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.

How I lost 50 % of my money in just one week (Report 35/2015)

Last week has been called by many scary names all referring to crash szenarios. The EuroStoxx 50 has gone down to 2,960 points just to go up again to 3,280 points on Friday closing. The Volatility went up to over 30 points, too.

In fact, for my options strategy the week has been worse then ever. All in all I have lost roughly 50 % of my money in just this week. Honestly, that is not acceptable at all and a real catastrophe.

Looking back on my Performance Report in week 34 I have to say, that I fulfilled the plan and opened the straddle at 3,150 points. That brought me a good premium income. Also I sold the spread at 3,000/ 2,850 points.

But never I thought that the index could crash further down another 300 points on Monday. Selling the straddle and using spreads as protection did not offer many buffer for the volatility spike that we saw on that Monday during the trading hours.

That led to the next problem that my margin has been crushed and I needed to do further adjustments that costed hell of a money to do. After many trades and adjustments I finally decided -- too late -- to use short futures to hedge the downside risk.

I closed all spreads as far as possible to take advantage of the higher spread value and to buy long puts for absolute protection. Additionally, I closed all open short calls for September to take advantage of the minimal intrinsic value that was left in those positions. And that also gave me more margin. I also closed the 3,550 short put to reduce the downside risk a bit.

Let's have a look at the result with all open positions right now (click to zoom):

Mistake Analysis

What mistakes have I done that led to this horror drop of depot value? Is it a general mistake in my strategy that I did not saw until now? So far, I would say the strategy still works fine. The idea of rolling down the straddles as the index moves lower is not a bad one at all.

What killed my performance was the fact that I did not cover all short put positions with a respective long put insurance. I never thought that a crash like that would be possible at this time.

If we look at last weeks open positions we can see that I had 8 open short positions in EuroStoxx 50. At the same time, we can see that I only had 6 long put options. So there were 2 naked puts hanging.

What did I do on Monday? I opened another straddle using a bear put spread as protection. In fact, I added another short put to the calculation leaving me with 3 naked puts in the crash scenario.

In hindsight, the wise move to do on Monday would have been to cover the naked puts with futures after the drop below 3,100 points. That would have saved me many premium for expensive put options. I could have bought them after the market bounced back to 3,200 points two days later.

Even better would have been the move to close the trade early with a win of more than 1,000 EUR or 10 % in less than 2 months. Not doing that, is that what we call greed?

Lets have a short look at the payoff diagram:

To be honest, there is nothing else to say then that looks awful! Principally I locked in a huge loss of almost 6,000 Euro in worst case. In best case the loss can go down to only 4,180 points if the ESTX50 closes as 3,150 points. Compared to the possible win of 3,000 Euro the loss is still fine. But knowing that the account is only 10,000 EUR big, the loss is quite game-changing.

Outlook for week 36

For next week I will put another 2,000 EUR in the account to keep myself into the game. I have already opened new positions for December expiration at 3,350 and 3,150 points that are insured at 3,000 points.

The current positions for September will be closed step by step if possible without paying high premiums. If that is not possible, I will simply wait until expiration. In any case there are not many options to increase profits at this time as any adjustment will also increase risk on the other side again that could mean in worst case losing even more money an a losing trade.

Regarding the December opening I will post a separate article with the related information and diagrams.

For now, I will take care of my wounds. I will lean back a bit and will try to calm my emotions to be ready for the next series.

Note to myself:

Always use long put insurance.
Close trades early with 50 percent of profit.
Don't let winners become losers.
Should I close positions before the expiration of the second month, meaning after half of the 3 months period?

Performance Report Week 34/2015

The last week was a killer. EuroStoxx 50 dropped down to 3250 points closing and 3,200 points after hours. Volatility rised up to 30 again. All my profits are wiped out within a week. Now I am facing a paper loss of roughly 1,200 EUR.

So what's the plan for next week?

At first let's have a look at the current options positions (click to zoom in):

The first group contains all insurace-related positions and the second group contains the option straddle positions. SC means short call option, SP means short put option, LP means long put option and so on. Negative numbers show income, positive numbers are expenses.

As expected the short calls do have lost almost all of their intrinsic value leaving us with a paper profit of round about 3,000 EUR. On the other side, the short put options are heavy under water with a current loss of almost 5,000 EUR.

The long insurance options do reduce the loss with a profit of 1,000 EUR.

Having a look at the payoff diagram we can see that the index is currently trading quite below our profit range. That means, further falling prices down to 3,100 points result in higher losses around 3,000 EUR. After that risk increases even higher.

So whats the strategy for next week? At first we will sell the next short call at 3,150 points strike level. That should bring a premium of round about 1,600 EUR. Additionally, we will open another bear put spread 3,000/2,850 points for protection that should cost us around 170 EUR.

If we drop below 3,200 points in ESTX50 index, I will also sell the short put at the same strike level with an expected premium of around 800 EUR. At the same time I might close the short put option at 3,750 points as it is deep in the money.

The new payoff diagram looks kind of ugly after those adjustments. The reason for that is the focus on limiting losses. I will post some updates later this week.

My lesson learned so far is to close the position after 50 percent of the max profit to avoid situations like this.

Performance Report Week 33/2015

On Friday the EuroStoxx 50 closed at 3,491 points almost 5 % down from one week earlier. Volatility moved up to 22.84. All in all we are still in a good range, but I will have to keep a close eye to the market. As the expiration in September moves closer, the possible premium to adjust gets lower. Bigger price movements are getting potentially riskier.

After I have shown the position statements from my brokerage account, I decided to adjust the presentation for a better readability. At first the classic screenshot of the open positions:

We find 2 straddles at 3,350 and 3,550 points. The upper protection comes from the in-the-money short put option at 3,750 points. The bull put spread at 3,200/3,100 points forms the lower protection.

Position Overview

The following table is prepared for easy comparison and understanding. It will summarize all the trades including the closed ones. That allows us to always keep track of the book value and the realized income/ loss.

Let me explain the numbers in detail: The table contains a list of all traded option contracts since opening the strategy. It includes the number of contracts sold (negative) and bought (positive) and the cost price.

The following 3 column areas keep track of the short side and long side of the strategy. The short side will mostly contain the straddles while the long positions are only positions for protection.

The total opening value shows that we earned a total premium of 9,320 EUR up to now. At the same time we have spend 1,644 EUR for protection.

The total book value presents the current market valuations of each position.

The difference between opening value and market value will be our result if we closed the trade. That means, if we closed all short positions right now, we would be left with a profit of 2,150 EUR. Selling the protective puts would at the same time cause a loss of 914 EUR. Overall total profit would be 1,236 EUR as of today.

Trading Plan for Next Week

The range is still bound between 3,300 and 3,800 points. That leaves us with plenty of room to move up and down for a while. If we moved below 3,350 points I would sell a last straddle at 3,150 points with a total premium of 250 points. On the upside, we are left with 3,750 points. If we move to 3,700 points again, I would close the trade and take the profit.

Performance Report Week 32/2015

The EuroStoxx 50 is still moving in a wide trading range. Two weeks ago it closed around 3,600 points. Now, we are still facing 3,638 points. The Volatility Index VSTOXX is still around 18 and almost 50 percent less than the highest markes of 35 points. That is good for earning option premium, but bad for selling new positions.

So what happend in the past 2 weeks? The Butterfly Options Strategy is still working smoothly. I did not have to adjust anything. There are still a straddle (Short put and short call option) at 3,350 points and 3,550 points. Another short put position is open at 3,750 points as upper protection. Current position value is 1,700 EUR.

As the volatility is still low, I chose to close out my August protections. Instead I opend a so-called Bear-Put Spread consisting of 3 long puts and 3 short puts at a lower strike. The advantage is that I can offset some of the long-put expenses by selling puts at lower strike levels and earning option premium. The other side of the coin is, that down-side protection is limited to the strike of the short put strike. In my case, I bought long puts at 3,200 points and sold puts at 3,100 points giving me a maximum income of 1,000 points if the EuroStoxx 50 drops below 3,100 points.

Why did I chose this construction and did not keep with the long puts? The reason is, that we are more close to the upper range than to the down-side. That means, the Index needs to drop from 3,600 to 3,100 or at least 13 percents to release the full power of the bear put spread. A single long put would be on even lower strikes around 3,000 points -- in fact offering me less protections on medium down-moves.

Currently, I have my eyes on the upper side of the range. My area of maximum profit is at 3,550 points strike in September. If the index moves too far from here I will earn less profit until I start losing money above 3,850 points.

At the moment, we are perfectly in the range and everything is fine. The risk is when the markets moves strongly higher. I am only one and a half months out to expiration and premiums are getting notably less. That limits my options to adjust the range properly.

In fact, I don't think that I will hold the positions to the better end. Moreover, I am planning to close the positions before September, so that I can get ready for the next quarter on a blank sheet. The advantage is, that I can take profits and cut the risk that the trade crashes shortly before the expiration turning a fair win in a loss.