A $20,000 Options Portfolio To Trade Earnings: Week Of Jan. 3 [View article]

Kevin,

Thanks for the great article. In your experience, is it better to initiate the reverse iron condor a few weeks before earnings as opposed to the day before/of earnings? I realize that if we initiate it the day before/of earnings, volatility will be higher (which would work against the spread) but we would be able to place the trade at whatever price it is trading at closer to earnings.

Hedging The SPY ETF With Options - The Seesaw Market [View article]

RK,

Do you ever recommend selling the weekly puts OTM? For example, about a week ago, Spy was near the 200 day moving average (~126) and near the top of the trading range we have had recently. Would you have recommended selling the puts OTM targeting enough extrinsic to cover the weekly target as opposed to continuing to sell the weeklies ITM? My dilemma is when we are near the top of the trading range, I always have the tendency to sell OTM and when at the bottom of the range (~110-112) to sell ITM (which seems to contradict what you have recommended in your articles).

Options Strategies And Your IRA Account [View article]

Ken,

Thanks for another great and informative article! Several brokerage firms started offering portfolio margin accounts over the last several years. Can you comment on this and do you recommend using it?

I was rereading your comment to Henry and had a couple questions:

"There is no perfect answer to when I would consider ratcheting down.

Generally, if vix is very high, say 40 or above, I definitely consider ratcheting down to pick up the volatility. When things calm down the volatility will drop, even if a new lower range has been found and you could always ratchet back up.

For instance, the vix today is still around 34. This is too close to its trading range of around 30 for me to do anything. If vix gets to 40, then I would certainly want to either sell the 127's or sell a greater number of the weeklies."

If VIX gets above 40, and you reset the long dated put, what is the new strike to reset at (would it be the ATM)? Also, if selling a greater number of weeklies, how many more weeklies would one sell (also, would these additional weeklies be naked?)

Thanks so much for your time and generosity with both the detailed articles and answering our questions. You are truly an asset on Seeking Alpha. Happy Thanksgiving!

With regards to Henry's question, if VIX approaches 40 and he sells the 127 puts to capture both the downward move and higher volatility, do you advocate waiting before purchasing new spy puts at the lower range (to allow volatility to subside and thus be without protection) or buying the new spy puts immediately (which will be expensive due to elevated VIX)?

Hedging The SPY ETF With Options - The Seesaw Market [View article]

Ken,

Thank you for your detailed response. I have looked it over and will study it more thoroughly over the next several days (as well as re-reading all of your articles). Please forgive my ignorance if my questions are basic in nature as I am new to the calendar spread strategy. In the past, I have mainly traded OTM cash secured puts, bull put spreads, and iron condors, all with the same expiration month (with mixed results) and am interested in a strategy that will provide more of a hedge for these income plays. Some further questions I have after initially reading your most recent response:

1) My understanding of the calendar put strategy is that the capital outlay for the long dated puts will be recovered incrementally by the selling of the weekly puts, so in 1 year, the cost of the long dated put has been fully recouped. -If the stock moves up over time, the weekly puts sold ITM will gain in value as intrinsic value is converted to extrinsic value at a faster rate than the loss of the long dated put due to differences in delta and time decay, and one will make income from this movement. As the stock increases (in our example, AAPL moving up 10%), the long dated put should be rolled up as we would be underinsured in terms of strike price (ie current long put $390 strike, AAPL moves to $425, long dated put should be rolled up to $425 to provide cover for weekly puts being sold at higher prices). -if the stock decreases in price, the long dated put will protect against significant losses but one must continue to sell weekly puts to match extrinsic value (using criteria in your seesaw market article.) There may be fluctuations in one's account balance, but after the long put's expiration, no significant loss will occur -what is the risk in this strategy and how does one lose money with it? -is there a situation where you would roll the long put down over the course of the year?

2) In your example will AAPL, the ratio of weekly puts sold was 2 ATM and 10 ITM against 12 long term puts. How was this ratio calculated? Also, can the number of options be decreased (ie selling 1 ATM, 5 ITM weekly puts against 6 long term puts)

3) Will this strategy work with low beta stocks (ie Mcdonalds, IBM, MSFT or Coca Cola)? If so, am I correct in thinking that we would not sell the weekly puts as far ITM as with AAPL (which in our example was 10-15% ITM) because these stocks have a lower beta?

4) To reduce margin, can we implement this strategy with vertical spreads as follows (again from our example of AAPL) -buy 12 long dated Bear Put spreads (+12 390 strike, -12 380 strike) -sell 2 weekly ATM Bull put spreads (-2 385 strike, +2 375 strike) -sell 10 weekly ITM Bull put spreads (-10 405 strike, +10 395 strike)

-I think this would reduce margin on the sold options to 12*1000=$12,000 with the long term spread providing protection of $12,000

5) If one were bearish on a stock, can one use this strategy with calls?

Thanks again for all of your help. Looking forward to any insight or articles you may have on this subject in the future.

Hedging The SPY ETF With Options - The Seesaw Market [View article]

Ken,

Thanks for your prompt reply! May I use an example to see if I understand your response correctly. With AAPL closing at $388.81 today (10/10), one would sell 10 weekly puts for income, either at the money (current weekly premium of $6.20 at strike 390) or in the money (if in the money, how far ITM do you usually sell?). Then I would buy 12 long dated puts (2 more than what I sold this week) at the money (9 months out as there is no Oct '12) so July '12 $390 strike for $54.20. I need to recoup the cost of protection over the next 40 weeks so $54.20/40=$1.35 per week so I would sell 12 weekly puts ITM (with extrinsic value at least equal to $1.35?) so this week 395 strike put=$9 premium (intrinsic=$395-$388.8... extrinsic=$2.81). So in summary,

1) sell 10 weekly $390 strike puts for $6.20 premiumx10 puts=$6,200 2) buy 12 long dated $390 strike for $54.20x 12 puts=$65,040 3) sell 12 weekly $395 puts for $9x 12 puts=$10,800 (intrinsic=$7,428, extrinsic=$3372)

Hypothetical scenarios

So if AAPL finishes above $395 this week: 1) will keep $6,200 from 10 weekly $ 390 puts sold 2) lose some value on 12 July $390 puts due to AAPL price movement and time decay 3) keep $10,800 from 12 weekly $ 395 puts sold Total gain~$16,400

if AAPL finishes at $390 this week: 1) keep $6,200 from 10 weekly $390 puts sold 2) lose some value on 12 July $390 puts due to time decay 3) keep $4,800 from 12 weekly $395 puts sold (puts ITM by $5, so $9 premium-$5 ITM=$4x12 puts=$4800) Total gain~$11,000

if AAPL finishes at $380 this week 1) lose $3,800 from 10 weekly puts sold ($390 strike-$6.2 premium=breakeven of $383.80-$380=$3.8x10 puts=$3,800) 2) gain $12,000 from 12 July $390 puts (minus a little from time decay) 3) lose $7,200 from 12 weekly $395 puts sold ($395 strike-$9 premium=breakeven of $386-$380=$6x12 puts=$7,200) Total gain~$1,000

if AAPL finishes at $350 this week 1) lose $33,800 from 10 weekly puts sold ($390 strike-$6.2 premium=breakeven of $383.80-$350=$33.8x10 puts=$33,800) 2) gain $48,000 from 12 July $390 puts (minus a little from time decay) 3) lose $43,200 from 12 weekly $395 puts sold ($395 strike-$9 premium=breakeven of $386-$350=$36x12 puts=$43,200) Total loss~$29,000

Hopefully my math was correct. If so, may I ask the following questions 1) how to deal with the last scenario showing a loss of $29,000? 2) how to deal with assignment on either the 10 lot $390 weekly put sold or the 12 lot $395 weekly put sold? 3) for the following week, would one again sell a 12 lot weekly put with minimal extrinsic value of $1.35? 4) if the stock advances in the next 9 months, if/when to move the long put to a higher strike?

Hedging The SPY ETF With Options - The Seesaw Market [View article]

Ken,

Thank you for such a wonderful and insightful series of articles on hedging with SPY. It appears that most of these strategies were designed to hedge a portfolio of long stocks. Would these strategies be appropriate to hedge a portfolio consisting of out of the money cash secured puts or put spreads sold on either a weekly or monthly basis for income? If not, could you comment on any strategy that would be effective for hedging such a portfolio. Thanks again.

## The Good, The Bad And The Ugly Way To Go Long Apple [View article]

what parameters (ie strike, delta) do you utilize for choosing your Jan 2014 AAPL LEAPS?

thanks,

## A $20,000 Options Portfolio To Trade Earnings: Week Of Jan. 3 [View article]

Thanks for the great article. In your experience, is it better to initiate the reverse iron condor a few weeks before earnings as opposed to the day before/of earnings? I realize that if we initiate it the day before/of earnings, volatility will be higher (which would work against the spread) but we would be able to place the trade at whatever price it is trading at closer to earnings.

thanks again,

## Hedging The SPY ETF With Options - The Seesaw Market [View article]

Do you ever recommend selling the weekly puts OTM? For example, about a week ago, Spy was near the 200 day moving average (~126) and near the top of the trading range we have had recently. Would you have recommended selling the puts OTM targeting enough extrinsic to cover the weekly target as opposed to continuing to sell the weeklies ITM? My dilemma is when we are near the top of the trading range, I always have the tendency to sell OTM and when at the bottom of the range (~110-112) to sell ITM (which seems to contradict what you have recommended in your articles).

As always, thanks.

## Options Strategies And Your IRA Account [View article]

Thanks for another great and informative article! Several brokerage firms started offering portfolio margin accounts over the last several years. Can you comment on this and do you recommend using it?

## Hedging SPY With Options - Part 3 [View article]

I was rereading your comment to Henry and had a couple questions:

"There is no perfect answer to when I would consider ratcheting down.

Generally, if vix is very high, say 40 or above, I definitely consider ratcheting down to pick up the volatility. When things calm down the volatility will drop, even if a new lower range has been found and you could always ratchet back up.

For instance, the vix today is still around 34. This is too close to its trading range of around 30 for me to do anything. If vix gets to 40, then I would certainly want to either sell the 127's or sell a greater number of the weeklies."

If VIX gets above 40, and you reset the long dated put, what is the new strike to reset at (would it be the ATM)? Also, if selling a greater number of weeklies, how many more weeklies would one sell (also, would these additional weeklies be naked?)

thanks,

ongba

## Hedging SPY With Options - Part 3 [View article]

Thanks so much for your time and generosity with both the detailed articles and answering our questions. You are truly an asset on Seeking Alpha. Happy Thanksgiving!

## Hedging SPY With Options - Part 3 [View article]

With regards to Henry's question, if VIX approaches 40 and he sells the 127 puts to capture both the downward move and higher volatility, do you advocate waiting before purchasing new spy puts at the lower range (to allow volatility to subside and thus be without protection) or buying the new spy puts immediately (which will be expensive due to elevated VIX)?

thanks,

## Hedging The SPY ETF With Options - The Seesaw Market [View article]

Thank you for your detailed response. I have looked it over and will study it more thoroughly over the next several days (as well as re-reading all of your articles). Please forgive my ignorance if my questions are basic in nature as I am new to the calendar spread strategy. In the past, I have mainly traded OTM cash secured puts, bull put spreads, and iron condors, all with the same expiration month (with mixed results) and am interested in a strategy that will provide more of a hedge for these income plays. Some further questions I have after initially reading your most recent response:

1) My understanding of the calendar put strategy is that the capital outlay for the long dated puts will be recovered incrementally by the selling of the weekly puts, so in 1 year, the cost of the long dated put has been fully recouped.

-If the stock moves up over time, the weekly puts sold ITM will gain in value as intrinsic value is converted to extrinsic value at a faster rate than the loss of the long dated put due to differences in delta and time decay, and one will make income from this movement. As the stock increases (in our example, AAPL moving up 10%), the long dated put should be rolled up as we would be underinsured in terms of strike price (ie current long put $390 strike, AAPL moves to $425, long dated put should be rolled up to $425 to provide cover for weekly puts being sold at higher prices).

-if the stock decreases in price, the long dated put will protect against significant losses but one must continue to sell weekly puts to match extrinsic value (using criteria in your seesaw market article.) There may be fluctuations in one's account balance, but after the long put's expiration, no significant loss will occur

-what is the risk in this strategy and how does one lose money with it?

-is there a situation where you would roll the long put down over the course of the year?

2) In your example will AAPL, the ratio of weekly puts sold was 2 ATM and 10 ITM against 12 long term puts. How was this ratio calculated? Also, can the number of options be decreased (ie selling 1 ATM, 5 ITM weekly puts against 6 long term puts)

3) Will this strategy work with low beta stocks (ie Mcdonalds, IBM, MSFT or Coca Cola)? If so, am I correct in thinking that we would not sell the weekly puts as far ITM as with AAPL (which in our example was 10-15% ITM) because these stocks have a lower beta?

4) To reduce margin, can we implement this strategy with vertical spreads as follows (again from our example of AAPL)

-buy 12 long dated Bear Put spreads (+12 390 strike, -12 380 strike)

-sell 2 weekly ATM Bull put spreads (-2 385 strike, +2 375 strike)

-sell 10 weekly ITM Bull put spreads (-10 405 strike, +10 395 strike)

-I think this would reduce margin on the sold options to 12*1000=$12,000 with the long term spread providing protection of $12,000

5) If one were bearish on a stock, can one use this strategy with calls?

Thanks again for all of your help. Looking forward to any insight or articles you may have on this subject in the future.

Ongba

## Hedging The SPY ETF With Options - The Seesaw Market [View article]

Thanks for your prompt reply! May I use an example to see if I understand your response correctly. With AAPL closing at $388.81 today (10/10), one would sell 10 weekly puts for income, either at the money (current weekly premium of $6.20 at strike 390) or in the money (if in the money, how far ITM do you usually sell?). Then I would buy 12 long dated puts (2 more than what I sold this week) at the money (9 months out as there is no Oct '12) so July '12 $390 strike for $54.20. I need to recoup the cost of protection over the next 40 weeks so $54.20/40=$1.35 per week so I would sell 12 weekly puts ITM (with extrinsic value at least equal to $1.35?) so this week 395 strike put=$9 premium (intrinsic=$395-$388.8... extrinsic=$2.81). So in summary,

1) sell 10 weekly $390 strike puts for $6.20 premiumx10 puts=$6,200

2) buy 12 long dated $390 strike for $54.20x 12 puts=$65,040

3) sell 12 weekly $395 puts for $9x 12 puts=$10,800 (intrinsic=$7,428, extrinsic=$3372)

Hypothetical scenarios

So if AAPL finishes above $395 this week:

1) will keep $6,200 from 10 weekly $ 390 puts sold

2) lose some value on 12 July $390 puts due to AAPL price movement and time decay

3) keep $10,800 from 12 weekly $ 395 puts sold

Total gain~$16,400

if AAPL finishes at $390 this week:

1) keep $6,200 from 10 weekly $390 puts sold

2) lose some value on 12 July $390 puts due to time decay

3) keep $4,800 from 12 weekly $395 puts sold (puts ITM by $5, so $9 premium-$5 ITM=$4x12 puts=$4800)

Total gain~$11,000

if AAPL finishes at $380 this week

1) lose $3,800 from 10 weekly puts sold ($390 strike-$6.2 premium=breakeven of $383.80-$380=$3.8x10 puts=$3,800)

2) gain $12,000 from 12 July $390 puts (minus a little from time decay)

3) lose $7,200 from 12 weekly $395 puts sold ($395 strike-$9 premium=breakeven of $386-$380=$6x12 puts=$7,200)

Total gain~$1,000

if AAPL finishes at $350 this week

1) lose $33,800 from 10 weekly puts sold ($390 strike-$6.2 premium=breakeven of $383.80-$350=$33.8x10 puts=$33,800)

2) gain $48,000 from 12 July $390 puts (minus a little from time decay)

3) lose $43,200 from 12 weekly $395 puts sold ($395 strike-$9 premium=breakeven of $386-$350=$36x12 puts=$43,200)

Total loss~$29,000

Hopefully my math was correct. If so, may I ask the following questions

1) how to deal with the last scenario showing a loss of $29,000?

2) how to deal with assignment on either the 10 lot $390 weekly put sold or the 12 lot $395 weekly put sold?

3) for the following week, would one again sell a 12 lot weekly put with minimal extrinsic value of $1.35?

4) if the stock advances in the next 9 months, if/when to move the long put to a higher strike?

again, many thanks for such an elegant strategy.

## Hedging The SPY ETF With Options - The Seesaw Market [View article]

Thank you for such a wonderful and insightful series of articles on hedging with SPY. It appears that most of these strategies were designed to hedge a portfolio of long stocks. Would these strategies be appropriate to hedge a portfolio consisting of out of the money cash secured puts or put spreads sold on either a weekly or monthly basis for income? If not, could you comment on any strategy that would be effective for hedging such a portfolio. Thanks again.