Building Out Our Options Portfolio From Scratch

Building Out Our Options Portfolio From Scratch


Hey everyone. This is Kirk here again from Option Alpha
and welcome back to the video update. Tonight, we’re going to go through all the
trades that we made on Monday, March 18th. We had a couple new entries today as we continue
to slowly build out the rest of the April portfolio and then start building out today,
the May portfolio. Today was our first, very first day for starting
new positions in May expiration, so I’ll go over those here in a second. Just as a recap of Friday… Friday, we actually had a really quick little
closing trade and this was a big surprise for sure. What we do often… And for those of you who have been around
long enough, you see this all the time where we close out the inside legs of a position
and we usually leave these long outside legs on to expire worthless and what I usually
call them is little lottery tickets because that’s what they are. They don’t often and rarely do they ever make
money, but this is a case where it actually did. Our little lottery ticket, 106 calls that
we had that we thought were going to expire worthless and weren’t worth anything, again,
there’s no reason to close them because they, at that time, were worth maybe $1. You just leave them on and let them ride it
out and in this case, they ended up being worth $90, so we ended up closing these for
a $90 credit. On Friday, huge pop in SMH right at the end
of expiration. I know a lot of people actually emailed me
and got much, much better pricing than 190. I was late to the game. Around 11 o’clock when I actually got closed
on this position. Again, it just goes to show sometimes also
that oftentimes, people get much better pricing. I know some people got 120, I mean, 125, 115,
105. I know a lot of people got in the 110 range. Ultimately though, what it ended up doing
is it ended up turning what was a $50 scratch trade for SMH which I adjusted here to just
zero profit and loss on this one because we total it up on this one. The SMH position that we had adjusted into
ended up being a $130 profit which is just really fascinating on the outside. If you actually take a look at what happened,
SMH, for all intensive purposes, moved completely away from our center strikes and we had to
adjust and we were diligent in adjusting probably right about the best time during this slight
move down. We rolled up our puts and took in some additional
credit, went inverted, the whole nine yards and I think we played this thing as well as
we possibly could’ve because at this point, we entered a stock that was basically down
in this 97-ish range here and the stock basically moved away from us for most of the entire
expiration period. It was a really good little play here, again,
just showing how nimble you can be with options. You can’t do that with stocks and it’s
just a really cool little case study. Alright, so today on Monday, we got into a
couple new positions. The first one was an additional laddered entry
for April expiration. There’s 32 days to go, so we still have a
couple of days to squeeze some positions in. For FXI, we’re just simply adding a new
laddered entry centered around the 45 strike. As FXI continues to move, all we’re going
to do is just add this new position here and ladder into more of a bigger position in this
core ticker. This is one of our uncorrelated tickers that
we generally want to be trading. We had the 44s. Now, with the stock trading around 45, we’re
going to have the 45 iron butterfly as well and that helps balance out the position. You can see, we did everything pretty systematic
across the board, just selling the inside strikes, moving our long legs out as well
and took in a $180 credit. We also started today, selling our May contracts. We’re about 60 days out which is generally,
the range that we want to be in to start building out this portfolio. It doesn’t have to be 60 days, but in that
ballpark is where we generally want to be and as I mentioned in the trade comments,
what we’re going to do is we’re going to slowly add positions in our series of uncorrelated
tickers that we recently came up with from our research. We’ve got a list, a pretty short list of
tickers. We’ve traded most of them this last month,
so you don’t have to guess what they are. They’re right there. We’ve been trading them. And this uncorrelated list, we’re just going
to work backwards on from high IV to low and just probably get a full set of positions
in the core list of tickers first and then go back through and recycle through with another
set of laddered entries. Again, it’s nothing fancy. It’s nothing too complicated. There’s not a lot of thought process necessarily
that goes into it because it’s been back-tested and researched and data behind it. We just have to actually work the system and
do the mechanical processes of entering positions and checking position size, etcetera. Today, the top two IV tickers that we had
on our list were XBI and XOP, so we entered into positions on both of those. First one here was XBI. Again, a very standard entry here is the 91
iron butterfly centered at 91. We bought options out on either end $10. That way, we could really maximize this credit
that we’re getting here and collect as much premium as humanly possible. Again, this is May 2019 expiration, not May,
the 19th of May. Expiration is always the third Friday. These are the monthly contracts for May 2019,
our first series here. In XBI, you can see what we are basically
working with once Thinkorswim loads up. We’ve got our April contracts in here and
now, we’re starting to spread positions out across May, so we sold the 91s and then
we bought down here the 81s and bought up here the 101s, so just created a really nice
core position to start. We did generally the same thing with XOP,
except it is truly an iron condor. This was not an iron butterfly. This was an iron condor. We did have a very tight inside strikes, so
it’s going to act more like an iron butterfly as we mentioned in the trade comments, but
when we were trading this today, XOP was basically 30.5. It was trading right in that range and so,
for us, it was one of those things where we didn’t want to and it actually closed the
day about 30.5. We didn’t want to pick direction. That’s ultimately what it was. What we wanted to do is just be as neutral
as possible. What’s the best way to be neutral? It’s basically just to spread the strikes,
the 30 and the 31 and call it a day. And then we went out on either end as far
as it was logical to buy premium. You can see, going out to the 37s, you don’t
really get that much of reduction in price, but again, going out to 36 is just doing a
$5 wide spread. It’s about what you need on both the call
and the put side. Pretty systematic, pretty standard entry here. Again, we’re just starting off small with
a couple sets and we’ll look to add some more laddered positions later on as we build
out the rest of the portfolio. Hopefully this helps out. As always, if you have any questions, let
me know and until next time, happy trading.

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