Markets
Friday
Dec182015

GLD Mar 18 ‘16 +$100/-$95 Vertical Call Spread: 70.21% Profit Banked in 120 Days

The 182nd trade that SK OptionTrader closed was a vertical call spread on GLD, the ETF that tracks gold.

Trade: Short GLD Mar 18 ‘16 +$100/-$95 Vertical Call Spread

Entry: $4.06

Exit: $3.40

Return: 70.21%

Opened: 19-Aug-15

Closed: 17-Dec-15

Days Open: 120

Since the beginning of 2013 we have held a bullish outlook on gold. Through this year we have remained bearish, with the view that tightening by the Fed would drive gold to new lows. However, we respected the risks that had the potential to cause the Fed to delay the first hike, such as the slowdown in China and decline in oil dampening inflation.

We targeted a short trade that would take advantage of gold making new lows on a Fed hike anytime during 2015. This led us to GLD options with early 2016 expiries that held high upside potential if gold broke significantly lower towards key support at $1030, which translates to a GLD level of $98. One strategy that fit these criteria was a short GLD vertical call spread trade with March ’16 expiration with $100/$95 strike levels.

Therefore on August 19th we signalled to our subscribers that we had sold GLD Mar 18 ‘16 +$100/-$95 Vertical Call Spreads for a net credit of $1.01. This means that we sold GLD calls with $95 strikes and simultaneously bought GLD calls with $100 strikes, both with March ’16 expiries.

If our view was correct, then the spread between the prices of the puts would narrow to $0.00 from $4.06. However, if we were wrong we could have lost the maximum downside of $0.94, the difference between the strikes of $5 minus the net credit of $4.06 received. The simple payoff diagram below illustrates this.

Our downside risks were clearly much smaller than our potential returns here. However, this was necessary as we looked to take advantage of a considerable break lower in the yellow metal, which held a lower probability of being realised. Therefore the maximum return of 431% and the constant increase in profits between a gold price of $1050 and $1000 gave this trade positive risk reward dynamics, as expected losses were much smaller than the expected gains.

Gold initially moved lower after we sold the call spread. However, after the Fed delayed the first rate hike from the September meeting gold bulls became energized and the metal began to rally. The hope of these speculators was that as the Fed had failed to hike in September, perhaps lift-off would never be achieved. This being a bullish scenario for gold, the metal rallied.

The October Fed meeting saw this come to an end, with Yellen paving the way for the first hike to come in December. Following this economic data remained strong, with nonfarm payrolls and inflation printing at positive levels. This allowed Fed speakers to signal the market that the first hike would very likely come at the December FOMC meeting. The expectation of hawkish action was priced into gold, leading to its decline.

Following the first hike this week we took profits on this trade. Our reasoning here was that gold had broken lower towards key support at $1030 after the Fed hike and this was the movement that we had initiated this trade for. Therefore we looked to action our trading plan and bank a strong profit of 70.21% for our subscribers.

We are pleased with the result of this trade. Although the realised gains were significantly less than the maximum possible, we were not swinging for the fences here. Our goal was to take advantage of a break lower in gold prices following the Fed hike, and we successfully did. The trading discipline here has avoided the risk of a possible rebound in gold, which would erode the profits we have now banked. Therefore we are happy with the result here, and look forward to repositioning this capital to take advantage of the next major gold movement.

SK OptionTrader Trading Record Summary

Number Of Closed Trades: 182

Average Return Per Trade: 28.34%

Average Duration Per Trade: 60.55

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Wednesday
Dec162015

SPY Dec15 Iron Condor +186P/-188P/-215C/+217C: 22.93% Profit Banked in 56 Days

The 7th trade that OptimalOptions closed was an Iron Condor on SPY, the ETF that tracks the S&P 500.

Trade: SPY Dec15 Iron Condor +186P/-188P/-215C/+217C  

Entry: $0.43 

Exit: $0.07

Return: 22.93%

Opened: 13-Oct-15

Closed: 8-Dec-15

Days Open: 56

During October equities rallied exceptionally well, having their best month since 2009. We believed that this performance was unlikely to continue for another two months, and that equities would likely struggle to make new all-time highs. At the same time however, we held the view that the Global Central Bank Put made it unlikely that the lows would be retested for a considerable amount of time.

Our views translated to SPY, the ETF that tracks the S&P 500, being highly unlikely to trade below $188 and above $213. We therefore opened our SPY Dec15 Iron Condor +186P/-188P/-215C/+217C trade. This means that we sold $188 strike SPY puts while buying $186 strike puts and also sold $215 calls while buying $217 strike calls. This resulted in us receiving our maximum profit of $0.43 as a net credit at the beginning of the trade.

If our view was correct, the spreads on both the call and put legs would narrow to $0.00 from $0.43. On the other hand, if our view was wrong and equities rallied to new all-time highs the spread on the calls leg would widen to $1.57 with the puts leg expiring worthless. Similarly, if equities began to tumble again the calls leg would expire worthless while the spread on the puts leg would widen to $1.57. Therefore our maximum loss was $1.57, the spread on each set of legs minus the net debit received. The simple payoff diagram below illustrates this.

Clearly, our downside risks were much greater than our potential returns. However, we viewed the probability of equities remaining range bound as particularly high. Thus the trade had positive risk reward dynamics as the expected losses were much lower than the expected gains.

After we opened our Iron Condor equities continued to recover and did not come close to retesting the previous lows. With the rally higher the S&P 500 came close to but ultimately failed to make a new all-time high. The highest SPY traded while our Iron Condor was open was $211.23 and the lowest $198.94, this means that the trade was always in the money.

This resulted favourably for us, as both the call and put legs of the trade had their time premium eroded. Compared to a directional play this trade clearly outperformed a short on equities, which would have lost money. However, when considered against an outright long trade over the same time period the result is more impressive, as our Iron Condor position outperformed a long SPY 10 times over. Therefore, we are particularly happy with the use of the Iron Condor strategy and the performance of the trade overall here.

Wednesday
Dec162015

SPY Mar16 $192/$187 Vertical Put Spread: 4.51% Profit Banked in 132 Days

The 178th trade that SK OptionTrader closed was a vertical call spread on SPY, the ETF that tracks the S&P 500.

Trade: Short SPY Mar16 $192/$187 Vertical Put Spread 

Entry: $1.01 

Exit: $0.83

Return: 4.51%

Opened: 29-Jul-15

Closed: 8-Dec-15

Days Open: 132

One of the strategies that we have employed this year is to sell downside protection on equities, which takes advantage of the Global Central Bank Put being in play. Therefore during late July we looked to sell vertical put spreads on SPY, the ETF that tracks the S&P 500.

We held the view that the S&P would be unlikely to fall below 1920, and that any decline below that would likely be short lived. This translated to a level of $192 for SPY. In terms of the time frame we intended to give ourselves considerably leeway to allow equities to bounce back from any possible corrections. Therefore we looked to use puts expiring approximately 8 months out.

On July 29th we signalled to our subscribers that we had sold SPY Mar16 $192/$187 Vertical Put Spreads for a net credit of $1.01. This means that we sold SPY puts with $192 strikes and simultaneously bought SPY puts with $187 strikes, both with March ’16 expiries.

If our view was correct, then the spread between the prices of the puts would narrow to $0.00 from $1.01. However, if we were wrong we could have lost the maximum downside of $3.99, the difference between the strikes of $5 minus the net credit of $1.01 received. The simple payoff diagram below illustrates this.

Our downside risks were almost four times our potential returns, but due to the Central Bank Put being in play we viewed the probability of the S&P making and staying below 1920 as particularly low. This resulted in the trade having positive risk reward dynamics, as our expected losses were far less than our expected gains.

Equities made neutral movement until mid-August, when concerns around economic growth in China rocked markets and triggered a correction. This selloff saw this position show considerable losses for a significant amount of time. However, the long dated expiry allowed us to weather this correction and wait for markets to recover again without being forced to realise the losses.

After the recovery we continued to hold the trade while the time premium of the puts eroded, increasing the value of the position. Ahead of the December Fed we chose to exit the trade to reduce the event risk to our portfolio, resulting in a modest profit of 4.59% being banked.

While this trade has not performed as well as we had hoped, we are pleased that its design has allowed us to bank a profit, albeit a limited one. A short vertical call spread is a bullish trade, which means that we were long equities while holding this position. However, the S&P has in fact moved lower over the same time period that we had the trade open, while we have banked a profit. Therefore, although we had hoped for greater gains to be made, we are satisfied with how this trade has performed.

SK OptionTrader Trading Record Summary

Number Of Closed Trades: 178

Average Return Per Trade: 28.14%

Average Duration Per Trade: 57.96

Sunday
Dec132015

SPY Dec15 -$213/+$215 Vertical Call Spread: 30% Profit in 41 Days

The 177th trade that SK OptionTrader closed was a vertical call spread on SPY, the ETF that tracks the S&P 500.

Trade: Short SPY Dec15 -$213/+$215 Vertical Call Spread 

Entry: $0.60 

Exit: $0.18

Return: 30.00%

Opened: 23-Oct-15

Closed: 3-Dec-15

Days Open: 41

During October equities rallied exceptionally well, having their best month since 2009. As the month came to a close we believed that this performance was unlikely to be continued over the next six weeks, and that in fact stocks were likely to pull back somewhat after such a rally.

Technical and fundamental factors also indicated that the stellar performance of October was unlikely to be repeated in the near future. Resistance at 2110 had proved tough to break for the S&P, with only minor movements made above the level. We also noted that stocks would likely struggle to make new all-time highs even if economic data was positive, as this would ensure a December rate hike that would likely tighten the bullish effects of loose monetary policy on equities.

Therefore, we took the view that the S&P would not make new all-time highs. This meant that SPY, the ETF that tracks the S&P, would be unlikely to move above $213, which translates to a level of approximately 2130 for the S&P.

To execute this view we sold an SPY Dec15 -$213/+$215 Vertical Call Spread for a net credit of $0.60. This means we sold $213 calls on SPY, but also bought $215 calls simultaneously to avoid unlimited risk. Both sets of calls had December expirations and the difference in their prices meant that we received $0.60 at the beginning of the trade. The $2 spread between the strikes of the calls and the net credit received meant that the maximum gain would be $0.60, with downside limited to $1.40.

If our view that equities were unlikely to make new all-time highs was correct the spread would move from $0.60 to $0.00, with both calls becoming worthless and expiring out of the money. On the other hand if we were wrong, we could have lost $1.40 as the spread could move to $2 with both options in the money. The simple payoff diagram below illustrates this.

Our downside risks were more than twice our potential returns, but given the technical and fundamental factors in play we viewed the probability of the S&P making a new all-time particularly low. This resulted in the trade having positive risk reward dynamics, as our expected losses were far less than our expected gains.

Equities continued to rally through the rest of October, but ran out of steam quickly as they turned lower only four days into November. From here the S&P 500 failed to top the high made in early November and failed to make a new all-time high while we held our position.

We continued to hold the position after equities made a minor selloff towards the middle of the month as this trade held positive theta. This means that time premium eroded as we approached expiration with the S&P below 2130. Therefore we were able to increase the profitability of this trade by holding it past the November lows.

When we exited the trade we banked a 30% gain, which is more than 20 times better than a direct S&P 500 short. The use of the short vertical call spread trade worked well here as it allowed us to directly express our view that equities would not make a new all-time high, but would not necessarily fall, a view that has been proven correct. Consequently, we have banked yet another winning trade for SK OptionTrader subscribers.

SK OptionTrader Trading Record Summary

Number Of Closed Trades: 177

Average Return Per Trade: 28.27%

Average Duration Per Trade: 57.54

Wednesday
Nov112015

USO Nov15 -$16/+$18 Vertical Call Spread: 20.25% Profit Banked in 45 Days

Trade: Short USO Nov15 -$16/+$18 Vertical Call Spread 

Entry: $0.37 

Exit: $0.04

Return: 20.25%

Opened: 25-Sep-15

Closed: 9-Nov-15

Days Open: 45

Towards the end of September 2015 oil appeared to have found a range within which to trade. The key support at $42 made up the lower bound, while technical and psychological resistance at $50 formed the upper.

Given the long term downtrend, we believed that oil would be more likely to break lower than higher if the range was broken, and therefore looked to initiate a short position. Using USO as our chosen vehicle the equivalent lower and upper bounds were $14 and $17 respectively.

We sold a USO Nov15 -$16/+$18 Vertical Call Spread for a net credit of $0.37. This means we sold $16 calls on USO, but also bought $18 calls simultaneously to avoid unlimited risk. Both sets of calls had November expirations and the difference in their prices meant that we received $0.37 at the beginning of the trade. The $2 spread between the strikes of the calls and the net credit received meant that the maximum gain would be $0.37, with downside limited to $1.63.

If our view that oil was likely to remain low was correct the spread would move from $0.37 to $0.00, with both calls becoming worthless and expiring out of the money. On the other hand if we were wrong, we could have lost $1.63 as the spread could move to $2 with both options in the money. The simple payoff diagram below illustrates this.

It is clear that our potential risks were much greater than the rewards, but we viewed the probability of oil remaining low as particularly high. This meant that the risk reward dynamics of the trade were positive as the expected losses were much lower than the expected gains.

USO initially moved higher in the two weeks after we opened our short, leading our position to show a minor loss for a while, so in hindsight we were early signalling to open this trade. However, the risk reward dynamics were still positive upon opening the positon, and remained so whilst we held the trade as we were confident that oil would remain close to its lows.

This resulted particularly favourably for us, as USO fell after moving close to the top of its range. Then to add to this, the minor rebound following this in fact increased the gains on this trade. The bounce was reversed, allowing us to exit this trade near the lows for USO and gain an increased amount of time premium, which further increased profits. We therefore banked close to the maximum gain on this trade buying the spread back for $0.04, earning a 20.25% profit. This gain is more than triple those of an outright USO short over the same time period. Therefore, overall we believe the trade and use of the short vertical call spread strategy worked well.

Trading Record Summary

Number Of Closed Trades: 3

Average Return Per Trade: 15.91%

Average Duration Per Trade: 29