TickerTank

Our Members received my AMZN earnings trade around 2:30pm EST today.  In the spirit of education, I wanted to share the email with our tumblr readers.  The Iron Condor is the trade we made, the others were simply me thinking out loud and sharing more trade ideas.

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We’re still in earnings season, so I’m still trading earnings when a good opportunity presents itself.  You know my style by now, I like to find promising opportunities give me a theoretical advantage or make sense to me if I have a directional bias.  Today’s earnings candidate is AMZN, and I am sharing my trade with Premier Members as an added bonus to your membership.

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BIDU reports earnings after the bell.  The expected move is 4.17. Feb Weekly IV 60.9%, Feb IV 52.90%, Mar IV 52.8%. 

There was a bullish symmetrical triangle break (above) Friday, giving BIDU a bullish technical view into earnings.  Technicals don’t mean much going into earnings, but it’s worth noting. 

If I were forcing myself to play this I’d go with the weeklies and I’d pick a direction.  In this case, I’d be bullish, and I’d buy the Feb1 12 130/135 Call Spread @ 1.90.  I wouldn’t want to play the Feb1 12 125/130 Bull Put Spread because I want to risk less capital on a directional pick. 

All in all nothing too enticing here. If you are comfortable getting risky with it, the Feb1 12 120/140 Short Strangle may be worth a look.  I wouldn’t play it though…not enough extra pre-earnings volatility premium built in.

I don’t recommend books often, but I have received a ton of requests for recommendations recently.  Due to these requests, I am going send a recommendation via email every once in a while. 

There are a few that I feel no Trader or aspiring Trader should be without.  One that falls under this category is ‘The Bible of Options Strategies”  by Guy Cohen. 

This book is organized very nicely.  Chapters are broken down by strategies; Income, Vertical Spreads, Volatility, Synthetic, etc.  The strategies that are covered in this book are covered well, giving the reader a firm grasp on the level of difficulty, directional bias, capital intensity, and so on. 

To this day, I reference The Bible of Options Strategies from time to time if I need a quick reminder about a specific element of any given strategy.  Obviously this book does not determine all of my criteria when utilizing specific strategies, but it played role in my understanding of them. 

Amazon has this book at a very fair price (considering I paid full retail when I bought it several years ago).  If you have access to a Kindle or Kindle app, you can save a few extra bucks by buying the Kindle version. 

Click here to order The Bible of Options Strategies via Amazon.  I hope you find it as useful as I did.

We’re in the black on our SBUX earnings trade.  We told you about the SBUX trade here, which was our way of profiting off a earnings reaction within the expected move of 2.55.

Sure enough, the reaction in SBUX stayed well within the expected move range.  Better yet, the stock is trading right on the 47 strike we chose!

Our long 47 Put Calendar is +34.52% at the moment.  We bought the spread yesterday @ 0.42, and the market is currently paying 0.565 for this spread.  A $14.50 gain per spread is not a home run, but this strategy fit our earnings based trading style and we are happy with the results. 

This trade still makes a lot of sense to us.  The probability of SBUX staying in between our upper and lower break evens into Feb expiry is now 73%, so we have decided to continue holding this position.  Given the optimal earnings reaction in relation to our spread the reward to risk is favorable and we are comfortable with holding into next week.

Here’s an email I sent to members at 3:00pm EST. Now that the market is closed and SBUX has reported, I am going to share it here…similar to our AAPL earnings trade.  It’s a nice educational piece. Please feel free to leave questions in the comments section.

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This is not an official trade alert.  I simply like to share my thoughts on earnings based trades from time to time.  I trade earnings on occasion, like I did with AAPL a couple days ago.  When I do, I trade small.  I plan to share these trades with you not as an official alert, but as a learning example.  Feel free to follow if you want, but understand trading earnings is risky.

That brings us to SBUX.  They report earnings after the close today.  The expected move is 2.55 up or down.  Implied Volatility in Feb is 35%, and in Mar is 29%.  IV is typically low in SBUX, so 35% is not significant but worth noting considering we’re talking about SBUX.

So I ask myself, how can we take advantage of this 17% IV differential between Feb & Mar while staying at or outside the expected earnings move range?  The answer is buying the Feb/Mar 47 Put Calendar, which I filled @ 42. 

The IV differential provides an opportunity to buy this calendar spread cheap.  I’m risking $42 per spread to make a max gain of $108 if SBUX pins 47 on Feb expiry…not a huge capital risk.  Lower break even is 43.90 and upper break even is 50.35, keeping it outside the expected move range. It makes sense to me, so I put the trade on.

The risk is a move well outside the break evens, but if that happens I’m okay losing the worst case $42/spread I have at risk.

We shared our AAPL earnings trade analysis with you yesterday in this article.  As noted towards the end of the article, we played a small position in the AAPL Feb 385/390/450/455 Iron Condor.  Here’s how this trade went…

• We sold the Iron Condor @ 1.86 credit; sold 385/390 put spread @ 0.90 credit & sold 450/455 call spread @ 0.96 credit
• As you know, AAPL gapped significantly higher after the report.  The stock opened at 454.44, quickly sold off a bit, and is now settling into our Iron Condor range at around 447.50. 
• The Iron Condor is now priced @ 2.20, making for a loss of 0.34 if we were to exit now.  AAPL is in the max profit range, but there is still 23 days left until Feb expiry so the spread is not showing a profit here. 

So what to do now?  Exit or adjust?

We have adjusted the trade as follows…

• Covered Feb 385/390 put spread @ 0.05 for a gain of 0.85.  This allowed us to take profits on that portion of the Iron Condor, and freed up the capital to put to use in something with more potential. 
• Sold Feb 420/425 put spread @ 0.59 (“vertical roll”). We used the capital we freed up to roll to a closer to the money put spread with more premium in an effort to squeeze a little more profit out of the put spread side of this Iron Condor.
• On the put spread side, we have 0.85 in realized gains and 0.59 in unrealized gains…totaling 1.44
• Covered Feb 450/455 call spread @ 2.10 for a loss of 1.14.  Spread is too close to the money and we think AAPL may run higher so we want more upside room. 
• This loss results in 1.14 realized loss on the call spread side, totaling 0.29 in overall realized loss (0.85 - 1.14).  That said, if the 0.59 spread expires worthless we will have an overall realized gain of 0.30 (0.59-0.30).

So in closing, our initial trade was correct but not immediately profitable.  AAPL did stay in the 390-450 max profit range our initial Iron Condor trade allowed, but the intrinsic value increase in the 450/455 call spread outweighed the lack of implied volatility decay in Feb options.  This resulted in a small loss on the Iron Condor itself had we exited today, but we are confident our adjustments will allow us to profit on the trade in the end…or at the very least break even. 

We may add a new bear call spread to make this an Iron Condor again, but we want to watch the price action for the remainder of the week before taking that action.

Here’s an email we sent to TickerTank Premier Members before the bell.  Now that the market has closed, we are sharing it on the blog since there plenty of educational value here.

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Now that implied volatility levels have pulled back significantly, it’s is much more difficult to trade an outside the expected move Options strategy into earnings.  AAPL reports tonight, so lets see if there’s anything enticing. 

Historical IV levels for AAPL are approximately 20%.  Into tonight’s earnings event, IV on January weeklies (expire in 3 days) is 65% and IV on Feb’s (expire in 24 days) is 35%.  Jan Weeklies provide decent IV levels, but the lack of time premium thwarts defined risk efforts to go outside the expected range.  Feb IV levels aren’t rich enough to make a big impact, but let’s look at the situation anyway.

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Indice futures as well as futures like Gold, Silver, 30-year Bonds, Crude Oil, US Dollar Index are very important to follow.  I base all indice ETF trades on their corresponding futures charts.  I also place other ETF Options trades based on their corresponding futures chart.  Reason being, the futures market is huge.  BIG money plays in those waters, making most of the futures markets (not all) EXTREMELY  liquid.  You will get the clearest chart, and can establish trades in other instruments based on what you see in the futures chart. 

Here are some match ups that I play…

/ES - SPY
/YM - DIA
/NQ - QQQ
/TF - IWM
/GC - GLD
/SI - SLV
/ZB - TLT

You can also look at the inverse and/or 2x & 3x regular and inverse etf’s for each.  As long as the underlying and the Options market for the underlying is liquid, it is safe to trade an Options strategy in it based on the corresponding futures chart.

-Nick Fenton

The Options market has priced the expected earnings move in GOOG at 31.55.  Given current price of 636.95, this translates to an expected move range of 605.40 to 668.50. 

When we trade Options into an earnings event, our preference is to stay outside of the expected move range.  That means we would be interested in spread that have breakevens below 605.40 and/or above 668.50. 

Problem is, now that the volatility environment has cooled off there is not much opportunity to do an outside the range trade in GOOG.  Therefore, the only trade that makes sense to us is a directional one that is close to or around the money.  At these levels we are moderately bearish, but not bearish enough to warrant a close to or around the money trade. 

However, if we were bearish enough we would buy the Jan12 635/640 Put Spread @ 2.45 as a dice roll trade.  This tilts the probability of success slightly in your favor, but in the end it depends on a very uncertain outcome. 

Like we said, we prefer to stay outside of the expected move range.  Since there are no attractively priced spreads that accomplish that agenda in GOOG, we are staying away this time.  Good luck if you play it!

We recently posted about the importance of liquidity, as well as using the right strategy in any given volatility environment.  Those are two key elements to trading Options successfully, but there’s another element we have not dedicated a post to that is very important as well. 

Let’s start this off with the assumption that trading is a zero sum game.  Any given stock or futures position, whether long or short, has a 50/50 chance of being a winner.  This is otherwise known as a 50% probability of success.  

Our objective when trading Options is to put ourselves in a situation where the odds theoretically favor us winning.  Here’s how we tend to approach things…

• Find a technical setup in a stock or future that has a reward greater than or equal to 2:1
• Compliment that scenario with an Options strategy that has a probabilty of success greater than or equal to 51%

That means if we were trading a stock or future with a 50% probability of success, we’re risking one to make two or more.  But instead of taking a position in the stock or future with a 50% probability, we increase our odds of making money on the setup by putting on an Options Strategy that gives us a probability of success greater than 50%.

Let’s use the write-up we did on Nasdaq Futures yesterday as an example.  At the time of the post, Nasdaq Futures were trading at 2374, which translates to around 58.31 in QQQ.  The suggestion in the article was a bearish play on the Nasdaq as it runs into resistance at 2400.  Let’s say we shorted QQQ at 58.31 (50% probability of success) AND entered the QQQ Feb12 59/60 Bear Call Spread we mentioned in the article @ 0.45 credit (a little over 55% probability of success).  Let’s say at expiration QQQ has not broken resistance, but it is trading at 58.90. Our short QQQ position would be at a 59 cent loss, but our Bear Call Spread would be at max gain of 45 cents.  Our QQQ Short position would be at -1.01%, but our Bear Call Spread would be at +81.82%. Plus, the Bear Call Spread required way less capital to trade. 

This is a crude example considering I rarely hold Options positions into expiration, but it serves it’s purpose.  The objective of this post is to make you think differently.  Look for attractive reward to risk scenarios from a 50/50 perspective and compliment them with an Options Strategy with a higher than 50% probability of success!  Sure you risk more to make less which sounds counter intuitive, but you win more.  That’s a trade I’m willing to make every time.

I just received a question about Naked Puts via email.  After replying with my criteria, I thought why no share it on the blog. 

My optimal scenario with Naked Puts is as follows…

• the underlying and options market for the underlying are very liquid (5 cent or less bid/ask spread on the front month closest to the money strike)
• the underlying is trading at or near a defined support level
• I am comfortable getting long the underlying from the cost basis price point an exercised put would result in
• implied volatility is 2x historical levels or higher
• probability of success is 75% or higher (I prefer 80-85% range in most cases)
• 25-35 days until expiration
• no earnings during holding period (unless it’s purely an earnings play, in which case the criteria may change)

Naked Options strategies are typically shunned due to the theoretical unlimited risk.  With Naked Puts, the risk is limited to the stock going to zero which debunks that theory.  Also, if you’re only trading liquid options attached to a liquid underlying, the probability of any given stock going to zero in 25-35 days with no earnings event is extremely low.

There are ways to get a better idea of your max potential loss on any Naked Put trade.  For example, I look at the chart and get a good feel for worst case price point in a given time period, then see what the loss on the Naked Put would be at that price point on expiration to get a better idea of max potential loss.

-Nick Fenton

In the following blogs, we are going to take a quick glance at the most important Futures charts.  We will analyze the S&P 500, Dow 30, Nasdaq 100, and Russell 2000 in an effort to establish what the pot odds favor from a directional perspective in the second half od January.

Let’s do it!