Saturday, January 7, 2012

01/06 Weekly update

This week's update will not have any of the charts, we just moved to South Florida and have no Internet connection as of yet. The IBM calendar seems to have moved very little, I have a feeling a lot of the volatility was taken out of the position Friday. I'm still learning how the calendars work, most of the P/L is driven by volatility on the back and front month option contracts, so it is still a learning process for me, that being said, my guess is that if one had entered a calendar during the last minutes of trading on Friday, he/she would be likely to see profits on Monday, I'll study to see how this works out.

For now, the first week of the year was not very active, the market seems to have moved very little, let's see if we find some stability for a change.



Anonymous said...

Hi Gustavo,
I'm glad your move is a success, and welcome back to Florida. If you drove from California, you might have passed right by us in Oklahoma. Maybe your stuff passed us by in a truck.

I researched calendars quite a bit 18 months ago. I was intrigued after watching one of Dan Sheridan's free webcasts and he said something to the effect of "losing on a calendar spread is like being bit by Lassie, but losing on a credit spread can be like being bit by a pit bull." I liked the notion of a safer spread.

I ran into two problems with calendars. If volatility goes down as it seems with your IBM spreads, then you can lose more on your back month options. You definitely have to be a little more patient with calenders. And you have to watch for events like earning that can effect you vols. Once I realized how serious this can be another bit of Sheridan advice hit home, calanders are good if you think vols are low, and most important aren't going any lower.

The other problem I found with calendars was the commission expenses can eat us small retail account holders up. But you have avoided this problem by staying with a higher priced stock like IBM or the indexes.

Well best of luck with the move and with your trading. I always learn a lot when I check in with your website.


Gustavo's Trades said...

Hey Dave,
We actually flew into Florida. I thought about driving, as it would be somewhat more cost effective, however, driving for about a week with 2 kids a dog and a wife that gets motion sick didn't quite seem like worth the effort. I'm sure our stuff passed you guys in one of the UPS trucks (luckly they didn't toss our boxes).

I think Dan Sheridan's advice is right on the money, with one key point I would like to add: Being bit by a dog sucks, no matter what kind of dog!! :) I have a Beagle and it is the most friendly dog you can imagine, yet one day a friend mentioned to me he was bit by another beagle and was quite a damage on his hands.. Long story short, the beagle that bit him was an older (and almost blind dog), he got scared with his sudden approach and the rest is history... Think about it: when a dog barks at you, you WILL step back, no matter what type of dog, isn't that true?

Well, IBM is taking a good bite on me this DEC position, isn't it?? It is like it is stuck in mud, right under the tent, but the tent sunk in the sand due to vols going lower.

I backtested the IBM tripple calendars and did notice that the DEC/JAN months are challenging because tipically the vols go down during this time of the year, that being said, they can be quite a safe haven when you trade during the summer months, as tipically the vols go up (sometimes way up).. Interestingly enough, the NDX Iron Butterfly has the exact opposite historical profile: it wins quickly in DEC/JAN and are usually challenged in the summer months..

One of my goals this year is to have these two spreads and understand their behaviour. Perhaps evolving my strategy to pick one or another depending on historical volatility profile, I think in the end having the volatility profile and adjusting to the best trade is the end-goal. That's why I'm pushing myself to trade calendars.. I have always been a condor/butterfly trader and it takes a different mind-set and approach to trade calendars, also there is only one way to learn it: Just Do It.

The way I'm going around the commissions is by using IBM and also using a calendar spread with 2 or 3 months between the front and back-month contracts.. This makes for a bit more expensive calendars and thus I need less contracts to allocate the target capital. Also it doesn't hurt to negotiate commissions with your broker.