Markets
Saturday
Oct312015

QQQ Nov15 -$92/+$87 Vertical Put Spread: 9.03% Profit Banked in 28 Days

The second trade that OptimalOptions closed was a put spread on QQQ, the ETF that tracks the NASDAQ.

Trade: Short QQQ Nov15 -$92/+$87 Vertical Put Spread

Entry: $0.46

Exit: $0.05 Return: 9.03%

Opened: 22-Sep-15

Closed: 20-Oct-15

Days Open: 28

In mid-September 2015, equity markets were nervous with fears that a slowdown in China combined with a potential Fed hike could de-stabilize the global economy. Stocks we falling and demand for downside protection (via put options) had sky-rocketed, meaning put options were now a lot more expensive. In our view put options had become too expensive and the implied volatility levels were too high.

To take advantage of this we sold out of the money put options on QQQ, the ETF that tracks the NASDAQ, in our model portfolio. We sold QQQ Nov15 -$92/+$87 Vertical Put Spreads for $0.46 net credit. This means we sold $92 put options on QQQ, but to avoid unlimited risk we bought $87 puts simultaneously, both with November expirations.

If our view was correct, the spread would move towards $0.00 from our entry at $0.46, as both puts become worthless given they are expiring out of the money. If our view was incorrect, we could have lost $4.54 (as they spread could move to $5, the different in the strikes, if both were in the money), but that was the maximum possible loss on the trade. The simple payoff diagram for the trade is shown below.

Our downside was clearly much larger than our upside, but the probability in our view of the upside scenario eventuating was so much greater than the downside scenario that we felt the trade still had positive risk-reward dynamics.

In hindsight, we were too early signalling that put options were a sell. QQQ moved lower in the week following our signal and therefore our position showed a loss for a while. However we remained confident that the downturn would be short lived, and volatility was still too expensive, therefore we held on to the trade. This worked in our favour, as QQQ recovered and we were able to buy back the put spread at just $0.05, locking in a 9.03% gain.

The return on our put spread trade was much greater than buying the underlying shares, but we took a much greater risk by selling puts. On balance this trade worked well, although our timing could have been better for entering the trade, waiting another week would’ve given us a higher entry point and greater potential profit.

Trading Record Summary

Number Of Closed Trades: 2

Average Return Per Trade: 13.75%

Average Duration Per Trade: 21

Saturday
Oct312015

DIA Nov15 +$150/-$154 Vertical Call Spread: 18.46% Gain In 14 Days

The first trade that OptimalOptions closed was a call spread on DIA, the ETF that tracks the DOW.

Trade: Long DIA Nov15 +$150/-$154 Vertical Call Spread

 Entry: $3.25

Exit: $3.85

Return: 18.46%

Opened: 25-Sep-15

Closed: 9-Oct-15

Days Open: 14

Equity markets were very weak with concerns over China and a slowdown in the global economy. As a trading operation based purely on options, we viewed the pricing structure of equity options overly skewed to the downside.

We therefore entered an options structure to our model portfolio that would return a profit if the DOW did not venture to new lows. We bought DIA Nov15 +$150/-$154 Vertical Call Spread for $3.25 net debit. This means we bought $150 call options and sold the $154 call options on DIA, both with November expirations.

If our view was correct, the spread would move towards $4.00 from our entry at $3.25. If our view was incorrect, we could have lost our net debit of $3.25, but that was the maximum possible loss on the trade. The simple payoff diagram for the trade is shown below.

Our downside was larger than our upside, but the probability in our view of the upside scenario eventuating was so much greater than the downside scenario that we felt the trade had positive risk-reward dynamics.

Whilst we were perhaps a week early in entering this trade, the DOW began to move higher after struggling to break down to new lows. This meant our vertical call spread began to move higher from our entry of $3.25.On October 9th, just 14 days after entering the trade, we sold the call spread at $3.85, banking an 18.46% gain. Whilst we could have held the trade for longer, there was only $0.15 more upside in the spread, therefore we opted to take profits and free up the capital for use in other, more rewarding, trading opportunities.

The return on our call spread was more than triple that of buying DIA shares over the same time period. However we took a greater risk by buying a call spread instead of shares, allowing us to generate a greater return.

Trading Record Summary

Number Of Closed Trades: 1

Average Return Per Trade: 18.46%

Average Duration Per Trade: 14

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