Greg Loehr's  Instablog

The SPX calendar trade from last week is now working out like a charm with the index heading back to the 1630 strike. At this point I could roll the short option out another week and turn the trade into a risk-free position. Or I could let it ride for a little bit and see how much more profit the trade can make. Let's look at both ideas.

Recall that this calendar trade uses June as the long month and the weekly May2 options as the initial short option, with the net cost of the trade at $22.00. Each week I continued to roll the short option out to the next weekly expiration, and now the short option of the trade expires this Friday, the first Friday in June.

After subtracting all of the credits collected from each roll from the initial debit, we arrive at a current "basis" (for lack of a better term) in the trade of only $0.50. With the calendar fairly valued at $9.60 today, that means we have a profit of $9.10; or 41% on the original risk. With the three contracts we're tracking in the model portfolio, that's more than $2,700 in profit.

The question now is what to do with the trade. The VIX has jumped from 13-14'ish when this was first traded to above 17 as I write this, so that's had a positive effect on the trade. But with this vol pop, the short options have also gotten juiced. Between now and Friday this calendar has about another $10 of theta, which is huge. So I could let the trade percolate, and if the market remains somewhat docile, then the calendar should really explode in value.

But, I could also roll the short option forward right now and bring in about another $5.75. That would bring the "basis" of the trade to a credit of $5.25, which means the trade would be risk free. And, the position could continue to generate even more profits through June expiration. With important economic reports coming out this week, like ADP employment figures, Beige Book, and NFP, maybe this is the best move.

After discussing this trade in today's Live Trading Session, I've decided to hold the position for now, and I'll start to gauge the market's reaction (if any) to these economic reports. Stay tuned to see how this one turns out.

Trade safe!

Greg Loehr

Disclaimer: Loehr Consulting, LLC ("Company"), doing business as Options Buzz, is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities customers should buy or sell for themselves. Before placing any trade you should consult with a licensed broker or registered investment advisor as well as read The Characteristics and Risks of Standardized Options. Please visit www.OptionsBuzz.com for the complete disclaimer and terms of use.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Despite the SPX grinding higher, it looks like Big Blue is starting to roll over. After coming close to filling the gap around $205-206, it's refusing to participate with the broader indexes and is starting to look a little tired.

Notice the implied volatility. It's ticking up. (click to enlarge)

If the stock does indeed sell off, then either long puts (no later than July) or long put spreads (no later than June) would probably work out nicely. In the Live Trading Sessions we're tracking a bearish trade that can profit by 100% or more if IBM drops about 3% from here.

Trade safe!

Greg Loehr

Disclaimer: Loehr Consulting, LLC ("Company"), doing business as Options Buzz, is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities customers should buy or sell for themselves. Before placing any trade you should consult with a licensed broker or registered investment advisor as well as read The Characteristics and Risks of Standardized Options. Please visit www.OptionsBuzz.com for the complete disclaimer and terms of use.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Ever start out simple, with just one or two trades, and then end up with an entire mess of options? Congratulations! You're now trading a "position". Perhaps you've heard the term but aren't sure what it means. You're trading a "position" when you've gone beyond using just one strategy.

Trading a position is typically going to be much different than managing a single strategy. For instance, with a single strategy, the profit or loss of the trade may trigger an exit from the trade.

Here's an example of this: you buy the June 50 call for $1.00, and you look to cut losses at 50% (if the call drops to $0.50), or you sell the call at a 100% profit (the calls moves to $2.00). In this case, the greeks may give you an indication of the change in value of the trade, but it's the price of the option itself that is triggering the exit order.

If you compare that to a position with multiple options, the value of any one (or even more) of the options isn't typically going to be the reason that prompts you to trade. The profit/loss of the position as a whole might trigger an adjustment or closing trade. But here, the greeks become particularly important with a position.

Delta and gamma are at the heart of gamma scalping a position. Theta and vega considerations might prompt a rebalancing of the position. And understanding the change in the greeks both over time, and with stock movement, really separates position management from a single strategy.

If you take the example of a long call spread, this trade will never attain any short deltas, except perhaps in the case of assignment on the short call. Depending on the makeup of a position, deltas can go from long to short and back to long again depending on where the stock goes.

While handling a position certainly differs from single strategy trading, it's not quite as difficult as one might think. Take a look at the following position. I traded this position on the SPY's many years ago, and while closing down the risk heading into expiration, I realized I was sitting on gold mine of material for a class on position management.

(click to enlarge)

With approximately 2000 options across nine strikes, inevitably the first question a student raises in the class is "How did you get into all those trades?". The answer is simple: "The same way YOU do. At times I was bullish; other times bearish; sometimes neutral."

The real question isn't how the trade was opened; it's "what are you going to do now?". Think of it this way: once you're up in an airplane, how you got there really isn't the issue. It's how you're going to land.

So, after considering the effect of the dividend, the expected range of the stock, and the greeks, I placed six very easy trades. Four 'buy to close single option' orders, one 'buy to open single order', and one stock order. That's it. Don't think that advanced trades need to be used. It's more about an advanced understanding of using the simple things.

The effect of these six simple trades was three-fold:

1. Neutralized the risk and locked in the profit
2. Accomplished this with fewer commissions
3. Added free options with synthetics

Granted, the likelihood of the free options paying off heading into expiration is quite slim, but if someone hands you free lottery tickets, you take them. For position trading, sometimes less can be a lot more, right?

Trade safe!

Greg Loehr

Disclaimer: Loehr Consulting, LLC ("Company"), doing business as Options Buzz, is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities customers should buy or sell for themselves. Before placing any trade you should consult with a licensed broker or registered investment advisor as well as read The Characteristics and Risks of Standardized Options. Please visit www.OptionsBuzz.com for the complete disclaimer and terms of use.