Monday, October 25, 2010

10/25 Daily Summary

We went beyond my 2120 area and I added the extra long NOV call as planned, the contingent orders triggered and now the trade is back to B/E, I usually try and avoid using this long call if the market goes straight down from my entry then great, if we bounce up a bit then I get the extra long to reduce my delta exposure, that is the case this month. Game plan updated accordingly


Manuel said...

Been seeing a lot of days where the price action has been going up but the volatility is following suit instead of going down. I started trading the RUT for a few months now. I love the butterfly trade now was a condor fan. You're blog has really given me more confidence in my trading. It is nice to see someone doing this with the monthly income trade mentality. Kudos to you!

Anonymous said...

Why did you adjust with a Nov. call as opposed to a Dec.. With the Vols
on the low side wouldnt this be more
beneficial. It might cost a little more but dont you get more theta and reduce your vega more in case of a down turn?

Gustavo's Trades said...

Hey, two comments in a day, that is a first.. First of all, thank you for posting your feedback and questions, I really appreciate it.

Manuel, I'm glad the blog is helping you with your trading, I am a huge fan of butterflies, and just like yourself I started with trading condors.. I did a full round and traded a bunch of different strategies (see the posting on those on the blog) to finally settle down with the one that best fits my style.. Once you find that, just stick with it and the results will show.

Regarding the adjustment with the NOV call: In reality I didn't consider this first move an adjustment per say.. I Consider this part of my initial position, I just don't enter it right away because I like to give the market a chance to give me a gift right away.. Say we backed off from here, I would be getting in profits much sooner.. Since we bounced up, I then place the last step on my entry game with the long call to cut the deltas in 1/2.

Why not starting with a DEC call? That's what I do if we keep moving higher or down from here, I don't use the DEC call on this first step because I usually leave this call there during the whole trade, so if I pay more for it, I lose more money by leaving it there. It could work either way I guess, as long as you get rid of the DEC call as soon as the market drops down and you're confortable it won't snap back up..


Gustavo's Trades said...

Ok, the second part of your question: "Wouldn't it (back-month call) reduce the vega more in case of a down turn?".. This is all relative, the back-month options don't behave exactly the same as the front-month options, so while in your TOS it shows you get a better vega hedge, in reality, when volatility spikes, it will spike more on the front-month and less on the back month.. So, the "apparent" extra protection turns out to be a wash at the end of the day.

There is a complicated name for this vega behaviour, I rather keep it simple: if vols are up 2% on your front-month, it is likely they'll be up about 1.5% or so on your back month, this is not taken into account when you see the whole greeks on the position..

I hope this helps.