Wow, guys, What a ride for GOOG. I had lots of them but closed nearly all before the announcement. A nice profit. I now have all AAPL calendars. A bunch of the 355 and more of the 360’s.
I have received many emails asking for more info on these. So the quickest way to explain them is to think of them exactly as covered calls on stocks. The advantage as I told in one email; As follows;
I now have 35 cal spreads in AAPL for the 360 July-22 and the Jan 360 calls.
The difference between a covered call and a calendar spread is as follows;
To do 35 covered calls means that I would have bought 3500 shares of AAPL, at 355 cost that would have cost me 1,246,500. and I would have received 14 ea. in prem. So cash in would be 49,000. This is a 3.9 ROI – But to set up the same income of 49,000 doing the spread, I just had to buy the Jan 360 call for a cost of 105,088 which is a ROI of, 49,000. / 105,088 = 46% on a week play. If AAPL goes up all is about the same. If it goes down below 360, I let them expire and then next week sell the 360’s again. Of course a major drop in the stock means your next week prem will be smaller but without a super drop, it is money in the bank each week. You have to keep in mind that Jan 2012 has a ton of ‘time value’ in it and that will start eroding. So I will only use these until late September or so. Eventually you will want to sell these so you don’t want them to drop to far.
This is not necessarily a bullish position. AAPL is reporting this week and I always expect good things but … it is advised to not use a close strike that is below the Jan strike. Use the same or a higher ‘near’ call strike price.
I hope all had a great week and more profits to come. I promise no new strategies.. lol
Jerry
96 comments:
My positions at this time are;
These are all Calendar spreads.
45 AAPL July 22-355-- Jan 2012 355
25 " " "-360-- " " 360
Depending on the market and each potential stock, Monday morning I will be opening positions in Goog maybe nflx and pcln. There are plenty other possible picks. Variables are earnings date and premium rate. Maybe GS, AMZN, & BIDU; the usual gang of suspects.
So you will keep AAPL over earnings? What happens to these if AAPL drops like 20-30 bucks?
Hi Everyone, I just read this in my weekly AAII magazine. Thought it will be helpful to this board. These are things that could affect the stock market next week. It is a good summary.
TK
The Week Ahead
Nearly 100 members of the S&P 500 will release second-quarter earnings next week. Dow components Bank of America (BAC), Coca-Cola (KO) and Johnson & Johnson (JNJ) will report on Tuesday. American Express (AXP), Intel (INTC), and United Technologies (UTX) will report Wednesday. The Travelers Companies (TRV) will report on Thursday, and Caterpillar (CAT), General Electric (GE) and Verizon (VZ) will report on Friday.
Switching to the economic calendar, the National Association of Home Builders’ July housing market index will be published on Monday. Tuesday will feature June housing starts and building permits. June existing home sales data will be released on Wednesday. Thursday will feature the July Philadelphia Federal Reserve survey and The Conference Board’s June leading indicators index.
The Treasury Department will auction $13 billion of 10-year inflation-protected securities (TIPS) on Thursday.
Kansas City Federal Reserve Bank President Thomas Hoenig will speak publicly on Tuesday.
@TK - Thanks for all the details. Nice summary.
@Jerry/All -
I apologize for being verbose, but I have a few basic comments/questions regarding this diagonal spread strategy.
1. Buy a lower strike call in the future (example AAPL Jan 2012 - 355)
2. Sell a higher strike call for AAPL near term 360 (July 22)
Motivation & theory behind strategy-
1. Higher rate of return
2. Buying a simple call in the future may or may not be fruitful if the stock price doesn't reach the strike price. By selling a call short term we
make money if the sold call expires worthless and keep decreasing our buy premiums by doing so with each sold calls in the future.
3. If the sold call does not expire worthless, the bought call will be in the money. Now the entire position should be liquidated at this time for a
possible profit or break even?
Margin related considerations -
I do my crumb spreads in an IRA account. Usually brokerages don't let sell naked puts, but let you sell covered calls. Now if this was a calendar spread, the price movements of the bought call and sold call will be more coordindated and margin requirements will be lax.
Because the call that is bought is in the future, I am not sure of the way how margin requirements have to be met if the sold put goes into money before expiration. So will brokerages restrict or allow this kind of diagonal spread and if so, next step in an IRA account?
It will be better to look at a profit/loss graph on an example like AAPL above at various strikes for a few weeks once the the trade is open.
@Nic - That is the same question I had as well. To go one more step in that direction, if AAPL or any other stock drops about 20 or 30 bucks after you buy the diagonals, then if even if we could sell another call - there could be 2 issues.
1. The margin requirements will creep going up and up as the price of the stock keeps going down and down and at one point it might be high enough that doesn't justify the return.
2. The value of the long call will be decreasing where it could become worthless.
Assumption here is, we won't let 1 and 2 happen. The whole position will be liquidated possibly for a break even or loss.
Chelski, I don't know if I could do what you're doing (congrats to you). I'm so use to having so much cushion in my positions that those strikes are a little too close for my comfort zone. But hey, it's certainly working for you (nice ROI's).
Your quote "So when you trade a naked today for next week and plan to close on Monday or Tuesday, does the direction of the market have to go your way for you to close with a profit". So far, that has not been the case, market up, market down it has not mattered, I've been able to close most trades on Monday, Tuesday morning at the latest.
Your quote "or is it because of time decay over the weekend it doesn't matter which way the market goes you can still close out for a profit?" Those words are "spot-on"...that's absolutely the way things have been playing out. I've only been trading this strategy for 2 1/2 months now and I'm selling premium (the old sell high, buy low thing) every Thursday/Friday into the weekends and so far, every Monday, the premiums are lower then they were when I sold them on Thursday/Friday no matter whether the markets were up or down. Because the options I sell are so far out of the money (they have a very low delta), the SPX is going to have to drop quite a bit for the delta component to kick-in and overcome the effects of the weekend theta decay. That's certainly possible, but so far with the resiliency of these markets, that hasn't happened.
@Jerry
So your sold July 355 and 360 's are now in the money, doesn't that imply assignment? What happens next? Just trying to get my mind around this. Thanks c
Dave, when you close out on Monday/Tuesday I guess it's not as easy to make money on another trade to close on Thursday/Friday, or is it?
I like this GIGO strategy being a "skinny dipper" lol but you do need a lot of capital due to the margin requirements and hope to get there one day soon. Say your weekly roi is 0.4% x 50wks less taxes of say 23% = 15% a year, consistently every year is pretty good. I'll probably become a skinny dipper when I have reached my first million! Lol
@safensimple
With AAPL above 355, his sold put will expire worthless unless a massive miss with earnings release. Jerry could close the position and take profits since aaple went up at the end of the day on Fri. and there is time leaking out faster on the Jul22 355's.
Jerry....correct me if needed here.
RK
@ RK and Jerry
I thot the near term sell was a call (AAPL July 22-355) , am I wrong?
Looking at OPEN for next week bottom is in and earnings Aug. 2??
@ Avid
I did a very similar diagonal spread last week with AAPL (had 360/365) so I can address a couple of these points:
Your first 1 & 2 are totally spot on. As for 3, the main thing to consider is whether the sold part is ITM. Short-term profit for these strategies maximizes right around the sold strike, so in my case AAPL was spiking up right at the end of the day on Friday so I sold very close to 365. (ended up being about 14% return) So you will do much much better than "break even or get a small return" when the sold becomes ITM. If it gets too far ITM it will start to outpace the bought side; there is a sweet spot for sure. (This is a neutral spread, but the profile is the same for all calendars) http://www.theoptionsguide.com/neutral-calendar-spread.aspx)
As for your question about magin: There is no margin requirement. These are debit call spreads that you buy and own. So if the stock turns south you have plenty of time to wait it out for recovery, if you want to keep writing calls against it in the meantime.
I don't know anything about IRA requirement or whatnot. Please clarify if I misconstrued anything.
Hi all, finally some time to blog and read the questions..
Nic, yes I will keep AAPL over earnings. When a stock has disappointing earns or lack luster, and they fall back it just means that the 'now' week expire worthless. You then sell the next weeks and off you go again. It is true that depending on how far it falls effects the Jan strike. But a stock like AAPL shouldn't fall all that much as it is still highly recommended and a good PE and sales are booming. You are using the Jan strike as a substitute for real stock at less than 10% of the stock price. But you receive the full premium for the sold july strike.
AVID-K
1. Higher rate of return.. Yes
2. Buying a simple call in the future may or may not be fruitful if the stock price doesn't reach the strike price. By selling a call short term we
make money if the sold call expires worthless and keep decreasing our buy premiums by doing so with each sold calls in the future. Exactly..
3. If the sold call does not expire worthless, the bought call will be in the money. Now the entire position should be liquidated at this time for a possible profit or break even? Yes and no.. You do not have to liquidate the long (Jan) call. Most do to lock in the profits. Example of why.. the stock moves up and the Jan calls (the ones you want to sell at some point) moves up. If you don’t sell and the stock then fall some, you have lost some of the profit in the long call. For my recent AAPL calls I left the long 355 calls and rolled the July 16 into the July 22’s. the long ones also go up when the stock moves up. And the higher the stock moves the more the long goes up and at some point you are going to sell it. But as it has a lot of time premium, time will start eating away at it. You don’t want to let all of that TIME val disappear. It is money in the bank that is why some close the entire position, to capture all of the time val in the long side. But and a big but, is when these rules guidelines were outlined by McMillan etc, weekly’s were not available. The weekly’s let you capture premium each week.. a gold mine!
Also; regarding margin. No margin is actually used. The maintenance to keep the position in line is the debit of the two positions. If you opened at a debit of 30, ie; bought a Jan for say 40 and sold a July for 10 = -30. now a stock drops a bunch so the jan drops to 10 and the july goes to 0. You now only have a plus of 20. ( originally you had a plus of 30) If you had 10 of these your account bal would need another 10,000. It is the same situation if you bought stock for 40 and sold covered calls on it. Assuming you had used all of your available buying power and the stock then drop, you would need to close some or deposit some to keep the balance in order. *don’t use all of your available funds!
Safe n S.
Assignment is always possible but seldom done. There is more money in the options than in the stock. You are protected by the long (jan) call. If you were assigned you then assign the jan to someone else. To avoid this, as with any position when TIME val is about gone, –close-roll or prepare.
Jerry
Thanks Gremjum, I do agree with your posting above.
I don't think I have explained what happened to my GOOG positions that were left open when GOOG reported and took off in price. I had the Jan 560 and the July 16, 560. Wake up and find GOOG through the roof. I still made plenty of money on the position when I closed on Friday around 12:30… because, the Jan long call initially went up about the same as the July call, but within hours the TIME value decrease quickly in the July. Near closing most of the time val went out and I closed at a nice profit.
I hope this explains the worry of being assigned. In this position I was in the money around $40 but the option was selling for around 45.
Someone would lose $5 if they assigned!
Raging bull. I will look at OPEN, thanks for the tip.
Jerry
Hello Jerry,
Thanks for the info on the diagonal strategy. It looks like you enter the position with both options (long dated) and (weekly) being out of the money. Do you have use any guidelines as to how far they should be OTM (ie certain percentage or number of strikes from the current price)? Many thanks for setting up a great website!
ongba
Thanks Jerry, I'm gonna try a calendar spread trade this week. Hope the general market/debt ceiling thingy doesn't sink AAPL along with the rest. This strategy sounds almost too good to be true. We'll find out?
Chelski, your quote "when you close out on Monday/Tuesday I guess it's not as easy to make money on another trade to close on Thursday/Friday, or is it?" I'm going to answer that with the ever popular, "straddling-the-fence" answer of "yes and no". Yes, from the standpoint that as you get closer to expiration of those weekly options, you're going to have to skinny dip at strikes that are closer to the ATM strike (less cushion) and that means you'll have to take on more risk (less cushion=more risk) if you want to take them trades. No, from the standpoint that theta is still theta and theta is going to do its thing whether you're entering the trade on Thursday/Friday or Monday/Tuesday. Whoever coined the old adage "there are only two guarantees in life--death and taxes" was either living before they had options on stocks or was not an option trader because you can add a third one--"death, taxes, and theta" making it three guarantees in life (three that is if you're an option trader). All OTM options have to eventually go to a zero bid because nobody is going to pay any money for something that is worthless and all OTM options, on expiration, are going to be worthless. The further out strikes will go to a zero bid first with the others to follow (in a "domino-like" effect) as expiration gets closer and closer. Now, a drop in price (manifested through delta) and/or a rise in volatility (manifested through vega) can add some "mojo" to premiums of OTM strikes (temporarily), but as long as those strikes stay OTM, they will eventually go to a zero bid, it has to happen, it will happen. I'm using that guaranteed theta effect on option premium pricing to repeatedly play the outer fringes of an option chain (knowing the next day, two at the most, they will go to a zero bid) and can BTC them @ .05 making multiple GIGO iterations on this theme during the lifetime of that weekly SPX option series.
All I'm doing right now is "small fry" stuff (with reference to # of contracts). Max # of contracts in play at one time is 30 (because of the large margin requirement/contract). I'm learning different ways to play this strategy (and there are several), gaining knowledge and experience along the way (as well as this "easy money" and this truly is the easiest money I've ever made trading). When I feel I'm ready, I'm going to get a portfolio margin account and trade this strategy from that as the ROI/margin thing is much more compelling. All I'm doing right now is "preparatory work" for that eventual move. That's when I plan on making some serious money trading this strategy.
Chelski, if you make a million dollars doing what you're doing right now...why change? Don't fix what's not broke! It looks like you're having good success with your current trading strategy and if you make a million dollars doing it, just keep doing it baby!
This is a BIG earnings week, maybe the biggest, so use caution and don't force a position.
Ongba, I use the next available strike.
This week NFLX, POT GOOG might be suspects for the spread.
Good luck all
Jer
Jerry/Gremjun - Thank you very much for the details.
On the margin part I still have to get my head around this -
Initially we have a long call and short call with a debit. So there is no margin requirement.
But what happens when the stock price drops and the short call expires. We get the money as the sold call expired worthless. But if the stock price had dropped say 60 dollars from 360 to 300. Now if we were to sell another call at 330 or so, since it is less than the 360 long call that we maintain, we do need margin for the difference between the 360 and 330?
Or what you are saying is, sell the call closest to 360 resulting in less margin/no margin? If the stock drops consideraby this may not be possible right?
And also as a followup to Avid, why not pick a higher long call strike, like 400, as it would be cheaper and less likely to get ITM (even though I understand it doesn't matter if the long call gets ITM, or do we want it to?)
Hey All,
Hope you all had a good weekend. What is everyone thinking for this week? I took a look at some SPX trades and the premium was kind of high for the 1230 spread. This shows me that the market will be down this week. I will wait till Tuesday or Wednesday to open a position. With earning here this week the market may move alot. I may even pass up this week for trading if i don't like anything.
calendar spread. AAPL 380 (bought)Jan12 and (sold)Jul22 calls. Small, small position.
Just bought AAPL 370 diag 7/22, 01/12
and AAPL 375/370, and
AMZN 215/210 diag
AAPL is holding up, all the rest + SPX is looking ugly today.
Anxious to try out this strategy. Thanks Mr. Jim
rick
I opened some 1200/1980 spreads on SPX. This gives me 100 point cushion for the week. The market will probably tank, but I don't think it'll drop much.
Just curious, anyone here long term investors? I like investing in dividends stocks and with the market dropping there are some good deals to be had.
Morn' all
AVID, one thing you must wrap your brain around is that you are basically doing a covered call. When you buy the long call, it is the same as buying stock. Of course buying stock you don't have a 'time' factor. So when you sell the close call it is like a covered call. There is no margin involved as you ‘own’ the long call. You have spent the money! You can certainly lose if the stock drops a long way. You might pay 40 for a long call on GOOG and if the stock dropped 50 points the long call might be worth 30. Never forgetting that one day you plan on selling that call, so now you have a 10 point loss. Hopefully offset by the near calls you have been selling. When opening this position you are just hoping to capture the built in time factor that will expire on Friday.
Nic, there are several ways to play this type of spread. A plain calendar spread is using the same strikes. A diagonal spread is like a calendar spread with diff strikes. Basically the same except you can set a more bullish or bearish position with a diagonal.
Using the same strike, that is pretty close to the existing stock price is most often what I do. It is pretty much a neutral strategy. I just want to capture the eroding time factor in the near strike..
My positions at this time are;
AAPL, 355 July and Jan 45 of them
360 “ “ “ 36 “ “
AMZN 210 both sides 20 of them
AAPL has earns this week and AMZN next week
Dave, thanks for your thorough answers, as always. Those Greeks are all Greek to me, well, because I haven't yet tried to understand them, but you explained them nicely here for the lay-person like me to get an overview of them. Thanks!
As to "Why change a working strategy?" Well, with any investment there's risk and it's all about how you manage the risk. In the case of weeklies, each week is different with different market events and I assess where I can get the most cushion for the return I am seeking. What happened in the disastrous "Bald week" (sorry, Rick if you're reading, that's how I'll remember it) has made me even more cautious. Although I must admit if I had not already made 2% that week I would've put on that infamous 1350 call and I myself probably would've lost a huge amount of money as I was "weighing" the risk/return and got it wrong.
Overall, what I'm trying to say is that with spreads I realize you need to hold on to them til expiration to make any money and even a week can be too long! lol especially in this volatile environment, and so your GIGO method reduces exposure and therefore risk even more so.
I do like these Calendar/Diagonal spreads and am paper trading those. With weekly returns like that together with 'managing the risk" one may reach their annaul target ROI and only need to trade even once a quarter! We'll see....
Sold (10) UYG Aug $43s for .25, UYG is trading at $57, 52 week low is $46.57, feels like a safe play.
Henry, my investment funds are primarily divided between Selling Puts and increasing dividend stocks.
If something happened to me, I know my wife wouldn't want to sell puts for income.
What dividend issues interest you now?
Ed, if you're lucky enough to have a trusted friend selling puts, like I do, then I know that person will continue to make say, a conservative 15% after taxes year after year on our money if something ever happened to me. No other investment strategy comes close! but yes, dividends is the next, but far next best thing. :)
Hi Talked to my broker and the diagonal call spread strategy does have a scenario where maintenance is needed. People should keep in mind that owning the Jan call does not mean you own the shares, rather you own the right to buy the shares at the strike. It is not the same as a covered call.
His answer – No maintenance is required if you sell a weekly call at a strike that is equal to or above the Jan strike. If it is below that then its different. Here is an example (made up)
- I buy one Apple Jan12 400 call for $30.00 ($3000)
- I sell one Apple 400 Julywk4 call for $5.00 ($500)
- Now Steve Jobs gets very sick and the stock drops to $300 in one week.
- My July weekly expires
- My Jan12 call drops to $10.00.
- I want to keep my Jan call (avoid the 2K loss) and sell the next weeks Apple 400 call but its only worth 10 cents (fictional) – not worth it so I say well I can sell an apple 350 call for $4.00.
- If you sell the apple’s weekly 350 call your account will show that it is not a naked call or a covered call but rather a call spread with the Jan12 call as the ceiling at 400. This amounts to a 50 pt margin or 5K. Remember this is not a covered call where you own the 100 shares (you already paid the $40K and its taken from your account), you own the right to pay $40,000 to buy 100 Apple shares. Your broker will require maintenance as they would with a simple weekly call spread (e.g. Sell July weekly 350, Buy July weekly 400)
So to avoid maintenance the sold call’s strike needs to be the same or above the long call. Please talked directly to your broker on this if in doubt but at least Options Express was very clear on this
Regards
RHM
Jerry - Thanks for your explanation and details provided.
Hi guys - I'm just getting into this and am testing the waters a bit. I want to learn more about the spreads but from the sound of it you guys are having some good success.
This morning I sold 5 7/22 GOOG 570 puts at 1.15. Hoping 25 points this week is a decent cushion.
Are the calendar spreads better than naked puts because you can get a better ROI or just because of the margin requirements?
Wow that's great Chelski!
Very nice to have a friend like that.
Josh,
Goog just had a huge run up from earnings last week. We could see a bit of selling now? If Goog drops 7 tomorrow then 8 the next day, you'll be sweating it out. IMO 25 pts for GOOG is not enough....for me anyway. Everyone has a different level of risk tolerance.
Dave G., quick question... on the trades you've made over the past 2.5 months what is the average (roughly speaking) change in theta from Friday to the following Monday?
Thanks,
Mark
Instead of SPX weekly this week,
Opened some calendar spreads for
IBM,AAPL,INTC
@ED
I like how stocks with strong fundamentals are taking a beating in this market. For example, Aflac, Waste Management, and Procter & Gamble are all negative for the year. I like using the income from trading credit spreads to buy these stocks for long term. It's like getting free money twice haha.
@All, I picked up the SPX 1230/1225 Spread this week paper money only. I know the market is going to go down, and I wanted to test the waters.
Depends on how everything looks on Tues / Wed I may jump in.
RHM, thanks for that piece of info. As many others, I'm also very interested in these calendar/diagonal spreads (my paper trade diagonal AAPL 380/375 made about $5,000 today alone). The problem is that everything that sounds too good to be true usually is, so I'm trying to get my head around this one.
One thing that works both for and against you is the 'slowness' of the long call, since it is so far away the movement in price isn't linear. AAPL doesn't seem to share the delta of GOOG here. Comparing with today's option chain, assuming this gives an approximate picture, twenty points up to 395 from 375 represents less than $10 in premium, and about the same if it should drop. Using for example 40 AAPL 380/375 diag spreads as a little study test, they would cost me approx $24.50 (29.50-5) each or about $100,000.
- If AAPL goes up 20 bucks, I would then make about $9 on the long call, but I would have to deduct the short one, which is now in the money. As far as I can understand it would be about $10 ITM since I have about $10 to the strike, resulting in a total loss of $1, or $4,000.
- If AAPL comes in just below 380 I would get about $2 on the long, and in this case $5 on the short one that expires for a total of $7, or $28,000.
- If AAPL drops 20 bucks my long call would loose about $9 but I would get $5 on my short so a total loss of $4, or $16,000. If I keep the long one I would apparently then get a maintenance problem of about $80,000 for the difference between my next chosen strike now $20 down and the long call.
- If something happens to Steve Jobs and it dives $100, it seems the long call would obviously loose a lot, perhaps $20-25 of its $30 value, and after the short call result in a $25 loss, or about $100,000. Maintenance wouldn't be an issue as I would have lost the whole investment.
Well, I'm sorry for the less than rosy picture, and I really hope I'm making a mistake somewhere with my numbers, and welcome scrutinization. Jerry? What am I missing? To me it seems a bit risky to do this over earnings.
Hi Nic
1- You only have a maintenance issue if you start selling near term weeklies below the long call. (I assume when you say 380/375 you mean you bought the Jan 375, sold the 380 eeekly) As long as there is some reasonable premium you can continue to sell the 380 or even the 375 strike every week and get some $$$.
2- The slow speed of the long call is true at the beginning of the week however as Friday approaches the weekly call will lose all of its time value while the Jan call will keep most of its.
For example a real trade was sell the 370 Apple Weekly for 9.25, Buy the Jan 370 for 31.75. Apple was at 369. Cost: $2250
At close today with Apple at 374. The weekly is at 12.26, Jan at 35.10. Stock moved ITM up $4.00, weekly moved up $3, Jan up $3.35. Let say it just stayed here. Then by Friday expiry.
Weekly would be $4.00 (all time leaks away), Jan would likely be still at around 35. For $3100, profit $850.
So what is the downside (using my example). Well the stock drops well below 370 and selling the 370 weeklies just does not generate enough income between now and Jan expiry to get back what you paid for the Jan Call.
As Jerry said this really only works with stocks like AAPL , GOOG that have alot of time premium in the near term weeklies.
I think the near term call has to erode to $0 at expiration. You buy it back on Friday as it approaches $0. Unlike you, I am not smart enough to paper trade first so I'm gonna find out how this works in real $ terms. Have the July 365/Jan365 @ $23.40. Steve Jobs, keep on keepin' on....
@Jerry, what say you?
RHM, my numbers above were based on AAPL@369 and the bought jan 375 and sold 380 weekly. I'm not sure whether we agreed or not, but from what I can tell we both seem to come to the conclusion that this is a highly neutral trade that works best if the option expires without a big drop.
As you said, I can't really continue to sell the weekly if it has dropped to much as it won't generate enough income unless I go down closer to the current stock price, and then I end up needing more maintenance.
I'm just trying to figure out what I'm missing when someone like Jerry keeps this over earnings, when a, however unlikely, significant drop would present a very difficult situation from what I can tell. In fact, a significant increase could probably generate an equally difficult one, as the near term value of the ITM sold call would increase more than the long Jan call, wouldn't it?
RHM, the Jan call would keep most of its value at the end of the week, as opposed to the near term sold one, but only if the stock didn't drop, right? I'm suggesting a scenario where AAPL takes a dive, and the Jan call would then follow it down.
This sure is tricky, I can't really simulate it in TOS either, as the OnDemand function only has a few strikes on every date buffered, and I need one where there is a significant drop to see the effect.
Nic your bringing up some good points I have been trading diag spreads for about 4 mon. with mostly good results. You can build in more safety with wider spreads say AAPL Jan12 360 then sell the weekly 380 this gives more room for the stock to move and still have profit. An example I had GOOG last week SEP 535 and sold the weekly 560 for 2250.00 debit, fri morn. I sold out for 3100.00 a 850.00 profit, like most trades with stocks or options the biggest risk is a big drop in the stock price , I got lucky on that GOOG trade but overall these trades will work just don't get too greedy.
Hi all, yes the risk with any option or stock position is, a major turn in the stock. If you buy or sell a put or call, the stock could go down or up etc. So there is some risk with any investment. Regarding AAPL I would not worry about a major drop. It might go down 25 on bad news but it has a low pe, and making money by the bushel.
You can, for more safety and less returns do an AAPL cal spread using the 350 both Jan and July.
You have around 25 pt of cush and take in around a dollar in time prem. You have a debit of around 20. With the 20 pt debit you make ball-park 5% So a 20K acc’t would make around 1K per week. That 5% in a week is darn good returns with more safety. Regarding the cal spread being like a covered call. That is to get traders thinking regarding the use of margin and the maintenance question that keeps coming up. You won’t have the situation as with puts and other options that are naked. Maintenance request will not come knocking on your door. It is like owning stock, if it goes down, your acc’t bal will go down but unless you borrowed money to open the position it is just what you see for value. For a stock like AAPL if it drops a fair amount, there will always be some premium for the strike you pick and if you have to take little bites each week until the stock make a comeback, and it will, so be it. Now a high flyer with out quite as good record would be a NFLX. My advice on these types are to do just a few.
Some great points and questions from all. This is fun and can make good profits whichever way you choose to go. Don’t go and re-fi the house just yet…
Jerry
Ok, so I managed to make a test in TOS OnDemand system where AAPL dropped 20 points. In the week of June 6th, AAPL started the week at 346 and ended it at 325. I bought 50 Jan 355 and sold the weekly 360.
Now, the weekly only had a value of $.98 so the reason they are so high right now I assume is due to earnings week, but this is something to consider if we can't find the same premiums during regular periods. The long call had a value of $30.08 in the beginning of the week, and closed Friday at $19.60, which is a drop of $10.48 for the $20 the stock fell. Obviously the weekly expired. The loss was $47,250. The Monday after the AAPL 335 weekly was .80, so recovery would take a while.
What I learned was that since there eventually will be time decay even in the long call, one has a chance to recover short term dips if the stock comes back, but only if it does so within the next couple of months. For a stock that went to 360 like AAPL and then traded in range all the way down to 310 this would have had complications. Since the strategy seems to be to keep the long one if there is a drop, in order to sell calls against it, I can't see any solid exit strategies that would work either.
I then did the opposite and found a week with a dramatic increase and earnings call. In the week of April 18th, AAPL started the week at 327 and ended it at 350.80, a $25 increase. I bought 50 Jan 335 and sold the weekly 335. The long call had a value 34.53 and the short 4.50 on the Monday, relatively similar to what we are looking at today. I paid $30.03. At Friday closing the long call had increased to 45.80, a $11 increase compared to the 25 the stock jumped up. Unfortunately the now deep in the money short call also went up by over $10 and ate most of the increase in the long call, resulting in a total profit of $1,100 for 50 options at a debit of $150,000.
I'm not so sure what my tests proved, as it also has a lot to do with what happens in the weeks after, but hopefully it is interesting to see real life numbers on what happened when the stock went down 20 contra up 25. I wanted to share my findings since many seems ready to jump in, but few seems to have real life experience to share. My conclusion has to be that this is a strategy that really only works well when the stock is very neutral, and that it can be close to impossible to recover if there is a significant drop.
Just a note that I typed in my results without seeing Jerry's comment, but it would be great to get your take on my findings, Jerry.
Nic, Yes and no. Your results were for a month ago from now. If you had the position you refer to with AAPL, it is now 30 points above where it was just 5 weeks ago. Holding on for a stock like aapl might be very profitable? Of course as the brokers say, "past performance is not ..." Also limit your positions to less than tying all the acc’t into one position.
Here is one that some of you might be interested in. IBM, posted tonight and blow-out numbers to the good side. It should open around 178 Doing the 180 for July and Jan would look like this…Jan 180 strike is around 7.45 the July this week is 1.25. that is a debit of 6.2 The July is all time val so most will slip away. That should be above 16% ROI for the week? The opening might be different than after hours but not all that much. For me I am jumping in on this one tomorrow morn.
Jer
Wow, I leave a week and come back to find everyone in school on diagonals and calendar spreads. What a great discussion and money saver! You could spend 2k just to learn this all in a day. Tomorrow will be fun with earning galore. Jerry, I do like the IBM trade.
Chris
hi jerry,u mean 16% roi for the month as IBM doesnt have any weeklies
ali
Nic, Jerry
I have been reading up on Diagonal Spreads In Guy Cohen's Options Bible book. Nic has some valid points regarding the drop in the stock price. The only way to combat that would be to buy the long term call deeper in the money and therefore if the stock drops significantly, you can continue to sell calls against it at a lower strike. Only problem is it will increase the total debit of the trade and therefore, decrease the %ROI. For example, AAPL at 374, buy Jan 300 calls, sell July weekly 375. If AAPL drops 25 dollars, the weekly will be worthless. Although the Jan 300 will decrease in value, one can now sell the 350 weekly call next week and can sell weeklies all the way down to 300. To address the problem of a hugh runup, I have read that one can sell less than the total number of short calls with respect to long calls. Using the same example above, if I have 20 of the Jan 300 calls, I would only sell 8 of the weekly 375 calls. Therefore, I have 2 long calls which are not covered and will therefore help in offsetting any tremendous gains in the stock. Again, the tradeoff is less money from the short calls as one is only selling 8 of them and holding 10 of the long calls. Hope that helps.
ongba
Oops,
Typo. In the 2nd to last line it should read "Using the same example above, if I had 10 of the jan 300 calls" not 20 as originally stated.
Doctorali,
IBM does have weekly options :)
Nic - Thanks for you detailed analysis and inputs. I have been trying to think in those same terms before making a plunge :) Now I am not sure I will do this yet, but things are in the right perspective now.
This forum is wonderful with a mix of people and diverse ideas that keeps everything in balance. Thanks.
Ongba, the run-up part seems to be no problem as last week I had the 560 goog when it was trading around 530 before earnings. Over night it ran right by me about 40PT the time value still eroded and the long (JAN) increased also. The big drop is always a concern with naked puts etc but picking good stocks and smart trades minimizes the risk some, if not nearly all
Jer
I have found an interesting way to put in an order on weekly's. (cal spread) I put it in just a little below the 'last' trade even if the stock is going up (IBM today). If you are trying to capture the extra 'time val', within hours or tomorrow at the latest the time has to erode and eventually the price will come back to YOU. Well that is the plan! I will let you know it if works. lol.
Mark, not sure exactly what you're asking for in your question. You can do a screen snapshot of an SPX option chain on Thursday/Friday (when the new weeklys come out) and then again on Monday (after the weekend has passed) to see the effect the weekend time decay has on the SPX option premiums. I'm not trying to "blow off" your question, but I think the option chains can illustrate the theta effect much better than I can.
Dave G, that's exactly what I was asking. I have been doing screenshots of various option chains but was just curious if you have noticed an average difference in theta while you have traded the past few months. I would simply add that information to what I am already gathering. Thanks, Mark
@Jerry,
Are you still holding AAPL call 360 July22? when do you buy back "in the money" call? do you wait till the expiration day?
Kenny, yes i still have them and have added to the 355's. the 255's still have over 2 in time and 20 in cush. I will close late on Friday. I will start to unwind around when there is two hours left or when the time has leaked out of them.
OK, with all you diagonal and calendar spread traders out there, I'm just a small-time skinny dipper picking up the crumbs as I got filled on my AAPL 310 puts @ (.15). Option premiums are showing AAPL has an implied move of +/- 18.50. I just can't see AAPL dropping to 310...even on disappointing earnings. We’ll see. It looks like AAPL will report about 30 minutes after market close. Good luck to all in AAPL trades!
Earnings are coming in strong and I have a feeling SPX will reach a new high this week. So no iron condors for me. Anyone else get the same feeling?
That was a good IBM trade this morning. I didn't go out as far on the plus side only took and October 185. But the stock ramped up, so I will take the profit. IBM did have weeklys.
Chris
Jerry et al.,
Besides AAPL and GOOG (and this week IBM) what other weeklies have you found to be successful with the calendar/diagonal spread?
thanks,
ongba
Ongba, some great ideas there, I think I have to get Guy Cohen's Options Bible book.
Unbelievable, $7.79. Even to much for people to dare to sell on the news even with a 22% run up. Amazing company.
Nic,
Cohen's book only has a short blurb on it so you may want to go to a bookstore and just read the 3 pages on diagonal spreads. There is a book by Marc Allaire called understanding LEAPS which has an entire chapter on this strategy which is more detailed than Cohen. Also, there is a word document that I got from one of the options sites which is a details the strategy using SPY Leaps and selling monthly calls. Jerry has given us a gem with the weekly calendar/diagonal strategy that he uses but when I read about the strategy in standard options textbooks, they advocate buying the leap deep in the money (delta near 0.8) as a stock surrogate and selling calls against it, but in a ratio of about 8 short calls for 10 long calls. It seems like the strategy I have read would help more against a significant drop in the stock since one can continue to sell the calls on the way down to the long strike and with only 8 short calls against 10 longs, the deltas of the extra 2 long calls will help counted the increasing delta of the short calls if the stock gains significantly. But like Jerry says, many ways to make money using options and he seems to be doing very well!
I'm left speechless by Apple's numbers. AMAZING!!! Although I'm a PC guy, much respect to Apple!!!
Wooow, over $400 right now!!
the question i have about the calendar trades like the IBM trade is that when it moves so far in the money then the short option doesn't erode/becomes all intrinsic....so you just play it hoping it stay close enough to the strike to to let the high volatility that was priced in to erode quickly.....and if stock moves too high by expiration to lose any further theta decay then you just roll it to the next weekly ?
I actually think the AAPL calendar trades will work. A lot of people shorting at 400 and it could be back at 385 or so in the end of the week. If it does, I will try it by buying the Jan 375 or so and then sell calls for a couple of weeks.
ps- my other question about these At the money calendar calls spreads is that you are negative delta so the the short ATM options will move more than your long ATM call....so if the stock moves up enough past your strikes like post earnings IBM then the short option will move more dollar for dollar and could see more of a loss on the delta difference than the gain in the volatility drop ?.....seems like if you are bullish on earnings then smarter to be long a diagonal with your long call being in the money and short weekly being at the money ?
This is sort of off-topic and probably reveals some deep ignorance on my part but when exactly does trading ever stop? It was my impression that regular trading was done at 4pm and that after-market stuff was done at 4:30pm.
When I heard that AAPL was going to *resume* trading at 4:50 and then I saw that the bid/ask soared to over 400 I was a bit confused. Even now, at 6:30pm EST I see fluctuations going on in the real-time data. Where would the trading be happening at 6:30pm EST that causes the price to move around? Is this some kind of futures thing? I was just curious if anyone had a definitive answer.
HI Brain, I must first say that I do things different and after 15 years of doing this daily, I know less than many... but I have no idea what theta and volatility and delta mean. I know the definition but they change on a whim of sellers or buyers ideas or earnings reports etc. I doubt that there has been many times when the delta predicted accurately, that such and such option would move blank amount with the movement of the stock. I don't get peoples concern or preoccupation with these arbitrary numbers. More power to the ones that look at them and Go 'aha'.
Pick a good stock and use good common sense and make money. If the position disappoints you I doubt that any of the predicting greeks would have foreseen such a thing. EX; what was the delta on an AAPL 390 or the 370 yesterday...
Now on to your question. Regarding why not be ATM with the short if I am bullish. I am bullish but I had absolutely no idea what AAPL would report. What if a bad report? My way is pretty much a neutral strategy. I want to make money no matter what happens. Regarding your question of negative delta and delta difference, you get much deeper than I do into trying to figure all the math part. I kind of do the KISS. Maybe someone else can address the reasons for the plays that according to greeks should be done. Me, I just pick what looks like a good play and go for it.
You are correct regarding the near strike will move more than the far out one, but the time decay will not be as fast for the Jan call as one that expires Friday . The AAPL 355 & 360 will lose around 2 dollars by late Friday. That is no matter what the price is compared to the stock price. That’s all I need to know. Again, more power to the traders that use the info. I have found that all the computers in the world can’t compete with common sense.
Tomorrow will be interesting to see the option activity.
Hope all are happy with AAPL.
Jerry
i wasnt trying to focus too much on greeks but i just thought people didnt do calendars if they are expecting a big move because like with ibm the big move up causes short option to not have any time decay because so far in the money...so didnt make much on move up and risk to downside was still there being long the far out option. i guess i though calendar spreads for for more neutral moves no wanting it to move much either way
Gremjun, after-hours trading of stocks (not options) lasts another four hours after the closing bell for the day. I live in the CST and markets close here at 3:00 PM and after-hours trading lasts till 7:00 PM after which all trading ceases till pre-market trading the next day. Only limit orders are allowed in after hours trading and yes, stock prices do move around in after-hours trading.
That's my problem with this part of the discussion as well. Once the short leg is ITM, time decay becomes more or less irrelevant, doesn't it? The only thing that seems to matter is that the the short ITM moves on a one to one basis while the long Jan call moves at about half speed, letting the short one eat it up on big jumps. At least that's my understanding (which doesn't say all that much :-)
Gremjun, pre and after hours seems to vary a little between different brokers, at TOS I can start 2.5 hours before and keep going 4 hours afterward (I think). The volume is considerably lower though and it is unfortunately seldom a reliable indicator.
So the way I understand how it will unwind, you can easily see what portion of the premium received for the near term sold position is the 'time value'. That value has to erode to 0 by closing on Friday. You have to buy back the part that's in the money on the solds and close the position, but that is basically offset by the bot far out position. (tho not exactly one to one as we saw today). So you get to keep the amount of value 'decayed' from your original sold options plus or minus the difference in between the long and the short positions. Hopefully there is some $ remaining. How's that sound?
Safe N S,. yes and no, There is a good chance that i will just roll up or out the sold calls. ie; buy to close the 355 for July 22 and sell to open the July 29 I might roll the 355's into 360 or 365 depending on what the stock is going for at the time of making a choice. Each week I might only roll one more strike. Several ways to play a big jump. Part of the decision is how much i trust the stock. With AAPL going into fall release of a new phone and possible TV and next gen of ipad etc All of that and still a modest PE. What’s not to like. The clock is also ticking on the Jan’s. A lot of time val in those that has to erode also.
I was browsing through youtube and stumble upon this video. It's similar to the calendar spread in theory, but it improves on it by buying puts and writing calls options on a single trade. The guy says it's "BULLETPROFF". Anyways, here's the link. I'm not trying to advertise or anything, just thought it's an interesting idea. Cheers!
http://www.youtube.com/watch?v=mfXiZEZ8V6g&feature=related
Hi
I thought I would show you what happened exactly on my apple trade in real time. I wanted to try/experiment with the calendar spread so at a few days ago I opened it.
AAPL at 365, opened the 370/370 call spread. Sold Julywk4 370, Bought Jan 370
1) AAPL at 369. JAN: 31.75 JUL 9.25 TIME Value in July 8.25 . Spread=$2250
2) AAPL at 374. JAN: 35.50 JUL 12.26 TIME Value in July 8.26 . Spread=$2280
3) AAPL at 377. JAN: 35.50 JUL 12.60 TIME Value in July 5.75 . Spread=$2290
Announcement
4) AAPL at 389.35 JAN: 41.55 JUL 20.35 TIME Value in July 1.00 . Spread=$2120
So now if the time value goes to 0 then the spread will close at approx. 2220 for a small loss of 30. Of course you can roll into next week and try and get the time value there. What this illustrates is that the JAN option did follow the near one fairly closely after a big jump so there is protection in this strategy against that. I closed this trade today at $2150 in the end for a few reasons
a) I saw at one point the time value drop to 0.35, I can’t be at the computer today and that gets a bit too close for comfort. Yes it is rare that you get assigned early however it happened to a colleague of mine in April and the general rule of thumb is if you see the time premium of an ITM short option get close to zero (usually less than 0.10) the risk of early assignment is real
b) I’ll be camping later this week and next so did not want to roll the July to wk5
Regards
RHM,
What was the original debit on your trade when you opened it with AAPL at 365?
Hi
Oops i missed that, lets try this without the typos.
Opening Spread; $2190. Closed today at $2150. Small loss. Likley could have ended up with a small gain if i stuck around until the last 2 hours Friday.
Cheers
RHM, you post was the stuff I was trying to clarify above as I always thought the calendar spread which is a neutral strategy you wanted it to stay in a close range near your strikes or else the short option moves to much that all time value turns into all instrinsic value an no time decay so you dont make anything on the big move up even if volatility drops and could even lose a little with big moves up.....as a neutral strategy wants a neutral move not big moves...so like you said you would just have to keep rolling the weeklies until it finally pulled back and you could collect the time decay on the short options(and if the stock really moved up then your long option is pretty far in the money now then you dont have to worry about as much time decay on your long option so you can just hold onto it longer to keep rolling the short options ..anyways, this is a great blog
hi rhm
which brokerage company do u use.I use options express and options house,but i dont see any tool which can tell me the time value in option price.
thanks
ali
closed my aapl 380 calender spread this morning. What happened was that the jul22 went ITM (enough to be assigned). The premium on my Jan12's was too high for me to assign them in return. This situation made me a bit nervous. If assigned to Jul 22's, I would have been in a bit of a situation. I already had a gain so I took it and moved on.
I know that there is more value being in the option and assignment is unlikely BUT...just didn't seem like is was worth it for me to stick around and find out. Also, the money had already been made.
RK
Hi
Brian - yup -i like to "simulate" with a little money on the table to simulate the trade and my emotions.
Doctorali - I just did a simple subtraction. Strike is at 370,Stock at 375, Option at 9.00. I call "time value" Option - (Stock-Srike) = 4.00.
Note: I made a slight error on the last one should have read 5.60
cheers
To all the questions about cal spreads here is how mine is doing. tues morn i BTO the AAPL Jan12 370 call and sold the jul22 390 call technically a diagonal spread the debit was 1625.00. At 11:50 am wed. I can sell out for 2425.00. By selling the call out of the money you of course collect less prem. but if the stock runs up a lot it keeps the spread profitable.Doing it this way you have profit if the stock goes up or stays about the same or drops a little, your loss comes in a steep drop but we already accept that risk so be careful when you set these up. I just do a few of these on each stock and like Jerry say's pick up some crumbs, so far I have found these spreads quite profitable overall. What a great blog this has become to learn from it is great I learn something every time I look at it.
Henry, I had a quick look at your youtube video, but from what I can tell this guy is doing real covered calls, i.e he is actually buying the stock. That is starting to get a bit expensive with our usual suspects, GOOG, AAPL, etc.
He buys a stock (let's say AAPL at 390) and then a put at about 10% up (perhaps 440), six months away, as protection. Since that will be more expensive than 440 in total (in this case about $63 for a total of 453) he then finances the difference with selling a call two three months away. This is where the model stopped working for me. Since he wanted to allow a jump up, I guess we would be looking at a call higher than the 453, ideally significantly higher, and those calls have very low premiums. I've probably misunderstood something, or the method didn't suit AAPL perhaps.
I'm sure this is very clever, but to me it seems that you have to really have the right timing. Would be really interesting if it could somehow be combined with calendar spreads so we didn't have to buy the stock.
I also tried to recreate his setup with
@jamesaliano,
i notice on some of your calendar/diagonals, your long is anywhere from 1 or 2 months or out to 6 mo. do you have rules for your selection?
Trader: I used SEP for GOOG and AAPL mostly to keep the upfront cost down, the thinking here is since the trades were on before earnings if it's not good the loss would be smaller. If the stock is under 100.00 I usually go out 6 mon. or more. The stocks that have weekly's are looking like the way to go simply because you can sell calls each week. I just did one with At&t and got some decent prem. also I like the etf IWM as it has weekly's, of course you can also lose with these so make sure you have some kind of risk management rules, my basic rule to limit risk is I don't put over 10% of funds in any one trade. Investopedia.com has some good articles on these and other trades.
FFIV down 22% on earnings. Good thing for Jerry's rules.
sorry I meant last quarter.
2 quarters ago sorry, not good at blogging. Now that FFIV has reported I am hoping for the $80 strike for .27 for a 3.26 ROI
Hi guys and dolls,
I will start a new blog post as this is great but getting long
Jerry
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