How to view the entire chart:
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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You have seen us demonstrating some calendars based on the Skew Finder 2 from platinum. The limitation of a calendar is that a jump in Delta would eliminate our profits, and that could happen overnight. I have said before that playing calendars is like watching grass grow while worrying and watching that your dog could pee on it. In other words, you wait and wait and wait for expiration day to arrive and then suddenly, overnight, the stock goes out or range. You could lose everything or could be forced to take profits immediately. Yet I recognize that a volatility skew between front month and back month seem like easy money ready to be picked.
Today I will illustrate how you can do the same trade in the front month while leaving your trade open to the possibility of a sudden jump in Delta or Vega. First, we locate stocks that have a volatility skew betwen the front and back month options. Here is the list I found today:
I go down this list trying to locate <90 IV that is below 40% and then compare that with the front month IV. Both JBL and RIMM would serve my purpose, but I finally settled for RIMM. Using Interactive Broker's pages, I was able to see a better skew on RIMM than on JBL, as the skew on platinum was a bit misleading. JBL's IV was actually high in relation to its historical IV.
The strike price of At the money options for RIMM very close to the current strike price of $62.5, but the long-term options did not have this strike price. Considering that I wanted to play this trade as a calendar, I decided to enter it as a short-straddle/long strangle combination, rather than as a straddle/straddle combination.
As a matter of fact, the best way to enter this position, when you have to leg into it is to enter 1/2 of the long straddle or in this case straddle and then follow with a Condor. Here is my confirmed fill. Play close attention to time of fill and the number of contracts per leg.
Interactive Brokers would have taken the position as a unit, and probably would have fill at a good compromise price.
Here is the final product, after the whole position was filled and priced average two long calls and two long puts:
This is my first position of this type based exclusively on volatility skew. My rule is to keep volatility below 40%. The skew should be near 15%.
If you'd like, follow this as a paper trade, perhaps with a comparable calendar spread. All comments are welcome.
24 comments:
Interesting Trade. I'm intrigued. I will follow it as a paper trade.
Good Luck with it!
Hi Juan,
It's been some times since i've posted anything on your blog. Was at OASIS06 and attended joe Contes session on "calendars on the fly"
I was amazed at the striking resemblances in the risk graph on his calendar as compared to the PCCRC. It made me wonder if one would be superior than the other in different scenarios.
The reason why his strategy looks similar is that he does a normal calendar (could be put or call) with OTM puts and OTM calls. The results is similar but it seems less complicated. I'll be doing some backtest on both.
Any comments from the master?? :P
regards
Thanks Comet. I hope you ask your questions along the way, so we can have some discussions on it.
"Calendars of the fly" does not seem to be a descriptive name. The truth is that the transformations can be as varied as the people trading them. I would not be surprised of someone with experience would have figure out that you can: take Vega profits, be open to strong Delta moves or wait for Theta decay in a trade like this. SInce you have more ways to win than to lose, you are using knowledge to make you some gains. Why don't you post an example of what was done so we learn from this.
btw, I would rather be called a student of options. This is as complex a subject as any other, and I am still learning. All I say is my opinion, awaiting comments and criticism.
I saw the same stock yesterday also. I placed a similar trade using Dec longs for a little higher theta, but higher debit. It would have been better if the long IV was about 37-38, however the IV chart shows a high probability of higher IV
I also attended Joe's Calendar class. I felt he confirmed PCCRC, even though doesn't buy as many extra long options. Therefore his risk is higher for a breakout, and higher reward if the stock stays in range.
You might make a note of the setting at the bottom of the risk graph page "Quote Predictions Use" constant or average IV. What you choose will affect the picture and max risk. If you choose ave. you will get this message: “NOTE: your risk and profit graphics may disagree with the risk and profit text. Switch the bottom graphic setting to "Bid or Ask Constant IV", as discussed in Help ??, above, to make the graphics agree with the text.”
]Thanks for this website and the good information. Rick
Juan,
I did have a question. Why did you decide on a Strangle for the Long Months instead of your usual Straddle for the RIMM PCCRC?
What were your reasons?
1. There were no available $62.5 calls or puts for the long portion.
2. I am playing the skew so Delta gains is not my objective to begin with. I am interested in Vega declines on the front month.
I suggest that you try to see what the "Calendar straddle" entry (as opposed to the Calendar strangle entry) looks like and compare them from the perspective that I expect RIMM to go flat. The longs are a protection, not much else.
This is clearly an alternative, I have not actually tested, I am just using my acquired knowledge about greeks.
Ooops, my bad. You did mention previously that there were not 62.5 strikes in Sept.
Juan,
For regular PCCRC(Non IV Skews), I know you pick High fliers, but do you want Low IV or High IV for the trade?
It is all explained in my PDF's and movies. If you or anyone else have not seen my pfd's or movies, send me an e-mail.
For high fliers they should be low IV, but also a low IV/SV ratio, preferably on the rise.
The whole point is to avoid a volatility crush. BUT I have learned that by selecting a skew (like the IMCL trade lately), volatility tends to even out and this is when you gain.
Thanks Juan, I thought your regular PCCRC trades targeted Low IV.
That is correct. Look for stocks that are EITHER:
1. High fliers with low volatility and low IV/SV but that may rise. You make money with Vega, Delta, Theta or a combination of two of them.
2. Any stock known to be (or has been recently) a momentum stock with a skew in the volatility. You can use Platinum Skew Finder 2.
Your job is to sell high volatility and buy low volatility. If your skew is the reverse, forget it.
Juan
Hi Juan,
RIMM are due to release earnings on the 29th June.
Is your trading plan to keep this trade until after earnings or exit before
Cheers
As RIMM approaches earnings, volatility will increase. This may cause Vega gains.
As RIMM has been on the decline for quite a while, the proximity of earnings may cause bears to cover their shorts to take profits, which may give me some delta gains.
But my expectation is to gain with the sideways movement of the stock.
If I get good profits before earnings, I may close the position. Otherwise, I'd wait to see if there is a strong move after earnings.
I said before that I prefer to be reactive, rather than proactive, when it comes to this trade. If volatility remains low, the only factor that I fear, volatility crush, would have little effect on my trade.
We will see...
Your trade is showing a 7.7% gain already. Again you are doing better than I am because I went out longer on the long options. Maybe I will learn. Looks like IV should increase several points, giving each of us good gains. My Vega is 537 compared to your 653. Rick
Vega is fun isn't it.
OptionxXpress showed me a $1800 profit early this morning... I could not believe my eyes. I should have exited, what the heck, it has been less than 24 hrs..!!! oh, well maybe next time.
Rick, don't worry too much. It is easy to get caught up on the "I did not get enough profit game"
You will make money with these trades because luck play less of a role here. So the selection of your longs is a bit of an art. You bought time, but those change in volatility less readily.
Thanks for making your observations know for others to benefit from them.
What a great trade. I've tested so many strategies to take advantage of Vega and this is by far the best that I've seen.
Juan,
The IMCL trade you entered on 5/30 looks great. Volatility on the longs is increasing nicely. With 15 longs and 8 shorts you're just shy of 40% profit. Have you taken your money off the table or are you still playing?
The thing is, Bryan, I have probably tested 10 time what you have. I am not braging, just relating to you how much work it has been to learn on my own without anyone to compare notes with. I am glad to have smart people like you to make me realize that maybe I have a system that would work in most markets.
The thing about the PCCRC is that I am ready to make Theta and Delta gains with these two trades too. I am in no hurry to leave the trades because the IV's for my longs are on the increase while the IV of the shorts may decline some more. Admitedly this could change rather quickly. But the configuration of both trades suggest that I could benefit from sideways motion or a rally.
As long as you think you would have enter the trade at this point because the IV is favorable, then you still have a good trade. However, there is nothing wrong with taking profits, even when things are working fine.
Think of trading like the show "Deal or no Deal". Right now we seem to have the $1,000,000 case still unopened, but that could change in no time. The "banker's offer" may appear low now but it the $1M case is open, the offer will drop. It is human nature to reject the "deal" for as long as the amount is increasing. After a drop in the offer, then you are more ready to take the next one that comes close to the one you rejected. But it seem silly to take one offer while they are on the rise. So act like a human and wait until the reward declines a bit.
Juan, hello, my name is Gil Gutierrez and I once took the Platinum seminar but never followed up properly with it and I have traded a bit undisciplined. Mostly at optionsxpress lately.
I do not understand the trade you entered on 6-20. Good luck with it. i will try to learn.
I have entered the Elliott wave forecase on RIMM in my web site:
WWW.Pathometrix.com/Frames.html
Feel free to make additional comments or ask questions.
Juan,
How is this trade going? Have you made any adjustments? Are you still in this trade?
Hi Comet.
Yes indeed I am still playing this, with a profit close to $1000. Note that the original position started with -$1700. The quick answer to your question is I have not made any modifications. We have not yet close to expiration, volatility has not spiked and neither have the price. One stays in the trade unless there is a good reason to leave.
If you like to see an update on any of the trades I have been working on, I have set up a folder for sharing. If you want to have access to it, simply follow the instructions in one of my recent articles.
http://stockoftheday.blogspot.com/2006/07/current-and-archived-trades.html
RIMM is in there. If I find it necessary to modify the trade, I will post an article explaining why. Thanks for your interest.
BTW, if you'd like to see my Elliott wave count on RIMM, take a look at it in this site:
http://www.pathometrix.com/Frames.html
Thanks Juan. I'm also paper trading this at the same time. I can't wait to see how it turns out during Expiration Week!
Good Luck!
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