Trading Small with Futures Options

Futures are very large principal products and the underlying value of a single futures contract can be anywhere from $23,000 for natural gas /NG and up to $160,000 for US Treasuries /ZB. This means that for many accounts trading them is prohibitively expensive. However fortunately there are options on these underlying futures, that provide a good amount of leverage. Using futures options it is possible to create trades that only risk a hundred dollars or less to make a few hundred dollars or more. These can have a risk reward of for example 1 to 3 (risk $100 with max profit of $300). This means that you can easily construct trades to work within a portfolio of smaller size for example $50,000. using futures options also allows you to benefit from time decay and also high implied volatility on the underlying (similar to standard equity options). this gives you a lot more flexibility than just trading the futures out right long or short.
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AGNC – Bull Put Spread – Trade Postmortem

Quick update, on our AGNC trade exit just before the close on May 21st (yesterday). Like we stated there was significant event risk for mortgage REITs today with Ben Bernanke’s speech at 10am.

There would have been significant volatility in the position, and it would have been down a few hundred dollars during the morning spike (see chart). In the end we were proven wrong, and would have made money if we had held on to the close, then closed out the position a day later. However it probably wasnt worth the risk of AGNC running higher, for the limited gain.

We are a little fixated on getting our $100 back that we lost on this trade, but AGNC looks like technically it could go a lower relatively quickly. Looks like the lowest close since March 2012. So we’ll keep an eye on it for now, and probably add the same style of put spread trade at lower levels in a few days or a month or so.

AGNC – Bull Put Spread – Trade Exit

Agnc moved down, and relatively quickly from May 2nd $33.10 to May 21st $29.55.

The June strike 30 put option has protected us relatively well. However getting closer into June expiration there is battle between negative time decay in the near term Jun (losing money if agnc doesn’t move down) and the positive downtrend in the agnc stock price (making the overall position money). The position is now slightly short agnc with an approximate delta of -0.10.

If we are to hold this position we need an increasing swift agnc decline into June expiration. We took the position off today on May 21st because we got a nice 1.5% downdraft. We still exited with approximately a $500 loss on all 2 option legs position.

Any bounce up in AGNC of more than $1.5 (to $30) could cause losses over $500, so the risk/reward to holding the short for the 30 days to June expiration is skewed to it moving down increasing quickly. AGNC standing still will lose the position money. Any time you *need* the market to move in a particular direction in a relatively short timeframe or you will lose money every day, it is usually not a good risk/reward trade.

There is also significant event risk for mortgage REITs tomorrow May 22nd with Ben Bernanke’s speech at 10am. This will likely be market moving for AGNC based on the FED’s bond buying program.

Overall the position lost about $100, which was unfortunate. However our original investment thesis was that AGNC would remain stable over the summer was proven incorrect. Agnc declined from trade entry $33.20 on March 16th, to $28.55 on May 21st (-14% decline). By way of a simple comparison, only 100 shares of agnc would have lost -$465 + $125 dividend = -$340 (and we were trading 8 contracts, controlling equivalent of 800 shares).

We can roll the entire structure down to lower agnc strikes and try again to make our $100 back. This wasn’t a positive result, but at least we get to try again without significant losses.

Remember we have to hold each option leg for 30 days, which is why we sometimes adjust (add legs) when selling would be easier.

TSLA – Trade Update – May 2013

TSLA beat expectations and is currently up big after hours. This should have a large volatility collapse tomorrow AND went in right direction for the spread (bullish), so this trade is likely a quick winner tomorrow.
Based on tomorrow’s indicated open it will be about 30% OTM, so it is likely safe to hold for a few trading sessions to let the volatility drain out of the position (after all the earnings excitement fades)

After Hours: 63.15 +7.40 (13.27%)
May 8, 4:58PM EDT
(this is an indicative quote – but after hours is moving around so much don’t put too much sway in it, however it is definitely up big)

AGNC – Bull Put Spread – Trade Adjustment

Agnc has sold off so we roll into 31 put. Position is still making money overall, so no need to panic yet. Rolling down still makes approx $400 realised profit, on the upper short leg of the spread (even though market was down).

Purchase  PUT  AGNC 33 Sept2013 AGNC1321U33 8 contracts  2.77  -2,228.95
    Sale  PUT  AGNC 31 Sept2013 AGNC1321U31 -8 contracts 1.4    1,107.02

If agnc makes a move up from here this combination will still make money. So we will hold on and see how it does.

AGNC – Bull Put Spread – March 2013

We have tried to run a put spread on AGNC to help capture its big dividends over the summer. Put premiums include the implied dividends between now and expiration, so if you are short an AGNC put you could be said to be capturing the dividend in advance. These OTM put options typically trade as expected future dividends + time value. So there is some advantage to selling them over a 6 month period, if AGNC price is relatively stable.

Let’s try an bull put spread to limit our risk:

Purchase  PUT  AGNC 27 Sept2013 AGNC1321U27 8 contracts  0.55   -452.95
    Sale  PUT  AGNC 33 Sept2013 AGNC1321U33 -8 contracts 3.31  2,634.99

Since this has a delta of 0.60 it is a pseudo long pos, so we need to treat it as if it has significant risk. So we will hedge the downside with a disaster hedge put at a shorter duration (this is a bit like a married put position, where the short Sept spread acts like the stock).

Purchase  PUT  AGNC 30 June2013 AGNC1322R30  8 contracts 0.61    -500.95