A "new" trade: Dynamic Covered Strangle

First, this isn't new; I thought of a version of this a couple of years ago and it may well be standard practice by organizations who aren't publishing their trade ideas.

But it looks good enough to me that it reminded me of this guy:

This is Pele, the Brazilian soccer star, who came out of retirement in 1974 to play for the New York Cosmos for an amount of money that he described as "The Sun, The Moon and The Stars."

Now for the trade ... it requires these brokerages attributes:

• SPAN margining ... one could theoretically do it with equity options, but the margin requirements are so much greater it probably doesn't make sense in most cases
• trading of futures and futures options

This makes it challenging to work inside IRAs in many brokerages; some don't allow futures trading or futures options trading, inside IRAs. Make sure you know your brokerage's rules before getting excited about doing with your IRA.

Step 1: sell N contracts of any futures options strangle, 30-50 DTE. So far I've backtested this only with /CL (West Texas Intermediate), the only dataset I have, but I don't see a reason that it shouldn't work with any futures product that supports options.

Step 2: set a contingent order with a tight stop to buy N of the underlying futures only when reaching the short call strike. (If your brokerage doesn't support contingent orders you'll have to do this with alerts.)

Step 3: set a similar contingent order and stop to sell N contracts when reaching the short put strike.

Wait and watch ... 80% of the time (on a one-standard-deviation strangle, with strikes at the 16 delta), nothing will happen and you can just close the trade for a profit of 50% or 80% or even 100% of the credit received.

Another advantage: you are not worried about a huge move in either direction! I'd be fine doing any /CL trade with this setup with the war drums beating last week ...

Backtesting results!

Setup details:

• January 1 2016 to Dec 23 2019, /CL (West Texas Intermediate crude oil)
• Futures options prices, including 'delta' and underlying price
• End of day prices only
• Tests were run with just a 1-lot strangle (i.e. selling 1 call and 1 put)
• I used 30 to 50 days until expiration
• I set to take 85% of the credit we got on opening of the trade

I varied the delta of the options I sold:

.16 delta            + $28577               13 whipsaws

.30 delta             +$52997               15 whipsaws

.40 delta             +$70907               28 whipsaws

The "whipsaw" count is the number of times that the underlying price went through the strike price once and then came back once ... Clearly making sure that these whipsaws are handled optimally is key, and they will be a small drag on earnings nonetheless ... but selling the options closer to the money (.40 delta) pays enough extra to compensate you for this extra attention.

Also, you need to watch the extrinsic value left in your options to decide when to get out ... if you're getting whipsawed around a strike early on you need to hang in there as the option price will still be too high for you to close for a profit. Later on with the extrinsic value down to 50% or less of the opening credit, you can certainly get out and move on if getting whipsawed at that point.

Note that the option price will collapse to the amount it's in the money; for example, if you sell the 65 /CL call and /CL closes at 67 at the time your option expires, you are down $2000 on that option ... But: (1) you got credit when opening the position and (2) you bought the the /CL option contract at 65 that covers your option loss ... so you are just left with that opening credit!

Note also: there's no reason this couldn't work with shorter timeframes like those available in /ES and /GC ...

I'd suggest to start:

• Take 1/2 of your account's buying power and set up a variety of futures options trades as described above ... /CL, /GC, /NG are three you should definitely consider.
• Try the .30 delta to start and make sure you stay on top of the strike breaches going back and forth
• After you work with this for a couple of months, you can try the .40 delta ...

Have fun! More next week ...

Craziness continues; A.M. Triumvirate debuts; equities + futures = profit!

The market craziness continued this week, with equity prices whipsawing crazily all month so far:

S&P 500's wild August 2019

As I mentioned last month, I demoted the "fabulous NDX trade" and moved to use each of the three a.m. settled indices: SPX, NDX and RUT.

I am just trading small accounts right now (mea culpa) so can't do wider "wings" on the iron condors, and this week once again showed why that's a problem ...

The NDX trade was short the 7530 and long the 7540 call, and the a.m. settlement price was all the way up to 7564. That's 100% loss in the case: $737 per 1-lot ... if one had been doing 50-point-wide wings, that reduces the loss to about 65% ...

The other two trades worked ... and didn't. RUT was OK, being the least volatile of the three lately.
SPX closed at 2870, great for the account where I had the short strike at 2875 ... but I put one on later in the a.m. that had the short strike at 2865, long at 2870, so: 100% loss ($390 per one-lot) .... but less than 10% if doing 50-point-wide strikes.

So I think I'll mostly stop doing this trade in accounts that aren't big enough to widen the strikes ...

The two accounts I'm trading right now are both small enough that they can't handle futures trades, and that makes all the difference right now. While the equity positions I've been trading have held up better than I would have thought, they're just down slightly (about 8%) where futures positions would have taken up the slack.

I mentioned the 'short oil' trade last time. Natural gas is similar. But opposite these two is gold, which has been going up:

The thing is, selling calls against a long commodity position is very rich; volatility goes up (and prices go up) the higher you go. For example, the latest gold futures (/GCV9) price is 1517 ... and you can sell the 1525 call option expiring September 25 for $27.30 ... i.e. $2730 credit. This brings your breakeven price to the downside all the way to $1490 ... 

That together with your short oil and gas positions can keep your account humming while equities are going nowhere.

More next week!

Crazy week (it could have been worse) new trade implied by solar energy price crash

"Better positioned for next week?" Silly me:

That's a 100-point range in the S&P 500, and the futures markets in S&P were 50 points wider at least ...

This guy was at it again:

The market recovered most of what it lost and got back into the range where the neutral trades I have on have a chance to make a profit, finally, by the end of the week.

But the big news is the documentary I saw last week ... if oil and gas are now more expensive than solar, that implies that one could go "short" these two ... forever.

The two futures tickers involved are first, crude oil: /CL

And natural gas, /NG

These last two charts show the last 2 years of each commodity price ... had I seen the documentary shortly after it came out I could have been profiting all along!

Two possible trades:

1.  short futures contract and sell 1 put against each contract
2. short futures call option

These are equivalent, risk-wise (according to Tastytrade), but for /CL the short call takes less margin ($2800 versus $4000+ for the combination one above) ... 

More next week ...

Another mixed week (and spring didn't come yet)

First, my natural gas 5-day trade didn't work ...  It's not spring yet:

The snow is slowly melting but we still have plenty around.

I give up on short-term trades except for the one I'm dependent one: the "fabulous NDX" trade ... and now earnings trades, which I have been testing for a few weeks.

This week I went 13-3 ... I made tactical error in one the losers, BKNG, holding on to see if it would come back in the next day before expiration. It was already below both put strikes, but not yet showing max loss. It continued down the next day (expiration Friday the 1st) So I should have closed it out quickly, the way things turned out.

I think Tastyworks may have BKNG marked incorrectly in options liquidity. They have a 4-star ranking system, and BKNG gets only one star.

But on entry to the trade I had a limit price of 56 cents but got filled at 82 cents ... then when closing out on Friday a.m. I thought I'd have to give as much as 20 cents extra ... it was a 5-point-wide spread so should have collapsed to $5 nearing expiration. I put in the order for $5.20 ... and it was filled at $5.03! This is better than some allegedly more liquid underlyings have done ...

So: $86 - $503  ... a $417 loss. Annoying, but it could have been worse ... and I also could have closed it out for about 1/2 that loss the day before, darn it.

BBY and VMW were also losers, but smaller ones that I closed quickly.

This week we have earnings reports from Costco and Target ... more next week!

Question answered: first losses in 0.08 delta earnings trades

I knew it couldn't last, but not with 3 in one day!

Garmin:

CVS:

This was a shortened week, with Presidents' Day keeping the markets closed on Monday the 18th ...

CVS and GRMN (Garmin) both went well outside their expected moves ... both were defined-risk trades and CVS was just on the edge of the short strike when I closed it the next day, so not a big loss. GRMN blew through both short and long strikes and stayed there all week when I closed it for a full loss. DVN was a short strangle that was worth multiples of its initial credit when I closed it early Wednesday, but not as bad as GRMN.

But everything else won: NTES, HLF, HFC, BHC,  DBX,  BIDU,  ROKU,  FSLR ... that's 25 and 3 (89.285%)  overall for the two weeks and still showing a profit.

Even though I have set "close for 50% of the credit" orders, sometimes it's better than that. ROKU I sold for 58 cents and would have closed it for 29 cents or better ... but 'better' turned out to be only 17 cents! If only I'd had 30 contracts instead of the 3 I sold ...

But looking at the largest loss in GRMN: what if I had sold a strangle instead?

I'd have gotten double the credit: 40 cents or so a contract, but the spike in price was about $10, from about $71 to over $81 ... the short strike would have been the same place I had it ($78) and the price I'd have closed it for should have been just a little different than I closed it for, not until Friday, for $3.04. So not very much difference in this case; I'll have to continue monitoring this.

In other news: I continue to be transfixed by very short timeframes and so sold a call spread in /NG, expiring Monday:

• short the $2.70 call
• long the $2.72 call

Credit $130; total risk $350 ... right now (Friday 7:34 pm PST) the price of the current /NG future is 2.698 ... if it will just stay there through Monday, that will be good. Spring is imminent, right?

I also have on the strangle on /NGJ9 options expiring in 32 days at 2.55 and 2.93 ... credit I got for this one was $330, which I want to get 1/2 or $165 ... fingers crossed. Of course I'd love to win both. 

More next week ...