|
Ongoing Spread SVXY Strategy – Week 5:
Near the open today, SVXY was trading about $86. We want to sell a put that is about $1 in the money (i.e., at a strike one dollar higher than the current stock price). Our maximum gain each week will come if we are right, and the stock ends the week very close to the strike of our short put.
Here is the trade we placed today:
Buy to Close 1 SVXY Sep2-14 86.5 put (SVXY140912P86.5)
Sell to Open 1 SVXY Sep-14 86.5 put (SVXY140920P86.5) for a credit limit of $1.20 (selling a calendar)
Each week, we try to sell a weekly put which is at a strike about $1 in the money (i.e., the strike price is about a dollar higher than the stock price) as long as selling a diagonal (or calendar) spread can be done for a credit.
When we entered this order, the natural price (buying at the ask price and selling at the bid price) was $.85 and the mid-point price was $1.25. We placed a limit order at $1.20, a number which was $.05 below the mid-point price. (It executed at $1.20).
If it hadn’t executed after half an hour, we would have reduced the credit amount by $.10 (and continue doing this each half hour until we got an execution).
Each week, we will make a trade that puts cash in our account (in other words, each trade will be for a credit). Our goal is to accumulate enough cash in the portfolio between now and January 17, 2015 when our long put expires so that we have much more than the $1500 we started with. Our Jan-15 may still have some remaining value as well.
This is the 5th week of carrying out our little options portfolio using SVXY as the underlying. SVXY is constructed to move up or down in the opposite directions as changes in volatility of stock option prices (using VIX, the measure of option volatility for the S&P 500 tracking stock, SPY). SVXY is a derivative of a derivative of a derivative, so it is really, really complex. Right now, option prices are trading at historic lows, and lots of people believe that they will move higher. If they are right, SVXY will fall in value, but if option prices (i.e., volatility) don’t rise, SVXY will increase in value. In our demonstration portfolio, we are assuming that option prices will not rise dramatically and that SVXY will move higher, on average, about a dollar a week.
In this simple portfolio, we own an SVXY Jan-15 90 put. We will use this as collateral for selling a put each week in the weekly series that expires a week later than the current short put that we sold a week ago. Today’s value of our long put is about $14 ($1400) and decay of this put (theta) is $4 (this means that if SVXY remains unchanged, the put will fall in value by $4 each day). The decay of our short put is $13 (and will increase every day until next Friday). This means that all other things being equal, we should gain $9 in portfolio value every day at the beginning of the week and about double that amount later in the week.
Let’s talk a little about delta today. Delta is the measure of how much the option will increase in value if the underlying stock moves $1 higher. You can check out the delta value of a single option or your entire portfolio at any time. Puts have a negative delta value and calls have a positive value. If you have sold someone else an option, then your short position is positive if it is a put, or negative it is a call.
Most options traders like to maintain a delta-neutral portfolio condition. This means they don’t care if the stock goes up or down, at least for small changes. In our little SVXY strategy, we want to be a little bullish in our portfolio, so we are aiming for a net-delta-positive condition.
To repeat what we covered last week, since we are dealing in puts rather than calls, this is a little complicated. I hope you won’t give up. Delta for our Jan-15 90 put is minus 50. This means that if the stock goes up a dollar, our long put option will lose about $.50 ($50) in value. The weekly option that we have sold to someone else has a delta value of about 75 (since we sold it, it is a positive number). If the stock goes up by a dollar, this option will go down by about $.75 ($75) which will be a gain for us because we sold that to someone else.
Our net delta value in the portfolio is +25. If the stock goes up by a dollar, the portfolio should go up about $25 in value because of delta. (Unfortunately, this gets more confusing when you understand that delta values will be quite different once the stock has moved in either direction, but we will discuss that issue later).
If the stock behaves as we hope, and it goes up by about a dollar in a week, we will gain about $25 from the positive delta value, and about $100 from net theta (the difference between the slower-decaying option we own and the faster-decaying weekly option that we have sold to someone else.
Our goal is to generate some cash in our portfolio each week. This should be possible as long as the stock remains below $90. We will discuss what we need to do later if the stock moves higher than $90.
To update our progress to date, the balance in our account is now $1890 which shows a $390 gain over the 4 weeks we have held the positions. This is more than double the $45 average weekly gain we are shooting for to make our goal of 3% a week. We now have $744 in cash in the portfolio.
Next Friday we will make another similar trade and I will keep you posted on what we do.
On another subject, have you got your free report entitled 12 Important Things Everyone with a 12 Important Things Everyone with a 401(K) or IRA Should Know (and Probably Doesn’t)? This report includes some of my recent learnings about popular retirement plans and how you can do better. Order it here. You just might learn something (and save thousands of dollars as well).
--------------------------------
Any questions? I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.
You can see every trade made in 8 actual option portfolios conducted at Terry’s Tips and learn all about the wonderful world of options by subscribing here. Why wait any longer to make this important investment in yourself?
Even better, you can become a Terry’s Tips Insider, and receive all our educational reports and materials absolutely free by opening a new account at the best options broker around - thinkorswim. If you open an account with our link, they will give you 60 days of free trading or up to $600, the same deals they give to everyone who opens an account with them. You must use this link to sign up - open thinkorswim account – and once you have funded your account with at least $3500, email Seth@TerrysTips.com and let him know that you have done it, and this is what he will do – sign you for our Premium Service package ($119.95 value plus an extra 4 months of our Premium Service, valued at another $190.80). You get $300.65 worth of services without paying us one penny.
I look forward to having you on board, and to prospering with you.
Terry
|
