11/29/2013

Put Friendly Trading

      Ever since the stock market crash in 1987 investors have viewed put options as a short hedge against overpriced and turbulent markets. The reality is there are better ways to utilize put options rather than outright costly hedging. Two of the most proficient ways to look at puts are collars in an up market or when a stock that you own makes a parabolic up move and in a down market via the outright sale or via creating a synthetic long call.

      In the first example using puts as part of a collar the owner of the shares can approach the trade as almost a free protection against a sudden reversal and simultaneously capping the stock to the upside via the sale of an OTM call.

XYZ stock trades at $85.80

Earnings are due in the next week and analysts are divided on the forward outlook of the company’s guidance.

The June 90 calls are trading for .30 and the June 80 puts are trading for .23

Selling the call and buying the put can be done for a .07 credit. The credit pays for the commissions and creates a free collar on the stock which is now capped out at 90.07 and creates a downside floor at 80.07 before commissions are taken into consideration.

The July 90 calls are trading for .92 and the July 80 puts are trading for .82

Selling the call and buying the put can be done for a .10 credit. The credit pays for the commissions and creates a free collar on the stock which is now capped out at 90.10 and creates a downside floor at 80.10 before commissions are taken into consideration.

The Aug 90 calls are trading for 1.60 and the Aug 80 puts are trading for .1.55

Selling the call and buying the put can be done for a .07 credit. The credit pays for the commissions and creates a free collar on the stock which is now capped out at 90.05 and creates a downside floor at 80.05 before commissions are taken into consideration.

In each of the above scenarios the trader has protected his downside via the purchase of the put for approximately 6.6% drop in the shares and has capped the stock via the simultaneous sale of the call for an upside move of approximately 5% 

You can view the entire article published on tradersexclusive.com

Also for trading ideas and commentaries and responses from industry professional go to https://mtmtradercommunity.com

*Disclaimer: This is not a recommendation. All trading entails risk. Anyone employing any strategies and having limited knowledge of options trading should consult with a FNRA licensed professional.

11/26/13 TUES

                                 

Best Buy Co Inc.           NYSE: BBY

IV Jan Monthly 42.60%

BBY holding up along a long term trend line starting from a low set on around Jan 9^th, 2012 at 11.40 levels.  The trend is coming in around 39.30 areas. Broke through and rallied back above the trend line after breaking down about 15% from the recent highs. Looking at selling the Jan Iron Condor 44/43 call vs the 40/39 put for .75 or better. Stock gapped lower from 43.14 not a bad risk reward with earnings behind going into the holiday season with IV in Jan sitting around 42.40%

Technical Support        39.35*    37.4/36.8**   32.90/31.85***

Technical Resistance   40.80/41.12*    42.25*     42.90/43.40**

Open Int. (est.)   Strike Jan Monthly (52)

37               4,670

38               2,300

39               2,120

40               7,230

41               1,645

42             15,880

43               4,665

44               1,995

45               3,315

*Disclaimer: This is not a recommendation. All trading entails risk. Anyone employing any strategies and having limited knowledge of options trading should consult with a FNRA licensed professional.

The “Greeks”

      Options are dynamic animals governed by a set of theoretical variables known as “Greeks.” Together they assume the dynamics of the sensitivity of the option with regards to a one point move in the underlying.

The most important of the “Greeks” are:

Delta represents the rate of change in the price of an option in relation to a one point move up or down in the underlying.

Gamma represents the rate of change in the delta of the option itself. In essence the rate of change in relation to the rate of change in relation to a one point move up or down on the underlying. 

Rho represents the sensitivity of an options price with regards to a change in interest rates.

Theta represents the option prices rate of decay price in relation to time until expiration.

Vega represents sensitivity of an options pricing to a change in implied volatility with regards to the underlying.

Additional terms of note:

ITM      in-the-money

ATM     at-the-money

OTM    out-of-the-money

Intrinsic Value

Extrinsic Value

      The above 5 “Greeks” are the most significant variables that go into the pricing of an option when trying to determine what a positions inherent risk is with regards to movement of the underlying and time left in an options life.

Delta

      The Delta of an option is used to identify the equivalency of the number of options to the actual underlying shares. As time passes, the deltas rise or fall the option in relation to the underlying, depending on the option in question, as expiration nears.

Look at the following examples:

Delta Table

BRUN @ 75.00  

Strike    August (16)   September (51)   December (142)

65           .91                       .88                      .80

70           .81                       .72                      .65

75           .42                       .44                      .47

80           .11                       .19                      .29

85           .02                       .07                      .17

In the above Table A notice that deltas increase on the 65 and 70 strikes (ITM) where as they decrease on the 80 and 85(OTM) strikes as expiration nears and stay relatively stable on the 75 strike (ATM). 

In-the-money options have little extrinsic values therefore their Theta is low, but they have the risk of loss in value should the option start to move to at-the-money or even out-of-the-money.

At-the-money options have the most Theta due to the fact that they offer the closest relation to the underlying price they typically have low to no intrinsic value associated with them.

Out-of-the-money options are comprised of only extrinsic value.

Gamma

       As the price of the underlying moves up or down so does the delta in relation to pricing of the option. A one point gain or loss means the underlying is either closer or further from the strike, so the relation of the price of that option changes accordingly as well. This is known as the gamma. As an option nears expiration the gamma tends to increase as it becomes more sensitive to movement in the underlying.

Gamma Table

BRUN @ 75.00  

Strike    August (16)   September (51)   December (142)

65           .02                        .03                      .03

70           .06                        .05                      .03

75           .09                        .06                      .04

80           .04                        .04                      .03

85           .01                       .02                       .02

Notice in the above table that the most sensitive options are again the august 75 strike, which again are the most sensitive to a price change in the underlying.

Theta

      Since options have a defined life or set expiration date, Theta is one of the most important of the variables. At expiration they will either expire worthless or be converted to shares of stock. That is a given. Knowing how much time decay an option will incur allows a trader to calculate his risk of owning or premium capture if they were a seller of the option. The rate of decay increases exponentially as the option gets closer to expiration. In the money options have what is known as both intrinsic value which represents the amount of premium in relation to the strike with regards to parity to the underlying. Extrinsic is the amount of excess premium in relation to parity with regards to the underlying.   

Theta Table

BRUN @ 75.00  

Strike    August (16)   September (51)   December (142)

65           -.03                       -.01                      -.01

70          - .04                      - .02                      -.01

75          - .05                       -.02                      -.01

80           -.03                       -.02                      -.01

85           -.01                       -.01                      -.01

      In the above table notice that the decay is greatest in the front month and on the 75 strike which represents the ATM options. This is due to the relation of premium left in the option in relation to the amount of time left in the life of that option. It is also worth noting that Theta is expressed as a negative value due to the fact it represents decay. If Vega were to increase the value of the options would also increase, but the decay would simply be greater.

Vega

      Vega is actually representing the value in relation to the underlying as volatility increases so does the value of options. This occurs for a number of reasons. Traders back off as sellers due to increased risk. They want to be paid for the increased risk of selling that premium if you will. Buyers are also willing to pay a higher premium as the chances of the option ending up ITM increase. It is a constant ebb and flow and sets the pace for the rest of the “Greeks” to follow suit.

Vega Table

BRUN @ 75.00  

Strike    August (16)   September (51)   December (142)

65           .03                       .05                      .12

70           .06                       .09                      .17

75           .06                       .11                      .18

80           .03                       .08                      .16

85           .01                       .04                      .12

Rho

      Though at this point in time Rho has been rendered somewhat moot, it is important to understand a couple of things with regards to options pricing. A rise in interest rates causes puts to become cheaper due to the increased cost of carry on stocks. Speculators would rather face premium decay as opposed to paying the cost of carry. The at-the-money options in the furthest out months are the most effected by the changes in interest rates.

*Disclaimer: This is not a recommendation. All trading entails risk. Anyone employing any strategies and having limited knowledge of options trading should consult with a FNRA licensed professional.

 Soybean Futures             ZS

After last week’s crop report the futures were unable to sustain the rally from the 1246area up to the 1321 level backing down to 1270 level and consolidating. It looks like they are poised to make another run at the 1320 area with trend resistance dictating the next target area at 1340 and 1355 respectively. After the 1355 area it looks like there is little technical resistance up to the 14oo area which is where the previous rally failed which began from the 1160 area.

ZSF IV 16.30%

Look at buying the Jan 1350 call and selling the Jan 1400 call for 6.00 or better

The risk is $300 with a potential reward of $2,200 over the next 38 days.

*Disclaimer: This is not a recommendation. All trading entails risk. Anyone employing any strategies and having limited knowledge of options trading should consult with a FINRA licensed professional.

11/19/2013 TUES

VIX   CBOE Volatility Index

    “The ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge."”

      “VIX values greater than 30 are generally associated with a large amount of volatility as a result of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent, times in the markets.”

VIX - CBOE Volatility Index. Retrieved from http://www.investopedia.com

Looking very tempting down here around the 12% level, looks like it spikes every couple months over this past year, and from this area, last spike was on 10/9/2013, with all the spikes this year getting up at the very least to the 17% level and above. Looking at the Dec 13/18 call vertical for 1.15 or better looks like it closed on the mid-point of 1.25, also looking at the Dec 13/18/23 call Butterfly for .75 or better,  but more inclined to work the call vertical.

*Also for trading ideas and commentaries and responses from industry professional go to https://mtmtradercommunity.com

*Disclaimer: This is not a recommendation. All trading entails risk. Anyone employing any strategies and having limited knowledge of options trading should consult with a FINRA licensed professional.

Put Friendly Trading

      Ever since the stock market crash in 1987 investors have viewed put options as a short hedge against overpriced and turbulent markets. The reality is there are better ways to utilize put options rather than outright costly hedging. Two of the most proficient ways to look at puts are collars in an up market or when a stock that you own makes a parabolic up move and in a down market via the outright sale or via creating a synthetic long call.

      In the first example using puts as part of a collar the owner of the shares can approach the trade as almost a free protection against a sudden reversal and simultaneously capping the stock to the upside via the sale of an OTM call.

XYZ stock trades at $85.80

Earnings are due in the next week and analysts are divided on the forward outlook of the company’s guidance.

The June 90 calls are trading for .30 and the June 80 puts are trading for .23

Selling the call and buying the put can be done for a .07 credit. The credit pays for the commissions and creates a free collar on the stock which is now capped out at 90.07 and creates a downside floor at 80.07 before commissions are taken into consideration.

The July 90 calls are trading for .92 and the July 80 puts are trading for .82

Selling the call and buying the put can be done for a .10 credit. The credit pays for the commissions and creates a free collar on the stock which is now capped out at 90.10 and creates a downside floor at 80.10 before commissions are taken into consideration.

The Aug 90 calls are trading for 1.60 and the Aug 80 puts are trading for .1.55

Selling the call and buying the put can be done for a .07 credit. The credit pays for the commissions and creates a free collar on the stock which is now capped out at 90.05 and creates a downside floor at 80.05 before commissions are taken into consideration.

You can view the entire article published on tradersexclusive.com

Also for trading ideas and commentaries and responses from industry professional go to https://mtmtradercommunity.com

*Disclaimer: This is not a recommendation. All trading entails risk. Anyone employing any strategies and having limited knowledge of options trading should consult with a FINRA licensed professional.

11/15/2013 FRI                              

Apple Inc.                        NYSE: AAPL  528.16

Avg. Daily Volume     11,673,139

IV    Dec 22.35%   Jan 24.00%

AAPL looks like it has some support at the 520 level over the past month or so, which was the 28% retrace from the hi of 705 to the lo of 385.10.

      Look at a Dec or Jan put 500/450/400 Butterfly’s. The Jan is trading around 5.95 and the Dec is trading around 3.45 on the mid-point. There may be a little more upside so try looking at low balling on the spread or even legging into the spread if it pops by buying the 500/450 put vertical and then taking advantage of the ensuing drop selling the 450/400 put vertical to complete the butterfly spread hopefully for a great price reducing risk even further.

      The risk is only $345 on the Dec and $595 for the Jan spread with potential of reward of $4,655 and $4,405. With a relatively low Implied Volatility and a seemingly over bought market the play offers both excellent potential as well as low Theta decay over the next 1 – 2 months.

Open Int. (est.)   Strike Dec Monthly (35) Jan Monthly (63)

400             2,150                          27,720

410             1,120                          14,525

420             1,180                            7,860

430             1,390                            8,100

440             2,560                            5,675

450             6,150                          41,700

460             4,260                          21,150

470             3,480                          13,820

480             6,245                          16,320

490             4,635                          14,340

500           18,100                          86,465

For a better understanding of Butterfly spreads you can see the full 3 part article published on tradersexclusive.com

Also for trading ideas and commentaries and responses from industry professional go to https://mtmtradercommunity.com

*Disclaimer: This is not a recommendation. All trading entails risk. Anyone employing any strategies and having limited knowledge of options trading should consult with a FINRA licensed professional.

11/14/2013 THURS

Earnings Volatility: Friend or Foe?

      When a company has an earning conference scheduled, many times there is speculation not only in regards to the accuracy of the projected Earnings Per Share (EPS), but to several other factors as well. These include, but are not limited to sales and revenue streams, products in the pipe line, cash on hand, management changes, possible future stock or bond offerings, etc. The uncertainty may cause volatility in the shares themselves, but the diamond in the rough is actually the temporary parabolic increase in the exchange listed options on the underlying shares. Traders tend to stay on the side lines going into the days leading up to the earnings conferences. Call buyers swap out shares of stock for call options so they may participate in a rise should the shares move higher and limit the potential should the shares trade lower, forcing the call options to trade, in many cases, a drastically expanded volatility. Additionally, put buyers force the options higher as they try and protect their positions.

      From a traders perspective the opportunity to capitalize on the potential volatility allows them to capitalize with limited risk via Verticals, Butterfly’s, and Diagonal Spreads. A Long Vertical Spread is simply a long call at a lower strike and a short call at a higher strike or a long put at a higher strike and a short put at a lower strike, normally in the front two months where premium is most sensitive and susceptible to Theta (time decay), especially if the earning are in the last week prior to expiration. The Long Butterfly is similar but it is achieved by buying a long vertical and selling a short vertical with a common short strike. The Long Diagonal is achieved by selling a front month option and buying a back month option of the same type, put or call, on different strikes. The trick is to devise a way to use options to benefit from a potentially large swing either up or down to your advantage.

      The first step is to identify and qualify a particular stock that by looking at past performance of the stocks movement going into earnings and finding those stocks that have the earnings calls closest to expiration. Certain stocks like Intuit Surgical Inc. (ISRG), Priceline.com Inc. (PCLN), and Google (GOOG) are prime examples of stocks that have the potential for large moves and have earning calls close enough to expiration to qualify taking a look at.

      The second step is to take a look through back testing at what volatility has done at those points in time, looking for dramatic increases in front and second month volatility a few days prior to the earnings call. In ISRG front month volatility is usually around 30% +/- 3% with earnings scheduled a couple days before expiration and can move 50 or more points either way, makes the stock a great candidate to look at. Patience is key as well as identifying several stocks that fit the parameters to justify the placing the trades. Normally the volatility doubles and in some cases is more extreme than that, which is what you need to look for. For this very reason it is essential to have several stocks to watch closely due to the fact that they may not all present an equal opportunity to place a trade, remembering the goal is to take advantage of the temporary rise in volatility

The full article can be viewed at tradersexclesive.com

*Disclaimer: This is not a recommendation. All trading entails risk. Anyone employing any strategies and having limited knowledge of options trading should consult with a FNRA licensed professional.

11/13/2013 WED

Soybean Futures      ZS  close on  11/12/2013  1314.50

The Soybean Futures seem to have broken through the initial resistance area at 1300 and are sitting just at the next resistance area of 1316.50. Above here look for the soybean futures to rally up into the 1350 area and with a little bit of help from the short covering could see the the Jan futures set to test the 1400 level

Resistance         1327/1331*    1344.50/13246/1352***   1380/1410****

Support             1300*        1380**    1360*    1351***

Open Int. (est.)   Strike      January   (44)

     1340              7455

     1350              2380

     1360              5600

     1370                386

     1380              4830

     1390                400

     1400              5870

     1410                277

     1420              4715

     1430                  45

IV 15.40%

Look at Buying the 1350/1380/1410 January Call Butterfly for 2.50 or better which represents a risk of only $125 per spread while offering a potential gain of $1375  over the next 44 days

to read more on Butterfly spreads review previous posts here or see the full three part article published on tradersexclusive.com

*Disclaimer: This is not a recommendation. All trading entails risk. Anyone employing any strategies and having limited knowledge of options trading should consult with a FINRA licensed professional.

11/12/2013 AMZN

Amazon.com Inc.                                       NASDAQ: AMZN 354.38

“Morgan Stanley commented "We believe that growth needs to accelerate to justify recent performance, the absence of which could lead the group multiple to revert to the mean." The analyst warned investors that trading on strong TAM opportunity can face strong pullbacks” (Janowicz, 2013).

Reference

Janowicz. E. (November 11th,  2013) Morgan Stanley Lowered Internet Sector View, Warning on Possible Pullbacks. Benzinga.com. Retrieved  from http://www.benzinga.com

      The shares broke through the 355- 357 support area that had developed after the last earnings call. The economy isn't doing as well as the numbers indicate especially in light of some of the future guidance moving forward as was the case with IBM. The most recent lo’s on the shares is 341.88 as of last Thursday. The 345/330/315 Nov monthly put butterfly +1/-2/+1 is a cheap play going into this week’s expiration.

      If you can buy the put butterfly spread for 1.00 or better the risk is $100 with a potential reward of $1400 per spread which is optimally realized at the 330 strike by this coming Friday. The spread can still offer a great yield if the shares break below the break even price on the spread which comes in at 343.85 which is a drop of  roughly 9 points or so from where it is trading around.

      The 330 area represents a 10% drop from the recent hi’s after an astounding 220% increase in share prices from lo’s set in late December of 2011.  The breakdown in the markets last week showed how vulnerable the market is to a sell off as well as going into the end of the year expect to see some profit taking as investors seek to adjust their portfolios possibly adopting a more cautious tone until they see what the first quarter brings as well as if and when the Fed starts to tamper back form the Quantitative Easing which is expected to start as early as December but possibly may be delayed until March of next year.

       Yesterday’s Blog entry briefly touched on the subject of Butterfly spreads and can further be viewed at tradersexclusive.com

IV 28.40%  Nov Monthly (3)

Avg. Daily Volume 3,182,000

Open Int. (est.)     strike             NOV 13 Monthly (3)

310                                     3250

315                                     3400

320                                     3400

325                                     4460

330                                     3390

335                                     1850

340                                     3390

345                                     2360

350                                     3650

355                                     5533

360                                    3660

Reference

Janowicz. E. (November 2013) Morgan Stanley Lowered Internet Sector View, Warning on Possible Pullbacks. Benzinga.com. Retrieved  from http://www.benzinga.com

*Disclaimer: This is not a recommendation. All trading entails risk. Anyone employing any strategies and having limited knowledge of options trading should consult with a FINRA licensed professional.

11/12/2013 Mon

Understanding the Basics of Butterfly Spreads: Part A

      In this topic butterfly spreads and variations will be addressed in an to attempt to build on a concept that will be further explained, after which the reader will have a fundamental grasp on the different ways to properly position themselves for a wide array of scenarios in regards to the underlying security in question.

      Butterfly spreads are an options position created by buying one vertical spread and selling another with the short strike of the verticals on the same underlying and on the same side, either puts or calls with the short strike of the verticals being the common strike. They are away to target a stock price regarding a specific range and are relatively low risk plays. In essence the short vertical, or vertical that is sold, is used to pay for apart of the cost of the long vertical, or vertical you purchase. They are considered low risk in that the cost is defined.

BRUN trading @ $55

The May 60/65/70 call butterfly may trade for .50 with 3 to 4 weeks left until May expiration at a nominal implied volatility of say 30 – 40 percent.

The position would read as long +1 May 60 call, short – 2 May 65 calls, and long + 1 May 70 call.

      The most you can lose would be .50 not including commissions. The potential for profit is 10 to 1 in that, if at or near expiration, BRUN were to trade around $65 at or near expiration the spread would be worth 5.00. A similar spread could be created through the use of put options with the May 50/45/40 strikes. The call butterfly would be considered bullish and the put butterfly bearish. Buying both creates a position that profits from a move either way, optimally, of 20% up or down. The further out from expiration you go the more you will pay for the spreads. You want to stay within a couple months of expiration due to the nature of options in regards to Theta, or time decay.

The full article as well as parts B and C can be viewed on tradersexclusive.com website

*Disclaimer: This is not a recommendation. All trading entails risk. Anyone employing any strategies and having limited knowledge of options trading should consult with a FINRA licensed professional.

11/8/2013 FRI

Google Inc. and Amazon.com Inc.

NASDAQ:      GOOG and AMZN

       Both stocks hit yesterday AMZN down to 343.56 a loss of - 12.62 on the day. GOOG was down -14.80 only a -1.45% loss, but more significant is that it is trading below the 1015- 1020 level which was acting as support for the shares the past couple weeks. In both cases it presents cheap trades going into tomorrow’s weekly expiration.

     

      With regards to both stocks they seemed to have picked up a little momentum in a jittery market. GOOG offers an inexpensive risk reward scenario in a stock that could sell off 20 to 30 points or more just on the basis of failing to hold at the 1000 price level.

AMZN

Look at buying the 340 Nov weekly puts for 1.00 or better look at buying the 340/335 weekly put vertical for .65 or better.

Open Int. (est.)     strike             NOV 13 Weekly (1)

330                                 1,100

335                                 1,960

340                                 2,670

345                                 2,155

350                                 3,775

GOOG

Look at buying the 1000 Nov weekly puts at or around for 1.00 or better or look at buying the Nov weekly 1005/995 put vertical for 1.50 or better if the stock opens higher.

Open Int. (est.)     strike             NOV 13 Weekly (1)

975                            360

980                            800

985                            850

990                         1,240

995                         1,920

                                  1000                         3,890

                                  1005                         3,000

                                  1010                         5,370

*Disclaimer: This is not a recommendation. All trading entails risk. Anyone employing any strategies and having limited knowledge of options trading should consult with a FINRA licensed professional.