TT - KYO: AAPL Calendar, 02/24/14

TastyTrade - Know Your Options

LIZ & JNY explain how a calendar in AAPL works.

What is a Calendar spread?

1. You sell the front month and buy the back month of the same strike.
2. Since you are buying the more expensive option, your risk is the debit that you pay.
3. Make sure your debit is less than the value of the short option, as this is used to forecast the future value of the Calendar.

How do Calendar spreads make money?

1. IV increases, or
2. The underlying moves to your strike at expiration, or
3. Time passes without the underlying moving.

• Calendar entry criteria:
• Low IV Rank!
• Open on Monday following monthly expiration Friday.
• Front month DTE should be around half of the back month DTE.
• Generally choose the first OTM strike.
• You want the underlying to go to your strike, but not through it.
• If it does you should close.
• Exit:
• Home Run: at expiration the underlying is at your strike, and you close out.
• Foul Ball: the underlying moves far away from your strike by expiration. Close out if your strike gets passed by.

TT - MM: VIX Saved the Cat, 02/21/14

TastyTrade - Market Measures

Is there a correlation between the price of the VIX and being short premium?

We looked at the daily closing price of the VIX between 2005 and 2013 and bucketed the results annually with VIX above and below 15.

TT - GC: Cheater Math, 02/20/14

TastyTrade - Game Changers

Equation to calculate the expected move of an underlying:

    1SD move = Price x IV x SqRt(DTE/365)

Cheater Math for 1 day expected move:
    1SD move = Price x IV x 5%
    2SD move = Price x IV x 10%

Example of 1 day move in SPY: Price = 183.02, IV = 15%:
    183.02 x 0.15 x 0.05 = $1.37 (1SD move)
    183.02 x 0.15 x 0.10 = $2.75 (2SD move)

TT - MM: Desperado, 02/20/14

TastyTrade - Market Measures

During periods of extended rallies and low IV we may look to trade calendar spreads. With a directional bias, we wanted to test how lower probability calendars compared to ATM calendars as well as put debit spreads.

We tested downside put calendars into up moves (up 5% in two weeks) over 5 years in IWM and EWW.

You can easily see that buying a calendar that is 1 strike OTM outperforms the other "cheaper" calendars.

SLM Ribbon

The TastyTrade SLM Ribbon is a study set consisting of 3 exponential moving averages: 8, 13, and 21 days.

• Bullish open signal:
• 8-day EMA cross above the 13-day EMA
• 13-day EMA above 21-day EMA
• Open above 8-day EMA (more conservatively: complete candlestick above 8-day)
• Bearish close signal:
• Close below 13-day EMA
• or, 8-day EMA cross below 13-day

TT - GC: Randomness and Candlestick Patterns, 02/13/14

TastyTrade - Game Changers

NFLX Pre-earnings Strangle

1/28/13

• Selection criteria:
• Underlying must normally experience a 2:1 volatility expansion prior to earnings
• Trade:
• 14 days before earnings (10 trading days)
• BTO a Strangle (long Call + long Put) at .10 delta
• STC day before earnings

NFLX last reported earnings on 1/22/13 after market close. On that day the Jan4 options had the highest IV at 149%. Using thinkBack we can buy a strangle on 1/8/13 when the Jan4 options had an IV of 75%. The .10 delta points to the 280P and the 425C.

Karen the Super Trader notes

1/21/14

Notes from the first 2 TastyTrade videos featuring Karen the Super Trader.

2007 - $100,000
2008 - $150,000 : 50% return!
by 2011 - $41million (includes additional capital)

Transition to success:

• Stopped trading stocks (50/50 proposition)
• Stopped trading earnings plays (got burned too many times)
• Slowly migrated from stocks to indexes
• Prior to 2009: iron condors and credit spreads
• Beginning in 2009: naked options
• Started shorting premium

VIX vs VXX, UVXY, VXZ, XXV

VIX

• A measure of market expectation of S&P 500 volatility over the next 30 days
• Simply: it measures how much people are willing to pay to buy or sell the S&P 500
• If people are willing to pay more it represents uncertainty in the market
• Counter index: when the market goes down the VIX usually goes up (and quickly)
• A bullish outlook in the VIX is a bearish outlook in the market
• No Underlying, therefore cannot own
• Cash settled
• No bid/ask
• Different expiration dates
• Option premiums are based on a future price, not the current market price
• Future value is close to where the calls and puts are priced the same
• Never trade a calendar in the VIX, what you pay/risk up front is NOT what you can lose

VXX

• An exchange-traded note (ETN) that holds a long position in first and second month VIX futures contracts that roll daily
• Trades like a normal product since it has an underlying that you can own
• Same expiration dates as other equities
• Short-term, not buy-and-hold; long-term holders will experience time decay
• Be more aggressive when closing/rolling
• During periods of low volatility VXX often trades higher than it otherwise should (pricing in an expectation of increased volatility)
• During periods of high volatility it often trades lower than it should (pricing in an expectation of a return to lower volatility)

UVXY

• Trades like the VXX but is double leveraged (Ultra)

VXZ

• Structurally similar to the VXX, but it holds positions in fourth, fifth, sixth and seventh month VIX futures
• Much more a measure of future volatility and tends to be a much less volatile than the VXX

XXV

• Looks to replicate the performance of shorting the VXX

TT - MM: IV Scaling Management, 01/06/14

TastyTrade - Market Measures

Take-away:

• Study: 5 years in IWM, TLT, FXE
• When IV Rank was above 50%:
• Sell 1SD strangle with 45 DTE
• When IV Rank increased by 10:
• Sell an additional strangle
• Compare the results:
• Manage winners at 25%, 50%, 75%
• Hold until expiration

Scaling into a position when IV Rank increases always paid off, with the average P/L per day being greater. Once again, managing winners is more profitable per day, as opposed to holding until expiration.