Short Butterfly Dec 2015 - Performance Report Week 39/2015

Due to personal circumstances I have not been able to publish a report last weekend. Hower, the changes were only minimal. EuroStoxx 50 closed on Friday at 3,113 points and VStoxx closed at 30.5 points.

At the end, the two long put options at 3,000 points expired worthless leaving me with a loss of 458 EUR.

In the same week before expiration I bought already protection for October: 2 long puts at 2,950 points and 2 short put options at 2,750 points for a total debit of 576 EUR.

On the upside I have extended my long call option at 3700 with another contract for 123 EUR to reduce margin and leave room to move in case we do really move upwards again. But at the moment, I do not see that coming.

On September 22, the markets made another big move down below 3,100 points. During the trading hours we saw prices around 3,050 points so that I decided to build up the next leg of the straddle at 2,950 points. After my my last experience in August I prefer to have a bit more buffer on the downside.

I sold one contract short call option 2,950 points for December earning a premium of 2,345 EUR. So the total premium received goes up to 9,331 EUR. To cover the short call, I bought a long call option for october at 3,400 points for 35 dollars to reduce margin requirements by more than a thousand EUR.

The new payoff diagramm including insurance by October expiration looks as follows (click to zoom in):

The short put option will be sold after we close below 2,950 points. If that happens, I will have to close the straddle at 3,350 points to reduce possible losses.

My current positions:

At the moment, the whole short option straddles trade at a profit of 320 EUR. But the negative influence of the insurance leaves me with a loss of 753 EUR in the books. All in all we see a loss of -433 EUR.

But there are still 2 months to go.

Performance Report Week 37/2015

Last week has been kind of boring after the huge market moves at the end of August. Everybody seems to be waiting for the FED? EuroStoxx 50 closed around 3,200 points and volatility in VSTOXX was around 30 points.

There was a good thing and a bad thing: The good thing first -- the EuroStoxx 50 trades exactly in my range of maximum profit between 3,150 points and 3,250 points. I do not wanna say, there is a real chance of making any profit this month after the desctructive results in August, but at least there is a good chance of reducing the loss.

The bad thing is -- the EuroStoxx 50 trades exactly in my range of maximum profit! Why is that bad? My problem is that I generally do not believe that an Index will be flat for a very long period of time. So it might happen that it swings in a narrow or wide range, but I am not sure if it really keeps on staying flat around 3,200 points for long. That means at the same time that the risk increases with every day that the Index will break out in one direction or the other!

So what do I do? Is it wise to hold on and pray that the index will stay flat till expiration? Let's just have a look of the payoff diagram as it was on Friday after markets closing (click to zoom):

We can clearly see that my losses quickly add up if the index market moves more than a hundred points in any direction!

On Friday I decided to keep on holding. The facts make sense that everyone will wait for Thursday for the FED announcement.

But as we have already Monday now, I have to admit that I finally chose to close out my open positions half an hour before the European markets closed! I do not want to take the risk of further losses anymore and just take what I already have.

In real trading we are talking about closing the straddle at 3,150 points for a profit of 1,233 EUR and closing the straddle at 3,250 points for a profit of 298 EUR. At the same time, I sold the long put insurance at 3,000 points for a little time value of 56 EUR and the long calls at 3,400 for a value of 22 EUR. All summed up, I earned 1,609 EUR for a profit of 1,017 EUR.

The biggest loss is still outstanding: The naked put at 3,750 points and the short future at 3,115 points. That will result in expenses of 6,350 EUR. The premium earned before was only 1,558 EUR leaving the position with a loss of 4,792 EUR.

That is the new payoff diagram with only two open positions left (click to zoom):

In fact the position is frozen now. The loss is a fact, but what is more important to me is the exclusion of risk. I do not have to worry anymore what happens on Thursday. My margin is finally back in a reasonable level and I have room to work with my December positions that also might need some further adjustments.

My total loss on the whole trade since opened in June will be 3,187 EUR.

Start of the Butterfly Strategy for December

At the end of August I have startet the next trade for my strategy with expiration in December 2015. Due to the catastrophe with my September positions I did not find the time to describe the trade yet.

On August 21st just before the crash I started with a straddle at 3,350 points. Just after the weekend, on August 24, the market dropped further and reached the second trigger at 3,150 points. At that strike I sold the next straddle for an even higher premium. At the same time I bought insurance with expiration in September: 2 long put options at 3,000 strike.

As the market moved lower, I added one long call option at 3,700 points for December as protection for a possible rebound to the upside. I liked t he low premium and took the chance to reduce the risk for the whole time to expiration. If the markets go up again, the call can pay for further options to buy in case.

Lets have a look at the open positions (click to zoom in):

After all transactions, the premium received totals 698 points. 64 points have been paid for insurance.

The current break even points are 3,550 on the upside and around 2,950 on the downside. Further adjustments will be made if the market moves below 3,000 or above 3,500. Depending on the possible premium, the new straddle will be sold or just the in the money option.

The resulting payoff diagram looks as following (click to zoom in):

Based on my experience, I will close the position when it is possible to take 50 percent of the maximum profit. At this time, the maximal profit possible will be reached between 3,150 and 3,350 points with 434 points of profit. So the trade will be closed with a profit of 217 points.

Alternatively the position will be tied up 6 weeks before expireation -- that is after half of the trading period -- so that no bigger losses can be made after that point in time. I will have to decide who I will treat that exactly. I prefer to close the whole trade at all.

Performance Report Week 36/2015

After the horrible week that crushed my depot by almost 50 % the last trading week has been less volatile. The reason is that markets came back a bit and traded in a narrow range between 3,150 points and 3,300 points. Friday closing was at 3,180 points for EuroStoxx 50 and a volatility of 35 points for VStoxx.

I took the chance to further reduce my September positions and closed out the short put option at 3,350 points. At the same time I also closed the corresponding long put option at 3,200 points.

At the end, I am left with a total premium received of 381 points for short options and 50 points of value in long put positions. The short future FESX is negative 85 points. Book value is 741 points to close the short side. The long puts will pay down for 41 points. In real money terms we are talking about a loss of 381 - 741 - 85 - 50 + 41 = 454 points multiplied by 10 equals - 4,540 EUR.

Looking at the payoff diagram, we can see that round about 4,500 EUR is also the maximum loss that I will be facing. That's going to happen if the index moves far away from 3,150 points. That is the strike of the remaining short straddle that carries time value of almost 1,700 EUR.

Ideally I would close the long options now to lock in the their decreasing value and wait until the short options expire. But in that case I will open the position again to the risk of volatility that I want to avoid by all means. So I will hold the long options and lose 50 points to hopefully earn 170 points from the straddle.

The short future will be hold to neutralize the short put at 3,750 points leaving me with a calculated loss of 3,750 - 3,115 = 635 points. Of course, if I just knew that the market would rise further I could close the future early and earn back some points from the short put, but who does really know?

So the strategy for September will be to survive the last 2 weeks and close that dark chapter before I can finally focus completely on my December positions.