WDIS: Back to Cool

Short Puts in Mid Range IV Rank

| Feb 12, 2015
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    WDIS: Back to Cool

    Short Puts in Mid Range IV Rank

    Feb 12, 2015

    Following a quick recap of Katie's TSLA earnings play (an Over Easy), and recapping how they are defending her UNG Covered Call strategy, Tony and Katie point out that her beta weighted delta is slightly short. Since the team has closed several trades in recent days, they want to place a trade that will give them some long delta.

    Earnings in UPS were recently announced, the stock has been beat up and there is a relatively high IV Rank at 53%. Despite the fact that the stock is expensive, it's a plausible candidate for a short Put.

    In High IV Rank, we typically look to sell a Put that has a 30 Delta (Probability ITM of 30%) or lower, because oftentimes we can still collect enough credit. On UPS, the 30 Delta strike has somewhat of a wide bid/ask spread, and since the Naked Put takes a lot of buying power, Tony is not so sure it’s the best use of capital. Not only that, but BECAUSE Katie has a beta weighted short portfolio, they could short the At-The-Money Put, which would give them more long delta while allowing them to collect more credit with the same buying power used. They ultimately go with the latter.

    Finally, despite being bullish Citigroup (C), the price moved too quickly too fast. They are short 45 delta and the Call side is being tested. So Tony and Katie play defense and underhedge their short delta by rolling up the Put side. Underhedging means not rolling the trade to make it completely delta neutral. Rather, this still gives Tony and Katie some directional bias, but allows them to pick up some long delta and additional credit.

    Looking at the rest of their portfolio’s performance, it’s time to manage a winning trade in IBM. This was Naked Put sold originally for more than 1.60 in credit. At tastylive, we look to manage winners at 25-50% max profit. Given that Katie can buy back the Put option for 1.04, that would book her a winner and enable her to free up 2.4k in buying power to be used in a new trade.

    Last but not least, the team has a quick lesson in pricing VIX to /VX. As a rule of thumb, Tony explains that traders can determine where VIX should be trading by looking at the strike that is trading for the same price on both the Call and Put side.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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