Under the Radar on 4 Legs

Adding a puppy to a relatively consistent routine brings a dimension of humor to a “normal” workday. Over the last year, I wake up late, have a coffee, check out the european markets, ramble on brandnet, work, study, etc. Since Sunday, I’ve been trying to house-train a puppy, which for those of you who’ve tried, is akin to hoping a stock will move in your favor. Sometimes she does, sometimes she doesn’t. Over the past 3 days, I’ve learned to identify some important signals. She sleeps then she pees – my RSI. She eats then she pees – my MACD. She drinks then she pees – my VIX. Now these are important indicators, but the trick she NEEDS to learn is: She goes outside then she pees – my P&L.
Lab PuppyI’m counting on Galaxy to be a precocious puppy.

During my man’s best friend walks in the frigid cold, I ask myself; what market activity has me recently perplexed, what current trading opportunities should I dig into, and how should I be evolving my option portfolio in light of this slow grind upwards? All of this while attracting the most beautiful women in Paris… Precocious I say.

Leaving the finer sex aside for obvious reasons, lets look at the evolution of an option spread. Good information on evolving a straddle, butterfly, or vertical spread is very hard to find. (Try to find some information on evolving a calendar spread, that’s nearly impossible.) I’ve a concrete straddle example which I’m working on this month:

  • FXI – ishares FTSE China 25 Index
  • Feb 37 Straddle

I bought the Feb. FXI 37 Straddle in the middle of January while the current price was $37.50.  I started to see profit on the call leg at about 39 with very positive delta, I needed to make an adjustment. Time was slipping away and my 37 puts weren’t going to compensate for a downward move (unless it was extreme). I might as well be holding a simple 39 call, and I had little downside protection. I’m still bullish on $FXI but wanted to widen the smile. So I rolled up the 37 calls and bought the 39 calls. At that point, I was holding a Feb 37 put and a Feb 39 Call, a strangle. The third evolution I made was to roll up my 37 puts to 39 puts, which put me back into a straddle position again. Today FXI is at 40.09 and my original straddle would have been solidly ITM. You might say I should still be holding the original straddle, but these transitions have the effect of taking a small amount of profit off the table over and over, while keeping my risk profile more in-line with my comfort levels. If $FXI approaches 41 in the near term, I’ll repeat and transform my current 39 straddle into a 39/41 strangle, if not I’m much better prepared for a downside move.

These three charts give you an idea:

The 37 Straddle

 

The 37/39 Strangle

 

The 39 Straddle

 

(Thought I’d try Pinterest…)