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Web's Weekly Roundup & Scalping Around Long Options

Analysis of S&P 500 Futures, 30-Year Bond Futures, and Crude Futures. Gamma scalping with options and managing leaps. Market forecasts and notable patterns.

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Web's Weekly Roundup & Scalping Around Long Options

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  1. Web’s Weekly Roundup&Scalping Around Long Options August 1, 2015 Presenter: Web Begole

  2. RISK DISCLAIMER Day trading, short term trading, options trading, and futures trading are extremely risky undertakings. They generally are not appropriate for someone with limited capital, little or no trading experience, and/ or a low tolerance for risk. Never execute a trade unless you can afford to and are prepared to lose your entire investment. All trading operations involve serious risks, and you can lose your entire investment. No trades are recommendations or advice and we cannot be sued for losses of capital. All trades are for educational purposes only. Contact your broker or RIA for execution, margin, and other capital requirements. Everyone watching presentation adheres to ALL disclaimers on www.optionhacker.com and www.keeneonthemarket.com

  3. Web’s Weekly Roundup Analysis of /ES (S&P 500 Futures) and forecast (BULLISH) Analysis of /ZB (30-Year Bond Futures) and forecast (BEARISH) Analysis of /CL (Crude Futures) and forecast (BEARISH) Gamma Scalping with Options and Managing Leaps

  4. /ES Futures (S&P 500) YTD 2015 O/C Change: +61pts (+2.99%) H/L Range: 171.50 Opening Price: 2038.25 Current Price: 2099.25 High: 2126.25 Low: 1953.5 Notable Pattern: We will be starting August right at the monthly POC. There was an abnormally large amount of buying into the close on Friday (in the order of ~250k contracts in the final 10 minutes) Forecast: Given the buying pressure I can only assume that the /ES will rally early next week towards the 2125.50 level. That level will be a significant one for the market, either breaking to new highs after, or falling back towards 2064.25 Large Buying on Friday’s close

  5. /ZB Futures (30-Year Bonds) YTD 2015 Opening Price: 157’21 Current Price: 156’15 High: 165’11 Low: 147’11 O/C Change: -1’06 H/L Range: 18’00 Notable Pattern:Looking to start August above value having climbed throughout the month of July – a price pattern a bit at odds with the /ES.Big money has been taking profits throughout and sold a lot on Friday’s close. Forecast: A short term reversal could be in order soon back to 155’17 with a likely move back down into value as the /ES moves higher.

  6. /CL Futures (Crude) YTD 2015 Opening Price: 59.81 Current Price: 46.77 High: 64.23 Low: 46.68 O/C Change: -13.04 (-21.8%) H/L Range: 17.55 Notable Pattern:A massive move away from value during the month of July and an open for August below value as well. Big Money has been buying, but one must interpret this as short covering – however, they sold heavily into Friday’s close. Forecast: I expect to see further weakness in /CL possibly down to the 43.46 level soon. Large Selling on Friday’s close

  7. Looking Ahead Overall: I have to admit that overall I’m simply scratching my head. The relentless rally in the /ZB amid an overall market that has also seemed to have zero interest in declining is just one example of market-wide disconnects. We’ve also been seeing the /DX and /CL moving in lock step the same direction – which doesn’t typically happen… Even AAPL which carries a large weight in the market indexes has not participated in the market rally (sure earnings and all, but not even intraday moves in conjunction) And what is even more odd is that I’m not seeing a huge decline in volume in the /ES or other instruments, they’re all trading amongst or above their average daily volume. This is odd because these disconnects typically occur within low volumes where the smaller traders can influence prices more easily.

  8. Gamma Scalping With OptionsOr: Managing Leaps “Gamma Scalping” Selling Options in Front Dates Reducing Cost Basis

  9. Gamma Scalping with Options • What do I mean by “Gamma Scalping”Adjusting the deltas of a position in order to bring in money to make up for time decay. Andrew and James have discussed doing this using stock itself, I will discuss this using options. • What’s wrong with using stock? (ex: Selling shares of stock against a long Call position?)Unless someone has portfolio margin, it can be very capital intensive. As always, using options instead can take less capital. • The guiding rule:Brokers will margin your position based on the furthest dated option. If I am long a back-month option and short a front month option of the same strike and type, I have no additional margin requirement. If I am short a back-month option and long a front month option of the same strike and type, I will have the margin requirement of having a naked option position.In this way, I can treat a long-dated long option as if it were a stock position itself. If I own a January 2017 100 Call in XYZ, I can sell a September XYZ 100 Call against it and simply take in the credit if XYZ stays below 100. The credit I receive can be used to either lower my cost basis of the far dated call or can be used to buy more long dated calls. • Other rules (& catches):If I sell an option that is closer to the money than the option I am long, I will be margined as if it were a credit spread (5pts wide = $500 / 1lot). This is still less capital intensive however than trading the stock itself.If I sell an option that then becomes in the money, I will have to manage my way out of it – and we’ll talk about how one can do this.

  10. Gamma Scalping with Options • Today we’re going to look at AAPL. On January 2, 2015 AAPL closed at 109.33. Assume I have a belief that AAPL will trade 130 or higher on that day and I buy 10x January 2016 130 Calls at $6.08. $6,080 of investment to control 1000x shares of AAPL throughout 2015. On this day, those calls have a delta of 0.33 (a 33% chance of being in the money by the January 2016). This also means I currently control (on an intra-day basis) 330 shares of AAPL, and this will go up as the price moves up, and down as the price moves down. • So, I know that AAPL is going to move around a lot between now and then. Is there anything I can do with this position rather than watch the P&L move up and down over the course of a year?Yes!Looking at the below chart we can see one important factor… theta decay is at its peak ~42 days to expiration. On this day I’m 378 days to expiration… so I don’t need to worry about theta decay a whole lot… but can I put it to my advantage?Yes! Peak ~42DTE Low ~21 DTE Source: tastytrade.com“Comparing P/L and Theta Efficiency on Different Trade Durations”

  11. Gamma Scalping with Options • So we’ll keep our sweet spot at selling options in that 49-42 days to expiration window ahead of the massive decay. • On the same day (with AAPL closing at 109.33)….The February 130 Call is marking 0.43 with a delta of 0.08 (it has only an 8% chance of being in the money by Feb expiration) not to mention, it has 49 days to expiration, so sooner than later it’s going to decay in value quickly.So what happens if I sell those options? Free money. This will cost me ZERO in margin as I would be short the front month and long the back month. $430 back if AAPL stays below 130 before Feb… • So what all this means, if AAPL stays below 130 by Feb expiration, I get to keep the money from selling those options with no margin requirement on the position. • Let’s move on forward in time…

  12. Gamma Scalping with Options • On February 2nd, 2015, AAPL closes at 118.63.The Feb 130 calls are marking $0.11 with 18 days to expirationThe March 130 calls are marking $0.84 with 46 days to expirationThis is the sweet spot to roll the short calls. • So I buy back the Feb 130s, and sell the March 130s.The March 130 Calls have a delta of 0.16 (16% chance of being in the money)The Jan 2016 130 Calls now have a delta of 0.40 (40% chance of being in the money… up from 0.33) • Let’s move forward…

  13. Gamma Scalping with Options • On March 2nd, 2015, AAPL closes at 129.09The March 130 calls are trading at $2.64The April 130 calls (with 46 days to expiration) are trading at $4.32 • Given again that this is our sweet spot for theta decay, time to roll once again.I buy back the March 130s for $2.64 and sell the April 130’s for $4.32The April 130s have a delta of 0.49 and the Jan 130s have a delta of 0.53 • AAPL is getting awfully close to our long call… But let’s stick to the plan and move forward again…

  14. Gamma Scalping with Options • On April 2nd, 2015, AAPL closes at 125.32The April 130 calls are trading at $0.56The May 130 calls (with 43 days to expiration) are trading at $3.13 • Given again that this is our sweet spot for theta decay, time to roll once again.I buy back the April 130s for $0.56 and sell the May 130’s for $3.13The May 130s have a delta of 0.37 and the Jan 130s have a delta of 0.44 • What we can note here is that the closer AAPL is to our long-dated call option, the more lucrative selling the nearer term options becomes…In other words:The more I am able to bring my deltas down to zero, the more I can lower my cost basis. • Also, if you’re like me, you get the picture and are getting bored (knowing that AAPL has barely breached 131 all year….) What about the more troublesome situations….? What if I had bought the 120s and done this???? • Let’s start over…

  15. Gamma Scalping with Options • So on January 2nd, 2015, AAPL closes at 109.33 and I decide to buy the January 2016 120 calls at $8.83 (delta of 0.43) • On the same day (with AAPL closing at 109.33)….The February 120 Call is marking 1.46 with a delta of 0.22 (it has only an 22% chance of being in the money by Feb expiration) not to mention, it has 49 days to expiration, so sooner than later it’s going to decay in value quickly.So what happens if I sell those options? Free money. This will cost me ZERO in margin as I would be short the front month and long the back month. $1,460 back if AAPL stays below 120 before Feb… • So what all this means, if AAPL stays below 120 by Feb expiration, I get to keep the money from selling those options with no margin requirement on the position. • Let’s move on forward in time…

  16. Gamma Scalping with Options • On February 2nd, 2015, AAPL closes at 118.63.The Feb 120 calls are marking $1.80 with 18 days to expirationThe March 120 calls are marking $3.60 with 46 days to expirationThis is the sweet spot to roll the short calls. • So I buy back the Feb 130s, and sell the March 130s.The March 120 Calls have a delta of 0.45 (45% chance of being in the money)The Jan 2016 120 Calls now have a delta of 0.52 (52% chance of being in the money… up from 0.43) • Let’s move forward…

  17. Gamma Scalping with Options • On March 2nd, 2015, AAPL closes at 129.09.The March 120 calls are marking $9.58 with 18 days to expirationThe April 120 calls are marking $10.65 with 46 days to expirationThis is the sweet spot to roll the short calls. • So now we’re in a pickle…. The short calls are in the money… what can we do?Why are we in a pickle? Well we’re now short AAPL… why?The Jan 2016 120 calls have a delta of 0.65The Mar 2015 120 calls have a delta of 0.88… my net deltas therefore are -230!I can mitigate in 1 of 2 ways:Buy more calls in January (marking 17.58)or reduce the number of short calls I have… • So one option I have is to buy back all 10 of the March 120 calls and sell only 9 of the April 120 calls… doing this 10x9 actually gives me a credit of $0.05…. Not enough to cover commissions but let’s look at the deltas now:The April 120 calls have a delta of 0.79 and now I only have 9 of them instead of 10…. The Januarys have a delta of 0.65…Math time:+65*10 = 650-79*9 = -711I am now short only 61 deltas (instead of 230!)…. That’s a help. And will be better if AAPL moves down. • Let’s move forward…

  18. Gamma Scalping with Options • On April 2nd, 2015, AAPL closes at 125.32.The April 120 calls are marking $5.93 with a delta of 0.70The May 120 calls are marking $8.28 with a delta of 0.67The Jan 2016 120 calls have a delta of 0.57 • So we’re still in the money, still in a pickle here…My net deltas currently are -60….Let’s see if we can again increase some deltas… • (Note Earnings are going to happen during this roll stint, that’s why there’s a huge difference in the prices between the two 120 calls. I can take advantage of this and reduce my short calls!) • If I sell 8x of the May 120 calls at $8.28, I can buy back all 9x of the April 120 calls for a net credit of $1,287, increasing my delta position back to positive.My deltas in January +570My new deltas in May 8*-67 = -536570-536= +33 • Again, regardless of the movement of AAPL, if on the first of every month I look at getting my deltas as close to zero as possible, I can continually reduce my cost basis on the options in January. Let’s keep going here…

  19. Gamma Scalping with Options • On May 1st, 2015, AAPL closes at 128.95.The May 120 calls are marking $9.10 with a delta of 0.91The June 120 calls are marking $10.30 with a delta of 0.78The Jan 2016 120 calls have a delta of 0.63 • So we’re still in the money, still in a pickle here…My net deltas currently are (63*10)-(8*91)= -98….Let’s see if we can again increase some deltas nearer to zero… • If I sell 8x of the June 120 calls at $10.30, I can buy back all 8x of the May 120 calls for a net credit of $960, increasing my delta position back to positive.My deltas in January +630My new deltas in June 8*-78 = -624630-624= +6 • Again, regardless of the movement of AAPL, if on the first of every month I look at getting my deltas as close to zero as possible, I can continually reduce my cost basis on the options in January. Let’s keep going here…

  20. Gamma Scalping with Options • On June 1st, 2015, AAPL closes at 130.53.The June 120 calls are marking $10.70 with a delta of 0.95The July 120 calls are marking $11.32 with a delta of 0.75The Jan 2016 120 calls have a delta of 0.61 (NOTE: Price is higher, why is the January delta down? Implied Volatility, AAPL is expected to move around a little more… Earnings coming?) • So we’re still in the money, still in a pickle here…My net deltas currently are (61*10)-(8*95)= -150….Let’s see if we can again increase some deltas nearer to zero… • Because earnings are coming and I don’t know which way AAPL will go, and because of my rolling technique I will have one more roll before the earnings, this may be an opportunity to reduce risk. So lets increase front month short deltas… • If I sell 9x of the July 120 calls at $11.32, I can buy back all 8x of the June 120 calls for a net credit of $1,628. My deltas here remain negative, but I have taken in some extra credit for the position.My deltas in January +610My new deltas in July 9*-75 = -675610-675= -65 • Let’s keep going here…

  21. Gamma Scalping with Options • On July 6th, 2015, AAPL closes at 126.00.The July 120 calls are marking $6.23 with a delta of 0.91The August 120 calls are marking $7.83 with a delta of 0.72The Jan 2016 120 calls have a delta of 0.63 • My net deltas currently are (63*10)-(9*91)= -189….Let’s see if we can again increase some deltas nearer to zero… • This stint in the roll will include July earnings (coming in two weeks) so I need to figure out my opinion. I believe AAPL will rally on earnings, so I want to have some net long deltas going into it. So I’ll look to again reduce the number of short calls. • If I sell 8x of the August 120 calls at $7.83, I can buy back all 9x of the July 120 calls for a net credit of $657, increasing my delta position back to positive.My deltas in January +630My new deltas in August 8*-72 = -576630-576= +54

  22. Gamma Scalping with Options • On July 31st, 2015, AAPL closes at 121.30.The August 120 calls are marking $3.28 with a delta of 0.57The September 120 calls are marking $4.75 with a delta of 0.56The Jan 2016 120 calls have a delta of 0.56 • My net deltas currently are (56*10)-(8*57)= +104….Let’s see if we can decrease some deltas nearer to zero… • Because all the deltas are closer to being in-line here, I have an interesting opportunity:I can reduce the number of short calls down to 6 in September and still take in a credit on the roll: Buying back 8 of the Augs, and selling 6 of the Septs = $226 in credit. But my net deltas would be (56*10)-(6*56)=+224This leaves me with 4 naked options in January and positive deltas and still a risk of $809 on the table….So what if, in addition, I sold 4x the September 125 calls marking $2.42 with a delta of 0.37Now I have guaranteed profits in the overall position, I have 6x covered/roll-able calls in January and now I have 4x 5pt-wide Debit Verticals (also roll-able) on for a credit!And my deltas are now: (56*10)-(6*56)-(4*37) = +76 There are plenty more rolls to come before January, but for the sake of example, lets pretend I have the September 120 Calls from the beginning instead of the January’s. So where we are now is the end of the line. What’s the profit scenario? On September Expiration:If AAPL closes at 120 or below, I walk away with $161 profits on the position.If AAPL closes between 120-125, I profit $161+$400 per point above 120.If AAPL closes at 125 or above, I take a total profit of $2,161. Under no circumstances can I lose on the position, and I have guaranteed that I have recovered my original investment of $8,830.

  23. Q & A With Web

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