Rolling Thunder

[Marc1]

Thanks Status. I've seen the left side of ToS and OptionVue turn down sooner and stronger than expected; true... Since there is no loss to the downside, there is no panic in my mind. BTW, I took your advice and pulled off the trade for a quick 24% RoR profit; I am not interested in converting this to a unbalanced Condor this early in the trade.

 

[status1]

Nicely done

Actually I was wrong about the sloping down of the T+0 line I was thinking of a BWB or an unbalanced condor but since you have a regular balanced condor you would not see that

The market was all over the place today It was up before the fed than it went down after the announcement than started coming back until the news conference than it gradually went further down ending near the lows of the day and the year
I guess traders were expecting the fed to do nothing so they panicked and started selling everything or maybe that was programed selling
In any case I am still expecting a pullback now that the fed fear is out of the way

 

[RJM]

Hello from the future! Fascinating to read and understand the thought processes that were in place prior to Christmas Eve and the "excitement" that made everyone... or me at least... very anxious. But how did either of you, or anyone else reading this for that matter, negotiate the extraordinarily deep V bottom (with collapsing volatility)? For my part, I over traded, over adjusted, and got sucked into the vortex. (My trade was a beauty... or so is should have been: using futures options for margin leverage, I had a very very wide short strangle paired with a short call vertical, 28-32 dte). With the NQ around 6600, I sold the regular Jan (expy today) 7300p and the 6200 call 2x, covering one of those calls with a 6400c, collecting 1345. The original position offered no risk to the upside ( ~$800 upside profit on 1.5x initial* margin of one short future). [* And there's the rub: span margining for futures looks to see what the max loss might be if there is an overnight move down [8%] and up [5%], so unlike equity index positions, margin requirements can and do change...].


On the way down, I butterflied away one of the short 6200 call, but as we saw, 100 points at a time was simply not enough. Relocating the remaining call vertical lower also helped, but with volty accelerating, there was nothing left except hedging the short put with a short future. Long story short (there were many chapters...), the trip back up was struggling to find sufficient credits on the call side (and raw fear stayed my hand on the short put side), so debit condors were used, but in a short covering rampage, even the sequence of condor, butterfly, condor* won't keep pace. (Call premia will be coming in, so you (I) end up trading closer to the money, with the result that the short covering rampage simply runs over you. At sub-5900, there was very little expectation that we would expire in January at 6800. Especially after the move from 6350 back below 6150 between 12/31 and 1/3.)

While I appreciate that Tom is sorting out how to maintain the forums and the website, I would guess there are more than a few shell-shocked option traders out there scratching their heads about how to better/best deal with an environment where realized volty has outstripped implied vol for weeks on end. It has to be particularly challenging as the net outflows (from the market) have been overwhelming net inflows. At the very least, the move to shorter duration fixed income has underscored the feeling that trading is not for everyone.

Regarding a possible "fix" to my trade above, I think a 'do-over' will include a 'mid-duration' put backspread. (Initial DTE was 36, so something around 14-20 dte.) Im thinking that the risk in the above structure was a serious vol pop from a crash, which would (and did) lead to significant backwardation. Had I put on a Dec31 put backspread where the sea of death was just beneath and to the left of the 'peak' of the p/l tent, I could have avoided a lot of agita, and possibly have taken some profits and let some of the storm pass.

Would love to hear/read others thoughts,
RJM

* (condor/fly/condor sequence)
+ - - +
+ = +
- +
+ - - +

 

[status1]

WOW I am not sure where to begin

First of all I don't trade futures so I don't pretend to understand your trading so a lot of the things don't make sense to me
I am only trading SPX but I was just curious about your trade setup
For some reason the trade you describe does not mach the graph unless you are showing the graph after some adjustments or maybe the description is wrong

To begin tour trade you said "
With the NQ around 6600, I sold the regular Jan (expy today) 7300p and the 6200 call 2x, covering one of those calls with a 6400c, collecting 1345 "
Is that backwards perhaps ?
Why would you want to place an in the money short strangle ?
The margin for that is a lot higher if you even get filled
Leaving that aside adding a call to that is not going to make it look like a BWB type trade that you are showing in the graph
Perhaps it makes sense to others but it doesn't make sense to me
I can't comment on the rest of the trade if the opening trade is wrong but it seems to me like you had to make a lot of adjustments which tells me that you were too close to the market given the volatility and market conditions

 

[RJM]

WOW I am not sure where to begin

First of all I don't trade futures so I don't pretend to understand your trading so a lot of the things don't make sense to me
I am only trading SPX but I was just curious about your trade setup
For some reason the trade you describe does not mach the graph unless you are showing the graph after some adjustments or maybe the description is wrong

To begin tour trade you said "
With the NQ around 6600, I sold the regular Jan (expy today) 7300p and the 6200 call 2x, covering one of those calls with a 6400c, collecting 1345 "
Is that backwards perhaps ?
Why would you want to place an in the money short strangle ?
The margin for that is a lot higher if you even get filled
Leaving that aside adding a call to that is not going to make it look like a BWB type trade that you are showing in the graph
Perhaps it makes sense to others but it doesn't make sense to me
I can't comment on the rest of the trade if the opening trade is wrong but it seems to me like you had to make a lot of adjustments which tells me that you were too close to the market given the volatility and market conditions

Not sure why you doubt this is the trade. The screenshot from OpVue shows the position, and no, the margin is not "higher". (Easily confirmed on TOS with any similar set up: short strangle paired with a short call vertcal.) The object is to generate sufficient credits and to create a p/l profile that meets ones expectations. This trade filled on December 13, in the late afternoon. For the credit i mentioned. Obviously, had I known the market was going to drop 800+ points I would have chosen different strikes (or just sold a ton of futures), but that defeats the purpose of neutral non-directional income trading. At the time I placed the trade, the downside breakeven was more than 10% below the market.
I'm confident that if you modeled the setup correctly you would see the same p/l graph.

Market volatility in hindsight makes nearly all non-directional trades appear ill-advised. But the fact of making adjustments is hardly evidence of poor design (only of poor prognostication).
RJM

 

[status1]

How do you get a flat line on the upside ?
You said you sold 2 calls and you covered one of them so that leaves another short call naked so I don't understand how you can have a flat line on the upside and say that there is no risk to the upside

 

[status1]

Just trying to recreate your opening position with today's prices with nq at 6800 according to your description you sold a put 700 points higher so in today's price that's 7500
The 7500 nq put is 667 credit with a 22K margin
The equivalent to your position for the call that would be the 6400 strike for which you get 430 credit with 17 k margin
It sounds like you get a lot of credit but because it's backwards the combined trade is fighting each-other so the combined trade shows a loss of -$30 at expiration with a margin of 28K in a reg T account

Switching the trade around and using the 7500 call and the 6400 put in a combined trade it shows $880 gain at expiration with only
6K margin in reg T account

 

[Marc1]

I believe RJM's original question was simply...how did either of you, or anyone else reading this for that matter, negotiate the extraordinarily deep V bottom (with collapsing volatility)?

On my end, Put Debits, some turned into risk-free Put Condors, others started with Put Condors, hedged the topside with 1 DTE Call Debits (risked off quickly), and recently Dual Call Diagonals at zero initial cost, yet added-in Call Calendars.

Marc

 

[RJM]

How do you get a flat line on the upside ?
You said you sold 2 calls and you covered one of them so that leaves another short call naked so I don't understand how you can have a flat line on the upside and say that there is no risk to the upside

For Status1: Couple of clarifications of your analysis and of my own record. First, I sold - at 1:32p on December 14th, not 13th, the 7300p with the price @6650. (That's 650 points above ATM, a small point).
Next, you are correct that there was, in fact, upside risk. Here is the OpVue graph as at the cash close on Dec 14. The graph I showed, did not extend far enough to the right to show where the upside breakeven point was (+11%), and I should have clarified that there was for me no meaningful risk to the upside, considering the trade had 31 DTE.

I'm not sure why you are seeing 22k margin for exposure on 1 future option (which settles into a future, if in the money at expiration. TOS (TDAmeritrade) does not ask 22k for a single NQ future. Im not sure what your broker is charging, but that is not what I have at TD/TOS.
Here's a screen shot of the 34 DTE set up using the Analyze page, showing margin requirement of $4177.
Finally, here's the Risk profile from TOS of this set up, using the strikes above:

The situation on December 13 and 14th was distinctly different, with vol increasing towards the end of the year, and with skew seriously inflating the value of the 650 point in the money put (my trading partner entered the same strikes on the 13th, which may have been the source of my mixed up dates). Note that because I used the weekly expiration that is 34 days away in the simulated trade above, there was no available strike 650 points ahead (at least not on TOS). The combination of a closer ITM put and different volty and skew is responsible for the P/L line being underwater in the graph shown here.

Finally, in Span Margining, as I mentioned, TOS evaluates prices above and below the money assuming volty goes up and volty goes down, and then it chooses the greatest risk that it (the brokerage) may face, and requires that calculated risk to be held in margin. Here's a shot of TOS's widget "Explain margin" (available by clicking on the "Margin required number in your Analyze page on TOS) overlaid on the Risk Profile.

Feel free to reply/comment further if you have any other questions.
RJM

 

[RJM]

I believe RJM's original question was simply...how did either of you, or anyone else reading this for that matter, negotiate the extraordinarily deep V bottom (with collapsing volatility)?

On my end, Put Debits, some turned into risk-free Put Condors, others started with Put Condors, hedged the topside with 1 DTE Call Debits (risked off quickly), and recently Dual Call Diagonals at zero initial cost, yet added-in Call Calendars.

Marc

Thanks Marc, you've got it exactly. As pretty much every trader knows, its not the getting in that is the hard part. Its the "what do I do now," when the SHTF. December 24 was historical, and hysterical. Paying up for a Put Debit was not my first choice (but perhaps should have been). Not sure how a put debit entered at To is easily converted into a risk free Put Condor when, at T1 the price has dropped another 100 points and vol has cranked another 2.5pct in the meantime. Narrower back spreads placed closer to the first short put? The 1 DTE Call db trades were good in the climb back, but you had to have some strong courage at hand: the pullbacks were heartstopping (12/26 to 12/27; 12/31 close to the low on 1/2 (158 NQ points), heck, even from 1p on 1/2 to the close on 1/2 was 159 point drop.

Not sure I know what your Dual Call Diagonal is, sounds like a double diagonal, which uses puts and calls, but dual call? Curious to learn the embedded theory... presuming you are trying to capture reversion from backwardation to contango? Or, is it a hedge against further backwardation?
Thanks,
RJM

 

[Marc1]

Thanks Marc, you've got it exactly. As pretty much every trader knows, its not the getting in that is the hard part. Its the "what do I do now," when the SHTF. December 24 was historical, and hysterical. Paying up for a Put Debit was not my first choice (but perhaps should have been). Not sure how a put debit entered at To is easily converted into a risk free Put Condor when, at T1 the price has dropped another 100 points and vol has cranked another 2.5pct in the meantime. Narrower back spreads placed closer to the first short put? The 1 DTE Call db trades were good in the climb back, but you had to have some strong courage at hand: the pullbacks were heartstopping (12/26 to 12/27; 12/31 close to the low on 1/2 (158 NQ points), heck, even from 1p on 1/2 to the close on 1/2 was 159 point drop.

Not sure I know what your Dual Call Diagonal is, sounds like a double diagonal, which uses puts and calls, but dual call? Curious to learn the embedded theory... presuming you are trying to capture reversion from backwardation to contango? Or, is it a hedge against further backwardation?
Thanks,
RJM

Hi RJM,

To put it visually, when I look at my portfolio view, most of my potential profits lie to the downside.

Therefore, instead of getting frustrated with the upside moves, I "hedge" to the upside. This hedging can be something as simple as slightly OTM Call Debit, Call Debit with a Short Put (Risk Reversal), and/or a no or low-cost Dual Call Diagonal (AKA Call Double Diagonal); perhaps something like the below, oftentimes, shifted up. And oftentimes, I "lay track" in front of the upward move, by continuing to add no-cost/extremely low cost Call Dual Diagonals.



Presently, I have no need to downside hedge on my SPY, SPX stuff, yet I do with my equity options positions, as I have unbalanced Condors on several, and the hedges cost $1 - $10 a tranche. Or, I have a Put Backspread, OTM Put Debit Spread, a wide BWB or OTM Put Calendars if I am speculating a down move on an equity/ETF.

If the market is "too volatile", I play a bunch of Reverse Iron Condors on some equities/ETFs.

If it's raining outside, I bring an umbrella, and I make sure I don't wear my sandals with socks...

Regards,

Marc

 

[status1]

For RJM Thanks for clarifying the graph on the upside That makes sense now
The margin is still off for some reason
I used the exact strikes and expiration you posted and I am still showing about 28k in margin on TOS
Maybe there is a difference in some settings in TOS ?
In the explain margin in the first column at 6805.50 where you have 1665 margin req I have 25929.15 and for the minimum risk I have 201.00 for PNR I have nothing and for EPR I have 10%
Maybe someone else can explain why 2 exact same trades can have such a big difference in margin

Leaving the margin aside just curious what was the reason for using the deep in the money strangle instead of the out of the money ?
Is there any advantage for doing that ?

 

[status1]

I think I figured out the margin
I was playing with the settings and I found that if I change the settings from BP effect to margin req than it will match your margin
It seems that for equities or indexes the BP effect and margin req is the same but for futures it makes a difference especially if the trade is upside down so even with today's lower vol doing the same trade the right way it shows a profit of $222 at expiration so That's why I was puzzled as to why the trade had to be upside down I don't see the advantage of doing that even with the higher vol

I am also guessing that liquidity is probably not very good so far in the money so I imagine adjusting
the trade may be more difficult

 

[Simon]

Hi RJM

Why don't you come and briefly talk us through the trade at the next TG1. Would be a good topic and very interesting.

Good trading

 

[RJM]

Status 1: Regarding margin, is it possible that you are looking at an IRA account that requires higher futures margin? And while TOS doesn't allow futures option trading in [my] IRAs, the analysis page when I am logged into an IRA account on TOS today shows the following $5106 in "Explain Margin":


With futures options that have EURO settlement, I don't know if there is an advantage to using the deep ITM strangle, other than possibly some liquidity benefit considering the market maker's perspective, and the difference in the way each strangle reacts in a down move. If I consider what each of the OTM strangle seller and the ITM strangle seller will be facing in the event of a (big) down move, it seems the ITM strangle may be preferable. The ITM seller's deep ITM puts will, due to put-call parity and conversion trades, be losing their remaining extrinsic, and the gamma effects on delta are reduced bc the option has a hard boundary of -20 (to the market maker, +20 to the short put holder). The (now less) deep short ITM call will be losing value as it's delta moves towards (atm) -10 (NQ futures have a delta of |20|). The OTM strangle seller faces the opposite situation: the short OTM puts are increasing their delta towards +10 (with INCREASING extrinsic, and increasing premium due to volty expansion) while the already tiny short delta calls will be drained of significant value.

I have not run realized numbers on this analysis, but I think it is accurate. I welcome any further correction.
RJM

 

[status1]

RJM I don't have an IRA account and if TOS does not allow futures trading I am not sure how you can even check the margin
I believe my explanation is correct about the margin setup I see on your screenshot says Margin req while mine was saying BP effect

This setting can be changed if you click on setup on the top right corner than settings and under the General tab click on positions and look for the Position Margin/BP effect that's where you can toggle from one to the other

Actually the trade is not as bad as first thought because I made it with individual strikes and with the bid ask prices being so wide
and TOS is selecting the bid as the default it makes the trade a lot worse
Doing a strangle as a combined trade it picks the mid price so it shows $1235 at expiration and the margin req at 5176 using the Margin req setting

I don't trade strangles but if I were I would have reversed the trade so the 650 or 700 point would have been OTM to give it more room to the downside and not have to go in a panic with the adjustments
Thanks for sharing you trade

 

[RJM]

Hi RJM

Why don't you come and briefly talk us through the trade at the next TG1. Would be a good topic and very interesting.

Good trading

Schedule permitting, I'd be happy to try and work through the trade at a TG1. I would love the opportunity to brainstorm and consider a handful of questions that I still have...

 

[RJM]

RJM I don't have an IRA account and if TOS does not allow futures trading I am not sure how you can even check the margin
I believe my explanation is correct about the margin setup I see on your screenshot says Margin req while mine was saying BP effect

This setting can be changed if you click on setup on the top right corner than settings and under the General tab click on positions and look for the Position Margin/BP effect that's where you can toggle from one to the other

Actually the trade is not as bad as first thought because I made it with individual strikes and with the bid ask prices being so wide
and TOS is selecting the bid as the default it makes the trade a lot worse
Doing a strangle as a combined trade it picks the mid price so it shows $1235 at expiration and the margin req at 5176 using the Margin req setting

I don't trade strangles but if I were I would have reversed the trade so the 650 or 700 point would have been OTM to give it more room to the downside and not have to go in a panic with the adjustments
Thanks for sharing you trade

Happy to share this and other setups. Re: TOS, they allow futures trading in IRAs, but they don't allow futures options in IRA accounts. (The logic of this escapes me, except to the extent that futures options (on NQ certainly) are notoriously thin, and the b/a are fairly non-existent overnight. Other than atm options, IB doesn't generally post bid/ask spreads on NQ except in extended hour periods and premarket, and even then the depth is extremely light.)

 

[kenb]

Rolling Thunder used book for sale discounted...

Rolling Thunder by J. L. Lord 9781532308369 | eBay

Later they watched as the put increased in value as the underlying fell, and they were left wondering “do I take the profit on the put or not?”. This technique can teach the avid investor a way to take profit off the table while maintaining a protective downside position.

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[Marcas]

Would you be willing to write review of this 'Rolling Thunder' book?