We’ve said it many times before, and we’ll say it again. Let the Futures guide you decision making process when trading.
For example, here’s a look at the four grid chart we constantly view throughout the trading session. From top left to bottom right; /ES, /YM, /TF, /NQ (all 2 day 2 minutes bars):
And here’s what we keep on our secondary screen. From top left to bottom right; /CL, /NG, /DX, /ZB, VIX, /GC (all 2 day 2 minutes bars):
This combo allows us to keep our finger on the pulse of the market from an intraday perspective.
We also utilize longer term futures charts when determining Options positions. For example, if we something attractive in the 30 year Bond Futures chart (/ZB), we will place a trade in TBT or TLT based on what the /ZB chart is telling us.
This is a very basic rule of thumb, but very important.
Sold (to close) BIDU Nov11 135/140 Put Spread @ 1.55 for -0.70
The end result is a loss of 0.10…or $10 per spread. Our position was small as mentioned in the video, so although this wasn’t the winner we were hoping for, it did not have much of an impact in the grand scheme of things.
This trade made a lot of sense, and selling the Naked Call to partially finance the trade proved a very smart strategy at the end of the day. We rarely take a directional stance into earnings, but given the circumstances here we decided to step outside our normal earnings trade box.
We’ll stick to staying outside of the expected move in most cases, but you will see us take a shot at this type of earnings based trade strategy again in the future.
AAPL reported below expectations, sending shares lower by about 6.5% to 395.00 after hours last night. This morning, AAPL is rebounding quite nicely. The rebound is a gift for the Iron Condor we put on before the close. Let’s review the trade and reveal the results.
What was the trade?
After our expected move analysis, we sold to open the Oct 400/405/440/445 Iron Condor @ 2.25. This means we were putting ourselves in position to collect a credit of $225 per Iron Condor we sold if AAPL expires between 405 and 440 this Friday. Being that this was an earnings trade, we had no intention to hold into expiration…we just wanted to take advantage of a potential earnings volatility crush.
What was the result?
AAPL rebounded off after hours lows before the opening bell this morning. When the market opened, this spread was trading at break even. As the morning progressed, AAPL continued to rally. A few minutes ago we decided it was time to take the gift and exit the spread (blue oval indicates exit).
We covered the Iron Condor @ 1.65 for a gain of 0.60, resulting in a 21.82% return on risk. There was about $7/spread in transaction costs, so we came out with a gain of about $53 per spread. Not bad for a days work.
With only 30 minutes left in the day, it’s time to put on your AAPL earnings trade (if any)! Let’s do a quick analysis…
First, what’s the expected move?
Current stock price is 422 (trading at all-time high resistance)
Front month IV is 65%
Front month closest to the money straddle is the 420 @ 21.90 debit
Front month closest to the money strangle is the 415/425 @ 17.15 debit
Expected move = (21.90+17.15)/2 = 19.525
Upside threshold = 422+19.525 = 441.525
Downside threshold = 422-19.525 = 402.475
Now that we have those number, what’s the trade?
We prefer to Options positions that allow us to stay outside of the expected move. We also have the Options criteria that has been discussed several times on this blog to take into account.
With that in mind, here’s a few high risk ideas…
Sell to open Oct 420/425 Strangle @ 19.00 which puts your break evens just outside the expected moves. You may widen the legs to give yourself more cushion.
Sell to open Oct 400 Naked Puts @ 3.00 to give yourself a little cushion below the lower expected move and a 92% probability of success.
Sell to open Oct 440 Naked Calls @ 3.85 to give yourself a little cushion above the upper expected move and 89% probability of success.
Defined risk trade ideas…
Sell to open Oct 400/405/440/445 Iron Condor @ 2.35 which puts you right at the upper and lower expected moves with a 74.82% probability of success.
Buy to open Oct 420/425 Put Spread @ 2.50 which is a 1:1 reward to risk with a 50% probability of success. Basically risking $250 to make $250 per spread on a bearish bet given AAPL is at the top of its range.
We prefer defined risk trades, and are going to work the Iron Condor. Keep in mind the Iron Condor has extra transactional costs being that it is a four legged spread.
UPDATE: Iron Condor filled @ 2.25
UPDATE 2: AAPL trading @ 395.50 after an earnings miss. This is outside of the lower break even, so as of now the Iron Condor is a losing trade.
WYNN has a solid bearish technical case in tact. Here are three reasons we sent a bear spread trade alert out to members yesterday.
1. Head & Shoulders neckline break (small blue oval) followed by a retracement to neckline support turned resistance (yellow oval) creates an optimal entry scenario on a bearish trade.
2. Two year uptrend support break followed by retracement to uptrend support turned resistance (yellow oval) making for an optimal bearish entry.
3. WYNN tends to react to the 50 day moving average. It recently broke through it, and has since popped back up to 50 day moving average resistance.
Based on today’s 4.67% downside move, we are doing well in the position so far. Hopefully this is just the beginning of the big downside move we are expecting in WYNN (90 target), but only time will tell.
AA kicks off earnings season after the close. Is there an earnings play? Let’s analyze based on the current 10.25 price point on AA:
Oct2 Weekly 10 Straddle @ 0.75
Oct2 Weekly 10/11 Strangle @ 0.40
(0.75 + 0.40)/2 = 0.575, which is the approximate expected move in either direction
Now that we know the approximate expected move, let’s see if there is a solid Options play.
Oct2 Weekly 9/10 Bull Put Spread @ 0.22 is no good; break even (b/e) is not outside expected move and price on less than one third the width of the spread.
Oct2 Weekly 11/12 Bear Call Spread @ 0.10 is no good for the same reasons; b/e is not outside expected move and price on less than one third the width of the spread.
Oct2 Weekly 9/10/11/12 Iron Condor @ 0.32 is a worthy candidate. It’s not quite one third the width of the spread (0.33), but close enough to consider. Lower b/e is 9.68, which is right at the lower end of the expected move. Upper b/e is 11.32, which is 50 cents above the upper end of the expected. We like having more room to the upside than downside because we feel there is more upside than downside here.
Oct2 Weekly 10/11 Short Straddle @ 0.40 looks nice if you are comfortable with no defined risk. Lower b/e is 9.60, upper b/e is 11.40…both outside the expected move. Probability of success is about 50%, which is not quite as high as we like when going with a naked strategy.
Lastly, it may be worth it to take a stance on AA here. Given we are in the bullish camp going into this earnings release, our “stance trade” of choice is the Oct2 Weekly 10/11 Bull Call Spread @ 0.40. That said, we will likely play the Iron Condor if the market allows it to fill before the close.
If you follow me on twitter, you know how much I adore Steve Jobs and the products he helped create. I realize I am far from alone in this, and know many or all of you felt sorrow upon hearing last night’s news of his death.
Steve Jobs was an amazing entrepreneur, and a man I have looked up to and studied for many years. His passing was expected as his deteriorating health was no secret, but it is a painful loss to the world or entrepreneurship and technological innovation nonetheless. He will be very missed, and never forgotten.
A gentleman by the name of Tim Knight created a series on Steve titled “The Passion of the Jobs.” I thoroughly enjoyed watching these videos when they were released, and wanted to take time to share them with all of you as a celebration of his enormous contribution to the world.
We recently discussed winning trades in MCD and SPY. Unfortunately, we can’t win em all and VXX is proof of that.
We have talked about the VIX range of 30 - 44 several times on this blog. We have traded the range more than we have written about it, and this is the first loss we have taken. On September 22nd, the VIX popped to 44 range resistance (white oval).
We took this opportunity to place a bear spread on VXX. An alert was sent to members, and the VXX Oct 50/51 bear call spread filled @ 0.34 (entry indicated by blue oval).
After entry, a large drop in VXX had us feeling great about the trade. That didn’t last long. As you can see in the chart above, volatility began to spike sending VXX in a strong uptrend. The VIX eventually broke through 44 range resistance which was a very bullish signal for the VIX, but it was unable to surpass recent highs at 48 and has began retreating.
Rather than letting this play out, we are looking at this pull back as an opportunity to exit this trade and protect our capital. This pull back could be a breather before volatility continues to spike, or it could be a signal a volatility top is in. Either way, we did not like the break above 44 and feel this trade is better off as a small loss here.
An exit alert was sent to member. The spread was covered about an hour ago @ 0.43 for a loss of $9 per spread, resulting in a return on risk of -14.93%.
There’s good news here as well though. The positive return on risk in the MCD & SPY trades outweighs the negative one here. Also, this VXX trade was a 1% portfolio exposure trade whereas the MCD and SPY trades were both 2% portfolio exposure trades. In the end, the gains in the MCD and SPY trades dwarf the loss in this VXX trade, but a loss is still a loss and we aren’t happy about it.
TickerTank Premier Members have another winner on the books. We just sent an exit alert for a SPY bull put spread we entered Monday afternoon.
Late Monday, we saw S&P Future trading on 1100 consolidation support. We saw this as a great risk/reward opportunity to put on a bull spread in SPY with a little cushion just in case.
A SPY Oct 108/110 Bull Put Spread trade alert was sent to members. The trade filled @ 0.81 at 3:45pm ET.
A few minutes after our entry, S&P Futures broke and closed below 1100 support. The next morning the market gapped down slightly and continued to weaken. We must admit this made us quite nervous, but then the end of day super rally happened and set us back at ease.
After a slight continuation to the upside today, we decided to book profits in an effort to put another winner on the books and raise capital.
In the image above, the blue oval indicates entry and the yellow oval indicates exit. Entry was 0.81, exit was 0.56 for a total gain of 0.25 or $25 per spread. This transaltes to a +21.01% return on risk, beautiful!
We exited a Premium Member trade in MCD yesterday for +28% return on risk. Here’s how it all went down…
MCD has attracted sellers at the 90-91 level several times in the past 60 days.
On the morning of September 29th, the food sector was very weak. Heavy selling was taking place in names like YUM and WFM, so we looked for opportunities in the sector. That’s when we noticed MCD hanging tough at the 90 resistance level.
One could argue that the relative strength in MCD could be a sign it was poised to break through resistance, but the probabilities favored a pull back from the level. With that in mind, we entered the MCD Oct 90/92.50 Bear Call Spread @ 1.00 (blue oval indicates entry)
Yesterday we covered the spread @ 0.58 resulting in a gain of $42 per spread (yellow oval indicates exit). The max potential loss on this spread was 1.50, so a quick calculation of 0.58/1.50 translates to a return on risk of +28%. Not bad for two trading days work!