Thursday, July 07, 2005

So busy...

I've been very busy with my main business (writing niche software applications) , preparing for a business trip so I haven't been able to blog much. Here's a round-up of what has been going on.

My trading lately has been piss-poor. Remember those RIMM puts I covered ahead of earnings? The stock dropped hard after earnings...yet the RIMM puts also dropped due to the volatility crash. This was a good lesson in the post-event implied-volatility crush. I'm still not sure whether it was a good decision to close the position out or not. Hey, I shouldn't complain about making money I guess, but when has that ever stopped me?

The main area where I have been trading poorly though, is the gamma-scalping expiriment. I need to decide whether I am position trading or if I am actually going to scalp the gamma. I wrote that I had hedged my position to delta-neutral by shorting some SPY shares when the market was up about a buck. I then had at least 2 chances to make round trips for a profit of around $20 each time, but I felt very strongly that the market was heading down and so each time the market was down to where I had previously determined that I would re-balance to delta-neutral by covering my short SPY shares...I heald onto them and the market rallied back to around where I originally shorted. Then after Teusday's big rally, I decided that the market was too strong, and I covered at a loss of around 10 bucks. Then on Wednesday I changed my mind and decided that I needed to really give this gamma-scalping a try, so I hedged back to delta neutral by selling 38 shares of SPY short again. That turned out to be a good trade. Thurseday morning after the London Terrorist attack I covered this time and made about $45. It's a good thing I covered. The market was strong all day. The thing is...I still feel the market should be heading for a short-term down time I short to get delta neutral (assuming the market goes up first) will I decide to play it as a position trade, or will I stick with the gamma-scalping plan? I don't know. Furthermore..what if I buy stock to hedge to delta-neutral in the down-turn and I miss out making the big money on a big down move because I was hedged?

It's funny how even though this is a small experimental trade, I still succomb to all of the usual greed and fear emotions . This is why I have to have some money on the table when trying out a new strategy. Without the emotions of having actual money on the table, it just isn't real enough. I wouldn't pay as close attention to the trade if it was just simulated, and even if I did, I wouldn't be able to have this kind of emotional reaction during simulated trades. Part of learning to trade a new instrument or new technique is mastering the emotions that come up. I find that eventually I come to a point where I just "feel comfortable" and can make my trades rationally. So far it does seem like if one stuck to the plan, this gamma-scalping could be very effective.

One really good trade I made last week was selling some UNH July 50 puts short. They had such a great yield and expected return over only 15 days that they seemed almost too good to be true. After I sold them, even though UNH seemed to be going up, the puts hardly lost any value. Presumably the implied volatility was increasing during this time (I haven't looked at a graph). I think I checked on and saw that an earnings announcement was coming just prior to expiration. I've traded UNH options a lot and this seemed like unusual behavior for UNH going into earnings, but I just accepted that the earnings must be the reason for the dramatic IV increase. Well, then on Wednesday UNH was halted because they announced an acquisition. So I guess someone knew ahead of time and that is why the IV was moving up so much and why the expected yield on those puts looked so nice. It's a good lesson I learn over and over again...often options are "over-valued" for a really good reason...something big is about to happen. The nice thing is, it never has really hurt me much when this has happened. It seems that often in my case even though the options market has anticipated news...the level of fear has been too high.

The stock was halted most of the day. Usually the (acquiring) stock goes down after the company announces an acquisition because it dilutes the existing shareholder's equity. I wasn't really worried though. My puts were enough out of the money, that the market would have had to really hate the deal to drop the stock enough for me to lose money. The deal was not particularly large, and people generally like this company. The stock seems like it only goes up and up and up, with relatively little volatility. That's the kind of stock, shareholders are willing to forgive if the company does a bad-acquisition. Furthermore, I had a feeling that even if the stock sunk, in the evening Cramer would have UNH written on his knuckles as this is one of his favorite stocks. It seems like lately, Cramer has been able to move even big stocks (Even though, I'm a little skeptical that he was solely responsible for the big CSCO move...) with his television show. I was hoping that this would be enough to keep me above the strike until expiration. Little did I know he was on vacation and so there would be no stock-pumping Wednesday night even if I needed it. It turns out to have been a moot point though. UNH actually moved up once trading resumed! The puts plunged in value. I am now patiently waiting for expiration to squeeze the last dime out of the puts.


At 4:06 PM, Blogger Bob said...

Yes welcome to the world of gamma scalping. It's not as unemotional as it first appears. To be a good gamma scalper, you also need to be a good stock trader. The CSCO thing sucked and was a great opportunity to have tried gamma scalping on. That's the point of the low vol. You need to lock that in. For instance, I was leaning long on that yet still ended up doing fine because I sold those itm. Although, a stock like CSCO isn't the best to do it on since after a pop that it had after Cramer you generally want to sell options with a lot of time premium in them which CSCO otm don't have.

I think we have a possibility to sell out those calls this week at .05 or .10. This market seems to want to rally.

At 11:07 PM, Blogger Quant Trader said...

Yeah that is what has been the most surprising result from my experiment in gamma-scalping. I can't believe how much my emotional response has been involved with the trading. I really forsaw it being more like this:

At the end of each day, I'd check how much the stock had moved. If it had moved more than 90 cents, I'd recalculate the delta of the position, and simple as that. So far, I've been unable to resist the temptation to try to anticipate the direction of the market.


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