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.

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.

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

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: 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)