Sentimental Options

[Benton D Struckcheon]

Very strong options action today on GDX. Good volume, nice ratio of calls over puts, and not too frothy. Nearly as close to perfection as it gets. I'm getting a little more confident that we can challenge the old highs in gold.
Condor in the Russell got relief today from the slight down day we had. Just need one more to put a little bit more theta into the mix.
I have some parameters that I'm using for stops, that is, where I would buy back the sold inside call and put. I'm also developing some interesting little strategies for the statistical anomaly that having to buy back those insides would represent.
The thing about options is - they give you options. Horrible pun, I know, but the whole point is that the strategies and tactics you can come up with to exploit the little bumps along the road are just endless. You do have to spend a few expiration periods making sure you're not nuts, so it's not for the impatient.
Anyway, keeping it basic here, as all these things are just fantasies in my head just now (did anyone say something about delusions? Me, delusional? Nah...) this thing is still underwater. OTOH, just as I figured, that's because the day after I did the trade RUT broke out for a 2% move in a single day (Monday), which is a pretty rare thing. The day after you do a condor for any sort of real risk at all - the worst possible time for it to happen - is of course the day it would decide to break out. Still in all, unless this turns out to be 1987, the fall of 2008, the 1996 Tequila crisis, the 1998 LTCM crisis, the 2000 dot-com bust, the 2007 February China debacle, the summer 1990 Iraqi invasion of Kuwait, the 1989 October mini-crash when the deal on United Airlines fell apart, or the spring upside meltup of 2009, I should be OK.
'Cuz, you know, the market is perfectly normal & rational, except for the times when it's not.

 

[DionysusToast]

What's your ultimate goal here - to trade options on the indices or on individual stocks ?

If you want to daytrade options on stocks, there's some stuff I'm looking at now that may be of interest but sentiment indicators probably won't help.

 

[Benton D Struckcheon]

Thanks for the offer, but no. Indices only, swing only, far as mechanical; the discretion is in the intraday decisions on when and how to enter/exit, where I use that linear regression 100 indicator (not really an indicator; more like a set of guidelines, really) to figure out when to act. I don't want to be tied to a screen all day all the time. Just those days when I have to act, based either on signals or on the day's action.
NYX might be the only exception, but swing only anyway.
GDX is, I am finding out here, a special case, in that it's volatile on both ups and downs, and both the liquidity of the options and the nature of its volatility make it an ideal trading vehicle for options. It looks like there really isn't anything else like it in the options world. (LEH was close, but it's gone. Sigh...)
So, my intent is to develop this iron condor thing with the RUT, which won't take much longer to whip into testable shape, for use in generating income during the majority of the time when the indexes don't move much, and then back to the original intent of this thread to try to come up with a better sentiment indicator for the main indexes, something that works more like what I have for GDX, which ain't perfect, but is good enough.

 

[Benton D Struckcheon]

Problem with doing new things is you tend to obsess on them and forget about the old reliables. Fortunately, gold is acting like it's supposed to since the last signal, so far. On the options sentiment front, volume has gone way down since the near-perfect day of about a week ago, but the call to put ratio has been holding up, and was outstanding today, which saved it from issuing a sell. So, still long, and still looking at the realistic probability that the old highs will be breached, as so far there hasn't been any real froth to speak of.
The condor on the RUT was busted big time today, of course. My stop was at 722, a level not breached during the trading day, so I'm going into tomorrow with a dangerously unbalanced position. I took my eye off it during the day, and have been appropriately punished for that, as I'm going into tomorrow dangerously unbalanced. Futures are a bit down so far, so I might survive the experience. Still, a lesson in not letting your stop be too rigid. Holding this overnight is not a pleasant thing.
OTOH, losses so far have been relatively mild, and we can take the position as of right now as the max loss on a condor at these levels of the RUT: P/L on it is -136.80 with commish included, which isn't great, but is hardly awful. If that's what to expect as a max loss on a single condor in normal times, I'll take it. What happened just now is not the worst that could happen if you do a condor, but it's pretty close, as the stop got hit a mere 9 trading days after putting it on, due to the fact we've had 8 up days and one down day since then, and two of those up days were at +2%, which is unusual. Given that the width was dictated by the historical volatilities of the last few years, which includes some pretty wild times, it's safe to say this is a statistical anomaly of a high order. Getting whacked for such a small piece of money on such an anomaly isn't exactly Armaggedon.
The probabilities as of right now are in line with why I placed the stop here: probablity of touch, aggregate (both sides, using the multiple probability calculation outlined before) is 68.77%, meaning that in "normal" times, there's a two-thirds chance the top side of the condor, at 740, or the bottom, at 620 (May options), would get hit. The probability of expiring with either side in the money is still pretty low, at 35.8%, but that is just within one deviation, if assuming a normal distribution, which is higher than I would accept, and is once again why the stop is here (all figures derived from figures provided on the TOS platform).
BTW, what I found horrifying while trawling the net for what was said about iron condors is that mostly you got stuff about how you should keep to within a "comfort zone". Iron condors, being market neutral, have to be all about probability. The idea should be to enter it with the aggregate probability of either side getting "touched" being less than 50%, and of either side expiring in the money at the very least being below 33%, which would make it at least a one sigma event. This is what I did for this first scaled up experiment, and is what I would think would be the minimum requirement, probability wise.
Getting back to our current situation, on the third hand, there's the chart, which shows us to be at a strong resistance area, where we were just before the crisis, a level around which we revolved through most the first three-fourths of 2008 before the fall collapse. That would suggest we would spend some time here, consolidating these recent advances. I'll be taking this in while trying to figure out exactly how to approach my next move on this, since no matter what, this position will still be in place tomorrow morning. I'll of course update the P/L tomorrow, on the reasonable assumption the 722 level gets hit during the normal trading day, and I execute some trades to adjust the condor, or transform it into something else. Not quite sure which yet.
Chart with support/resistance level we're at below. A very interesting picture:

 

[Benton D Struckcheon]

All in P/L as of tonight on the condor is -217, which is not good, but hardly a disaster. A decent benchmark for what to expect to lose in normal times on a busted condor. In abnormal times like the fall of '08, you'd have to of course increase this considerably.
This is important, since the main criticism of condors is that you could lose a year's worth of profits in a single bad month. That doesn't look likely so far, IMO, if you keep to probabilities that are reasonable. Also, of course, keep in mind that this is my first semi-serious foray into adjusting a condor, so I expect I'll get better at it as we go along.
One of the things I think I'll do is also use the linear regression 50 indicator, as the Russell just doesn't move like GDX does, so looking at the 100 lines doesn't help much. After the day was done, I spent a considerable amount of time staring at the 50 lines and thinking those might have helped more during the day. Something to putter around with with the newly-discovered (thanks to a thread up in General Chat) On Demand button, which allows you to replay a day's action, or a month's or whatever. A very nice new feature of the TOS platform. I'll be replaying today, and seeing what I could have improved, and how.
Also, btw, besides the relative lack of volatility in the Rus2k, there's also the fact of the positive vol skew, which introduces some interesting little behaviors. I'm used to the reasonably flat skew of GDX, but this condor exercise is introducing me to the idiosyncrasies of the positive skew.

 

[Benton D Struckcheon]

Of course I forgot to say what I actually did: bought back the 620, sold a 640 put on the put side. On the call side, got out of both, and legged into selling the 750 and buying the 760. So everything is moved up 20 points, except for the bought put, which is still at 610. The probability of hitting the 640 is very low, so I'm comfortable with leaving it there for now.
Aggregate probabilities are 46.4% for touching, 24.6% for expiring, or back to where the other one was before yesterday's breakout. Futures are down tonight on Google's relative miss, so it looks like I'll at least start out with a favorable move back to the 700 midpoint.

 

[Benton D Struckcheon]

Sell tonight on GDX based on continued plummeting options volumes. The percentage of calls in that volume also fell, so that didn't save it today, as it did yesterday. Judging by what's happening so far, looks like my exit tomorrow from the long will be ugly.
When it rains, it pours.

 

[Benton D Struckcheon]

I should point out that if this goes right (a big if), the potential profit is still higher than even this all-in loss amount: as of this very moment, 240 simoleons (1.975 - 1.025) + (3.5 - 2.05), a few north of the -217 so far. So, down but not out, even after this initial whack.

 

[Benton D Struckcheon]

Sweated out a small gain on the GDX call spreads by legging out: sold the bought side first, then sitting nervously with the sold side until it fell enough to cover commish and give me a little profit. Had to sweat out the usual 10AM bounce, which was pretty powerful today. Feeling better now...