Archive for options


Hot Cider On A Cold Night

I haven’t been writing much lately. Lots going on. Bought a house. Remodeling before I move in. I have a picture of my Acura TL with 1200 lbs of ceramic tile in it I’ll upload one day. Low Ri-der don’t use no gas now, Low Ri-der don’t drive too fast.

Parasites still pursuing their lawsuit, but it’s being delayed due to some “bigger money” cases, which I take to be good news.

Have had multiple awesome job offers in a short period of time, may yet find the perfect combo of pay, schedule and autonomy and finally leave The Hospital.

Right now, I’m sipping my favorite Hot Drink for a Cold Night (it dropped over 40 degrees in just a few hours last night). Unfortunately I can’t reveal the super-secret family recipe.

Magic Potion

(Note this is not the famous cider promoted on the Bob and Tom show by the Dickens company…)

One of these and a bit of reading Vonnegut or Watts or Pirsig, and a crappy day becomes a very relaxing and pleasant evening.

Oh, and the market-

As I wrote last month, I took what was left of my account (mostly drained due to legal and home-buying circumstances) and loaded up on PUTS. The RSI(4) method I developed last Spring and Summer was screaming “short,” and I was just ready to get on with it, one way or the other. As mentioned, on October 5-10, I bought PUTS on QQQQ


I bought PUTS on GE

GE Puts

And, of course, I had to buy PUTS on AAPL


After time decay, the AAPLs ended up in the red, but the GEs and the Qs did ok. I did not manage to blow up.

Which brings me to my newly discovered rule of how the market works: The Market does not want you to lose money; it simply wants to foil any plan you have, which just coincidentally usually is a plan to MAKE money.

Monday afternoon (I have witnesses who hate my guts), I had had all I could take, the RSI was screaming again, and I flipped out of all the PUTS and fully into CALLS on the Qs. I actually entered very near the bottom of that candle:

QQQQ Calls

I fought the overwhelming urge to sell those CALLS Tuesday on that Long White Candle, staying with the odds that after such a run the market would gap up Wednesday morning. It did, and I sold almost immediately. Nearly 200% in a day and a half.

I actually was so “in the groove” that I flipped again and bought a half position of PUTS Wednesday morning, but I had to go lay ceramic tile (see new home reference above), and sold them before lunch for a small gain, 20% I think. Guess if I had held them you’d be seeing the Snoopy picture again.

Anyway, I discovered, or rather remembered, why the different jobs and a few thousand more dollars working for someone else still doesn’t appeal to me…. because my time with my daughters is paramount, and as for income, this is my passion, this is where I want to make my living. As a guy I love dearly said in a trading interview last year,

The autonomy. It’s all on you. No one else to take the blame when you mess up, no one to steal the glory when you shine. YOU are the rate-limiting step, or to paraphrase Seinfeld, the master of your domain. I think trading attracts doggedly-independent individuals for that reason.

My Friends Know…

Happy Feet

My friends know how I agonized all weekend over taking the reversal signal my little system gave me Friday. This morning, I added ATM (at- the- money) Puts with some OTM (out- of- the- money) Calls as insurance. For you Greeks, the delta was weighted pretty heavily towards the Puts. As of this afternoon, the agony I experienced over the weekend has, shall we say, subsided:

SPYders chart 8/28/07

Whether To Wait for New Entry or Roll Options Forward

That was my dilemma. As I wrote (and danced) about last week, my current methodology gave an outrageously strong buy signal Thursday (8/16) afternoon, and I piled into calls which expired the next day. Worked out nicely, but then I was left with the decision as to how to proceed- I had to sell the calls Friday (8/17), but I had just gotten a “buy” signal the day before, and usually they’re good for a number of days.

My two choices on Expiry Friday were:

  1. Wait for “re-buy” signal to get long (basically, a pullback into the swing long), or

  2. Roll the options forward- sell the August Calls and purchase Septembers with part of the proceeds, taking some chips off the table in the process

And now it seems I have the answer to my dilemma:

SPYders chart 8/24/07

Monday didn’t pull back to 143, which is the level I had targeted for re-entry. It’s now clear that rolling into September Calls on Friday would have been the best choice, regardless of whether there was a pullback afterwards.

Getcha next time? Soon Amy, Soon.

57 Percent In 24 Hours

I don’t recommend options trading. In fact, the majority of the time I spend discussing options with folks is trying to talk them out of pursuing their latest, greatest idea.

However, there are very limited situations where the leverage offered by Puts and Calls comes in handy. The trade I entered yesterday and just closed this morning is one example.

Here’s what led to the trade:

  • A failure of a long entry signal to materialize based on Friday’s action. To me, this said that the rise in the market yesterday was questionable at best, and possibly a complete fakeout. Note that without a disciplined trading plan, I would not have been anticipating a long entry signal and noting its absence; I would have been emotionally chasing the market and trying to stay on the “winning” side, and that is, as they say, a loser’s game.

  • Options Expiration Week- with only a few days left to expiration, there is very little time value remaining in options prices; if I see the potential for a quick (albeit small) move in a stock, this is the period where I’m most likely to attempt to exploit that move with options.

  • Irrational Exuberance - seeing the relief on everybody’s faces that the “scare” was “over” and their retirement accounts were “safe” reinforced my suspicion that this was indeed a false rise in prices. Did they really think this could all work out overnight? Then when I saw that midday headline from some journalist having an orgasm about the Bulls being Back In Charge, I took it as a signal that the optimism was completely out of control, and I bought Puts.

With a little help from Lady Fortuna, those Puts were entered near the top of yesterday’s sideways action, and I sold them a few minutes before I started writing this post for a 57% gain after this morning’s selloff.

Why am I not “holding out for more”? Greed. The necessity of differentiating between “letting your winners run” (one of the most worn-out cliches in all of trading) and “being greedy” is crucial. I entered this trade due to what I saw as an overbought market and irrational exuberance in the public’s attitude. This morning, the market is down and Joe Schmo is crying about his 401(k) again. The situation has resolved, and to stay in the trade any longer would be hoping for a larger gain and being greedy. Hope and Greed are the parents of the rotten child we call Chapter 13. They should not be our friends.

16 May 06: Puts sold on downdraft

Coming into this week, I was left with a few puts I bought on AAPL when the resistance area around 72 held some days back. The 10AM spike downward Tuesday morning gave me the opportunity to sell them:


Had I waited until the close, the late-day drop would have netted me significantly more money. However, with this being expiry week, and with the VIX situation I wrote about earlier, I felt that any stretching of the rubber band to the downside was a gift horse, and I wansn’t gonna look it in the mouth.

Jan 20 Options Activity Sets Record

From Reuters:

The Chicago Board Options Exchange, the largest U.S. options mart, said options volume at the exchange was more than 5.3 million contracts on Friday — the busiest single trading day in its 33-year history.

(Just a followup on my previous post regarding Friday being extraordinary from an options standpoint).

20 Jan 06: A Day for the Record Books

Dow down 213. Nasdaq down 54. S&P down 24.

Not really that big of a move, historically speaking. But among the folks who have spent years trading options, Friday was one of the most memorable days ever.

First, a quick chart of the NDX:

NDX chart

The major indexes all pulled back well into the recent Nov-Jan trading range, and have therefore created a failed breakout. Without an immediate and fierce reversal to the upside, this is an ominous sign. All potential swing trades are off. My picky entry rules kept me from going long last week, and I couldn’t be prouder of them. Scribbling notes to yourself for years sometimes pays off!

The increased volatility should create some amazing day trades, and I’ll be actively watching for those each morning that I have the opportunity. As a matter of fact, check out the VIX (volatility index, used to be based on the S&P 100, now based on the S&P 500):

VIX chart

There’s a legend that some traders make their entire living off of one simple trade: anytime the VIX moves more than 10% away from its 10-day moving average, they go the opposite direction. For instance, if the VIX surges 10% above its 10MA, they go long (the VIX spiking up signifies a selloff). If it drops 10% below its 10MA, they go short. That last one is rare, as it’s hard for a “spike” to equal “decreased volatility.”

The VIX closed at 14.56 Friday (its high for the day, BTW). Its 10MA was 11.71, so that puts it over 24% above its 10MA. According to the above trading strategy, that would indicate a hellaciously strong buy signal.

Imagine jumping in and buying after the uncertainty created by Friday’s drop. Spooky, huh? Welcome to trading. Disciplined trade entry and money management rules are the only way to mitigate that fear and pull the trigger when necessary.

I won’t be attempting the “VIX fade,” as I call it. Not because it’s not legit, but because I haven’t studied it enough to know for sure. It sounds sensible enough.

Another painful lesson we all eventually learn is the one about trying to trade someone else’s tips or systems, no matter how well-intentioned. My playbook is currently limited to specific day trade and swing trade setups, and nothing else. Bouncing around from method to method in search of a guaranteed winner is a sign of inexperience, and a sign that one still has some losing, er, learning to do.

“One of the Most Memorable Days Ever”

I love watching new traders’ expressions when they ask “What do you think the market’s gonna do” on expiration day (note: options expiration day, for trading purposes, is the third Friday of each month) and I answer “absolutely nothing.” I always chuckle when I hear lines on the idiot box about the “increased volatility due to options expiration” and especially the dreaded “triple witching.” Increased volatility? The indexes get pinned as expiration week progresses, and there are plenty of good trades to be had simply betting that an index will end up in the middle of the last few days’ range. As a matter of fact, I have a rule in my little notebook that says, “Don’t daytrade optionable stocks on Thurs or Fri of expiration week.” That’s because a day trade has much less chance of success on those days as the stock gets reeled back in from whatever move it tries to make.

By around lunchtime on Friday, I was surprised. By 3pm, I was stunned. I couldn’t remember the last time I saw a move like this on expiration day. This was big. Friday night, after getting the kids settled down, I fired up the ‘puter and did some number crunching. I’ve never actually seen any published statistics about expiration day and its supposed “volatility,” but I knew from experience that it’s unusual for expiry day to be anything but dead boring, movement-wise.

Here’s how I did my little impromptu volatility study:

  • I downloaded historical data on the Qs (volume numbers more reliable than index volume) back to the beginning of 2000, so I could include the huge lurches the market made in ‘00-’02.

  • Wrote an Excel spreadsheet to determine whether a given day was options expiration day (hint: use the DAY and WEEKDAY functions within a couple of nested “ifs”), then compared the volatility of that day’s range to the previous 20 days.

  • I made this comparison by taking the average range of the previous 20 days, then the standard deviation in range over the same period, and finally calculating how many standard deviations away from the average expiry day fell.

    Using standard deviations from average factored out the confusion that would be created from trying to simply compare absolute ranges over the years, which would be apples to oranges. An expiry day in 2000 with a range of $4 wasn’t such a big deal if the Qs were $80 and the average range for the previous 20 days was $5/day.

The results of my study of expiration Fridays over the last 73 months are as follows:

  • 50 expiration Fridays (68.4%) have been of average volatility (+/- one STD).

  • 17 expiration Fridays (23.3%) have been significantly less volatile than average (more than 1 STD below average).

  • Only 6 expiration Fridays (8.2%; less than one per year) have been significantly more volatile than average (more than 1 STD above average).

That’s right: fully 92% of expiration Fridays have been of average volatility or less . So much for the “increased volatility of triple witching.” But that’s not the clincher:

  • Since January of 2000, only two expiration Fridays have had a range of greater than 3 standard deviations above the prior 20 days’ average:

    1. 4/21/01, which was 5.4 STDs more volatile than average, albeit on lighter than average volume.
    2. You guessed it, 1/20/06, which was 3.7 STDs more volatile, and on significantly increased volume.

No wonder Friday seemed so unusual. One thing is for sure- anyone who happened to be loaded with puts cleaned up like never before (or, almost never). Cheers to them.

What’s this mean for the future? I think that for certain it means we’ll be seeing wider price swings, which is music to the ears of daytraders. It may also mean that we’ve just reached some sort of major inflection point in the market. The new trend will emerge soon enough, and we’ll know for sure.