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BABA and MBLY Campaign Debrief
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BABA and MBLY Campaign Debrief

Before we get to the specifics of last week’s option campaigns, I wanted to cover some interesting observations we made from our strategies this past week. In an effort to show how little risk is associated with these types of vega strategies, I actually believe we went too conservative this past week. While we made money on both campaigns we could have certainly done better had we decided to be just a bit more aggressive. Generally speaking, I’d rather give up some return potential in order to increase the probability of success. However, in this case, we could have easily increased our returns without a very noticeable difference in our risk profile. Let’s review:

  • We could have gone three weeks out on our back month longs instead of two. That extra week of extrinsic value does make a difference when vega gets crushed. Moving forward, I believe it makes sense to go back out to three weeks for our back month longs. As a reminder, the closer you get to the present, the cheaper the option will be, so the less you’ll need for an initial outlay. The key is to find a balance between how much you have to spend and how much extrinsic value is lost during the vega crush.
  • We went entirely with Limping Condors (usually referred to as Double Diagonals) this time out. Our reasoning is that LCs tend to hold to their value better if the stock does nothing. That’s because the farther out longs of the LCs have less extrinsic value to lose than the closer-in longs of the Double Calendars. That being said, double calendar spreads (DCs) make more money if the underlying moves to one of the short strikes. In hindsight, BABA’s unusually high IV coupled with a normally low HV made it a good candidate for a DC.
  • It’s hard to complain about making money on campaigns where very little risk is involved. However, given commissions, bid/ask spreads, and possible margin requirements, I believe we need to push the envelope just a bit more than we did last week. That being said, the old adage of “No one ever lost money from taking profits” still applies here, and we’re still very pleased with how the strategy is shaping up. Now on to the campaigns:

BABA

2016-05-09_BABA_wrapup

We spent $30 to make $32. That’s certainly not a bad deal. BABA moved quite a bit on earnings, but still fell well within the range of the straddle forecast (the price of the straddle prior to earnings). In other words, we were never in danger of losing money on this campaign (at the prices we used in our setup). As we mentioned earlier, a DC would have made more sense in this case, and we’ll likely be incorporating those more often moving forward. Another point about the setup prices – after we posted the setup, the call skew in BABA got crushed and the calls side of the LC was much cheaper than our posted prices. In shouldn’t have made all that much difference since the relationship between the long and short call remained about the same (but that does happen now and then during the trading day). Keep in mind, when this options service is live, you’ll be getting these trades as close to real-time as possible, which should eliminate most discrepancies in price.

2016-05-09_BABA_volatility
Once again, the vol chart looks beautiful after the fact. In this case, HV didn’t even really budge and IV got crushed. That’s a perfect illustration of why you use this strategy.

MBLY

2016-05-09_MBLY_wrapup

We spent $34 to make $13, which is nothing to write home about, but the campaign was still a winner (not including commissions and such). Given commissions, this one only paid off if you did a bit more volume – and of course we’d like to see more cushion in the P/L numbers. What happened is that while the front month got annihilated as expected, the back took a bigger beating than what we wanted. That’s because the stock did so little that the entire vol term structure got compressed. That being said, it wouldn’t have made much if any difference had we done the DC instead because the entire vol curve shifted down. What could have made this setup a bit more profitable was going farther out on the back month longs, which is another reason why we’re going to shift to three weeks out from now on.

2016-05-09_MBLY_volatility
From the chart, IV dropped and HV didn’t move. All good as expected. It doesn’t look like IV dropped that much, but 10% is a big deal when it happens overnight.

MBLY is a great example of how you can still make money if the stock does absolutely nothing, while still being in position to make a nice return on a bigger move. Let’s not forget how little risk was involved with this campaign as well. Overall, the strategy continues to show its many strengths and we’ll keep digging for more great opportunities this week.


About The Author
Jay The Option Executioner
Jay The Option Executioner has taken his battle axe to the options market for the last 20 years. He started as a floor trader on the CBOE, serving as a market maker in equity options. The Executioner also consulted with options trading firms on Wall St. and ran the options book for a hedge fund. Jay has since hung up his axe and now enjoys writing about options.

  • tandaradei

    Any thoughts on playing SCTY earnings today?

  • https://evilspeculator.com Sir Mole III

    Okay, I’ll take a look a bit later – they report after the market right?

  • https://evilspeculator.com Sir Mole III

    For one it’s a bit cheap – trading around $22, so there may not be enough skin in the game.

  • https://evilspeculator.com Sir Mole III

    Pretty quiet here in the past few days – nobody trading?

  • jmoney3000

    Nothing for me to do, but watch. That’s my job today

  • mugabe

    on longer time frames .. REITs on fire at the moment

  • Time Bandit

    Just got back from my Crown Prep with a Temp on so I can smile again.

    On the trading front at this moment, I have 4 Open Positions, Short Crude, Short Intergrated Oilers via ERY, Short XLB and Short /ZL.

    Got stopped for -1R on my last GBP/JPY Short last night and will probably flip to a long before today’s close.

  • Mark Shinnick

    JDST doing well.

  • randomuser6789

    It gets quiet around here whenever the VIX is below 17.

  • https://evilspeculator.com Sir Mole III

    LOL – not really but it seems that some people are taking a bit of a break. It’s been nasty tape over the past year really – exhaustion is growing. Which is however a reason why I am thinking of introducing more IV option plays here. If market direction becomes more unpredictable then trading *volatility* is not a bad idea!

  • randomuser6789

    Cool! I love that stuff.

  • https://evilspeculator.com Sir Mole III

    Me too but it seems that the current crew isn’t too hot on options (judging by the traffic here Friday and today).

  • Mark Shinnick

    Agreed.

  • captainboom

    It’s that time of year boss. Teaching motorcycle safety classes and shooting fireworks displays. Also working on my own RBT as time permits.

    I’m scanning the options posts, and will revisit them in the future. Made and lost a lot of money with long calls many moons ago, and I like the vega crush approach.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    VIX hourly.

    http://stockcharts.com/public/1092905/chartbook/428507379;

    ..given that the 10 & 20 just rolled under the 50. I have no bias, that it will go higher any time soon.
    if one or two candles can get above the 20, then I would reasses.

    You can see the previous example in April.

    -GG

  • https://evilspeculator.com Sir Mole III

    Naked long calls or puts – very typical for retail attempting to land a 10-bagger. And they do have their place in very specific situations – I have used them myself, sometimes just for hedging at inflection points. When it comes to system trading on a continuous basis I prefer vega/theta neutral plays in order to reduce risk, and that’s what we’re trying to introduce here.

  • Time Bandit

    A while back, I followed Tom Sosnoff into a few of his Option Trades except for the naked plays. He was doing a lot of naked stuff at the time.

    I’ve mentioned this before but a friend of mine was holding some naked SPY Puts on May 6th 2010. That was not a pretty sight.

    I was also involved with an Option Guru a few years ago. Can’t say it was a positive experience. But one thing I learned about entering a multi layered option trade is to have some patience. For example if you send out a trade calling for a $35 Debit then a player should put the trade on at .35 Cents and leave it there for awhile. If it’s a distance from the mark then begin increasing it by 1 penny at a time. But only increase the debit until the trade doesn’t make sense anymore. At some point if you can’t get filled at a reasonable level above the mark, simply pass and wait for the next trade.

  • Billabong

    Closed BIS position for +2.37R…

  • CandleStickEmUpper

    Been lurking around here and there. I mostly watch the Zero. Mole, I would like it if you also provided your Futures NQ and ES updates from time to time, in addition to the excellent new options strategies posts (not my cup of tea, but your explanations have been awesome)

  • https://evilspeculator.com Sir Mole III

    No worries – I’ve had a bit of a shit day today and was unable to muster up another post. I will pick things up here tomorrow.

  • Time Bandit

    Nice one BB.

    I’m going to take another look at this sector and see if I can make it work.

  • https://evilspeculator.com Sir Mole III

    Exactly right – getting those things filled sometimes takes a bit of patience. On the exit side you want to have enough time as well so it’s best to not wait for the last moment.

  • Billabong

    I haven’t cross checked them. I only do BIS on the long side (short) and it rarely gives me more than 3 buy signals in a quarter. It’s either a risk on or risk off sector taking no prisoners. It’s another sector where I only use small positions.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    Just. won’t,
    die.

    /NQ assault mounting to attack the up side.

  • Eddie

    I’ve been trading options for a while and using your notes to get a sense of where the market is, these last two options posts have been spot on for me (I was able to get similar results in BABA, MBLY). I’ve been getting good results with neutral options trades in the past month or so in SPX, any option related posts you share would be great !

  • https://evilspeculator.com Sir Mole III