Category Archives: Bear Directional

Strategies that make money when stock or ETF price goes *down*.

Mexican Bearish Put Diagonal Spread

This trade idea shows how to approach trading the Mexican Market ETF (EWW) with a slightly bearish bias. If EWW maintains its position or goes down slightly over the next month, then this position is likely a winner. The strategy will only make a limited amount of money if a large sustained selloff occurs immediately. The only main directional risk to the trade is a large rally higher. This trade was IRA eligible so using multiple option legs does not generate lots of complex tax reporting, and there was no issue of paying extra capital gains if the trade is ultimately successful.

Mexican market and volatility overview

Mexico has been in the news recently due to a lot of tariff talk. This has meant that the Mexican stock market has been trending down since April 2019. EWW has had a high of $47.18 in April 2019 and a low of $41.77 in March 2019. For the majority of 2019 the ETF has been in this trading range between approximately $42 and $47. This relatively confined range and lower volatility makes it a good candidate for a diagonal spread. The trend since April 2019 has been slow ping gradually down so rather than buck the trend we can enter a slightly bearish put calendar spread to take advantage of any ongoing minor sell off.

Mexican Bearish Put Diagonal Spread- Trade Entry Chart - 20190628

The volatility chart for the last year shows a very wide range of implied volatility there was a huge spike up to approximately 43% in December 2018 when the tarriff talk was at its height. They implied volatility has moved down a lot since then six months later and by the end of June 2019 is approximately 18% which is one of the lowest readings for the year. Therefore it is a good relative volatility level to enter a put diagonal spread that will benefit if volatility increases. We can continue to express a slightly bearish opinion without over paying on trade entry for option premium.

Short EWW Bearish Put Diagonal Calendar Spread - Volatility chart - 20190628

Mexican ETF Trade Entry in June 2019

The trade entry was on 28th of June 2019 as shown in the trade below:

Trade Date
Trans Type
Buy to Open Long Put
Put EWW 39.00  EXP 20-Sep-2019

Buy to Open Long Call
Call EWW 43.00  EXP 20-Sep-2019

$ 479.66

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Summary of Mexican bearish put diagonal spread

This trade was OTM so had approximately a 40% of being ITM at expiration - it was therefore a lower probability trade. Initially selling the shorter dated put help finance the longer dated put, and reduce the overall risk in the position. The Mexican ETF EWW will hopefully drift lower over July without any major move either way.

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