- My position coming into the FOMC release: long 35 strike price calls and long 30 strike price puts, all expiring on Wednesday, which was end of the month.
- Reason for the position: end of month options expiration along with the release of FOMC announcement. My expectation was for increased volatility; not necessarily any overall directional movement.
- Being long calls (this means I have the right, but not the obligation to exercise the calls, once exercised, I would be long futures in my account) meant that I profited if prices rose; additionally, any shorting of futures against long calls had limited risk as the call could be exercised, which would result in being long futures. The long futures would then be offset against the short futures, closing out the short futures position.
- Being long puts (the right but not the obligation to exercise the puts; once the puts were exercised short futures would be in the account) meant that I profited if prices fell; additionally, any buying of futures against the long puts had limited risk as the puts could be exercised, which would result in being short futures. The short futures would then be offset against the long futures closing out the long futures position.
- Prior to the announcement, I was carrying a minor long futures position against the puts. That sell was announced during the webinar. The position following that sell was long the 35 strike calls and long the 30 strike puts with no offsetting positions.
- The excitement began as futures began to decline. I suspect some of the erratic decline was related to month end options expiration.
- As the market dropped sharply, I went 100% long futures against the puts. The best price I got for the futures was 2820.25. The market rallied to 2831.75 before close and I sold the futures at 2831.25. I then turned around and sold the puts recovering some of the premium when the market dropped below the put strike price before close.
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Several questions arose regarding my put options. For example:
- Why did I buy long futures against the puts instead of just selling the puts? The answer is that I wouldn’t recapture much of the time premium remaining on the puts because the intrinsic value was too high-the puts were well in the money, the in-the-money amount almost perfectly matched the amount of the put. By buying futures against the puts I now had the opportunity to trade against the puts. As you can see, this opportunity came to pass as the market rallied to a high of 2831.75. My best futures buy was just above 2820. My futures sell on the rally was just below the rally prior to close. I was then able to sell the puts as the market dropped. This doesn’t happen too often. However, I had very little to lose by buying the futures since the puts were about 10 handles in the money.
- Where did I have my futures stop? I didn’t place any stops as I was protected via owning the puts.
- What exact price did I buy the puts, calls, and futures. There was no exact price; I don’t approach the markets that way. I just act when it feels right, or the odds are in my favor. I worked into buying the long futures against the long puts. You just don’t know the exact price.
- Why did you use puts instead of shorting futures? The volatility in the futures might have shaken me out of a winning position. I have a lot of scars over the past 40+ years. Additionally, the puts offer me more choices and limit my risk.
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What did you do when the futures went much lower before they rallied? I just sat back and relaxed; I had a locked in profit. I had observed the market and noticed that with all the selling the POC had not migrated lower. The odds were that traders were getting short-in-the-hole (short at poor prices).
- Why did I buy long futures against the puts instead of just selling the puts? The answer is that I wouldn’t recapture much of the time premium remaining on the puts because the intrinsic value was too high-the puts were well in the money, the in-the-money amount almost perfectly matched the amount of the put. By buying futures against the puts I now had the opportunity to trade against the puts. As you can see, this opportunity came to pass as the market rallied to a high of 2831.75. My best futures buy was just above 2820. My futures sell on the rally was just below the rally prior to close. I was then able to sell the puts as the market dropped. This doesn’t happen too often. However, I had very little to lose by buying the futures since the puts were about 10 handles in the money.
Watch the replay and try to relate to the above comments. Wednesday was a wonderful educational session.