Last trade on Nikkei 225 (N225) Index Options

On April 30, I closed my last contracts of Nikkei 225 (N225) Index Options.  With that, I will stop trading N225 Index Options.

The main reason to stop trading N225 Index Option is : Tick Size!

Source : Option Spec (http://www.jpx.co.jp/english/derivatives/products/domestic/225options/01.html)

What this means is :

• If the Option price is 50 points or less, the Option change price in 1 point up or down.  
• Once the Option price goes over 50 points, the Option price change in 5 points up or down.  
• And if the Option price goes over 1000 points (ie 1000 * JPY 1,000 = JPY 1,000,000), the Option price change in 10 points up or down.  I have yet to encounter any Option price above 1000 points.

As an Options Seller, you want your Options to expire worthless.  That is to say, you want your option price to go down.  You do not want your option price to go up.  You make money when option price goes down; you loss money when option price goes up.

Here is the problem of the Tick Size.  When the option price goes down, below 50 points, it goes down 1 point at a time, slowly.  When the option price goes up, over 50 points, it jump 5 points at time!

A typical premium collected from N225 Credit Spread is about 20 points.  To reach the targeted profit of 80% (4 points), it goes down 1 point slowly from 20 to 4 points.  However, when your option position goes against you, it will jump 5 points at a time.  And 5 points is 25% of your collected premium!

At the point (Delta 25-30) that you need to make adjustment (or cut loss), your option price is definitely over 50 points.  Your option price is definitely going to jump 5 points at a time.  And because of the Difficulty In Trading Combo Order for K200 and N225 and the Problem In Combo Order Execution for K200 and N225, you will not just loss 5 points.  You will loss 10 points due to the Bid/Ask Spread. That is 50% of your collected premium!

As you can see from the above screenshot, at Delta 14-23, the option prices are already above 50.  With a tight Bid/Ask spread, you will see 5 point Bid/Ask spread at single option contract.  With spread (due to two option contracts), the tight Bid/Ask spread is 10 points.  The above screenshot didn't have the fortune of tight Bid/Ask spread, you ended up with 15 points Bid/Ask spread.

My analysis of my trade results show that I always end up losing more than 3X of the collected premium when I adjust (or cut loss) at Delta 25-30.

Even though Option Selling has higher probability (about 80%) of wining, you will still be hit with losing (even if it is 20% probability).  Losing trade is certain.  You will have to accept that you will have losing trade, about 1 out of 5. Hopefully 1 out of 10.

If you make 64 points in 4 wining trade (4 * 16 points = 64 points) but you loss 65-70 points (3 * 20 points + 5-10 points spread), you will end up losing even though you have higher probability of wining.  This does not work.

The total wining must be more than the total losing.  The lost trade has to be limit to about 2X, ie 40 points.  With that, at least, you will end up wining 24 points (64 points - 40 points) for 1 losing trade out of 5 trades.

Therefore, here ends my option trading with N225.  I will only trade K200 from May.  I will start to explore commodity future option to diversify.  I think trading with just one Index Option is a bit risky even though I know there are people simply trade S&P500 Index Option or Russel 2000 Index Option solely.

Well, let's continue to explore in this journey of Option Trading.

November 2014 Nikkei 225 Iron Condor Adjustment#2

On Oct-29, 

1. I closed the Put Spread at 7 as it reach 50% target credit in just 3 days.  Took in profit of JPY 40,000 (15-7 * 5 * 1000)
2. I also close the Call Spread at 46 as its Delta hit 25.  Took in lost of JPY 150,000 (46-16 * 5 * 1000).
3. I sold 10 Call Spread at 13 at Delta 8.6.  Took in credit of JPY 130,000 (13 * 10 * 1000)
4. I also sold 5 Put Spread at 13 at Delta 8.7.  Took in credit of JPY 65,000 (13 * 5 * 1000)

I sold the 10 Call Spread as part of the adjustment I mentioned earlier.

I sold 5 Put Spread as part of the adjustment.  However, I didn't sell 10 Put Spread because

• I am worried there might be a retracement after today run
• I want to sell Put Spread on a down day
• I want to sell Put Spread when volatility goes up 

So, I leave another 5 contract Put Spread for another day.

The Iron Condor is now 14250/14500/16375/16625.

Credit received : JPY 195,000 (130,000 + 65,000)

Max risk: JPY 2,305,000 (10 * 250 * 1000 - 195,000)

Margin: JPY 1,000,000 (~ USD 10,000)

Days to expiration (DTE): 16

N225 Nov2014 Iron Condor Profit/Loss : JPY -80,000 (30,000 + 40,000 - 150,000)

Related Posts:

Oct-27: November 2014 Nikkei 225 Iron Condor Adjustment

Oct-16: November 2014 Nikkei 225 Iron Condor

November 2014 Nikkei 225 Iron Condor Adjustment

On Oct-27, I closed the Put Spread at 4.  Took in profit of 6 (JPY 30,000).  I immediately sold another Put Spread 14125/13875 at 15 (JPY 75,000).

Details:

N225 at 15348 (1223 points 7.96% downside)

Sell N225 October 14125 Put at 43 

Buy N225 October 13875 Put at 28 

Credit received : JPY 75,000

Days to expiration (DTE): 18

The reasons I close the Put Spread are:

1. It reached almost of project target of 70%.  Originally intention was to have IB auto close at 3 (1 point lower than the limit set as stated in this post).  Somehow, this round IB close at the limit set, 4.

2. At Delta 3 or 2, Spread value of 3 or 4, it no longer provide any protection for the Call Spread if N225 continues to go up.

3. To bring in more credit in anticipation of Call Spread adjustment.

I normally don't roll up when the DTE is less than 30.  However, the Dec Put Spread with Delta 9-10 was not attractive.

The Iron Condor is now 13875/14125/16000/16250.

Credit received : JPY 155,000 (75,000 + 80,000)

Max risk: JPY 1,0950,000

Margin: JPY 500,000

Days to expiration (DTE): 18

Related Posts:

OCt-16: November 2014 Nikkei 225 Iron Condor

November 2014 Nikkei 225 Iron Condor

On Oct-16, I sold an Nikkei 225 (N225) Iron Condor 13000/13250/16000/16250 when N225 was at 14739.

Details:

Buy N225 October 16250 Call at 18 

Sell N225 October 16000 Call at 34 

N225 at 14739 (~1261 points 8.56% upside; 1489 points 10.10% downside)

Sell N225 October 13250 Put at 65 

Buy N225 October 13000 Put at 55 

Credit received : JPY 130,000

Max risk: JPY 1,120,000

Margin: JPY 500,000

Days to expiration (DTE): 29

Weekly Market Reivew N225

N225 closed at 16,229.86 on Friday, 26-Sep-2014, lost 91.31 (0.56%) over the last 4 trading days. NKVI lost 0.03 (0.18%) ending the week at 16.66.

N225 managed to get back below the top Bollinger Band, but not much.  And the band has widen.  N225 has been grinding up since August 8 low.  This is no good for selling Iron Condor or even just Call/Put spread.  The low volatility didn't provide good premium.  In fact, I couldn't find a good premium to sell Put spread to form Iron Condor.  And, the Call spread is being challenged every time N225 edges up.  Should I consider buying option instead of just selling option?

Both the weekly and monthly chart continue to look bullish.  Not much has changed.  

November Position : Call Spread 17250/17500, 17375/17625
November 17250/17500 position is currently at a paper loss of about 8 points (JPY 8,000, before commission).  N225 is about 1020 points away from the Short Call.  Delta is at 0.1252.  DTE is 47 days.  This position looks ok.  Just need to keep a watch on the Delta movement.

November 17375/17625 position is currently at a paper gained of about 1 points (JPY 1,000, before commission).  N225 is about 1145 points away from the Short Call.  Delta is at 0.1030.  DTE is 47 days.  This position looks ok.  No action needed. 

Weekly Market Reivew N225

N225 closed at 16,321.17 on Friday, 19-Sep-2014, gained 372.88 (2.34%) over the last 4 trading days. NKVI gained 0.34 (1.93%) ending the week at 16.69.

NKVI finally dropped with the rise of N225.  This is usual.  

Last week, I mentioned that N225 may bash through 16,000 and challenge the previous high at 16,320.22.  Not only, it closed above it.  It reached a high of 16,364.08, highest since 2008.  While the Friday bar is very bullish, it is also way above Bollinger Band.  Will it take a breather to retrace before going up?

Both the weekly and monthly chart continue to look bullish.  The weekly chart, like the daily chart, seems a bit over extended on the Bollinger Band.  Will we get a retracement?

November Position : Call Spread 17250/17500, 17375/17625
November 17250/17500 position is currently at a paper loss of about 11 points (JPY 11,000, before commission).  N225 is about 928 points away from the Short Call.  Delta is at 0.1534.  DTE is 54 days.  This position does not looks good.  Need to monitor closely on the Delta movement.

November 17375/17625 position is currently at a paper loss of about 3 points (JPY 3,000, before commission).  N225 is about 1053 points away from the Short Call.  Delta is at 0.1261.  DTE is 54 days.  This position looks ok.  No action needed. 

Trading Calendar
Monday Sep-23: OSE will be closed for trading

Add November 2014 N225 Call Spread

Sep-19, I sold a N225 Call Spread 17375/17625 when N225 was at 16274.20.

Details:
Buy N225 October 17625 Call at 35 (Delta: 0.0792)
Sell N225 October 17375 Call at 50 (Delta: 0.1187)

N225 at 16274.20 (~1100 points upside)

Credit received : 20 (JPY 20,000)
Max risk: 230 (JPY 230,000)
Margin: JPY 100,000
ROM: 20%
Days to expiration (DTE): 55

Below is the chart as at close of Sep-19:

This the P&L Chart as at close of Sep-19:

Mistakes made in Cutting Loss

At 8:10am,  N225 was at 16,178.32, Delta was at 0.2394.  Bid-Ask spread was 43-37, 6pt spread.

The minimum fluctuation is 1pt for 50pt or less and 5pt for over 50pt up to 1,000pt.

At 8:39am, after sending kids to school, N225 went up 20pts to 16,198.84, Delta was at 0.2512, Bid-Ask spread was 46-40.  Base on last close price 80-34, the spread was 46.  Loss is 228% of credit (46 minus credit of 14 divide by 14).

Base on the criteria (Delta > 0.25 or/and Loss > 200% of creidt) in my Exit Strategy, I should close this call spread immediately, for Stop Loss or for Adjustment.

I didn't!  I spend the next hour trying to determine what contract to roll out & up.  Well, I have long determined in my weekly review that I will not just roll up to current month as the DTE is too short.  I will roll out to next month, November contract.  However, I have not determined what Strike price to roll up too.

Worst!  Besides looking at what Call Spread to roll out to, I was also looking at what Put Spread to form Iron Condor.

By 9.43am, N225 went up more than 80pts to 16,282.92.  At this point, N225 is up 216pts!  Delta was at 0.3012, Bid-Ask spead was 59-53.  Base on last close price 105-47, the spread was 58.  Loss is 314% of credit.

While I managed to close at 55 as written in this post, it was lucky as there was a dip/retrace when I tried to cover in separate legs.  Not a repeatable process.

At 12.15pm, N225 went up to 16,361.86.  The spread had also gone up and widen to 75-65, 10pts spread because the 16,750 Call price went up above 50pts.

Conclusion
1. The first cut loss is always the best cut loss
If I had cut loss at 8.39am, when both criteria hit, I could sell the spread at 46 (suffered 6pts spread).  The loss will be 32pts (JPY 32,000), 228% of credit.

2. Focus on closing the loss position
I should spend time closing the loss position instead of rolling/adjusting.  Cut loss should execute fast while new position should always take time to find best opportunity.  Juggling between cutting loss and opening new position simply didn't work.  Time is not on our side.

3. Should I cut loss on the loss leg first?
In the Call Spead, it is the Short leg that is suffering the loss.  If I have cut the loss leg first at 80 (buy at Ask price), I sell the Long leg later at 60.  The spread will end up at 20.  The loss will be 42% of credit (20 minus credit of 14 divide by 14).
This idea is yet to be explored before it is put in Trading Plan.

Close October 2014 N225 Call Spread of Iron Condor

On Sep-19, I closed the N225 October 2014 Call Spread of Iron Condor 13250/13500/16500/16750.

Details:
Sell N225 October 16750Call at 50
Buy N225 October 16500 Call at 105

Note: All calculation before commission
Credit received : 14 (JPY 14,000)
Credit paid : 55 (JPY 55,000)
Loss : 41 (JPY 41,000), 293% of Credit
Margin : ~JPY 100,000 for full Iron Condor
Loss On Margin (LOM) : 41% or 82% for full Iron Condor or half Iron Condor respectively
Days on Trade : 39

Weekly Market Reivew N225

N225 closed at 15,948.29 on Friday, 12-Sep-2014, gained 279.61 (1.78%) over the last 5 trading days. NKVI gained 0.34 (1.93%) ending the week at 18.

NKVI continue to climb with N225, despite slower, like last week.  This is unusual.  Such anomaly should not persist too long.  Else, something unusual may happen.  Let's watch it carefully.

Last week, I mentioned that the range could be expanded to 15,000-16,000 range. It was almost there.  It reached a high of 15984.90 on Friday.  Will 16,000 be a resistance?  Or will N225 bash through it and challenge the previous high at 16,320.22?  Let the market tell us.

Both the weekly and monthly chart look bullish.  It seems that they are going towards the previous high of 16,320.22.

October Position: Call Spread 16500/16750
October Position has a paper loss of about 13 points (JPY 13,000, before commission).  N225 is about 540 points away from the Short Call.  Delta is at 0.1626.  DTE (Days To Expiration) is 26 days.  

This position is bad.  The loss is almost 100% (credit was 14 points).  One of my adjustment criteria is when loss is 200%.  I have to watch closely this.

Delta is also bad at 0.1626.  The other adjustment criteria is when it is over 25 to 30.  This is the second item I need to watch closely in the coming week.

If either one of the above criteria met, I will make the adjustment.  With DTE only <26 days, I will not roll up.  Instead, I will roll out and up to November contract.

The at the money call 16,000 is selling at 185 (Ask price).  The sellers do not believe N225 will be above 16,185 at October expiration?  The at the money call 15875 is selling at 240 (Ask price).  The sellers do not believe N225 will be above 16,115 at October expiration?  So, is my Short Call 16,500 safe?

November Position : Call Spread 17250/17500
November Position is currently at a paper loss of about 1 points (JPY 1,000, before commission).  N225 is about 1300 points away from the Short Call.  Delta is at 0.0957.  DTE is 61 days.  This position looks good.  No action required.  Waiting for opportunity to add the Put Spread leg to form an Iron Condor.

Trading Calendar
Monday Sep-15: OSE will be closed for trading

Weekly Market Reivew N225

N225 closed at 15,668.68 on Friday, 5-Sep-2014, gained 244.09 (1.58%) over the last 5 trading days. NKVI gained 1.72 (10.79%) ending the week at 17.66.

Last week, NKVI dropped with the drop of N225.  This week NKVI gained with the rise of N225.  This is unusual.  NKVI should be inversely correlated to N225.  However, this might not be really alarming as the movement in these two weeks were small (100-250 points).

Last week, I also mention that the range has expanded to 15,000-15,700 range. I could have underestimated the upper range.  I think it is at least 15,800.  Or 16,000 if N225 push higher next week.  After all, N225 is still on uptrend on daily chart.  However, N225 is at the upper end of the Bollinger Band.  It could retrace lower before it move higher.  Let's see.

Nothing much has change on the weekly/monthly chart, N225 is still on an uptrend.

October Position: Call Spread 16500/16750
October Position has a paper loss of about 3 points (JPY 3,000, before commission).  N225 is about 830 points away from the Short Call.  Delta is at 0.1045.  DTE (Days To Expiration) is 33 days.  This position does not looks too good (obviously since it is at a paper loss now).  However, Delta is still healthy at 0.1045.  It does not call for any adjustment, yet.  Will start to plan for next action if Delta move closer to 0.2.

If N225 remains about the same for the next week, the time value decay (Theta) will bring the position to break even.  Of course, this is just theoretical and hypothetical.  In reality, N225 will move up or down, so is Delta, Gamma, Vega and IV.

November Position : Call Spread 17250/17500
November Position is currently at a paper gain of about 2 points (JPY 2,000, before commission).  N225 is about 1580 points away from the Short Call.  Delta is at 0.0727.  DTE is 68 days.  This position looks good.  No action required.  Probably will look for opportunity to add the Put Spread leg to form an Iron Condor.

November 2014 N225 Call Spread

Sep-3, I sold a N225 Call Spread 17250/17500 when N225 was at 15795.71.

Details:
Buy N225 October 17500 Call at 33 (Delta: 0.0702)
Sell N225 October 17250 Call at 50 (Delta: 0.0974)

N225 at 15795.71 (~1454 points upside)


Credit received : 17 (JPY 17,000)
Max risk: 233 (JPY 233,000)
Margin: JPY 100,000
ROM: 17%
Days to expiration (DTE): 72

Below is the chart as at close of 3-Sep:

This the P&L Chart as at close of 3-Sep:

Related Posts:

Sep-19: Add November 2014 N225 Call Spread

Details:

Buy N225 October 17625 Call at 35 (Delta: 0.0792)
Sell N225 October 17375 Call at 50 (Delta: 0.1187)

N225 at 16274.20 (~1100 points upside)

Credit received : 20 (JPY 20,000)
Max risk: 230 (JPY 230,000)
Margin: JPY 100,000
ROM: 20%
Days to expiration (DTE): 55

Close October 2014 N225 Put Spread of Iron Condor

On 1-Sep, I closed the N225 October 2014 Put Spread of Iron Condor 13250/13500/16500/16750.

Details:
Buy N225 October 13500 Put at 18
Sell N225 October 13250 Put at 14

Note: All calculation before commission
Credit received : 15 (JPY 15,000)
Credit paid : 4 (JPY 4,000)
Profit : 11 (JPY 11,000), 73% of Credit
Margin : ~JPY 100,000 for full Iron Condor
Return On Margin (ROM) : 11% or 22% for full Iron Condor or half Iron Condor respectively
Days on Trade : 21

This the P&L Chart with Call Spread left:
Buy N225 October 16750 Call at 14 (Delta: 0.0776)
Sell N225 October 16500 Call at 40 (Delta: 0.1012)

Weekly Market Reivew N225

This review came late because I was having a short weekend vacation across the causeway. 

N225 closed at 15,424.59 on Friday, 29-Aug-2014, lost 114.6 (0.74%) over the last 5 trading days. NKVI lost 1.75 (9.89%) ending the week at 15.94.

Looking at the bigger picture on daily chart, N225 dip back into the 15,000-15,500 tight range.  However, I will think that that range no longer hold.  The range has expanded to 15,000-15,700 range.  The Bollinger band has also expanded.

At the weekly chart, N225 is concurrence with the daily chart.  It stays in the expanded range of 15,000-15,700.

Looking at the monthly chart, the long pin bar failed to break the last month high which was just 220 points away last week.  The green bin bar also turn red with the month closed.  It is still a bullish bar rejecting 15,000.  But it is no bullish if it has turn green or break last month high.  We need the next bar to tell us more.

NKVI continue to move lower (please ignore the last bar as this is done on Monday morning) to 15.94.  With this low volatility, will need to explore buying instead of selling.

SPX broke 2000 this week and stay above it.  It closed at 1003.37, up 6.63 points on Friday.

Below is how the P&L chart looks like as at 29-Aug closed (please ignore the Index and Price as it is real time on 1-Sep):

Action plan for the week

I will close the Put Spread as it has reach my 70% credit target.  I sold the Put Spread for 15 points credit.  The Put Spread is now worth 4 points.  I will gain 11 points (11/15 = 73%) by closing (buying back) the spread.