Friday, June 29, 2012

The FLIP side of conviction (ex $VIX vs. $AAPL)

In these turbulent big swing trading days most of us likely have positions that have gone wrong. It is in times like these that we need to HONESTLY revisit our thesis and CHALLENGE our conviction antagonistically. I call this post the "Flip" side of conviction:


SITUATION: A while back I had VIX trade that went wrong on me. I got stuck in a very tight iron condor (long story for another time). So I had the choice of a)closing it and taking the loss; b) punting out into further months and let a bad trade drag on; or c) try to end it there in that period. So, I opted to try and end it right then and there.


ORIGINAL THESIS: The VIX was showing strong support levels around 20. Also the Eurozone was showing no signs of solutions. Most importantly, there was no leadership anywhere in the world. This meant that markets should remain nervous which in turn should have kept the VIX at elevated levels for a good while.


DETAILS: Position in question was: $VIX Iron condor 19/16-21/24
* 19/16 apr credit put spread.
* 21/24 apr credit call spread.


THE PROBLEM: Then the VIX tumbled to the 14s burying my lower leg way ITM. Support became resistance.


THE FLIP:
Instead of keeping on fighting the tape (which wanted to cap the VIX with complacency) I decided to revisit my original thesis. It became clear to me that markets were bloated with complacency. Though I didn't agree, I accepted the market sentiment and decided to use it to my advantage; hence, the flip.


So, on 4/12, I flipped the put spread into a credit call spread; I needed to end this sticky trade once and for all.
I closed my 19/16 credit PUT spread and opened a 19/22 apr credit CALL spread for $90 credit. So far I had collected a total premium of abt $1950. Had I stayed the course with my credit put spread I would have been 'HOPING' the vix would turn around. Instead, I ditched the hopium and accepted that my thesis was broken and acted to fix it.


WHAT HAPPENED: The vix stayed below my levels and I closed both positions for debit ($481.61). So the position finally was profitable but it was a struggle. Since then, I haven't put any VIX positions.


*** LESSON: Reserve the right to change your mind when faced with new set of circumstances. When I put the credit put spread on, the vix seemed to have solid support. But then it flipped and that support turned into solid resistance. Even until now and with all of this eurozone uncertainty it still is relatively muted.


IMPORTANT NOTE: I didn't just give in to pressure; I don't often 'flip.' Had this situation been in any of my $AAPL credit put spreads (instead of the $VIX) my decision would have been completely different. Since I believe that mid to long term AAPL is a definite buy, I would not have flipped on a credit put spread that goes in-the-money. I would have most likely opted to extend my trade out to give me more time to be right (or my thesis to work out). This is different that being stubborn with the trade; this is simple math: AAPL sells everything it makes and for a premium + people who don't have AAPL products wished they had them + AAPL has buckets of cash on hand + pays dividends + ... you get the idea. Happy trading.


Follow my trades on @racernic on twitter and stocktwits.




THIS IS NOT A RECOMMENDATION OF ANY SORT. I ONLY INVEST MONEY I CAN AFFORD TO LOSE. OPTIONS TRADING IS RISKY BUSINESS.

Friday, June 8, 2012

Iron Condor under fire $AAPL example

BACKGROUND: If you follow me on twitter or stocktwits you know that I like to sell iron condors on about a dozen stocks ETF's and indices. I try to keep my strikes far enough from price at the sell-to-open time. I have a few rules that I have developed to help minimize failure (but that's another post).


TRADE: Assume that I am bullish AAPL mid to long-term. So,  I sold-to-open an iron condor in $AAPL and it looked like this:
Credit put spread 555/550
Credit call spread 600/605
Say I put this on when AAPL was 575ish


SITUATIONThen AAPL sold off down close to 555. Lower leg of the iron condor is now under fire and has exploded in price. Conversely, the upper leg has shrunk in price (helping minimize the loss).


MY OPTIONS:
1) I can panic and close the trade out for a loss.
or 2) IF IF IF IF my conviction in AAPL is still intact (no fundamental changes in aapl) and I believe that the trade is still a good one then I will do this:
a- Close the upper leg for pennies. This way when AAPL rallies back I will no longer have the upper risk.
b- & I may add to my lower leg. From here (like my 'crazy' trade) the risk is minimal since the leg is already in trouble. This will also help speed up the breakeven point on the way back up when aapl rallies.


LESSONNotice that I didn't put exact numbers because as this is not an exact science. The bottom line is that I don't necessarily panic and raise the white flag when one leg of my iron condor gets tested. I revisit the thesis and decide if I am being STUBBORN or am exercising true CONVICTION.




THIS IS NOT A RECOMMENDATION. I ONLY TRADE WITH MONEY I CAN AFFORD TO LOSE. OPTIONS ARE DANGEROUS AND CAN LOSE MONEY FAST.

Crazy $AAPL trade that risks almost nothing

These are some crazy trading times and what better time to post a crazy trade. Although it is a crazy trade, it risks almost nothing. I love the risk/reward ratio on this.
BACKGROUND: I like $AAPL for mid to long-term trades. I believe that the company is dominant and has sustainable advantages across all its products; no one even comes close in second place. I posted bit more about it (see link at bottom later). Bottom line: aapl will be worth more later than now.


THESIS: I think that apple sold off from its post earning highs unjustifiably. I also believe that there is a good chance that it will blow its numbers away once more in its coming earnings release. Once that happens, they will come out of the woodwork to buy back what they just sold off hand over fist; hence, aapl will spike up big.


THE 'crazy' TRADE: I want to sell a July credit put spread. The strikes are what make this trade unconventional:
sell the 635 put
buy the 630 put
Yep, you read it right... end up with an in-the-money 635/630 July credit put spread.


THE NUMBERS: as of now, here are the numbers on it:
premium collected would be $4.25 (=>risk is .75)
the reward is +$4,250.00
the total risk is $750.00
that is 5.67 to 1 reward to risk ratio... that is darn high.
Theoretical possibility of success is 15%
This is a long shot sure. But it offers me big reward and not a lot of risk. Furthermore, in this volatile environment it's not anymore crazy that investing in the stock market... period! Plus I can unwind this one anytime in between.

BEST CASE: Apple will continue to rise approaching earnings period. Then reports blow out numbers and spike up past my short strike. I get to keep the $4250.


WORST CASE: Apple reports and still is mired way below my strike. My max loss is 750. Realistically, I may still regain some equity even in this bad case scenario and loss might be lower or break-even. But I still have to count on the complete loss assuming aapl goes to zero.


OTHER CASE: Apple will continue to rise approaching earnings and my credit put spread gets cheaper to close and I may chose to close it for some profit (keeping in mind that IV will remain elevated because of the upcoming earnings).


SURPRISES: Apple may announce a new product or service like the TV and/or TV feeds or ??? and spikes even higher.


here is the why I like aap post from a while back.
http://sellcreditspreads.blogspot.com/2012/05/why-i-like-aapl.html

THIS IS NOT A RECOMMENDATION. I ONLY RISK MONEY I CAN AFFORD TO LOSE. PLEASE DON'T TRY THIS AT HOME.