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May 2021 Trades

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earlyretirementnow.com
Posts: 183
Admin
Topic starter
(@earlyretirementnowcom)
Member
Joined: 5 years ago

I will start a new topic for the May trades.

Well, there you have it! My puts went ITM today. I had strikes between 4060 and 4080 expiring today. The 4060 were safe but the others went ITM by $9.46 on average. 

This was the first major loss since 2/24/2020 (573 days), wiping out just under 3 weeks worth of option premium. I also had three very small losses in between:

  • 6/12/2020: Several $1000 but still less than 2 weeks of option income
  • 9/23/2020: Just a few $100, due to playing around with same-day options
  • 10/19/2020: Just a few $100, due to playing around with same-day options

So, it's just the cost of doing business. I had pretty good intuition (a.k.a. luck) in setting the strikes just about where I thought a bad 2-day run might end up in the current vol environment. I guess I could have done better by waiting to roll the options on Monday. I did most of the trades early that morning in the first 3h of trading when the index was at around 4230. Right before closing, the index had dropped all the way to 4188 and I could have sold the Wednesday options at much lower strikes. It's just the luck of the draw. Sometimes the market goes in your favor sometimes against you when you roll your options early in the morning.

My Friday options have strikes between 3525 and 3625 and a premium about 50% above my target. Now is the time to shift up the risk and recover the loss!

Let's hope this is just a temporary pullback and we don't fall another 10% over the next 2 days! 🙂

34 Replies
NavyPack
Posts: 136
(@navypack)
Estimable Member
Joined: 10 months ago

Thanks Big ERN for details.  I had puts at 4055 and 4080, so lost a bit.

Sold Friday at a 3 delta at 350 points OOM and 3710 strike for $2.10, which is double recent and 50% increase from recent sales.

 

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1 Reply
earlyretirementnow.com
(@earlyretirementnowcom)
Joined: 5 years ago

Member
Posts: 183

@navypack Yeah, the premium was really good for the Friday options. I made about 1.5x my usual target. But it's frustrating to see how the vol is now already melting away. Was hoping to milk this vol spike a bit longer and speed up the recovery. Not gonna happen, haha!

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E Trader
Posts: 6
(@e-trader)
Active Member
Joined: 5 months ago

Thanks for the update, Big ERN.  I had a similar result.  I shorted 4085s early on Mon. and they were in the money just over 20 bucks.  If I had better timing luck and put the trade on later in the day, I probably would have kept all the premium as you mentioned.  I hedged w/ short SPY and short /ES futures and mitigated about half the loss.  I gave back about 3 weeks of income.

I hope to incorporate timing/technical analysis for better entries as well as short signals for hedging in the future as I watch the market all day.  It is quite unnerving when the market reaches your strikes.  The negative gamma makes the p/l swings wild and hedging very dynamic (a lot of work where you can't take your eyes off of it).

The market is rallying hard today to throw a little salt in the wound.  The upside is I sold Friday's 3580s and barring an 1987 event, they should be good.

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2 Replies
NavyPack
(@navypack)
Joined: 10 months ago

Estimable Member
Posts: 136

@e-trader would certainly be interested in what you learn on hedging, since every hedge I've used has just been a drag.  

I'll certainly start hedging VIX spikes, if VIX gets down to 10-12 range.

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earlyretirementnow.com
(@earlyretirementnowcom)
Joined: 5 years ago

Member
Posts: 183

@e-trader Nice! Delta-hedging is certainly a good insurance policy. It works against you if there's a quick recovery but it helps when you get negative momentum (like 3 days of losses in a row, e.g. Mon, Tue, Wed this week).

I have never done the Delta hedging so far because my initial Delta is so small that I don't see the need. But after the Tuesday drop, it would have been useful! 🙂

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E Trader
Posts: 6
(@e-trader)
Active Member
Joined: 5 months ago

I wouldn't advise hedging to anyone.  ERN and Spintwig have done the backtests and the stats speak for themselves.  If most traders fail, any attempt to improve the results opens the door for a more probably reduction in return w/ added headache and time committed.  I am a full time, discretionary trader.  I watch every tick in the market and can make quick adjustment.  Even then, I botch it and often wish I hadn't monkeyed with a hedge.

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earlyretirementnow.com
(@earlyretirementnowcom)
Joined: 5 years ago

Member
Posts: 183

@e-trader I don't discard Delta hedging completely. Could be a good hedge against an unraveling market.

For people doing covered call writing (similar to short puts, just usually a higher strike) hedging out the equity risk to distill the pure vol premium gives you better risk-adjusted returns. See the following research:

https://doi.org/10.2469/faj.v71.n6.1

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Chris B
Posts: 1
(@chris-b)
New Member
Joined: 1 month ago

I too sold puts on Monday morning (thus undoing the luck of having covered calls assigned Friday). The wound was pre-salted. 

ERN did you just pay cash to buy your puts back, roll them, or accept assignment?

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nobatmanjokes
(@nobatmanjokes)
Joined: 8 months ago

Trusted Member
Posts: 68

@chris-b I think most of us are selling on SPX which is cash settled so no assignment to worry about. With /ES you want to get in there at the last minute to sell if assigned so you don’t carry levered futures through the weekend - closing at the last minute can be expensive but you can sometimes buy a cheap call and leave if you’re deep ITM. With smaller accounts this is one reason to prefer XSP over SPY so you don’t have to take assignment.

I also think most just let the old puts expire rather than closing to reduce costs, so when we say we’re rolling usually it’s just selling the new puts. Some might BTO/STO to preserve buying power.

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earlyretirementnow.com
(@earlyretirementnowcom)
Joined: 5 years ago

Member
Posts: 183

@chris-b They expired in the money. It's easier that way.

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