Author: Bryan Halliday

We have decided to “delta hedge” up our portfolio. This insurance comes with a cost. However, it does also offer profit potential if the market declines. Our current SPY beta weighted delta = 0.22. So, we bought a put spread in SPY that has -0.22 delta to offset the portfolio. Basically this moves us to a flat overall position. If markets go higher, hopefully our share gains outpace the market move but the SPY put spread would be expected to lose money. If the market goes lower, hopefully our shares hold up relatively well. But the SPY put spread will make some money to offset some portfolio losses. The details are shown below:

Buy to open: SPY Oct 18th (monthly) 552.00 strike put
Sell to open: SPY Oct 18th (monthly) 529.00 strike put
Debit: 5.50
Max risk = 5.50 or $550.00 per spread
Max reward = 17.50 or $1,750.00 per spread

In addition, one more note on our SNAP position. We traded a 1×2 put spread. So, while our lower strike puts have exercised early and we currently own 200 shares. We still own the higher strike long put. That gives us the right to sell 100 shares at 13.00 per share over this weekend (that will happen automatically). So, after this weekend is when everything will shake out and we will end up owning 100 shares. We sold the covered call earlier against that 100 share position.

We will end up with 100 shares of SNAP after this weekend at a cost basis of 9.33/share. We have sold a covered call today against those shares.
Sell to open: SNAP Oct 18th (monthly) 11.00 strike call
Credit: 0.23

We made a couple of changes to APA and X yesterday. So we are all set with expiration weekend. See you in class on Monday!

Our APA short puts have worked really well. They are likely to exercise us into 100 shares of the stock over the weekend (currently slightly ITM). We are buying those puts back and closing the trade and then reselling a short put at a later expiration and lower strike price. This is called “rolling down” the short put position. It effectively gives us the potential to get a much better cost basis if the stock goes lower through next month. Buy to close: APA Aug 16th (monthly) 30.00 strike put Sell to open: APA Sep 20th (monthly) 27.50 strike put Debit: 0.27 This locks in a profit of +1.38 or +$138.00 in the original short put. Provides us with +0.55 of income for the Sep put. And moves our potential cost basis down a couple of bucks! We have decided to let our U.S. Steel (X) stock get called away this weekend from our covered call. However, we are adding a 1×2 put spread that can get us back into the stock if the stock pulls back in price. And we will get paid to do it. Part #1- Doing nothing with our X stock and short call. We will be “called away” at 40/share. We bought at 37/share. The result is a profit of +$300.00 in the stock. Plus we have made money in the premiums collected over the past couple of months. Part #2- Today we added a 1×2 put spread. This will require us to buy back into the 100 shares being sold IF the stock goes down below both strike prices. The details are as follows: Buy to open: X Sep 20th (monthly) 42.00 strike put (ratio of 1) Sell to open: X Sep 20th (monthly) 40.00 strike put (ratio of 2) Credit: 0.37 Max risk = repurchasing 100 shares of stock at a cost basis of 38.37

A couple of days ago we scalped a profit on VIX calls. We aren’t day traders but in that instance we bought and sold the same day. That trade made +$130.00 of profit per contract. We are going to take a slice of that profit and risk it in a low probability trade. This is a strategy that is highly likely to lose the full $30.00 at risk. However, the potential pay-off is great. And we are playing with the House’s money so to speak.

Please note: expiration on this is NOT next Friday. The expiration is the morning of August 21st and it will settle in cash. So, unless we exit early, this is an easy trade to manage. We can hold into expiration and let it settle. Worst case we lose -$30. Best case, we make some multiple of that up to +$470 being the max gain.

Buy to open:  VIX Aug 21st (monthly) 25.00 strike call (ratio of 1)
Sell to open:  VIX Aug 21st (monthly) 30.00 strike call (ratio of 2)
Buy to open:  VIX Aug 21st (monthly) 35.00 strike call (ratio of 1)
Debit: 0.30
This is a lower probability strategy so a max loss is more likely than a profit!
Max risk = 0.30 or $30.00 per spread
Max reward = 4.70 or $470.00 per spread

With August monthly options expiration approaching next Friday, we wanted to update a couple of positions. Trade #1- SNAP We entered into a 1×2 put spread in this stock. The ideal scenario would be for the stock to land at the short strike price of 11/share. Anything below 11/share and we will end up buying 100 shares of the stock but at a steep discount. Lets review how that works. Bought 1 contract of the 13.00 strike put Sold 2 contracts of the 11.00 strike put Debit paid = 0.33 for the spread The 11.00 strike puts may get exercised early making us long 200 shares of stock. However, at expiration our 13.00 strike put will auto exercise as well. So, we don’t need to do anything to our trade at all and at most we will end up owning 100 shares of stock at expiration. We could tell our broker to exercise it early but that is not necessary and actually eliminates some potential. Here is the math breakdown: You sell 100 shares at 13.00/share = $1,300 coming in You buy 200 shares at 11.00/share = $2,200 going out We paid 0.33 for the spread = $33 going out The 100 shares sold and 100 of the shares bought offset over expiration weekend, leaving us long 100 shares at a cost of 933.00 total or a 9.33 cost basis in the stock (2,200 + 33 – 1,300 = -933 total paid). We don’t need to do anything with our 1×2 put spread even if the short puts are exercised early and we will end up owning 100 shares of SNAP stock at a 9.33 cost basis worst case scenario. Right now it is slightly below that price so just a little bit under our cost basis. Trade #2 – APA We have short puts in APA that are ITM currently. If the stock finishes below the put strike, we will buy 100 share of that stock. Since we sold the 30.00 strike put and got paid +2.20 credit, our cost basis would be 27.80/share.

We are speculating on a VIX long call. Since we launched this new program, our account size is smaller. And as such all of our hedges and trades in this account are fairly small as well. This will be a little more risk and speculation given a risk of $320.00 total. We would anticipate being out of this position in the near term. Buy to open: VIX Sep 17th (monthly) 22.00 strike call Debit: 3.20 Max risk = 3.20 or $320.00 per contract

As suggested in the earlier newsletter, we wanted to re-enter another put butterfly in AAPL after taking profits in the first. This trade has been pushed out to November and down in strikes. That makes it less cost (risk) and since we locked-in a profit of +161.00 earlier today in the first trade, the first profit nearly paid for all of this new trade! Sell to close: AAPL Nov 15th (monthly) 190.00 strike put (ratio of 1) Buy to close: AAPL Nov 15th (monthly) 170.00 strike put (ratio of 2) Sell to close: AAPL Nov 15th (monthly) 150.00 strike put (ratio of 1) Debit: 1.80 Risk = 1.80 or $180.00 per spread Reward = 18.20 or $1,820.00 per spread

We have taken profits on our AAPL put butterfly. However, the plan will be to re-enter another put butterfly at lower strike for less cost in the coming days. In this way, our profit today will pay for most of the risk of the new trade. Essentially creating a risk-free trade. First, we are simply taking profits in this trade. Sell to close:  AAPL Oct 18th (monthly) 220.00 strike put (ratio of 1) Buy to close: AAPL Oct 18th (monthly) 200.00 strike put (ratio of 2) Sell to close: AAPL Oct 18th (monthly) 180.00 strike put (ratio of 1) Credit:  5.45 – this order has been filled Profit of $1.61 per spread We have a short put in EQT. That put has a nearly 100% probability of exercising us into the stock as originally planned. We have already taken profits in the long put strike. So, we are going to sell a covered call against that strike. This will allow us to generate a little bit of income against the position. If the stock recovers back above 33/share then we will likely “buy back” this call. The details are as follows: Sell to open: EQT Aug  16th (monthly) 33.00 strike call Credit: 0.23 – this order is pending and has not filled as of this update

 

We have exited the lower strike put in EQT. We talked about this in the class on Monday. We wanted to use a big spike lower in the stock/market to exit this leg. This will leave us “naked” the higher strike put but as always planned, we want to own 100 shares. Sell to close:  EQT Aug 16th (monthly) 33.00 strike put Credit:  1.52 Intel has fallen dramatically overnight. They surprised everyone with the extent of their earnings but the bigger surprise was them slashing the dividend. The rotation out of growth and into value stocks hasn’t worked in the near term. In fact, everything is falling this week sharply. There is quite probably more selling before it is all done. However, we should be able to continue to generate income and profit from hedges/trading while that happens. In the future, we expect to see many of these stocks bounce back and flourish.

 

Our CCJ position is falling on an analyst downgrade. We sold more covered calls than shares owned but that hasn’t offset this much downside. We like the position but it clearly has gone down more than expected in the short-term. So we are adding a put butterfly as a tail-risk hedge. This is a great risk/reward but it is way OTM in strike prices. So, the idea will be to potentially squeeze out a bit of profit to offset some of the loss in the stock if selling gets severe. This hedge is low probability and the most likely outcome is the loss of the $40 paid per spread. Buy to open:  CCJ Sep 20th (monthly) 35.00 strike put (ratio of 1) Sell to open: CCJ Sep 20th (monthly) 30.00 strike put (ratio of 2) Buy to open:  CCJ Sep 20th (monthly) 25.00 strike put (ratio of 1) Debit: 0.40 Max risk = 0.40 or $40.00 per spread Max reward = 4.60 or $460.00 per spread