Bottom fishing or Covered stock?

Q: I am a member of the DMA and had some questions regarding SRS. I want to enter this trade but do not know if I should be bottom fishing it or buying a covered stock, due to the following:

– Bottom Fishing: negative skew / am considering selling the Oct 9 Put / buying Jan 8 Put
– Covered Stock: high IV – for each 100 shares bought I am risking around $140, which seems “expensive”

Any thoughts you can share with them. Is there another alternative I could be considering?

A: It depends on whether you are bearish or bullish on srs.

The ‘bottom fishing’ trade you mentioned is bearish. You will only make a profit is srs falls to 9 (max profit). You max loss is the debit you pay for the spread and you will have a max loss if srs rises by the October expiration.

If you’re bullish I would recommend the covered stock rather than the diagonal position.

The reason why the covered stock is seemingly expensive is because srs has a high beta (high volatlity) so the premiums are generally high but you can adjust the risk by going deeper into the money on the put side.

You didn’t say what strikes you were going to use for your covered position… but I would look for a put with an .80 delta if you want to reduce your downside risk – you’ll pay a little more for the protection but if srs declines you will have good protection.
You’ll also get unlimited upside potential if srs continues to rise.

3 Legged Box question

Q: I have a 3 leg box trade on SRS. Since the market has turned do you take the bearish leg off and let the call side run or leave the trade intact.
I bought Dece so I can let it go for a while.

A: I keep it on until the option I sold as part of the vertical spread is near worthless then I buy it back.

I also like to convert the 3 legs into a ‘box’
to lock in my profits when the market is about to turn against me and I have a good profit. But that requires some skill in determining short-term market direction. My MarketDNA software can help with that.

Hedging with a synthetic stock position

Q: You discuss hedging SRS with a synthetic stock position in IYR. My question is why not do a short synthetic position in SRS, Sell call and buy puts. I have noticed people in the TOS chat room talking about shorting AIG this way versus borrowing stock to short. This way you would have along and short position in the same stock. thanks in advance.

A: AIG is a different story because there is no corresponding ‘short’ AIG etf with calls and puts. So your only hedging option is to sell calls and buy puts.

There are 4 reasons I’m using IYR to hedge instead of a collar (a “collar” is ‘selling calls and ‘buying puts’ on a stock you own) on SRS:

1) If I sell calls on SRS they can take my stock away if srs surges and they are in-the-money thereby losing my position that I was able to purchase at much lower prices.

2) If my puts on IYR are assigned I have long IYR stock which is a hedge in itself – it’s equivalent to having a deep -in-the-money put on SRS. It does require more margin however.

3) IYR and SRS are very tightly correlated – srs is exactly 2X the move of IYR.
I know ahead of time what my exact risk is and I can scale in or out and be long or short my hedge by simply adding a few contracts.

4) The theta is positive (I set it up so that the option I sold is slightly higher in price than the one I bought) so I collect money if the stocks do nothing.

Question about Victory Spreads

Q: In your demo video for this spread you say potential losses should be about $50 or so. You refer to favorable pricing. Would you please explain what you mean by favorable pricing? I have tried several scenarios with stocks that I think might be making a move up but in each case my potential losses were closer to $200. Today I reviewed AU (Anglogold Ashantilt) selling the oct 35 call and buying 3 Jan 50 calls. If the stock settled between 37 and 50 by Oct expiration I would lose money with the worse loss being $183. Not bad but more than $50. Am I missing something? Thank you. PS Am really enjoying the course.

A: The amount of loss in a victory spread depends on:

1) volatility at the time of the trade
2) the number of contracts used
3) time to expiration

It sounds like you were using the same example I was as far as contracts go (sold 1, bought 3) so the only differences would be “volatility” and “time to expiration” which would explain the difference in potential loss.

Adjusting a Double Calendar

Q: I’ve bought your online course & it’s really eye-opening to someone like myself who thought he has already known a lot about options.

I’ve gone through all your videos regarding the portfolio selection, the setup & adjustment of the “Double Calendar” and “Sale of an Iron Condor” trades and they were clearly explained.

However, I have this bugging question that I hope you could help me. That is, how do you adjust a “Double Calendar” or “Sale of an Iron Condor” position if the price goes against your position (ie. moved very close to your breakeven point) if it happened during the last 1 to 2 weeks before expiration and options premium have already gone down a lot.

Would laying another double calendar over an existing one or in the case of an iron condor, shifting the whole iron condor still be practical during these final 1-2 weeks before expiration with not much value in the option premium?

A: I mentioned on the videos that adjustments are really only a viable solution in the 1st or 2nd week you are in the position due to the fact hat option premiums are still relatively high.

So if you put a position on 4 weeks to expiration, trying an adjustment in the last week or two would not work due to declining premium.

One alternative is to adjust using the next month out where premiums are higher. There no rule that says your adjustment has to be made in the same month!

A second alternative is to simply close the position out, of course, and move on to the next month. In most cases this is the best option.

Training Videos Question 1

Q: I bought your training videos 3 weeks ago , which appear to be your first version of the training course “trading as a business”, in a hope to learn option trading cashflow secrets regardless of the market move, the videos are great and I am really happy with them, but they were recorded few years ago I believe, but that is ok as according to you , this is an evergreen business as the principles will never change because the markets never change.

the thing is , after I signed to your daily market advantage a week ago , I noticed that some of your comments were based on some techniques that were somehow different than the videos I am learning of , and I am referring at the video of 31/08/09 where you mentioned something about the put spread calendar that is good to trade now and that the iron condor is not suitable at the moment.

– my question is, as a new trader what would be the best strategy that you recommend from your videos to trade the current market for monthly cash flow, something does not need too much of the advanced technical analizes or too omplicated and easy to handle until i pick up the knowledge from your daily market advantage.

A: I appreciate you feedback and your questions.

It’s true that the principles I taught are evergreen in the videos from last year. The ‘greeks’ will never change – but *how* you use them is a different story.

I have slightly revised my strategy to take better advantage of market moves using income trades with technical analysis on volatility as the most important component.

I released 2 important white papers: One paper on the greeks and another paper last November 2008 to take advantage of the volatility. (These are included in the download area for all paid customers)

Iron Condors Question 2

Q: I purchased your course and I’m enjoying it….I’m up to Module 5 right now.

Question for you: How do you choose between selling Iron Condors (credit) and buying Double Diagonal Calendars (debit)? Is there any criteria for favoring one over the other when building your portfolio every month? Or, do you simply try to mix it up?


A: I choose between Iron Condors and Double Calendars by using volatility as a guide.

When volatility is high and coming down I want to add Iron Condors with a slightly positive delta because it means the market is probably rising as volatility drops.

When volatility is low and rising I want to add put Double Calendars to my portfolio because I make money on the ‘vol spread’ between the front month and the back month. Said another way, if volatility is rising I only want to purchase put Double Calendars because the market is probably trending lower.

Theta Scalping Question 1

Q: Towards the back of the video, you indicated an adjustment of adding 300 shares of QQQQ stock. You had 60 contracts open. If I wanted to know how many shares would be required for one contract, would I divide the 300 by 60, or 30, or 15? I would assume divide by 15, since for the iron condor you used needed a long and short for the puts and the calls, or 4 contracts for one condor.

A: Adjusting for theta scalping positions has nothing to do with the number of contracts in your position, it has to do with deltas.

In the video you reference I was probably ‘short’ 300 deltas that’s why I needed to buy 300 shares.

In order to determine the number of shares when theta scalping you need to know your deltas.

The delta will tell you what you need to get back to a delta neutral position

For example if you’re short 300 (displayed on TOS as “-300”) 300 deltas then you would need to purchase 300 shares to be ‘neutral’ and if you were long 300 (displayed on TOS as “+300”) then you would need to sell 300 shares (short) to be delta neutral.

However, and this is important, it is not alway wise or preferable to be perfectly delta neutral. You need to know the bias of the market at any one time. For example the market bias since March 9 has been ‘up’…
you would have done well by understanding the current market bias and trading accordingly by being slightly long (positive) deltas at all times.

The market bias can be either:

1) Long (up trending)
2) Short (down trending) or
3) Neutral (trading range bound)

The bias changes week to week, month to month so it’s important to know the current market bias that’s why the daily market videos I do are so important to all option traders. You need to know the bias.

Hope that helps

Iron Condor Question 1

Q: When entering a Iron condor, aren’t you at risk of being put a stock or forced to buy a stock if the underlying breaks your strike. Can this be avoided by simply trading calendar spreads because you are in effect short & long the outer month at the same time. I’m just worried about being put a stock after a huge move and not having the money in the account to do so.

A: Once one side of your Iron Condor is past your break even I would either roll it up or down (adjust) or get out of the trade altogether.

Whether you get out or adjust is a matter of how you think market will move over the course of your trade.

You’re not in much danger of those options being exercised UNLESS:

1) they have less than .25 cents of extrinsic value (EV) left in them and
2) the company pays a dividend and the ex-div date is coming soon

Generally if the option is ‘out-of’ or ‘at-the-money’ it will NOT be exercised because there’s too much time value left in the option.

If it goes deep ‘in-the-money’ and has less then .25 cents of EV it could be exercised at any time.