Market Shutdown Guide for Options
Lots of conjecture around the market shutting down, what happens to open option positions. Tos directed me to this guide (remove the quote marks and copy/paste the link):
It used to be that the option owner would have to provide execution instructions, but now OCC executes every option that is ITM at expiration. I’ve had an issue with collars, where at the last minute the protective put drops ITM, gets assigned—taking my long stock away, and I’m left with naked short calls. So on my collar positions I’ve been trying to spread the short calls with something, anything, cheap to protect against that scenario on a surprise shutdown with ITM puts ready to expire.
It’s also important to be aware of how spreads will be affected on market shutdown if the stock price is between the spread strikes at shutdown (with looming expiration), it could cause execution/assignment of one leg leaving a potential dangerous situation.
So the way I read this is that on a shutdown, the options that expire during the shutdown will be assigned based on the last regular traded price of the stock before shut down. So….let’s say you have a AMZN Call Credit Spread, short 1800 long 1810, and the last traded price of the stock is 1805…..you WILL end up short 100 shares of AMZN at 1800, the 1810 will expire. This is quite dangerous with no ability to manage.
Couldn’t resist selling MSFT Apr 3 105 puts for 1.35….will be much higher in the morning it looks like.
Bot Dec 17.5 Fuzzy last week for tariff hedge, .18 net debit
Sold at the open for .20 net credit
Basically a scratch
Charlie McElligot at Nomura is issuing a lot of gamma red flag warnings for a vol shock. What the heck…a nice time to dust off a fuzzy in VXX.
Dec 20 Bot 17.5 call
Dec 20 Sold 17.5 put
Dec 20 Bot 15.5 put
Net price: .18 debit
I would guess vol stays steady here due to upcoming tariff increases on Dec 15, so I think not much decay on this–it’s a cheap way to get on some long gamma.
Did anyone catch Benioff’s interview two nights ago w/ Cramer? I found it troubling. I’ve always been a Benioff fan, but I’m seeing that he’s maybe losing focus. He spotlighted a stupid “Einstein Doll” that is supposed to talk and answer questions “you can buy it on Amazon”….huh? The doll didn’t work, it was an awkward moment. He seems to be losing touch w/ any kind of shareholder focus. I put a short on yesterday by selling shares and buying a protective call. I sold shares at 163.25, the call was an expensive January 165, so I need a sharp move down to make money, but it was in the 140’s not too long ago. Earnings coming up. Curious if anyone else saw it, if it hit you differently.
#SueCollar new TGT
I needed a new position in one of my accounts and went back to the well on TGT. The vols and spreads are bumping around big time this morning on TGT, I probably should have waited before locking this in. But I saw favorable vol spreads so grabbed it. Jan 3rd opened up on TGT, but the spreads and liquidity were really poor, so I went with a Dec 27/Dec 13 starting setup.
I’m spending a lot of time now looking at the volatilities on the chain for the setup, and comparing them to realized volatility. The most expensive part of this strategy is buying puts, if you can buy puts “cheap” relative to realized volatility it should help the overall success (that’s also why I’m now comparing put vol to the call vol being sold–trying to eek out a bit more edge). As you know, OTM puts have a higher volatility, and that vol drops as you approach ATM. It’s typically opposite on the call side of the chain (except for tickers with upside danger like Vix and Gold)–ITM calls have a higher vol than OTM calls. It dawned on me recently that tightening the vol spread between the short call/long put strikes would further tighten risk on these. It does in fact lower the delta even more, which is great risk control, but further restrains the upside in grind-or-melt up conditions. That’s the trade off. I’m looking to keep the vol spread now at 3 or less points. The put buy continues to be a balancing act though between volatility and price….since in normal market conditions it’s throw-away insurance. So I don’t want to overpay on price just to get a lower volatility.
If you use TOS, you’ll see the option chain has a different vol than the analyze tab. I keep wanting to ask the trade desk for an explanation on that, but I’ve chosen to use the analyze tab volatility for my record keeping.
TGT Entry: Starting P/L in this account for TGT is zero
BOT 300 shares @ 127.08
BOT 3 Dec 13 121 put @ .95, at the time of purchase vol was 22.37%, 90-day realized vol is 43.1%
SOLD 3 Dec 12 126 call @ 4.00, vol was 24.16%
This was a vol inversion that I grabbed, usually the put vol is higher than the call vol
You can see I’ve sold well in the money calls to get a higher volatility.
Max risk at the onset is $909.00
One of the collars I had set up was on TGT, which of course had earnings today. The original stock purchase was at $111.84, and after a roll last week, was protected down to around $96. It’s really run away to the upside. There is plenty of premium in the position still, especially since the Dec13 short 96 puts have become very illiquid. It looks to me that the 300 share position will net out around $503 in profit (including the dividend) by the Dec 13 expiration, a hold of about 2 months. This would equate to roughly an 8% annualized return….right in my target. The ROR is huge given the risk controls in this strategy.
A couple comments on this:
1. TGT is an interesting hold for this strategy due to their dividend timing. Since the ex div is the day before earnings, it is really hard to lose shares to someone wanting to take the dividend—since the short calls retain such high premium the day before earnings.
2. This is a perfect example of having to stay focused on a low-risk/low-return strategy. If the loss of the put premium is too much to bear, it’s the wrong strategy for you (you might be saying “coulda woulda shoulda made $4600 just holding shares vs $503 on the collar”). I get it, it’s valid. But I really appreciate the controlled risk on these things, the easy sleep at night.
On a side note, since I’ve been training intensely on vol for a couple years at Option Pit, I decided there needs to be more vol strategy folded into the collars. I’m now trying to keep the vol spread at less than 3 points between the calls being sold and the puts being bought. To accomplish this the calls need to be sold ITM, vs ATM. ITM calls have a higher vol to counter the higher vol of OTM puts.
Let me know if there’s any interest in this going forward–I get if it’s too boring 🙂