OK, this is an options trading blog, but I’ve been obsessed lately with these 3x levered ETFs and how much they move intraday.  Just last night I was up until 3:30am researching price patterns and paper-trading it in my mind with various intraday indicators that I like, mainly the CCI.  Particularly, the most volatile is the FAZ, a 3x levered ETF which shorts bank stocks.  This thing moves 20-30% intraday quite frequently!  With that kind of volatility this is day trader candy!  I also noticed something interesting: it gaps up or down overnight about 10% each day!  So at the end of the day if you can guess which way it’s going to gap open the next morning you get a nice 10+% move by putting on a trade at 3:55pm EST and taking it off shortly after the market opens.

Since this is an options blog, I have to consider some sort of options play on FAZ.  Looking at the chains the options are pretty pricy since they are so volatile.  I’d hate to short anything in here since it moves so wildly and I don’t like shorting options on levered ETFs because of their bias towards intraday price correlations: over longer trends they do not correlate to the movements of their underlying stocks very well, only on a shorter term basis.  I think one interesting idea is to consider trading these during expiration week, where you’re paying for less theta and just speculating up or down on their short-term price movements, or maybe short some options a few days before expiration that are still a fair amount out of the money so they expire worthless.  Still, this one is a scary beast to play with.

In the meantime, I’ll be looking more into this constant overnight-gapping phenomena and see if I can get good at picking which direction it’s going to gap.  I picked DOWN last night and I was right, it gapped down on the open about 11% from yesterday’s close after the first minute of trading from $56 to $50.

These are pretty good Optionetics articles. Essentially, a long-term call can be thought of as owning an underlying stock, especially if it’s an in-the-money call and an expiration date farther into the future, because it has intrinsic value and is a more long-term holding than a front month call that you would sell against it. I did something like this on AAPL in November: bought a 2-month 75 ITM call, sold an 85 strike front-month calls for 2 months.  It worked out nicely as long as AAPL stayed above my long-term call’s strike price (75) which it did. And since it’s ITM I get more delta on the 75 strike’s gains.  My goal is to just get the calls I sell to pay for my theta (time decay) costs of owning the longer term call, which makes it cheaper to own than owning the stock outright.

Part 1
http://www.optionetics.com/market/articles/20794

Part 2
http://www.optionetics.com/market/articles/20826

You could also consider something like this using synthetic stock but it brings more downside risk.

Everyone keeps saying “gold is going up”.  It seems to make sense as our government is printing money as fast as possible.  However, gold hasn’t had a huge run yet probably because all of the other countries are printing money as well so everybody is deflating their currencies at the same time, lessening the blow to the dollar that you’d expect.  At some point though the printing madness has to stop and we have to let inflation take its course.  At that point gold will rally hard.  However, I don’t know when that’s going to occur, but I think we’re probably 2-3 quarters away from seeing inflation come back in so I figure I’d try a LEAP (Jan 2010) call spread on the GLD.  Buy the 100 strike, asking $10.80, and sell the 110 strike, bidding $8.00, for a net debit of $2.80.  The max profit is $7.20 for a 257% gain if GLD is greater than $110 at expiration.  My exit plan is to get out if the spread goes down 50% (to $1.40) or wait until expiration hoping it expires in the money.  I picked these strikes because I figure the chance of going up $21 (24%) in 1 year was very likely, and I picked a $10 spread because I usually like to pick spreads that are about 5-10% apart.

I like to have a few LEAP spreads around with small amounts of money in them.  These are like CDs for me, except with much higher reward potential.  And with that much time out you can get some nice risk/reward ratios if your long-term thesis is correct with minimal risk.

Monday, 12/15

Goldman Sachs (GS) comes out with earnings tomorrow morning and I thought it might be a good opportunity to sell volatility ahead of earnings.  With the historical volatility currently at 122 and the IV at about 100, this high volatility allows us to collect more premium than in a more normal, low volatility environment.  Also, being that this is options expiration week, the front month options don’t have much time value.  I figured I wanted to sell out of the money puts and calls (strangles) and hope that the price of GS after reporting earning remains within the range of my strikes and that they will expire worthless in the next 4 days.

At the time of purchase GS was trading at $65, a nice mid-strike price to work with.  I sold 50 of the 85/45 strangles, giving me a wide $20 range (30% of the current price) for an income premium of $3,600.  I also got a little riskier yet smaller by selling 10 of the 75/55 strangles for an additional $2,640 of collected premium. That position gives me a $10 range on both ends (15% of the current price).  So basically, I’m betting GS won’t move more than 15% by Friday.

If stock price starts to reach the edge of the inside strangle (75/55) I will look to get out at my break-even points ($77.64 and $52.36) on this position but keeping my premium on the wider strangle.  The break-evens on that strangle are $88.60 and $41.40.

I’m liking the options action during expiration week, esepcially the selling of options.  Since there is not much time value left the premiums are not as juicy, but the probabilities of success (expiring worthless) are higher so these trades are more conservative in that regard.

Tuesday 12/16

GS closed the day yesterday up to $66-ish and this morning it’s up to $71 after the earnings announcement this morning.  Of course, the puts are worth much less now, down about 70%-90%, yielding a nice gain so far. And the 85-strike calls I sold also came down in value due to a decrease in volatility, even though they are closer in-the-money now.  The 75-strike calls I sold however are up, but not by much, only from 1.15 to 1.40.  The decrease in volatility has helped to minimize their upside gain.  It’s Tuesday and I’m thinking of just holding everything to expiration (this Friday) so they expire worthless.  The only one that worries me is the 75-strike calls that I sold, though the stock would have to go up another $5 to start to reach my break-even point and I’m somewhat reassured in that these contracts expire in less than 4 days.

Tuesday, 12/23, after expiration

Well, I wish I had covered those $75 calls before expiration, GS went all the way over $80 by the end of the week and never came down.  So those calls expired $5 ITM (in the money) and by Monday the calls were exercised and I found myself short 1,000 shares of GS!  Luckliy though GS came down near $75 again today and I covered my short position for a small $300 loss.  Not bad considering on Friday I was sitting on a $5,000 loss!  So overall, I squeaked by with about a $5,000 one-week gain.  I just felt GS was overpriced at $80 and I’m glad I held on enough at least to cover my short instead of covering on Friday and taking the $5,000 loss.

I think the takeaway for me was that when you’re selling volatility before an event, after the event happens and the volatility comes back down you need to take off the nearest-risk position (in this case, being short the $75 strike) and watch the rest of the positions closely until expiration.  I would have been happier taking the loss on covering the $75 strike and sleeping more easily for the rest of the week.  And I feel lucky GS eventually came back down to $75 after my calls were exercised.  Because this was an event-driven play, once the event plays out you should take off some or all risk since it the position was based on a short-term thesis.

Even though the stock rose 8% shortly after I sold the calls, the fact that the calls only rose 21% is a testament of the power of volatility in pricing options.

LVS has just been absolutely murdered this year, down about 96%!  However, some are starting to call a bottom here and it could be due for at least a brief snapback.

While looking at this stock I see a couple of interesting options opportunities.

1) 5.00/7.50 vertical spread.  At this price the spread would cost you, at market prices, $0.90 (buy the 5.00 strke for $1.10, sell the 7.50 strike for $0.20), but the 5.00 strike is already $0.58 ITM so the extrinsic cost of the spread is just $0.32 as long as the stock stays above $5!  The max profit is $1.60 (7.50-5.00-0.90).  However, since the 5.00 strike is ITM and has $0.58 of instrinsic value, you’re only risking $0.32 of time value.  Therefore, it’s possible that the spread could be worth $2.50 at or near expiration, when you only put $0.32 at risk, an almost 8:1 reward ratio.

2) Going synthetically long (buying the 5.00 call, selling the 5.00 put) would cost you $0.70 (1.10 - 0.40) and, near expiration, for every dollar the stock rises, the value of the synthetic stock rises.  Synthetic stock is very risky since if the stock goes down you can lose money very quickly as well.  But if you’re very certain it’s bottomonig out here, a synthetic long gets you in the stock at $.070 instead of $5.58, risking much less money up-front to get long the stock.  If the stock goes to $8, for example, the $0.70 position would be worth $3.00 since the 5.00 call would be $3.00 ITM and the 5.00 put would be worthless.  That would be a 329% gain!  However, if you bought the stock and it went to $8, that would be just a 43% gain.

However, there are 6 trading days left before expiration so these moves would have to happen soon, but with this market so volatile it’s certainly within the realm of possibilities.  Again, as a warning, synthetic stock is very risky.  If you trade these do so with very little capital that you’re OK with completely losing, because it could easily happen.

I’ve been reading The Options Bible lately, which I didn’t think I’d get much out of other than mechanics of different options strategies, which I feel pretty comfortable with already.  However, while reading the section on selling naked puts, it discusses on how you can sell PUTs as a way to mark an entry point to when you want to buy a stock, while collecting premium.  Lately, I’ve been looking at AAPL when it was in the high 90s and I was wanting to get back in if it was going to go back to 90 again, so I realized I could sell PUTs, collect the premium, and then if it does go back to 90, and if I was assigned, I would be obligated to buy the shares for $90, a price I wanted to pay for anyways.  If it never got down to 90 then the PUTs would expire worthless and I’d keep the premium I collected.

Now, when it actually gets back close to 90, I may chicken out and want to change my mind based on a different market outlook, so the only way to get out of the obligation would be to buy back the PUTs but by then they would have increased in value if the move down was quick, probably causing a net loss.  However, if I was still convinced 90 was a good price target for me then it’s a good way to commit yourself to buying at that level and collecting some premium on the way down.  Pretty cool!

With Google’s growth slowing down it looks like the rapid growth days of Google are over.  Google has been fairly range-bound lately and it appears to be right in the middle of a range here.  Looking at the chart below, a safe bet would be to sell an iron condor on GOOG around the 600 and 425 strikes (purple lines).  A riskier but potentially quicker-profit play would be the 550 and 460 range (orange lines).

Looking at September strikes for the orange range the 550/580 call spread sells for $2.95 and the 460/430 put spread sells for $4.35.  Stops would be at or near 460 or 550.  You maximum loss would be $22.70 if you don’t stop out.  Potential return on risk is 32%.  I chose $30 spreads somewhat arbitrarily: I try to have spread between 5-10% of the stock price for nice income without exposing too much risk of loss as well as limiting margin requirements so I don’t tie up so much cash for so long to hold these positions.

For the purple range we have to go farther out because those September spreads weren’t worth that much that far out of the money in the front month.  For some reason I couldn’t get pricing on October options so we’ll go out to December.  The 600/630 call spread sells for $4.40 and the 420/390 put spread sells for $4.10 for a total max income of $8.50.  Max risk is $21.5 if we don’t stop out and return on risk is 40%.

Remember that APA 125/135 call spread that I mentioned earlier as having sold for a 100% gain? Well, turns out that same spread expired worth $9. I bought it for $1, sold it for $2. Had I held on, I could have sold it for $9 for a 800% gain! That’s one thing I liked about the trade when I put it on in December: it had a potential 9:1 profit ratio and it fulfilled it’s full potential last week as APA closed over $140.

Now it’s always easy to look back and kick yourself for not holding on longer, but a 100% gain is a pretty juicy gain and one you’re going to want to keep. So, what I’ve heard that other traders do is if they have a position that has doubled in value and they think it may run even higher, they will sell half so at worse they break even if the rest of the position becomes worthless. Meanwhile they’re still in the game with the other half. That would have been nice if I had done that here.

Crazy, but towards the end of the day Friday Google’s April 500 strike call option was up 10,000% from the previous day’s price. That’s what I love about options, you can have incredible leverage in such a short amount of time.

I was wondering if I had held these options and had trouble selling them because it was the day before options expiration and was “stuck” holding onto these my understanding is that my broker would automatically exercise these options for me instead of letting the contracts go worthless. Great. However, if I didn’t have the capital in my account to purchase all of the stock that I had the right to, would that still happen then and they’d just immediately buy then sell them at market price come Monday morning? Or would they just let them expire since I didn’t have the capital to exercise them fully?  I believe the former action is what should take place (they’d exercise and then immediately sell them for me)

Earnings always have great potential to make some quick returns with options, either to sell the volatility preceding the announcements, pick a direction where you think it’s going, or create a straddle/strangle if you think it’s going to move big but not sure which way. Here are some stocks which I feel have a lot of up or downside potential in them during this earnings season.