Front month and back month in options trading

Q: A couple of weeks ago I purchased the Trading Pro System and also subscribed to the Daily Market Advantage.

You have provided an unbelievable resource and I am still working on paper trading and learning the adjustments on the iron condors and Calendar spreads. It is very interesting information.

I have watched the video on the Victory spread strategy several times. In attempting to utilize the strategy in the video I am not currently finding trades that match the low downside risk demonstrated in the video.

It seems currently many options front month I.V. is lower than further out months – I am not sure if this is affecting my analysis of the trade. I was also wondering if the relative close time until Oct expiration affects the outcome of this strategy? I did try numerous examples with selling either the Oct or November options.

Do you have any current examples of the Victory Spread strategy that could help me understand what I am missing or do I need to wait until after Oct expiration and then retry my analysis.

I greatly appreciate your expertise and enjoy listening to your market review each night. Keep up the great work.

A: The front month (Oct) has only 8 days left- that is the reason you cannot find any trades. There’s no time premium left in the front month.

The general rule is: Never use a front month with less than 30 days remaining.

In addition, the Vol will give you different risk profiles that may not be favorable. You want the front month to be a slightly higher vol than the back month.

A trick to finding those types of trades is to look for a stock that has sold off hard. For example – RIMM (on 9/25/09)

It lost about 15+ points in one day skyrocketing the front month Vol while the back month had a lower Vol.

The setup was very favorable at that time – it’s too late to do it now.

So use the 30-40 day month options and find stocks that have that positive volatility skew.

Closing position with synthetic options

Q: Thanks for the detailed video.
One quick question regarding yesterday’s video. You showed how to close the postion with synthetic options. Now, When we close the sell postion (in this case SPY call sell) by buying the SPY call, do we need to sell that as well? SPY call bought needs to be sold to clear the postion just like regular call you buy , you sell to close the postion?

I’m sorry for asking silly question but I’m newbee and in learning phase. Will the same closing works for other spreads like Iorn condor and Double calendar?
Thanks again for your wonderful support.

In future, if situation is suitalbe to buy spread like Iron condor and Double calendar, please do share.

A: Yes it works the same.

If you are ‘short’ an option then you must buy it back to close the position and if you are ‘long’ the option you must sell it to close the position.

Options getting exercised?

Q: I was able to make it through some of the videos last night and this morning.
Pretty straight forward so far, I understand the criteria for placing the Iron Condors and Double Butterflys and also, the adjustments and when and why..
But I would like to see you do a video or tell me how to handle the rare case of getting exercised on either a short put or call. Especially how to handle getting exercised for the vertical spreads of a Iron Condor and also the shorts of a Calendars.

Perhaps this is just my lack of knowledge of this, but I know more than most about options and I still have question about closing out or handling my PUT/CALL shorts being exercised. I would expect this type of trading can result in several shorts being in the money before expiration.

Great videos, I will keep going..

A: As far as getting exercised goes… here’s the general

If a ‘short’ option is:

1) ‘in-the-money’ AND
2) there is less than .25 of extrinsic value left

… then you’re likely to get exercised.


3) you are MORE likely to be exercised if it’s a stock or etf and it pays a dividend and you’re short the option near ex-div dates if the option meets the criteria above.

The exercise happens overnight and if you meet the criteria above you will get exercised and you’ll see in your portfolio that the option position that was in the money is gone and you will have the stock in your account instead (long or short, depending if the option that was exercised was a put or call).

If you do not want the stock position you can sell it in the pre-market if your brokerage account allows trading in the pre-market.

Trading Videos Streaming?

Q: I hope that at sometime soon that you can put the daily videos on line
for viewing..
I find it a bit cumbersome and time consuming to download and unzip for viewing.

A: I understand your video concern… since we do a video almost every day the bandwidth for all members accessing the current video – if it’s online like youtube vids- plus all past videos being accessed online at any one time could require more servers than we are prepared to manage and/or the cost would be prohibitive and we would have to discontinue the service. In addition, most member prefer a download so they can review them on their computer at any time in the future without having to login.

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)