Late night musings with the TOS platform and ruminating over the past happenings with our beloved AGNC.
It is ours you know. You and I have lived it, breathed it, soared with it, had the heart palpitations with it(Oct 4th), made money, lost money, held its hand through its blah days(4th Q, last) and through some "get out of my way" days(last month). Reminds me of marriage....;-)
Anyway, I am up for some more empirical experiments. I have been tracking the "what if" stuff re. my recent penchant which is the Calendar Bull Put Spread. This, as you recall, is when we place the trade by Shorting an outer contract Put and purchasing a nearer contract lower strike Put, thereby receiving a net credit.
Our hope is for a rise in the PPS(hence "Bull") and as the PPS does rise the Spread becomes less in premium, whereby we buy the spread back. The difference between the original premium received and the price you buy the spread back for, being your net profit.
OK, if you've got the premise, here are the details for the experiment:
Sell a small lot of spreads(let's say one). There that was easy. Do it every trading day. What? Yes, every trading day. The long contract month will be the one that gives us at least .70 and contain at least one EX that hasn't yet occurred. Often you will get 1.25- 1.85.(This depends a lot upon IV, but don't worry now about IV..just look for your price).
The Long Put you purchase two strikes lower on the near contract month for no more than .15(often.05-.10). This is basically insurance in case the lights go out and we all have to eat spam. Do you carry fire insurance on your home? That is what the Long Put hedge is..."Fire Ins."
The results are quite incredible. Not one day loss during all of 2011. .30/day average x 20 trading days/month average = 6.00/month. Trading one spread that is $600/month. Trading 100, that is $6000/month. Trading 1000, that is $60,000/month.. I want to trade 1000...;-)
Here is the kicker. With this method you want the PPS to be channel bound, or stay the same and not move at all or to move up. All of those make us win. If we do go down, just no more than two dollars below our lowest traded PPS, and we win. We're selling Puts to all the Arsh's(sorry brother) out there, that are planning on the PPS going down. We are betting against that notion.
What do you think? I am going to try this starting on Mar 5th. Why not tomorrow? Hey, its an experiment and I am putting real dollars out there....;-)
I should add that a "nice" broker should treat this differently, and close the other leg of the spread at the same time. But evidently not all brokers do that. You have to descend into the fine print of the brokerage agreement to see whether any of them actually commit to it.
I have heard such complaints as well over the years.
Here is the risk here:
- For a vertical spread, the broker requires only the difference of the strikes as margin.
- This is tempting. One may enter a very leveraged position (1000s of contracts on each leg) considering that their risk (excluding premium paid or received) is the difference in strikes.
- However: in a flash crash, the short leg may be assigned. If you don't have enough margin to buy the shares (assuming a put spread), the broker just liquidates your position at the bottom of the market. If the market then corrects, your long puts do not cover the loss.
Moral of the story: Do not enter multi-leg positions unless you have margin to cover assignment of the short leg(s) alone. Do not assume that required margin is always the total risk. This is a rule I always follow. Over-leveraging can hurt.
This, by the way, is one of the reasons that I have mentioned more than once the need for option traders to read the little booklet brokers send you when you open an options trading account:
It does mention things risks of this sort -- as well as other ones. It's one of the best descriptions of option trading risk I have seen.
Try again - shorter.
Maybe it was a margin problem where the people didn't have enough cash to buy the shares if assigned. All I know is some people were complaining on another forum about having their shorts closed ATM during the day and their accounts were debited the difference.
Thanks YBF. I'm thankful that I didn't put myself into a position of being in margin debt, and will definitely make certain that I never do in the future either since I ahbor interest. I had to read your post twice to fully grasp it and take it in fully, but I've got it. The most significant statement that hit home to me was this one: "When the price of your position changes, the margin debt doesn't change, but the margin does, and more rapidly than if you didn't leverage on margin." Interesting and very good to know information!
I'm really liking my itty bitty steps into options so far, but man oh man do I have a lot to learn yet! It's fabulous to have a board as great as this one is to learn from you all though, thanks guys!
If you bought to open, you sell to close.
If you sold to open, you buy to close.
And yes, if you don't actually go into debt on margin, you don't pay interest, but you do limit the amount of margin you can use for other positions or for borrowing.
Very important thing to remember is that "margin" is the part you actually own, and "margin debt" is the part the lender owns. When the price of your position changes, the margin debt doesn't change, but the margin does, and more rapidly than if you didn't leverage on margin. And when you collect cash from a transaction it goes to margin debt first; you can't have positive cash and nonzero margin debt at the same time (except temporarily, since margin is recalculated once a day, after close).
Ok Doc, I did some reading at TDAT, then spoke with a rep -- since I'm not in a neg bal on my margin balance there's no interest throughout the period of that option trade, and I have more than enough assets in that account to pay for the EPD if I get it at that price so I'm OK.
And, to close it out if I decide to later on, I'm guessing it would need to be a buy to close in the same month/year right? Now that I know I won't have interest incurred over the time I feel all calm, cool, and happy again. *grin*
Sheesh - I know how our government officials feel when they obligate our tax dollars so easily now - when the money I'm playing with came so easily it's all too easy to act as though it's play money... and that's not good. I resolve myself to act more responsibly henceforth Doc!
So... I hope that you post some very SIMPLE AGNC option trade so I, and those other options newbies like me who might also be reading, can learn from your expertise through doing in a more intelligent manner.
Your friend always,
G'morning Doc! I just bought 10 contracts (hence the $45k dock to my available margin balance in that particular acct.). So -- I could close my position out by buying april puts to close?
(really dumb of me to have done this without running it past you first -- sometimes I learn best by doing first & then going "oh oh, what have I done afterwards!". This is one of those times... *chuckle*
EPD has been on a rout and I think you will be fine. How many contracts did you short? There is incredible one year support at 39.00; with all indicators presently pointing up.
Worse case, you own the shares at 40.90(+ commission and margin interest)/share. If you plan on unloading them at the April run to EX, you could buy the Apr45Put for .15. That would guarantee you no loss between now and April OPEX, no matter how badly the PPS does between now and then.
My house is unlikely to burn down, therefore do I or don't I get the fire insurance....;-)
Best to you,