In this series I am going to show you my analysis on stocks in which I have PCCRC's. The goal is to see if the Elliott wave analysis supports the bullish outlook in this stocks. I am posting a video clip as well as the charts.
I. AAPL
point your browser to this address to download the charts: http://homepage.mac.com/paperprofit1/.Public/AAPL.pdf
II. ADBE
point your browser to this address to view the video: http://homepage.mac.com/paperprofit1/.Public/ADBE.mov
point your browser to this address to download the charts: http://homepage.mac.com/paperprofit1/.Public/ADBE.pdf
III. AMZN
point your browser to this address to download the charts: http://homepage.mac.com/paperprofit1/.Public/AMZN.pdf
IV. CDWC
point your browser to this address to download the charts: http://homepage.mac.com/paperprofit1/.Public/CDWC.pdf
V. GOOG
point your browser to this address to download the charts: http://homepage.mac.com/paperprofit1/.Public/GOOG.pdf
V. LXK
point your browser to this address to download the charts: http://homepage.mac.com/paperprofit1/.Public/LXK.pdf
V. PNRA
point your browser to this address to download the charts: http://homepage.mac.com/paperprofit1/.Public/PNRA.pdf
VI. SBUX
point your browser to this address to view the video: http://homepage.mac.com/paperprofit1/.Public/SBUX.mov
point your browser to this address to download the charts: http://homepage.mac.com/paperprofit1/.Public/SBUX.pdf
VII. EBAY
point your browser to this address to download the charts: http://homepage.mac.com/paperprofit1/.Public/EBAY.pdf
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12 comments:
Hi Juan,
Would you please share the actual snapshots from Platinum for each trade?
I would like to see when you entered these trades and monitor them.
Thanks,
Mary
Juan,
I just got to know your blog from Phil(Optioncoach). I find your posting very interesting, I am taking some time to digest the good information.
I have recently got interest in this Ratio Calendar Diagonal Spread, for which it is very similar to your PCRCC Strategy.
I will leave the picking of stock for the moment for which your step should make a lot of sense. I am trying to compare your selection of sell leg strike price.
I will use one of your recent pick, PNRA as an example for comparison. Let look at 24 Nov 2006 closing price.
For your PCRCC, I would pick the following positons :
PNRA at $60.97 on 24 Nov 2006.
Sell 1 Dec $60 Call at $2.25
Buy 2 Feb $60 Call at $4.93
Buy 2 Feb $60 Put at $3.47
Sell 1 Dec $60 Put at $1.33
a debit of $1,322.
Please see the risk graph as follow:
[URL=http://imageshack.us][IMG]http://img95.imageshack.us/img95/3663/pnrapcrcctx7.jpg[/IMG][/URL]
For the Ratio Calendar Diagonal(RCD) Spread, I will choose the sell leg at OTM of 1 strike price away, but still the same front month.
PNRA at $60.97 on 24 Nov 2006.
Sell 1 Dec $65 Call at $0.3
Buy 2 Feb $60 Call at $4.93
Buy 2 Feb $60 Put at $3.47
Sell 1 Dec $55 Put at $0.28
a debit of $1,602.
Please see the risk graph as follow:
[URL=http://imageshack.us][IMG]http://img135.imageshack.us/img135/2390/pnrarcdmg1.jpg[/IMG][/URL]
By looking at the risk graph, I find the RCD provides a more balance profitability toward the end of Dec expiration with increase in IV. In one month time on Dec expiration, 10% increase in IV will make the porfolio breakeven no matter the price of the stock. For the PCRCC, the risk graph on Dec expiration is more unbalanced, it more like a W shape. With 20% increase in IV still could not make it profitable regardless of the price of the stock.
Have you compared selling OTM strike legs vs ATM strike legs ? Could you give your insight ?
Chiu
Chiu,
Let me be perfectly honest. I have not back tested or paper traded a RCD as you proposed, so I can only guess what its advantages and disadvantages would be based on the risk graph profile.
Comparing with the PCCRC is an even more difficult task. I don't even know if the same conditions would apply in both trades.
I can, however, tell you why I choose the PCCRC, based on the expectations of the greeks for the particular underlying.
Although I have a PCCRC on PNRA, which I entered a while back, it does not mean that I would enter it now, it would all depend on certain conditions being met. For that I have written extensively.
Based on the premise that a momentum stock would move strongly, either up or down, over a 3-5 month period, I expect Delta gains, hence I enter a long straddle with that many months to expiration. The RCD you describe has an ATM straddle as well.
I then make sure that I don't pay too much or suffer from slow, but continues time decay on my longs by shorting the front month options (1/2 as many as the longs). In theory, if the stock does not move much, I could recover some of my investment, and even make a small profit, by Theta decay of the shorts. The RCD shorts OTM calls and puts, so they will most likely expire, but I don't think that they represent much of a protection against time decay because they are currently both about $0.3 a share. I make it a policy not to short options that would bring me less than $0.50/share. You simply are not bringing in that much premium.
The final element is Vega. I want to sell high IV and buy low IV. Consider that you are buying 2x the IV in the longs, so a decline in IV in both longs and shorts, could cause a "volatility crush". So the profile must be right, and as the IV of the longs increases and time decay consumes the shorts, you may make money, even if the stocks do not move at all.
I think that it is critical to examine each case individually and decide which of the two trades makes more sense, based on the greeks. I have selected 3 situations in which the PCCRC should work, most of the time:
1. High fliers: The best performing stock of the last 3 months, with low IV and low IV/SV ratios.
2. Volatility skew: Stocks with front month IV>40% and back month IV <40%. The differential between the two IV's should be >15%.
3. Post-earnings jump: Stocks that rally >10% in price after beating estimates and increasing earnings forecast. IV should decline after earnings. You could wait a few days after earnings, until IV begins to bounce. I have found that a stock may continue to rally in the following days, and in such cases Delta bring in the profits.
I hope this is clear. Feel free to experiment and report back on your RCD. I would recommend that you try to be specific as to which situations produce the best results.
Thanks for your imput here, it is much appreciated.
Thank you for your response. Let time tell us which way will be better.
I have one more question on choosing the long leg option month.
I see that you have a position on AAPL and EBAY. Incidentally I have the same positions using the RCD on both stocks as well even before I started reading your blog. AAPL and EBAY will report their next earning on 17 Jan 07 and 18 Jan 07 respectively. And the expiration date for Jan 2007 option contract is on 19 Jan 07. From past observation, the IV of AAPL and EBAY will increase significantly towards the earning date, especially on the expiration month contract. So I am not sure whether it is better to have the long legs on the Jan 2007 or Apr 2007 (next available month) for these cases.
Both stocks have the history of having the IV increases gradually toward the earning announcement date, I do not have the experience in choosing the long leg for such cases.
Could you comment ?
Chiu:
I will decide what to do with my current PCCRC on AAPL and EBAY as we approach earnings.
It may well be that AAPL hits 120. My PCCRC has a strike price of $85. In such case, I might simply leave the trade then, before the post-earnings collapse in IV.
I really don't know what I am going to do. I will now then, and only then.
Juan,
You might have misunderstood me. I am not asking how to do the adjustment. My question is more on how to decide the Long Straddle Contract month. With the earning release about 1-2 days before the option month expiration, will you choose Jan 2007 Option Month as the long leg month or you will go for a further month (say Apr 2007)?
Separately for AAPL based on the past observation, it is highly likely that they will announce price split any time soon since it has hit $90 stock price now.
One more question, some one has told me that this kind of strategy is also called the Tarzan loves Jane Spread (there are 4 types). Do you have more informtion on that ?
Hi Juan,
Could you please post a video of your RET analysis of the most recent Ebay trade (Jan 2007)? It really helps me to see you do the analysis.
Also, was wondering if you could share the Ebay trade you have placed. I am paper trading and back testing the PCCRC system and it would help me to see the differences in the trade I have created compared to yours. I could then ask you relevant questions as to why you picked a certain strike or a certain month option. This would help me understand the greeks better and facilitate my learning.
Appreciate your help.
Thanks,
Tanvir
Hi Juan,
Came across another PCCRC candidate while back testing / paper trading. Stock symbol is WFR and it jumped 19% on earnings announcement on 26Jan07. Several analyst upgrades were announced, great profit & sales projection by the management etc. http://biz.yahoo.com/ap/070126/memc_electronic_materials.html?.v=1
Put call ratio is not very low but in the low range. IV/SV is less than 1 and it is near its 2 yr IV lows. The only concern here is that long option IV is not below 40.
Let me know what you think of this as a potential PCCRC candidate.
Thanks,
Tanvir
The IV/SV on the day in question was below one. The short-term IV was in decline and the long-term IV was around 40.
This is a borderline example, but I would think that after a couple of days IV would decline and that would hurt the trade somewhat. So you'd be relying on Delta gains for a good performance on this trade.
I think I remember this candidate. I finally turned it down because I am tired of semiconductor stocks. But that should be no reason for you to turn that trade down.
Here is what I would have entered. Remember on Interactive Brokers, you could enter the position in one ticket, so assuming that, I would have entered:
STO 1, $50, Feb07 call
STO 1, $50, Feb07 put
BTO 2, $50, Apr07 call
BTO 2, $50, APr07 call
Debit $11.95
With x10 contracts per leg, the profit by now would be $450, or about 3.76%. With 8 days to go to expiration, I see that the IV of the short-term options is below %40, while the IV of the second month is high. My concern is that the April IV is higher (look for earnings report date in April). If the April options expire AFTER earnings, this options will appreciate.
The stock is moving sideways a bit, so I would even wait until next week before the rollover.
A decline in long-term IV may hurt the position.
I hope this helps.
I entered my E-BAY PCCRC on Dec. 8th and rolled over the calls on Jan 4th and the puts on Jan 18th. On the day after earnings, I sold 1/3 of my long-term puts, as the stock jumped.
More details will follow.
Actually, my trade on EBAY started back on October. To check the trade in detail, if you have optionetic's Platinum, you can SHARE my trades, including the EBAY.
The instructions on how to see my share trades, follow this:
http://stockoftheday.blogspot.com/2006/07/current-and-archived-trades.html
To check my RET analysis, go to this address:
http://homepage.mac.com/paperprofit1/.Public/EBAY.pdf
Elliott Wave Theory is a method of technical analysis that looks for recurrent long-term price patterns related to persistent changes in investor sentiment and psychology. The theory identifies waves identified as impulse waves that set up a pattern and corrective waves that oppose the larger trend. https://elliottwaveinstitute.com/
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