Welcome
I just wanted to take this time to welcome everyone to the Chicago Options Traders blog. I will be posting on here from time to time as well as answering questions from the group and also just allowing the group to interact with each other. I will also be posting relevant articles that I find of interest to the group.
In order to post to the boards you need to register. Very simple and painfree process. I started this blog at the recommendation of one of our members. I felt sending out mass e-mails to everyone was getting burdensome with every question and answer. This will work much better.
Good trading to everyone!
In order to post to the boards you need to register. Very simple and painfree process. I started this blog at the recommendation of one of our members. I felt sending out mass e-mails to everyone was getting burdensome with every question and answer. This will work much better.
Good trading to everyone!
posted by John at 12:20 PM
32 Comments:
John:
Once again thanks for your efforts on our behalf. This is a great idea, however, I am not sure I can figure out how to use it. I attempted a comment once, was surprised it knew my display name, and when I went to publish it, got a THIS PAGE CANNOT BE DISPLAYED MESSAGE. So must be doing something incorrectly.
The instructions are befuddling
Suse
John:
Guess it worked, but have no idea what I did
Suse,
Can you please tell everyone what you did to register and post? Also for some reason, I don't see your name showing up as a member but you posted.
OK, in order to post simply go to post a comment. It will ask for a username and a password. Fill that in and it should allow you to post. Let me know if anyone is still having problems.
John,
Looks like it's working fine. Great idea! I can check it from anywhere at any time. Thanks.
Herbert
Testing
Trader tax expert reference?
John (or others),
I've just recently started trading full-time for my own account. I'm trading a in a JBO and am getting professional trader status with mark-to-market accounting.
My question: can someone direct me to a tax expert so i can do the proper paperwork and filing with the IRS to ensure my trader status?
thanks for setting up the blog,
michael
Mike,
I trade out of a JBO as well as a professional trader. I'll ask around some of the guys at my firm and see what I can find out for you.
Well, it looks like everyone is figuring out how to post now. That's good. I know it's not as easy as it should be, but it's free. If anyone is still having trouble, let me know through e-mail and I'll try to walk you through it.
Hey great idea.
I just changed the color to a lighter blue. Let me know if this color works better for everyone. The black background was nice but I guess it might be hard on your eyes if you spend too much time reading this blog which I hope you. So let me know if we should keep this color.
Hello John
I would appreciate information/recommendation for tax software and accountants in the chicago suburbs that know how to handle returns with lots of option transactions.
Trader status I have not done yet and wonder who has done it and their experience. Are you worried that you rarely can ever go back from mark to market accounting and have long term capital gains on your stock portfolio or are you segregating accounts so this is not a problem?
Has anyone tried tradelog? Can either turbo tax or tax cut premier editions process equity option transactions including exercise and assignment?
Well, finally figured it out.
Still looking at APPX trade. Seems best strategy is to place multiple trades. The Jan 45 / Feb 50 (7:8 ratio) and the Jan 35 / Apr 40 (6:8 ratio) both are credit trades (no risk if stock falls) and favorable results if vol falls 40 pts. If stock soars to $55 (apparently not contemplated by market), than both will make a bit.
Still looking for a downside on the Jan 45 / Feb 50 trade. Appears to have a high ROI through all price points with a 60 pt decline in vol.
Len,
I'm not sure I understand why you are so hesitant to take a small debit on this trade. The trade you propose has very little upside, espeically for an FDA play. And at the same time you want to put on 4 legs.
I would try to keep this as simple as possible. For a .30 to .50 debit you can put on a trade that can payoff 2 to 4 pts. That's why we trade FDA plays, to get that kind of payoff. You simply can't get that under normal market conditions. I would count on the vol coming in at least 50 pts. And yes, 50 plus on the stock price is very possible on the news.
Pay no attention to the action in the stock leading up to the news. It won't tell you anything. This is a stock with a small float and very high beta. So it's going to move all over the place.
If the data is good, this thing will fly and squeeze the hell out of every short in it. But that shouldn't play into this. You are not trying to predict the stock move, what you are trying to do is create a favorable outcome. Big difference.
I have started increasing the trade side at a small debit. OVue software is giving me strange answers. For example, the software when valuing the Feb $50 call as follows: value at Jan 5, price $45, vol -60 pts = $1.35. change the date to X1, and the value increases to $2.10, counterintuitive. Am I missing something?
Len,
I get .90 for the Feb 50 call on Jan 5 with a 60 pt drop in vol. At Jan expiration I get .50 for that same call with the 60 pt drop in vol. I'm not sure what you are doing. Are you using the details screen to adjust the date and vol? That is the easiest way to do it.
Well, I am beginning to think software is screwed up. That would be a huge thing. Currently, OVue is suggesting an intrinsic value of Feb 50C as $.70,an IV of 98.9% with stock at $33.45. I am using detailed screen. If your numbers are right, than all my analysis is probably way off.
Len,
Yes, the .50 number is correct at today's vol. I was dropping the vol 60 pts already. At Jan expiration, the feb 50 call with the stock at 45 and the vol coming in 60 pts is worth about .50. I hope this clears things up.
APPX Research Note
American Pharmaceutical Partners is probably among the most closely watched names this week as the PDUFA date for their Abraxane breast cancer drug is on Jan 8. Abraxane, formerly known as ABI-007 is a novel, Cremophor-free formulation of the commonly used cancer drug paclitaxel (Taxol).
The question of course is, will it be approved? While earlier the sentiment on Abraxane was negative, with bears pointing towards the very low response rate in pivotal trial's Taxol arm, the sentiment has gradually improved. Yet, the close to 50% short interest still suggests there are a lot of non-believers out there...
Merrill Lynch previews the event, saying in case of an outright approval they see an immediate price target of $47.71. Notes that if there is a significant short position in the stock at the time of the action, the shares could overshoot the target. In case the FDA requires additional trial(s) they see an immediate price target of $31.46. The target assumes Abraxane launch in 2008. The worst case scenario includes a non-approvable letter with an an immediate price target of $32.56. The target excludes all Abraxane-related expenses and assumes F2005 EPS of $1.48.
John:
I noticed your comment that I am not on the member list. Where is and how do you access the member list.
Suse
Suse,
I'm not sure. I think you have to create a user profile or something. I originally thought everyone who registered would be on a list. This is not the case. It's not a big deal.Do you get e-mails when someone posts?
COMMENT ON LEN'S APPX TRADE
Len, i think you need to look carefully at what happens to your spread over different volatilities and price scenarios.
at current volatility, the spread looks like a big winner with an upside bias. however as vol drops the spread actually takes on a downward directional bias.
even though you have ratioed the spreads, they act more like bear call credit spreads than typical calendars that have the same strike price. to see it clearly assume a normal call spread where you sell the 45 strike and buy the 50 strike. at one-to-one the spread is most profitable below 45 and least profitable above the 50 strike. unless the ratio is more like a typical backspread (1 by 2 or 1 by 3), even a slight ratio will take a long time to reach breakeven on the upside.
with a complicated calendar you have to plug in many variables to truly see how the dynamics of the spread play out. essentially this spread is short gamma and long vega. which means that you will lose as the underlying moves away from your short strikes (until your additional long strikes come into play).
the vega risk is also key. at 50% volatility you'll start to lose value around $40 on the stock. at 40% vol the loss starts at about $37. so if you get a big up move in the stock but vol drops, you're likely to be disappointed with the trade. (if you're bearish, this is a decent spread).
i think John is right - simplify. take a directional bias (up, down, or sideways. then play the vol skew to your advantage. if you think the stock will go up pick a strike much higher than current value (say the 50 or 55 strikes - using the same strikes for both the long & short legs) and buy the timespread. you'll benefit from the move and the vol crush this way. likewise if you think the stock will dive, buy the timespread at a lower strike. if you're neutral, use any of the short gamma strategies that you are comfortable with (e.g. short strangle or straddle). if you are going to ratio you can use a lower strike but make sure you look at the results dynamically on a graph using much lower volatility levels.
michael
Great Post Mike.
Here are some simple rules to remember.
When you are long a timespread (calendar) you want the stock to be right at your short strikes at expiration. This is a short gamma trade albeit one with limited risk. So regardless of what you think is going to happen, your max profit is always going to be at the short strike and you will start to lose money as you move away from that short strike.
One of the problems you are going to have when you involve several different strikes, is that you are going to have to model each individual strike. You can't universlly say, well I'm going to drop the vol 50 pts. Each strike will have a different impact.
Also you have to take into account the vol smile (skew). After the news, the skew is going to flatten. The software doesn't know this. It's going to use the same skew that you have right now which is a very steep smile.
Another thing to remember and this can't be said enough. Don't spend so much time trying to get rid of the risk in the trade. Risk and reward move together. If you get rid of one, you also get rid of the other and vice versa. This is one of the universal laws of options. Risk cannot be removed, simply transfered.
If you want to make money in this game, you need to seek out risk, not hide from it. The key is knowing which risks to accept and which ones to avoid. It's a tradeoff and ultimately the best traders find a risk they are comfortable with and exploit the hell out of it.
Hi John:
No I am not getting an e-mail when a comment is posted. So, despite the fact that I did add myself by hitting the Post a Comment button and then doing what it said to do, apparently I am invisible when it comes to the e-mail side of things. I have clicked on the little e-mail button to see what happens, but nothing does. It appears that only a few of us have managed to get on this thing. Any clues.
John
Ive tried short-term strangles on these FDA plays and it just didnt seem to work out. Your better off just picking a direction and going for the craps shoot. I personally would just buy the Jan 05 35 call and thats it. You risk the $400 and look to at least double that. If its a non-mover take whatever money is left and run like hell :)
Yeah, short strangles are not a good idea on FDA plays. I don't know anyone that has ever made money on these types of events selling straddles or strangles. Buying the Jan leaps is cheap in terms of vol but still no where near as cheap as buying the time spread. You can buy any combination of time spreads for .25 to .40.
Also, you need a much bigger move to make the same percentage return from buying the leaps verses the timespread.
I think any combo of buying the Jan call spreads would have worked just as well.
Hi This is my blog post. Heck I don't even know what blog is so here goes. I put on an AAPL calendar Jan 65/Apr 65. I know earning come in Jan 12th BUT positive bias too juicy to ignore. Any comments? Thanks
Hi Gabby,
Welcome to the blog. The trade looks decent. Keep in mind AAPL traded up about 9 pts last qtr on their earnings report and rallied another 8 or 9 pts in the days after. That was almost a 40% move in days. Almost 20% after the report alone.
Your biggest concern here is if the stock trades higher going into the earnings report. A 10% move would mean a 6 pt move on the stock. I expect the April vols to come in at least 10 pts which puts your breakeven around the 69 area. If the stock sells off going into the report, you might catch a break. But I expect AAPL to report a solid quarter especially with I-Pod sales going through the roof.
Another thing that might help you is the fact that the big gap last quarter kind of caught everyone off guard. Now, AAPL has pretty high expectations, so I wouldn't quite expect the same kind of move it had last quarter of 20%. But I think a 10% move is very likely. Good luck on that trade.
Mike and John thank you for your insight. I still think my OVue software is probably a bit nuts, but I have taken your advice. I had some nice gains in my earlier trades so I have taken the gain. One advantage of opening these type of trades is the risk is moderate before the announcement and you might get a chance to close at a profit as the stock swings around.
I am posting this message on all the forums so just bear with me here. In order to make sure we have some type of continuity on the flow of posts. The best way to post is simply to post under the latest article. I think this will make things easier since we don't have a regular message board. If people post under different articles, I'm worried that responses might be ignored. If you have to, you can make reference to a previous post and under which article it was if it's a follow up. I hope this helps things run smoother.
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