SURVIVING THE GAME
DECEMBER 22, 2008
2008 - 25

Markets are trading sideways and marking time until Christmas. I think everyone is just exhausted and wants the time off. Friday was am amazing expiry for DIA DEC options. DIA closed at $85.26. You bought back the 84 calls at the close for $150 each. The 84 puts expired worthless.Volatility is collapsing as we speak. In the last 11 days we have fallen from 56 to 42 on the VIX. This has led to large gains in your DIA JAN and FEB straddles. The JAN 86/86 was sold for $1275 each on Dec 2nd, it closed Friday at $695 and is currently $650-$665. The FEB 90/90 was sold on Dec. 17th for $1310, closed Friday at $1080 and is currently $1050-$1080.

There are two ways to play this. The decline in volatility is great for existing positions, not so great for any new positions. The lower volatility leads to lower option premium, therefore reducing amount we would get for selling new straddles. In the good old days, I would be chasing this volatility down, adding furiously to new positions, “before it is too late”. Today I view this the exact opposite. I’ll take the juicy gains and do what I can to protect them. There will always be another opportunity to start new trades.

With that, here are some new trades:
Buy 20 DIA JAN 96 calls at $21 each.
Buy 20 DIA JAN 76 puts at $80 each
Total cost $101 per trade
The JAN DIA position is now risk free.
Sold the 86/86 straddle, bought the 76 put and 96 calls as insurance.
The most you can give back now is $1000 per straddle and net premium is $1174 per straddle. Remove stops on the straddle.
Try to buy 20 DIA FEB 102 calls at $30 each or less. This will cover the upside of the FEB 90/90 straddle.
Lets see what the Christmas break hands us.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca