TT - Trading Guidelines (notes by Doug W)

All below from TT Market Measures episodes, except where noted:

Strategy Selection (Sosnoff recommendations) - 19 JUL 2013

When IV Rank is high, strategies to consider:

·         Sell Strangles (higher return on capital with less capital)

·         Sell Iron Condors

·         Sell Iron Fly

·         Sell Verticals

·         Covered Calls (higher return on capital with less capital)

·         Naked Puts (higher return on capital with less capital)

In low IV environment, focus on underlyings with high IV and widen out strikes.

If IV Rank is low, strategies that benefit from volatility expansion are:

·         Double Diagonals

·         Pair trades (allows to extend duration while reducing the risk)

·         Bearish directional

·         Debit put spread (ITM/OTM)

POP and ROC considerations:

Place high POP trades while attempting to maximize ROC.  Weighted average of portfolio POP of around 65%-75%.

(Where Do I Start) Strategy Checklist  - 6 DEC 13

Jade Lizard Entry:

Market Very high IV and/or VIX

Stock high IV Rank and low basis. showing oversold

Nearest OTM Put, then Call spread based on premium to cover spread

DTE closest to 45

Jade Lizard Manage:

Close between Put and Call side with 50% max profit

Adjustments only go against Put side

Chicken Iron Condor Entry:

Market High IV and/or VIX

IV Rank over 50%, nearest OTM Strike prices to give you about 45%/50 reward/risk

DTE closest to 45

Chicken Iron Condor Manage:

Close between 35% - 45% max profit

Adjustments not likely - best to let go to expiration for high likelihood of managing a winner

Ratio Spread Entry:

Market Very high IV and/or VIX

Stock high IV Rank

ATM or Nearest OTM strike to buy and , then sell OTM (2) Call/Call - Put/Put

DTE closest to 45

Ratio Spread Manage:

Close with 50% max profit

Adjustments - buy the synthetic short OTM option

(e.g. stock @ 100 and you buy 105 Call (1) and sell 110 Call (2) - if stock goes to 110 ,you buy the 115 call to make a butterfly (easiest adjustments)

Calendar Spread  Entry:

Market low IV and level of markets not important

Stock low IV rank and lots of liquidity (front and back month) with NO binary inversion (event coming up so volatility is negative against you) OTM Strike prices (usually nearest or next nearest) to give you about 35% Prob ITM (down for bearish (index)/up for bullish (stock) because of vol skew

DTE closest to 15-23 in front month and 45-55 in back month

Calendar Spread Manage:

Close near 50% of what was paid for the trade

Adjustments are none, unless two or three month spread and roll in there

(Where Do I Start) Understanding Defined Risk Credit Spreads and ICs  - 9 DEC 13

Improve Prob of Success or increasing risk?

Increase Risk ( also increases profitability):

Move closer to ATM strike

Collect a bigger credit

Short duration

Increase Probability of Success (of actually making any money):

Move further away from the ATM strike

Widen the spread strikes

Collect a smaller credit

Lengthen duration

How do we choose underlying to trade - 18 JUL 13

Common themes in developing selection strategy:

·         Maintain a list of 30-50 liquid products

·         Build a sense of market awareness by monitoring these products

·         Look at IV, IV range, liquidity, binary events (earnings), and price weakness or strength

·         Consider existing portfolio, as well as overall market conditions

IV is important statistic - compare IV to overall market and correlated products

IV Range - current value to its high and low - look for high in range for a mean reversion

Liquidity - Most efficiently priced options; ease of getting in and out.  High open interest and tight bid/ask are key indications of liquidity

Earnings/Binary Events - use for trading potential, but limit the number simultaneously.  Events have significant impact on IV and theta decay.

Weakness/Strength - buy into weakness and sell into strength.  Price action of underlying to assist in underlying selection process.  Also consider Vol strength and weakness,

Underlying Selection - highly liquid and familiar stocks, turning to absolute IV and IV Rank for potential trades, governed by high POP and plausible ROC.

High IV Rank Occurrence - 11 NOV 13

5yr study (13 underlyings - see chart below) checking how many crossed over 50% IV Rank

to determine available trades

Ave # of underlyings w/IV Rank>50 entry point was 5.07 per month

Take away:         If using 50 underlying in your list, a trade for high IV Rank strategies can be found each day…

Managing Winners - High IV - 09 SEP 13 (High IV Trades)

5 yr study (BIDU, AMZN) comparing 50% vs. 75% IV Rank trades

Sold I SD Strangle closest to 45 DTE and taking profits @ 25%/50%/75% of max profits/Exp

Take away:

@ 50% IV Rank, best profit @ 25% max profit

  @ 75% IV Rank, best profit @ 50% max profit - 100% winners

BIDU @ 50% IV Rank - $2489.50 // max P/L per day @ 25% max profit // ave. hold pd of 16 days (19/20)

BIDU @ 75% IV Rank - $3491.00 // max P/L per day @ 50% max profit // ave. hold pd of 19 days (9/9)

AMZN @ 50% IV Rank - $3394.50 // max P/L per day @ 25% max profit // ave. hold pd of 15 days (20/20)

AMZN @ 75% IV Rank - $2932.50 // max P/L per day @ 50% max profit // ave. hold pd of 19 days (10/10)

Managing Winners - Contract Duration - 29 AUG 13 (High IV trades) -

2 yr study (SPY, SBUX, NFLX, AAPL)

Sold 1 SD strangle; trades placed 45 days to expiration and analyzing max P/L per day against max profit.  IV was NOT considered in trade.

Take away:

Where IV Rank not considered, results varied by underlying for best ave P/L in duration (btwn 25%-75%) This shows importance of managing winners regardless of IV Rank

SPY - best ave P/L per day @ 50% max profit of premium, but 100% winners @ 25%

SBUX - had more winners with less risk @ 50% although best ave P/L @ 75%

NFLX - best ave P/L per day @ 50% max profit

AAPL - best ave P/L per day @ 25% max profit

Best results selling high IV% contracts

Iron Condors: How Much Premium - 5 NOV 13 (High IV trades)

5 yr study (AMZN, GOOG,SBUX)

Looking for the strikes that offer best premium, to risk ratio for entry point

Looked for IV >50% with trades at 1/3 and 45% width of strike, comparing to 1SD

Trades placed as close to 45 days to expiration as possible.  Each trade went to expiration

Take away:

At IV Rank > 50%, Iron Condor best profits were at higher premium with higher IV ranks (e.g. going for it 45% of spread)

AMZN $1,717 Avg IV rank 67% highest profit @ 45% (14/17)  - SD of P/L $205

GOOG $950 Avg IV Rank 63% highest profit @ 45% (10/19)  - SD of P/L $358

SBUX $950 Avg IV Rank 64% highest profit @ 45% (13/17)  - SD of P/L $64

 note that GOOG had a loss at 1SD

Biggest loss was less for premium @ 45% width

Big Boy IC's - 26 SEP 13 (High IV trades)

2 yr study (SPX)

Analyzed varying OTM short strikes and widths on first of month

Trades placed 45 days to expiration

Limits risk of a strangle and allow for a substitute for retirement accounts

Take away:

Where IV Rank not considered, Big Boy Iron Condors @ 90% OTM w/20 pt wing made 23/25 good trades with $5,000 BP reduction/contract and better P/L values (for BP effect) than strangles

Managing Big Boy ICs - 15 OCT 13   (High IV trades)

5 yr study (from 2008) with AAPL, GOOG, 3 yr with PCLN 

Strangles highly favorable for premium sellers who look to sell volatility and are patient enough to collect premium through theta decay.  Some traders are not tolerant of such risk.

IV % (rank) crossed 50% - closest 45 DTE…

Each strike placed 1SD; wings placed 20 pts way

Held profits to 25%/50%/75%

Take away:

At IV Rank above 50%, Big Boy Iron Condor best P/L per day occurred primarily at 25% max profit with an avg hold pd of less than 15 days with very high percent of winners

AAPL $3,164,00 // max P/L per day @ 25% max profit // ave. hold pd of 13 days (22/22)

GOOG $2006.00 // max P/L per day @25% max profit // ave. hold period of 14.9 days (18/19)

PCLN  $1965.50 // max P/L per day @50% max profit // ave. hold period of 24.6 days (14/17)

Note: @25% PCLN had 16/17 winners for avg hold pd of 13 days at $3.39 vs. $4.70 per day @ 50%

Managing Big Dawg Butterflies - 29 OCT 13 (High IV trades)

5 yr study (AAPL, GOOG, PCLN)

Debit spread in anticipation of non-movement (price staying in a tight range).

Prior study showed high IV BDB trades were successful.

Setup:  Bought Call butterfly with short strikes nearest to ATM with wings approx at 16% and 84% OTM; entered trade closest to 45 DTE - and taking profits @ 25%/50%/75% of max profits/Exp

Take away:

With high IV Rank, Big Dawg Butterflies @ 25% max profits were best P/L per day trades between 23 and 32 days  (with GOOG showing loss in all other trades) Note: in 11 Dec 13 Market Measure episode, Tom Sosnoff prefers broken wing butterflies to regular butterflies (harder to make a profit)

AAPL $8,821 // max P/L per day @ 25% max profit // ave. hold pd of 20 days (20/22)

GOOG $3,647 // max P/L per day @ 25% max profit // ave. hold pd of 32 days (13/19)

·         Other durations for GOOG were at a loss!

PCLN  $17,332 // max P/L per day @ 25% max profit // ave. hold pd of 23 days (15/17)

Managing Jade Lizards - 22 OCT 13  (High IV trades)

(Study lasted 5 yrs with EWW, FXY, GDX) …over a bull market

1/3 width of strike on $1 call spread and sold corresponding put to bring credit over $1

Enter when IV rank crossed over 50

Take away:

At IV Rank above 50%, Jade Lizards best P/L per day occurred at 25% max profit with an avg hold pd of around 12 days with very high percent of winners Note that GDX was in a Gold bear market and still made profit, BUT only at 25% max profit

EWW $426.00 // max P/L per day @ 25% max profit // ave. hold pd of 11 days (14/14)

FXY $777.50 // max P/L per day @25% max profit // ave. hold period of 12 days (22/22)

GDX  $340.25 // max P/L per day @25% max profit // ave. hold period of 11.5 days (19/20)

EWW and FXY max profit is at 50%, but less profit/day

GDX only profitable at 25% (example of bear market move )

Selling Puts into Weakness - 07 OCT 13   (High IV trades)

(AAPL. BIDU, AMZN, AMZN)

(selling Puts in market drops are rich in premium)

 Trades placed 45 days to expiration

Take away:

If stock dropped 10% within two week period, then: 67% OTM Put yielded high returns with btwn 84%-100% wins 84% OTM Put yielded btwn 50-80% of returns at 67% OTM but at 100% wins

If stock dropped 10% within two week period, then:

67% OTM Put yielded higher returns btwn 84%-100% wins

84% OTM Put yielded btwn 50-80% of above returns at 100% wins

Long Puts LOST money

Selling into Strength - CALLS (AAPL, AMZN, BIDU) - 08 OCT 13

(selling Calls in market advances are cheaper than puts in weakness)

Trades placed 45 days to expiration

Take away:

If stock rose 10% within two week period, then: Call spreads were winners 55-67% 69% OTM Call yielded 66-80% wins but best profit 84% OTM Calls yielded 76-93% wins but less profit …so selling Calls into strength are not as profitable, nor high a percentage of success as selling Puts in weakness Note that BIDU lost money in all scenarios

BIDU LOST money in all scenarios…

Long Calls LOST money

Strangle Entry - 09 OCT 13   (High IV trades)

5 yr study (NFLX, BIDU) for high outlier moves to provide worst case results

High IV% of underlying w/enough premium to widen breakpoints

Also test premium collected to equal a certain percentage of expected move…

Example:  SPY NOV 1SD strangle - 173C/153P

·         NOV expected move is +/-8.68

·         Credit should be at least:  $1.73 ($8.68*20%) - both found on Nov options chain

·         Midpoint = $1.74

Credit is greater than 20% of the expected move…

IV% > 50

45 DTE

Sell 1 SD strangle

Collect (premium of) at least 20% of expected move

Take away:

With IV Rank >50%, found 1 SD strangle where premium collected is 20%.> than expected move (found on options chain) showed 100% success, but with few occurrences

Managing by IV Rank - 12 NOV 13

5 year study (IWM, XLE, EEM, GLD, EWZ) entry points crossing above 80% IV Rank on non-earnings plays!

Sold 1 SD strangle with near to 45 DTE as possible and mechanically managed only on volatility contraction.  Exited at 10%/15%/20% DROP in IV Rank, plus to expiration.

Take away:

With IV Rank >80%, found 1 SD strangle where premium collected is 20%.> than expected move (found on options chain) showed 100% success, but with few occurrences

Note that trades will typically not be exited only on IV Rank drop, if losers - as they will be managed for winners…  Sweet spot was in 15 pt drop.

(e.g. holy grail is waiting for extreme IV Rank - ave occurrence was one every other month)

Extreme IV Rank (percentile) - 01 NOV 13  (High IV trades)

5-Year study (AAPL, AMZN,YHOO, NFLX)

Higher IV allows us to collect a greater amount of premium, expand breakevens, and increase overall prob of success.  Impact of short premium selling at extremes (>95% and <5%)

·          

·         Entry when IV rank crossed above and fell below 95/5%

Sold 1 SD strangles, close to 45 DTE as possible.

Held trades through expiration without management.

Take away:

With IV Rank > 95%, 1 SD strangle held to expiration yielded 77.8% winders with an avg P/L per trade of $237.81 from avg premium collected of $4.78 Trades at < 5% had significant overall losses even though 72.9% were winning trades This was an academic exercise as winner management of trades are expected vs. running to expiration.

Defined Risks and Earnings - 31 OCT 13  (High IV Trades)

2-yr study (AAPL, NFLX, AMZN, PCLN, MA) on each earnings cycle

Binary nature of earnings announcement allows us to sell high IV, in anticipation of pending volatility crush.   Allows earnings plays in addition to regular portfolio.

Defined risk limits potential profits and reduce risk compared to undefined risk trades. 

Trades placed:

·         ATM Butterfly w/long strikes just outside expected move

·         IC - short strikes just outside expected move, 1 strike wide

·         Strangle - Short strike just outside expected move

Take away:

Earnings trades placed the day before with legs one strike outside expected move, (for ATM Butterfly, Iron condor, and Strangle), Strangles had the best overall profits and highest win rates.  Strangles had high profits and high win rates, but the highest losses in bad trades.   Earnings trades placed the day before with legs three strikes outside expected move, (for ATM Butterfly, Iron condor, and Strangle), ATM Butterflies had the best overall profits but at lower win rates.  Strangles had high profits and high win rates, but the highest losses in bad trades.   Iron Condors had better success and overall profits at the extended strike legs and less risk when adjusting contract size for similar premium to strangles

Improved risk variation: tweaked the short strikes by moving out an additional 2 strikes beyond the expected move.

Double Diagonals (when IV Rank between 20 and 50) - 30 OCT 13 (Med IV trades)

2 yr study (AAPL, AMZN, GOOG)

Bought a double diagonal on first trading day following expiration Friday. Selling a strangle in front month at roughly 75% OTM each leg and buying a strangle on next cycle one strike further out. DTE on front month was 28.

Trades on high-priced liquid underlyings. 

In periods of low IV, use debit and calendar spreads to take advantage of vol expansion.

Selling a front month strangle and buying a back month strangle.  Captures faster decay of near term option, while benefiting from increasing IV.

To complement a portfolio of short premium strategies, time spreads benefit from increasing volatility and can be an excellent way to balance overall vega.

Take away:

With IV Rank between 20% and 50%, Double Diagonal (per Tom Sosnoff’s criteria 1 SD strangle spread), provided 67% winners with good profits and biggest losses not much more than biggest wins.

LOW IV Trades: When IV Rank is near 0, then trade: debit spreads, calendars, and diagonals

Calendars Low IV - 9 DEC 13

2 yr study (SPY) in periods of low IV

Selling front month 20DTE and buying back roughly 45DTE

Managed trades at 25%/50%/75%/exp for idea exit point

Avg IV Rank 17.15; avg debit paid $1.18

Take away:

On calendars only profitable trade was 25% DB with 14/20 (70%) winners @ P/L $169 (not much); So must manage them aggressively. Based on his research, calendars don’t provide much return for the risks involved.

Avg days held 16.2; avg P/L per day $0.52

Earnings - Durations - 23 OCT 13 (Earnings Play - Vol Crush)

2 yr study (AAPL, AMZN, IBM, BIDU) take advantage of volatility crush 1 day vs. monthly cycle

Sold Strangle just outside the expected move on weekly cycle and closed the next day.

Move needs to stay within the breakeven points.

Take away:

On earnings selling strangles just outside expected move, typically 75% winners, but the amount of profit varied based on the underlying. Where monthlies were traded in lieu of weeklies, holding the trade (vs. liquidating after earnings announcement) would mitigate loss or turn into a gain

AAPL 75% winners with low profit over time (ave P/L $11.06, but -$1,843 is biggest loss)

AMZN 75% winners with better profit over time (ave P/L $250.81, and -$581.50 is biggest loss)

BIDU 75% winners with ok profit over time (ave P/L $79.76 and -$389.50 is biggest loss)

IBM 75% winners with ok profit over time (ave P/L $43.00 and -$297.00 is biggest loss)

Note: IBM was 2x more profitable using MONTHLY CYCLE, but P/L per day was less than 10%.

AMZN was 2.5X more profitable using monthly, but P/L per day was around 13% the binary trade.  For losing trades on binary even in IBM and AMZN, holding would improve loss or make a gain.  For others, holding would generate larger losses.

Buying vs. Selling: Earnings - 25 SEP 13

2-yr study (YHOO, IBM, GS, AAPL)

Sell GS ATM straddle was most profitable earnings play on weekly.

1 SD strangle was most profitable for GS and AAPL (GS had much less drawdown)

IV Ranks were in 50's.

Take away:

On earnings selling strangles and straddles had varying profitability based on the underlying.  GS proved to be a very high probability earnings trade for both the straddle and strangle trades. Buying always was a losing proposition.