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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I am working on this trade today. I will keep you posted as to the progress. This is the trade early this morning, as I decided to enter the trade today. If you use Interactive Brokers, you can use the Option Trader facility to create the full or partial combos.
In the list below, in order we have:
1. Stock Price.
2. Dec. 60 calls
3. Dec. 60 puts.
4. March 60 calls.
5. March 60 puts.
6. The PCCRC combo, as I hope to complete after done. If you are trading with IB, all you need here is to enter the order by clicking on the ask price, modify to your own asking price, and enter the number of combos. My objective is to enter 20 combos for a price of around $25.000. If you trade with IB, you could enter 1 combo for $1200, and exit with an acceptable profit targer, 30% for example.
7. Short Straddle.
8. Long Straddle.
If you are using OptionsXPress, you cannot enter the Combo in one ticket. There are 2 basic approaches to enter the trade:
a. The long straddle and the short straddle. The long has 2x the number of contracts in the short straddle.
b. A condor with an equal number of shorts and longs, followed by a doubling up of the long portion, as a straddle.
Using OptionsXPress Trade calculator, you can estimate the asking price to the whole combo as follows:
The BID for such a combo could be calculated to see what would you be able to close the position today, if it was filled. Note the "FLIP" bottom in the middle of the page. Doing that shows you the price to sell (close) the PCCRC.
The BID is then $1,230/combo and the ask is $1,285/combo.
My hope is to fill somewhere in between, let's say $1265/combo.
I have filled the position as a Condor, followed by a straddle. Note the time of day (this may be important):
OX automatically calculates the average price for each leg of the position, and displayed under the "COST BASIS" column, which I can use to modify my entry numbers in the Platinum risk graph.
With the data in hand I go back to my Platinum risk graph and enter the trade as it was filled. I wave able to fill the position for $1,265/combo, as I hoped I could. One can see how entering the trade in IB would have been easier, to just enter a bid for $1,265/combo and simply wait until it was executed. As of this writting, the bid/ask for the combo was $1200-$1300. A savings of $35/combo, or a savings of $700 for my entire position, well above my commissions of $25/leg ($150).
11 comments:
I like the trade. I also entered the same trade, but with just 1-2 Contracts. We will see how it goes!
Hi Juan,
I am still testing your PRC and CRC. I do find that at times a simple call or put does better than a PRC or CRC.
With your trade on ERTS, what is the amount you are risking? Is it the Entry Debit or Max Risk?
If I intend on staying in this trade for 50 days for example, would you adjust the "days to expiration" in Platinum to calculate the actual risk? I tried this but it does not work for PCRC but it does for strangles or straddles.
Look forward to your response.
Mary Berkhout
The PCCRC is quite fluid because IV can decline or increase, changing the look of the risk graph. You'll get use to not rely on the Risk Graph to figure your maximum risk.
I would be a mad man (or a very rich trader), If I risked $25000 in every trade. As of right now, the max risk in the ERTS trade is $4724. But that is going to chance, because the PCCRC is fluid. IF the IV of the front month increases, my risk will increase, unless the IV of the back month increases too, in which case my risk will decrease. A precipitous decrease in the stock price is usually accompamied by an increase in IV, which will also decrease my max risk. If the stock rallies strongly, the tendency for the IV would be to decrease, in scuh cases, the Delta picks up the slack, and I would make money by virtue of the increase in value of the long calls. The shorts tend to lose value quickly because of time (Theta) decay.
So you see, the original trade hardly ever stays the same. So the risk will change. One week to expiration you will have a decision to make. Does the risk graph resulting from a rollover look attractive? is so, then you do the rollover. Do you have a 30% profit due to Vega or Delta gains? then perhaps you may want to leave the trade. Is the stock very close to the strike price and you are making money by virtue of the Theta decay? in such case, you may want to go to the last week of the life of the short options, and see if they expire worthless (I hardly ever do this, by the way).
The worse case scenario, comes when the stock declines with low IV. When this happens, the stock may go below the break even point and make you a modest profit, or it may bounce back, landing close to the strike price.
I keep a portfolio of trades like this, and I am happy to say that it has been growing steadily, this is why I feel comfortable trading such large amounts. I started with $6000 trade, with Max risk of less than $1000. So do some paper trading and some back testing and find your comfort zone.
Look at the Max RIsk, not at the debit, but don't be surprise of the Max Risk changes. Just be sure that you trade stocks with IV's below 40% to begin with and close if IV goes over 50%. Try to pick the stocks that have already suffered an IV crush, such as it happens right after earnings. You will be surprised how consistently you can make money with this system.
Thanks Juan.
That was very thoroughly explained.
After entering the trade, you don't seem to worry whether the stock goes up or down as long as IV/stock is moving. Is this correct? You mentioned that the first decision point is about a week before expiration of the short options.However, if your lose 30% of your max risk before this point, would you exit the trade? What are your stop losses?
Regards,
Mary
Mary, I have not yet lost 30% in the many trades I have entered. In the worst case, I have lost 10%. BUT that is not to say that the unexpected won't happen.
One week before expiration you may decide that there is little point in going forward with a mediocre trade when you have some winners on the go. However, rolling and rolling, month after month may allow permit the big move or IV jump to occur and make your trade profitable.
No, I don't worry much with this trade. After years of not making much money trading, I am happy to say that I am getting consistent gains, as I have said before.
Your stop loss is not a traditional stop loss, just close the position if you feel that there is not much point in staying in the trade. Your vision is to have one of this happen:
1. Stocks move strongly UP or strongly DOWN, exceeding the breakeven points.
2. IV jumps above 50%, causing gains of 20% to 30%.
3. The stock stays in a trading range close to the strike price of your options.
Mary, ultimately, you are going to have to do some back testing using platinum, take a look at my examples in this blog and begin to have a feeling for this style of trading for you to make your own conclusions.
It is not a simple form of trade, but it is based on knowledge and gives me peace of mind. No other trade format or system has given me that.
Thanks again Juan. I am learning so much from you.
While testing, I noticed that the IV of the shorts go to zero when it is deep in the money, with still a lot of time to expiration(more than 25 days) Do you close the shorts and roll to a higher strike or roll forward a month?
Regards,
Mary
You can do many things, Mary, I prefer to let you discover that on your own. Using Platinum you may look at which modification produces the desired result with the least cost in commissions.
Ultimately, closing the position and open a new one would depend on volatilty conditions of the new trade. You may say that the new PCCRC becomes a high flier strategy.
If you are deep in the money, you can do a rollover to next month for a small credit. Also consider selling some of your longs. Doing so is a way to take profits and make the trade look more like a straddle. Because the PCCRC is a delta neutral trade your adjustment should tend to keep the nature of the trade. However, there is nothing wrong with letting the position run as a bullish trade, if you wish.
To keep the trade as a bullish trade, you couldl buy back your short calls and sell an equal or slightly larger number of long callls, enough to pay for shorts, collect some profits, and keep the bullish nature of your trade. Use this with rallying stocks such as AAPL today.
Juan,
Thank you for making all the options available.
As a filter,I am seeking price change of at least 10% move up in one day which is usually accompanied by volume spikes. In entering the PCCRC on these candidates, having observed the news and lowestIV, do I need to wait for close above the high of the %price change day?
Mary
When I choose candidates with the 10% increase in price (usually immediately after the opening), I select those with news that indicate unexpected increase in performance. When a company says "we expect an increase in revenues in the months to come" or something like that, or even some fundamental increase in expectations due to an unexpected even. Like AAPL making a deal with the big 5 music lables about the iPod. This are unprecedented events that are sure to increase a company's revenue.
Next you calculate how much would the PCCRC cost (bid and ask) and write it down. See how the price evolves during the day. I enter my positions when the stock market is at is lowest volatility. That is shortly before 3 pm Eastern time. If you are using Interactive Broker or CyberTrader, you could enter the position in one single ticket, which is a great help. I would enter my position at the ask or very close to it then, because that is when the it will be the cheapest.
If you use a broker like OptionsXPress, you'd enter the long portion of the trade as a long straddle. This will require additional cash in your account. When filled, then you enter the short portion, as a short straddle. This brings some cash back into your account.
Finally, if you do not have the extra cash, you could still enter 1/2 of the long position, and when executed, you enter the rest of the trade as a Condor.
So you see, I don't need to wait for a movement up or down. You can cut on the price based on volatility, and I do not need to wait for a confirmation, such as "a close above the high of the $ price change day". Why? because if the stock goes down, I am protected. IF the stock reverses after the news (unlikely if the news are really strong - as cited above) I expect to make money to the downside. I have seen stocks rally strongly in the days after the announcement but rarely, they may go down, but then eventually UP. This is why I give myself 3 months or so for the longs to work. The short allow the time to pass with no serious consequences to the reversal in the direction. In fact I might make money by erosion of time value of the shorts alone (Theta decay). By the time of the first rollover, I can decide wether it is worth it staying on the trade, or close the position.
Juan,
thank you for your generous tips.
I use IB. I was thinking whether it is better to buy the call option first on ERTS, given that it is further away from 80, then buy the Put as price rises; then do the shorts in reverse order i.e. sell the call in the near month as the price is rising and the put later as it falls a bit.
I had a look at your AAPL and did a variation using less debit:
tinyurl.com/yk2xwp
I look forward to your coments.
Mary
Its funny that I spend my timing trying to persuade OptionsXPress to allow 4 legged-ratio trades in their web site because it is so much easier to enter the trade as a whole (and you may get a better overall price) and now you suggest to leg into the trade!!!
No, Mary, my recommendation is that you enter all legs in one strade if at all possible. Since you trade with Interactive brokers, it should be easy to do just that, using the "COMBO SELECTION" which pops up when you click "OPTION SPREADS" from the "OptionTrader" Page. Be sure to ask for advice from them on how to enter the position in one single ticket. Trust me, it is a lot more fun than legging in!!!! as they say.
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