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Individual investor from Germany, looking around the world for investment opportunities, especially where options markets are available. The US is head and shoulders regarding Options market liquidity, but there are also (options) opportunities in Europe, mainly in leading indexes and blue... More
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  • AAPL - Long Term Perfmormance Covered Call Trade In Possibly More Rocky Times

    Be long AAPL - or, for someone who likes to trade Options:

    Buy a leap call Jan-2016, e.g. $105 and continuously sell calls against it. Because we are just before earnings - and especially if you are bullish - stay away far enough; I sold the Sep $105 call against it (so it is effectively a calendar spread at the moment). I will keep selling calls. If AAPL rips upwards, you need to roll the call up and further out. There are 17 more months to go, so plenty of opportunity to make money if AAPL does not drop. Keep the overall position delta-positive if you are bullish AAPL. As long as your short calls have a strike at least as high as the leap call, and are not in the money, that is always the case.

    There is always temptation to just buy out of the money calls, but if you do it often, the odds are just against you. That is the nature of the options game.

    Of course, if one holds outright long stock, you may enjoy the ride - and in addition to the dividend you may collect option premium by selling calls against your position.

    Disclosure: I am bullish AAPL via Options exactly as described.

    9 Jul, 01:22 PM

    (Remark : originally published as comment here - I will continue to publish updates here as things happen)

    Disclosure: The author is long AAPL.

    Additional disclosure: Position via Options as described

    Tags: AAPL
    Aug 01 4:36 AM | Link | 37 Comments
  • Japan's Renaissance After Two Decades Stagnation? A Multi-Year Bet

    Japan has experienced a real estate bubble up until the early 1990s. Then that bubble burst and Japan remained essentially in deflation and successive recessions ever since. Long term comparisons with other after-bubble periods (Gold after 1980, Dow Jones after 1929) show that this is about the time that it takes to finally leave it all completely behind.

    Elapsed time alone of course is not enough. The bottom for Japan has been called before, even in the late 1990s! But now we have new inertia by the new government that follows a QE concept that seems similar to that of the FED in the US. For all it's worth, the US markets have not fallen into deflationary spiral after 2008/9. Other problems notwithstanding. Overly large budget deficits are there in Japan as well, but with a twist: The sovereign debt is by far higher than in any other western-style modern country (based on GDP). But the money is mostly borrowed from Japan's own citizens. We do not know this plays out in the future.

    With its permanently ultra-low yields this may go on for quite a while - as it has in the past. Japan must avoid an increase in interest rates on its debt at all costs. But there may be no point waiting or trying to time the point when it faces a debt crisis. We waited half a human life of piling debt (since the early 1970) for the debt problems to bite some western countries. The problem with debt is not the principal but the interest. As long as Japan can keep it ultra-low (another how many years?) let the music band play on the Titanic...

    In any case: If Japan manages to get some inflation going in real terms and the economy starts to pick up in earnest, this could be reflected in the markets.

    Therefore a multi-year bet with leap options on the EWJ funds on Japan:

    Open a bullish leap options "risk reversal" basket (EWJ currently $9.67):

    1 long call Jan-2015 $11

    1 short put Jan-2015 $8

    As of market close 2012-Dec-19 this nets $0.23 per basket. Total delta around 0.5.

    If we are right about the market, we have theoretically unlimited profit potential. If we are wrong, there is also almost the same loss potential as for the underlying (going to zero). In practical terms can a large country's stock market not go to zero as a whole, can it.

    Also, if we catch a bad entry (EWJ has already started picking up) we can exit with a small loss. Delta of 0.5 means that we participate only by 50% of any movement initially. If however we stay, in with the market going up as hoped for, delta will also pick up and our rate out participation will nicely increase. In the end, we will essentially be long EWJ if there is a sustained up trend -- in which we will participate.

    In the event the trade develops successfully, we can at some point buy back the short put, realizing a profit, and also sell a shorter term call, making the whole thing a diagonal spread.

    But that is a vision for the future.

    Disclosure: I am long EWJ.

    Additional disclosure: long EWJ position as long leap call; may inititate an additional bullish position in EWJ options within the next 72 hours

    Dec 20 8:30 AM | Link | Comment!
  • VXX The Other Way Around ... A Neutral To Bullish Bet

    How do you hedge your long positions? One solution is VIX futures or options thereof. The savvy investor knows that the VIX index is a measure of implied volatility of options on the S&P 500. For more information on what exactly VIX is there are lots of Web resources to consult.

    One variation of the theme is VXX; essentially a combination of short term VIX futures, rolled regularly.

    The biggest downside of VXX is that is suffers from contango (later VIX contracts more expensive than earlier expiries). This works like a built-in price decline mechanism for VXX. And you can see it! Bring up a VXX chart of a chart provider of your choice (use time span anything between 6 month and 4 years) ... what a dog! If you've never seen it - you'll be stunned (remark: VXX has gone through reverse splits; therefore the nominally high figures in earlier years).

    VXX has often been criticized for this serial decline -- the counter argument being that "portfolio insurance" (which is what VIX and its derivatives are meant to be) costs money and if it is done right it does work well in bear markets -- as VIX is strongly negative correlated with the broad market. Though some say there are better ways to hedge a portfolio with than VXX.

    Then: Why not turn the table on VXX: GO short on VXX! But be aware that on the downturn of the broader market -- which is when VXX is supposed to shine -- it can more double! As happened in summer 2011. Of course the IV of the broader market is the all important factor as to how much VIX and VXX rises. But even a small market dip like in spring 2012 let VXX rose from $62.68 to $90.

    Remedy? There is a liquid options market of VXX -- but they are very pricey (IV >60%). Just like options in the VIX futures. Therefore, the following suggestions:

    - go short VXX

    - buy an o.t.m. bull call spread or iron condor of VXX options with expiration date in a couple months. Depending on strikes and expiry you may need more than one basket for an effective hedge. But especially iron condors can be effective while inexpensive.

    If you wish, you may try to boost your return by selling a put beneath the current going price of VXX. Your put is covered by your short VXX position. Try to get a strike that lets the option stay out of the money under normal circumstances. It may be advisable to choose expiration no further than a couple months away. VXX could well reach $24 by February barring a sharp market drop. The advantage of VXX is that it "suffers" a predictable decline but rarely a sharp drop (other than in the direct aftermath of a market correction / VXX climb). With selling the put you earn the premium.

    Be aware that being outright short a futures or ETN position theoretically carries unlimited risk, unless it is hedged.

    Be also aware that being short a put option carries a high risk as the underlying may -- in theory -- may drop sharply; theoretically to zero (although it is hard to imagine how the IV can drop to zero).

    Another way to play this is buying put calendar spreads, also o.t.m. Why not try a Jan/Feb $26 spread? As always with a calendar spread, all you risk is the money spent to open the position - in theory. Practically, you can almost always recover some of it if things don't turn out as expected (as the back option still has some value left when the front month's option expires).

    So - if VXX is really as bad as some pundits claim, let's turn the table: One trader's loss is another person's win. Let us try to be that person.


    There is one rare-occurrence but potentially big-loss tail risk: If we have 2008/9 markets all over again, VIX (the parent of VXX) could go above 100, trade in backwardation (later futures contracts cheaper than earlier ones; = the inverse of contango ==> works like a built-in price lift). Who knows how far VXX could skyrocket? The basket as described above does NOT hedge the short VXX against a monster climb.

    Therefore I will actually change the short-VXX into Leap Puts d.i.t.m:

    close short VXX futures.

    buy to open VXX JAN17 2014 PUT $40.

    That costs performance as there is an extrinsic value of about $4.20 as of today. At the current rate of decline of VXX that would take some 3 months. Also, it binds more capital as you are long the (deep in the money) put.

    Of course, any bear market would change that overall timing. But any losses are limited to the capital invested. No worries there.

    The plan is turn the condors into profit on any average market correction (no monster decline) or else wait for expiration of all the options and profit from the long put.

    If VXX rises above and beyond the condors it is time to liquidate them. Depending when (and if) this happens, the long put can be kept and the other options can be rolled over to some other strike and later expiration.

    If there is a "monstrous" rise in VXX due to (the next act of the) financial crisis, I will liquidate the VXX long put for a loss. But if that's the case there will be great opportunities to re-enter into a similar bet once the market calms down - then with even better odds for profit.

    Disclosure: I am short VXX.

    Additional disclosure: Besides being short VXX, I have (VXX-)bullish iron condor VXX options positions and a calendar spread open.

    Tags: VXX
    Dec 17 3:14 PM | Link | 6 Comments
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