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.

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

TastyTrade - Game Changers

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.

TT - WDIS: Strategy Checklist, 12/06/13

TastyTrade - Where Do I Start?

TT - BP: Trade Parameters, 11/25/13

TastyTrade - Best Practices

• Strangles and Theta Decay - 8/8/13
• 15 or 45 Days To Expiration - 10/14/13

TOS Tip: Adjusting Cost Basis in TOS Risk Profile

11/24/13

When analyzing a position with Thinkorswim's Risk Profile it isn't accurate if you modified the original trade by rolling, closing half an iron condor, etc. For example, below is the risk profile for a current position in JCP.

• BTO +10 Jan14 11 C
• STO -10 Dec13 8 P

It shows I am currently up $170, with a max profit of $190 at Jan expiration if JCP stays between 8 and 11. This is confirmed by checking the closing order, which would be a debit of $20. However, TOS is ignoring my original trade and that I rolled the short puts.

TT - MM: Scaling into Strength, 11/22/13

TastyTrade - Market Measures

Take-away:

If we enter a trade based on high IV Rank, and the IV Rank continues to rise, does this warrant scaling the position by selling more premium?

• Entry: past 5 years in FXE, IWM, and TLT
• IV Rank > 50%
• Sell 1SD strangle w/45DTE
• If IV Rank increases by 10 (say, from 55% to 65%) sell another 1SD strangle

• Results: In these non-stock (indexes) examples it paid off 28 out of 29 times to scale in.

TT - MM: Duration and Volatility, 11/18/13

TastyTrade - Market Measures

Take away:

• Entry: IWM, XLE, EEM, GLD, and EWZ
• Sell 1SD strangle when IV Rank crosses above 80%
• Compare 18 DTE and 45 DTE
• Exit: Manage trades at 25%, 50%, and 75% of max profit
• Compare to staying in until expiration

IV Rank Strategies

High IV Rank - over 50%

• Sell premium and bank on vol contraction
• Short OTM credit spreads
• If bullish, short put spreads
• If bearish, short call spreads
• If neutral, short strangles and iron condors

Low IV Rank - under 50%

• Buy premium and bank on vol expansion
• OTM debit spreads have negative time decay!
• Buy ATM debit spreads for less than intrinsic value to see positive theta

TT - MM: High Probability Strangles, 11/15/13

TastyTrade - Market Measures

Takeout:

When making high probability trades in large indices with high IV Rank, how do we manage winners based on P/L per day?

• Entry: 5 years in SPX, NDX, and RUT
• IV Rank above 50%
• Sold a 2SD Strangle (97.5% OTM)
• Exit:
• 25%, 50%, and 75% of max profit
• Compared to closing day prior to expiration to avoid assignment

• NDX had highest P/L-per-day at 25%
• RUT had highest P/L-per-day at 50%, but only slightly more than at 25%
• SPX had highest P/L-per-day at 25%
• Short strangles tie up lots of capital so managing winners at 25% returns the highest P/L-per-day and reduces the number of days in trade
• If you don't need to free up the capital, let these high probability trades run!

TT - MM: Chicken Iron Condors, 11/14/13

TastyTrade - Market Measures

Take-out:

This strategy only works at earnings and for high priced stocks. For lower priced equities the short strikes get too tight and it's hard to collect enough premium.

• Entry: 2 years in AAPL, NFLX, AMZN, GOOG, and MA
• High IV Rank (above 50%)
• Sell iron condor 1 day before earnings
• Compare:
• Collect 45-50% of the width of the strikes (risk = 50-55%)
• Collect 33% of the width (risk = 67%)
• Sell shorts at 1SD (risk = 84%)
• Exit:
• Close (BTC) 1 day after earnings

Note: Increasing the credit taken in reduces the risk (possible loss) but also decreases the probability of success.

When used in the appropriate situations this strategy outperformed the 'standard' strategies in P/L, drawdown, and expected winners. Collecting 50% of the strikes should have resulted in a 50% success rate and yet was actually profitable 60% of the time. (1SD iron condors have an expected success rate of 68.2% while the 33% trades should win 67% of the time)

TT - MM: High IV Rank Occurrence, 11/11/13

TastyTrade - Market Measures

• High IV Rank Strategies:
• short strangle
• short iron condor
• short iron butterfly
• short vertical
• naked put
• Low IV Rank Strategies:
• put debit spread (ITM/OTM)
• calendar
• double diagonal

How often does High IV Rank occur?

TT - MM: IV Rank and Managing Winners, 11/06/13

TastyTrade - Managing Winners

Carry-out:

• Entry: look at AAPL and GOOG back to 2008, PCLN back to 2010
• High IV Rank (> 50%)
• Sold Big Boy Iron Condor w/45DTE
• Short strikes at 84% OTM
• Wings are 20 points out ($20 spreads)
• Exit:
• 25%, 50%, and 75% of max profit
• Compare to holding until expiration
• If target wasn't reached the position was held until expiration
• Determine drop in IV Rank over length of trade

• Close at 25% to maximize P/L-per-day and free up capital
• Close at 50% to maximize P/L and reduce losers
• No reason to hold longer (unless perhaps IC is centered and POT of shorts is very low)

TT - MM: Iron Condors - How Much Premium, 11/05/13

TastyTrade - Market Measures

Carry-out:

• Entry: look back 5 years in AMZN, GOOG, and SBUX
• High IV Rank (> 50%)
• Sell Iron Condor w/45DTE:
• Collect 33% and 45% width of the spreads
• Compare to 1SD IC
• Exit: hold until expiration

• The risk on an iron condor is inversely related to the reward (credit taken in).
• During high IV rank the 1SD strikes are too conservative and carry too much risk in extreme cases.
• Sweetspot for high IV Rank Iron Condor:
• IV Rank above 50%
• 45DTE
• 45% Credit

TT - BP: Volatility Expansion, 10/28/13

Volatility

• Q:  What does Implied Volatility (IV) represent?
• A:  IV represents a 1 Standard Deviation (1SD) move in the underlying for the next year. It is displayed as a percentage, meaning if AAPL has an IV of 0.3 then a 1SD move would be 30%. If AAPL is currently trading at $500 then it would have an expected move of +/- $150.

• Q:  Can IV be used to estimate moves of an underlying on a shorter time frame than 1 year?
• A:  Yes.  1SD Move = Price * IV * SquareRoot(DTE/365)

Using the above example of AAPL, the expected 1SD move in one month would be:

500 * 0.3 * SqRt(30/365) = $43

• Q:  What is the relevance of a 19.1% IV?
• A:  A 19.1% IV represents an expected move of 1% per day. Twice that IV, or 38.2%, means a 2% expected daily move.

• Q:  What is Realized Volatility?
• A:  Realized Volatility refers to the actual move of the underlying.

If AAPL (trading at $500 with an IV of 0.3) moves $100 in one year then its volatility is 0.2 (100/500) or 20%.

• Q:  What is IV Rank and how is it used?
• A:  IV Rank (or IV Percentile) shows where the IV currently sits in relation to a specific time period (usually one year). We have seen that IV is consistently a mean reverting metric and IV Rank allows us to capture this, putting it on a comparable scale. We look for underlying with high IV Rank to sell premium.

• Q:  What is the significance of Implied Volatility for each option expiration cycle?
• A:  The IV on a specific option cycle represents the given IV for that time period (expiration cycle). The IV on any given option chain will often appear similar to one another and the overall IV of the underlying. A vol discrepancy will often appear on the closest expiration after binary events, such as earnings.

• Q:  What is vol skew?
• A:  Vol skew refers to the fact that volatility and velocity is greater to the downside. Skew builds extra premium into the OTM put when compared to the equivalent OTM call. For this the options pricing model is based on a lognormal distribution, as a stock price cannot fall below zero.

TT - MM:Directional vs Skewed IC, 09/16/13

TastyTrade - Market Measures

TT - MM: Managing Winners - High IV, 9/09/13

TastyTrade - Market Measures

Take-away:

• Entry: past 5 years in AMZN and BIDU
• Sell 1SD Strangle w/45DTE
• IV Rank > 50%
• IV Rank > 75%
• Exit:
• Close at 25%, 50%, and 75% of max profit
• Compare to holding until expiration
• If target % is not reached hold until expiration

• Waiting for 75% IV Rank greatly increases the average P/L-per-day.
• Holding until expiration did not return the highest profit and was nearly the lowest average P/L-per-day.

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)