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)

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Spread Adjustments 3/4 – 3/11

Spread Adjustments – 3/3/11

Spread Adjustments – 3/2/11

Spread Adjustment – 3/1/11

Spread Adjustment

Beginning 3/1/11 the daily trade activity I will be focused on monitoring will be the adjustment to each spread as a grouped position instead of the realized p/l on individual strikes. Specifically what will be tracked is the

  • change in basis from using the average costing method instead of FIFO
  • realized p/l on each adjustment
  • cumulative premium collected from all strikes and expiration months written against the spread

P/L from each spread already recorded in the portfolio tab will not be included retroactively.