Small caps are giving me butterflies! RUT

Happy New Year Traders!

After the FED inspired exuberance in the last half of the month of December, I felt I should get a little short.

 To act on this, I entered an Unbalanced Broken wing Butterfly in Russell 2000 index options (RUT).

This is a way for me to short RUT with some upside protection. For February 20 expiration, I bought one 1250 call, sold 3 1270 calls, and bought 2 1350 calls to define my risk. The short calls are sold at about 5% higher than where RUT is trading currently. The spread was sold for a net credit of $10.15.

I sold the spread for a pretty nice credit, but 50 days to expiration is pretty far away. I think that it is in the realm of possibility that RUT could very well move up that 5% before expiration.

One of the reasons that I like Broken Wing Butterflies, and more particularly the unbalanced kind, is that if I'm wrong, and RUT expires at the 1270 strike, the net credit on expiration will be in the neighborhood of $25.00. This far exceeds my income expectation on this trade and would be a bonus. The worst case scenario for this structure is if RUT runs up 5% very quickly in the new year. The expiration break even is 1285 for this particular butterfly, and if that level is touched, I will close the trade.

 

Ok, so looking at the P&L chart above, it could cost as much as $32.00 to close the Unbalanced Broken wing Butterfly at 1285 before expiration. This is more risk than I am willing to bear. Enter the hedge: An out of the money butterfly in RUT.



 

I spent quite a while trying to find call debit spread structures in IWM, the Russell 2000 ETF, that satisfied the purpose of a hedge, and I couldn't find one. I was initially wanting to use IWM, because if I came up with a structure that used the same strikes as the trade above, I would still be able to enter. What I ended up settling for as my hedge is the 1260/1280/1300 call butterfly expiring in February monthly cycle. If my short term negative opinion on RUT doesn't play out I am going to buy 2 butterflies to hedge my UBWB. If RUT blasts off 5% these butterflies will allow me to close at 1285 with much lower losses than I other wise would be able to.

So, here's the skinny. If RUT is weak when it opens on the 2nd of January, I will just close the UBWB if I can close at $4.85 or better. If not, I will buy the OTM Butterfly hedge, and I will be in the trade for the long haul. The UBWB is a negative delta trade that benefits most when RUT declines. The double edge on that sword is that the UBWB can go far in the red very quickly to the upside. The purpose of the hedge is to nullify that delta somewhat without giving up the income side of the trade.

If you have any questions or comments, don't hesitate to ask in a comment below.

I will update the status of the trade here periodically. Follow me on Twitter @B50cal1978 as I post updates there as well. Don't be afraid to check out my sponsors below and to the right.

Wishing all of you and your families the best in the New Year!

STT

Damsel in Distress! RSX

Good Day Traders,

What an interesting week. WTI Crude dropped and then bounced into the end of the week. There was a continuation of the collapse in the Russian Ruble, and then the FED came in and blasted every index short out of the water.

In the midst of all this, I found myself at the end of the week positive in all of my short index volatility positions, and I was able to close a long trade in RSX. I am still inside out on my short position in Oil volatility via OVX, but I still have time for those to play out.

As for RSX, I had a trade earlier in the year that I though I would take a shot at repeating.

Mother Russia is my Damsel in Distress.

Above is a one year chart of RSX. The highlighted area is from March of this year. What prompted me at the time to want to take a long position in a down trend, was that the collapse of the Russian stock market at the time became a front page news story in non-financial media. I took a small long position by selling a put spread to buy calls. I was able to close the trade a couple of days later with a profit.

Fast forward to November... Whenever financial stories become part of the approved AP drivel that's allowed to be discussed in mass media, I get curious. It seems that nobody is better than calling a bottom in securities than ABC.

After this last severe downdraft, concurrent with the slide in the price of crude oil, the Russian economy again became approved by the AP as a disaster story drama piece for American consumption. Here's How I played it:

I sold a put spread far out of the money to finance the purchase of an at the money call. I did not know for sure when the bounce would come, but I was pretty sure that it would. I entered the trade with the options expiring in 13 months on January of 2016. There was a ton of liquidity the night I placed the trade, even in the LEAPs. I placed the trade on a single entry ticket to reduce commissions and because the spread combined on all three legs of the trade was around $.05. I got filled 2 cents below mid prices the second I clicked the mouse.

My primary risk management in this trade is duration. I had 13 months to be right, I just chose to close it in three days. The trade concept is entirely speculative based on anecdotes in mass media. The execution is based on what looked like capitulation to me on December 15 on the RSX chart, characterized by 2.5 times the average volume, and the gap down over the previous session.

So in summary, Long RSX for $1.80 on 15 December, closed for $3.40 on 18 December, thus rescuing my Damsel in Distress.

Good luck trading next week to everybody, and happy holidays to you and your families.
STT

Why you gotta be so Crude?

Good Morning Traders,

In my eternal search for volatility to sell, the extreme move down in crude oil futures and related products has not gone unnoticed. Over the last week or so, I've been going through different ways to capitalize on a decline in Crude Oil volatility as the holidays approach, and into the new year. I looked into different possibilities with USO and I couldn't find a trade that worked for me because of the very low price of the USO ETF currently. I have been surfing the CBOE Options Hub lately, and now I have a plan.

My basic thesis is that current implied volatility in the USO is way higher than historical norms, and that volatility will abate in the coming months creating an opportunity to profit from this anticipated decline.

Behold the OVX. In short, his is a volatility index that seeks to track the volatility of the USO ETF. The options on OVX are cash settled, European style options. This is a benefit to me over USO because there is no risk of early assignment if things don't go my way.

My plan is to sell a 32.5/42.5 call credit spread in OVX in the February 2015 expiration cycle. I am shooting for a credit of $2.40. The total risk on this trade would be $7.60, and my break even level at expiration would be at $34.90 in the OVX. I am choosing the February cycle because if I am wrong, I have a whole lot of time to adjust, roll or otherwise manage the capital involved.

Drop comments or questions if you so desire. I will update the progress of this trade and my others as they are filled or closed.

Good Luck!
STT

All That Glitters is Gold. GLD

Good Morning traders,

With this crazy rally off of the "V" bottom in the indexes, it has been a little difficult for me to find volatility to sell in the normal places I look. For most of my monthly income trades I use SPX options about 45 days out from expiration, usually placing a 10 Delta Iron Condor. With the VIX below 12, I am uncomfortable placing the put side because of how far and how fast these condors can go into the negative on even small moves down in the SPX. What I've done this month for the January expiration cycle, I've sold a 2150/2200 call spread in SPX for $3.15 at about a 20 Delta. My plan is to sell the second half of the Iron Condor before 9 Dec 2014 if I see a VIX print above 15. If not, I'll take profits on the call spread at %50 of max credit, and try again next month.

Here's what the above spread looks like:

Here's a post from Dana Lyons about "V" bottoms providing some context to the market we're in.

 

 

In an effort to find volatility to sell to keep my income goals on track, I went back into the play book for a trade that I made money on earlier in the year, and that I was reminded of by Dan Sheridan from one of his recent Youtube posts, an Iron Butterfly in GLD.

 

 

I sold this Iron Butterfly for $3.68, centered on the 115.50 strike expiring 26 Dec 2014. My target is 25% of max credit or $.92 by a pre-placed limit order. If I get anywhere close to the expiration break even points at 112 or 119, I will close and take the loss. If I am awake (I live in Japan) and I am up more than $.58, I will manually close and take profits at that point. I want to be out of the trade ASAP.

 

While the implied volatility at the time of sale was high compared to historical volatility, thus providing a high credit, the recent propensity of GLD to swing wildly is also the greatest risk in this trade. Though the options expire on the 26th of December, I ideally want to be out of the trade in 7 days or less. The Vega for the trade as I type is -98, and the Theta 33. I am looking for volatility to contract to get me out as early as I can.

If you took the time to read this far, please drop a comment or a question. I enjoy questions and engagement from other traders who do these kinds of spreads or are trying to learn.

Thanks for your time,
STT