Sell in May and Go Away

Yo Pit Crazies!

 

Counting, counting, counting …

 

It seems we are obsessed with counting.

 

I count that Phil Mickelson is 50 years old — but he still out-drove all the younger Tour pros on the 16th hole at Kiawah Island on Sunday afternoon.

Phil making it count!

 

Phil knew how to make it count at 366 yards!

 

And it seems that experience still counts for something, as Mickelson yesterday became the oldest major winner ever.

 

As an old option trader, I count my contracts. If you’re confused as to why, read on — because it matters for you.

 

Making It Count

 

As you may know, Option Pit DC and Wall Street Insider Frank Gregory and I are running The Power Income Portfolio Starting Lineup.

 

For now, I’m writing up the trade and portfolio ideas in the Option Pit Stop letter on a weekly basis. (if you want access to that free letter, just email support@optionpit.com.).

 

What I want to accomplish is make some cash and manage a portfolio approach to options based on Frank’s K Street and Wall Street knowledge …

 

He comes up with great ideas every week and it’s my job to turn them into positions.

 

Name a more iconic duo. I’ll wait.

 

The issue, really, is timing and trade type. If I’m holding several option positions, I need to have some balance for an overnight hold.

If I have totally long contracts (or totally short contracts), that could give me too much on the wrong side of the market if things go bad or sideways.

 

To help manage this, I count up the contracts I have on the same side of the market. Long contracts with long contracts, short contracts with short contracts, puts and calls all can effectively “balance” each other. 

 

Older traders remember how to do this since this was the first level of risk management for floor traders.

 

Short too many puts? Hey it works great until it doesn’t, then the great sadness occurs.

 

If you trade options and have multiple positions, how many contracts are you short and how many contracts are you long?

 

If the current market is eating your positions alive, you might own too many calls since most of the market action has been churning, going nowhere. The opportunities to close a call or put have been fleeting, so taking profits in this kind of market is very important. A lazy bull market is easy to sit on calls but not so in a churning market.

 

I will do a “contract count” in the The Starting Lineup below and other Option Pit products.  Better to count what you have now before it is too late.

 

THE LESSON: Counting contracts is a method of netting long and short contracts out to see where real market exposure is.

 

The Rundown

 

Trading Legion:
The Trading Legion is an intermediate-level education and a long strangle trading vehicle. The goal is to teach students the best times to buy options.

 

I will focus on trading a “one-side” strategy this week in which I want one direction to deliver higher returns, say 50%, and the other direction to remain flat. If the conditions are right, I can put these trades on for flat-to-positive theta.

 

The Power Income Portfolio:
Frank Gregory and I run a portfolio approach to trading options with stocks that have good long-term prospects based on Frank’s K-Street knowledge and my options expertise. We are aiming for positive theta trades and using that income to buy calls is the big growth opportunity.

 

Here’s the latest …

      • Ford (Ticker: F): We’re long five F July 02 11 calls and short five Jun18 13 calls, so the net count is 0. (Five longs minus five shorts.)
      • General Electric (GE):I own GE June 4 14-strike calls for a $.16 credit. Even though I own them for a credit I am long five calls.
      • Vale S.A. (Ticker: VALE) I’m long five VALE June 18 22-strike calls and long three 20-strike puts we own for $1.60. So, here I’m long five calls and three puts.
      • We own four Taiwan Semiconductor (Ticker: TSM) June 18 120-strike calls for $3.10 and one TSM June 18 100-strike put for 1.95. That is long four calls and one put.
      • Palantir (Ticker: PLTR) I own (200 shares) and the four PLTR June 18 17-strike puts.   A stock position is long one call and short one put as a synthetic equivalent. So, net we own two calls and two puts.

TOTAL: All told, we net 17 calls and six puts. Looking at the positions in that way shows I’m still favoring a rally since I own more calls than anything.

That is good, because I want ownership — but if my stocks stall in the short term, the decay hit will grow. That is where I find the positions this week that I have to make decisions as to whether to extend time or not. VALE and TSM are on the hot seat.

Power Moves Portfolio Starting Lineup
The portfolio’s current open positions:

 

Volatility Edge/Volatility Trading Club:

The Option Pit VIX Light is still yellow. Volatility, As I wrote above, is still very bouncy, so the yellow light will amarillo.

 

VTC Trade No. 246 is my only live position right now.

 

      • I own five VIX June 16 30/45/60-strike call butterflies and three VIX June 16 20-strike puts. This position is up around 10% and still waiting for a bit more move.
      • Net I am not long calls — I am flat calls:, long five, short 10 and long five in the butterfly. While I am long in the puts, so the position is not aggressively long.

 

Remember, a lot of vol strategies I use are market neutral. That means whether SPX or VIX go up or down, the positions still make money. This is a technique you can learn in the Volatility Trading Club and Volatility Edge!

 

Robinhood Trader:
Option Pit CEO Mark Sebastian uses the Robinhood Radar to find order flow in active names.

 

Look for ways to use the Gamma Radar to hedge this week in Thursday’s Turbo Trades session with me and Mark at 3 p.m. EST. 

      • Mark is long puts in Uber (Ticker: UBER) and Virgin Galactic Holdings (Ticker: SPCE) for  a total of seven puts. 
      • Also on the long side, Robinhood Trader owns a total of 13 calls in ExxonMobil (Ticker: XOM), American Airlines (Ticker: AAL), AT&T (Ticker: T) and Boeing (BA).

Like what you’re seeing? Have more questions? Drop a comment below!

 

To Your Trading Success,

 

AG

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