Q1 Earnings

AAPL – vert + 2 butterflys
4/25 NFLX – diag + vert + 2 butterflys
4/26 AMZN – diag + vert + 2 butterflys
4/27 BIDU – IC + 2 butterflys
4/28 MSFT – 2 calendars + IC

Other Earnings
4/26 DAL
4/29b CAT

BIDU Earnings Play (Ranges)

Closing price (4/27/11) = 151.11
ATM Straddle =  10.8
Expected move = +/- 10.05

Composite of the two:

SLV Open Interest

The blue boxes are JAN 13 expiration. You can ignore the red JAN12s. This is a graph of open interest in the CALL and PUT side respectively. I’ve learned the best way to interpret this data is that a larger open interest implies a speculative short contract position. This is a zero-sum market but the long is hedged and traded away. A position of that size which is that deep ITM likely had the majority of it opened as a short position. Since it’s a sell you look at this and assume they’re betting that the underlying will go below the CALL strike and stay above the PUT strike by a certain date.

When you analyze this trade, taking into account the ratio between the CALL and PUT open interest you see a prediction for a move to 20 over the next 2.5 years. The ratio spread is similar to a strangle but you can see they leveraged the ratio to move the steepest losses to the range of 20 to 0. The payout is at it’s highest at $20/sh where it pays 8:1 and breaks even between 4.32 and 46.17. It’s closing price on 4/26/11 was 44.03.

AMZN Earnings Play (Ranges)

AMZN closing price (4/26/11) = 182.30
Expected move = 10.4
ATM Strangle = 8.6

AMZN Earnings – What the market is showing

Closing price = 185.42
Expected move = +/- 10.888
ATM Straddle = 11.28

High open interest at the 190 and 170 strikes shows a downward bias.

NFLX Earnings Play (Ranges)

Expected move priced into the market of 21. Position is ITM for a move of +/- 47 with explosive upside on the boundaries.

AAPL Earnings Play

AAPL [Chart]
MMM @ +/- 14.15
Currently trading @ 330
MMM Range: 316 – 344
Entered 2 positions:

  1. Weekly Butterfly – ITM between 315.43 and 324.56 (max return – 1000% @ 320)
  2. Short PUT Vert – ITM above 332.85 (max return – 43%)
Update: Added 2nd weekly butterfly to cover the range 325.83 – 334.20 for extra insurance after the overnight gap up (area between double-dashed red lines is uncovered).

Disassembling an Options Position (AXP)

This is an example of a trade that will take 1-2 months to mature. I began building a position in AXP (with downside bias) on 3/31/11 and it started reversing sharply upward on 4/5 [chart]. By developing a strategy and updating it as circumstances changed, the basis of the underlying MAY short position was lowered and risk was hedged away with an emphasis on efficient use of capital. The overall position in American Express Co. is now positive even though it moved in the opposite direction from what was originally anticipated.

Adjustment Phase (4/5-4/11): [Hedge, leverage, and pull out profit by reconfiguring spreads]
The goal of the entry process was to build a position by layering high probability spreads on top of each other which created an inventory of  goods for sale that could be reconfigured to create something valuable. An emphasis on keeping both risk and capital requirements minimal was prioritized at each level of the trade.

The current inventory of the position can be reconfigured various ways but the simplest way to present it is integrated to stock simultaneously short 300 shares and long 200 shares with a reduced basis in the long MAY PUT. The speculative position is the Long MAY PUT and the rest is the “inventory.” The inventory is hedged against itself elegantly; MAY long synthetic stock vs MAY short synthetic stock and APR short synthetic stock vs the APR 48 CALL. The APR 48 CALL was bought for 0.06 and reduced capital requirements by $600. Deltas are beta weighted to SPY.

The position as of 4/12/11 is composed of the following derivatives:







The trade history for the position is located in the adjustment phase link above and includes detail on how the spreads were taken apart and recombined.

Entry/Setting Up Phase (3/31-4/5):
(3/31) [Start position that takes advantage of time and downward movement]
Enter a diagonal with an embedded long PUT vertical to take advantage of a move down. After Friday expiration the short PUT expires worthless and the basis of the long MAY 11 PUT is reduced by 0.54 to 1.58 (25% reduction in basis of PUT) which moves the break even point up, lowers the risk of the position, and frees up capital.

(4/1): [Reduce basis in PUT and reduce riskPosition (as of 4/1/11)
Sell an out-of-the-money weekly PUT vertical. Since there is an embedded long PUT vertical in the diagonal then I could sell a PUT vertical against it to collect .07 which lowered the basis of the MAY PUT and the risk of the position while freeing up more capital.

(4/4): [Start building a position with high probability spreads]
Sell an April CALL Vertical and a May Iron Condor. Up to this point AXP had been moving with me so I felt confident adding a similar position for April and May expiration.

(4/5) Buy back weekly vertical on short-term play [Next time look for more premium to cover commissions]

P/L on AXP position (4/12)

Finding and Trading Calendar Spreads

  1. Find front month ATM option with positive skew >= 2%. Implied volatility should be sold should be greater than vol bought.
  2. There should be no earnings close to expiration causing a positive skew.
  3. Volatility in current period should be in the lower 1/3 range over last 6 month period.
  4. Look for an underlying following a channel technical formation.
  5. P/L targets: 20% gain and 25% loss (calculated on margin).
  6. Adjustment occurs at the B/E points. Take off half position and add ATM calendar to widen the spread.

LVS Spread – Opened 3/24