Going into today I was looking to put on a long volatility trade (ie. calendar spread) on AAPL. Much of the influence came from this post by @OptionPit “AAPL Setting Up For Excellent Calendar Spread“. I can’t say enough in how much I have learned from Mark Sebastian in analyzing volatility and income trades and when I read this I liked the trade. I saw it as a low gamma trade that should be not too difficult to manage for an end of day trader. Going into today AAPL was get hit pre-market based on news that it didn’t sell as many iPhones as expected, but that news argument is a whole different story and the only thing that mattered was that AAPL was getting hit. As expected, on the open AAPL volatility saw a gap and had me step aside from my plan going in and analyze other options if I wanted to take a trade.
Watching the price through the day I then decided I might have a better edge selling short-term volatility via weekly options rather than buying long-term volatility. I then decided to watch the 5 minute chart for intraday entry on AAPL and the AAPL VIX ($VXAPL). These individual volatility charts are a must watch in my opinion if you are putting on income trades, more information can be found here courtesy of CBOE.
Going in I planned on putting on a 10-wide Iron Butterfly as it contained much of the weekly range I was looking for and at the right risk. Below is a chart with the following notes:
- On the left is the AAPL daily chart
- Top-right is the AAPL 5-minute chart
- Bottom-right is the AAPL VIX 5-minute chart
- Notes can be found on the charts
A key takeaway here is patience and letting the trade come to you. I used to chase the fill when putting on spreads and I have since learned to put the trade on and let the fill come to me as before I was losing that edge on my adjustment looking for that fill. It took time but now if I don’t get the fill I brush it off and look for the next trade. In this case I put the order in at 1:55pm and got filled at 2:03pm. I put the trade on as I believed we would see buyers come in as AAPL was nearing the opening range lows and AAPL volatility was reaching highs. Seeing this I believed the right trade was a short-term Iron Butterfly that would have dual benefit from a rise in price and a drop in volatility.
Looking at the chart above you can see where I put on the trade. Luckily the stars aligned and the trade worked out perfectly. I definitely lucked out as both scenarios worked in my favor. I say lucked out because no one knows what future price or volatility will be but the key is to go in with a plan and look for as much edge as possible. This trade found the edge and price & volatility changes just so happened to work in my favor allowing this to be a good strategy. Also I went into the trade planning to hold this longer than a day. But I was happy with the gains, they came quicker than I thought, and right now I am looking for singles/doubles versus the homerun. So I took my money and ran. Below is a picture of the trade risk profile on a 1-lot with the red hash marks showing the end of week breakeven’s and the live price. Total risk was $750 per spread and the picture was taken at end of day but the gain I took was $120 per spread (+16%) so the profile was around the same look.