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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We have been lucky enough to have Coach Phil post some trades he uses to take advantage of strong moves (in either direction) after a volatility crush. I am posting the trades here, and they are in the Platinum shared trades as well.
10 comments:
Hi Juan,
Thank you for your quick reply and sheet. I will take a look at it and
try to implement it.
I was wondering if you bought/read the popular L.J. Lord books. And if
so, what do you think of it? I consider ordering the One Strategy For
All Markets book or all three books at one time but think they're quit
expensive and I've seen mixed opinions about the books. What are your
thoughts about them?
One question about your PCCRC. My knowledge about (ratio) Calendar
Spreads is that they are best/ideal when the front month IV is higher
than the back month IV. I often see the opposite for your PCCRC
trades. Does this make a lot of difference for the trade or effect the
trade negatively?
Thank you for your time and effort!
Cheers,
Hung
I have not read Lord books. However, if you want a comprehensive book in Options, check McMillan's book.
I will look into L.J. Lords books, since you recommend them.
You are correct in saying that front month IV should be higher than back month IV. This is a REQUIREMENT when you want to play the SKEW strategy, I have demonstrated for IMCL, earlier in my blog.
However, when you are trading the earnings strategy, I would go for it it the difference between front and back is only a couple of percentage points between IV's, as long at the IV is historically low for both. My expectation is that a rise in IV will increase the value of both, but since you have more contracts in the back months, your Vega is positive, and your trade will be profitable in the months to follow, as IV bounces back.
Pay close attention to the IV charts when entering this trade. IF IV has declined strongly, as it usually does in the day after earnings, it will begin to increase shortly thereafter. You have also DELTA and THETA working in your favor, so you should be OK, even if the IV of the front month is lower than the IV of the back month by a couple of percentage points.
Bryan:
If I may, I scan for candidates with IV in the lowest possible percentile. I then study the price chart and IV history to see if the stock is capable of large moves and if it does have regular IV spikes, possibly around earnings. I avoid stocks with IV that has been falling steady or make $1 and $2 moves over time. In other words I want RIMM and GOOG, not GE :).
Phil
Hi Phil
I am happy to see that your 1st visit was a one time event. Your contributions are very valuable here.
It may appear that you'd agree that a momentum stock can go rapidly up or down and that after an IV crush is the ideal moment to place these kinds of trades.
It strikes me that your trade resembles more the straddle (or strangle for that matter). Mine may look like a calendar spread near expiration, if the stock has stabilized around the strike price.
What they have in common is the use of momentum stock. While you are using your gut feeling or experience on what a momentum stock is, I select among the best performers of the last 90 days (high fliers), or the spike in price right after earnings.
In either case, we also both pick stocks that have low volatility at the moment, but that the IV is more often high. In the case of AAPL, IV shoots up just before earnings and then collapses. Knowing this pattern, common to many stocks has proven a great opportunity for this kind of trades, as Bryan has noted.
Bryan, it would be good if you told us more about your experiences. For example, what kind of returns you are getting, what kind of adjustments (if any) have you done, do you rollover or take profits at a specific target? do you make a decision point the one week before expiration?
Anyway, there is some flexibility in the rules, so tell us what have you experienced.
Bryan, if you routinely sell a portion of the long calls, as the stock moves up, you prepare yourself for an unexpected and eventual reversal in the market.
If the short put becomes nearly worthless, days before expiration because the stock has rallies, one could sell an number of puts of the second month, as long as they are worth >$0.5 and that the total number of short puts do not excreed the number of long puts.
Of course the downside potential becomes limited, so a strong overnight drop may cause you a loss, but as long as expiration is around the corner, you should be fine. Letting the puts expire will return the configuration of your PCCRC to the protected form.
I would add one comment. If the stock makes a large move higher, you can sell a small portion of the long calls to bring the deltas back to close to $0 and you can lock in a profit up until the short month of expiration. I cover such an adjustment in the journal and if Juan will not mind here is a link since it is easier than pasting it in:
http://www.elitetrader.com/vb/showthread.php?s=&postid=1267511#post1267511
On Rimm the stock moved from my entry price of $119 to $134 today and was plus $325 deltas in dollar terms. If I sold 4 of my long calls the deltas went almost flat, the net debit was reduced by a nice chunk and at the short month expiration I had a locked in minimum profit of 10% or so with potential for more.
Thanks Phil, please feel free to post any link you wish. We are here to share!!!
Hi Juan/Bryan,
This PCCRC is quite new to me could I ask how you find/ screen stocks with IV crush and vol spikes and price spikes, is there some way of finding these kinda trades. Do you just go through plat’s cheap IV stocks and hope to find one there or is there some other filtering way to get at it. I understand using skewfinder is another good method.
I know that by now there are so many posts that it may be difficult to find the methodology. I have posted example after example of my approach, with some videos too, all designed to illustrate what I do.
I have 3 basic candidate groups:
1. Stocks that have jumped more than 10% after earnings.
2. Stocks with a significant (>15%) volatility skew between front month and back month.
3. Stocks with the highest % change in price over the last 90 days.
All of these can be easily found using Platinum, or some other software.
In addition, IV must be in the low range of the stock's 2 year IV chart. You are hoping that IV will increase at some point in the duration of the trade (IV profits), and/or that time erodes the value of the front month options (your shorts), and/or the stock moves aggressively either UP or DOWN. Preferably UP, but DOWN will also work if the stock does it quickly with a spike in volatility.
Recently, I have had the best results picking stocks that have jumped after earnings, with a decline in volatility. However, there will be times when such jumps are uncommon. There will also be times of high volatility in which the skew may work best. There may be bear or sideways markets in which the PCCRC should be made more neutral. When that happens, we may have to adjust the trade.
In all strategies, the IV/SV should be below 1. Eventually, IV/SV begin to increase and a spike about 1 results in good profits in this trade.
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