Mailbag for January 29, 2010

The Mailbag is BACK. I hope you Option Traders enjoy! Don’t forget to check out the new article I wrote for SFO!
SFO article: How Well Do You Know Your Vega?

Hey Mark,
From my point of view biggest problem for now is to defend existing Calendars and Condors strategies. I’ve already done adjustments for all three Calendars for DIA, SPY and IWM because they hit BE. And even more fun, my DIA – now Double Calendar – is near BE again.
Regards,
Czarek
Czarek,
One of the biggest problems that traders have is using all of their bullets at any given time. A bullet is my analogy for capital that the trader is able to trade. Generally when I trade I do trade the same strategies over and over again. BUT, I always keep capital lying around in case I see an opportunity to pounce on. Never be so invested that you are unable to jump on a ‘berry’ trade. BTW we used to call awesome trades ‘berries’ which I always found funny since I don’t like berries very much.
SEB

Mark,
What about shorting VXX [instead of using double diagonals or calendars on volatility pops]? VXX is based on implied volatility swaps so that should give you a straight short vega position on this month. It will not let you take advantage of inter-month spreads though.
Any theories as to why VXX has been dropping while SPY is dropping slightly as well? Volatility has dropped a lot in the last few days?
MktMkr

MktMkr
This is an option blog; the VXX is an excellent way to trade the VIX straight up. However, many people cannot go in short whatever they please. In those scenarios I think options are the best way to trade. Also, as you stated if I am looking to put on intermonth spreads, the VXX is not a great product.
As per your second question, check out this article, might explain what you were seeing
How option time premium decays over the weekend
SEB

Mark,
Why do you set PUT side of your spreads so far away from ATM [after this downturn]? Is it due to negative directional bias or it might be related to greek setup (Vega) that you want to achieve?
Thanks
Ron

Ron,
I try to treat every volatility trade as if the direction doesn’t matter (unless I have a directional bias); especially, whey I open a trade. Thus, when I set up new trades based on IV I try to set calls and puts at an equal distance. In this case of the trade you were asking about it was about 50 points. That presented the certain greeks and probabilities I was looking for. In this case I wanted flat vega and a wide set up.
SEB

Hi Mark,
I have recently changed brokers to TradeMonster and would like to thank you for the special rate – this makes the commissions charges great! Just a question, I have been getting used to the site before placing any live trades and found that most of my usual monthly income products are not supported with the trigger quote. How do you place orders to make adjustments on your positions? – do you just sit and watch the markets all day (I don’t want to do this as my last broker was TOS and it was so easy to just place an order to trigger if the underlying hit a certain price) or do you select a price you think the spread could be worth at that adjustment underlying price? Your thoughts / knowledge much appreciated!
Cheers,
Steve

Steve,
I am not an expert with TM. I personally watch the market all day and really don’t deal with trigger quotes. However, they have a really good staff. If you email me a more exact question, including the product and what you are trying to do, I will make sure you talk to the right person to help you. Mark@option911.com
Thanks,
SEB

Mark,
Negative skews were pretty high RUT JAN/FEB ATM Spread about -3.5, would that have been a good time for a reverse calendar. Implied volatility was kept low until the holiday in the front month. BTW GREAT site, good job Mark!
John M.

John
Just because the spread is wide doesn’t mean it’s a perfect time for a reverse calendar, although it can. Before entering a theta negative trade, ask yourself why the trade looks this way. In this case I certainly would not want to put on any trade until after the holidays. Although, I would have been wrong because a reverse calendar done before Christmas would have done well by Jan 5, and even better over the next week. Thank you for the thoughts on the website, I think it’s great as well. Of course I think everything I do is great. You should see me after I take the dog for a walk. I am always saying “Man am I a great dog walker!”
SEB

Mark,

-V

V
I would say mentoring in not absolutely necessary to advance a career, however let me say this. I went through a year of training before anyone was willing to put me on a badge. I am sure if you asked Dan Sheridan my boss and general trading guru, he would tell you something very similar. Again, getting mentoring will lower the time it takes one to learn to trade. It also may help the trader avoid some of the losses due to being green at trading. Check Dan and me out at my day job at www.sheridanmentoring.com if I didn’t think it was a great place to learn, I wouldn’t work there.
SEB

I hope you enjoyed the mailbag, keep the questions coming! I’ll try to write something tomorrow as well!

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