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 ...

Pipe bombs and volatility, SPX, NDX, futures

There's nothing like watching the market for your just about to expire (neutral) options spread when you get this news:

Pipe bombs were sent to George Soros, CNN, other "liberals"

This whacked my SPX trade for a total loss ... This was one of the low points (Wednesday at 1pm PDT of an extraordinarily volatile week:

I'm still trading futures options, but I've decided to try SPX and NDX 4-day spreads at the .08 delta: SPX Friday to Wednesday and NDX Monday to Friday in hopes of juicing the results between Fabulous NDX monthly trades. Bad timing for the SPX last week, but the NDX came in for full profit after bouncing around like a ping-pong ball on Friday. (It actually never got too close to my short strike at 6725).

And (duhhh ...) I can test this with SPY and QQQ ... I've dropped back to using SPY (a short strangle, at 247 and 275.5 (i.e waay out wide). Tomorrow morning I'm going to put on a 50-point-wing wide NDX iron condor and a QQQ trade also (strangle or condor).

I'm going to try all these for 10 weeks ... I speculate that they should work in the 90% range, but we'll see.

Futures options are not quite as fabulous when doing strangles/condors as with butterflies, but I'm still using them also as part of the mix. But with volatility at such hugely elevated levels lately, it's too tempting to mix in equities. The VIX closed Friday at 24.16!

More next week ...

/ZN trade wins, leading to more diversification ... and better profits, I think!

Your $200,000 virtual account made $5734.40 last week. (Watch this space for better results next week.)

I've just been (mostly) trading SPX for the past several months, and that's mostly worked. (The addition of the NDX a.m. settlement trade has been an excellent kicker, adding profit once per month since Nasdaq pulled the plug on the weekly version.)

The /ZN butterfly trade I put on last Sunday has already produced more than 1/4 of its full credit. Unfortunately Tastyworks doesn't yet have Good 'Til Cancelled orders available for futures options, so I'll have to get this done when the market opens tomorrow afternoon.

I just this evening ran the numbers on a range of futures options: gold, oil, the British Pound, the Euro, Soybeans, Wheat and bonds ... The futures margining system, SPAN, is so much more lenient than the standard options margining system that the profit potential is much greater:

Not only that, diversifying by sector like this removes the "terrorist attack" problem by just diversifying within equities. Most of the equities move together during stressful events (like 2008), where futures markets are more diverse.

I've been diversifying over time: putting on an SPX trade every couple of days ... and although that worked well enough, the 2-day-differing expirations are too highly correlated, especially after the weeks like we just had:

I'm short the 2950 calls in SPX, which have suffered on this up move with 10-12 days to go in the two expirations. (But fortunately the overnight NDX trade covered this loss and then some. Yay!)  I'm wide open to a down opening on Monday a.m. swinging these trades to a small profit. But I think I'm going to take them off in favor of this diverse futures setup anyway ...

More next week ...

Trades so far:

Expiration	Underlying	Long put	Short put	Short call	Long call	Credit Received	Result
07/16/2018/	SPX	2680	2730	2810	2860	$3.60	Won 100%
07/18/2018/	SPX	2700	2750	2820	2870	$3.95	Won 100%
07/20/2018/	SPX	2700	2750	2835	2885	$2.40	Won 100%
07/20/2018 (a.m.)/	NDX	7260	7310	7410	7460	$5.99	Won 100%
07/25/2018	SPX	2705	2755	2835	2885	$2.40	lost 16% of amount at risk
07/27/2018	SPX	2695	2745	2825	2875	$3.50	Won 100%
07/30/2018	SPX	2720	2770	2850	2900	$2.60	Won 100%
08/01/2018	SPX	2730	2780	2870	2920	$2.15	Won 100%
08/03/2018	CMG	430	450	490	510	$1.01	Won 100%
08/03/2018	AMZN	1692.5	1722.5	1887.5	1917.5	$2.60	Won 100%
08/06/2018	SPX	2720	2770	2860	2910	$2.05	Won 100%
08/08/2018	SPX	2740	2790	2860	2910	$2.05	Won 100%
08/10/2018	RUT	1610	1640	1710	1740	$1.53	Won 100%
08/10/2018	AMZN	1737.50	1767.50	1885	1915	$1.79	Lost about 30%
08/13/2018	SPX	2760	2810	2885	2935	$1.65	Won
08/15/2018	SPX	2760	2810	2860	2910	$3.80	Won
08/17/2018 (a.m.)	NDX	7310	7360	7460	7510	$4.42	Lost 7.07%
08/22/2018	SPX	2720	2770	2860	2910	$3.95	Won 70% of possible
08/24/2018	SPX	2745	2795	2880	2930	$3.30	Won 100%
08/24/2018	RUT	1600	1650	1715	1765	$2.16	Lost 17.7%
08/27/2018	SPX	2760	2810	2890	2940	$2.45	Lost 23%
08/29/2018	SPX	2770	2820	2890	2940	$2.95	Lost 47%
08/31/2018	SPX	2795	2845	2925	2975	$2.55	Won 100%%
09/21/2018	SPX	2750	2780	2980	3910	$2.45	Won 50%
09/24/2018	SPX	2750	2770	2970	2990	$1.85	Won 50%
09/26/2018	SPX	2725	2735	2955	2965	$1.15	Won 52.7%
09/28/2018	SPX	2700	2720	2955	2975	$2.05	(open)
10/01/2018	SPX	2705	2735	2950	2980	$2.60	(open)
10/03/2018	SPX	2710	2740	2950	2980	$2.60	(open)
10/05/2018	SPX	2765	2785	2965	2985	$2.10	(open)
10/26/2018	/ZN	117.5	119	119	121	0"56	Won 25% of credit -- all that we expected
09/22/2018	NDX	7475	7510	7650	7690	$3.11	Won 100%