The expiration date for all listed stock options in the U.S. is the third Friday of the expiration month.
So as long as the S&P does not move up 8+ points tomorrow, our Oct options will expire worthless and the portfolio’s realized gains will increase by $1090.
Looking forward, our Nov position is still very much at risk. We will take a minor loss if the S&P index advances beyond 1375; a major loss if it advances beyond 1400.
Next week we will also decide if we will establish a Dec position. Option premiums are very low right now because volatility is low. volatility is low because the market, for the most part, has been moving in one direction, up. So it may be difficult to find positions that offer enough reward to justify the risk.
Effective concurrently with the October 2006 expiration, the threshold for automatic exercise and assignment of option contracts is reduced to $.05. This is a reduction from the previous threshold of $.25.
In other words, options that are in-the-money at 4:00 p.m. EST on the Friday preceding monthly expiration by an amount equal to or greater that $.05 will be exercised automatically. For example, if a customer has an account which contains a long equity option position which is in-the-money by at least $.05, the position will be automatically exercised. Conversely, if a customer has an account which contains a short equity option position which is in-the-money by at least $.05, the position is likely to be automatically assigned by the options Clearing Corporation (”OCC”).
This change in option expiration exercise procedures was put into effect by the OCC with the approval of the Securities & Exchange Commission and is standard practice throughout the industry.
Three straight weeks of impressive gains have left us with very little breathing room (9 points with one week to go before the Oct options expire). Additionally the Nov 1375 call is on life support. Only a market correction next week can save it from becoming a losing position. Unfortunantly with the strong up trend, this is not likely to happen.
delta : -107.17
theta : 141.46
Oct EV : 443.47
Nov EV : -217.6 (sigh…)
What a great day for the market and what a bad day for our portfolio. We started today with 13 trading day before our Oct options expire with 41 point cushion. With the 16 point rise, we are left with 25 points for 12 trading days. This is very similar to our situation on Sep 1st:
The Sep option 1325/1350 on the call side has been under pressure all month. We started this week at 1295, about a 30 point cushion. Unfortunately the S&P index moved up 15 points and is now sitting at 1310. That leaves use with only 15 points of breathing room. The only consolation is that there are only 9 trading day left till the Sept options expire.
Hopefully we will have the same happy ending.
Unlike Sep, however, our position for the following month is not as promising. One of our Nov position also has a 1375 strike price. So unless the market corrects, we will likely suffer some loss. *knock on wood*
It’s been 3 month since I started testing this strategy - so far so good.
The initial plan was to test/deposit $5000 and roll it in two lots, alternating months. This means:
- deposit $5000 in Jun
- use $2500 to try to make ~$200 in Jul (risking ~$600)
- use $2500 to try to make ~$200 in Aug (risking ~$600 - having already profited ~$200 in Jul)
- use $2500 to try to make ~$200 in Sep (risking ~$600 - having already profited ~$400 in Jul&Aug)
- so by this time we would have made $600 and going forward would continue to risk ~$600/month
- reached break-even point where our option portfolio’s realized profit = our option position risk
- with 80% winning percentage positions, the chance of the portfolio going negative in the next two month is stistically only 4% (20%x20%)
- will be playing with the house’s money from 3 month and beyond
I am in the process of setting this up for my mom and my girlfriend.
What actually happened to my portfolio is:
- deposit $5000 in Jun
- use $2500 to try to make ~$200 in July (risking ~$600)
- actual realized profit of $273
- the success in Jul made me confident enough to deposit another $5000
- so the deviated plan now use $5000 to try to make ~$400 in Aug (risking ~$1200 - having already profited $273 in Jul)
- actual realized profit of $647
- the success in Jul&Aug made me confident enough to deposit another $5000
- so the deviated plan now use $7500 to try to make ~$600 in Sep (risking ~$1800 - having already profited $920 in Jul&Aug)
- actual realized profit of $890
total realized profit equals $1810
If I stopped investing more capital into the strategy, this would have been a break-even point. Our Oct position would look like:
- use $7500 to try to make ~$600 in Oct (risking ~$1800 - having alrady profited $1810 in Jul&Aug&Sep)
However I did make two more deposits for the Oct and Nov positions because I believe the risk is worth the reward. Again, the winning percentage of this strategy is similar to having AA in Texas Holdem poker. If you exercise proper risk control and sound money management concepts, holding pocket aces and going all in with an 80% winning percentage is a situation that you want to be involved in over and over again.
If we include unrealized gains, we are up 17.07% this quarter. If we annualized this it would be 53.73%. This, however, would require that our winning percentage remain close to 100% - not realistic. I am hoping that we can achieve and sustain 30 - 40% annualized returns.
The market continues to move upwards. This has increased our risk in both the Oct and Nov positions.
For the first time in our short trading history, we have part of our portfolio with a negative EV. In the world of Texas Holdem poker, it is as if someone hit their trips against our pocket aces. In this situation we would need to catch one of the remaining 2 aces in the deck. This chance of this happening is about 13%. Not good.
However, our option situation is not as bleak. Despite the negative EV, our Nov positions still have a winning percentage of 63%. This winning percentage will improve if:
- market moves down
- market stays neutral with the passing of time
Thinking positively, the market will slow down in Oct because it is overbought and fund managers would be done with their end of Q3 Sept window dressing. But that remains to be seen.
$5000 @ 11.88 = 420.87 Shares
New Account Total: $27346.15
New Total Shares Count: 2301.81
Option Trading Mathematics (how to read?)
We entered an Index Option position today.
1200/1225 - 1400/1425 x3
Max option trading reward : $585 if 1225 - 1400
option trading risk : -$1983 if below 1225 (2.1%) or -$2800 if above 1400 (7.4%)
Max option trading risk : -$6915 if below 1200 or above 1425 (3%)
Expected Value: $274.15
Option Trading Thoughts
Today’s correction has helped our portfolio accomplish all three of the objectives we listed yesterday. Our delta improved from -33 to -17 and our theta is now at 57.
Our Oct option positions have a delta of -9, theta of 31, risk Expected Value of $230 and a toal Expected Value of $794.55. That means we are in a very good/safe point with a very high chance that the Oct option position is another winning position (92% winning percentage).
The Nov option position are not as solid as the Oct position. We are working with a smaller overall range as we moved up the put side strike price to 1225 (1225 - 1375). Percentage wise, however, this only increased our losing percentage by 1%. Our winning percentage is still above 80% at 80.75% with an EV of $247.15. Note: Realized gain increased by $236.50 as the result of today’s transaction. We will not include this number, however, until the Nov options expire.
