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Account Status July 20 (69% YTD)
Account Status July 20 (69% YTD)more_vert
2020-07-31T22:26:13+00:00
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Account Status July 20 (69% YTD) 2020-07-31T22:26:13+00:00close

Our Ride Trades continue to be the main profitability source of the account.

Again, this month was tough to trade VXX strategies but we recovered some lost ground from the previous month. During this market environment it will be better to choose strategies on VXX that will have lower risk, like the butterflies that we are managing at the moment. The market is choppy with high swings that make difficult to trade pure Delta negative strategies like the Short Call Verticals.

We introduced this month a new SPY strategy. This one is very short term using Calendars and Diagonals. All of them were positive trade, which also contributed for the increase in overall profitability of the account.

I am still waiting to increase a bit more the number of Patrons in order to start with a sound base for weekly catch-up on trades and interaction between you and me.

I will continue to manage the account and all suggestions to improve are welcome!


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How to get started trading options
How to get started trading optionsmore_vert
2020-07-19T16:10:43+00:00
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How to get started trading options 2020-07-19T16:10:43+00:00close

For those of you that started trading stocks, forex, or any other market and are having difficulties to become profitable (don't feel alone, I had the same problem!), you should try to trade options. As I wrote before in other posts, those markets will deliver 50% / 50% winning chance – you enter a long position and expect the asset to move up; or the contrary, you enter a short position when you expect it to move down. This is hard and it is not easy to find a profitable system. I am also a bad market move forecaster... that's why I moved to options.

Most traders, don’t trade options, although they are the most flexible trading instruments that exist. I guess most traders do not use options because of its learning curve, due to its complexity. It can be intimidating if you do not start with the right tools.

Delta, Theta, Gamma, Vega… are the main options Greeks that every options trader must manage. But the rewards, flexibility, and diversification opportunities make learning options worth it.

For me, one of the big advantages of using options to trade is its leverage. By a fraction of the price paid of 100 shares, for example, you can buy a Call or a Put and have similar exposure! Or even if you combine selling options with buying options, you can even reduce in the investment needed.

After some time, many traders feel as comfortable with options as they do with "normal" assets like stocks or ETNs. Here you have some ways we could use to trade options:


  1. Portfolio hedging. The most basic form of using options is to buy a put to hedge a long stock position. A similar way and “cheaper” is to buy Put Verticals. This will protect a trader long stock/ETF position against the large down move, reducing losses that would occur without those. This is very similar to insurance and, hence, it will cost money and reduce overall portfolio performance, but also reduce its volatility.
  2. “Income” trades. There are several income strategies, but the easiest is to sell a Put. The Put seller may be bullish on the underlying asset but wants to acquire it at a lower price or simply gain exposure in a less directional way. Selling puts has positive expected returns over the long-term with less downside exposure than owning the underlying asset outright. Of course, the trade-off is that your upside is also limited. There are other "income" trades like Calendars or Butterflies.
  3. Directional. Options can also deliver directional strategies. Similar to go short an asset, a trader can buy a Put our buy a Put Vertical if he anticipates the assets will move down. If he wants to have a similar position like going long in an asset, he can buy Calls or Call Verticals. In a simplistic way, this is how it works.

These 3 simple examples outline some ways to use options. There are many other ways to use them with several strategies, called spreads, like the ones we trade like the CROC or the Ride Trade. The easier spreads are the ones talked above and are called Vertical Spreads, where one option is bought and another is sold.

With all of this in mind where do you can start?

You can start becoming a Tier 2 Patron. We are trading easier to apply strategies, like the VXX Vertical spread or even a Butterfly. Of course, I am more than happy to clarify any doubts you may have when we enter any of those trades. You can subscribe to Tier 2 Patron here.

If you understand the mechanics of these ones you can move into more complex spreads like the CROC or the Ride Trade. Last week, I started to trade a new and easy to apply strategy on shorter time frame options. In essence, this trade is to be in place for about 3-5 days. It uses SPY or QQQ (index ETNs) to avoid big price movements. It uses only one adjustment type to simplify.

Additionally, I am doing mentorship and classes to anyone who wants to trade options (from beginners to advanced traders). Just send me an email to pedro.branco.vol@gmail.com asking for it. I will be glad to answer you.


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Why Ride Trade is exceptional? (+72% YTD)
Why Ride Trade is exceptional? (+72% YTD)more_vert
2020-07-12T20:52:34+00:00
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Why Ride Trade is exceptional? (+72% YTD) 2020-07-12T20:52:34+00:00close

Ride trades are about 72% YTD. It is being used in both SPY and QQQ ETFs.

I developed this options strategy (no stock involved) after researching for a strategy that can be easily managed by someone who trades as to have extra money at the end of the month. This is a medium-term options strategy that can be traded smoothly. As an example, no trades or adjustments were needed in the last week...

But what are the characteristics of the "Ride Trade" that makes it exceptional (even during the Feb/Mar market selloff?

1. Risk Management & strike price selection

This strategy is aiming Delta Neutral positioning which means it tries to minimize price fluctuations of the underlying. Several adjustments are possible. Traders have some flexibility in its management but always under clear guidelines. The ultimate goal is to flatten the t0 line maintaining Gamma as low as possible, as Delta as close to 0.

Our approach in terms of strikes follows different criteria that adapt to market conditions of the moment the trade is entered. Instead of using prices and a fixed percentage from market price, we use Delta. This will deliver a Delta neutral position when entered where the distance from market price is variable depending on IV levels. This is a different approach followed by most advanced options traders.

2. Options chain selection

This topic is key to structure the trade and is not so obvious for the majority of the option traders. The selection of the options chains to use on each trade serves to avoid excessive fluctuations and adjustment needs. Short term options are much more volatile than longer-term. Shorter-term options deliver higher theta than longer-term. A combination of selective option chains delivers an ideal combination of reduced volatility and higher Theta. Another property that impacts this trade is the IV level of each option chain. If they are in backwardation, after a market selloff, it will help a lot in this trade!

3. Theta positive

This strategy delivers positive Theta. This means that we do not need to be stressed about the market not moving (Delta) as time passes. In the Ride trades, we are on the right side as time passes we are capturing profits.

4. Highly manageable price interval

Given its construction, this trade structure delivers a wide price interval where SPY and QQQ can fluctuate to deliver profits. Even in cases where there are bigger movements, there are adjustments to be made that add value to the trade with the goal of capturing more profits. In the case of a big market sell-off, it will help the trade. Adjustments needed are clear and, in fact, they will help the trade boosting profits! This happened in the Covid crash. The fact that this trade requires adjustments in certain market conditions, it is advisable to have aside 50% available cash in case anything goes against.

This type of trade is used by many market professionals. It is a mid to advanced level options trade type that mainly manages underlying price movements that present a low risk. I do not use it is stocks as these can have strong price variations. I prefer to be on the safe side and use index ETFs that are less prone to have 10%-15% price changes in a day.

The Ride Trade is available to all my Tier 3 Patrons. They have an available pdf file that describes and teaches all the details of this strategy. They are also receiving my trades with my adjustments. And best of all, they can interact with me to clarify any doubts.



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Top 5 tips for newbies options traders
Top 5 tips for newbies options tradersmore_vert
2020-07-05T07:15:32+00:00
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Top 5 tips for newbies options traders 2020-07-05T07:15:32+00:00close

Options trading is a bit complex and can be very profitable if a trader knows what are the risks of his positions. If you’re new to options trading, however, then check some basic guidelines before starting an adventure in options trading with your own real hard-earned money.

As an overall rule, before starting to describe each tip, there are some important things to remember when trading options (for both newbies and experienced traders). Like in stocks or forex, options positions involve risk. In a simplistic way, is a trader's responsibility to manage his position and total portfolio risk. Unlike stocks or forex, options have other parameters (implied volatility, days until expiration, Delta, to name a few) that impact on their pricing. Therefore, options trading is a bit more complex than simply by and sell a stock or go long or short in forex. Options are a very flexible instrument that allows the trader to adjust in several ways. Usually, I compare options trading to a chess game. There are several ways to adjust a position. And that is why I consider it challenging.

But, let’s move to the 3 key topics for newbies (and experienced, too) options traders.

1. Research, study, and practice (a lot!)

Due to the high flexibility and complexity involved, my recommendation is to start learning from available information on the web or buying some books. As stated before, here are my advice on this topic:

Before I suggest any book, I will suggest free education resource available to everyone:

https://www.cboe.com/education/ Here you can learn the basics of options! And available free courses.

There are a lot of books you can learn the basics: here you have some

- Trading Options Greeks: How Time, Volatility, and Other Pricing Factors Drive Profits, by Dan Passarelli

- The Options Playbook: Featuring 40 strategies for Bulls, bears, rookies, all-stars and everyone in between, by Brian Overby

And the bible of Volatility based trading (only after you reach a comfortable level and want to move forward):

- Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Ed, by Sheldon Natenberg

But, my final word is: go to a brokerage company and start trading with paper money using a top options platform with simulation capabilities. I use ThinkorSwim platform. Nothing is better than learning from practice. There you have a simulator where you can see the impact of time, volatility, price change, etc on your position. The practice is key to get the feeling of the expected impacts when several factors change.

If you decide to move alone, which is good at the beginning to give you the foundations of options, my second recommendation is to have at some point in your learning process someone to guide you and highlight for details that you will not find in the more theoretical literature. Even after more than 10 years of experience I am studying and learn new topics!

2. Options are highly flexible

Options trading is unlike traditional investing where you simply try to buy low and sell high. Using options, traders can profit by predicting downturns, stagnation, and up moves of the underlying. But, this is not all. You can choose a strategy depending on the Implied Volatility (IV) levels. Or use a strategy based on each option Delta. For experienced options traders, Delta is a key measure to define strikes – more than price percentage from the current level -because Delta varies with IV and it gives an idea of probability.

The flexible nature of trading with options means that traders who are new to options have a lot more to consider when making a decision. With this trading flexibility come several tactics for either success or failure. For example, a Vertical Spread can be opened at certain strikes. But after some time, if there is profit on it you can close it of turn it into a Butterfly or a Condor to lock-in some profits and gain a bit more. But, even on those strategies, they can be constructed as unbalanced, to produce a certain Delta of the overall position, etc

3. Options are used to adjust positions risk

Options are a great tool to hedge positions. Either stock positions or even options positions. Due to their huge flexibility traders can limit the risks of their position. This is what we do in certain strategies like the Ride Trade. We constantly manage Delta risk using other options trades. Or if a trader has a long stock position but doesn’t want to sell it, buying a Put option for protection to the downside can limit losses if that happens. Several hedging techniques are available in options trading, and they make a compelling case for investors to enter in the options world. Here, I am applying some hedging techniques depending on market conditions.

4. Understand your structure dynamics

On every individual option position or in any multiple options structure have a curve. Understanding the curve and its dynamics is key for any trader to know the impacts of variables that will deliver a new outcome to the structure. The trader needs to be in control of the positions. Advanced options trading platforms deliver this info like ThinkorSwim I use. These platforms allow the trader to simulate the passage of time, what would be the impact of a change in volatility, or, simply, the underlying change. This is also relevant to understand how the “Greeks” are affected by those changes.

5. Always have your exit strategy ready

When it comes to trading options, as with trading stocks, eliminate your emotions. Trading should be understood as a business. Any trader should have a plan to be followed, strictly. This means having a clearly defined exit strategy after any position is entered. Exit strategies aren’t just to execute when the market moves against. They are also guidelines to execute when a profit target is reached. It is also important to know when to leave even when things are going in the trader’s favor.

Options trading key takeaways

The bottom line when it comes to profitably trading options is that there is no one-size-fits-all approach. Options are complex instruments that require a lot of study and practice. Understanding options dynamics is very useful to make decisions and this is key to know when to exit a position.

Options are trading tools that deliver huge flexibility. After a position is opened, there are a lot of adjustments possible. Constant changing Greeks need to be understood in order to develop adjustments to manage position risk (Ride Trade is a good example).

Always have a plan. This includes an exit strategy at all times (both at a loss and profit).



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Account Status (+46% YTD)
Account Status (+46% YTD)more_vert
2020-07-01T21:51:01+00:00
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Account Status (+46% YTD) 2020-07-01T21:51:01+00:00close

Our Ride Trades continue to be the main profitability source of the account. Again, this month was tough to trade VXX strategies and the lost money on this asset was compensated by the gains in the Ride Trades. During this "permavol" market environment it will be better to choose strategies on VXX that will have lower risk, like the butterflies we are managing at the moment. The market is choppy with high swings that make difficult to trade pure Delta negative strategies like the Short Call Verticals.

I am still waiting to increase a bit more the number of Patrons in order to start with a sound base for weekly catch-up on trades and interaction between you and me.

I will continue to manage the account and all suggestions to improve are welcome!



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How to win on options trading for income?
How to win on options trading for income?more_vert
2020-06-28T17:43:51+00:00
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How to win on options trading for income? 2020-06-28T17:43:51+00:00close

In fact, we can earn a lot of money by trading and specifically trading options. But there are some key factors that have to be present to achieve that goal. But for the majority of us, as retail traders, we should accept the fact that to make money out of trading options is to earn a side income out of part of our individual wealth.

Hence, trading options for income may be the first step towards building a sizable portfolio that might eventually become sizeable enough in order to get an absolute value that would be sound. For a portfolio of $500k to achieve a 2% monthly (fairly accessible without high-risk options strategies) will give 10k per month… but, a 5K account will only produce $100… it depends on investment account size!

Most traders associate investment success with a high success rate of winning trades as well as large returns on a set of individual trades.

Besides several stock and options trading websites claim high return / success, the most fundamental theory behind investing continue to be the relationship between risk and reward. Period! While a trader could successfully invest in one single and have a huge success with very large return, committing a significant portion of everyone funds to a single security or strategy exposes anyone account not just to high rewards, but also to a significant risk of losing all your money. Trading options for income is not a get-rich-quick scheme. That is more “gambling”. By contrast, it is a systematic implementation of a set of strategies intended to yield consistent results over time.

A trader portfolio’s performance is successful when it would provide additional income while progressively build a growing amount of capital that will continue to deliver bigger absolute returns over time.

As stated above, the amount of capital you are willing to invest to trade options for income is a numbers game. Experienced traders have set their goals to achieve 2% – 3% monthly returns on their portfolios without incurring significant risks. This means that to produce $5,000 per month, you need to have around $200,000 to $250,000 available to invest.

Another fact that impacts is the time you are willing to commit to trading. Most people who want to start trading also have a day job that demands a significant portion of their time. Which is ok, but trading options, like any other activity, requires time (not only dedicated to trading itself), but also to study, research and practice. I took about 6 years to study, practicing, trading, losing until reaching a consistent level. Discipline, studying and managing positions risk was a game-changer for me!

To achieve success on trading, like in any other profession, will be related to the time invested in learning and implementing trading strategies until achieved an expertise level that will produce consistent returns. Also, I can tell you, that a mentorship helped me a lot! It made me learn faster and alerting me to some dangerous positions I was taken as well as other kinds of adjustments made possible by the flexibility of options. Trading with someone will also boost your knowledge as it could deliver different perspectives. If possible for you, better to not trade alone (especially if you do not achieve an expertise level on options trading). There’s much more on options trading in terms of complexity than trading stocks.

Some simple strategies

Selling Puts

Selling a Put is an easy way to generate income. Doing this also allows you to buy a stock at a price lower than the current traded price. A put option gives the holder the right, but not the obligation, to sell the stock at a certain strike price at or before the option expiry. Traders selling a Put must be willing to take ownership of 100 shares of the stock at the strikes price you sold the option. There are other factors you could enter into the equation when doing this like the level of IV (Implied Volatility). For example, in beaten-down stocks where the IV is high could deliver opportunities to capture more premium. If every month you sell a set of Puts in several stocks you could spread the risk and have a nice income. The strike at you sell is also impacting the level of premium collected and the probability of profit.

Covered Calls

A covered call is an option trading strategy that consists of selling call options on stocks you currently own. A call option gives the holder the right, but not the obligation, to buy a stock at a certain strike price at the expiration date of the option. Covered calls are great if you have a neutral to slightly bullish view on the stock.

By selling a call on a stock you own, the trader earns a premium. If the stock’s price remains the same or it drops, the option will expire worthlessly and the trader keeps the stock and the premium collected. On the contrary, if the security increases in price, the buyer of the option may exercise the option and the seller will have to sell the stock at the strike price.


Putting both strategies to work

Suppose you want to buy AAPL shares. It closed on Friday at 353 after a 3% drop, so IV is a bit inflated versus a normal state. Monday, at market open, you have 2 ways to buy AAPL stock:

1. The stock trader: simply buys 100 shares with a total investment of $35300 and hope it will move up in the future to sell them for profit. Or l lose if he sells at a lower price.

2. The options trader:

a. Sell one Put at 340 for 6.30 with Expiry on 17 Jul (18 DTE) for an approximate $6000 margin commitment and a credit received of $630;

i. If at the expiry date, AAPL closes above 340, the Put expire worthless and the option trader keeps all the premium collected ($630);

ii. If it closes below, the option is exercised and the trader bought the 100 shares at $340 for a total investment of $34000

iii. Selling Puts can be done continuously (every month or week) and the credit continuously be cashed in until option is exercised;

b. At a given moment, when the Put is exercised, the trader owns the shares. He can now start selling Calls against them, collecting premium until, again, they are exercised

i. If at Expiry, the stock continues to fall, credit from sold Calls is being cashed in

ii. In a moment where AAPL shares will close above the strike price of the sold Calls the shares will be exercised and are sold at that strike.

What you could see above is the flexibility of options can give versus simply buying or selling stock. In the example above, you cashed in credits from Put selling. And, at exercise date, you bought the 100 shares at lower price than initially!

When you understand the power of options, you will never want to go back to trade stocks! And that example is a pretty basic usage of options!


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Trades / Account comments
Trades / Account commentsmore_vert
2020-06-20T17:03:38+00:00
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Trades / Account comments 2020-06-20T17:03:38+00:00close

The last 2 weeks had delivered huge price swings. This environment was very difficult to trade the VXX Short Call Vertical strategy because we entered some trades when Contango was in place (it reached high levels of circa 7%), but sudden moves made this type of trade to deliver negative results. Nevertheless, taking into consideration that VXX Short Call vertical acted as a hedge for the Ride Trades in place, the losses were fair.


- Ride Trades (SPY and QQQ)

This strategy continues to deliver very high profitability. It is, by far, the most consistent strategy I have developed given for any market condition. It produced lower profitability, from what we are used to, when IV was decreasing. Due to its excellent performance and consistency, the percentage amount dedicated to this strategy will continue to be high (50%-60% of account value).

At the moment both traded assets are up by: SPY $3070 and QQQ $3390. Given the fact that an average trade investment is about $3-4K it is easy to conclude how sound this strategy is doing since the beginning of the year!


- VXX trades

We continue to profit from some butterfly trades, entered at specific points and at selected IV levels. This has been lately the best strategy for VXX that is helping to recover some losses. Nevertheless, since this is a low-risk strategy, although it produces nice returns on investment (circa 20% in a few days), it delivers low absolute figures.

The riskier strategy (short call vertical) had been very difficult to profit due to the high swing level on VXX price. Nevertheless, the brilliant (sorry about not being humble) trade management made in the last trade entered (moved to Long Vertical, then to an unbalanced Butterfly, then again to a Short Vertical), produced a small loss. This trade management showed the flexibility options give to traders. As I mentioned before, I feel that options trading is like playing chess: a lot of moves to chose from; a single one to take as a reaction to VXX price move given some judgment and flexible criteria! Currently, we are down $1.8K in this asset.


Account status

Due to the high profitability of Ride Trades that are covering the losses of the VXX verticals, the account is 48% as of today.


Lessons learned / next steps

VIX is still in high mode. Despite any "high" contango level (when it reached 7%, VIX was around 25). The conditions to apply the Short Vertical were not ideal, despite the high contango level. Keep in mind that a high VIX means high Volatility. And high volatility means high swing! So, taking this into the equation, it would have been better to wait for VIX to decrease below 20 to enter short verticals, along with a high contango level. Lesson learned!

I am developing a new low-cost hedge with VXX that could deliver very strong results in case of a sudden VXX spike. If it proves profitable, this will be available for Tier 3 Patrons.


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What separates rookies from pro traders?
What separates rookies from pro traders?more_vert
2020-06-06T17:01:57+00:00
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What separates rookies from pro traders? 2020-06-06T17:01:57+00:00close

Due to yesterday's trades that produced some losses, I would like to discuss this topic alerting to the inevitability of them. If someone tells that this is not part of the game, I can tell you that they are not true traders!

By opposition to experienced traders, newbies seem surprised when losses happen. The majority of us think that placing a trade is accepting risk! No, it is far more beyond: placing a trade is taking a risk.

A clear example of trading psychology that illustrates the loss avoidance (yes, we have difficult to accept it!) is canceling or moving a stop loss when the trade is going against an initial thesis, in the hope of recovery.

Most traders, especially less experienced ones, have a problem with trades that are producing losses. They never expect to have them.

If a trader truly accepts risk, which means he is accepting the possibility of having a loss, before the trade, the experienced trader would never move the stop-loss or cancel it. This is because prior to the trade, he accepted the investment at risk (max loss), in exchange for a potential profit.

From a business perspective, a trader accepts the risk/trading loss as a standard business cost, like in any company. And, when it happens, the experienced trader closes the trade and move on to the next one.

This is why trading losses don’t seem to bother experienced traders as much as new traders.

In a standard business (like running an online store) you should spend a certain amount of money on promotion, otherwise, you will not grow your sales. You need to have some kind of costs to sustain your business. Losses will come along the trading year and you should think about them as “costs”, like in any business. If you had a track record of consistent revenue with a clear trade plan, you believe you can spend money to make money, which will lead to profits. This is the mindset of a pro trader, or similarly an entrepreneur in a normal business.

New traders don’t have this in mind, because they don’t have the track record yet, so trading losses take on a much bigger meaning for them.

So how to become consistent, accepting losses as costs?

With a proper trading plan. You can find in my book a set of strategies that I am teaching and trading which were developed and tested and produced a proper trading plan. A trading plan is a script with profitable ideas. For each strategy, there are clear guidelines to follow and achieve consistent profits.

Trading profits are a direct result of having a structure for producing winning trades that surpass losses.

To achieve consistent profits, you need an edge, a strategy that gets molded and adjusted into a trading plan. When a trader reaches this stage, trading losses are a business cost, because in the end of the year the results will be positive!


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Account Status (+49% YTD)
Account Status (+49% YTD)more_vert
2020-05-29T21:09:13+00:00
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Account Status (+49% YTD) 2020-05-29T21:09:13+00:00close

Our Ride Trades continue to be the main profitability source of the account. We decreased value from last month due to some difficulty to trade VXX on this choppy volatility market. Even using our cautious and selective approach, we lost previously earned money on it. Also, the decreasing IV environment was challenging for the Ride Trade, but we are very well positioned to continue to profit from the trades in place.

Still waiting to increase a bit more the number of Patrons in order to start with a sound base for weekly catch-up on trades and interaction between you and me.

With full transparency on trading and solid learning through live trades posted, we are growing our Patrons base!

Many thanks to all of you!


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Set your trading goals properly
Set your trading goals properlymore_vert
2020-05-23T22:04:29+00:00
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Set your trading goals properly 2020-05-23T22:04:29+00:00close

One of the first and frequent questions my students ask is: "can I double my account in 3 to 6 months' time?". The answer is easy: yes, you can! The problem is that is not easy. Having a goal of this magnitude in trading puts you more on the gambling side than, by opposition to the investing side. If you set such a high target you need to take huge risks to achieve the desired huge target. Eventually, like a gambler, you may win the jackpot and double your account in such a reduced timeframe! But, doing it for the second time will be much more difficult. So, it would be expected huge volatility on the profitability of a strategy with such a high target. My trading style is more on the "investing" side than on the gambler one. I prefer a low steady income than high volatile outcomes.

Let's define a balanced, yet high attractive enough, trading profitability target. Take the S&P500 (the broad market, diversified index): it delivered roughly an average of 8% annually in the last 20 years. If I trade, at least, my goal is to beat the market and take a bit more risk in my trades. Otherwise, it would be better to invest in SPY (ETF that replicates the index).

To be honest, I like to have a shorter time horizon because, as some of you know, I tend to trade in monthly waves. So, I define my target with a monthly goal of 3%! Now, you may ask: Why 3%? Isn't it low?

First, I do not consider it low; in fact, it is high. If you compound 3% a month it will deliver 43%annually, which compared with 8% S&P annual return is highly attractive. If you achieve 40% several years in a row, it will be huge! You will be an excellent trader!

Second, because my strategies are developed in monthly cycles, I can manage and compare it to my monthly trade goal. If one month I get 6% and another lose 3% and the following win 4%, on average, I have a figure to compare!

Third, from my trading experience, it is better to have low and steady profits than high volatile trading results. Usually, I have profit targets for each trade around 10% of the committed investment in that trade. As soon as I get that profit target, I take profits and move to the next one!

As a resume, smaller profits will give higher results in the long-term! Do not set your trading goals too high in order to push you to take unnecessary risks that will deliver in the long-term negative results (I know what I am talking about!).

Keep in mind that trading is about the long term; not the short term. The short term is for gamblers!




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Delta Neutral trading
Delta Neutral tradingmore_vert
2020-05-16T17:49:43+00:00
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Delta Neutral trading 2020-05-16T17:49:43+00:00close

Last couple of weeks we discussed the importance of Implied Volatility in options pricing because the majority of beginner options traders fail to understand it and how important is volatility and how it can be used to our advantage.

The majority of beginner traders are options buyers and miss out on the chance to profit from high volatility declines. This type of trading strategy is called Delta Neutral. One book that I can suggest that explores this concept is “Option Volatility and Pricing” by Sheldon Natemberg. A must-read if you want to move your trading into the next level.

Delta Neutral trading can be used to explore extremes in volatility. The goal is to enter a position that starts in a Delta Neutral (Delta near 0) state and adjust accordingly as long as underlying moves to maintain Delta neutrality. Please bear in mind that not only when underlying price moves that impact Delta, but also when there is an IV change or time passes. If we keep Delta under low value and Volatility changes according to our predictions we end up gaining money from this type of trade.

For example, if we are under a low IV environment and we anticipate a market move down which will cause a spike in IV, we can buy an ATM (at-the-money) Straddle. This strategy involves buying a Call and a Put at 0.50 and -0.50 Deltas that both neutralize each other and the position will gain if market moves in either direction and/or if there is an increase in volatility. By then, if Delta of the position becomes, for example, at -10, we can buy 10 shares or buy 1 Call at 0.10 Deltas to turn our overall Delta close to 0 again (become Delta Neutral).

But now, you may comment that this should not be so simple. Indeed, it is not so easy because with options everything varies and one key issue is time value! As time passes, in the given example, we are buying options, and hence the position will lose money due to options time decay. The strategy described above included only long options that will produce high negative Theta! If the increase in volatility is not fast enough, the position will lose from time decay even if there were an increase in options volatility.

For the ones that are following me, you are now concluding the "Ride Trade" is a Delta Neutral strategy. But a different kind of Delta Neutral strategy that explores not only Volatility changes but is also hedged to Theta! In fact, that strategy produces a positive Theta and we are not stressed about losing money with options time decay. It captures value from time decay because it involves selling options.

Additionally, all the adjustments made take into consideration not only Delta adjustments but also minimizing Theta impact, maintaining it as much positive as possible! Ride Trade solved the problem being Delta Neutral and gaining from time passing. Even, being Vega positive, it can profit in a decaying volatility environment due to a time premium that will compensate for it!

But now, you are thinking that "Ride Trade" is the perfect trade! No, it isn't! There is no such trade! There are circumstances where it does not produce profits, For example, if there is a fast decrease in IV (with a fast market movement up on SPY or QQQ) just after the trade is entered whenTheta is still low. That is why we can have other strategies we can combine with VXX to offset the potential losses.


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user avatar
proptrading - 4 Jun 20 20:32
It depends on how much lots you trade...
user avatar
User #34372567 - 3 Jun 20 03:12
Hi Pedro, Based on the RIDE trade parameters is there a expected Theta value on opening the trade? EG. Theta of >10...
Again, Implied Volatility!
Again, Implied Volatility!more_vert
2020-05-09T18:37:23+00:00
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Again, Implied Volatility! 2020-05-09T18:37:23+00:00close

We can start discussing this post on options pricing where options prices are defined by two main constituents: intrinsic and extrinsic (or time) values. Intrinsic value is an option's inherent value or an option's equity. If you own a $40 strike call on a stock that is trading at $50, this means that you can buy the stock at the $40 strike and immediately sell it in the market for $50. The intrinsic value, or equity, of this option is $10 ($50 - $40 = $10). The only factor that influences an option's intrinsic value is the underlying stock's price versus the option's strike price. There is no other factor influencing an option's intrinsic value.

Using the same example, let's say this option is priced at $14. This means the option premium is priced at $4 more than its intrinsic value. This is defined by the extrinsic or time value of an option. Time value is the additional premium that is priced into an option, which represents the amount of time left until expiration given its risk defined by the market participants. The price of time is influenced by various factors, such as the time until expiration, stock price, strike price, etc. But, the most important factor that comes to define the extrinsic value of an option is (you guessed it!), Implied Volatility!

Implied volatility represents the expected volatility of a stock given the time horizon of the option. As expectations change, option prices react appropriately. Implied volatility is directly influenced by the market participants and expectations of the share price's direction. As the demand for an option increases, implied volatility will rise. Options that have high levels of implied volatility will result in higher priced options. Conversely, as the market's expectations decrease, or demand for an option diminishes, implied volatility will decrease. Options containing lower levels of implied volatility will result in cheaper option prices. This is important because the rise and fall of implied volatility will determine how expensive or cheap time value is to the option, which can, in turn, affect the success of an options trade.

For example, if you own options when implied volatility increases, the price of these options also increases. Hence a change in implied volatility for the worse can create losses, even when we can be right about the underlying direction.

Each option has a different sensitivity to IV changes. For example, short-dated options will be less sensitive to implied volatility, while long-dated options will be more sensitive. This is based on the fact that long-dated options have more time value priced into them, while short-dated options have less. Hence longer-dated options have higher Vega than shorter-term ones!

Additionally, strike prices will also have a distinct sensibility to IV changes. Options At-The-Money have a higher sensitivity to IV, while options that are further In-The-Money or Out-The-Money will be less sensitive to IV. For the same expiration, ATM options have higher Vega than ITM and OTM ones.

Choosing the right strategy when opening a new trade will increase the odds of success. As already seen, checking the IV level is key to an options trader. That is why I look always (and is more important) to IV Rank or IV level before entering a new trade! Why? Because, like when you trade stocks, you buy when you anticipate price will move up! When trading options it is the same, but for IV! We should forecast where IV will move! Use long Vega strategies when IV is low or "sell" IV when it is high!

Check this before entering a new options trade:

. Make sure you can determine whether IV is high or low and whether it is rising or falling. As IV increases, option prices become more expensive. As IV decreases, options become less expensive.

. When IV reaches extreme highs or lows, it is likely to revert to its mean (it is a mean-reverting property).

. If you come across options that yield expensive premiums due to high implied volatility, understand that there is a reason behind. Check the news to understand the reasoning (before earning announcements is common a rising IV environment). Keep in mind that after the market-anticipated event occurs, IV will collapse and revert to its mean.

. When you see options trading with high implied volatility levels, consider selling strategies. As option prices become relatively expensive, they are less attractive to purchase and more desirable to sell. There are several attractive strategies that are Vega negative (covered calls, put selling, short straddles, irons condors, vertical credit spreads)

. When you see options that are trading with low implied volatility levels, consider buying strategies. examples are Call/Put buying, long straddles, Vertical debit spreads. when buying options, better use long-dated options to reduce time decay (lower theta) and hold them through a forecasted volatility increase.


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Is it easy to earn money from options trading?
Is it easy to earn money from options trading?more_vert
2020-05-02T17:41:03+00:00
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Is it easy to earn money from options trading? 2020-05-02T17:41:03+00:00close

Along these years of teaching, some students and followers had put me several questions, and here you have a list of most common ones (and my answers).

1. Is it easy to learn how to trade options?

Yes, it is easy to learn options trading. It is easy to understand their principles and how they work. Like in any topic, as much effort you put into it, the faster you can learn. I can tell you that stock trading is easier: you buy it and expect to sell it at a higher price ... in options trading, not only price movements impact on options pricing, but also time, implied volatility, etc. But, if you ask me, is it easy to trade options consistently? I will tell you (to be fully honest), no it isn't! But you can reach this level if you have the right tools (knowledge and manage risk properly). You can skip a lot of trial and error and grow faster on your path if you have the right mindset and a good coach. Yes, this is true!

2. What are the best books to learn options trading?

Before I suggest any book, I will suggest free education resource available to everyone:

https://www.cboe.com/education/ Here you can learn the basics of options!

There are a lot of books you can learn the basics: here you have some

- Trading Options Greeks: How Time, Volatility, and Other Pricing Factors Drive Profits, by Dan Passarelli

- The Options Playbook: Featuring 40 strategies for Bulls, bears, rookies, all-stars and everyone in between, by Brian Overby

And the bible of Volatility based trading (only after you reach a comfortable level and want to move forward):

- Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Ed, by Sheldon Natenberg

3. What is the best options strategy?

There is not a "best strategy". Options are so flexible that they allow a huge variety of options strategies we can apply in several market conditions (related to the level of IV - Implied Volatility). Options pricing depend in great measure on their implied volatility (apart from other factors). Additionally, there are directional trades (like when we trade stocks) and income trades, where we expect none or minimal market movement! Another factor is the trader style and risk tolerance. Are you able to trade naked options? Or do you only accept to trade limited risk strategies? Another factor to decide is which assets to trade (stock, ETFs, etc). Stocks are usually more volatile because they announce quarterly results which are times of higher volatility. ETFs are more stable... so, a lot of factors that influence which trading strategies to apply!

4. Can I double my account in 6 months trading options?

Over the web, I see a lot of sales pages advertising how to achieve 200% returns on options trading. Or posting past options trades and their profitability and a minority of losing trades. Or many options sites that advertise "10%/month" or "5%/week". They might succeed in doing that for a limited period of time, but it's only a matter of time until they blow up their accounts. Making money with options is easy. Doing it consistently is much more difficult. People see all the hype and think it is an easy task. To become an engineer you have to study for 4 years and after that to become a good one you have to have 5 years of practice! The same applies to options trading!

But to me, transparency to my students and followers is more important! That is why I am posting pictures of the trading platform with fill prices as they happen. If any trade is a loss it will appear to everyone. It is part of the business! We do not know where the market goes the next day. That is why to achieve consistency we need to manage risk, select the right strategy to apply in the actual market conditions!

My code of conduct is to not promise what I can't or what is not the truth! And I will not mislead my Patrons. As stated in my Patron service description, I cannot promise any get rich scheme! I can promise that you will learn from me. From my trades, according to my trading style.

5. In resume, what can you expect when you start trading options?

Like in every topic or job there is a learning curve. As more effort and study you put into the topic, more knowledge you will get into and you can reach better decisions along with your trading. But, it is from common sense that:

The majority of options traders lose more money than they make. The figures commonly referred tell that about 90% are ending up losers and after some period quit trading, but the most important here is that they do not research why they end up failing. Probably if they understood why they fail, they will move to the positive side of the equation!

Only a small fraction of retail traders are consistent. Given the point above, the key to profitability is consistency! The numbers given above will get smaller if the analysis is extended to a 3 to 5 year period. Don’t get discouraged! I have passed that stage (but I had to)!

The best way to start is by opening a Demo account. I always recommend my students to trade demo for 3 to 6 month and after gaining confidence moving to live trading. This way you learn how to enter orders, adjust trades, and more importantly learn from your mistakes without losing real money. If you move to a live account, start small and increase when you increase your confidence;

Expect to have losing trades and live well with it. Too many people quitting after a streak of 4-5 losing trades. Losing trades and have a negative month is part of options trading. The trick is to keep the losses as small as possible and move to the next trade and expect to be profitable. If you have confidence in your strategy and know that is profitable in the long-term, continue to do it under the defined risk limits;

Don’t make your options trade your main income activity. If your goal is to be consistent expect smaller profitability (on average 5% a month is excellent!). If you aim to get rich in a single trade you are gambling not trading to reach consistency!


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Understanding Implied Volatility (IV)
Understanding Implied Volatility (IV)more_vert
2020-05-02T14:58:49+00:00
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Understanding Implied Volatility (IV) 2020-05-02T14:58:49+00:00close

Before entering into details about Implied Volatility (or IV) and its huge relevance on options trading, I would like to point out that, as you can see from all my strategies, entry and exit points are much more dependent on Delta values than on stock or ETFs price movements. This is because Delta also varies with IV (and time, and price position, etc). My strategies are based on probabilities and when are applied will adapt to each moment market conditions! So, when I open a trade with at a 30 Delta Call in a low IV environment, probably this means a 3% move from the actual price. But, maintaining the same strategy in a high volatility environment, it could mean an 8% move or more! As you can conclude, when dealing with options it is better to think about probabilities than of percentage price move! What I mean is, if you sell a Put 10% OTM because you expect to collect premium due to stock move higher or stays at the current level it does not mean anything to me if I cannot understand if that stock is low or high volatile. If you tell me that you are selling Put at -10 Delta, this has a different meaning to me! It does not matter, in this case, if a stock is high or low IV… you sell a Put to collect premium with an average chance of 90% of the options expire worthless at expiration.


Implied Volatility and Statistical theory

When you trade stocks, only price variation enters into the equation. When dealing with options many factors will impact its price, but Implied Volatility (or “IV”) is the main driver that impacts options value. So, when you take a long position in a stock you expect it will increase in price. When you have a net long position in options you expect its IV is low and expect its IV will increase in the future (well, there are other factors involved, but in a simple way, this is what to expect). So, like in stocks, “Sell High and Buy Low” also applies but for IV in Options! Chosen options strategies should take IV level into account! In fact, I check more often the IV level of a Stock than its price chart (I am an options trader; not a stock trader!).

Implied volatility (IV) is determined by the current price of options contracts on a particular stock, ETF, or future. Its value is a percentage that indicates, at the moment, the annualized expected range of 1 SD (Standard Deviation) for the asset-based on option prices. You can see on Picture 1 that, statistically, one standard deviation will encompass approximately 68.2% of outcomes in a sample. When it comes to IV, one standard deviation means that there is approximately a 68% probability of an asset settling within the expected range as determined by options prices. In picture 2 there are two curves that illustrate two assets under different levels of IV. By means of comparison, if both assets have a similar price, the options prices will be more expensive on the blue one than the black one.

Let’s use an example where you can check the options price in two assets, SPY and NVDA (currently at similar prices (282), for an ATM Put at the same expiration. As you can see, IV of NVDA (56.91%) is higher than SPY (33.47%) and consequently, options prices are much different (13.82 for SPY and 22.11 for NVDA).

Some math on Implied Volatility

Given the IV of each option, we can compute the 1 standard deviation expected range (this will have a 68% chance to happen) for a stock's price after one year:

Expected 1-year range = Stock price * (1+ IV) for the top of the range and Stock price * (1-IV) for range minimum.

For one year expected moves, simply multiplying the stock price by implied volatility will do. However, for shorter time frames, the expected range calculation must be adjusted with the expiration date. Here is the formula for calculating a stock's one standard deviation move for any time period:

Stock Price * Implied Volatility * SQRT (Calendar Days to Expiration / 365).

In the given example, for SPY:

282.79 * 33,47% * SQRT (48/365) = 34.1

It means that SPY can vary +-34.1 in the next 48 days (or 249 to 317)

Next week I will discuss IV dynamics or IV changes along the way, as market participants anticipate higher or lower risk. And this also impacts the strategies we will choose.


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Comments (3)
user avatar
User #34372567 - 4 May 20 02:39
Hi Pedro, Hope u are staying safe. The values shown at the top right of every sub-section of option dates, is that the AVG IV, and in the brackets the deviation? Thks.
user avatar
proptrading - 4 May 20 06:16
Hi Brandon, yes in percentage the average IV and in bracket the expected move given that IV at expiration. Cheers
user avatar
User #34372567 - 5 May 20 01:26
OK, Thks for clarifying!
Is it easy to earn money from options trading? 2020-04-25T16:33:04+00:00

Along these years of teaching, some students and followers had put me several questions, and here you have a list of most common ones (and my answers).

1. Is it easy to learn how to trade options?

Yes, it is easy to learn options trading. It is easy to understand their principles and how they work. Like in any topic, as much effort you put into it, the faster you can learn. I can tell you that stock trading is easier: you buy it and expect to sell it at a higher price ... in options trading, not only price movements impact on options pricing, but also time, implied volatility, etc. But, if you ask me, is it easy to trade options consistently? I will tell you (to be fully honest), no it isn't! But you can reach this level if you have the right tools (knowledge and manage risk properly). You can skip a lot of trial and error and grow faster on your path if you have the right mindset and a good coach. Yes, this is true!

2. What are the best books to learn options trading?

Before I suggest any book, I will suggest free education resource available to everyone:

https://www.cboe.com/education/ Here you can learn the basics of options!

There are a lot of books you can learn the basics: here you have some

- Trading Options Greeks: How Time, Volatility, and Other Pricing Factors Drive Profits, by Dan Passarelli

- The Options Playbook: Featuring 40 strategies for Bulls, bears, rookies, all-stars and everyone in between, by Brian Overby

And the bible of Volatility based trading (only after you reach a comfortable level and want to move forward):

- Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Ed, by Sheldon Natenberg

3. What is the best options strategy?

There is not a "best strategy". Options are so flexible that they allow a huge variety of options strategies we can apply in several market conditions (related to the level of IV - Implied Volatility). Options pricing depend in great measure on their implied volatility (apart from other factors). Additionally, there are directional trades (like when we trade stocks) and income trades, where we expect none or minimal market movement! Another factor is the trader style and risk tolerance. Are you able to trade naked options? Or do you only accept to trade limited risk strategies? Another factor to decide is which assets to trade (stock, ETFs, etc). Stocks are usually more volatile because they announce quarterly results which are times of higher volatility. ETFs are more stable... so, a lot of factors that influence which trading strategies to apply!


4. Can I double my account in 6 months trading options?

Over the web, I see a lot of sales pages advertising how to achieve 200% returns on options trading. Or posting past options trades and their profitability and a minority of losing trades. Or many options sites that advertise "10%/month" or "5%/week". They might succeed in doing that for a limited period of time, but it's only a matter of time until they blow up their accounts. Making money with options is easy. Doing it consistently is much more difficult. People see all the hype and think it is an easy task. To become an engineer you have to study for 4 years and after that to become a good one you have to have 5 years of practice! The same applies to options trading!

But to me, transparency to my students and followers is more important! That is why I am posting pictures of the trading platform with fill prices as they happen. If any trade is a loss it will appear to everyone. It is part of the business! We do not know where the market goes the next day. That is why to achieve consistency we need to manage risk, select the right strategy to apply in the actual market conditions!

My code of conduct is to not promise what I can't or what is not the truth! And I will not mislead my Patrons. As stated in my Patron service description, I cannot promise any get rich scheme! I can promise that you will learn from me. From my trades, according to my trading style.


5. In resume, what can you expect when you start trading options?

Like in every topic or job there is a learning curve. As more effort and study you put into the topic, more knowledge you will get into and you can reach better decisions along with your trading. But, it is from common sense that:

The majority of options traders lose more money than they make. The figures commonly referred tell that about 90% are ending up losers and after some period quit trading, but the most important here is that they do not research why they end up failing. Probably if they understood why they fail, they will move to the positive side of the equation!

Only a small fraction of retail traders are consistent. Given the point above, the key to profitability is consistency! The numbers given above will get smaller if the analysis is extended to a 3 to 5 year period. Don’t get discouraged! I have passed that stage (but I had to)!

The best way to start is by opening a Demo account. I always recommend my students to trade demo for 3 to 6 month and after gaining confidence moving to live trading. This way you learn how to enter orders, adjust trades, and more importantly learn from your mistakes without losing real money. If you move to a live account, start small and increase when you increase your confidence;

Expect to have losing trades and live well with it. Too many people quitting after a streak of 4-5 losing trades. Losing trades and have a negative month is part of options trading. The trick is to keep the losses as small as possible and move to the next trade and expect to be profitable. If you have confidence in your strategy and know that is profitable in the long-term, continue to do it under the defined risk limits;

Don’t make your options trade your main income activity. If your goal is to be consistent expect smaller profitability (on average 5% a month is excellent!). If you aim to get rich in a single trade you are gambling not trading to reach consistency!

flag
A little secret to improve your options trading!
A little secret to improve your options trading!more_vert
2020-04-18T13:59:46+00:00
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A little secret to improve your options trading! 2020-04-18T13:59:46+00:00close

Some of my students have some difficulty understanding what is the t0 line (magenta line in Thinkorswim platform) and why it is so important when trading options! It gives a lot more info than you would think.

The majority of options traders are used to pay attention to the traditional risk profile of options at expiration. For example, a Short Call Vertical Spread has the characteristic “Z” shape; a long Straddle a “V” shape risk profile, etc. And this is not a bad thing. With it, the trader has the “view” of its position towards expiration. It only tells you about how the profit/loss of the position will end up. The big issue here is that he will only benefit from that profile (or curve) at expiration; until we get there, time, price changes, volatility, etc will influence how will we get there!

But the key issue is that majority of profitable options traders will close their positions far before the expiration date! Depending on strategies, positions are exited from 5% to 50% max profit. Hence, the expiration line (light blue line in ThinkorSwim) is far less important than the t0 line; which, in fact, shows at present moment where we have our position and to where it would go if there is a price change (or we could also simulate other variables impact).

Check the images attached for the same strategy (with and without expiration date line) to check for yourself the differences. Would you trade the same way? Would you take the same decisions?

To be honest, I check the risk profile graph every single day a couple of hours before the market close. But, in essence, I wouldn’t need it because I am checking the Greeks (1 or 2 times a day using my mobile)! These ones give you a precise position risk at a given moment; the risk profile graph helps you to understand what will happen in case of a price movement of the asset. And for this, you do not need to expiration date line! It will not give you any additional insight into your position risk!

Take this challenge: remove the expiration line (ligh blue) from your options position analysis and manage your risk only with t0 line!


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Account status 15Apr: +45%
Account status 15Apr: +45%more_vert
2020-04-15T17:41:38+00:00
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Account status 15Apr: +45% 2020-04-15T17:41:38+00:00close

Our Ride Trades continue to benefit from the opportunities of a high IV environment and deliver high returns. Our Annual Profitability target was now reached!

I think this is the moment to publicly thank all my Patrons for the support given to continue to move forward with this service. I also want to leave a special word to a smaller group of students (the majority of them are also Patrons) I had taught options trading on 1-2-1 classes (including my proprietary strategies).

It is my pleasure to interact and transfer my knowledge of more than 10 years of research and trading experience!

I think we have a nice base to move forward into the next level where we can also have group weekly meetings to discuss options trading, strategies, and trades in place. Let's wait to increase a bit more the number of Patrons in order to start with a sound base!

With full transparency on trading and solid learning through live trades posted, we are growing our Patrons base!

Many thanks to all of you!


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Stock price charts?! Thanks. I prefer K.I.S.S.!
Stock price charts?! Thanks. I prefer K.I.S.S.! more_vert
2020-04-10T15:12:21+00:00
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Stock price charts?! Thanks. I prefer K.I.S.S.! 2020-04-10T15:12:21+00:00close

Last night, after market closed, I was checking my twitter account and a group of “prophets” were anticipating a market correction next week; another group of “prophets” state this rally will continue, and market recovery is in! Majority of them with nice charts full of support and resistance lines, Fibonacci, Elliot Waives, indicators, … you name it. Like always, I would say majority of those “prophets” have a negative sentiment; if a correction happens, they will twit “as I told last week…”.

The truth is no one can predict market behavior! I started trading trying to predict the next move but, soon, I understood I am not a good forecaster, like big majority! Hence, I continue to believe in the 2 most probable outcomes for next Monday close. Both having equal chance to happen. Either it closes green or red! (I would not bet on a close at the same value of last close…).

That was also the reason why, for several years, I took a different approach on my trading. In the last 5 years I was focused on volatility trading capturing market value from VXX structural edge. Recently, I also incorporated indexes and developed directionless strategies that, under the market conditions (high IV), is also delivering exceptional results (as you may see from my account appreciation – you can find in public posts here; no need to subscribe!). My focus is to manage risk from each trade as well as overall portfolio. Not looking at charts! When I am trading, my screen is 70% of the time in the “position statement” and 25% on strategy analysis on ThinkorSwim platform rather in charts panel!

I am looking at the Greeks of each individual position. All of them are important! Hence, I do not need to check the markets every hour. Two or three times a day is ok for most of the days. Each strategy has a set of Greeks that are most important to me! For example, in the Ride trade, Delta and Theta as well as its Ratio are the most relevant! I always keep delta as neutral as possible! The goal here is capture options decay. In the Surf Trade, I mainly I look for Delta and have it as much negative as possible under certain parameters.

So, my trading style follows the rule of K.I.S.S (Keep it Stupid and Simple). No fancy price charts with lines and a lot of indicators! Yes, I can read charts and I look at them, but I do not base by trades on them! I do not trust the market! It always have a surprise.


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Theta decay does not affect options the same way
Theta decay does not affect options the same way more_vert
2020-04-05T15:12:38+00:00
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Theta decay does not affect options the same way 2020-04-05T15:12:38+00:00close

As explained in a previous post, Theta is the option Greek that expresses an option's expected price variation with the passage of time. Options are "decaying" assets, losing value to their owners, which means that option prices decrease over time. An option's Theta estimates how much an option's price will decrease by each day that passes (with other variables constant - price, volatility, etc).

Apart from impacts on Theta from Volatility changes and other variables, I would like to focus this discussion on how option positioning (At-the-Money, In-the-Money and Out-the-Money) affects Theta and hence time decay of its price.

This is very important to know because majority of books and educational blogs in the web tell that price decay of options accelerates in the last 30 days until expiration. In fact, this is true, but is not the whole truth!

OTM options have only "extrinsic value" and only this extrinsic value decays as time passes. An option's intrinsic value is the option's real value at any given moment, and intrinsic value does not decrease with the passing of time, by definition.

In essence, options that have the most exposure to decay are the ones with the most extrinsic value, which means that At-the-Money options deliver the greatest potential losses from theta decay. They have 100% extrinsic value and is where this is maximum!

Like most things related to options, nothing is linear due to all variables that are changing every day that affetc their pricing. The decay rate of an option may speed up or slow down as time passes. This depends on whether the option is in-the-money, at-the-money, or out-of-the-money.

In generic terms, as expiration gets closer: ATM option decay tends to speed up significantly, but OTM decay tends to slow down or maintain.

In fact, the decay of at-the-money option prices accelerates as expiration gets closer and closer. More specifically, the rate of at-the-money decay is fairly slow from 75 to 60 days to expiration. From 60 to 30 days to expiration, the rate of decay began to accelerate. In the final 30 days, the rate of decay really increases with the steepest decay occurring in the final 5-7 days.

As mentioned earlier, out-of-the-money options decay slower and slower as expiration approaches because near expiration, OTM options will be nearly worthless, which means the option doesn't have much to lose. For these options, the decay curve is steady by opposition to the ATM fast decay curve.

The picture attached illustrates time decay of options across the options chain, as stated in the text.

Knowing these properties, we can really think on strategies that take into consideration of these properties. For example, ATM Calendars have the highest theta decay than OTM or ITM. ATM Short straddles have higher time decay than short strangles that are OTM ...


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Comments (2)
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proptrading - 6 Apr 20 17:36
Hi Ana, good question! That's because higher theta values occur ATM. Check new picture added in the post with highlighted region of Theta; Short Straddles ATM have higher Theta than short strangles because you are selling more ATM options. When you short a Strangle, far OTM you will have lower Theta because you are selling less theta options. Meanwhile, I corrected Straddles and Strangles also in the post (they were exchanged). In the example I am refering to the magnitude of positive theta when you open those strategies (Short strangle and straddles have positive Theta)
user avatar
User #31715003 - 6 Apr 20 04:43
Hi Pedro! Do you mind giving specific examples as to why ATM calendars have the highest theta decay? And why do short straddles have lower decay than short strangles?
Account Status Q1 (32% YTD)
Account Status Q1 (32% YTD)more_vert
2020-04-02T18:12:51+00:00
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Account Status Q1 (32% YTD) 2020-04-02T18:12:51+00:00close

Just disclosing account details. Our trades are moving very good.

Ride trades are producing nice juice!

I must highlight that all trades are shared with all my Patrons with filled prices pictures. No exel files! Simply pictures of filled trades just after they are filled. All trades include their rationale!

Join us and learn our to trade options like pros, managing risk properly!



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VXX trade opened
VXX trade openedmore_vert
2020-03-30T18:07:18+00:00
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VXX trade opened 2020-03-30T18:07:18+00:00close

Decided to open a new butterfly trade in VXX, due to still high IV of its options. Butterflies are still cheap and we can also profit from any IV decrease and theta decay.

This time, bought 10 lots of a VXX butterfly a bit higher than before 41/45/49 for a 0.40 for 17APR. Let's use part of the gains from previous winning trade to use on this one! We are at 18 DTE and we should benefit from nice theta decay.

Our profit target will be, again, 100%: when its price reach 0.80. I entered already a GTC (Good Till Cancel) order at that value and wait for it to be executed.

If there is a continuous price increase in VXX we should exit even before we reach the maximum loss; let's only risk 50% of our max loss (when market price of the butterfly reach 0.20).

PS: This is a bonus for Tier 1 patrons, that are not receiving trades so often due to high backwardation level on entry level strategies!


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VXX Trade Closed for 100% profit (in 2 days!)
VXX Trade Closed for 100% profit (in 2 days!)more_vert
2020-03-30T17:54:15+00:00
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VXX Trade Closed for 100% profit (in 2 days!) 2020-03-30T17:54:15+00:00close

Just wanted to announce the GTC order I had at 0.60 got filled a few moments ago!

The butterfly trade entered on friday paid off. P&L YTD on VXX is recovering, although still negative (254USD).

Just wanted to highlight the account Greeks (and especially the ones from Ride Trades on SPY and QQQ) are spot on! Basically they are with high Theta and very low (neutral) Delta!

Ride trades continue to capture Theta and recovering and very well positioned. We are now at 46 DTE on the front sold options where we will see an increase, day by day, of Theta. At the moment, both "rides" are producing about 130USD per day in Theta value.


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A great options strategy to use right now!
A great options strategy to use right now!more_vert
2020-03-29T14:12:34+00:00
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A great options strategy to use right now! 2020-03-29T14:12:34+00:00close

Markets are under high volatility mode (VIX above 50 for about 3 weeks) and high backwardation levels (at the moment -16%). This puts another perspective into the attractiveness of our “standard” strategies. This means that during these “not normal” times we should look to other strategies that now give us an edge, like the Calendar Spreads we already discussed. In this post I would like to present and discuss other strategy that is currently delivering an edge if introduced properly. It has negative Vega which means it will benefit from Volatility decay as well as positive Theta where we will benefit as time passes.

The (long) butterfly spread is an options strategy is a limited-risk that consists of simultaneously buying a Call (or Put) spread and selling a Call (or Put) spread that share the same short strike and all options are in the same expiration cycle (compared with Calendar spread where we have two options with different expiration cycles). For standard butterflies (there are another type, called unbalanced butterflies that I will not cover here, although we had last week a profitable example!) the distance between the short strike and the 2 long strikes is equal. In fig. 1 you have a standard butterfly done with Calls (it will be the same if Puts are chosen instead).

Another way of thinking is: a long butterfly contains an embedded short straddle wrapped within a synthetic long strangle. This type of structure allows the properly positioned long butterfly to capitalize from time decay and/or falling implied volatility just as a short straddle would. The big difference is that the long strangle “wrap” of the long butterfly severely limits the risk in the position, making it an appealing “directionless” strategy for risk-adjusted return traders.

Butterflies are commonly used when a trader believes the stock price will trade near a certain price in the future (short strike), as a butterfly's maximum profit potential occurs when the stock price trades at the position's short strike at expiration. Since you are selling the center and buying wings, you have a chance of making a maximum of the difference between the two strikes, less your cost of the butterfly. The most you can lose is the amount you paid for the butterfly, giving most typical butterflies a 5:1 up to a 10:1 risk/reward ratio.

Regarding losses or risk involved, this strategy usually have very low risk because they are cheap, which is represented by the fact that they generally have a low probability of profit. Especially under high options IV environment that we are under now, they are highly attractive because they are cheap. Please, compare Fig. 2 where we enter the same butterfly (same short strike and same distance of long options at the same expiration) but in a low IV environment. You can easily see the max profit decreased as well as max loss (light blue line) when compared with Fig. 1.

When entering this type of trade, we should balance how far we position the long strikes. When wider strikes are used, which means the maximum loss is higher, butterflies have higher risk. Compare an example of this effect in Fig. 3, where it was increased from 5 points to 15 points the width between central strike and the other ones.

Greeks: IV and Theta

Time decay (Theta) works in favor of long butterfly spreads. Even though you have two long positions, the two short options still profit more from the time decay than the long positions lose from it. Time decay is highest in the last weeks before expiration and as much as it is near the short strikes.

Long butterfly spreads profit from a drop in implied volatility (IV). This means that it is best to enter a butterfly spread in a high IV environment because it will also is cheaper (lower risk involved).

Trading Approach

When trading long butterfly spreads you should have a range bound market outlook. You should expect that the price of the underlying asset will move little. You can have several alternatives when position the long butterfly spread: at the money, above or down the money. If you feel that the market will not move much you should position your butterfly at the money; here Theta decay is maximized. Usually this is placed when the market is calm and IV is low.

If you check the last VXX trade I opened, it was a butterfly below the money. Due to this high IV environment, I am forecasting (yes, forecasting – not certain!) that under the next week IV and VXX price will come down in order to profit from this trade. A clear example of not position the butterfly at the money. This also impacts the price of this spread when entering it. As far as it is from the asset price, it will be cheaper.

Although, majority of less experienced traders look at the butterfly for its profile and is tempted to exit near the expiration (a few days before) or leaving the options to expire (remember it you can open a butterfly trade for 50USD and expect a max profit of 1000USD), this is a very low probability trade. Butterflies should be exited far before they reach max profit. Profit targets should be defined in the range of 50%-100%!

Do not leave butterflies near expiration date (even though price is in the apex or at the short strikes price) because Gamma will enter into the equation and the profits that you may have could be easily erased in small asset movements! We should try to wait for the t0 line to inflate a bit and this is where we would make profits. When we have around 50% or a bit more, better to exit and cash in profits instead of waiting for a profit target of 200%-300%! I also exit this type of structure if losses reach 50% of the entered price. This will happen when t0 line inflates but the price will become far from the short strikes of the butterfly.

Let’s see how market will evolve next week and if we will profit from the VXX butterfly opened!

Butterflies are also used to protect portfolios on the downside, using very short term butterflies far out-of-the money. This is a cheap way to have protection, instead of buying Puts or Put Verticals. In fact, as soon as the t0 line become to inflate, it works great in case of market drop.


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VXX Trade opened!
VXX Trade opened!more_vert
2020-03-27T18:51:41+00:00
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VXX Trade opened! 2020-03-27T18:51:41+00:00close

Decided to open a butterfly trade in VXX, due to high IV ofoptions. Hence butterflies are cheap.

Bought 5 lots of a VXX butterfly at 39/43/47 for a 0.30 each for 17APR. We are at 21 DTE and from here Theta will start to increase. Our profit target will be 100% or when its price reach 0.60. We could enter a GTC (Good Till Cancel) order at that value and wait for it to be executed.

If there is a continuous price increase in VXX we should exit even before we reach the maximum loss; let's only risk 50% of our max loss (when market price of the butterfly reach 0.15).

PS: This is a bonus for Tier 1 patrons, that are not receiving trades so often due to high backwardation level!


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Comments (3)
user avatar
User #31715003 - 28 Mar 20 08:24
Thanks, Pedro! Have a great weekend!
user avatar
User #31715003 - 28 Mar 20 05:07
Thanks for including the targets in your post. This will make life a lot easier for those who are following your posts in a non-trading hour friendly time zone e.g. Asia Pacific :-)
user avatar
proptrading - 28 Mar 20 07:57
Ok Ana. I will try to put targets when is possible. Cheers
VXX trade closed for 12% profit ... in 2 days
VXX trade closed for 12% profit ... in 2 daysmore_vert
2020-03-27T18:26:22+00:00
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VXX trade closed for 12% profit ... in 2 days 2020-03-27T18:26:22+00:00close

Decided to close the VXX trade in place because we were about to touch the max profit line at expiration (light blue line). Not worth to wait (having money at the table or at risk) to capture a few more dollars.

Taking a nice profit (12% or 100USD for an invested capital of about 800USD) in a 2 day period! Nice.

We are now reducing our loss (YTD) in VXX


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SPY Ride Trade adjustment
SPY Ride Trade adjustmentmore_vert
2020-03-26T19:39:17+00:00
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SPY Ride Trade adjustment 2020-03-26T19:39:17+00:00close

I was checking the profile of t0 line of the SPY trade and its price was at the Apex of the curve. This means at the top of the "hill", where if the price moves higher or lower our profit will suffer (maintaining everything constant). As we aproach expiration it will become more and more steep in the edges of the structure (as we will start to suffer from higher Gamma - steepness of t0 line). So, I decided to smooth it for the downside in case we get another move back in the market addind a Put Vertical.

I opened, buying, 2 lots of Put Verticals (200/210) 17JUL to have more negative Delta at a small expense of Theta. To compensate this move, I added 1 Lot of a new Call Calendar at 280 (May/Jul). Still, we have a huge Vol Skew between both options chains and it seemed attractive.

We end up with a nice structure with Delta of 3 and 70 Theta. A Delta / Theta ratio of about 0, which is pretty neutal!


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VIX trade opened
VIX trade openedmore_vert
2020-03-25T19:02:27+00:00
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VIX trade opened 2020-03-25T19:02:27+00:00close

VIX continue to be in "high" mode. Decided to enter a butterfly trade (5 lots) on APR15 (40/45/50) chain. This one works as an hedged trade from the VXX unbalanced butterfly! Explanation below.

It was somewhat cheap @ 0.50 and given we are at 20DTE, Theta is very attractive. If VIX stays arround these levels and/or decrease to 40-50 we would profit from this trade; t0 line (magenta) would start to inflate and we would get out of it. Check figure 3 for a simulation, where you can see this effect (simulation for Apr, 9th).

If case of a Vol explosion, we should exit as soon as possible for a small loss; we shouold not wait for the expiry of these options in that case to limit losses as much as possible. Nevertheless, in case of a Vol spike we will win from the VXX unbalanced butterfly that will compansate for any loss on this trade.



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VXX trade Close / VXX trade opened
VXX trade Close / VXX trade openedmore_vert
2020-03-25T18:27:32+00:00
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VXX trade Close / VXX trade opened 2020-03-25T18:27:32+00:00close

Given current market conditions (still high backwardation level at -16%), I decided to close for a small profit the remaining Short Call Vertical from the CROC trade. If you check todays' market, we observe that SPY and QQQ are moving up strongly (4% and 2% respectively), but VIX is not decreasing (still +0,5%) and VXX is increasing 6%!

This means that this strong up market move is not being accompanied with a decrease in volatility as should happen under normal circumstances. Markets are cautious and investirs still nervous...

That is why I opened a new trade type (unbalanced butterfly) for April 17 (23 DTE) to capture Theta and have a positive Delta to profit if there is another Vol explosion or steady increase (with consequent VXX price increase). Nothe that the trade only loses if VXX has a fast price decrease. If it stays at current levels, increases or have a slow decrease our positive Theta will bring us profit!

Let's see what this strategy brings, because for June we are too far to enter a new CROC and for May we are too close. ..


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QQQ ride trade adjustment
QQQ ride trade adjustmentmore_vert
2020-03-24T18:28:12+00:00
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After this market "jump", I decided to remove the 2x Put Vertical to hedge. Now we have a pure "ride" with lower Delta (~9) and nice Theta (~47) that is working for us.

Much more Delta neutral position with QQQ price in the middle of the structure!


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VIX Trade Closed for a nice profit!
VIX Trade Closed for a nice profit!more_vert
2020-03-23T19:13:43+00:00
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VIX Trade Closed for a nice profit! 2020-03-23T19:13:43+00:00close

Just closed the trade for a 210USD profit (for a 3*120 = 360USD investment) . Not bad for a week trade ... 58% in a single week!


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Calendar Spreads have an edge under high IV
Calendar Spreads have an edge under high IV more_vert
2020-03-22T10:42:12+00:00
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Calendar Spreads have an edge under high IV 2020-03-22T10:42:12+00:00close
Note: because this topic is so relevant at the moment I republish this post (with some improvement)


Calendar spreads (or time spreads) are an options strategy that consists of buying and selling two options, either Calls or Puts, at the same strike price, but using different option chains (meaning different Days until Expiration). If a trader sells a near-term option and buys a longer-term option, with the same strike price, the resulting structure is a long calendar spread. To give an example is to sell a shorter term SPY Call at 270 17 APR 20 (currently at 33DTE) option and buy a longer term Call, again at 270, on the 15 May 20 chain (currently at 61 DTE). Check figures in the end of this paper.

Long Calendars are entered for a debit. The trader pays more for the long-term option than he collects for selling the near-term option due to higher time premium from the longer term one. . In the figure example, the trader paid $1.79 for the call calendar on SPY. In a worst-case scenario, if the stock price moves significantly in either direction away from the chosen strike price, the max loss will be the price paid for the calendar spread.

When trading long calendar spreads, we expect the stock price to trade near the strike price as time passes. If it does, the front month (short option) will decay faster than the longer-term long option. This is what we intend and will result in profit. You can check in the image (trade profile) that there is positive Theta: this means time is on our favor. As time passes, the short option will lose more value than the long option, generating profits for a long calendar spread trader.

In the example given, the position has positive Theta of USD4.9. This value means a trader who owns this calendar spread should theoretically make USD4.9 in profit with each day that passes, all else being equal. The positive Vega value of USD10.96 indicates that the long calendar spread trader should profit by $10.96 if each option's implied volatility increases by 1%.

Because calendar spreads (long ones) are Vega positive (bought option implied volatility is greater than the Vega of the short option, resulting in a net positive Vega position) there is the general idea that when there is a Volatility increase the Calendar will benefit. It could be expected (for the novice trader) since the longer-term option has a higher Vega than the front month option, that the long option "would" gain more value than the short option when implied volatility increases. In the ideal world this could happen. In the real world this do not occur, especially in high IV spikes, where the short-term and long-term IV do not change in tandem, at the same rate.

When there is a huge volatility spike, the IV of the near-term option rises faster than the longer-term one. In the option chain image you can see on the right side the average implied volatility of SPY options chains. For example, the 11MAR20 has 49% average IV and 17APR20 has 35%. The current market options volatility structure is not normal (we are facing a huge IV spike due to Corona Virus) and is said to be in backwardation (similar to futures price structure). This is, in fact, a good situation to buy Calendar spreads due to the high IV of the near-term option (higher at the moment) and buying lower IV of the longer-term option. The position stated in the image shows an IV of 27.13% (on the shorted option) vs 24.97% (on the long option). In that example, we are silling High IV and buying low IV, which is good! So, when SPY start to settle and options IV decrease and move to a norma state of Contango, the trader will benefit and could have profits if the movement is not so violent to the upside. Near-term option IV will decrease faster than the other and profits will be cashed in. Even being a Vega positive trade in a lower IV environment!

So, despite the fact that long calendar spreads trade with positive Vega, they usually lose money from an increase in IV.

In resume, Calendar spreads usually are not good long volatility trades, even though they have positive Vega.

So, when can we use Calendar Spreads?

1. Long calendar spreads are good in case of low IV (where we expect small movements in the asset). In this case profits will come mainly from time decay (Theta);

2. Long calendars have positive Vega, although they can be highly profitable to entry in high IV environments due to volatility skew between both options chains. We are selling higher near-term IV and buying cheaper longer-term IV. If the market trades sideways for one or two days and volatility falls, the near-term IV should fall faster than the longer-term IV, translating to quick profits

Trade ilustrations:

Fig. 1 SPY Calendar entered at high volatility environment – backwardation of options chain – Sold option at higher volatility than bought option. Trade cost = 4.2USD (profit zone: 242 to 302). Sold option at 52% IV and bought option at 48% IV.

Fig. 2 SPY Calendar entered at low volatility environment: normal market conditions (contango in volatility options chain structure): sold option at lower volatility than bought option. Trade cost = 6USD (profit zone: 251 to 291). Sold option at 45% IV and bought option at 48% IV.

Fig. 3 SPY Options chains where you can see on the right the decreasing average IV from shorter term to longer term chains.

There is clearly an higher edge on Fig 1 where it was bought cheaper volatility and sold expensive volatility!


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VIX Futures Curve
VIX Futures Curvemore_vert
2020-03-21T15:20:05+00:00
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VIX Futures Curve 2020-03-21T15:20:05+00:00close

The VIX term structure (or "VIX futures curve") is the relationship between the prices of short-term and long-term VIX futures contracts.

The shape of the VIX futures prices when plotted (upwards, downwards, or flat) indicates whether the market is expecting more or less market volatility in shorter-term or longer-term periods.

Additionally, the shape of the VIX futures curve has implications for the performance of volatility-related products.

The shape of the VIX term structure will fall into one of two categories:

Contango (Upward Sloping): Longer-term VIX futures contracts are more expensive than shorter-term contracts. Contango tends to occur in quiet market periods and is also the most common shape of the VIX futures curve. Check figure 1 from Vixcentral.com

Backwardation (Downward Sloping): Longer-term VIX futures contracts are less expensive than shorter-term contracts. Backwardation tends to occur during periods of extreme market volatility. Check Figure 2. from Vixcentral.com

To understand each of these curves, let's look at an example of each scenario.


Contango: Upward-Sloping VIX Futures Curve (fig.1)

The following chart demonstrates what an upward-sloping (contango) VIX term structure looks like:

On this example, the VIX Index was circa 13 while the VIX future (approximately 120 days away from settlement) is higher at about 17. The upward sloping nature of the curve suggests that market participants believe volatility will increase from 13 in the future, which makes sense because the long-term average VIX level is around 20.

In the event that the VIX Index (prices of S&P 500 options) remains around 13, the price of each of these VIX futures contracts will lose value as time passes.

Consequently, any long VIX futures traders will lose money, as well as traders who have on bullish trades in related volatility products (bullish VIX option trades, VXX and UVXY). On the other hand, traders with short VIX futures contracts or bearish positions in volatility products will are likely to profit (bearish VIX option trades or SVXY).


Backwardation: Downward-Sloping VIX Futures Curve (fig.2)

The following chart demonstrates what a downward-sloping (backwardated) VIX term structure looks like:In this case, the VIX Index is around 70. However, the VIX futures contract (about 150 days until settlement) is about 30 points lower at 36. The downward-sloping nature of the curve suggests that market participants believe volatility will decrease from 70 in the future, which makes sense because the long-term average VIX level is around 20.

In the event that the VIX Index (prices of S&P 500 options) remains around 70, the price of each of these VIX futures contracts will "slide up the curve" as time passes. Consequently, any short VIX futures traders will lose money, as well as traders who have on bearish trades in related volatility products (VIX options, VXX, UVXY, etc.). However, any traders who are long VIX futures or have bullish positions in volatility products are likely to make money.

Source: projectoption


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VXX CROC trade adjustment
VXX CROC trade adjustmentmore_vert
2020-03-20T17:57:47+00:00
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VXX CROC trade adjustment 2020-03-20T17:57:47+00:00close

Given the current volatility drop and the "unbalanced condor" structure we had in VXX (with negative Delta, hence sufering from current VXX price decrease), we decided to close the 5 lower Put Verticals. We continue to have in place the upper Vertical that is now benefiting from positive theta. We also turn this position in Delta negative and we will benefit if VXX continue to lower its price.


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QQQ Ride adjustment to capture more Theta and decrease Delta
QQQ Ride adjustment to capture more Theta and decrease Deltamore_vert
2020-03-20T14:17:44+00:00
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QQQ Ride adjustment to capture more Theta and decrease Delta 2020-03-20T14:17:44+00:00close

Decided to adjust this trade in order to decrease Delta and increase Theta. As you saw from previous figures, the QQQ lower strike calendars were been touched by price. Given that we are having huge swings in the market, it is better to lower Delta (it was around 39 before the adjustment) and Theta (was around 40 before adjustment).

So, we closed the upper 3 Call Calendars @222 and open new 3 Put Calendars @ 165 (at about 32 Delta on the May Option Chain). Another justification to open a new calendar is that implied volatitility is very attractive, where we sold the May options at an IV of 63% and bought the July at 55%.

After the adjustment QQQ price is in the middle of the structure and Delta is about 6 and Theta increase to 48-50. Hence, our Delta/Theta ratio is nicely reduced.



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VXX Croc adjustment
VXX Croc adjustmentmore_vert
2020-03-18T19:20:24+00:00
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Due to huge increase in VXX price, touching the nose of the CROC I had to adjust the position.

In fact, due to current extreme conditions, the adjustment is not anymore a CROC trade. It is now an unbalanced Iron Condor!

Basically I rolled up the lower Put vertical (from 31/29 to 45/43) for a credit, removed the central Short Call Vertical and maintained the upper vertical. We have now a smaller limited risk to the upside if VXX continue to rise (and it will with this high backwardation level (18% at the moment).

We have an increased Theta with this position.

Tought days, but we need to defend our positions!



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Account status at first month at Patreon
Account status at first month at Patreonmore_vert
2020-03-17T22:52:00+00:00
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Account status at first month at Patreon 2020-03-17T22:52:00+00:00close

I was checking initial posts and found out that today it is the celebration of the first month Patreon webpage! Back then it was 17th Feb and we were could not predict what we are passing now, with the covid-19 plague!

When I started account P&L was about 800USD and, currently (at the peak of Corona Virus), it is 2900USD! Well, probably a bit lower (circa 2500USD), because the figure shown is after market close and prices are not exact.

Also, I would like to thanks all my Patrons that keep motivating me to continue to push further.

I am here to help you and teach about options trading and my strategies! Just email me if you have any comments, ideas, doubts.

Thanks to all!


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"Ride Trades" continue to deliver / Account status (+24% YTD)
"Ride Trades" continue to deliver / Account status (+24% YTD)more_vert
2020-03-17T19:23:09+00:00
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"Ride Trades" continue to deliver / Account status (+24% YTD) 2020-03-17T19:23:09+00:00close

Wanted to make a post on each trade we have in place and share the account status; you have all the in in the images uploaded. Comments below:

VIX Butterfly: small profit coming and expect more if volatility comes down and theta increases - trade well positioned

VXX CROC: small loss (although it comes mainly from bid/ask spreads that are still very wide - trade well positioned

SPY Ride: Profits coming in due to time decay from sold options but also its implied volatility decrease - trade well positioned with low delta/theta ratio!

QQQ Ride: profits coming in due to time decay, price increase (Delta) and decrease in IV - trade not well positioned; QQQ price sits a bit below lower calendar. I am thinking to close higher Calendar and open a new one at lower strike. I will decide later, but it could help to reduce overal Delta risk and increase a bit Theta. Also trade could be better positioned with price near central calendar strike.


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Worth to mention today the robustness of "Ride Trades" given 8% market selloff
Worth to mention today the robustness of "Ride Trades" given 8% market selloffmore_vert
2020-03-16T18:18:54+00:00
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Worth to mention today the robustness of "Ride Trades" given 8% market selloff 2020-03-16T18:18:54+00:00close

Our SPY and QQQ Ride Trades are well positioned given the todays' sellof.

You can check by the figures, both structures are cashing in profits from Theta decay. Both are in positive territory.

SPY: 14 Delta and 74 Theta - giving a very low Delta/Theta Ratio! Spot on trade, cashing in from theta decay

QQQ: 23 Delta and 34 Theta - below 1 Delta / Theta Ratio! it is ok, but if market falls a bit I am considering to add a new Calendar trade to lower Delta and add some Theta! Pay attention to the fact that we have in place a Vertical Spread (2 lots) that is helping to decrease Delta of the overall position!

Currently, our account is up (YTD) USD1.9K which is very good given the current market conditions!


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VXX CROC Trade added, capturing high Vol and Theta
VXX CROC Trade added, capturing high Vol and Thetamore_vert
2020-03-16T16:27:07+00:00
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VXX CROC Trade added, capturing high Vol and Theta 2020-03-16T16:27:07+00:00close

Here you have a new CROC. We took profits from previous one where VXX price was approaching the "nose". Entered this new one to have a more well centered CROC trade. Note that the nose was at maximum available strikes - not at 20 Delta. It is at 40 Delta. But given the current conditions if VXX price continue to rise, we can close the position at any time without any loss. We have plenty of room until 75.

Nicely sitted trade capturing Theta. Delta is positive, but if VXX price comes down, we are protected by Vega which will offset the Delta loss (as well as Theta).


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VIX Puts trade added / VXX CROC Closed for profit
VIX Puts trade added / VXX CROC Closed for profitmore_vert
2020-03-16T16:00:15+00:00
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VIX Puts trade added / VXX CROC Closed for profit 2020-03-16T16:00:15+00:00close

As posted yesterday, here I am sharing a VIX butterfly (3 lots for 45/55/65) that was added a few moments ago at a cost of 1.20.

You can check that it is wide and, due to high Vol, it was comparably cheaper than usual. We are now benefiting from positive theta; also, if Vol drop we will benefit from it (butterflies are Vega negative trades)!

Also, you can check the closure of VXX CROC trade with an 85USD profit.

Bonus trade for Tier 1 Patrons!


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A VIX options trade to consider Monday. Seriously!
A VIX options trade to consider Monday. Seriously!more_vert
2020-03-14T19:14:12+00:00
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A VIX options trade to consider Monday. Seriously! 2020-03-14T19:14:12+00:00close

I am looking to enter this trade setup monday if high volatility persists (as I think it will!).

It is a Put VIX Butterfly (40/50/60) for 15 Apr that is cheaper than usual given the high implied volatility. This means the risk / reward to enter it is very attractive! Given the pricing that it is expected to open (circa 1USD) for each lot, it is very attrative to risk 1 and get 8. Obviously we would not expect to earn the max value of the structure but about 100USD per lot, which to risk a max loss of 100USD is quite good. We will not reach this max loss level because t0 line in butterflies are pretty flat with 30DTE.

This structure will capture theta decay as well as eventually decrease in volatility. Also, it is positioned a bit lower than current spot VIX spot (54) but centered to April Future current price. If, in about 1 week, VIX price decrease into the 40 area we should collect our profits with this trade.

Atention: VIX options are not quoted to VIX Spot; they are quoted on the corresponding future! In the above choosen option chain (15 Apr), options are related to 15 Apr VIX future (at 50.15 - check graph with VIX Futures price structure). Also you can see a huge backwardation level between the 2 front month futures.


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Ride Trades: QQQ Adjustment & new SPY trade entered
Ride Trades: QQQ Adjustment & new SPY trade enteredmore_vert
2020-03-13T19:40:31+00:00
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Ride Trades: QQQ Adjustment & new SPY trade entered 2020-03-13T19:40:31+00:00close

Making a brief per trade:

1. VXX CROC Trade: no adjustments needed; capturing theta; price sits in flat t0 line

2. QQQ Ride Trade: added 2 Put Verticals (bought 155/165 on 17Jul) to reduce positive Delta at a small theta reduction (circa 1USD per day); currently Delta/Theta ratio is below 1 which is ok.

3. SPY Ride: decided to close previous trade cashing in profits and enter a new one, better positioned at a longer term (May / July expiry dates) reducing overall risk - especially from Delta (and Gamma) now that we are approching expiration date. Again, the implied volatility of May options is higher than July, which is very good for this type of trade - the Vol Skew between options chains is attractive to enter new trade with an edge.


Account comments:

As stated before, we decide to close the VXX Surf trade for a loss, in order to free funds. I will withdraw 10k as I added 2x 5k to add more trades, defending positions. After all the adjustments we made and new trades there is an availability of cash of 13k. So, we can compare with the starting position of 10k at the start of this year.

At the moment we covered the losses of the VXX Surf Trade from the Ride Trades. We are now with about 1k YTD profit which is good for our trade style and strategies given current market conditions.


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VXX Surf Trade Closed 2020-03-13T19:06:38+00:00

Given the high backwardation level and high Buying Power involved of the 2 Surf Trtade lots, we decided to close it for a loss (circa 770USD). We could have had the decision of roll the Call for May or June (even at higher strike value to increase the negative Delta), but given current market conditions it is better to assume losses and when Volatiltiy starts to decrease, we will enter new trades, according to strategies guidelines.

VXX CROC trade is doing good as well as the Ride trades, which, given current market conditions shows the robustness of this trade!


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VXX Croc trade nicely positioned and profiting!
VXX Croc trade nicely positioned and profiting!more_vert
2020-03-12T21:40:10+00:00
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VXX Croc trade nicely positioned and profiting! 2020-03-12T21:40:10+00:00close

Just wanted to post this info about the CROC trade that currently sits on a comfortable area.

Theta is positive, Delta is neutral; check in the chart the t0 line horizontal in a big part of the structure.


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QQQ "Ride Trade" profit taking / New QQQ trade entered
QQQ "Ride Trade" profit taking / New QQQ trade enteredmore_vert
2020-03-10T21:31:00+00:00
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QQQ "Ride Trade" profit taking / New QQQ trade entered 2020-03-10T21:31:00+00:00close

Decided to take off risk from the table closing entire QQQ Ride trade for nice profit! Check YTD status.

Added a new QQQ Ride trade for the period May / July with calendars at delta strikes -25 , 50 and 25 (this Delta are for May options); decided to spread a bit the higher and lower calendars. Not the usual -30, 50, 30 due to current market conditions with still high volatility. You can also check (see figure 1) that May sold options have higher implied volatiltiy that the bought options which is good for this kind of trade! You can also check the profile of the trade in the same figure.

Regarding SPY Ride trade, sold the hedge Put Vertical (310/315) for a profit and also some Calendars (337 and 316) to become better positioned. You can see the new profile of the trade after the adjustments. SPY market price in more on the central position of the structure (ideal position with very low Delta). I was about to decide to close the entire position, but given the current structure and very high Theta and almost Delta neutral, let's profit from the time decay the sold options are now delivering before closing the entire trade and open a new one for the same period as the one entered today for QQQ.

As you can also see for the YTD results of both SPY and QQQ, we recovered nicely into profits!

I am also joining an image from yesterday CROC trade that is almost unchanged (small loss) even after the 8% drop on VXX price; as I antecipated yesterday this price drop was also included a implied Vol drop of VXX options and hence the loss was not so high as would have been expected given the negative Delta. Vega played as an edge! Let's continue to have this trade on and benefit from positive Theta (also hedging against Surf Trade in place).


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QQQ and SPY trade adjustments added
QQQ and SPY trade adjustments addedmore_vert
2020-03-09T21:04:15+00:00
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QQQ and SPY trade adjustments added 2020-03-09T21:04:15+00:00close

In order to reduce Delta of both positions we closed upper Calendars of both trades (SPY and QQQ) and opened new ones Calendars below the money around 30 Delta:

1. QQQ: Closed 238 Calendar Puts; Opened 190 Calendar Puts;

2. SPY: Closed 344 and 327 Calendars and Opened 260 Put Calendars;

You can check in last photo the prices of both opened and closed trades. And also de prices of the CROC trade opened today.

Also, you can also check the current trades profile, where you can see the current prices of QQQ and SPY are now better positioned (inside the "tent"). Also, note that Theta is also high and bigger than Delta, meaning we are nicely protected by daily time decay of options. 17APR has now 39 DTE and we are approaching our deadline of 25-30 Days where we should close our trades and enter new ones.

But markets are very strange at the moment. Our VXX Surf trade is on the losing limit; probably I will adjust options tomorrow for longer dated Calls with higher strike to deliver a more negative Delta and benefit from an "expected" VXX price decay... we do not know! Or even close the trade, assume losses and move on! We have now a CROC trade in place that it is expected to profit from any Vol or price decay of VXX... let's see what market will bring us tomorrow!

Happy and safe trading!


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CROC Trade added!
CROC Trade added!more_vert
2020-03-09T20:36:07+00:00
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CROC Trade added! 2020-03-09T20:36:07+00:00close

Given the current very high implied Vol of VXX, we decided to add a new trade: CROC one.

As you can se by the profile, if VXX price or VXX options implied Vol increases, we could benefit from it. Meanwhile, we are have time decay on our side as we have positive Theta.

In case on decreasing Implied Vol and/or VXX price decreases, we could have a small loss or even a gain, depending on the velocity of price and implied volatility move.





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Current market status is ideal to enter a VXX CROC Trade
Current market status is ideal to enter a VXX CROC Trade more_vert
2020-03-08T19:30:33+00:00
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Current market status is ideal to enter a VXX CROC Trade 2020-03-08T19:30:33+00:00close

The CROC trade is an advanced level options strategy that I developed that will benefit from high implied VXX options. Currently VXX has an IV Rank on 100%, meaning that have the highest implied volatility level for the past year! At the moment, VXX at-the-money 15May Puts have more than 100% implied volatility. We are on the right spot to enter a CROC trade!

This is a mid-term strategy because it uses 70-80 DTE options, where there is no need to monitor it daily!

Additionally, it can be entered under backwardation of VIX Futures by opposition with other volatility selling strategies that I am using / teaching. In case of longer period of backwardation and VXX will increase its price, this strategy will benefit because it has slightly positive Delta. Since it has negative Vega it will benefit if VXX options implied volatility decreases. So, we have time, volatiltiy and backwardation (if continues) in our favor!

In resume, it includes a combination of 3 vertical spreads, with different lots at specific delta strike prices. The profile of the trade (you can see it in the figure above) resembles a CROC with the head / eyes above water with a long nose ...

The main characteristics of this trade (named due to its shape), has all any options volatility trader want in a trade:

1. A limited risk to the upside – plenty of room to manage in case of a volatility spike! Even gaining from it!

2. Has a controled risk on the downside;

3. Benefits from VXX price increase (in case of volatiltiy spike and/or backwardation on VIX futures)

4. Benefits from options time decay (Theta positive)

5. Low delta sensitivity, compared to the other strategies (smooth, long t0 line)

6. Highly consistent;


If you subscribe for Tier 2 Patron, you will have access to all details on this strategy and available trades as well as its management.




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VXX Surf Trade Scenario Analysis
VXX Surf Trade Scenario Analysismore_vert
2020-03-08T17:53:52+00:00
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VXX Surf Trade Scenario Analysis 2020-03-08T17:53:52+00:00close

Markets continue to be in high volatility mode:

1. high backwardation level - closed on friday 15%

2. VIXclosed above 41 and well above March (front month) future!

My expectation is that the market will continue under this mode for a few more weeks, until the numbers of Covid-19 infected people start to shrink and governments remove anti-contagious measures. In Europe is starts to spread strongly and measures are being taken, afecting most businesses contributing to markets nervouseness.

Our position is negative about 700USD - almost at maximum loss; we have 2 covering Calls 17Apr @20 on our 200 Short shares.

Under this scenario, we have several options regarding our position:

1. Close it, assume losses and wait for better conditions to enter new trade;

2. Wait 1 or 2 more weeks to take any decision;

3. Roll our Calls to May and gain some more time (reducing theta and put our Delta more negative) with a small loss;

4. Buy 2 Calls - if we believe in the scenario of continous Vol increase and maintaing backwardation level. Under this scenario VXX price will continue to move up;

5. Out of scope is to add more 100 covered shares; only when contango enters.

I have no idea where the market will move in the next week but I can see that it recevered from an higher low on friday, giving some signs of intention of recovery. But this is technical analysis... which is only an indication, not to be too much confident.

Given current market conditions I would consider as much probable scenarios to take decision in next days is 2. and 3.

I am having profits on "Ride Trades" currently in place; probably tomorrow I will close them, cash in and enter new ones, better positioned! With the money available I will probably enter a CROC Trade on VXX. Current high implied volatility of VXX options and price level are delivering attractive credits!


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QQQ / SPY Ride trades cashing in strongly!
QQQ / SPY Ride trades cashing in strongly!more_vert
2020-03-04T23:00:36+00:00
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QQQ / SPY Ride trades cashing in strongly! 2020-03-04T23:00:36+00:00close

I want to share the current ride trades positioning after these 2 days of market recovery. In fact, not only Delta (positive) of both positions helped to recover from negative status but decrease in implied volatiltiy was the main responsible for it. QQQ ride is now positive and both position have wide price intervals where it could move and we are safe, cashing in from positive Theta!

As you can see from their structure, SPY can move from 290 -340 and we are ok in our position; QQQ has also a wide range - from 190 to 240. And as time is passing theta value will increase as we are approaching expiration date! It paid-off to add new position (Calendars) to each trade capturing the volatility skew of both option chains (shorter vs longer term). Even if volatiltiy does not crash we have a confortable Theta to cash in!

Theta/Delta ratio is also at very good levels. In SPY is even below 1 and QQQ is about 1.


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