Time is on My Side

I try and develop option trades that give me plenty of time to make decisions. Option trades can be much more forgiving of timing and that means not being stopped out unnecessarily - one of the main reasons people lose trading.

My RUT trade is a perfect example. I took some profit yesterday but ended up with a delta/theta ratio that was unfavorable. I saw it and knew it and remarked upon it in yesterday's post. But the good thing was that I could wait until today and see if the market co-operated before I had to make an adjustment.

Well, the market did co-operate and I sold the second butterfly right at the ES support. The total trade made almost 10% on my max Reg-T margin of $102,000 since August 6.

My "problem" now is to get re-invested by finding another trade with a high win rate. Well, no problem really because I just put on a new RUT butterfly for the October expiry. As you can see in the pic, the delta/theta is normal around 1 to 1. If the market moves down to my level, I take profit and if it rallies enough I add another butterfly to the position to make my teepee into a marquee. Having a very specific trading plan for the trade makes it easy to manage in less then 5 minutes a day.

The SPX Iron Condor trade is still cooking. I'm up about 3% at the time of writing this.

Took Some Profit

I took some profit on the RUT trade by taking off the higher butterfly. I'll put it back if RUT rallies to around 820.00 again, depending on context. Pic shows current RUT trade. My delta/theta ratio is a bit high, so I'll need to decide whether to do anything about that today if I can't take more profit on the other butterfly.

State of Play

I have two positions on at the moment: a RUT butterfly play and a SPX Iron Condor. Both were underwater for a couple of days. The RUT trade was a scale in trade and was expected to show an unrealized drawdown. Full details are on the pics.

Both are getting into profit as the market topped here. I have orders in to take profits in the market although I don't expect to have them all filled today unless the coyotes see that they have walked over the edge of the cliff.

Marquee Trading

I've had a few questions about my option trading, so here is a description of what I do. In addition to the very directional trades I make, as I have said before, I also do so called income trades.

These so called income trades are structured like the trades I did on the floor. On the floor, I made my money in two different ways:

• The edge from making markets and selling above fair value and buying below fair value. I made money off the spread I made. The more volume there was, the more I made. We - me and two traders I employed -  traded about 2,500 contracts a day on busy days, usually with a tick edge at least.
• Price erosion due to the passing of time. For this to happen I traded within a very firm structure: short the middle strikes and long the wings. I had to make a choice of whether to be long or short gamma taking into account possible changes in market direction and volatility. We used futures to balance delta when needed. My usual stances was to be short gamma so I could benefit from the erosion. How short of gamma depended on my view of price movement and volatility. Of course I sometimes was wrong in my opinion and lost money.

On the floor, I was to a certain extent at the mercy of the "paper". My job was to take the other side of their trades while at the same time having a directional view, volatility view and strategy.

Since coming off the floor, I have, until the last few years, concentrated on futures trading rather than options, as the technology and liquidity of trading options from off the floor was not something I felt comfortable with. However things changed as option volumes have grown exponentially and I have done well since I started trading options again.

To trade options from off floor, I needed a strategy. I based what I do now on what I did on the floor with the added benefits of:

• being able to choose my trades rather than take the other side of customer trades
• creating a rule based strategy that is objective not subjective and that has been validated with backtesting.
• a written detailed trading plan

My income trades are designed to more than double my money every year. I call the strategy Marquee Trading.

Going forward, I'll show the Marquee Trading trades as well as the more directional ones.

Monday's Trades

I had a busy Monday. Firstly, I put on a Directional Iron Condor trade in the SPX. It was biased a little on the downside as I think the market will back down or go sideways. When I take profit depends on how fast the market is moving and what adjustments I need to make.

As you can see, the position went into a small profit fairly quickly as the market moved down after I put the trade on. It's about a $15,500 Reg-T margin and I can earn between 10% and 30% during the next month based on the $4,600 credit I took in when I put the trade on.

None of yesterday's trades were triggered. Markets seemed to be inside the previous day's range. I'm looking at them again today.

Possible Entries Today

I did my analysis and I have 4 new possible entries today. Whether they trigger or not will depend on the market. For the BUYs I want to see strength and for the SELLS I want to see weakness. I have alerts enabled that will send me an e-mail/SMS when and if any of my levels are penetrated.

I'll post what I have done tomorrow into the ACTION column. The trades will use options, as it gives me an added edge. Not only do I feel that I am able to profit from the direction, but I can profit even if the market goes sideways and/or a little higher. I also have time to adjust the trade to avoid a loss.

Vertical Credit Spread or Broken Wing Butterfly

One of the trades I do is picking tops and bottoms in a swing move. I don't have to be too good at this if I use the right strategy and the math works.

Once I have identified the trade, I need to pick the strategy. This post is looking at a sell of the SPX yesterday. I identified the top and decided that I would use the weekly SPX as the vehicle. My next job was to choose the strategy.

Below as two pics. The first one is the VCS (vertical credit spread) where I sell, in this case, a CALL and buy a call 2 strikes further out. The second pic is the BWB (broken wing butterfly) where I sell 2 CALLS of the same strike as I did in the VCS and bought the CALL the next strike down as well as 2 strikes up.

Let's look at the math.

The VCS has a risk/margin of about $545 with a max possible profit of $453. The BWB has a risk/margin of about $355 and a probable max profit of $141. I say "probable" because there is a small chance that the price will expire at the short strike and provide a windfall of about $550.

Say I have $10,000 to put into the trade.

I can trade 10000/545 of the VCS = 18.35 sets.

I can trade 10000/355 of the BWB = 28.17 sets

The VCS has a max poss profit of 18.35 x 453  = $8312 with a probability of 54.4% of making it.

The BWB has a max prob profit of 28.17 x 141 (ignoring the windfall) = $3972 with a 56.5% probability of making it.

I have another alternative: the 1420/1430 VCS.

This variation has the following stats:

12.38 sets per $10,000, $808 risk/margin and $190 max poss profit with a 77.4% probability of making it. By the close I was 2% into my profit.

The considerations about which to use include:

• Probability of success
• Ease of adjustment
• probability of the windfall (I can maybe widen the price range of the windfall area)
• Ease of getting a fill 

On this occasion, I took this last variation. I wanted that higher probability of profit.  By the close I was about 2% into profit. I do many of these trades as you will see once I start posting these trades before the open - begins Monday.

The weekly options are options on steroids as they are so close to expiry when Gamma is wild. Even when I have an adjustment plan - difficult with weeklies - I assume for risk purposes that I have to exit on the basis of hitting a maximum loss. My math has to be satisfied with a win rate that takes the probable and probability of profit and max loss into account to give me a good return every year.

Vertical Credit Spreads

Those following the trades in my previous post about Vertical Credit Spreads should see how nice a trade they can be.

The trades went into profit straight away as the market moved in a direction faourable t the spreads, which was the whole idea. However, had I not been nimble enough or been too greedy to take profit, even though the market rallied in subsequent days, there was still profit and time to take them off.

I will be showing more of these very directional trades each week using both vertical credit spreads and broken wing butterflies.

More Specific Trades

I do quite a few trades every day as part of the way I diversify risk. I'm going to put more structure into this blog by posting some more specific directional trades, as well as a monthly income type trade with a directional bias.

Yesterday, my aim was to put these trades on:

They all filled (at mostly different prices) except the KO, which did not fill- but I am still working it. I'm trying to earn about 15% on my margin and stop myself out with a new high unless price is rejected there.

In about a week or so, when I get back to France after being at the Olympics in London, I'll start posting these before the U.S. markets open. Then people can watch the trade unfold as the market makers try and get orders filled at their price while I try and get a mid price fill with the time constraint of the market moving.