It’s easy to come up with a solid list of reasons to learn to trade options. High-probability trades, liquid marketplaces, leveraged products - these are good reasons, but not the only reasons for at least taking the time to understand options trading. One of the biggest differences between equity trading and options trading is the amount of cash required to place a trade with similar characteristics to a stock trade.
For example, buying 100 shares of MSFT right now would cost you nearly $3,000. Taking a position that replicates the performance of 100 shares of MSFT could be as cheap as $100 - the cost of two at-the-money, 1-point-wide call spreads. These positions, at least in the short-term, are expected to perform very similarly - both will rise in price by around $100 if the price of MSFT moves up or down $1. The big difference is that one costs 30 times less than the other!
Recognize that options trading has its risks, many of which are tied to the use of leveraged products and the decaying nature of expiring products. But also recognize that for the trader looking for control of shares without most of the cost of purchasing them, options provide a real opportunity for success.
Most experienced traders recognize that the performance of their account will often mirror the performance of the major market indices. Those indices track the most popular stocks in the US markets, and are among the most widely watched economic indicators in the world. For the trader who wants to trade changes in the overall market, or who wants to hedge existing positions, major ETFs present one viable path to do so.
Major market ETFs like SPY (S&P 500 ETF), QQQ (NASDAQ ETF), IWM (Russell 2000 ETF) and DIA (Dow Jones Industrial Average ETF) present traders with products that nearly perfectly track the indices upon which they’re based. These ETFs are extremely liquid, trade through the normal and after-market hours, and have incredible options volume, making them prime targets for any options trader, and great tools for hedging a long stock account.
Bottom Line: Familiarize yourself with the products that are available to you – stocks, ETFs, options, even futures and forex. The more you understand about the market, the better equipped you are to manage your portfolio in any market condition.
If you’re a TickerTank Premier Member, you receive our trade ideas. Sometimes we post complex options trades like spreads and iron condors (see today’s trade!), and sometimes we keep things more simple and put out mixed stock and option trades, like covered calls.
The covered call strategy is the most widely used in the options market. It involves buying stock and selling a call option against that stock, in order to reduce the total debit paid when the stock is purchased.
Why do we want you to know about them? Because selling a covered call against stock you already own creates a credit in your account, reduces the cost basis of your stock, and increases the probability that your stock trade will be a successful one in the long term.
Bottom Line: If you own long stock, covered call trading is a great way to increase your income and your probability of success.
Arbitrage is a term that every trader has heard in a headline, and every finance major has calculated on a test. It has a kind of mystique about it - the concept of “free money” in the markets, taking advantage of inefficiencies in pricing across multiple products or locations. It’s an interesting concept for a trader to consider, because the market is driven by fair pricing.
True arbitrage occurs when a trader can open a position and open an exactly opposite position at the same time, for a difference in price. An example would be the trader who can buy a share of AAPL at 590 and sell short a share at 590.50, in simultaneous orders (or at separate exchanges at exactly the same time). The trade has an instant profit of .50 per share - the definition of free money in the market.
It turns out that most options strategies are built by this concept. This is a tough thing to visualize without real training in advanced options strategies, but contracts are priced in relation to the underlying stock, and to each other, across strikes and across months, and even across products in some cases. This giant web of relative pricing keeps things in line for the retail investor, and helps to guarantee fair pricing on any product with significant volume.
While true arbitrage is almost impossible to find for the retail investor, it’s not an impossibility for the large players in the market. As you read this, servers across the world are ticking across hundreds of thousands of trades to capture fractions of a free penny. This transaction volume means there is substantial liquidity for those of us who trade in comparatively smaller lots, and we get better, faster fills on our orders because of it.
Bottom Line: Free money isn’t something you should search for, but understanding how options strategies replicate stock and other options positions will help you be a better, more mindful trader.
FSLR is up almost 10% today on news that it reached an agreement with a Californian county to continue construction of large-scale solar panels. Taking a look at the FSLR daily chart, it could be coming out of a nice basing pattern, and has recovered to cross it’s 50-day moving average for the first time since a late-February gap down.
This is worth paying attention to for the next few days. FSLR July options still have an almost 90% implied volatility even after the news of the agreement. This could be a great candidate for vertical spreads, or even a naked put, given the low cost basis of the stock and high implied volatility (roughly 5x the current level of the VIX, 18).
It’s been a summer of interesting volatility movement this year, as is evidenced by a 10-point range in the VIX since the start of May. It could be Europe fears, or Fed nonsense, but it’s presenting some interesting opportunities in the options markets. The VIX is up almost 3 points today on a >1% drop in the S&P 500, and this is about the 10th time in June that we’ve had such a large range.
Keep your eyes open for buying and selling opportunities that tend to crop up during periods of VIX fluctuation. Even if day-trading isn’t your speed, a spread seller can find good fare while the market is deciding what a fair volatility level is. You can bet we’re paying attention, and you’ll find proof in our trade alerts as the summer moves along.
Yesterday we posted an opening trade alert on SPY, and talked about a possible pullback to the $134 neckline of the recent inverted head and shoulders. Our blog post yesterday morning mentioned the possibility in detail, and it looks like the market was listening.
There were two hard spikes towards 134 during the day - once at lunchtime (the highest volume bar in the day, which is rare) and once in the last hour. Both drops were followed by rallies back to the daily VWAP (volume-weighted average price) near 135.40.
This just strengthens our feelings about the chances for a bullish market in the short term. If you put in that opening trade today, you should have been filled (we were, check the update) and you should have your eyes open for a possible exit next week, depending on market circumstances.
If you’ve used our trades, or read through our ideas, you’ll see that we include a very specific probability of success for each trade we propose. Obviously this is an estimation, as it’s predicting success in the future, but it turns out that the numbers are very accurate over time, with a large enough sample size of trades. It’s an accurate enough measure that tickertank.com founder Nick Fenton won’t place a trade without first considering probability of success - and in fact he manages his portfolio to maintain a specific probability average.
Take the time to consider your odds of success when you trade - it’s an important measurement that can offset the human tendency to “reach” for bad trades and be over-aggressive. Look for the trade that makes sense for you, and if it isn’t there, step back and find another than fits your criteria. If you can do this, the probability is that you’ll find more success!
If you’re a veteran trader, or you’ve been with us for a while, you know all about penny increment options - those options whose bids and asks move .01 at a time (or can, at least), vs. all other options, who move at .05 or .10 per tick. Penny increment options are great, because they allow for tighter spreads, more liquidity and allow you to be very specific in placing your orders.
You can find a list of all stocks and ETFs whose options are listed in penny increments inside the thinkorswim platform, which Nick will be demonstrating today on thinkorswim’s Wednesday Chat at 4:30 EST. Pay close attention - there are a few stocks that fall outside the list (notably Google, symbol GOOG), but for the most part this is a great starting point for making your personal watchlist.
Nick Fenton, founder of tickertank.com, will be speaking on thinkorswim’s Wednesday Chat tomorrow at 4:30 EST. Among other things, Nick will explain how to use specific criteria to find trades using different strategies.
One of the tools on the thinkorswim platform, the Spread Hacker, has turned the art of evaluating strategies into a science. You can use the tool to sort through specific filters, like probability of success, time to expiration, and underlying price. You can even assign the Spread Hacker to look only in your custom watch list of stocks and ETFs you trade.
Whether or not you use the spread hacker tool to find your trades, remember our advice - have parameters for each strategy you use. This will help you reduce the time it takes to find a trade idea, and help you hone your skills as a trader.
A recent article quoted various industry sources in claiming that new miniature options contracts could be released soon on high-priced, liquid stocks such as AAPL and GOOG. These options would use a contract multiplier of 10x instead of 100x - meaning that the trader who buys or sells a contract is only involving 10 shares of stock, rather than 100.
This could be a great opportunity for retail investors who own a few shares of large companies as a part of their portfolio. Instead of having to own $60k (100 shares * $600) in AAPL to write a single call against the stock, those investors who own 10 shares, or roughly $6k of stock, can participate in the additional returns and hedging opportunities that the options market presents.
Be warned, though - this type of product, when first released, will likely have less volume than “normal” 100x options, so prices may fluctuate wildly until the market gets a firm grip on pricing.
Bottom Line: New products are released regularly that, in theory, help the retail investor. Be sure to think carefully about the products you trade and the cost and leverage provided.
Tomorrow tickertank.com founder Nick Fenton will host a 3:00 PM CST chat session on TD Ameritrade’s trading platform, thinkorswim. Nick will cover trade selection regarding a few options strategies - Iron Condors, Butterflies, and Short Strangles. Be sure to catch the chat, as we’re sure you’ll learn a lot from Nick - he’s a seasoned pro!
One of the things Nick is sure to mention during his chat is liquidity. Liquidity, to most people, means the ability to sell something (like a house, car, or baseball card collection) for a fair price without a large delay in “execution”. In the market, liquidity includes this definition, but also involves the amount you lose when you enter a trade.
It’s common to see new traders, and even experienced traders, hear a tip on a new company, or catch an article online that sparks a trade idea. This isn’t a bad thing, but less-known (and less-traded) stocks have wider bid-ask spreads, which means you’re paying a higher price to buy, and receiving a lower price when you sell, than the real value of the shares. This is especially true in the options market, where low volume and wide spreads can lead to differences of $100’s of dollars per trade.
How much do you lose to low liquidity? Well, if the bid/ask spread on an option contract is $1.30/$1.70, and you purchase the option, you’re paying $170 per contract for an option with a real value of $150 (the average of the bid/ask spread). This is $20 per contract you’re losing - a simple 5-contract trade pushes the “loss” to $100!
This isn’t money you want to leave on the table! Catch Nick’s chat tomorrow, and be sure to listen carefully for his full explanation on how paying attention to liquidity can save your trading life!
Meet Nick here: http://www.tickertank.com/General-Information/meet-nick-fenton
Weekly Options have grown significantly. Last we checked approximately 70% of high volume optionable stocks have weekly options, and it won’t be long before that number hits 100%. Volume has grown significantly, and in turn these weekly options offerings have become an excellent tool for both Professional and Retail Investors.
The end result? Every Friday is Options Expiration Friday!
The third Friday still takes the cake as the most important Options Expiration day of the month, but that won’t last long. Soon every week will be an expiration week.
Bottom Line: It is still important to factor in the fact that today is the main Options Expiration Friday, but that importance is dwindling quickly.
"This latest line that has held since January 25th earnings is very steep, representing the parabolic price action we noted earlier. Lines this steep never stay in tact. We are keeping an eye on it, and intend to place a bearish strategy on AAPL when we see a closes below that line."
Sure enough that parabolic trend line broke and AAPL began to approach the 45 degree trend line we mentioned in the article.
"One never knows what will happen next, but we suspect continued range bound price action until AAPL runs into the initial up trend support line. At that point, we may start to see some upside in the stock.
The play here may be an Iron Condor given the somewhat high levels of volatility premium priced into shares of AAPL. We intend to explore this strategy, along with other range based options strategies.”
We were right again! Price action has been extremely range bound in AAPL. Now AAPL is testing the 35 degree trend line and so far it has held as indicated by the blue ovals in the image below.
So what’s next? We like AAPL long here. We think positioning bullish in AAPL is the play, and we have already started acquiring shares in the IRA. We plan to enter a bullish options position tomorrow or Friday.
Given the amount of time we were asked our opinion on the market today, I felt it would be valuable to send our thoughts to you.
Last week S&P Future (/ES) sold off 4.46%. The sell off has been met with significant buy side interest this week with /ES up 1.76% since Friday’s 1290.25 close.
Will this buy side momentum continue?
On one hand you have the completion of S&P Futures head & shoulders pattern measured move as we noted here.
On the other hand you have potential for a ten point upside move to 30.00 in the VIX that we talked about here. Add potential resistance turned support in the 146 area in 30-year Bond Futures (/ZB), and you have two potentially bearish cases for the equity market.
In order for us to feel extremely comfortable on the long side, we need to see the VIX back at 18 and Bonds back below the 145 price level. Until then, we do not intend to add to any bullish positions. If the VIX does in fact reach 30, we will look to enter some bullish credit spread positions as we see it collapsing from that level at the moment.
The Winner of TickerTank's Ultimate Trader's iPad is...
Thank you to all the individuals that participated in the second TickerTank ‘Ultimate Trader’s iPad’ + Lifetime Premier Membership giveaway! We appreciate you helping us spread the word about the contest, and putting the words “TickerTank” in front of more and more eyeballs.
Good business is all about exposure, and we have seen a great deal of interest in TickerTank since the contest started. We owe that increase to all of the participants in the contest, thank you very much!
So now for the big news…
We cataloged all of the entry credits in excel at the end of each day.
For twitter entry credits, we noted the twitter handle (one entry credit per day, aside from one afternoon where we gave a bonus two credits).
For Newsletter entry credits, we noted the email address (one entry credit, one time only)
For existing Premier Membership subscribers we noted the email address (two entry credits, one time only)
At 4:00 EST today, we went to random.org and plugged our numbers into the “True Random Number Generator”. Last time we had this contest there were 867 entry credits cataloged. This time there were 2,147…a 148% increase in entries! Excellent, thank you everybody!
The “True Random Number Generator” spit out # 2,077:
We went back to the excel spread sheet, and referenced 2,077. We can’t see we were surprised to see who the winner was as this person faithfully tweeted every day along with a few others.
We are happy to announce the winner of the TickerTank Ultimate Trader’s iPad + Lifetime Premier Membership is @fred_elkins! Congratulations Fred, you truly gave yourself maximum probability of success potential and it paid off big time. We will be in touch by the end of the day.
We are going to ask @fred_elkins to provide us with a video of him opening the box when he receives the package ,or a picture of him holding the Ultimate Trader’s iPad. If he agrees, we will be sure to post it.
Thanks again to everyone involved. And one last time, Congrats Fred!
What's your outlook on AM? This stock just bought up Barclay's debt on Clinton Cards. Do you think that AM is aiming to beat it's estimate on the earning call by the end of june? I'm 17.5 June Calls.
AM average daily volume is approx 750,000 shares. It is also hard to borrow (HTB), has very low volume & open interest in the options, and very wide bid/ask spread in the options. The stock lacks the liquidity and strategic flexibility we demand, so we would not consider taking any position in AM.
It’s Kentucky Derby week here in Louisville. This time of year is great. Tons of parties, charitable events, and promotions. Speaking of promotions…
We are giving away an iPad!
Not just any iPad…the Ultimate Trader’s iPad. It’s a black 32gb model and it’ll be loaded up with all of the best apps that Trader’s like me use to help us bank coin in the market.
How do I enter to win?
Simple: Just send out a tweet with the following:
1. A link to any TickerTank URL (we suggest this page or a recent blog entry!)
2. The word “@Ticker_Tank” in it.
So you could tweet “Check out the @Ticker_Tank Ultimate Trader’s #iPad #giveaway. I’m in it to win it! http://ow.ly/aFcfG $$”
How often can I enter?
Once per day by sending another tweet. Don’t annoy people with the same tweet everyday. Just tweet when you see an interesting article on TickerTank that others might enjoy, or if you have a clever tweet about the giveaway. Each tweet gets you one entry credit per day.
No, there is no purchase necessary. Anyone can win and every tweet will have an equal chance.
You really should be a member though…it’s great. Plus, we’re giving two entry credits to anyone that signs up for either product during the giveaway…four if you sign up for both products!
By the way, we’re giving all existing members two entry credit because that’s just how we roll.
What apps will be on it?
Patience. We will be highlighting a few of the apps we add to the Ultimate Trader’s iPad with a new blog post. (Great opportunity to tweet another entry, no?)
How will you pick a winner?
Each day at 9:00pm EST we will update our excel sheet giving one entry credit to every person that used @Ticker_Tank and linked to our blog in a tweet, and two entry credits to new sign ups. At the end of the giveaway, we will use a random number generator to choose the the winning number and we’ll match that up with the row number on our excel sheet to determine the winner.
When will you pick a winner?
On Friday, May 18th, 2012 at noon EST. The winner will also get LIFETIME membership to TickerTank’s Premier Membership AND Earnings Trade Alert System!!
Do I really have a chance to win?
Yes. This isn’t etrade running a contest to millions of people. We’re a small business. If you enter by tweeting every day, you’ll have a real shot at winning when we randomly select the winner. If you sign up for one or both of our products, you’ll have an even better chance of winning the Ultimate Trader’s iPad!
RVBD is down 22% in premarket trading. As a result, the stock has moved below our Short Put leg on the Apr12 25/30 Short Straddle, and this trade will be a loss. Our intention is to cover (buy to close) the Apr12 25 Put shortly after the opening bell, and let the Short 30 Call expire worthless. There is no reason to exit the call as it adds unnecessary transactional costs as the probability of it expiring worthless is nearly 100%.
I have been asked how big I go on earnings based trades several times via phone and email. It is important to remember that regardless of the fact this strategy is based on strict criteria and applied in a high probability manner, it is still in relation to an earnings event. You cannot discount the excess risk associated with trading earnings no matter which strategy you use. I personally use 1-2% of portfolio capital based on max loss (or probable max loss in the case of an undefined risk spread). That said, how much you expose your portfolio from a capital perspective is up to you.
There will be no earnings trade today as it is rare a company that meets my criteria reports earnings after the bell Friday or before the bell Monday.
Remember today is April Options Expiration day (expiry). If you are a day trader, beware of quirky intraday action until around 11:00am EST when things tend to cool down. Note yesterday’s intraday price action in the major indices as an example of how wild things can get as Options positions are unwound.
Next week presents a ton of opportunity. Here’s a few names that we are looking forward to analyzing for earnings trade opportunities: TXN, NFLX, AMZN, JNPR, X, BIDU, UPS, AKAM, DECK, OXY, XOM to name a few.
The two “juiciest” candidates from an inflated implied volatility (IV) perspective are RVBD & CMG. I chose RVBD because the bid/ask spread of approx 0.60 on the front month closest to the money strike in CMG is too wide. This results in too much potential for slippage. RVBD bid/ask spread on the front month closest to the money strike is approx 0.06. MUCH better than CMG.
Earnings Trade Candidate: RVBD
Easy to Borrow (ETB): yes
Liquid Options: yes
Offers Weekly Options: N/A (expiration week)
IV differential: approx 2x, 130% front month IV vs. approx 60% historical IV
Max Potential Gain: $70 per spread if RVBD expires b/t 25 and 30 (max profit range)
Max Potential Loss: theoretically unlimited, but max loss of $150 is more probable
Break Even: 24.30 lower b/e, 30.70 upper b/e
Explanation: Assuming a fill of 0.70 (which is currently 8 cents below the current nat price of 0.78), this spread gets us 1.9x outside the expected move on the lower end and 1.7x outside the upper end of the expected move. This gives nice cushion and leads to a high probability of a successful earnings trade. We look for a credit no less than 2% the price of the stock when selling strangles into earnings. In this trade the 0.70 credit is approx 2.5% the 27.70 price point on RVBD, so we are satisfied and comfortable going forward with this.
April options expire tomorrow, so this trade is almost purely based on volatility premium.
Here’s an image of the profit range (green oval) in RVBD:
NOTE: Trading Options into earnings includes financial risks and may result in loss of capital. Do not consider an earnings based Options strategy unless you understand and accept the capital risks associated with the trade.
A Note To Our New Earnings Trade Alert System Subscribers
I was in Chicago yesterday for a guest appearance on tastytrade as well as to host ThinkorSwim’s Wednesday chat. I spent the majority of my day travelling today, and was unfortunately unable to send out the GOOG Apr2 590/595/675/680 Iron Condor I discussed on ThinkorSwim yesterday. I’m very bummed because based on GOOG’s reaction to earnings it would have been a max gain winner. That said, there is a TON of opportunity ahead of us! Expect your first earnings trade Monday afternoon.
I anticipate at three earnings trades per week during the peak of earnings season. During off season, there will be weeks with no trades and weeks with one or two trades.
Earnings Trades is an email only service at this time. As noted on the thank you page, we collected a username and password from you in case we build a login for this product. You cannot login at tickertank.com at this time. Rest assured the trade related content you will receive via email is top notch. That said, there may always be room for technological improvements with this product.
One last thing. I prefer to enter earnings trades as late in the session as possible. This helps avoid crazy market moves and/or crazy moves in the individual earnings trade stock. Alerts will be sent between 2:00pm-3:30pm EST. I understand you need time to read, react, and place the trade if you like it, so I will do my best to email trades out closer to 2:00 than 3:30.
I am excited to have you on board, and thankful for the amazing response this Earnings Alert System has received. Thank you for your business, I greatly appreciate it!