Jun06|35-40-45|Put||Call|Credit|Spreads&trade_date=2006-05-12&sym=QCI&num_legs=4&tra0=1:R06:35.000:0.45:IMCL:2006-05-12:53.627:FFFFFF:0:0&tra1=-1:F06:40.000:3.65:IMCL:2006-05-12:51.9:FFFFFF:0:0&tra2=-1:R06:40.000:1.6:IMCL:2006-05-12:48.105:FFFFFF:0:0&tra3=1:F06:45.000:1.4:IMCL:2006-05-12:50.086:FFFFFF:0:0
http://platinum.optionetics.com/cgi-bin/platinumv30/op4email.php?trade_name=IMCL|Jun06|35-40-45|Put|Fly&trade_date=2006-05-12&sym=QCI&num_legs=3&tra0=1:R06:35.000:0.45:IMCL:2006-05-12:53.627:FFFFFF:0:0&tra1=-2:R06:40.000:1.6:IMCL:2006-05-12:48.105:FFFFFF:0:0&tra2=1:R06:45.000:4.4:IMCL:2006-05-12:47.44:FFFFFF:0:0
http://platinum.optionetics.com/cgi-bin/platinumv30/op4email.php?trade_name=IMCL|Jun06-Aug06|$40|PCCRC&trade_date=2006-05-12&sym=QCI&num_legs=4&tra0=-1:F06:40.000:3.5:IMCL:2006-05-12:48.776:FFFFFF:0:0&tra1=-1:R06:40.000:1.55:IMCL:2006-05-12:47.064:FFFFFF:0:0&tra2=2:H06:40.000:4.6:IMCL:2006-05-12:40.509:FFFFFF:0:0&tra3=2:T06:40.000:2.15:IMCL:2006-05-12:37.159:FFFFFF:0:0
http://platinum.optionetics.com/cgi-bin/platinumv30/op4email.php?trade_name=IMCL|May06|35-40-45|Call|Fly&trade_date=2006-05-12&sym=QCI&num_legs=3&tra0=1:E06:35.000:6.95:IMCL:2006-05-12:96.986:FFFFFF:0:0&tra1=-2:E06:40.000:2.3:IMCL:2006-05-12:55.556:FFFFFF:0:0&tra2=1:E06:45.000:0.45:IMCL:2006-05-12:65.818:FFFFFF:0:0
http://platinum.optionetics.com/cgi-bin/platinumv30/op4email.php?trade_name=IMCL|May06|35-40-45|Put||Call|Credit|Spreads&trade_date=2006-05-12&sym=QCI&num_legs=4&tra0=1:Q06:35.000:0.1:IMCL:2006-05-12:79.818:FFFFFF:0:0&tra1=-1:E06:40.000:2.35:IMCL:2006-05-12:58.121:FFFFFF:0:0&tra2=-1:Q06:40.000:0.55:IMCL:2006-05-12:54.314:FFFFFF:0:0&tra3=1:E06:45.000:0.45:IMCL:2006-05-12:65.818:FFFFFF:0:0
Fortitude:
If I.V. is in the decline, it makes sense to enter a butterfly. I personally do not like sideways trades, but accept that others might.
everything else being equal (such as expiration month and breakeven points), you would choose between put and call butterflies based on price. In addition, you would choose between credit and debit spreads based on risk. In any case, always consider risk/reward ratio.
Thanks for the contribution.
Juan,
Looking for high fliers candidates for PCCRC today, I want to prsent few for discussion.
GRMN looks a good candidate on both criteria.
N - looks a bit high on IV, but much less than 50%, and IV/SV ratio is below 1.
LCC - is just about right on both, IV is close to 50%, but ratio is below 1.
LVS - IV is below 50%, higher than average a bit, but IV/SV ratio is really well below 1. What's your take on this one?
AZR is low around 10% for IV, so in this sense would qualify, but the IV/SV ratio is just above 1. What would you do with this one?
EXPD - good on ratio IV/SV, but arguable on the position of IV
danny
I have looked at all of these stocks. This is what you need to look at further, to settle for one of them.
Remember, you should buy low volatility and sell high volatility. This way you have a good chance to make money on volatility alone. As a rule of thumb, the volatility in our longs should be below 40%.
The volatility of your shorts should be at least as high as that of your longs or even higher. That way if the volatility of the short declines, you make money on the short side too. Eventually, the I.V. will rise again. Since you have months before the long's expiration, surely the volatility will rise again. Just be sure that your are not buying high volatlity.
N looks good to me too, however, you have to consider also what the volatility for that particular stock has been. Even when IV is low, you have to consider how low is it relatively to itself over the last few months. Thus IV for N has been below 30% recently, and it is now at 35%. I would let the IV for the longs decline a bit and then reverse up. The hook formation from low to up in IV and IV/SV is an entry signal.
I have been looking at LVS myself, but it is just too high right now.
Overall, the recent bearishness of the market has cause a rise in volatility in many stocks. With a rally, volatility would decline and many candidates will show up.
I have entered another PCCRC on IMCL. the front month IV is in the 50's while the Nov. IV is at 35%. This may turnout to be another winner. The IV/SV is high right now, but the skew in IV is too attractive to let is pass.
Juan,
What is your trading plan before entering a PCCRC? One exit point you have mentioned is when IV moves >60%. Do you have any other Loss Exits and/or Profit Exits?
I'm paper trading IMCL right now and I'm looking forward to watching this position unfold.
IF IV in my longs hit >60%, I would exit.
IF the whole trade makes 30% or more, I would exit (unless there was a very good reason to stay).
You are trying to make money with Delta as well as Vega, so if the stock jumps or drops more than 20% I would exit or transform my trade.
There are always candidates that fit the entry profile, so you should not feel bad about exiting a profitable trade. You can always transform the trade, as we have discuss here, as long as the resulting trade looks like a straddle and volatility is not too high.
I hope this helps.
Here is my actual June 1.06 IMCL trade.
http://platinum.optionetics.com/cgi-bin/platinumv30/op3RiskGraph.php
if that link doesn't work. here's this one.
http://platinum.optionetics.com/cgi-bin/platinumv30/op4email.php?trade_name=IMCL|Jun06-Jan07|40-35-45|PCCRC|Actual&trade_date=2006-05-31&sym=QCI&num_legs=5&tra0=-10:F06:40.000:1.9:IMCL:2006-06-01:39.874:FFFF99:0:0&tra1=-10:R! 06:40.000:1.3:IMCL:2006-06-01:54.41:FFFF99:0:0&tra2=10:M07:35.000:1.75:IMCL:2006-06-02:36.707:66CCFF:0:0&tra3=10:M07:40.000:3.2:IMCL:2006-06-01:32.654:66CCFF:0:0&tra4=20:A07:45.000:2.45:IMCL:2006-06-01:27.097:99FF66:0:0
COMMENTS:
Buying real low IV and selling real High IV. Almost delta neutral and high vega. I had to leg in. The calls first then the 40 puts last the Jan 35 puts the next day. Its a semi strangle around the short straddle. The Jan options were only .20 more than the Nov.
It's not a real PCCRC, not enough delta. Rick
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