VIX Jumps, We Sell Options

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Sell options: In tonight's video we're going to go through all of the opening trades that we had on Monday, June 29th. And also, covering the trade from Friday last week. So we did have our one closing trade in Nike which we will cover here first on Friday.

Since we had one closing order we just didn't do a video for we're kind of throwing this into this video here tonight with all of the new opening orders with some of the other things that we traded today. So with Nike, really the story here was that we were able to close this thing out before a loss at the end of the day.

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We didn't make an adjustment to this trade, and I want to walk through why we were not able to make an adjustment to this trade because at this point the loss that we took on Nike is one hundred and eleven dollars.

We bought back just the call spread because I was the challenged side of the trade. And the reason we took that loss is that we weren't able to extend the trade to the next month for credit. And without being able to take in credit, there is no point in extending the trade out to the further time line because if you are not able to take in credit as you roll the trade from one month to the next, then you can't reduce your risk.

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And that is what we are trying to do when we take credit in is trying to reduce our risk on the trade overall. All right, so here is a chart of Nike. And you can see we did get that drop in implied volatility that we were looking for our earnings, but actually on the actual date that the stock announced earnings the stock traded as high as 110 and ended near 109, kind of 90 or so.

And so at that point, it was well outside of our expected range. And to roll the trade to the next contract month, moving the contracts out from the weeklies to the monthly July options, which is ideally what we would want to do in that scenario. Really would have cost us money. We would have paid a net debit, rolling the trades to the next month and adding the put spread in July as well.

And again, in my opinion, I don't think that's worth taking the trade out that next month because at that point you are starting to add risk. You are paying money to extend the trade, and that's not what we ideally want to do. We want to trade high probability things, and if we roll, we are only going to roll to reduce some of our risk and some of the potential loss or maybe get back some of the gains that we had.

Like we had done a couple of times before in the last two months where we were able to cut back some of the losses and even turn some trades around by rolling. But it all starts with being able to take in a net credit on the roll. All right, so I just want to cover that real quick in the video. For today's trades, the name of the game is Greece.

Thank God Greece is going through whatever it is going through, I mean not for the people or anything, but for the stock market and for implied volatility that's given us a lot more opportunity. Things are starting to pop up on our watch list that has higher implied volatility. EFA, SPY, DIA, etc. Now starting to have really good high implied volatility which is helping out.

For the first one here we are going to look at real quick, we did decide to add another iron butterfly in FXI for August. I went ahead and did the 45-53 calls and the 45-38 puts. And so you'll notice that there's a slight, slight, um, sort of skewed to this where we made the put spread side just a little bit tighter than the call spread side.

And the reason that we did that is that we think, you know what maybe there's a little bit more risk to the downside. Let's pull in just a little bit of that put spread side. It's not a huge unbalanced thing. It's just a very slight skewed to one side. We are just making the put spread side just a little bit tighter, and that gives us a little bit less risk on that end of the particular trade.

But overall took in a nice credit of about $3.41 by adding in this trade in FXI it gives us a little bit more balance to our overall portfolio for FXI. So here's what the overall portfolio looks like and I just want to toggle off the July, or the August position that we just added. You can see this is where our position is right now in July. So we have made an adjustment here probably not making an adjustment right at this moment.

But now that we added this August position, again it just gives us a little more balance and starts to reshape this profit loss diagram and helps give us a little more premium for the next contract month. Okay. So when we look though at the actual August position, again you can see what I was talking about here where we have just an ever so slightly tighter, um, spread on the put side and this gives us just a little bit less risk in case FXI does continue to move higher.

And we've accepted a little bit more risk from the top side. Again, mainly because we already have that July position that is there to protect us in case FXI goes higher. So we did a very slight skew here, you didn't have to do a skew if you didn't want to. In this case, we decided to do just a little bit of skew for our position to stack on top.

The next trade that we want to get into is EFA. So in EFA and DIA, these are both call credit spreads. So they are both barest positions that we wanted to add. What is great about both of these trades. Both the EFA August 67-68 call credit spread and the DIA August 183-184 call credit spread is that they are taking in more premium than the actual risk in the trade.

Now a lot of you who are premium members know because we have gone over this before many times in webinars. But one of the key things that I talk about with option pricing is that you've got to take in enough of credit to compensate you for the actual risk in the trade. In this case, with both of these securities, the actual risk in the trade was less than we were compensated.

So we were over compensated for the actual risk that we were taking. Not by a lot, but by a small margin that helps out long term. So in both cases, the stocks had higher implied volatility today. Implied volatility popped in both and then when we look at what I did here is just took a screen shot of where DIA was trading at the time that we made the actual alert in trade so you guys can see what the probabilities were.

Okay so here is just a screen shot of DIA. This is not live right now; this is the end of the day pricing. But at the time we executed the trade you can see our short strike here 183. The probability of this trade going into, or this stock going from 177 where it was when we entered the trade all the way out to and past 183 was only 21.43%.

So what I talk about often is making sure that you are taking in credit that is equal to 21.43% of the width of the strikes that you are trading. In our case, we are trading a $1 wide spread. So if we want to take in credit that is equal to that percentage of the width of the strikes, we want to take in a bout a twenty-one cent credit on this trade. So that we are fairly compensated for the risk that we are taking.

In this case we were able to take in a twenty-seven cent credit. So you can see by being a little bit more patient, not necessarily being overly active over the last couple of weeks. And waiting for this pop-up in implied volatility that it helps us find these trades that give us a lot of premium. And over compensate us for the actual risk that we are taking. The same thing happened with EFA as well.

All right, so as always I hope you guys enjoy these video updates. If you have any questions or comments, please let me know. Add them in the comments section right below these trading alerts on the membership platform. And if you do have questions about the premium lifetime membership tomorrow is the last day where you can schedule a quick call with me to ask your questions.

But please, I just ask because I've already got a lot of calls scheduled, that we just keep the questions to questions about upgrading or lifetime membership or anything like that. It is not meant to be a mini-coaching session, and I'm gonna try to keep everyone's time limited as much as I possibly can so that I can get to as many people as I have scheduled right now. 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.