JPM Calendar- Entry

[Administrator]

Hello everyone,

This marks trade #1 in our model portfolio.

On Friday, I entered 2 contracts JPM Oct/Dec 43 put calendar right ATM for $1.38 debit. Today I added another 16 contracts for the same debit of $1.38 to size it for a max loss of 15% of the trade (4% of total portfolio is my total risk). This gives me room so I can add a second calendar if this shifts one way or another.

I am managing a paper account of 20K as this is an amount that seems to be a reasonable financial goal for most people that want to trade.Â* This will help us all learn how to manage sizing a smaller account. Then, as you get better with your trading, managing a much larger account becomes easier and easier. if you are following along with us in the trades, you can set your paper account for whatever portfolio size you would like, just be sure to size the trades appropriately so as to not overexpose yourself!

$20,000 account X 4% total max loss on portfolio = $800

800 X 15% max loss on tradeÂ* = $5,333.33 / 100 shares / $1.38 debit risk = 38 contracts

So I will do 18 total contracts on the Oct/Dec 43 put calendar and have room to do another 18 at a different strike depending on which way it goes.Â* I'll keep you all posted on adjustments and exit.Â* As a heads up, I will be adjusting my calendars when I hit 5% loss, then a second time at 10% loss.Â* I will exit the trade no matter what if I reach 15% loss.

I'm looking to make between 10-20% profit on the trade. Earnings is on Oct 14th so most likely I'll be out of the trade by then to avoid volatility crush post earnings.

The chart is still channeling and volatility dropped on Friday and today so I could get a better entry price. However as earnings approaches, volatility will most likely increase.

In the TOS risk profile, you can see that the calendar is right ATM around 43 so our calendar is positioned neatly in the middle for now.Â* Beware that this is not a place and forget trade...this needs to be managed, especially since it's a single calendar at the moment.Â* If we are lucky, JPM will stay right around 43 and we can reach our profit goal before earnings without having to add a second calendar.Â* However, I am watching it on my spreadsheet and on the chart to be prepared with my armor if needed.

Good luck & Happy Trading!

Gekko

[jbharris88]

Any thoughts on an alternative stock to play for someone not allowed to own banking stocks?

[mcowley]

Thank you for offering these trade details. I'm sure this will provide a way for me to learn a lot.

I have been learning from the Dan Sheridan videos. There are three things I have learned about how volatility relates to calendars.

1.) For calendars he likes to look at the volatility as a factor to decide whether to enter a trade. I have heard him give slightly different volatility guidelines, but basically the idea is to only buy calendars on stocks that are in the lower range of their historical volatility. This brings 2 questions to mind for me:

- How does JPM's current volatility look in relation to it's historical volatility?

- Using TOS I can see the current stock volatility and option implied volatility, but I don't know how to look at the volatility history of a stock. Can anyone tell me how to do this on TOS? (So far I have only used indexes and the associated volatility, such as the vix for the spx, and the rvx for the rut.)

2.) Another other thing that Dan always talks about is the volatility skew between the short and long options in the calendar. At this moment (constantly changing) I see the following option IV for JPM:

long Dec 43 Put : 37.5
short Oct 43 Put : 38.6

That is a skew of +1.1. Dan's rule of thumb is that the skew should not be less than negative 2 or more than positive 4 (unless you can account for it and manage it). So this looks ok.

3.) Finally, calendar spreads benefit from an increase in volatility. Do we expect the volatility to increase? Is this just because of upcoming earnings? Or are there additional reasons as well?

I welcome any answers, comments, or discussion on this topic of volatility.

Again, thank you for sharing these trades for our education.

- Mark

[Gekkotrader]

Thanks for your comments Mark...here are some thoughts/answers to your questions...I appreciate the feedback.

1) You can view the historical volatility on TOS Prophet charts by going to "Apply Studies" then selecting "Historical Volatility" in the list on the left of the popup box. Another place to see it outside of TOS is ivolatility.com.

Looking at the 1 year chart, you can see the historical and average implied volatility has dropped significantly and has plateaued for a while. This is why I am looking for calendars right now versus credit spreads (verticals, iron condors, etc).

2) + 3) About the volatility skew, this is apparent for most stocks currently because of the steady bullish movement in the market since Mar/Apr of this year (volatility tends to drop when the market is bullish in most case (but not all)). Back when the market was tanking from Aug 08 - Mar 09, we saw huge volatility skews between the front and second months. As a result we were doing a lot of credit spreads then. Although the skew on JPM isn't huge, I am looking at earnings coming up and it's past history with earnings. The financial industry is very volatile so I am expecting it to increase up to earnings. Also, since I am doing a long month to Dec instead of Nov, this allows for more wiggle room with the skew since I have more time on my side if needed.

I won't just be looking at the financial industry but put more focus on indices since they are less news sensitive. Be on the lookout for more posts on entries for those soon!

Originally Posted by mcowley

Thank you for offering these trade details. I'm sure this will provide a way for me to learn a lot.

I have been learning from the Dan Sheridan videos. There are three things I have learned about how volatility relates to calendars.

1.) For calendars he likes to look at the volatility as a factor to decide whether to enter a trade. I have heard him give slightly different volatility guidelines, but basically the idea is to only buy calendars on stocks that are in the lower range of their historical volatility. This brings 2 questions to mind for me:

- How does JPM's current volatility look in relation to it's historical volatility?

- Using TOS I can see the current stock volatility and option implied volatility, but I don't know how to look at the volatility history of a stock. Can anyone tell me how to do this on TOS? (So far I have only used indexes and the associated volatility, such as the vix for the spx, and the rvx for the rut.)

2.) Another other thing that Dan always talks about is the volatility skew between the short and long options in the calendar. At this moment (constantly changing) I see the following option IV for JPM:

long Dec 43 Put : 37.5
short Oct 43 Put : 38.6

That is a skew of +1.1. Dan's rule of thumb is that the skew should not be less than negative 2 or more than positive 4 (unless you can account for it and manage it). So this looks ok.

3.) Finally, calendar spreads benefit from an increase in volatility. Do we expect the volatility to increase? Is this just because of upcoming earnings? Or are there additional reasons as well?

I welcome any answers, comments, or discussion on this topic of volatility.

Again, thank you for sharing these trades for our education.

- Mark

[tincup]

Thanks for the update Gekko. This is a great thing you are doing.

You mentioned your adjustment points, but what adjustments will you consider? Another put spread at the adjustment point? Something else?

Thanks again

tincup

[Jimmy DeMoney]

Just a question about the math: why did you divide your trade risk ($800) by .15? In your example you said you multiplied it but to get $5333 you had to divide. I understand your max risk of 800 (4% on a 20k account) but am not following how you are calculating how many contracts to buy based on the $800 MaxLoss.

Thanks,

JDM

[MatthewHaley]

I have a long term set of calendars on XOM that have paid off quite well. The skew at 70 is negative, but is at -2. The IV is also at a low point for the recent past. I see oil being volatile within a small range lately, and while it could jump, it hasn't lately. When it does, IV jumps quickly so the risk is a bit mitigated.

XOM is in a long term "triangle/wedge/intersecting diagonal support resistance" (man I hate the technical traders ambiguous terminology) range, so a breakout is possible at some point. I am not a major calendar trader, but for those avoiding financials but still wanting to be in an active non index market, this is a potential play.

Matt

[donpick]

What parameters do you use to screen for potential calendar candidates?
The only thing I can think of is to find stocks whose price frequently rises above and falls below the 8 day moving average.

[Administrator]

As a side note to everyone, if you are viewing this trade only on the main page, you should subscribe to the "Model Portfolio" forum in the blog this way you will receive real time posts. The main page will only arrive to you via email the following morning at 7am.

For those unsure how to subscribe to a forum, click on the Forums tab on the top of the main page (under the InsaneMoney logo), then click on the "Model Portfolio" forum (this is public for all). Then open the drop down menu on the upper right "Forum Tools" then select "Subscribe To This Forum." This will go right to your email everytime I post.

Friday is Quadruple Witching Day which means it is the expiration of contracts for stock index futures, stock index options, stock options and single stock futures (SSF). This is a HIGHLY volatile period so beware of any open positions you have. Watch out for large spreads between bid and ask pricing as well as big fluctuations in your profit/loss.

So just now my 7% loss mark was hit for my JPM Oct/Dec 43 put single calendar, so per my rules, I adjusted by adding my second calendar on the topside to bring my deltas back to neutral and recenter my trade on the risk profile.
http://imgsrc alt="JPM Calendar- ADJUST 9-17-09" title="JPM Calendar- ADJUST 9-17-09" width="592" height="520" class="aligncenter size-full wp-image-788" />

I added the Oct/Dec 46 call calendar. Typically it's good to use put calendars on the bottom legs and call calendars on the top so you have more flexibility to adjust later if need be by turning the trade into a diagonal or vertical if you choose to per your trading rules. You could also just go for the cheaper calendar of the two.

Once I added my adjustment, it brought my loss down to 2.7% in 15 minutes. This is because we added our other half of the position. This is a good example of why you should leg into a position instead of going all in from the beginning. It gives you the power and flexibility to adjust your position accordingly instead of overexposing yourself.

Over the last 3 days, the trade has fluctuated majorly because of vega (volatility dropping overall in the market) and not delta movement. You can see on the JPM chart that the price overall has not moved much. This is why we are doing this trade...to show you what can happen in a trade when volatility affects it. Remember that we are choosing trades for the portfolio to focus on management, not entries. The most important part of trading is to understand how to manage the trade, not just how to enter it. If you can practice managing trades on paper, then you will become a great trader. It is easier to make money in a super trending market, but where the real trading skills get developed is in the choppier more volatile markets like this one.

I will be posting more calendars today and/or tomorrow for some more stocks, ETFs and indices so be on the lookout....Stay tuned for the next episode of "Insane Money's Model Portfolio Bonanza."

Happy Trading!
-Gekko

[mcowley]

Thank you, Gekko, for sharing with us not only what you did, but why you did it. I perfectly understand the need to have an exact plan for each trade. What I would like to discuss is what that plan should be. I have been getting most of my initial information from watching the Dan Sheridan videos at the cboe site. His calendar adjustment rules (as I understand them) are as follows:

1. Do nothing until the stock price reaches one of the expiration breakevens.
2. The exception is that the calendar should be immediately closed if the maximum loss is hit (which he suggests should be 15-20%).
3. Adjust by doing one of the following (listed from most to least aggressive):
a. Add an equal number of calendars with the strike at the current stock price.
b. Remove half of the current calendars and add this same number at the current price.
c. Close the calendar for a small loss (especially if you now feel like you have misjudged the character of the stock [i.e. it is running and will keep running instead of pulling back or holding], or if there isn't enough time left before the short option will expire [he generally likes to be out about 2 weeks from expiration of the short])

He has additional rules that are used for further adjustments, if needed.

The reason I bring this up is for discussion of calendar adjustment rules. Gekko, this is definitely NOT to criticize your rules, but simply to use this comparison as the basis for a discussion. I know that each person develops a plan that is uniquely taylored to him/her over time. I would welcome information from anyone about when, why, and how they make adjustments in calendars.

A couple of questions to encourage discussion...

- If you start with using half of your allocated money (2-4% of portfolio, or whatever your plan dictates) to put on a calendar with the intent to add the other half to build a double calendar, would it be good to put on the 2nd calendar as soon as the price has moved in one direction or the other? How far would you want it to move to confirm direction? Or is it better to wait for some other signal point (such as increasing delta or loss %)?

- Is it better to use all allocated money for a single calendar and then if needed convert to a double calendar by removing half of the single calendar to use for funds to create the double? I ask this because it seems the best profit would be made if only a single calendar is needed and all funds are used for the single calendar. And it seems the commissions for removing half to create a double calendar, if needed, are not that significant.

Ok, this is getting too long, so enough for now. Again, thank you for sharing with us.

- Mark