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Options trader: We’re going to cover some of the trades that we made towards the end of the week last week, so the end of the week on Thursday and Friday. We only had I think two or three trades on Thursday and then the bulk of these trades were on Friday, but generally, the market has been really crazy. And I know that I’m getting a flood of emails asking about positions, so hopefully this will clear a lot of the things up.

But a couple of quick comments generally about where we’re at and I want to go to the actual charts of the Russell and then also SPY. Generally speaking, we’ve had a pretty volatile market which is a good and a bad thing. If you have positions on currently that you didn't enter with really high implied volatility, you’re now in a losing situation which is where we are with some of our positions on the put side because we didn't get in at the peak of volatility and we don’t know when that’s going to happen.

But that’s the bad part about where we’re at, that volatility is expanding and it probably expanded a little bit longer and more than most of us thought and I know it definitely caught a lot people off guard that we pretty much had a great August-September, and then as soon as we hit into October expiration month, the markets just continued to selloff, selloff, selloff.

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The good news is that this is a great opportunity. Even though there's high implied volatility and even though we’ve got paper losses on some trades, that doesn’t mean that you need to shy away from making those same high probability trades, so selling put spreads, selling call spreads, strangles, straddles, all of that stuff. This is the opportunity that we have during the year to add a lot of premium. The VIX hasn't been up into the mid-20s since February of earlier this year.

Not to say that this is maybe the end of the drop. We could obviously continue down even lower. But right now, implied volatility across the board is extremely high, and as options traders, this is a great opportunity. Hopefully, you’ve got some more cash left over that you’ve not overinvested in some positions. We’ve got a probably pretty significant position in X still going from the last two months that we’re still going to have and still feel good about that position, just continuing to roll down and adjust which we did last week as well, but this is a great opportunity to sell premium, so I don’t want anybody to shy away from this.

And this is exactly the time when most guys get out of the market. Most options traders, they get frazzled during this period, and I don’t want you guys to be like that. Hopefully, this is good, sound, calming words for you guys just to understand that this is the period that you need to invest. And we’re going to look back on this in 30 days and say, “Man! I wish I would’ve done even more.” Try not to do that. Try to be a little bit more aggressive. This is the period when you need to be more aggressive in how you approach things and definitely with your trades.

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Alright, to kickoff the alerts, we did a lot of credit spreads opening on Thursday and Friday. Not as many as we would’ve liked because we were fishing for some other pricing and didn’t get the pricing on a lot of them, so probably about 8 or 9 that we tried to enter got filled. We’ll continue to do that earlier this week on Monday and Tuesday as we wind out October expiration. That’s where we are with entering new trades.

And then closing trades, we’ll start to be a little bit more aggressive with closing or rolling any of our October positions now that we’re fully into expiration week. You can see here some of the closing trades that we had are losers that we rolled off just to save some money on because they probably are not going to become winners in the next couple of days. To kickoff the night, let’s talk about our credit spreads. The first one that we had is in IWM, and you’ll notice that all of these are November.

We’re definitely in the November expiration cycle, so not trading any Octobers unless it’s earnings. With IWM, we went ahead and sold the 101/99 credit put spread, took in about $.40 which is a pretty nice premium for IWM. And obviously, the Russell and the general market continued to move lower on Friday, but with our strikes at 101, we’re still well below. You can just expand this chart here just a little bit. And even with Friday’s drop, our strike down at 101 is still very far from the market. Because implied volatility is so high right now, it’s a great opportunity that we can’t pass up.

And the market may continue lower, but we’re playing all the way out until November expiration, so even if the market dips and moves lower, we’re hoping that at some point, it’s going to get up and adjust back up into more of a normal standard range and at some point, hopefully, implied volatility is going to go down as well. It was a great opportunity. We’ve made some money selling credit spreads on the call side with IWM and the Russell this month, so we went ahead and came back to the same well here that's made us money and went ahead and changed the script and sold some put spreads against it.

Same thing with XLF, we want to get short financials heading into earnings. We don’t know why, they just look a little overbought with the rest of the market. Financials might be one of the first things to continue to move lower and they had a real tough time this week gaining some ground. Financials, we went ahead in XLF and sold the 23/24 credit call spread for $.33, so it puts our breakeven a little bit over 23 for XLF.

Same general thing with XLF is that it’s continuing lower and it’s got almost 100% implied volatility. This is an excellent one to be trading right now because it doesn't have earnings coming up, so all of the stocks that we’re watching that have super high implied volatility have earnings on the horizon. We don’t want to jump the gun with a lot of these and get into them too quickly before earnings.

But this one has almost 100% implied volatility and like I said, our breakeven point is going to be a little bit over 23, about 23.33, so that gives us a lot of distance between ourselves and the market and it also provides us with some negative Delta for our portfolio to help balance out what we have on the bullish side and starting to build.

The other trade that we made was just another credit call spread in Tesla. Tesla has had a real tough time, it was one of the biggest downers on Friday for the market percentagewise, so a huge move down, and we went ahead and sold the 260/265 credit call spread, took in a 137 credit, did this one fairly small with Tesla. But you'll notice we got pretty clean signals once I go to Tesla here on the charts.

We got pretty clean signals for Tesla as it gapped lower that it was going to continue to move lower as we threw in some technical analysis studies. You can see here that we got pretty clean signals that it’s going to continue lower with MACD and CCI not breaking above that zero barriers on either one of those. At least with the gap, we think that at some point it’s going to continue to move lower and we’re going to try to take advantage of that.

We sold the 260 which is back above its original position, so it has to fully retrace that original position. But look, Tesla has had a real tough time and has tried to rebound and just keeps falling. We think that maybe heading into earnings that it might continue to fall a little bit and we’re just looking for a quick move lower, have an opportunity to take advantage of a move lower in Tesla.

Alright, going onto the closing trades, I’ll go through these fairly quickly because I want to get to the adjustments. We did close out of our UUP debit put spread. UUP is a bullish dollar fund, so you would buy UUP (it’s an ETF) if you were bullish on the US dollar. And in our case, we were bearish on the dollar just because of the huge run-up that it’s had, but it’s continued that route, so the market stayed a little bit more rational than we thought, did not have an opportunity to roll this to next month because the amount of money that we would pay to roll it just doesn’t justify holding the position.

In this case, we went ahead and closed out of our 23/22 put spread, we sold it back to the market for about $.15 trying to savor some of the money that’s left in it, took a 156 loss on UUP. Just quickly, I remained pretty bearish on UUP, and I might enter another position here as we get closer to expiration this week. But you can see the stock has had a huge, huge run-up higher and did make that down move; it just made that down move just not far enough to where our position break even was.

We did see the down move which was great during this expiration month, but it didn't make a move far enough down to turn a profit for us. But we might reload on this one and try again. It’s just a huge, huge overbought dollar fund right now and it's going to have some selling as we get closer to the end of the year for sure. Another one that we closed out of is AXP. AXP was just a long hedge. We had bought a debit call spread in AXP, 87.5/90 debit call spread.

We went ahead and sold that back to the market for a $.50 credit. A very small position, so we took a $90 loss on it. Not that bad with AXP. We had an opportunity to close it out, just didn’t get our premium and pricing. But you can see it's had a real tough time along with financials and some of the other ones like MasterCard and Visa gaining some ground this month. Even though it moved completely against us, it ended up being a fairly decent trade because it didn’t lose all of its value only because implied volatility has expanded during that time period.

Even though the trade pretty much went completely against us since the day we entered it, we didn’t lose all of the premium because of implied volatility. That helped buffer us for most of the month. Alright, onto some of the adjustments. I’m really excited to go over some of these adjustments tonight. I want to start with the Qs because I think this is really important. With the Qs, we originally had the call spread above the market, and as the market was rallying on Thursday last week, we decided to go ahead and enter the put side of this trade and create an iron condor, and this was nothing more than taking advantage of what the market gives us.

Super high implied volatility making this trade completely neutral on either end, so we decided on Thursday (not knowing that Friday was going to be a big down day) that we would go ahead and sell the put side of this trade. We did exactly the same number of contracts. We did the 94/92 put spread and took in about $.30 in credit on that side.

That $.30 is going to help us reduce our overall loss on the Qs and increase our premium, so that if it does fall into the range that I’ll show you guys here in a second, that will give us a bigger profit. And we’re now directionally neutral on the Qs overall, not really too bearish or too bullish, we just wanted to stay in a defined range in implied volatility to drop.

If I go to the Analyze tab, here is our original position. And I’ m sorry, this is a quick typo in here, this should not be 1. And I’ll fix it and it’ll be correct inside the membership area. But we did sell a total of 4 of these verticals just to hedge both sides equally, so it shouldn’t be 1. I think we had 3 contracts go in and then 1 contract afterwards, so it is 4. We did completely hedge it, it’s 100% hedged on both sides, 4 contracts on either side. But this is our original position in the Qs.

We sold the call spread above the market, the 102/104 and we decided to go back in and sell the 94/92. In this case, before the hedge, we could make at most 152 on the trade and we could lose $648. What we want to do as the market was rallying on Thursday, we wanted to go ahead and add this side of the trade because we’re still a little bit bullish on the market, that’s how we’re tilting our portfolio. We added the put side to the trade, so we sold that put spread at 94/92. Now, what this has done is it’s effectively reduced our max loss if it continues to move lower or too much higher to $528. If we’ve reduced our max loss, reduced our margin exposure, and now our max profit should we be right is 272.

At least at this point with the Qs, we’re looking for the Qs to land anywhere between 93 and about 102.5 between now and November expiration. I think it’s a completely realistic range, a little bit bullish because of the move on Friday, but about 93 which still gives us some range down below and 102.5 which is all the way up here.

Like I said with IWM, even if we have a drop under here quickly in the next couple of days, it’s not going to faze us too much because we have all of November for it to recover and fall back inside of this range. And especially with almost 100% implied volatility, you just cannot take advantage of this type of trade and sell some premium against it, especially in something so liquid as the Qs.

Alright, the other adjustment that we made on Friday, we went ahead and rolled down another one of our call side trades in X. X continues to move lower. That’s okay. We’re not going to touch the put side. We haven't touched the put side for a long time. We continued to roll down that call side and take in profit. We went ahead and locked in a profit again on our 38 calls, rolled them closer to 35. Now logistically, (and I know I had a lot of questions about this) this is how you enter the order in Thinkorswim or your broker platform, you use a vertical credit spread to do that.

Remember that a vertical credit spread is nothing more than selling the front contract which is the 35 and buying the back contract or the back strike at 38. Now, we were already short the 38 calls, so buying them back is closing out our 38 call position, banking that profit, it throws in the hopper to be used later on to offset any losses, and selling that 35 now becomes our new position.

Between the buying and selling, we took in an extra $.93 in credit and banked a profit on the 38 calls that we had sold. We’ll continue to do this with X. If X continues to move lower, we’ll just continue to sell call spreads against it all the way until it rebounds at some point and we start to realize some money back on the puts that we’re short.

Alright, in XOP, we did virtually the same thing except we went inverted this time. Our first adjustment in XOP, for those of you who are in it, is we went ahead and moved our call side closer. As XOP came closer, I think (and correct me if I’m wrong in the comments) I believe we had the 74 call or maybe the 70 call above the market. Anyways, we were short the 67 put below the market right here originally and I believe short the 70 call.

And what we did originally was roll these calls closer and we created a 67 straddle right over the market. And as you can see, XOP is continuing to move lower which is fine, implied volatility is very high, again fine, and what we did now is we rolled our call spread even closer down to I think 61 or 62 is where we ended up rolling it. We did go inverted, this still leaves us an opportunity to make some money, but we also have already banked money on two of the calls that we’ve already traded.

Even though we did XOP moved against us, now we’re down here at 61, we've already made money on our 67 calls and our 74 calls that we were originally short. We’ve banked those profits. That helps widen out the breakeven point, taking in more credit here. We rolled down the 67 calls to 61, took in a nice little credit of 162, so that moves our breakeven point out even further, another $1.62 on either end, and you can see here on our chart here of XOP that we’re now very, very close to our breakeven on the most recent trade in XOP in profit loss. All we need is just about a $1 move higher, and we’re back into a profit window here with XOP.

You’ll notice that making these adjustments is hard because the market is moving against you, and sometimes it’s hard to close out one side and get closer and more aggressive, but you can see that right now on our chart, XOP is trading right here at 58.75, so we only need about a $.25 move higher any time between now and November expiration for us to make money on this trade overall. That's really, really comforting to know that we’ve already banked some profits and we need a $.25 move higher in XOP.

Now, I don’t know about you guys, but between now and November expiration, the likelihood that at some point we’re going to get a move higher above here I think is pretty good. And that’s why we like the trade. I think that oil and gas overall is going to be pretty stable and people are going to come back in here and buy this at some point. It’s just a matter of time. It happens with all markets, they get irrational to the topside and they get irrational to the bottom side.

That's why I think that (as I said earlier in the video) you just got to be calm and you got to understand that this is an excellent opportunity to sell some premium. We don’t add to this position, but we definitely want to keep an eye on this position and make the adjustments that we’ve made. Alright, EWZ is another one that we closed out of, so this one is a little bit different. As we got closer to October expiration, we’re still trying to possibly roll our EWZ trade out to November.

We have not done that yet, but our one put spread that was deep, deep, deep in the money, our 48/49 put spread; we decided to buy back for less than the spread’s max loss which is going to be $1 when we come to expiration on Wednesday-Thursday. If you have the EWZ trade, we went ahead and bought that back for a $.89 debit. What that was is less than the dollar, so we saved some premium there. There’s probably no way that EWZ is going to get all the way back up to 48, 49 or above that level, so at least at this point, it’s not worth rolling, you just got to close it out, we can roll the rest of the trade out to October possibly.

And if you see the new resulting position here in EWZ, it’s pretty aggressive; it's pretty good. I like it. EWZ is trading right here at 44.76, so now we’ve got a nice little window of area that we can make some money in EWZ around 45 to 47. We do need it to move higher, but we’re going to try to roll this whole thing out to November this week, and tried to last week, just didn’t get fills on everything because there’s a lot of contracts.

But because implied volatility is so high and is so high for November, we just want to give ourselves more time. We don’t want to be on the dance floor the last day between making money or not making money. And IV rank is up at the 96th percentile, so if we can go ahead and roll this out to November, it just gives us more time to be right in the trade and more premium obviously with higher priced options in November.

Alright, and then the last trade to round it out here is eBay. eBay is a really interesting trade that we made. We went ahead and added an additional call side to the trade. eBay is a trade where we originally entered an iron condor in eBay and I’ll show you the profit loss graph here in a second. We originally entered an iron condor and we actually took in more premium than we risked. With eBay, instead of risking a lot of money to make a little money, we actually had more premium than we had money at risk which was great to start with.

But as eBay moved lower, we want just to make sure that if we do lose money on eBay and we can’t roll it to November, that we take in an additional credit to reduce our loss. And that's really the basis of this trade on eBay, is to add an additional call side to the trade to take in that additional credit of about $.12, so we went ahead and sold the 55/56 credit call spread above the market, and what that did is that took in more additional credit which reduced our loss.

Let me go to the chart here of eBay, so you can see what our original position look like. And here's our original position in eBay, an iron condor. Obviously, eBay has moved much lower than the range that we’re expecting, so what we want to do in this case is we want to move up somehow this loss side over here because in all likelihood, if we can’t roll this to next month, then we’re going to take a loss on this trade, and we would just want to try to reduce that loss and minimize it as much as possible. In this case, by moving up this side or the left side of our diagram, we also are forced to move down this side.

We do take additional risk on this side, but the likelihood that it goes all the way back up here is very, very slim, the likelihood that it moves $1 or $2 is much more realistic. When we went ahead and added this trade in, our new profit loss diagram looks like this. It looks like a butterfly up here and then pretty much a call spread on this side. We did add risk on this side, but the low likelihood that it gets up to 59/60, so I’m not worried about that side, and you'll notice that our loss is now reduced, so our loss came up on the left side.

This still leaves us an opportunity to make some money if eBay in October and if we can’t roll it to November, if eBay moves up to around 55, we still can make some money. But the whole idea here is that you’re playing defense on this side, so don't get too wrapped up in the “you make money, you don't make money.” If we can reduce our loss and play a little bit of defense, that’s the whole name of the game, is take a trade that goes completely against you and is able to adjust out of it or adjust it to a lower loss trade. And that’s what we’re doing here with eBay.

We still have an opportunity. We can roll this credit spread above the market closer, taking in another credit this week if we can’t roll it out to October. But hopefully, you guys get the idea here of reducing that side of the trade and minimizing this loss now by taking in that additional credit. I know that was a long video, but we had a ton to cover. It’s going to be a pretty wild week I'm sure. It’ll be interesting to see where the market opens up on Monday. I think futures are down this evening as I’m recording this video, but who knows what’s going to happen throughout the night?

And we definitely got a slew of earnings to look at for the rest of the week, so we’re definitely starting to get into the hot and heavy season for earnings which is great because implied volatility is good, the stocks are moving. I think it’s going to be a great opportunity to make some trades. As always, if you guys have any questions or comments, please email me. And 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.