No Time To Be Timid – Sell Volatility

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Sell volatility: Tonight, we’re going to go over all of the trades that we made for today, Tuesday, October 14th, as well as cover again the trades that we made on Monday the 13th. I did actually do that video, and I know that the email went out, but YouTube did not fully process that video, so I’m just going to cover those trades again here tonight and it’ll be just a little bit longer video because we’ve got so much stuff to go through and obviously, the markets have been going pretty crazy.

We’re going to get into our opening trades, both the ones that are tagged for Monday, so these trades were the trades we made on Monday, and then also the closing trades and any adjustment trades that we had. Bear with us. It’s going to be a little bit longer video.

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One of the things I’ll tell you guys even before we get into this is that I was talking with another member today via email. And I’ve gotten so many emails from people just asking questions, which is great. And of course, I welcome all the emails. Bring them on. This is what I’m here for, to help and hopefully help guide you guys in the right direction as far as how trading goes. But it's times like these I think that for me as an educator, I see that people take note of the things that I’ve been saying for months and months.

Members that have been with us for two or three months are now starting to realize why I keep harping on making your trade size small, sticking with the probabilities, having a lot of capital in your account to manage positions like this and also add two positions that are good positions like the VIX and the VXX that we keep adding to. A lot of these things are starting to come [Inaudible] now because we’re not in a market where we see the S&P go up 3 ticks every day and it was just steady, and it just keeps going up by 3 ticks.

Now, we’ve got tons of volatility, everything is all over the place, and this is when most traders are going to start ripping out their hairs. I just want to encourage you guys to stick with it, know that over time, probabilities do work themselves out, markets are cyclical, they don't go straight up, and they don’t go straight down, so just stick with it, know that what you’re doing is right, as long as you keep your position size small and your trade size small, don’t do things that you don't understand apparently.

Just because we do them doesn’t mean that you should do them as well if you don’t learn the trade. That’s why we have so many video tutorials to help get you over that hump first before you start making some of these trades and start mimicking what we do here.

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Let’s kick it off and talk about our two earnings trades. We had on Monday two earnings trades that we entered. We’re trying to get into a couple more, but just didn’t get into those, and as far as pricing, we didn’t get the pricing that we wanted. With earnings trades because we’re trying to focus in on that implied volatility drop right after the one-time events, right after earnings are announced, what we want to do here is sell strangles. Strangles are naked on either end.

You can do an iron condor if you want to. This is an IRA or a retirement account that you want to do these on, but you’re not going to have as high of a probability of success because you have to buy that extra leg. If you can do a strangle, that's ideal. In both situations for JP Morgan and Johnson & Johnson, what we did is sold a wide strangle, the 61 call on JP Morgan, the 55 put, and on J&J, we sold the 103 call and the 95 puts. In both cases, try to take it very wide, but still collecting a relatively decent premium.

JP Morgan a little bit less at about $32 and Johnson & Johnson, we’re able to gather a little bit more, about $76. Now, before I go to the chart, I’ll just quickly show you that we bought both of those back today at profits. Both JP Morgan and Johnson & Johnson, we both bought those back today at nice little profits, not as much as we usually see on some of these earnings trades because we didn't see the big drop in implied volatility.

There was a little bit of a decline in each, but not a huge drop that we usually see just because the overall markets were still very volatile. And actually, what we ended up doing was adjusting Johnson & Johnson just a little bit, so it turned a small profit in there today after our quick little adjustment after the earnings were announced.

But let’s go to the chart here of JP Morgan and let’s go over this one first and then we’ll hit Johnson & Johnson. You can see here that we did get a little bit of a drop in IV. Implied volatility did drop after earnings and you’ll notice it fell right within our range. Our lower range here is at 55, it wasn’t even close to that, settled nicely inside this range. Now, we could’ve apparently held this position for the next couple of days, but that wasn't the trade that we were making.

The whole goal of this was to take advantage of the drop in IV, the one-time binary event that happens around earnings. I usually like to get out of these trades if they’re profitable. In this case, it was, and it’s not worth holding for another three days just to see a wild swing in the stock as we head towards expiration. But you’ll notice that we didn't get the full drop that we were looking for. If IV had tanked, we would’ve seen a much larger profit much quicker in JP Morgan.

Johnson & Johnson is pretty much the same thing, only that it tested us to the lower boundary here today. It dipped below that lower strike, and you can see little, small drop in implied volatility, but overall, it went from about 100th down to the 90th percentile. And you know that definitely tested us to the bottom side, so that’s why we made a little bit less money in Johnson & Johnson, but still overall, even though the stock went against us and made a huge move, it was down almost 2.5% today, that even though it had that move, we were able to make money because we were on the right side of volatility which is really critical.

And I’m going to jump around here just a little bit because I want to make sure that we stick to this earnings subject and this earnings topic. I don’t know how that got moved over. The other earnings trade that we did enter today which is Tuesday is this strangle in INTC which is Intel. We had a couple of other trades that we were trying to get into, but Intel by far was the most liquid.

It seemed like it had the most options that were being traded and gave us the best pricing as we went further out. I want to go over this one in detail with you guys on the trade tab. But you can see that we went ahead and sold the October monthlies which only have 3 days left, the 34 calls and the 34 puts, so a very even distribution of the market, and we sold them for around $.40 each as far as a credit. When we go to Intel here…

And I just want to use the trade tab because we don’t even need to see the chart. It’s just a one-time event. You can see that Intel is currently trading about 32, so we’re very evenly spaced above and below the market. And what we tried to do was focus on the probability level on each end being equal. We wanted to make things as equal as possible. And let me just go here to the probability of in the money.

On the topside with our calls, we were focusing on the 15% probability level which is the 34 calls, so we sold those. The bottom side, same thing, around the 15% to 16% probability level which was the 30 puts. That's why we chose those strikes. If you're more conservative, you could’ve gone out further, but in those, you start dropping off here as far as premium you collect the further out you go from these strikes.

The market doesn’t anticipate a big move higher, and that’s why those options aren’t being valued as much. They’re still not too expensive options right now. They’re $19, $18 apiece, so it still gives us a little bit of premium being just far enough out of the one standard deviation move in Intel.

Going back to an excellent we made on Monday, we went ahead and added to our VIX position both on Monday with some extra call spreads above the market, and today as well with a VXX call spread above VXX which is a VIX ETF. Actually of these positions like I talked about at the beginning of the video are meant really to take advantage of the situation that we’re in with the market, high implied volatility; we’ve got doubled down on being bearish on implied volatility because, over time, it will go down.

And for these positions, they’re all the way out in November, so even if they don’t make money in the next two weeks or three weeks, we’ve got plenty of time between now and November expiration for these things to come in. With VXX, we were able to go all the way out to 45 which is pretty incredible because VXX hasn't been at these levels for about the last six or seven months. Let me drop the IV on the bottom here, so you can just see the chart.

And you know back in August, we had a little bit of pop here, made some money, we traded VXX then as well. And now, with VXX here, we were able to sell options all the way back out at 45. This is the level that we need to see VXX trade above and close above by this date which is November expiration. You know that every time VXX trades higher, it just gets crushed lower. And even back here when it was starting at 42 and went all the way up to 56, it then ended that same month, not the next month at about 42.

I feel superb about this trade because we’re starting here at 38. We’ve got a huge move to go up and close above that level. That means that there’s got to be extreme volatility in the market and it’s got to stay around for a long time. I like this trade, and you’re only able to make this trade if you’ve done things and kept yourself small along the way. And you can see that these positions are starting to get a little bit bigger as far as contract size because they are somewhat more high probability trades, so we're going to focus on those and be slightly more aggressive in them.

Another trade that we entered today early in the day is our iron condor in Halliburton. Halliburton is an interesting one. It does have earnings coming up, but you really can’t move away from the fact that it’s got 100% implied volatility. It’s been one of the hardest hit stocks out there. What we did with this iron condor is try to take in a lot of premiums. We took a $.94 credit on a $2.5 wide spread on either end, so an enormous credit and that hopefully is going to help protect our position.

And we tilted it a little bullish because we think that the move down is obviously huge, has to be respected, but at some point, it's got to come back to a normal range. That means that Halliburton has got to start trading higher sometime between now and November expiration. Logistically, what we did is sold the 60/62.5 call spread, also went on the market, sold the 47.5/45 put spread, took in a $.94 credit on this, kept it small with just one contract since it's a little bit closer to the market.

But when you see the chart here of Halliburton, you can see just how violently the stock has moved down. We’ve obviously tilted ourselves just a little bit bearish because at some point, it’s going to make a move higher and we want to be a part of that move higher. We've adjusted the iron condor appropriately to take advantage of possibly a move higher in the stock. Alright, this is what our iron condor looks like in Halliburton.

You can see that on the topside, we’ve got a range and a breakeven that’s a little over 60, so that's about where it’s at, about 61. On the bottom side, we still have some move lower, so if Halliburton does continue to move lower, it can go down to about 46 before it starts causing some pain. Today, it was trading and closing right at 50. You’ll notice that we gave ourselves a little bit of room to the downside, but most of our window is actually to the topside.

This is just one way that you can use these iron condors to shift your perspective on the market and your assumption either up or down depending on where you think it’s going to go. Our range right now in Halliburton because of implied volatility and how much premium we took in is about 46 to 61. If I just shrink this down here just a little bit, you can see that this is our range, 46 to about 61. This is the range that we would make money between now and November expiration, very much tilted to the bearish side, that's okay, but still relatively neutral. This is going to be a very neutral position on our portfolio even though its strike prices are positioned for a bullish move.

The last trade that we want to go over here for opening trades today is our short call spread in WFC. When a lot of the markets opened up, and earnings came out for JP Morgan and City and the like, and we didn't see that implied volatility drop as fast as we wanted, we had an idea to go back into the market and take advantage of that. Implied volatility hasn't dropped, but we’re now past that one-time binary event.

With Wells Fargo, it was one of the worst performing stocks today, and we decided to go ahead and add some negative Delta to our portfolio and sold the 50/52.5 call spread above Wells Fargo for $.50. I think it was an excellent trade. We ended up making some good money on it today. You'll notice that Wells Fargo, even though we’re now beyond that binary event, still has implied volatility rank in the 98th percentile.

It had a huge move lower today, so we’re just going to expect that the stock basically continues lower, not that we necessarily want it to go lower or believe that it’s going to lower, but we’re just playing it to the downside because we need some negative Delta in our portfolio just to even things out. That’s one of the ways that we’re doing it here today, is with selling a call spread in Wells Fargo

Moving on, we talked about the closing trades that we had in JP Morgan and Johnson & Johnson, so now we’ve got adjustments that we made. We’ll start off by talking about the adjustments that we made on Monday this week since that video did not process at YouTube. With eBay, we went ahead and bought back one of our vertical put spreads basically to start exiting it before October expiration.

We’re going to wrap up eBay with a lot of the other ones at the end, but safe to say that we are going to take a little bit of a loss on eBay. Our adjustment did work to reduce our loss which was great, so thumbs up there. And in this case, by buying back the 55/54 put spread, we bought it back at much lower than its theoretical max loss which would be $1. We saved some money on this end, and all of this helps to reduce the loss in eBay.

Same thing with our vertical in OIH, we went ahead and bought back our 49/46 credit put spread that we had originally sold, bought that back for less than the max loss. Alright, and then for adjustment trades that we made today for Johnson & Johnson like I talked about earlier, we did at some point early in the morning went ahead and rolled down our 103/99. This was when Johnson & Johnson was starting to test that lower boundary of our strangle.

We went ahead and rolled down the 103/99, took in an additional $.37 in credit, and that did help us because that was there to help drive the fact that we turned a little bit of profit in Johnson & Johnson. I’m glad that we made that adjustment. It could’ve been a little bit premature maybe, but it was mechanical, and that's exactly what we want to do, is react to the market and don’t think too much, just do what we know is going to work, and in this case, rolling that down actually ended up being a good little trade for us at the end of the day.

And then as far as X, what we did today in X which is our massive strangle in US Steel is add it to the call side. One of the ways that we’re going to fight back at the continued movement lower in X is by selling calls above the market and continuing to build that credit, so that if it does continue to move down, then we’ll have something there. Now, if it moves up, we’ve got short puts that are still going to make a lot of money back that is if X continues or ever does show some signs of rallying.

But in this case, what we did is not roll anything down, but purely added some more short calls to the position. I want to go over to the analyze tab here of X, so you can see exactly what that looks like. Alright, now we have nine of the 35 calls and today, we only had about 6. I think we added 3 of them, so we only had 6 of these. But if I just take this off for a second, you can see that even if I take off all the 9s…

It’s only 6 that we originally had, so we only added 3, but notice just the rate of descent here. Right now, the rate of decline is very, very aggressive to the downside. And by adding those additional short calls, we’re starting to flatten out this line. It’s very minimal here, but now you can see that the rate of descent here is much, much less and much, much more flat across-the-board. We’re starting to pull this side of the trade in, starting to flatten out this side hopefully by pushing this side up.

The more calls we can sell and the better that those go right now if X does continue lower, the flatter we can get this curve on the bottom side of our graph, meaning that every dollar that X moves lower, it has less and less of an impact on our portfolio. That’s what we did today. We’re a little bit unbalanced now, so we’re not completely even with our inverted strangle in X, and that’s okay. We have a lot of 35 calls, we got a lot of 32 puts, and if X does rally up the 44 and the 46 puts that we’re still short from way, way back are still going to make back a lot of their money.

Alright, and then finally our last adjustment (and I appreciate everyone sticking with me all the way through this video) is covering XLE. XLE is a fascinating one. We decided since XLE is moving lower and still has high implied volatility, we just cannot sit here and make some adjustment to take in more credit. What we decided to do is add a calling side for credit to this trade.

Now, what you'll notice is what’s a little bit different from this trade is that we went ahead and did the strikes just a little bit wider in this case. And by widening out these strikes above the market, we were able to take in a bigger credit of about $.52. Logistically, what we did is sold the 88 calls and bought the 92 calls on XLE, so well above the market for a $.52 credit. Now, on the profit loss diagram… And let me just go to the XLE diagram here. I’m going to take off these calls first.

This is what our short put spread did look like before this adjustment, so a very general short put spread. But you can see that at the current price of XLE if it doesn't ever rally back up to around 86 which it apparently could, we’d be losing about $680. By making this adjustment and selling 4, but just selling them a little bit wider, now we’ve got this broken wing iron condor here.

Now you can see we still have that short put spread in place, but we also now have this call spread above the market. And what that’s done is that we pushed down this side of the profit loss diagram, so we’ve added a little bit risk well above the market, but in return, we get compensated over here, and we’ve reduced that loss, that max loss that we have in XLE. We’ve still got November trade, so we still want to hold this, see what happens. But worst-case, if we don't make any other adjustments, we’ve now cut our loss from 680 down to 472.

That’s real, really helpful and we can continue to make adjustments to this to cut the loss. But this is the name of the game. If the market moves against you and makes a huge move lower, you’ve got to be able to reduce this loss and break it down. And hopefully we can continue to do that, we get a nice move up in XLE and oil generally and start to recover some of these trading losses. I know that was a long video tonight, but I appreciate you guys sticking with me. And as always, if you guys have any questions or comments, please add them right below to this video. 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.