TT - MM: Managing Winners, 08/29/13

TastyTrade - Market Measures

• The trading industry tells us to always manage our risk.
• If everyone is always managing their risk, and no one is making money, how does managing our risk work?
• Screw managing risk! Let’s just manage our winners!

• Underlying assumptions could be about the stock, the stock’s volatility, or the sector.

• If I've made 50% of my potential in one day then it makes no sense to hold for 39 more days.
• If I've made 60% of my profit with 50% of the time remaining I should probably cash in.
• Underlying conditions:
• If I'm short premium and premium starts to increase...
• If I'm short delta and the market starts to rally…
• Overall portfolio: How is my P/L?

• If we've made 90% with 2 weeks to go it makes no sense to stay in.

• A 1 standard deviation strangle has a 32% chance of losing and a 68% chance of staying between the strikes and expiring.
• (Shorting a strangle is a naked position and therefore carries a large margin requirement.)
• TastyTrade video: Standard Deviation 1 from 18-Jun-2012 (starts at 2:00), or YouTube.

• SBUX, AAPL, NFLX: all had monster runs, one way or the other in the past 2 years.
• AAPL and NFLX had exaggerated moves in both directions.
• SBUX had one-way move up.
• We chose a strangle which in reality wants a stock to stay within a specific range.

• Suppose you sold a SPY strangle for $1 and bought it back when it dropped to $0.75, it would have been profitable 100% of the time. (.25 net out of 1.00 potential)
• Holding until 50% profit only lost once and produced both higher profits and profits per day.
• Holding out for more than 50% produced more losers, a negligible increase in profits, and a lower average profit per day.
• Therefore, optimal target % was between 25 and 50% of maximum potential profit.
• Avg. P/L per Day = (P/L) / (avg # of days held) / (24 cycles)

TT - KYO: The Greek o' the Week is Vega, 08/19/13

TastyTrade - Know Your Options

Vega shows how much an option will gain or lose for every 1 point change in volatility. The ATM strikes will have the greatest Vega, while the shorter expirations will have the least.

In the table above, the Sep 148 Call and Put both have a Vega of .17. If the IV increased from 13.87% to 14.87% then the 148 Call and Put would both gain .17 in extrinsic value. Likewise, if IV were to decrease to 12.87% then they would both lose .17 in extrinsic value.

Vega plays an important roll in Calendar spreads where we sell a Call or Put in the front month and buy the same option in a later month. Since Vega is always lower in the front month, an increase in volatility would help our long position more than it would hurt our short position. A Oct/Sep 148 Calendar would gain .07 (= .24 - .17) if volatility increased by 1. Conversely, a decrease in volatility would hurt the long position more than help the short. The same Oct/Sep 148 Calendar would lose .07 (= -.24 + .17). For this reason we should only trade Calendars when IV is likely to go up.

How do Calendar spreads profit? The Sep options expire in 32 days while the Oct options expire in 60. So, we can estimate that at September expiration the Oct options will be worth what the Sep options are worth now. Thus, we can estimate that when the Sep 148 Put expires, the Oct 148 Put will be worth 1.50. If we were to pay significantly less than 1.50 for the Calendar then we should be able close it for a profit in 32 days.

Here we can see that we can BTO the Oct/Sep 148 Put Calendar for .96. Since it could be worth around 1.50 at September expiration that gives us a profit of .54 and a ROR of over 50%!

TT - MM: Standard Deviation and IV, 8/12/13

TastyTrade - Market Measures

What is Implied Volatility? IV represents a 1 Standard Deviation move (1SD) in the underlying for the next year.