Those of you who have seen me trade the PCCRC have seen that it could be profitable in several ways.
1. Delta increase. Because the configuration of the trade has a bullish configuration, a trade that jumps 10 points overnight can make us a larger return. Leaving that option open is always good. A news item can influence the stock in ways we cannot always predict. When such a jump occurs, it is always a nice surprise.
2. Volatility spike. If unexpected jumps in volatility occur, the gains in your longs (which outweigh the shorts 2x1) may result in large increases in the value of your trade, and they could happen overnight, even if the stock price has not increased, or actually has decreased.
3. Theta decay. Sometimes the stock move very little. But if you chose the right volatility configuration, the erosion of the front month option may be sufficient to generate profits. At the very least, you are financing the long portion of the trade, which is a straddle. This is why this position could be considered a "Calendar straddle". The straddle is the most hedged position in options trading, but it still has much risk in Theta. By selling front month options you mitigate the risk of Theta.
4. Volatility skews. If you find a stock with a large front month option IV and a low front month option IV, this is a candidate for a PCCRC. The only question remaining is: what is the risk of volatility declining in the long options?. We want the volatility to increase in the long options and decline in the short options.
If you want to participate, look for a candidate and post it in the comment line, preferably with the Platinum link, but you can also write it out. Explain why you have chosen this candidate and why you think it is a good candidate. I will examine the candidates posted. If I like one of them, I will post the trade here for follow up, and actually enter the position in my account, so you know I mean it.
Let's see how well we all do.
HINTS:
Earl Nightingale says that Luck is what happens when preparation meets opportunity. Oprah Winfrey has been assigned that quote too. We have learned how to enter a high probability trade (as long as you follow certaing rules of entry). But there is one more item to preparation: learn to recognzide the opportunities that are there every day. My strategy can be successfully implemented in:
1. High fliers. The stocks with the highest % gain in the last 90 days.
2. Break outs. Stocks hitting fresh 52 week highs.
3. Stocks that jump >5% in volume of 2x average vol.
4. Stocks with wide skew between front month options and back month options.
How do I find such candidates?
1. Percent Change Stock Ranker in Platinum. Use skew finder to select stocks with low IV, back month (>90d).
2. Use the 52 week high List tool in Platinum. Use skew finrder to select low IV, back month (>90d).
3. Use Percent Change Strok Ranker combined with Stock Volume % Chg Ranker in Platinum. Use skew finrder to select low IV, back month (>90d).
4. Use Skew finder to locate strong skews. Avoid stocks with IV that is too low (you could use calendar for those), we want momentum stocks.
Rick is right that we are in a high IV environment. This generates different oppirtunities. Keep an eye for those skews, it may be the best way to make this work in this environment. Do not discard the use of Strangles for your longs, those are better for Theta and Vega gains. The Calendar Straddle is best for Delta gains.
23 comments:
At risk of sounding uneducated, what is the PCCRC?
PUT CALL CALENDAR RATIO COMBINATION.
At entry my trades could be called CALENDAR STRADDLES, most often, but eventually, transformations make them into a combination of a call calendar ratio and an put calendar ration.
If you'd like to receive the PDF describing my trading style, send me an e-mail.
Juan
This is an excellent idea and should be beneficial. I will participate. However, I am having difficulty finding good trades in this higher IV market. Rick
Hi Juan,
would appreciate your comments on this trade on SEPR. it just breakout to a 52 week high with double normal volume. there's a skew formed as it' earning in in mid Jul.
rgds
calvin
http://platinum.optionetics.com/cgi-bin/platinumv30/op4email.php?trade_name=SEPR|60|PCCRC|breakout™_date=2006-06-23&sym=ERQ&num_legs=4&tra0=-3:G06:60.000:3.9:SEPR:2006-06-23:55.178:FFFFFF:0:0&tra1=-3:S06:60.000:3.5:SEPR:2006-06-23:56.318:FFFFFF:0:0&tra2=4:J06:60.000:6.3:SEPR:2006-06-23:41.935:FFFFFF:0:0&tra3=4:V06:60.000:5.! 3:SEPR:2006-06-23:43.044:FFFFFF:0:0
First, let me say that I have a butterfly (OCT 50,60,70 call) that I entered several weeks ago. I have been surprised how fast has SEPR gone up to my sweet spot. This is a disclaimer, so you know my bias.
That out of the way, the position you suggest is a deviation from my PCCRC in that your proportion short/long is higher than what I usually do. This favors THETA and VEGA over DELTA. A strong move in either direction will cause your trade to lose. Although you currently have a wide breakeven area, this could change if Oct. options decline or July options increase. The most likely situation is that there is going to be a decline in both options sets (more on this below). The character of your trade is a calendar, which begs the question: why would you enter a PCCRC if you expect sideways motion? You may do just as well (or better with a butterfly or a calendar spread. By doing a PCCRC you are really expecting a strong move in either direction or at least a jump on VEGA, while protecting against THETA losses over time with the short options.
ALWAYS check the news, and understand the reality of the underlying before placing a trade. The truth is, seminars teach you the functional aspects of options trading, but understanding Technical Analysis and Fundamental analysis is up to you. Here are the VERY RELEVANT NEWS:
"We think a takeout price in the $60-$65 area would be accretive for Pfizer, reflecting significant synergies…"
http://www.forbes.com/2006/06/23/sepracor-0623markets14.html?partner=yahootix
It the buyout rumor becomes an offer and then a concrete sale, Options will all go to zero or thereabouts. Your longs will suffer and you may actually lose money, even if the sale ends up at $65 as the article suggests. This is because your longs are still too high in IV. Notice how the Oct. IV is declining, but it is still high, and a decline in IV will cost your.
If and when the buyout rumors is categorically denied, and when the long-term IV has declined below 40%, then examine the IV/SV ratio (look at my rules for IV/SV). If IV/SV is below and begining to rise, then you'd have a good candidate.
On SEPR, consider a Butterfly or a plain calendar spread. If the rumor becomes true, the Butterfly will be the best position to take advantage of IV declines.
Just a note that strangles work better if a volatility increase is expected so Juan is right about that point.
Hi SC,
Not sure if you still remember me from the straddle vs strangle thread on the optionetics forum. Anyway, nice to see you on Juan's blog. I agree with you on that point, should the stock be cheap (<150).
But i do think that if the prognosis is that volatility will increase with no expectation (or no idea) of stock movements is going to be on a super expensive stock to the likes of GOOG or CME, then a PCCRC may then be a better bet.
Attached is a paper trade i've on GOOG. GOOG's IV is at it's low, with earnings coming up in a month's time. I would have love that IV/SV to hit below 1 too but it turned up just b4.
http://platinum.optionetics.com/cgi-bin/platinumv40/op4email.php?trade_name=GOOG|PCCRC&trade_date=2006-06-22&sym=GOQ&num_legs=4&tra0=-6:S06:390.000:8.6:GOOG:2006-06-22:30.562:FFFFFF:0:0&tra1=-6:G06:420.000:9.4:GOOG:2006-06-22:37.116:FFFFFF:0:0&tra2=8:T06:390.000:13.1:GOOG:2006-06-22:30.298:FFFFFF:0:0&tra3=8:H06:420.000:15.4:GOOG:2006-06-22:35.561:FFFFFF:0:0
Huat...
GOOG is a good candidate, in my opinion. Volatility is declining, but that is likely to change, so keep an eye on the trade until it makes sense. GOOG is likely to move strongly in either direction, which would bring DELTA and VEGA gains. But a very interesting factor is the high price of the underlying. A move of 20-30 points may be significant. Commissions are likely to be low when you enter a position with 3 shorts and 6 longs, for example. This is in contrast with a stock of $30/share, where you would have to enter 30-60 contracts to have equivalent gains.
Earnings may cause an increase in the front month options, so be sure you think about what works in relation to earnings. Do some back testing if necessary to know what to expect around earnings.
Huat...
GOOG is a good candidate, in my opinion. Volatility is declining, but that is likely to change, so keep an eye on the trade until it makes sense. GOOG is likely to move strongly in either direction, which would bring DELTA and VEGA gains. But a very interesting factor is the high price of the underlying. A move of 20-30 points may be significant. Commissions are likely to be low when you enter a position with 3 shorts and 6 longs, for example. This is in contrast with a stock of $30/share, where you would have to enter 30-60 contracts to have equivalent gains.
Earnings may cause an increase in the front month options, so be sure you think about what works in relation to earnings. Do some back testing if necessary to know what to expect around earnings.
StraglingCondor... I am glad to hear that you support my observation.
One way to take profits in PCCRC's with the same strike price in all legs is to change long calls to a higher strike price after a strong movement. Essentially changing a Straddle in to a Strangle in the long portion of the trade. So when you start with a Strangle you start with a lower price but your profit is on Theta/Vega more than Delta, I think. We will keep an eye on this fact and comment in future trades.
Reduced costs also means that you can enter larger number of contracts per leg, for a lower price. But commissions are higher too.
Hi Juan,
RE:Earnings may cause an increase in the front month options, so be sure you think about what works in relation to earnings. Do some back testing if necessary to know what to expect around earnings.
I am not too concerned about this. If you have observed GOOG during previous earnings, you may have noticed that their earnings were almost always 1-2 days before expiring (or even on expiry itself). Peculiar huh?
This is precisely the reason why i choose a Jul-Aug 390-420 PCCRC. By earnings, JUL options only have a day left, which by default make AUG options the best mths to have.
There may still be some skew but it'll be minimal as compared to stocks whoose earnings is way before current mth expiry.
I choose a long 8 short 6 as observations have shown that GOOG tends to move sideways before expiration. The idea of this trade is to close everything except maybe a pair of AUG strangle just 1 day before earnings, taking the vega gain off the table.
Of course, for a much larger account, other variations will be better.
The above method is based on a strategy which i documented on my blog called VEGA strangles/straddles (VS). For those interested, here's the link:
http://otrader.blogspot.com/2006/04/delta-neutral-trades.html
Careful with that Huat, I've been looking at GOOG IV too along with CME, and while low, looks like it could go lower. Being on the wrong side of vega on + $100 stocks is gonna hurt.
Juan, how did you get TWS to show the option IV in the posting below this. I tried enabling it and all I got was the market price IV not the option IV.
I have closed my position on IMCL. The reason is that the IV of the short term options was starting to pick up. So did the long-term ones, but it is clear that I am not going to make much further VEGA gains, so I would have to depend on Theta exclusively. The stock is declining which means that Delta won't help either. I was near my $3K standard, so I am not unhappy with the results. Considering that I have made over $5700 in the two IMCL trades, I consider this to have been a good trade.
If you'd like to see my confirmation, go back to the recent post on IMCL below:
http://stockoftheday.blogspot.com/2006/06/imcl-pccrc-making-money-with-vega-part_10.html
If you want to comment there, that is fine, I will be receiving an e-mail if there are further questions.
TWS:
Any of the webinars on Option Trader will show you how to customize the option chain.
Select an underlying from any page.
Select OptionTrader from the Tool Menu.
right click anywhere in the option's chain and then customize the Option Chain
A window pops up showing the list of customizable items in a column. Scroll down the list until you find Imp. Vol (%).
Click Apply and OK.
It should work for any change from here on.
Looks like I need more RAM then since it's still not showing.
Option Chains will only show bid and ask and IV (%) when the market is opened.
Since I closed the June 6th IMCL trade yesterday at $3000 profit, I couldn't help myself, I opened a new IMCL trade today. Here it is:
http://platinum.optionetics.com/cgi-bin/platinumv30/op4email.php?trade_name=IMCL|Jul06-Jan07|40|PCCRC|063006&trade_date=2006-06-30&sym=QCI&num_legs=4&tra0=-12:G06:40.000:1.388:IMCL:2006-06-30:44.739:CCFFCC:0:0&tra1=-12:S06:4! 0.000:1.938:IMCL:2006-06-30:42.018:CCFFFF:0:0&tra2=24:B07:40.000:4.438:IMCL:2006-06-30:34.079:99FF66:0:0&tra3=32:N07:40.000:3.951:IMCL:2006-06-30:33.087:66CCFF:0:0
Qouted prices are actual fills with comm. included. I like the IV skew. I am buying real low IV - 33.8. Feb options were the same price as Jan and just a little more than Nov. Great Vega and theta. I expect IMCL to continue it's sideways movement, but I am covered if I am wrong. It's is not a true PCCRC in that I have extra Feb puts to get close to delta neutral. Happy Holiday. Rick
06/30/06 The new IMCL trade doesn't come up right. Here it is: STO 12 Jul 40 calls at 1.388, STC 12 Jul 40 puts at 1.938, BTO 24 Feb 40 calls at 4.438, and BTO 32 Feb 40 puts at 3.951. When I placed the trade Jan and Feb options had the same asking price and were not much higher than Nov. I search through 200+ IV charts a day, trying to find good trades. I am not having success. Rick
Hi Rick, for what I can gather, here is the trade:
http://tinyurl.com/ml8j3
I believe you saved about $500 for the market closing price of your trade. You definetly have the magic touch.
Who is your broker?
How did you enter the trade?
In other words, what time of day did you enter it etc.
It would be nice to reproduce what you did.
I took your imput seriously, but I think that IV on IMCL is on the decline right now.
In fact the IV/SV ratio is quite high.
I grant you that there is still quite a bit of skew between the long-term and the short-term options and your choice of Feb may have been because the IV is well below 40%... You may get a good profit by declining July IV alone.
BTW, check ChartBender webinars, they are quite educational about volatility
http://www.chartbender.com/cbwebinararchive.aspx
The instructor recommends not to be deceived by the lower IV in the back months. The further back you go, the more susceptible those options are to volatility crush.
My suggestion would have been to wait until the dust settles and we see a hooking up of the IV curves.
Thanks for your trade, and we keep an eye on it.
BTW, I posted a reply to your post regarding the closing of the previous trade, did you see that?
It seems like you did slightly better than I did, but I am not sure if I had your trades entered correctly.
I guess I just want to be able to comment on your posts appropriately.
06/30, The trade you posted is right. My broker is Optionsxpress. I entered the trade as two ratio calendars, 24/12 and the extra 8 puts as a separate order after the puts were filled. (sometimes they will not except a ratio cal, sometime they will. Why I don't know) Of course I shaved about 1/3 from the posted prices. OX will give you the calc. prices on the screen as you place the ratio order. The put cal. filled at 9:25 am with IMCL at 39.30. The extra 8 puts at 9:27am at 39.35. I had a partial fill of 18/9 contracts about the same time, the rest filled at 10:25am at 39.02. I was a little nervous until the calls were filled. I was at market risk until then.
I agree IV is dropping, however I saw that the feb IV was about 33.7 and therefore about the same or lower than SV except the 6 day. You use the 6 day SV and it is real low at 13.9 compare the rest at 31 to 37. I didn't want to wait for IV to finish dropping for two reasons. The July options could have less time value to sell Monday and the market maker could notice the low IV of the Feb options and raise it.
Thanks for the chartbender info. I will check it out. In the past, I have experienced IV crush in longer term options, however nothing is forcing me to close the trade if that happens. IV could continue down of course. That is a risk in IV trading. However, IV usually rebounds, especially around earnings.
My plan on this trade is longer term. I will adjust to whatever the market gives me. Of course if the long term IV jumps higher a lot, I am out.
I haven't seen your post on the other IMCL trade yet. I had a lot more debit than you did and I had the extra $600 profit from the call trade. Therefore, you did a lot better than I did. Rick
Juan,
Is chartbender services something you used?
Thanks for the link. As I looked at the site I found the offers they have and wonder if you tried any of them. thanks!
Well not exactly, but their calendarized iron condors have some features of the PCCRC I use here. Only my approach hedges against strong Delta moves.
I would look at their material, if only to get background information about Vega trading.
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