Last week we started a $1500 demonstration portfolio using SVXY, and ETP that is destined to move higher over the long run because of the way it is constructed (selling VIX higher-priced futures each day and buying at the spot price of VIX, a condition called contango which exists in about 90% of days).Today we bought back an in-the-money expiring put that we had sold last week and rolled it over to next week.
I hope you find this ongoing demonstration to be a simple way to learn a whole lot about trading options.
Ongoing Spread SVXY Strategy – Week 2
Last week, we used the following trade to set up this portfolio:
Buy To Open 1 SVXY Jan-15 90 put (SVXY150117P90)
Sell To Open 1 SVXY Aug4-14 87 put (SVXY140822P87) for a debit limit of $12.20 (buying a diagonal)
This executed at this price (90 put bought for $15.02, 87 put sold for $2.82 at a time when SVXY was trading at $85.70.
Our goal is to generate some cash in our portfolio each week. This should be possible as long as the stock remains below $90 and we have to move that strike price higher. We will discuss what we need to do later when it becomes an issue. Right now, we are facing a market where the stock is trading lower than it was last week when we bought it. Now it is about $85, and our goal is to sell a weekly put each week that is about $1 in the money, and do it at a credit.
This is the order we placed (and was executed today):
Buy to close 1 SVXY Aug4-14 87 put (SVXY140822P87)
Sell To Open 1 SVXY Aug5-14 86 put (SVXY140829P86) for a credit limit of $ (selling a diagonal)
When we entered this order, the natural price (buying at the ask price and selling at the bid price) was $.65 and the mid-point price was $.90. We placed a limit order at $.85, a number which was $.05 below the mid-point price. It was executed at that limit price.
We paid a commission of $2.50 for this trade, the special rate for Terry’s Tips customers at thinkorswim. The balance in our account is now $1555 which shows a $55 gain (more than the $45 average weekly gain we are shooting for to make our goal of 3% a week).
Next Friday we will make another similar trade and I will keep you posted on what we do.
The stock has moved up a bit since we made this trade so you might be able to get a better price if you do this on your own.
This is what the risk profile graph looks like for our positions at next Friday’s expiration:
- SVXY Risk Profile Graph August 2014