Laddering or Stacking Options Trades

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Option trades: In tonight's video, we're going to go through all of the trades that we made for February 23rd which is Monday. Only had 2 ... I'm sorry three new obeying trades that we entered today. No closing trades, no adjusting trades, or any hedge trades.

Relatively quiet but we were able to get a couple of new positions on to start the new expiration cycle and trying to now build out our April side of our portfolio. We've got a lot of things going on already in March.

Now, we're starting to build out positions in April. Now that we're through February expiration, again it's time to start laddering and stacking trades as we go out into the next 2 or 3 months here. 

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Let's start off with the first trade and that's in USO. We went ahead and did yet another iron condor in USO, had success with it. Last month we got a position in USO currently for March expiration that's doing well. We're just going to keep going back to the well here. It's got high implied volatility; option pricing is not bad. Bid out spreads is pretty fair. All we can do is just make this consistently same high probability trade over and over again in USO.

For the April contracts, we did the 22, 24 calls. $2 wide spread on the call side. The 14, 12 puts, again a $2 wide put on the bottom side. We're very even; we're not skewed or unbalanced. We've taken about 34 cents of credit for each of the iron condors that we sold in USO. Again, the reason that we decided to go with the iron condor ... Excuse me, is because USO currently has implied volatility that's in the 92nd percentile. Again, being able to sell premium a little bit more aggressively and you can see our position size was a little bit higher. We did wider strikes.

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We're a little bit more aggressive with this position because implied volatility is remaining high in USO, in oil in general. It gives us an opportunity to take advantage of what the market gives us. I guess that this idea that at some point we're going to see implied volatility and USO come back down. It's just a matter of time.

It may happen this expiration cycle; it may not happen this expiration cycle, but it will happen. When it does, we want to be there with positions that are already in place to profit from that drop in implied volatility.  We've been very fortunate that USO's been pretty much stayed range bound here over the last month in half.

I think given just the dynamics of where the market is right now; I would assume that we might stay range bound but just get a little bit more volatile as USO tries to find some bottom over the next month or so. Again, it's a position that we don't intend on holding all the way through April expiration if we can get out with 50% of our max gain there, then that's exactly what we'll try to end up doing.

When we look at the trade tab, again you can see both of our positions down below. Our short strikes on these, we try to pin around the 15% probability of being on the money level on both ends. You can see both on the call side with the 22 strikes; there's a little bit less than 15% but trying to get it around that 15% probability or the one standard deviation move on either side.

Again, on the bottom side with the 14 puts, we did it around the 17% likelihood of success. Just coming in just a little bit more, getting a little bit aggressive here on the put side, just to add to the premium that we're collecting. Again, the whole idea is that we're staying mechanical and very systematic about how we continue to approach the market with our positions.

I'm going to skip over the TLT position real quick and talk about BIDU. We were able to get into a calendar here in BIDU. With BIDU, it's already been through earnings. It's seen a drop in implied volatility that we know happens after earnings. Now, we're trying to take advantage of possibly just an expansion of volatility or a directional move higher in the stock over the next month.

Now, we did this logistically by going into a long call calendar spread. With a long call calendar spread, we're sticking to the same strike price in both expiration months. We're doing the April contracts and the March contracts. We're buying the longer term contract which is April and selling the shorter term contract which is March.

In this case, with our long call calendar, we are short the March 220 calls and we are long the April 220 calls in BIDU. Now, the net difference between those 2 is that we ended up paying about a 215 debit. It's a little bit more than we wanted to pay for usually a calendar. We like to pay relatively small debits for calendars. They're not that high probability of success type of strategy.

With BIDU, because it's just naturally a bigger security. The stock is a $200 stock. It requires that we trade these things a little bit more rich in premium just given the stock price. This is what our calendar looks like, kind of profit and loss diagram for BIDU. The stocks are trading right about here. Our profit window starts becoming more realistic if the stock moves up another $3 or so.

Which is pretty much a subtle move for a stock that is a $200 stock. All we need is a $3 move before we're inside of our profit window. Then from there, we have a wide window of opportunity that we can see the stock move in. Anywhere between about 209 and all the way out to about 232 or so. We go back to the charts here; you can see BIDU. We have a very broad window that we can make some money with BIDU.

About 209, which is just about where it's trading right here to about 232 which is somewhere in this range. Beautiful wide window, we're playing it directionally bullish again like I said. Assuming that it just rallies here a little bit. We also need a couple more bullish positions in our portfolio just to counter balance some of the stuff that we already have iron condor wise. It's getting a little bit aggressive in the negative delta.

We needed a bullish position and BIDU seems to fit the bill here. Again, implied volatility for BIDU down the 2nd percentile. It's extremely low. Even if the stock stays completely flat, if implied volatility starts to rise over the next month or so, we'll have a very nice profit start to materialize even if the stock never moves anywhere. We're playing it in both of the ways that we could both directionally and we're playing a higher move in implied volatility.

All right, let's get to this TLT trade. This is a trade that I went over with premium members. If you're a premium member, you obviously know that we covered this in our strategy call. If you're not a premium member, this is one of the things that we do on those strategy calls the week before the market opens. Is that we start talking through new positions that we might be adding so that you can have a little bit of a heads up and can pre-plan out positions.

This position in TLT was a little bit different because we're doing a custom naked cell of TLT. The whole idea here is that TLT has incredibly high implied volatility right now. As the market has rallied higher, bonds have seen a pretty substantial decline in their value and price. Implied volatility has remained high in TLT which tracks bonds. It's up in the 79th percentile.

In this case, what we're doing is we're making a combination trade. We're selling a put spread below the market. We're selling the 120, 119, credit put spread. That is a net selling strategy that works to our advantage because implied volatility is high. We're also at the same time selling a naked 134 call above the market. We're selling that 120, 119 put spread below the market and a naked 134 call above the market.

Taking in overall credit of 112. With these types of strategies, again we've video tutorials inside the membership area that go over how to build these custom naked cells that you can do on your own. With these types of strategies, what we want to do ideally is taking credit that is more than the width of the put spread that we sold.

You can see the width of the put spread we sold is just $1. It's a $1 wide spread. In our whole position, if we can take in credit that's more than that $1, which we did. We took a $1.12 credit; that means we have zero risks to the downside in this position. This position, as it stands alone by itself, we have zero risks to the downside should TLT continue to move lower as this position stands by itself. We'll go over how this affects both of the positions that we have in TLT now. Again, you can see this is what it looks like on the trade tab.

We sold the put spread below the market right about 16, 17 % probability of being in the money. One standard deviation move below the market and then we came in just a little bit more aggressive on the top side and sold the 134 which is about the 20% probability of being in the money on the topside. Again, we're completely naked on the top side. This is where a lot of the margin risk is carried over.

Now, in TLT we originally still have a put spread or an iron condor for March. Let me show you what that iron condor looks like. You can see that this is our iron condor for March that we continue to have in TLT, we're now making adjustments at. As the market is testing us lower here, we felt that it's okay to add some risk to this side of our profit loss diagram. By selling the 134 puts, we're naked from 134 over when we kind of overlay both strategies on top.

That's okay because we have a bigger profit window this direction. We want bonds to go up just a little bit. This position serves 2 purposes. It was good just as a standalone position. Also, when we couple it with our March position that we currently have, it also gives us a little bit of extra room. To the downside should TLT continue to move lower, you can see that our risk is somewhat more mitigated to the bottom side. Now, our break-even points much further away from where the market currently is.

You can see that without that position, our break even point was much closer to the market. We started losing money if TLT got around 127, 126. Now it's got to go significantly below 126 before we start losing money and at this point, we only lose about $100 on the trade overall. This again served 2 purposes. It was meant to be a standalone trade by itself, right.

It was also meant to pair up and couple with this iron condor that we had in March and act as a barrier against them. Again, you can see we did give up a little bit of room on the top side, but we still have a wide window of opportunity here where if bonds start to rally higher we still have a chance to make some money in this position. We can obviously take off bits and pieces if we wanted to.

Very similar to what we did last month with DIA. That's the trade in TLT. Liked that trade. Glad we got it on. Got some good premium for it. We got into it as bonds were rallying today, which also helped. All right. That covers all the trades that we made today. Again, if you have any questions or comments, please add them in the comment section right below this video.

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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.