Tuesday, April 23, 2013

Currency Condors spread wings and Identifying new trends.

So, my week long test drive of FXE did not work out as I had planned. But by exploring the possibilities of using currency ETF's as viable Reverse Iron Condor trades, I have come across an interesting phenomenon.

A trade on FXE or FXB can be set up for a good risk/reward ratio for times that extend far beyond that of weekly options.

First I'll go over my trade entries this week, and then I'll bring it back to the currency ETF's and go over why I chose the trades that I did. The entries are:
  • FXE May 18 '13 130c/132c/129p/127p RIC
  • FXB May 13 '13 152c/154c/151p/149p RIC
  • C Apr 26 '13w 46.5c/47.5c/45p/44p RIC
The currency ETF's are interesting in that if you compare it with something like GLD, which has a similar price point to FXE, You'll see that you pay more premium for a shorter period of time to expiration based on the anticipated movement. Lately, the GLD may not be the best example for this due to it's generational decline last week. But a comparison of the price action of the last couple of months may point to why it may be better to have a monthly RIC in FXE, vice a weekly RIC in GLD.

Mid week pause for writers block...

Hmm. It's going to take much more time for me to get together this data for the comparison in GLD and FXE than I thought. I'm on vacation in Osaka, and this is the first month that I've even tried FXE, FXB and the other currency ETF's anyway, so more on that later I guess.

Update on this weeks trades so far. C is nearly in the money after the Tuesday U.S. session, as is FXE. If there is follow through tomorrow, the C trade may close profitably before the end of the week. There is still much more needed to the downside for FXE to profit, but with the problems in Europe and three weeks until expiration, a good chance for profit remains. FXB has not moved at all, but with 3 weeks for news events on the Economic Calendar, FXB is still wide open.

With Currencies, my breakout strategy is off. The robots have been shut down. As I get the picture for how my current strategies are playing out I'll get more into explaining what I'm doing. Basically I have moved to a strategy of manual entries in the direction of a trend. Using the Parabolic SAR for entries and stops, and FXCM's SMI or Stochastic Momentum Indicator as a trend filter. Here's how my screen looks with my current AUD/USD trade short:

Ok, so using the SMI as an trend filter, my clear bias for Aussie in this example is to sell the AUD against the USD. this I have done on the first reversal opportunity on the 4 hour chart after the SMI showed the bearish crossover. So far so good. My plan now is to trail down the stop with SAR dots manually whenever I get on the trading station. The most current picture shows a couple of green dots showing that price action may reverse. So, to allow price some room to move around, I have stopped trailing until I get another red SAR dot showing resumption of the trend.

Then, since my first lot is profitable, I will enter with a second lot on the reversal to capitalize on a bigger breakdown.

Cheers from Osaka.
STT

Friday, April 19, 2013

Still stuck in the mud

Quick update.

Both the Citigroup and FXE weekly Reverse Iron Condors for the week of 19 Apr have failed.

C spent the week chopping above and below $45 and ended at 45.03. FXE spent the week chopping around 130 and ended at 129.47.

Life beckons this Saturday. I will do a full post later on in the weekend.

I have a different way to play the currency ETF's that I believe will increase the odds of a postive outcome for the RIC trade. For Citi, I have changed the way I look at the strikes that I use to enter a RIC. More on that later.

May the profits always find you.

STT

Tuesday, April 16, 2013

Of GNC, and GLD...

First, prayers and well wishes go out to all of those affected by the tragedy in Boston.


One of the most interesting ways to enter a long stock position is by selling a put for the underlying security which you desire. There is significant risk in this strategy, and it also requires margin, or cash put up to your broker to cover losses if there is any. Often called a cash secured, naked put.

There's good news and bad news with put selling, so I'll start with the bad news first. Then, I'll show a variation of put selling that can result in great gains vs. capital outlay if the stock moves your way. I have examples of both in my portfolio right now.

Bad news: INTC

Opened on 5 September 2012 for a net credit of $75 after commissions.
Put 100 shares at October expiration, and here's how they sit today:
My entry to those 100 shares is about $22.50 a share. I've been getting that 4% annualized yield, but I'm still not in positive territory.

Enter the variation. The Risk Reversal is a way to get long an option by selling the opposing option when the trade is opened. It requires the same margin/cash and has a little more risk than selling the naked put. This trade should never be entered on any stock that you would not be happy with owning the shares at the put strike, or significantly lower. One other caveat: I don't ever sell a call to finance a put. When you are short the call, and the stock appreciates in the money before expiration, you owe the call writer those 100 shares and you keep nothing. So, here's the good news.

Good News: GNC

The best trade by far that I have in my portfolio right now is the GNC Sep 21 '13 $32.50 Risk Reversal. The Risk Reversal is initiated by selling a put, and using the proceeds to finance the purchase of a call in the same security at the same strike. Most brokers will allow this to be placed as a spread to save on commissions instead of buying each option separately. Here's what mine looked like:
So, for $75 after commissions, here is what it looks like after yesterday's close:
The spread has a current value of $925.00, and does not expire until September. The trend on the chart looks good. Valuation is not extreme as the earnings continue to grow. And I am planning to stay in the trade until GNC's share price is $47.50, or $37.50, whichever comes first. I also plan to close the put side of the risk reversal at the soonest available opportunity, so if there is a decline, the double whammy of increased implied volatility in the put as the share price comes down does not work against me.

Gold. GLD. Wow.
It looks like I have the increase in gold volatility that I was hoping for.

As I type, the futures in gold have stabilized, though they are rolling over the $1375 level and passing down through $1365. If we continue to have downward momentum towards yesterday's lows at 1330, I will be placing a trade called the Iron Condor that lives for Volatility spikes like this. If GVIX is above 20, and the market is stable, the trade will look like this, though the numbers will be different when the market opens up today.

I am looking for a net credit of about $225. My total net credit will be about 450, but I plan to close the spread as soon as I can get my $225. My total risk is $1550 if I get blown out, but to make $225 on $2000 of risk in 1 or 2 days justifies this for me. If this sounds crazy to you... It is. Don't do it in your own account just because I'm greedy.

Seriously though. This trade makes it's money on the fact that the implied volatility in the short options that you sold will collapse, allowing you to buy the spread back very soon. For example sooner than the market can move to either one of your short strikes. As outlined, I intend to close the trade ASAP after I put it on.

Also, GLD is back on for Weekly Reverse Iron Condors for me.

Questions and Comments are welcome. Follow me on twitter @B50cal1978. Be careful in your execution. Market Volatility looks to be picking up. Monitor your positions sizes, and preserve your capital to fight another day.

STT


Friday, April 12, 2013

Stuck in the mud

Just got done taking a killer bike ride around the perimeter of the airfield, and figured it would be a good time to post as I wind down this afternoon.

 
My post title refers to the worst thing that can happen to a trader that uses reverse iron condors. I was in the AAPL Apr 12 '13w 440c/455c/420p/405p RIC at an entry price of $5.15. I needed AAPL to move at least $4 above $440, or $4 below 420 to trigger my conditional order to close the call or put leg at $9.00 for a 40% ROI. This is only about 5% to one side or the other of $430, which seemed possible given the argument traders have been having over AAPL. The 5day chart shows what really happened:

 
 
I stayed in the trade on Wednesday due to the move of nearly $10 in share price that with any follow though at all would have resulted in at the very least having a shot to break even at 440, or profit above 445. Alas, on Thursday morning disappointing PC sales numbers were release that affected AAPL negatively. Apple is the third largest supplier of desktop computers sold in the U.S. and thus got killed by the numbers. And on Friday we got stuck in the mud by an options phenomenon called "pinning" that happens on expiration day as institutions settle large numbers of contracts often causing them to gravitate to a round level and stay there.
 
Here's how the trade closed:
 
 
AAPL was the only RIC I was in that expired on the week of 12 April. Due to rules of position size that I have for myself, though the single trade was a 100% loss, in the scope of my portfolio is only a 1% loss. The lesson here is that nothing is guaranteed, and that even though RIC's are one of the higher percentage strategies that are out there, It's important not to jump into water that's too deep.

For the week that expires on April 19, I have two RIC trades that are on:

  • C 46c/47c/44p/43p entered for $.50 which is about as high as I want to go to enter when spreading the strikes out so far.
  • FXE 130c/131c/128p/127p entered for $.34. With the US Dollar overextended, and acting poorly at the end of the week, I think there is a good chance that a pop in the Euro can take us into profit.
I will tweet and post the result of both of these trades when the result occurs. Follow me @B50cal1978. All comments and questions are welcome. Even if you don't comment, be sure to weigh in on the poll at the top of the blog.

As always, anything posted here is only my journey, and not a recommendation to trade any securities mentioned.

STT




Tuesday, April 9, 2013

How to capture volatility in Currencies with options...

One of the things that can be so frustrating about trading currencies is that they can be very random and unpredictable in shorter timeframes, such that even if your thesis regarding the direction of said currency can be correct, you may still get tagged out on choppy movements. This has happened to me more times than I care to count.

On currency trading platforms, one way to be directionally neutral is to find a ranging currency, and place entry orders above and below the range in the hopes of catching a breakout or breakdown. One problem, that I have found the times that I have attempted this, is that I will catch the breakout, watch as the price action drops down to tag my stop and carry on the anticipated direction.

Catching up to the present...  Lately, I have been doing quite well trading Reverse Iron Condors on volatile options. This has caused me, when I have time, to search for securities that are volatile.

Epiphany time. Currencies are volatile.

As a small time trader, I have not had the ability or means to enter the futures markets with a platform that allows me to take positions with options on currencies. Enter the CurrencyShares ETF's.

On my E-trade, I have spent the last week going over the viability of the different Currencies that are offered by CurrencyShares as ETF's and here is what I've found:

FXE, FXB and FXY seem to be the best candidates. Some of the others are interesting volatility wise, but will not work for RIC's.

FXA, for example, looks good on the surface volatility wise in the sense that you might get the required movement pretty easily, with a fair entry price vs. ROI. I just don't like the lack of volume.
Same with FXF and FXS. No volume to speak of in the options. FXCH and FXSG have no options at all.

So here's the trade. I am entering the 130c/131c/128p/127p Reverse Iron Condor expiring on April 20 for $.43
 

If I get filled for $.43 I will put conditional orders on each leg to close at $.85, or close to 40% ROI if the trade succeeds.

One of the good things I've noticed is that with other securities or weekly options, spreads this close have an entry price of $.55 or higher for 8 sessions worth of time. This trade has 10 full days of trading time for less than $.45.

I'll post how it turns out, as I may to this monthly, or will be adding FXB, or FXJ if the economic calendar of news so dictates.

As always, post any questions or comments you may have. I will be making an effort to post my trades and results on Twitter, so follow me @B50cal1978 for the latest.

Also, what I do is for the purposes of stimulating conversation, and the exchange of information and is not a recommendation in anyway to enter into any trade of any security mentioned.

May the profits always find you,
STT

Friday, April 5, 2013

All Systems Go

To get real time updates, and see when a new article is posted, Follow me on twitter @B50cal1978

Not a bad trading week for the Small Time Trader. Here's what happened while I was at work:

My Apr 5 '13w Reverse Iron Condors in Apple and Citi both closed at a profit. On my RICs I close the profitable leg, and let the losing leg expire to save on commissions.

Citi was opened at $.54 on the 28th of March, and closed on the 3rd of April for $.85. Here's what the closing transaction looks like:

 
After paying $229 to open, we closed for $323.85, a close to $90 profit in 5 days over a shortened trading week.

Apple on the other hand was opened for $3.20 on 28 March, and closed manually on the 4th of April at $5.89. I had to close manually on Thursday 4 Apr, because I was not sure that the trade was going to stay in the money based on pre-market movements. Here's the closing transaction:



After paying $330.75 to open, we closed for $577.46, a $246.71 profit in 5 days.

One of the reasons that both of these worked out so well, was that one day of premium was missing from the entry cost of the trade due to the easter weekend, so both of these cost less to enter than normal.

I was intending to roll both of these positions over to the closing week of 12 Apr, but I was only filled on AAPL. The price to enter C this week was more than I felt comfortable paying.

For this week I entered the AAPL 12 Apr '13w 440c/455c/420p/405p at $5.15 with a conditional order to close either winning side of the trade at $9.00.

On the Forex front, my CCI breakout strategies on the hourly charts went my way this week, even though it was looking rough at the beginning of the week.

I added GBP/USD to EUR/USD and USD/JPY. Here are the charts and the reports. Some of the entries and exits for the beginning of the week don't show on the screen caps, but they were all red anyway as you'll see in my weekly report.




As you can see, the Dollar's breakout against the Yen was the best performer by far with 207 pips captured by the strategy. This trade alone made this a profitable week. Toward the end of the week, the Dollar went the other way, declining against both the Euro and Cable on a poor Non-farm payrolls number.
The Euro and Cable positions are rolling over to next week, and will depend on opening gaps to see if they will close at a profit or not.

Here's the Profit and Loss for this week for the 3 strategies. Starting with $145.44, and ending at 159.6.


As always, comments and questions are always welcome.

STT