We recently told you about a GS Butterfly we entered. The thesis behind entry, chosen legs, etc is explained in the video embedded into this post.
This GS Dec 95/100/105 Butterfly position was entered at 0.70, meaning for every spread entered there is a capital risk of $70 for a max potential reward of $430. Today, the market price on the spread was between 1.45-1.60. We decided to take profits on half of the position in order to recoup the initial capital investment and let the remaining 50% of the position ride for free. Our half position was exited earlier today @ 1.50, a gain of $80 per spread or 114% return on risk!
This was a low probability of success trade entered to skew our high probability portfolio down a bit, so it made since to recoup the initial capital since all the the previous high probability trades in our portfolio have since been exited.
So far we have nailed this trade, and Members are happy with the results. If we peg 100 on Friday, the other half of the position will be closed for a substantial profit on the trade.
I have been using Technical Analysis for many years. To me, Fundamental Analysis is great but takes too long to pan out. Technical Analysis can provide the short term perspective needed to logically enter a short term Options trade.
That said, I have a theory about Technical Analysis. The more basic the better. The way I see it, there are tons of people watching basic technical items such as defined support & resistance, trend lines, bull flags, head & shoulders, 200 day simple moving average, and the likes. All of these people react accordingly to these basic technical parameters, which in turn is why they often work!
When you try to get fancy with fibonacci arcs, linear regression channels, and all the other technical studies that no one pays attention to…that’s when you start to win less.
I have been doing this for many years and have tested all sorts of technical studies. In the end, I always come back to basics. Now I don’t even try to get fancy. The craziest things I use are MACD and RSI (Wilder), and I don’t pay much attention to them unless I am somewhat “iffy” on a technical price level and am looking for some secondary confirmation.
All in all, I am a firm believer in the power of technical analysis. I should be, I’ve made a lot of money because of it. This stuff works, as long as you keep it simple.
Next time you form a technical thesis on something, ask yourself “Is this basic enough? Is there a high probability that tons of active market participants see this too?” If the answer is yes, create a logical high probability Options trade that compliments your technical thesis. My guess is you will be happy with the results.
Hopefully you didn’t get the wrong idea with yesterday’s post on how to survive volatile markets. The word “survive” may have given you the impression that volatility is a bad thing, but that is not true at all.
Volatility provides opportunity if you know what you’re doing. A good place to start is by comparing historical implied volatility to current implied volatility. If you’re a thinkorswim user, you can accomplish this by adding “Historical Volatility” under Volatility Studies on TOS Charts. Pull up a one or two year chart and you will get a quick idea as to the historical IV average.
Let’s use SPY as an example. The historical volatility is approximately 15%. Current IV for January is 29%, meaning IV is approximately 2x historical levels. That means premiums are rich and, with the proper strategy, you can take advantage of that.
SPY is just one example. In today’s high implied volatility market environment there are several liquid derivatives trading at 2x, 3x, and even some higher than 3x historical IV levels. This is best taken advantage of by being a net seller of Options. High IV markets are great for selling Strangles, Iron Condors, Naked Puts & Calls, Credit Spreads, and a few other less common strategies.
In the case of Short Strangles and Iron Condors, you are able to go much wider than usual on your range further increasing you odds of profitability in a range bound trade strategy. In the case of Naked Puts & Calls and Credit Spreads, you are able to give yourself a little more cushion to be wrong and still make money on the position.
Bottom Line: Do not be scared away by volatility. Embrace it and apply strategies that allow you to capitalize because of it.
No matter how good a setup looks to us, we will pass if the underlying does not have a liquid derivatives market. By liquid, we mean a bid ask spread no wider than 0.05 on the front month closest to the money Call or Put.
We make exceptions to this rule in high priced stocks like GOOG & AAPL, but anything priced 200 or less falls in the 0.05 liquidity standards.
2. Keep duration on your side
Time is a beautiful thing when trading a volatile market environment. Reason being, a trade can look awful one day and be just where you want in two days later. If you are short on time, you may not be able to hold long enough to see the position move in your favor.
That’s why we have been avoiding Weekly Options for the most part as of late. We tend to focus on monthly Options, entering new back month positions 10-14 days prior to front month expiration. Plenty of time for volatility to revive your position if the trade goes wrong.
3. Eliminate Stop Risk
When trading Equities or Futures, the best way to define your risk is to put a stop on. Well, in volatile markets stops do one thing…they hit. A defined risk Options strategy allows you to define the amount of capital you are willing to lose without having to place a stop on the position. This means that the underlying can move against you (which is likely will in any market, but especially in a volatile one) and you will not be forced out of the trade.
Options are amazing for many reasons, defining risk without a hard stop is one of them.
We’ll keep this one as simple as possible. There was a nice defined range between 50 support & 59 resistance in QCOM per the one year chart.
The overall market was bullish, and QCOM was approaching the 59 resistance level. We noted implied volatility levels of approximately 2x historical levels, and saw an opportunity to place a Short Strangle on the stock in an effort to profit off QCOM within a very wide range.
We sold the Dec 50/60 Strangle @ 1.29 (purple oval), giving us an upper breakeven of 61.29 and a lower break even of 48.71.
After only a few days, QCOM sold off and was sitting in the middle of our range. The spread value decayed over 30% in just a few days on the move, and we didn’t like the price action we were seeing in the overall market. To be safe, we decided to take profits on this undefined risk spread. On November 21st (just three short trading days later), we covered the Strangle @ 0.85 (green oval), a gain of $44 per spread. A 34.11% decay in the Strangle price in three days…beautiful!
The beauty of this high volatility market is that you can go super wide with these Short Strangles and still get paid a decent amount to sell them. This trade is a great example of just how wide you can get.
For educational purposes, here’s the trade analysis video we sent to members along with the detailed written trade alert.
As noted in our “Most Recent 15 Trades” post earlier today, we are recapping some of our recent trades for educational purposes. Let’s talk about the SPY Iron Condor we exited on Wednesday.
Reason for entry: There had been a very nice range in SPY between 110 & 122.50. Here’s a visual…
Once SPY broke above resistance, it quickly moved to 130 then began showing signs of range bound action in a tighter range. We noticed this range and, given the high implied volatility, saw an opportunity to sell a wide Iron Condor based on the new found range.
What was the trade: We sold to open the SPY Dec 118/120/130/132 Iron Condor on November 7th @ a fill price of 1.15 (credit).
What happened?: Things went well until the market started selling off heavily on November 17th. By November 25th, we were starting to get concerned about this spread. The good news was we had plenty of duration (time) left in the trade and there were several technical indications across the market indicating a potential short term pop. We decided to continue holding rather than cutting our losses, which proved to be a good decision.
End result: The market rallied, taking SPY back to the middle of our range. We saw this huge upside move as a gift, and sent an exit alert to members the morning November 30th after the +3.5% bull gap opening in the S&P 500. We covered the spread 0.68 for a gain of $47 per spread, or +55.29% return on risk! A beautiful trade!
Can a brotha get a few more visuals??
Here’s a visual of the tightened range we based entry on. Purple oval indicates entry, green oval indicates exit, and the small blue ovals indicates the break even price points on the spread.
Here’s a shot of the chart below zoomed in to a 30 day chart, gives a better perspective of entry & exit.
Last but not least, here’s the analysis video that members were provided with along with the detailed written trade alert!
We posted this trade idea on TLT on November 18th. Today would be a great day to exit the trade for a healthy profit. Let’s do the math…
Entry price on 120/121 would have been 0.38. That trade could easily be covered @ 0.20 here for a gain of 0.18 or +$18/spread.
Entry price on the Short 125 Calls would have been 0.80. Those can be covered here @ 0.15 for a gain of 0.65 or +$65/spread.
The overall gain (based on current pricing and assuming the fills mentioned in the original post) is +0.83 or +$83/spread
The trade did not go in the optimal direction initially, but part of trading is getting “gut checked”. The beauty of options trading is the ability to hold through moves that go against you without having to deal with stop risk (the risk of a hard stop in an equity or futures position being hit). Duration is a beautiful thing, as proven with this excellent trade!
Here’s a look at a 20 day chart of TLT. The blue oval indicates the entry on the day we published the trade idea article. The green oval indicates today’s exit. Gotta love it!
Bold Prediction Nailed, Initiating Bullish Position in Natty!
The title pretty much says it all. On September 30th, we made a bold prediction that Natural Gas Futures would print 3.25 by the end of 2011. It seemed a bit lofty, but we had valid reasoning and followed through with it.
As mentioned in the bold prediction post, we planned to start positioning in Natural Gas in the event our prediction came to fruition. Today’s low of 3.326 put Natty eight cents away from our predicted price. More importantly, today’s low resulted in an official fill of the October 27, 2010 bull gap (gray oval).
We see this price level as opportunity to ease into some bullish positioning in UNG. UNG is a p.o.s. by nature, but this gap fill coupled with strong support at 3.25 should result in a quick pop in natty so a quick trade in UNG is worth a shot.
Here’s a look at UNG:
Take a look at the Dec 7/8 Bull Call Spread and/or UNG Covered Calls using Dec 8’s.
Per ‘60 Minutes’ last night, Congress & Senate are exempt from insider trading rules & regulations. Basically, these are the people in power that are privy to market moving information prior to it being released to the public, and they are allowed to profit off it.
An example they provided was Nancy Pelosi being granted the ability to buy 5,000 shares of the Visa IPO, which went up 20 points in a matter of days. Coincidentally, there was a huge bill being passed around the House pertaining to more stringent credit card regulations. As the Speaker of the House, Pelosi has obvious power and influence on these types of things. Getting into an IPO is not a walk in the park, but conveniently it was for her. Sound a little “bribe-ish”?
"Common folk" risk prison and large fines if proven guilty of insider trading, yet Congressmen and members of the Senate may profit off of privileged information without even a slap on the wrist. That’s complete bullshit.
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!