Jeff Augen Weekly Strats

[Guest]

good screen thanks. was looking for sth like that, however prefer your DVO list as this one is heavy with <10$ stocks for above discussed reasons

[Guest]

So I'm trying a very small trade on aapl today, bought the 660/665/670 butterfly for a .45 debit.. we'll keep you updated on how it goes

[Guest]

So I'm trying a very small trade on aapl today, bought the 660/665/670 butterfly for a .45 debit.. we'll keep you updated on how it goes

looks a bit low, what exactly did you trade?

[Guest]

bot 2 660 puts

sold 4 665 puts

bot 2 670 puts

[Guest]

ah you have 5$ space, Augen did 10$ but even the 10$ one is ~1.60 vs. the 2.40 or so in his webinar. Looks like IV is much higher since then

[Guest]

So I'm trying a very small trade on aapl today, bought the 660/665/670 butterfly for a .45 debit.. we'll keep you updated on how it goes

be careful. did you accidentally enter the 24 Aug expiration? You need the 31 Aug.

Richard

[Guest]

So I'm trying a very small trade on aapl today, bought the 660/665/670 butterfly for a .45 debit.. we'll keep you updated on how it goes

I got in on the same trade... but at a .42 debit. I went in at the 5 point strike as well. During backtesting I got "quicker" results with the 5 point strike... quicker, as in I was able to close out the trader faster at my predefined T/P. But I intend to do a longer testing time period to get a better/more valid comparison.

[Guest]

So I'm trying a very small trade on aapl today, bought the 660/665/670 butterfly for a .45 debit.. we'll keep you updated on how it goes

I hope it goes well, personally I would have waited for a few weeks (at least) of testing. One of my biggest points of advice to anyone trading is don't ever rush into a trade, once your capital is gone, its gone. Who cares if you miss a big trade or too, if the strategy is sound, you'll have another.

[Guest]

Well, what I'm learning is (a) this trade is "cheaper" than I thought it would be, ( there is virtually no movement in the price between the time of entry and 30 minutes before close, © there is going to be slippage, (d) most surprisingly, the different strikes seem to be priced the same.

For instance, the AAPL 660/665/670 (if entered at 9:00 CST) and 665/670/675 (if entered at 9:30 CST), are both priced exactly the same -- currently. In other words, as of right now, if you had entered the 665/670/675, you would have no gain, even with 5 pts of movement.

Anyways, to those participating in data collection, DONT send me your results until close tomorrow, just keep monitoring.

[Guest]

I've been monitoring 7 different ones and noticing the same thing. Flat across them all.

[Guest]

So I'm trying a very small trade on aapl today, bought the 660/665/670 butterfly for a .45 debit.. we'll keep you updated on how it goes

we were discussing spreads and slippage earlier - do you remember the bid offer when you did the trade? How much over mid did you pay?

[Guest]

Well, what I'm learning is (a) this trade is "cheaper" than I thought it would be, ( there is virtually no movement in the price between the time of entry and 30 minutes before close, © there is going to be slippage, (d) most surprisingly, the different strikes seem to be priced the same.

For instance, the AAPL 660/665/670 (if entered at 9:00 CST) and 665/670/675 (if entered at 9:30 CST), are both priced exactly the same -- currently. In other words, as of right now, if you had entered the 665/670/675, you would have no gain, even with 5 pts of movement.

? we're talking about long butterfly here aren't we? (long wings short body) so a move is bad (5 points clearly not a problem yet) ....

[Guest]

Am I wrong or does the 660/665/670 fly look like it could be sold for about 0.75 now, meaning roughly a 60% profit from the 0.45 entry point?

[Guest]

Well, what I'm learning is (a) this trade is "cheaper" than I thought it would be, ( there is virtually no movement in the price between the time of entry and 30 minutes before close, © there is going to be slippage, (d) most surprisingly, the different strikes seem to be priced the same.

For instance, the AAPL 660/665/670 (if entered at 9:00 CST) and 665/670/675 (if entered at 9:30 CST), are both priced exactly the same -- currently. In other words, as of right now, if you had entered the 665/670/675, you would have no gain, even with 5 pts of movement.

Anyways, to those participating in data collection, DONT send me your results until close tomorrow, just keep monitoring.

Well... I think that was the point Augen was trying to make^^, the trade is pretty well hedged against small movements.

[Guest]

be careful. did you accidentally enter the 24 Aug expiration? You need the 31 Aug.

Richard

No I'm on Aug5

[Guest]

Am I wrong or does the 660/665/670 fly look like it could be sold for about 0.75 now, meaning roughly a 60% profit from the 0.45 entry point?

No I'm showing a mid of .45

[Guest]

And I have a limit sell at .68

[Guest]

And I have a limit sell at .68

I have a GTC at .65... I think we're on the same page here.

[Guest]

sorry, I was looking at the wrong week - oops - would have been nice though

[Guest]

we were discussing spreads and slippage earlier - do you remember the bid offer when you did the trade? How much over mid did you pay?

I went below the mid and started moving up until I got a fill... the mid tends to jump a lot in the morning...

[Guest]

I went below the mid and started moving up until I got a fill... the mid tends to jump a lot in the morning...

do you mind telling me the time of the fill? can see b/o at the time then. thx

[Guest]

do you mind telling me the time of the fill? can see b/o at the time then. thx

10:08:56 PM

[Guest]

10:08:56 PM

looks like is was ~ .10 / .65 then so say .33 mid and 10-12 cents slippage. Quite a lot if you double that for the round trip.

[Guest]

looks like is was ~ .10 / .65 then so say .33 mid and 10-12 cents slippage. Quite a lot if you double that for the round trip.

I am not sure if that would be a fair test, as the mid did go down to .33/.32 at some points, but for maybe a few seconds, and would jump back up to .45 to .50.

[Guest]

I am not sure if that would be a fair test, as the mid did go down to .33/.32 at some points, but for maybe a few seconds, and would jump back up to .45 to .50.

guess that's something we won't find out with paper trading - how much you have to pay away to get in/out. Looking at the MID chart from IB (was looking at b/o before and with the larger scale I think I got the mid a bit low) looks like mid was more like .38-.39 in the morning so more like 6c slippage or so. Still if it comes to 2 x 0.06 slippage plus 0.06 commission you need 18c or 40% to break even!

[Guest]

Again, I'm going to share allllllllllllll the data with everyone. However, on AAPL, pretty much from open to close, on the 660/665/670, the price bounced from a low of -0.05 (yes -0.05) to a high of .80 (at the time stamps I looked at, tried to take every 15 minutes, occasionally missed).

I am interested to see how this performs tomorrow, because the various strikes are all priced about identical right now, as TV erodes, that should change.

[Guest]

Again, I'm going to share allllllllllllll the data with everyone. However, on AAPL, pretty much from open to close, on the 660/665/670, the price bounced from a low of -0.05 (yes -0.05) to a high of .80 (at the time stamps I looked at, tried to take every 15 minutes, occasionally missed).

I am interested to see how this performs tomorrow, because the various strikes are all priced about identical right now, as TV erodes, that should change.

yep, I cut off that crazy moves off the first minutes in above graph. That's just the function of a very wide bid offer though - no one will fill you at -0.05 or even +0.05 for a spread that could be worth 0.00 at worst and 5.00 at best.

It makes sense to me that all the flys with centers say up and down 10$ from spot (on AAPL) have pretty much the same price. In fact Augen says that's the case in the Webinar, or you can stick it in an option pricer and move spot and you'll see that with 8 days to go the fly isn't too sensitive to small(er) spot changes. That's supposed to be one of the selling points for this strategy: the underlying has to move quite a bit over one day for this to make more than 50% loss.

[Guest]

as for waiting for paper trading... that's why I went with a small position <$100... to me this is like playing black on the roulette wheel... plus I feel like you learn more when you are actually in the trade (whatever the amount) then doing it on paper... although paper testing is very important also

[Guest]

My problem is the times I have tried to use IB for paper trading, I found that I could not get a trade to executed unless I was buying at the ask or shorting at the bid. Therefore I found it pretty much useless. Perhaps some of the other platforms like TOS are better.

Why can't this trade be -.05 or even a larger negative number? The negative value of the short strikes in the middle can be greater then the combined value of longs in the wings can't they? Its not likely but isn't it possible?

Also, I think Marco has had some great points about adding in the bid/ask slippage and broker transaction costs and showing how profit is significantly effected.

[Guest]

as for waiting for paper trading... that's why I went with a small position <$100... to me this is like playing black on the roulette wheel... plus I feel like you learn more when you are actually in the trade (whatever the amount) then doing it on paper... although paper testing is very important also

yep with you there. trading it in 1 lot will be more realistic than paper trading. I'm happy you're doing this but I think I too would have waited a couple of weeks or so to see what results the paper trading shows.

[Guest]

Why can't this trade be -.05 or even a larger negative number? The negative value of the short strikes in the middle can be greater then the combined value of longs in the wings can't they? Its not likely but isn't it possible?

worst case at expiry for this is to be worth 0. If you can pick it up for a credit (-0.05 or lower) you do that and hold it to expiry for a min profit of 5c. So no one should sell it to you at -0.05 unless he feels very charitable.

[Guest]

Here is the chart of SPY long butterfly initiated last Thursday with SPY around 141:

It could be initiated at 2.25. The price fluctuated between 2.05 and 2.30 on Friday, went to 2.35-2.40 on Monday, was as low as 1.85 on Tuesday (18% loss) and then started to climb. It reached 2.85-2.90 on Wednesday and 3.20-3.25 on Thursday. So if deadline to close is Wednesday, it was 25% gain, and on Thursday it could be closed for 45% gain. I personally would not wait till Thursday - the negative gamma becomes too large.

I think holding it past Mon it becomes a very different trade. From taking advantage of the accelerating WE time decay to hoping the underlying doesn't move before expiry and as you say the losses get bigger once you get a move the longer you hold on to it as gamma kicks in. So I for my part would be looking to get out by out Fri afternoon no matter what.

[Guest]

Aapl is sitting right in the middle of my 660/665/670 at 664 and I am pretty much even right now.

[Guest]

As a sampler: I opened a 1 contract AAPL 655/665/675 long call butterfly at 1.6 and sold it at 1.85 just now.

[Guest]

I was VERY excited about this trade to begin with -- but that is quickly cooling as I'm watching my three. There just is virtually no movement in the price, and essentially all we'd be doing is capturing tiny movements in the spreads as they coast around -- and that's not a strategy I've been successful with over the long term.

I'm going to look over all of the data, but right now, on AAPL, LNKD, and GLD, its not looking pretty. The spreads are large and the prices just aren't going to move much.

I think the short might have more promise to it.

[Guest]

Backtesting more last night, I actually got much better results right before expiration instead of right at the opening....(just a note)

[Guest]

I think most of the movement is supposed to be late in the session Friday, when the weekend time decay gets priced in to the options.

[Guest]

Yeah, I'm watching 7 right now. More then half have hit the bottom strike and the price of the long butterfly isn't changing much. The market in general has been strange today so it might just be an off day.

I've now got a subscription to OptionVue so I'll start putting in sometime into more detailed backtesting.

I was able to get out of AAPL long butterfly with a profit.

[Guest]

I was VERY excited about this trade to begin with -- but that is quickly cooling as I'm watching my three. There just is virtually no movement in the price, and essentially all we'd be doing is capturing tiny movements in the spreads as they coast around -- and that's not a strategy I've been successful with over the long term.

I'm going to look over all of the data, but right now, on AAPL, LNKD, and GLD, its not looking pretty. The spreads are large and the prices just aren't going to move much.

I think the short might have more promise to it.

I think conceptually the ITM long should be deeper ITM because the idea is that this position won't decay much because there isn't much extrinsic value to decay away. Perhaps structuring these butterflies a little differently is better. For example on AMZN you could have done this yesterday:

+1 635/ -2 645 / +1 650

Or some variation on this like

+1 630 / -2 640 / +1 650

or

+1 630/ -2 640 / +1 645

The key here is on the ITM call, if the extrinsic value is low that when the trade is flat you won't lose much. I can't test intraday, so I don't know how this would do, but I would submit this as a possibly variation. Also part of the analysis is how expensive the OTM call you are buying is. Sometimes the 645 could be a better deal then the 650 if it cuts your risk down and only costs a few cents more.

Sorry I can't be more help!

R

[Guest]

This is my understanding of the trade.... The point of the trade is to take advantage of decreasing IV towards market close on Friday. This usually starts to happen from 1pm, but can start to happen earlier. For example if theta on AAPL for a 10 contract butterfly spread is at $25 a day, then IV would have to decrease (i.e. through a forced decrease in demand [by MMs]) towards the end of the session to cover the 2.7 days that the market is going to be closed for the weekend. So basically all else equal, this trade should make a profit of at least $67 (hopefully more). The best strategy to take advantage of this is the long butterfly as it's well hedged on both sides and tends to have a very low delta.

[Guest]

So with aapl sitting in the middle of my bfly this should start to make money as we get closer to close today

[Guest]

that's the theory, but with the spreads this big and the prices this low, I'm worried -- we'll see though, still watching.

(Spread is still exactly where it's been since opening yesterday -- between .15 and .80)

[Guest]

that's the theory, but with the spreads this big and the prices this low, I'm worried -- we'll see though, still watching.

(Spread is still exactly where it's been since opening yesterday -- between .15 and .80)

The bright side is that if this doesn't happen, meaning that the markets were not efficient, then time decay would have to take hold over the weekend. If this is the case, then we would simply hold the trade over the weekend (and hopefully close it out Monday morning[?] for a profit [hopefully]).

[Guest]

It's not that they aren't efficient -- it's more that the market makers are scalping you on the spreads

[Guest]

Both PCLN and SPY are doing quite well. Especially my PCLN butterfly.

[Guest]

It's not that they aren't efficient -- it's more that the market makers are scalping you on the spreads

Good point, I am sure the MMs do some gamma or reverse gamma scalping to compensate for their possible weekend losses. But then I suppose that would imply that there would be no change in the spread's value (barring a large movement in the underlying and all else held equal) from Thursday to Monday afternoon. If that was consistently the case, then no one (figure of speech) would want to buy/sell these options on Thursday or Friday, they would wait until late Monday or Tuesday morning. This decrease in demand (bringing down IV), would of course decrease the price of the long options and increase the price of the short options, and thus increase the value of the long butterfly. So I think that over the long run, this strategy has to work. The main problem is that will the profit from this trade be enough to compensate us once we include commissions.

Edited August 24, 2012 by dwilliams8649

[Guest]

I'm curious what Augen meant by:

"The foolish retail investor who tries to sell time decay on weeklies in order to make the quick buck"

Does that mean he would think the calendars we do are foolish? Or the folks that do the same weekly trade with covered calls? I'm not certain what aspect of that trade he feels is foolish.

[Guest]

I'm curious what Augen meant by:

"The foolish retail investor who tries to sell time decay on weeklies in order to make the quick buck"

Does that mean he would think the calendars we do are foolish? Or the folks that do the same weekly trade with covered calls? I'm not certain what aspect of that trade he feels is foolish.

An iron condor on weeklies (weekly options that expire in 8 days) would be a "foolish" trade according to Augen.

[Guest]

Basically he's saying that sellers are not compensated for the amount of risk that they must take upon themselves during that one week period. Part of the reason for this is because weekly options are not used when calculating the VIX. So actually volatility might be higher than the number the VIX states. The higher the VIX the higher the price of options. So normally you want to buy cheap sell high. But people who sell time decay on weekly expiring options are selling "cheap". So Augen says that we should take the other side of the trade and buy from the "foolish" sellers who are trying to sell time decay through weekly expiring options.

[Guest]

Basically he's saying that sellers are not compensated for the amount of risk that they must take upon themselves during that one week period. Part of the reason for this is because weekly options are not used when calculating the VIX. So actually volatility might be higher than the number the VIX states. The higher the VIX the higher the price of options. So normally you want to buy cheap sell high. But people who sell time decay on weekly expiring options are selling "cheap". So Augen says that we should take the other side of the trade and buy from the "foolish" sellers who are trying to sell time decay through weekly expiring options.

With all due respect to Augen, I think this is right a large part of the time. However, I REGULARLY sell weekly ICs to capture, what I view as, mispriced risk. I just did such a trade on AAPL today, and I've been very successful doing it.

However,I do run my only STD calculations, as well as do an overall market risk analysis. If I can't get at least a 10% return (my guideline) on a MORE than 2SD trade, I won't do it.

If risk on the weeklies was really that mispriced, we could make a killing just buying ATM straddles or ATM RICs -- but we can't -- that's a consistent loser.