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.

Iron Condor vs. Iron Chicken

1/4/14

The Liz & Jny breakdown on iron condors:

• Iron Condor
• High IV Rank
• 45 DTE - No earnings
• Collect 33% - 40% of the width of the strikes
• If the strikes look "too close" then they probably are
• Iron Chicken
• High IV Rank
• Earnings, with High vol diff
• Collect at least 50% of the width of the strikes
• If the strikes look "too close" then they probably are

Simple decision tree:

• High IV Rank?
• YES: Earnings?
• YES: Iron Chicken
• NO: Iron Condor

TT - MM: Managing with IV Rank below 50, 01/03/14

TastyTrade - Market Measures

Normally, we manage our winners and exit our trades when we realize a certain percentage of our maximum potential profit. Assuming we entered a trade based on high IV Rank, what if we were to exit based strictly on vol contraction?

By the time IV Rank drops 30-40 points, so much premium has been pulled out of the options that it doesn't pay to stay in. If you averaged $3.69 for the first 25 days, and $3.18 for the entire 43 days, then a little algebra reveals that you only averaged $2.47 for the remaining 18 days. You'd be better off closing when the IV Rank dropped below 50 and redeploying the capital in another trade.

It also appears to be profitable to exit even sooner if the IV Rank drops 15 points or more soon after entering the trade. It is important to note that was a purely mechanical study. They closed the trades regardless of whether they were winners or losers. Perhaps even more profit would have been gained by not closing the losers until they became profitable.

End of Year Accounting

1/2/14 - Happy New Year!

While watching Swim Lessons today I learned something new and useful. Now that it's 2014 you may have noticed that the year-to-date totals on your TOS Account Statement have reset. Here's an easy way to look back at 2013.