WDIS: Back to Cool

Rolling for Increased Number of Occurrences

| Oct 6, 2014
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    WDIS: Back to Cool

    Rolling for Increased Number of Occurrences

    Oct 6, 2014

    Katie wants to increase her number of occurrences in November options. At the same time, she also wants to “keep the dream alive” with some of her October positions, so she and Tony look to roll some trades.

    They start by looking at Katie’s $FXE position because $FXE is up on the day. Their original position consisted of selling a put to finance buying a call spread. It has since evolved into a worthless call spread (a wash of a trade) that they will just let expire instead of covering it to save the cost of commissions.

    They have defined their risk on the put side by buying a put to spread off the original naked put they sold to finance the long call spread Therefore, they have the October 126/120.5 put spread. Tony has Katie roll her 126 put from October to November and buys a far out-of-the-money (OTM) to spread it off again to reduce her buying power requirement.

    Next, Katie and Tony look to roll her short October 95 straddle as well as her long OTM call and long OTM put (the wings) in QQQ. The implied volatility rank is high in $QQQ, so they agree it is a good opportunity to roll her options to November with the expectation that volatility will contract a decent amount.


    Tony: Katie we're back!

    Katie: Happy Monday.

    Tony: Happy Monday.

    Katie: I see you survived the, I wouldn't call it a golf tournament but how many holes did you actually get in?

    Tony: 9. We were playing a 9 hole, par 3. It was almost 5 par 4's.

    Katie: Well you have all of your fingers and …

    Tony: I have all of my fingers, my toes. Yes, yes.

    Katie: There we go then. I felt really bad for you

    Tony: Nothing froze off. It was bad, 38 degrees. You saw that picture I tweeted out or…

    Katie: No, I just thought of you on Saturday morning.

    Tony: It was brutal. I had so many layers on. It didn't matter. It was brutal. It was terrible. First time I've golfed in 2 years. If it wasn't for a charity outing, I would've… it was brutal.

    Katie: You would've backed out?

    Tony: I was definitely. I was dying to back out.

    Katie: Well, do it for the kids, man.

    Tony: Do it for the kids, yeah. Well let's take a look at your kid's count here which is your account, you've been trading for a year. You're up $2300, $2292. You're up $336 for today. We've had a few problems, I mean really… I don’t know. I like our performance, I like how we've been trading. I don't think our timing has been the best in a lot of the things that we've put on. You'll notice on oil, I'm looking at the first one, forward slash CL, you're down $550 for the year on that, that's just for this month because in oil future options, they zero them out each month so each month is separate so you're down $560 on there. If you hadn't made those trades, just looking at a high ID rank, a little bit bullish on oil. If you hadn't made those trades, your account would be up near its highs even with an EWZ position on and gold position that's come across against us, FXE. But I want to go to DOE for a quick second and take a look at your overall positions from it. So what I did here was, I just scrolled down for a moment on it. This is your November position, which we do not have enough November positions on here…

    Katie: I was thinking the same thing earlier this morning.

    Tony: Right, 46 days to go, 45 is our wheelhouse. So for us to get your 57% probability of success is kind of nice. It looks like you're leaning a little bit long. It's just the way the market's been going against your October positions that we have on. If you were looking at your October positions, we don't have to go right now because we're running out of a little bit of time, you only have a probability of success around 30 - 35% which means that you're October positions are really hindering your Nov positions on a pure delta standpoint. Now you're leaning a little bit short, we're a little bit lower today which is nice, but you really have a big position in oil which we need oil to rally on. We're not going to adjust your position yet. Go into TOS for a minute.

    Katie: I'm not at that 30 delta.

    Tony: You're not at that 30 Delta. We want to stay in the account… I'm going to the trade page, that's forward slash CL. We want to stay mechanical in there and we want to roll down the untested side when your puts become around 30 delta, 30 probability of success. We have to open up a couple of strikes. There we go. Your calls are well out of the money, we traded for like 15 - 17 cents, your puts are 90 cents and 73 cents but if you notice on the right-hand side there, probably be on the money around 20%. I'm just adding them both together and just averaging or so. At around 20% we'll need the oil… we don't want oil to go lower, but we'll need it a little lower before we move it down. What I do want to look at, and I want to move your October positions from October to November or I want to look to get out of some of them. One of the first ones, we can stay right here, is FXE. Now FXE was up a moment ago, I hope that it still is, it's up 72 cents. You can close up the strikes there to maybe about 10 or 15. So in FXE, what we originally had on here was what we call a stupid trade or a bullish trade. By stupid I don't mean because it was a bullish trade, it's just what we call it. We sold a put, which is a bullish position and we bought a call spread. So we sold a put to finance a long call spread. We've since turned this into something completely different. What it's called now, I have no idea but what we have in the front month, you'll notice we have that 28, 29 call spread is a wash. It means nothing. We're long a call spread that's probably never going to come into play so it's worth nothing right now. It's worth 1 penny. We leave it. It's not even worth the commissions to get out of it. What we do have in the front month, and we have a rally in FXE is that we are short the 26/21 put spread. That's the 126/121 put spread. Now we did that put spread because we wanted to find our risks because it take so much buying power. You did a great market measure on it today about how you've got this buying power reduction when you buy that farther out of the money you put a call to find your risks fairly cheaply. Go down to November and open up the November strikes. Now what we did in November was, we had sold a 26 call against it instead of doing it in October because October wasn't giving us any premium. The 26 calls were trading for 15 or 20 cents. The October 126 calls were trading for 60 cents I want to say. I don’t remember exactly.

    Katie: We did a 126/132 spread for 61 cents back on September 30th.

    Tony: So it helped us a little bit by 20 cents or 15 cents or something like that. We also went in and sold the 123/126 …

    Katie: Straddle… strangle.

    Tony: …strangle and we have no puts in November, right? I mean we have no long puts in November?

    Katie: Right. Tony: So what I'd like to do here is, I'd like to roll that Oct 26 put to Nov 26 put. It will pop up on this page right, so you'll buy the 126 put and then hold down the CTRL key. So we're just rolling a 126 put from Oct to November.

    Katie: So why do you roll in the money put? Remind me.

    Tony: Well, because we still want the positive deltas in FXE, that's the Euro. We're trying to mitigate a loss, of basically a small loss to break even trade still keeping the delta. Now this would give us an extra 126… could you just minimize the boarder tool for a moment? So this will give us a short 126 put where the blue line is, short 123 put. But we need to define this risk so we're not using a lot of buying power.

    Katie: So we want to buy a fire out of the money put like the 5 cent one, 117?

    Tony: Yeah, 117-18. I would go to the 117. So we would sell the 117/126 put spread and we would buy back the October …

    Katie: Put.

    Tony: …put.

    Katie: Got it.

    Tony: Does that make sense? So that's what I would like to do in FXE when we get off of here. Do you want to see it on the analyze tab or are you OK?

    Katie: I'm OK. I feel like we've done this before. I want to see you… If we have more time at the end, but I know we have more work to do.

    Tony: The second thing that I want to do is I want to keep it even. From the study that we did today and an account your size, meaning 30, some-odd thousand dollars doing strangles and straddles, especially straddles, the buying power reduction of buying those wings is worth it for you. That's what we found out and I never would've thought that that was true, but that's what we're finding. So I'd like to take this from… minimize it for a moment, from 2 naked short puts and then we're buying the 1 of the 17 .. I'd like to buy 2 of the 117.

    Katie: Of the 117. Got it.

    Tony: That’s correct. Then I’d like to … Got to go down to change it. Perfect.

    Katie: So then I'd want to buy 1 more call?

    Tony: That's correct, you're reading my mind. You can buy whatever call you want. Since the 117 put is so far away from the 126 put, I can buy any option I want on the up side meaning, normally we like to go with an equal distance away. But I can go closer and still buy a call that's 2 or 3 cents. I might even just go to the 132 just to keep it consistent.

    Katie: Got it.

    Tony: Does that make sense?

    Katie: Yeah.

    Tony: So let's hold down the CTRL key and buy 1 132 call. That's basically what I'd like to do in your account. Can you right-click and then create… Sorry, then analyze duplicate order? Go "Analyze Trade." See if it's in the analyze page. They just did an update on TOS so some of the things are a little bit new, even a little bit new to me. See if that trade should've popped up in there. Does it pop up in there? Un-click the trade for a moment. OK, so this is your position in FXE, your basically looking to scratch a tree; you're a small loser here at expiration. I'm trying to take that extra credit that we had… now remember, you still have a directional risk. You had a 67 long deltas. Click on the Custom Trade. You're going to have 50, 49-long deltas.

    Katie: OK so really, I've under hedged too much.

    Tony: That's correct, it's basically the same. You want a 126 pin which is certainly within the standard deviation of FXE. All right, leave that trade in the analyze tab so we'll know what it is and we'll try to do that. I don't know if we'll get a 29-cent credit but we'll try to get something close to that. Does that make sense?

    Katie: Mm-hmm (affirmative). Since IV is still kind of high in here I know that we're still trying …

    Tony: Go to FXE.

    Katie:… to get our head above water…

    Tony: You're 100% correct. If FXE's volatility was low I might look to be getting out. You're a small loser in here. It's October with 11 days to go, stock's up 76 cents today. I'm long 50 or 60 deltas, I make $30 or $40 back, I'd probably be looking to run. Since volatility's high, I still stay in. Since I still need trades in November, I stay in. If I have 15 trades in November, well maybe I don't do anything on this. We've got to go to something that I know you hate right now: The Q's. Just stay right here and go to QQQ.

    Katie: Ah, you know me too well.

    Tony: Were you thinking about this?

    Katie: Yeah.

    Tony: All right, so in the Q's you're short the 95 straddle and you're low on the wings to define it. But we've been short the 95 straddle for like 3 months it seems like right? Let's go into the trade page. You've got a high IV rank of 60% so you're good there. Not as high as it's been. You can delete that trade. I think it’s… yeah. Go to October for a moment. You're short 4 or the 95 straddles, you're long a far out of the money call and a far out of the money put so we're not using as much buying power as we normally would need with 4 contracts right at 1 strike. Now we have some things that we have to do here to get around the buying power reduction. So what we're going to have to do is, we're going to have to buy this straddle. That, the software will allow us to do 4 times. Then what we're going to have to do is, in November, we're going to have to sell 4 of the I in Flies which is selling 4 of the Nov 95 call and put and buying the wings at the same time. Now here's my thought and it's entirely up to you, go to the analyze tab, please. We have the market lower today, down $6 right now. You certainly could stay in this position. You're short 227 deltas. Let's just go to "Add Simulated Trades." And you're collecting 31,000 theta decay. And let's go to November, go to 95, and just sell 4 of the 95 straddles. And change it to 4. Very good. And un-click all of the other things that we have on in the Q's. Forget about the buying power reduction right now because I'm not buying the wings. We’re going to buy the wings. What I want to show you here is, you're delta changes from a $2.20 in change to $1.41. Your theta to k goes from $31 over the next 11 days to $19 over the next 6 days and that number grows as time goes by. You still have the same type of directional risk but look at what those puts are trading for. Those puts are trading for $1.36. The puts that you're short are trading for like 40 cents right now so you're getting about 95 cents more in premium. That means that you know everything is equal, right? The 95 calls are only worth $2.78 so there's another $1.35 in premium there. You're getting about $2.80 versus 80 cents in premium that you had in the front month. But now everything is a give-and-take. That front month premium is going to contract a lot faster as we move down to 95. But really, is that our … I'm bear-ish on the market but I'm looking to play premium decay. But I'm looking to play premium decay on this, IV rank is high, volatility is relatively high, go into forward slash VX on the chart. I apologize. Volatility is relatively high, of course it was high a few days ago and the market was lower too. Everything is all equal here, but we're not selling low volatility at 3. We didn't catch the high at 17 but we're right in the middle around 15 1/2. I don't know, I think it's kind of prudent to take … especially not having a lot of Nov positions, if I had a lot of Nov positions, I might look to stay because America doesn't look that great right now. We can't hold rallies it seems like. I would look to stay in October, but since I don't have enough November positions, I'm looking to roll that FXE and I'm looking to roll that Q position in EWZ, punch up EWZ. We just don't have the Vol contraction yet that I'm looking for. And you want to know something else? The markets aren't great in EWZ, they seem to be a little bit wide. I tried putting in some things at mid-price earlier today and I couldn't get filled, so I'm not looking to extend this into the next elections, I'm looking to close it, but I need volatility to contract a little bit more. I just don't have it yet.

    Katie: Well, we still have 11 days left.

    Tony: Let's take a look at your overall account for just a quick moment, in TOS is fine. So you have $358, XOP has become a pain. UAL has become a little bit of a pain. Now that's another one, open that one up for a second. UAL, you're inverted right? Short the 47 call which is right at the money now, well, you're not inverted yet. You shoot the 47 call to the 45 put we need to be able to go a little bit lower here. UAL is the type of trade where you might be pretty close to taking it off for a scratch if you had no… UAL has earnings in November, so if you have no opinion on UAL, you might look to take it off. If you're not at a scratch yet, then we probably close it.

    Katie: All right

    Tony: Does that make sense?

    Katie: I am on board with that.

    Tony: I mean, probably keep it on. Does that make sense?

    Katie: Mm-hmm (affirmative).

    Tony: Now your put was deep in the money yesterday, it's lower today. Make sense?

    Katie: Yeah.

    Tony: There's still a lot of premium left in there though because the 45 put should be, the expiration will be 0, the 47 put will be worth 10 cents, a lot of premium in there. Also a lot of risk, a lot of directional risk. I like what's going on in the market. Even the S&P is down 5 and change and NASDAQ 10.75. We need your oil to rally a little bit. You're really, you're a little too heavy in oil. It was my mistake, I made you do 2 contracts in there.

    Katie: C'est la vie.

    Tony: Well, I should've done a USO or I should've gotten out of your XOP position and then put more oil position on that way. That's my fault. Bad management by me. Everybody makes mistakes.

    Katie: Everybody makes mistakes. I was with you so…

    Tony: Did you have a good weekend? You were with me.

    Katie: I didn't do much. It was fun.

    Tony: All right. I did a lot of talking today. Tomorrow you've got to do some talking.

    Katie: Will do.

    Tony: What do I normally say?

    Katie: Peace!


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