Remaining Neutral Before The FED Decision

Download The "Ultimate" Options Strategy Guide

Fed decision: In tonight's video, we're going to go over all the trades that we made for September 14th. So today was a pretty active day. We were a lot of new things. I wouldn't even say it was too active, it was just active closing, and then we got into a couple of new trades. So, all in all, it ended up just being more active than usual, I guess.

But with the Fed coming up this week we don't want to be too active in our positions. We still want to try to be as balanced as possible as we head into that Fed decision on Thursday. So that's the goal takes some stuff off that is working as we get closer to expiration, stuff that isn't working we can take off, obviously, but then try to remain as neutral and as balanced as possible heading into that Fed decision. 

Related "Fed Decision" Resources:

Fed decision

On the closing side, we'll start on the closing trades we made today, and again, we've been doing this all month long. It's just closing out all the trades that are working. So every time that we have a trade that reaches a profit potential we start closing out. So we did that again today with APC and then also with DOW.

We also closed out of these two trades today. And again, this is just mechanically closing out trades when they hit our targets. Now with APC, it was nice because implied volatility dropped from the time we've entered the trade until about now the stock didn't move anywhere, so that's really where we got a lot of the premium decay is that drop in implied volatility.

Same thing with DOW, this is a little bit more of a directional play, but we got that drop in implied volatility, which was nice, even the drop from 100 down to 74 helped out with this position moving forward.

Guided Video Training At Your Own Pace w/ Option Alpha “Tracks”: Options trading can be overwhelming if you don't know where to start. Our “Tracks” are guided learning courses that help you reach your goals.

Each program was hand-crafted to help you regardless of your current options trading experience. Click here to choose your track ?

As far as the other two trades that we closed out of today, the first one that we got out of was our Target trade and our DE trade. Both of these trades were earnings trades that happened to be, luckily for us, earnings trades that gaped lower and then also the market just over all fell. This is right before the market correction, so we had adjustments that we made to these trades.

In DE, we rolled the contracts from the weeklies out to the Septembers we made adjustments and going inverted, and that helps save probably about $200 in potential loss off of these contracts, but it was still a pretty big hit on both cases. And again, you're going these types of trades when you go naked on some of these things and go inverted and start trading earnings.

And then we just happen to be in the wrong place at the wrong time with the market overall heading lower. So, we end up closing out both Target and DE both with losses. And you can see again, here's Target, the earnings announcement itself had a really big gap down on the stock, and it recovered some of that, so that's where made back some money after our adjustments.

We did make back some of our money after adjustments, but it didn't quite recover to the full extent that we needed it to as we headed toward expiration. And with expiration this week we don't want to run the risk of assignment in any of these contracts. DE was a different story. You can see just that earnings gap right here.

This was the big move, and then just the over all market moving lower didn't help out either so, had some added pressure to the downside. But again, some of the adjustments that we've made shaved a little bit of money off the potential loss, probably about $200 of extra credit that we could have basically eaten as an additional loss, but we were able to reduce that risk just a little bit more by rolling down our call-site contracts a couple of times.

So, in both of these cases, there's nothing you can do with these. You can't adjust them and roll them out to the next contract month. It's better just to take the loss, unfortunately, and move on to the next trade.

Adjustments that we made today, as we talked about with our Elite members on the strategy call this weekend, with Apple moving just a little bit higher now that we're past the announcements and all the events for Apple and their new products, we feel like there's probably a pretty good chance that Apple at least stays here or goes higher.

We're going to start making a small adjustment to our strangle around Apple. And what that means is that we're going to be rolling up our puts side, our naked put, from 90 up to 100. And that's all we did with this adjustment. The vertical spread just facilitated this roll from 90, we closed out the 90's, so we bought those back, and then we reentered a naked put at 100, and that gives us an extra credit of 48 cents.

Again that helps move our break-even point out just a little bit further. Now when we look at our pay-off diagram for Apple, we've got the straddle right over the market at 100. Now, unfortunately, at this point, Apple still is trading outside of our break-even point. So Apple's trading all the way up here, at 115.

We'd love to see the stock down here around 109 or so, but we've still got 30 days between now and expiration, so we don't want to be too aggressive in our adjustments. We still have a high probability trade that we started from the beginning, and there's a good chance that maybe Apple comes back down in that period.

So we don't want to be too aggressive, but we still left room to continue to make adjustments to this trade so if Apple does continue to move higher, then we can move this 100 strike up to 105 or 110 et cetera and start taking in, even more, credit. And again, that's just going to help reduce loss, widen our break-even point on this trade.

A couple of trades that we got into today, all of the same nature except for BABA. We did straddles across the board in Walmart, HPQ, and USO. And, look, the name of the game here is to diversify and get a premium out. So we did all October options across the board for USO, HPQ, and Walmart and we did the straddle right over the market.

Now, these are going to be your more aggressive type trades because implied volatility is much higher. And when implied volatility is high like this we have to make more trades but still keeping our position size small. So you'll notice we're still keeping our position size small across the board and we're just trying to get a lot of diversified trades, oil, energy, utilities, Currency, FXE, FXI, stocks like Walmart and HPQ.

You just try to get as many different things out there as humanly possible. So for these, Walmart, HPQ, and USO, again, name of the game here is high implied volatility. You got to go super aggressive on these because that's where you make your money. So you can see, implied volatility in Walmart still high in the 83rd percentile.

The stock really hasn't moved all too much in the last month or so and even though it did have a little bit of a down move after earnings and the market fall, it's pretty stabilized. We don't know where Walmart's going to go but we want to take a shot at Walmart and try to do something a little bit more aggressive and we're doing it just ever so slightly bullish at the 65 strike, and that's just because we had to pick a direction.

So you've got to pick some place that you got to go. We don't have strikes at 6428. So we're past earnings, we're past dividends in Walmart, so that makes it easy to make a trade in there. With HPQ, the same thing, across the board. Implied volatility high, the 78th percentile.

It's had a little bit of a bounce-back since earnings, but again, we're just trying to make trades that have high implied volatility, do it right at the market, and try to do it as aggressive as possible. Hopefully, we get a drop in implied volatility sometime between now and October expiration.

And that's the same thing with USO. We're getting back into USO. For Alibaba, what we're doing here in BABA is a little bit different. As we started taking off trades like our trade in DOW, which was a vertical credit spread for profit.

We have this trade, which was a bearish trade in nature, so it was directionally bearish, and now that we're taking off that trade we're trying to replace some of those trades with new directionally bearish trades.

And my whole idea here is that we want to have, obviously, a neutral portfolio but given the environment that we're in, given the fact that stocks have been really volatile, and to the downside more that to the upside lately, we want to have a bunch of trades or a handful of trades that are decisively bearish.

So there's quote unquote our money makers as the market falls or if the market falls. And Alibaba seems to fit that bill because the stock got crushed yesterday and got crushed today. And so we wanted to see if we could get into something a little bit more aggressive in Alibaba selling a $5 widespread, taking in a nice big credit of 140.

And we are doing this a little bit more aggressive because the stock has just been getting annihilated and we want to play it directionally down. Let's not try to buck the trend here, let's directionally play this thing lower. Especially if the market heads lower, this thing is going to be one of the first to get lower just because it's had such a tough time recovering regardless.

When we look at the trade that we made in Alibaba again, we're trying to do something a little bit more aggressive, so we did sell our short strike at about the 30% probability of being out of the money level. So a little bit more aggressive than we usually do at the 15% level but we were able to get enough premium to compensate us for that type of trade.

So, the key here is that we were able to take in enough premium to compensate for the actual risk that we're taking. And we know it's a little bit more of a risky trade, it's probably about a 70% chance of success winner, but we wanted to have that decisively bearish tilt in our portfolio moving forward.

All right, so hopefully you guys enjoy this video. As always, please let me know if you have any questions or comments. And until next time, happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.