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Trading Ideas using Options Explorer / Re: Lean Hogs (HEM19) : 18 April 2019
« Last post by TradingAdmin on April 23, 2019, 05:19:08 pm »
My implementation of this trade idea went as follows:



When I entered, LH were trading at around 96.5, which was in the middle between two strikes.  Being unable to determine the ATM strike, I went short a 97 Call and a 96 Call respectively.  I went Long the futures on receiving the second fill (second option) - which happened to be at 96.65.

The weekend saw the Volatility drop quite fast and the trade was sitting at $420 profit overnight (the opening up of our trading funnel is typical for a drop in IV with short options).  Price threatened the bottom range of the trading range, but I decided to stay in, see whether price will go back up into the trading range.  The open today saw prices gap down below the trading range.  As this was beyond the envelope in which prices were trading, and the structure we were targeting, it was a sign for me to get out.  I waited until after the opening jitters, then went out on a stop order with the Futures.  The moment the futures was filled I tried to get out of the two call options. 

I feel I was a bit bullied by the market at that point.  Theoretical profit in the position was around $330.  When eventually I got out, I only pocketed a profit of $220.  I am not happy with that, somehow the market bullied me out of $100.  But I'll take my $220 - it is not bad for a weekend trade.

To put this trade into perspective:  Margin requirement for this trade was $2075.  Profit was $220 in 6 days.
This is a return on margin of (220/2075) = 10.6% Return on Margin in 6 days (or 645% Annualised Return on Margin)
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Trading Ideas using Options Explorer / Lean Hogs (HEM19) : 18 April 2019
« Last post by TradingAdmin on April 18, 2019, 02:51:36 pm »
Lean Hogs is trading at extremely high Implied Volatility - an ideal condition for shorting options and taking profit on time decay.  With the Easter weekend ahead of us, US markets will be closed Friday, Saturday and Sunday - at least three days of time decay in the options that we can bank.

Here is Lean Hogs (looking at the June contract; the May contract will work as well, maybe even better, depending on the strategy that you would like to implement):



Lean Hogs has entered a trading range - characterised by the typical /\/\ pattern.  We do not know how long it will stay in this range before breaking out to one side.  Neither do we know which side it will break out to when it breaks out.  All we know at the moment is that it is trading in this range.

The strategy below makes profit when prices are trading in a trading range.



The strategy is to short both a Call option and a Put option.  The market can at most take out one of these two positions (it can either go up or down, it cannot move up and down simultaneously).  Therefore we use the premium on the one position to buy us some space on the other position; then we wait for time to run out - the time decay on the option, because of the high IV, is quite severe.  The longer this market stays level (in a range) the more money we will make.  We exit this trade when prices break out of the trading range (or when prices threaten our break-even lines).

There are five ways to setup this trade.  The first three are Master strategies, the final two Advanced strategies; the first two is better done on the June contract (simply because there is not enough liquidity in the futures market for May); the remaining three will work equally well in the June as well as the May contract - with faster time decay in the May contract (thus more advantageous - note the June contract shown in the picture above). 

To guide your strategy - remember that you want to sell both a Call and a Put option, for strategies 1,2&4, they need to be ATM (at the money), for strategy 3 they need to be ITM (in the money), for strategy 5 they are OTM (out the money, the further out you move, the less the risk, but also the less the potential profit.  Trade them according your experience (and comfort) level:
  • Short two Put Options ATM, then Short the Futures (shown in graph above)
  • Short two Call Options ATM, then Long the Futures
  • Short a Call ITM, Short a Put ITM
  • Short a Call and a Put ATM
  • Short a Call OTM, Short a Put OTM - you need to move about 15 strike-intervals OTM on each option before you start reducing the risk vs. any of the other 4 strategies above, profit drops from a potential $4600 to $1200

Strategies 1 & 2 employs an advanced strategy where we combine an option and the futures to form a synthetic option; they give us more flexibility to manage the trade when things start to go wrong - but for this we need liquidity in the futures market - hence the move to the June contract.
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Trading Ideas using Options Explorer / Market Update: 12 April 2019
« Last post by TradingAdmin on April 12, 2019, 02:24:55 pm »
We are monitoring the markets, but at this point in time there are just simply no trades.  We are looking at Lean Hogs, Coffee, Bean Oil in particular, keeping Cotton in mind; the energy complex. 

At the moment however there are no actionable opportunities, so we stay out of the markets..
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Trading Ideas using Options Explorer / Re: Cotton #2: Friday 15 March 2019
« Last post by TradingAdmin on April 02, 2019, 04:14:52 pm »
We are out of Cotton...

Anything from here onwards is purely theoretical.  This is the situation at the moment:



Our options strategy are still containing the move in Cotton.  Profit at the moment would be $75
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Trading Ideas using Options Explorer / Re: Coffee (KCK19): 15 March 2019
« Last post by TradingAdmin on April 02, 2019, 04:09:20 pm »
Last week we decided to hold on a bit more, hoping for an upwards correction in Coffee, which did not happen.

This week the position looks like this:



Coffee continued down.  Our profit increased from $420 to $440 - not really worth the extra week of risk we took.  At this point in time there is not really any point in keeping the trade, just take your money and get out.  (Yes, there is still a chance that Coffee can go back up, but (1) there is no indication from the price chart that such a move is likely and (2) there are very little time left before expiry)
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Trading Ideas using Options Explorer / Re: Cocoa (CCK19): 15 March 2019
« Last post by TradingAdmin on April 02, 2019, 04:04:20 pm »
This trade was closed.  I took $90 profit on it a long time ago already.  The previous post has shown that if you were willing to hold on a little longer, you could have banked $320.  Currently it looks like this:



There is hardly any profit left in this position.  BUT what I want you to notice is how the options trading strategy gave you a huge amount of space in which to capture profit.  From the day that we opened this trade until today, the position was never in a loss.  There was a lot of time for you to decide to take your money and get out.  Only if you were greedy and never got out will you no be facing a breakeven position.  It is no longer worth the risk to stay in the trade...!
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Trading Ideas using Options Explorer / Re: Corn (ZCK19): 21 March 2019
« Last post by TradingAdmin on April 02, 2019, 03:57:47 pm »
On Corn you had the choice to take the $330 profit on the table, or hold out for more.  This is what happened with Corn:



There is still $100 profit in this trade, but to hold out any longer is foolish - the risk is too high that you will turn what was a winner into a loser.  So if you still in it, get out. 

Bit of advice:  I was taught to look at the annualised return on your investment.  If the market is giving you a huge return in a very short period of time, do not push you luck, take the money and get out of there, there are always other opportunities
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Friday caused some anxious moments as the BP continued to test the lower end of the trading range.  I monitored it the entire day but it failed to give me an opportunity to leg into a Call option on the upside.  At the close of day I was faced with the decision to get out, or to carry a Naked Put option through the weekend.

In the end I had to look back at the reasons why I was willing to take this trade:
  • Because the BP was trading in a trading range.  If it broke out of the trading range, that would be my signal to get out.  By Friday it had not yet broke out of the trading range, so there was no "exit signal" yet
  • Because of the very high premium it gave me and with only a few days left to expiry the time decay would be severe - and that is what we were after in this trade.  To exit on Friday, with two days with the market being closed not taken profit off, is against the plan with this trade

I thus decided to stay in.  Monday then was a bit nervous, for I had to wait for the Monday Close in order to get a new data point.  But alas, Monday the BP corrected up and I was able to get out with a profit of $319 - in 4 days time, that is not bad at all for a trade that did not go exactly according to plan!!



Now I could have taken my chances to wait another 4 days to the close to bank the remainder of the $588 we received for this option.  But I was taught (1) not to be greedy and take the money that is on the table and (2) strange things can happen during the last two/three days before options expiry, get out of the market unless you are so far away from your strike price that nothing can hurt you.  I looked at $320 on the table, in just four days, and decided that is enough, I am happy with that and I'm out of there!
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Since the opening (when I started to watch the BP today), been trying to get in.  But it opened towards the bottom of the trading range, which is not good; I personally prefer it trading close to the middle of the range.  Few minutes ago it dipped quite low, very close to the bottom limit of the trading range, so I decided to try and leg into the trade.  Also decided to be a little bit less greedy and go for a put option a little further away.  The BP trading at 130.9, allowed me to short a 130 strike put for 0.0094 points = $587.50.  Hopefully tomorrow it will trade up and allow me to leg into a call before the weekend.

At the moment my trade (only one leg setup) looks like this:

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Trading Ideas using Options Explorer / Wheat (ZWK19): 28 March 2019
« Last post by TradingAdmin on March 28, 2019, 11:08:51 am »
I am trying to find a trading strategy in the Grains complex, for the more budget conscious (guys with smaller trading accounts who cannot afford the margin requirements on the British Pound; but who would like to build their accounts).  The extreme low IV at which these commodities trade at the moment makes it very difficult.

Here is a trade idea involving Wheat, which of all the grains are the most luck-lustre - it does not look like it is going anywhere.  That is what we want, we do not want wheat to go anywhere.  We can make money if it does just nothing...- just stay where you are, don't move. (This is probably one of the biggest advantages in trading options.  We are able to make money in flat markets, markets that goes nowhere.  Any other trading strategy, you need the market to move to make money.  Not so with Options.  We are quite happy to trade level markets!)



Note that we are setting up a double calendar position - we short a call in the front month and long a call in the back month; then short a put in the front month and long a put in the back month.  But then we short another Call and another Put in the front month.  You can further reduce the risk and the margin requirements by going 3/2.  Short three Calls and Puts in the front month, Long 2 Calls/Puts in the back month.

Profit from this position is about $1500 over the next 30 days, provided that Wheat goes nowhere.  If that slow upwards trend in wheat continues, it is fine, we are capturing that move.  We have a bit of risk on the downside, we do not want wheat to turn around.  But as long as wheat moves slowly - no sudden spikes in prices - it is all fine, it gives us plenty of time to realise the direction it goes and to get out of the trade.

The position involves four different positions.  My suggestion is try to set it up outside regular trading hours.  Prices are more stable, just leg into your different positions.  Please carefully look at the strike prices of your options relative to their underlying contracts, they are quite critical in this setup.  If you have a copy of the OE, I suggest setting up the trade in OE first, then experiment a bit with shifting individual strike prices up or down.  You will get a feel for how that influences your trade position, the price-area under which you are capturing your profit.
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