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An Insiders Perspective on Executing Option Spreads Probability and Theoretical Pricing Good trade / Bad trade Expiration Insights , Earnings Ideas and Trade Concepts Trading Ideas requiring minimal capital (1000$) Stock strategies and Active Trader tips Real - time trade ideas and strategies Trading Strategies for Range Bound Markets Finding Trades : Strategies that limit capital exposure The Art of Tape Reading Calendar Spread Guest Technician John Carter Managing Risk Vertical Spreads Tom Sosnoff - Friday Wrap Up 21 Apr 2011 An Insiders Perspective on Executing Option Spreads calendar spread - jpm looking for down move buy 41 put calendar ~ 0.96 debit horizontal - always click on front month vertical - click on bigger option always sell a month for which impl vol is greater than the one you are buying sep 40.38 % vol oct 36.37% vol never pay to roll a vertical are cal spreads good to put in low vol - yes calendars on low beta stocks eem calendar spread 33 put ~1.38 right now it is at 1.32 even though the stock moved by 3% , calendar lost only a nickel Probability and Theoretical Pricing use theoretical pricing calculator to calculate where to sell at use stock adj and vole adj to see price variations you can use it for spreads as well pm

Tos Seminars

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Page 1: Tos Seminars

An Insiders Perspective on Executing Option SpreadsProbability and Theoretical PricingGood trade/Bad tradeExpiration Insights, Earnings Ideas and Trade ConceptsTrading Ideas requiring minimal capital(1000$)Stock strategies and Active Trader tipsReal-time trade ideas and strategies

Trading Strategies for Range Bound MarketsFinding Trades: Strategies that limit capital exposureThe Art of Tape ReadingCalendar SpreadGuest Technician John CarterManaging RiskVertical SpreadsTom Sosnoff - Friday Wrap Up 21 Apr 2011

An Insiders Perspective on Executing Option Spreadscalendar spread - jpm looking for down move buy 41 put calendar ~ 0.96 debit horizontal - always click on front monthvertical - click on bigger option always sell a month for which impl vol is greater than the one you are buying sep 40.38 % vol oct 36.37% vol never pay to roll a verticalare cal spreads good to put in low vol - yes calendars on low beta stocks eem calendar spread 33 put ~1.38 right now it is at 1.32 even though the stock moved by 3% , calendar lost only a nickel

Probability and Theoretical Pricinguse theoretical pricing calculator to calculate where to sell atuse stock adj and vole adj to see price variationsyou can use it for spreads as well pm

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Good trade/Bad trade xyz 25 , buy 26 call at 1 $ for a unlimited upside stocks goes to 26 , on paper you are right , but it doesnot go fast enough so option value drops to 0.50 $ [ time decay offsets the appreciation ] this happens all the time same trade sell 24 puts at 1 $ stock at 24 from 25 , 24 puts at 0.50 , so you can buy back you are completely wrong , but still you made some money UNG , /NGClose 12.2 is at a low of 12.11 making new lows every day16 some time back , now at 12 contrarian to get involved - trading at lows, govt to get a regulation to prevent speculators prognosis -direction high liquid yes

1. vol is at 71% 2. vol,open interest on both call and put - high - 3000,120003. stock volume - 38 mil 4. single strike option5. could bouncce back to 15/16 ranfe 6. 13 call @ 0.90 , 25% prob, 75% prob of losing [bad trade] , BE 13.90 7. that is not completely accurate , that 75% is by expiry , prob of touching is 2 * 25% = 50%

○ [good trade] buy 12/14 call spread - when buying debit spreads or when playing upside , buy one strike in the money and one strike out of the money BE 12.75 , 40% to get here risking 0.73 to make 1.25 with a 40% chance of winning

chance of lossing is now only 60% from 75% what if i wanted even a higher chance of success ??? ● sell nearest otm puts sell 12 puts - prob of touching is 38% , so 62% success 12-1.05 [credit recv’d ] we require about 20% capital in the account , so for one lot [11*100=1100] we require about 200$[20/100*1100]so ROC = 100/200 =50% what about return on risk ? 10% stock could drop to zero , risking 11 to make 100

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11/100 = 10% ● trading range - 875/977

XLE - energy sectoretf - lots of trading volumeClose - 44.53 range bound prognosis - bullish sell a put spread @ stock 44.53 45/43 as a matter of consistency we would not like to teach u to sell itm put spread , only otm

so the one above does not meet our criteria sell 44/46 call for .95 cents debit

even though the above two are syntetically same but consider sell 44/42 put with strike in 30 % prob and collect 1/3 of width of strike ~ credit price/action -we are ok since s&p is at 875 , but if we are at 900 , then sell further otm [42/40] put spreads since there is some downside in the cycle 940 down to 910 , bullish in oil - which put spread to sell when i am bullish on oil .. look at co-relations.... xle & s&p are highly cor-related many oil companies are in s&p if at bottom of s&p range and xle at 44.50 , sell put spread at 42/44top 40/42 , 41/43 xle

Good Trade Bad Trade

selling otm put spread selling itm put spread

buying itm call spread buying otm call spread

Iron Condor - Good trade if you think we are in the bottom range ,

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be of 43 - prob of 43 by expiration short stranglelet say you want to take more risk Naked Put - builish with a lot more risksell naked put , 43 @ 1.75750 required in account 175/700 what if the stock starts to bounce up sell out of the call - 48 @ 95cents , more credit so 2.70 in credit, adding that to call strike [48+2.70 = 51.70 ] , prob of exp at 51.70 is 12% , so 80% on the upside movement of stock on the downside , 41 - 30 % prob ,so 70 % on downsidemargin on shorter strangle [ greater of options]equivalent to covered call - short a put , positive delta [49:12 ]this is a good smart trade alternatively i think xle going to rise hugely long strangle buy 45 calls - 2.10buy 43 put - 2.00 be on downside - 39.00 ,80% chance of losing upside - 49 , 80% of losing so a bad trade, time working against you AAPLup a lot 137135/145 - trading range market at bottom want to play sideways calendar spread - buy jul 135 call , sell aug 135 callcriteria - always otm as we want fastest rate of decay on the nearest otm optionsbad trade so choose buy 140 oct 09 ,sell 140 oct 09 , debit 3.80 , 2 month each month 1.65 for a roll

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-apple rangebound between 135/145 3.30 to make 10 so a good trade

Expiration Insights, Earnings Ideas and Trade ConceptsBefore Expiration Fridayoct less volatile sometimes - because they are not triple witching months, there are no futures expiration for some indexesso volatility is a little less lowest close in vix and eur/usd oct expiration - things happen as per history cash settled index positions [ spx,oex,ndx,rut] - rollover as long as you like the directionroll over - do not necessarily roll to the same strike , look at probability as well one strike in the money , one out of the money ~ you have to close out or close itm options by a penny otherwise you will be long / short the stock butterfly - close all legs else you will be long/short stockno reason to carry positions into friday afternoonif you are short a call for a stock which is announcing dividend , get out or roll over for dia there is a dividend ,so close out/ roll thoes those itm short for you will be assigned otherwise Trade Concepts { what do you in market ??? }what to do when s&p moved from 666 to 1100 market was bottom - low cost and high volatility , love short put and covered calls market tops - no covered calls { synthetically equal to short puts } , cost basis is so high wide iron condors on index - not like because of chance of a pullback , because we might get a 1 SD move e.g 10/50 wide ic for 1$ debit - i hate it - low cost and high volatility is exploding - you need diff. strategies vs other way around- lets say we are in a danger zone - 68% bullish - donot like covered calls - no short puts - donot like wide index iron condors because we might a 1 SD move - otm call calendar spreads - with the market going higher , diff for options to expand , might drop down to zero if you are bullish and still think there is a 5-15% move , buy call debit spread with buy one strike in and sell other out , risk 1 to make 1 or 1 to make 2 , 1 itm and 1 otm [or] upside butterfly - atm or just otm because they are not expensive [or] upside front month calls - as volatility is low around 20’s very bullish - sell otm put credit spreads neutral market - tight/flat iron condor - 1 or 2 strike wide - otm put calendar spread - if the market were to go down , vol might pop up and you risk 1 to make 1.5/2- otm/atm put butterfyl - because they are cheap given rising markets - good time to hedge long portifolio - if you are long in ira etc - short credit spreads , short delta strategies as long as your

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collecting premium- pairs trading [long/short fund] - buy 1 sell another , sell call and put , do a vertical spread here and there bearish- long debit spread - put one strike in the month and another two strikes out in the money- given low volatility - ok to do buy a put not front month but a 2 month out - short call verticals - trade for big premium because of skew inversion - skewed butterfiles and iron condors - as long as skew in the call side , as long as call side has multiples of width compared to put - otm put calendar spread - because volatility will explode if you can nail the price for a good payout . good support level for a good 50% more payout Earning Ideasbunch of earning coming out over the next few days C,BAC, GOOG , IBM , NOK , GE , HAG C front month volatility at 160% { guess earnings are tomorrow}and back month at 60 % one year ago 19-20 , now 5 $ buy oct 5 put or call at 0.15$ , no directional bias if you have a direction bias , 15 cents will be a reasonable bet expected move with two more days to go can be calculated by taking the front straddle and strangle,add them and divide by 2 to get expected market move may be double your money for 30 cent move bearish - buy 5 put bullish - 5 call BACC 18.59 , 80% vol do on a small scale for one daysell 18 straddle expected move in here is about 65 cents [ avg of front month straddle and strange is 1.30/2 = 65 cents ]consider 18/19 straddlesell 18 call sell 19 putcollect 1$ betting 17-19 range GS Close 192.28 , up 5.00 buy 190/ sell 195 put spread for 2.50 debit

risking 2.50 to make 2.50 with a 30 cents theoroticall they better nail their number because the stock got already downgraded yesterday.

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NOK Close 15.39has been in 14-16 range vol for front month - 115% , for all other months - 45% bullish 16 call calendar spread

bearish 14 put calendar spread

IBM C128.35 same like gsbearish - buy put spread 130/125

bullish - buy call spread 125/130 best play ~ vertical as front month vol is 56% and back month is 27 % expected move around 5 bucks never buy { premium } straddle or strangle 2 days before expiration HAG C 26.26 +1.62 vol front month - 115 % vol back month - 54%

because of high volatility differential GE - choppy sell 16 calls and 17 puts front month vol - 76 % , back month vol - 46 % not enough money on the trade GOOG Close 536 front month vol - 75 , back month vol - 34% pinning tendencyfun for butterfly traders and sometimes for iron condor

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look at front month strangle and straddle 1] b 540 puts / s 530 puts 2] bearish , might drop to 510 butterfly 10 point wide b 520 put sell +2 520 put buy 1 510 put

expected to land between 501 and 519risk a 1$ to make 9$ ( if you land at 510 $ )

play otm 3] choose call side - bullish , choose put side - bearish

Trading Ideas requiring minimal capital(1000$)expiration insights - short one - long some other underlying unwinding of arbitrage positions - unnatural buying pressure because there are lots of shorts quarterly dividends - be careful of etf’s [ sept dec march and june ]offcycle - aug - only dia [ no dividend risk ]mnx , ndx , spx - thursday is the last time when you can hedge / trade /close it on friday morning it is marked up or down , you will not be able to hedge it value is based on the print in the morning if you have a calendar in spx , front month is turned to cash and later month becomes open endede.g. oex deep ITM , you should roll vertical spreads should be closed before the expiration thursday---------------------------------------------------------------------------------------somewhat market directional EEM - emerging markets index h 37.19, l 19.36current at 35.16 put calendar buy sept -dec 33 ~ 1.38 in debit the reason 33 is picked because we are bearish no volatility skew as it is same across sept and decso no volatility risk

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itm cal spread - bullishatm cal spread - nuetralotm calendar spread - bearish the reason it is loved , it is a 3 month cal spreadthree rolls in there3 months so 1.40/3 = .46 looking at the current itm cal spread sell 35 aug/sept cal spread - 1.00 credit [ two days before expiry ]the reason this is being shown is to show the profit potentialyou are risking .46 to make 1.00so looking at this atm , we can get a idea of what happens if we go down from 35 - 33 +one neat thing is even now for sell 33 aug/sep call spread ~ 0.64 which is one third of the cost when happens if it goes up [ only possible near expiration because all prices come into line] sept 30 put is between 0.23 to 0.26 centsbreakeven is 32 for the 33 put as we are paying 0.46 cents lossing 50% of my investment would be the 30 strike because it is at 0.23 if i want to get at my upside and downsideso in another words if the index moves 1 point , i am ok , 35-36 if it moves up three strikes i loose 50% , 35-38 old high was 37 , so i loose only 50% if it goes above old high+probability of expiring above 38 is 17% risking ½ to make 2 times --------------------------------------------------------------------------------------- ung - bulish futures trade all over the place low was 11.91 and today we are almost theremore oversold [ last nine close in red out of 11 days ]paying .84 to make 1.16 , one of the reason people buy these kind is because they can make more when the direction is correct only paying .14 , this drops .14 and you reach beif you are bullish , buy one strike in the money

capital you have to put up is spread - credit

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prob of success is 56% ---------------------------------------------------------------------------------------QQQQlast at 39.30index had parabolic movelong put vertical - debit . always itm if i do short put vertical - credit , otm

already 70 cents in the intrinsic valuepositive theta decay generated probability of expiring

---------------------------------------------------------------------------------------FAZ27.27gaint moves and it went sideways non-confirmation when the market blewup , it just went sideways and i think it has some upsidegood liquidity and volatility bullish play in a bearish etf if you are trading leveraged etf , 2 times do ½

3 times do ⅓ of your normal trade100 shares 1 stop away for normal etf50 2 for 2 leveraged low in faz is 24.07 vol is now 110 %

intrinsic is 27 cents, so premium paid is 73 risking 1 $ to make 3$expected vol is 110 % , range is 0 - 60 for next yearif vol is 70% , this would be a stupid tradewe are taking a expected shot off of volatility

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expected move is 10% a month , 0.10*27 = 2.70 , so you could easily hit 30make two lose 1 with 33% probability when you do itm debit spreads, you want to go to the expected move , 30 in this casewe are taking expected move of volatilty with a better probability if you are bullish , you do the opposite trade--------------------------------------------------------------------------------------- bearish in oil use OIH AAPLskewed skp strike butterfly bearish stint to itclose at 164.60

max risk is 500 $ per contract , max profit is 1000 $ per lot 34% of appl going above 170 profilt potential from 145 to 165 - maximize166 - you loose 100$ 168 - you loose 300$---------------------------------------------------------------------------------------

Stock strategies and Active Trader tips

Real-time trade ideas and strategies10-12 % range expectation VIX - 29 , lowest - volatility contraction from 60 game plan - /ES at 900 , range 920 - 930/40downward range is may be 840 - 80010-12% range for remainder of summer have a bias - bullish or bearish i think we are at the top end of the rangevix at lowest range , interest rates wrt yield curve are flashing warning signs, top end of range risk/reward favors playing a small downside tweak to trading range not going to be a oppurtunity to get long premium , entire street is selling volatility divergence between major indexes SPX-NDX, SPX-DJX rolling overso SPX has to rollover as well [setup ] inverted yield curve , most stocks at pin , large divergences , low volatility [ option prices are so cheap]

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[1] EEM 32.61 ,buy june 34/32 put spread for 1.03 ~ bearish [30:54] parabolic movealways look for risk 1:1 with no extrinsic premiumbe is near top end of range - so good overbought underlying resistance in stock is at 33 break even in stock is at top end of range prob should be at 50% always buy 1 strike ITM and other OTM

looking at the chart , stock zoomed by 50 % [2] [email protected] buy june/sept $12 put calendar spread for 0.75$ sideways moveoverbought underlying1:2.5 10 spreads only use 750$jun-july , july-aug , aug-sept - three rolls

looking at charts - stock is range bound all the way to last 6 months

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[3] jpm 34.43 sell the june iron condor http://www.optiontradingpedia.com/free_iron_condor_spread.htm

downside play always choose nearest month when doing nuetral iron condorsyou sell the top end and buy the lower end and hope it stays in between risking 55cents to make 95 cents [4] spy 91.75 really bearish - credit spread

sell june 93/95 call for .77 sell otm premium add credit to your short strike and that becomes your be 30% of expiry always look to collect premium = 1/3 of width of strike [5] spy/dia pair trades spy 91.25 dia 81.84buy june spy 90/88 put -0.80 sell june dia 84/82 put 0.80 spy will go down more than dia spy are over bought when compared to dia

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Trading Strategies for Range Bound MarketsEstablish range 780 - 860 , 60/800 at top of range , create positions short in delta - so that as market falls you position rise exact opposite at the bottom of the range spy top end 860 - 880 , choose mid-point ~870 call spy bottom end - 760-780 , choose mid-point ~770 put probability of reaching mid point is usually 30% , so pick this if you sell something for .35 with a single strike of width , prob of expiring worthless is 65% ** upside call spreads are richer than downside put spreads Criteria 1. enough time to go to expiration - > 23 days

2. [Strategy 1] otm call spread 87/89 , 0.65 credit - always if you get 1/3 in credit for any strike width , you minimize the trading costs , 3. [Strategy 2] condor 87/89 , 79/77 , BE is 87+1 on the upside , 77-1 on the downside, look at the probabilities of reaching these

4. [Strategy 3] unbalanced condor- lets say you did your homework and feel that on the downside , it will breakdown below 810 sell 81/80 put spread taking a credit of 0.93 ... you risk only 7 cents on the downside and chance of reaching upside is 28% 5. at low end of range - buy stock , sell covered calls

Finding Trades: Strategies that limit capital exposureVIX - 22 ~ very difficult to set up a trade watch commodities , gold, futures , forex etc to get a idea of the markets how can you trade broad based etfs’ without watching the futures ?GLD - at all time high GLD - rising by the day , but impl volatility atm is too low 23 % so pricing will be lowcheap/crushed volatility usually means , prices are lower112.25 , consider 109 put buying at 1.45 , so the BE will be at 107.50 , the prob of getting to 107.50 is 23% , so the chance of losing is around 70-80% to make double you investment , it should move 3 dollars from BE ( 107.50 - 3 = 104.50 ) , 6% drop in gold , prob of getting here is 10% if you 10 contracts , chance of losing 1500 is 75% , 25 % for break even and 10 % for doubling you moneyrisk/reward doesn't look good --------------------------------------------------------------------------------------- instead consider buying a closet itm put spread , 113/111 for a debit of 1 $ , premium exposure is only .25so you are paying 1$ for 75 cents . be is at 112 ( 50% ) [ 31.36]so for max profit , to get down to 111 , prob of expiring here is 43.72%so all of a sudden you are moving prob in your favor from 10% to 50% ~ --------------------------------------------------------------------------------------- [if you are looking for a smaller profit] ~ risk 2 to make 1 to increase probabilitysell a otm call spreadrisk 60 cents to make 40 cents 113/114 sell call spread for 40 cents credit [ 60 % probability , blind guess because of perfect pricing model]--------------------------------------------------------------------------------------- [ bullish that gold is going to 1150 , GLD 115 ]buy 112/114 call spread , 86 cents debit , 60 cents extrinsic risk risk 86 cents to make 1.14 bullish 112/114 call spread bearish 113/111 put spread

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--------------------------------------------------------------------------------------- VIX 21.63 [tough to trade for retail customers]difficult index to trade , non standard expirations , expire to future pricessome people vix as disaster protection as vix gets cheaper , one fun way is to sell naked puts , because of limited downside as volatility can’t go to zerovolatiliy will never touch zero vix topped at 80 in oct when the market was at rock bottom for a product which can go from 20 to 80 or 80 to 20 , that rules out short calls*** never do calendars on vix , too much risk *** no short calls enough volatility when you sell a naked put last low was 20.1 , present at 21.63 , may be it will be double bottom bearish - naked 20 put not good as you collect only 20cents for a 1% return ???selling itm put is ruled outsamething for naked calls as well otm butterfly [ capitalize on vix closing ] you have to pick a target call butterfily of 2 wide buy butterfily [ usually trade at 2cents around theo price]market sell off prognosis 22.5/.25 / 27.5 [ risking 35 cents to make 2.15 , this vix couldbe in a range ]bet 22.85 and 27.15 , i make money below(19) and above ( 80) , you loose 35 cents similar butterfly on intel etc would be much higher as volatility is low . where as here volatility on volatility is in the range of 70% one other waysell calls spreads when vix pops up [ 29/30 when vix popped to 28] --------------------------------------------------------------------------------------- Interest Rates TLT - perfect product for play on interest rates in lieu of futures where margins are really big volatility is only 17% how do u make money with such low vol? difficult if i think rates will lower , and this will pop , if i buy otm callsbuying otm puts and calls - but change of be is like 20% - horrible trade one way - butterfly tlt 94.97 93/95/97 buy butterfly at 50 debit (expensive ) , profit potential is only 1.50 but in case of vix , it was 2.50 , this is because of volatility [ play a little directionally ]bullish , put spreads are ok,when stocks have low vol , otm options tend to skewed higher directional trades work better if you sell nearest otm put spread - long sell nearest otm call spread - short *** when vol is low , stay away from straddle,strangle and butterfly [you pay more ]always look for potential return of 8:1 and not like 3:1 ---------------------------------------------------------------------------------------FAZvol is very high , triple leveraged stock prognosis - range bound

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high vol because it is triple leveraged covered call candidate[ low cost basis and high volatility] - if it is trading at its lowest range buy stock and sell nearest otm call @18.69 and sell 19 call sell otm nearest put [ on account of high vola]18/17 vertical spread for 0.46 credit , be is 17.54 , only 13 cents higher than old low with a 54% prob risk 1 to make 1 - good trade buy itm call verticalbuy 18/21 calll because of high vol at 1 debit risk 1 to make 3 70 cents of of intrinsic 30 cents only for leveraged play ---------------------------------------------------------------------------------------EUR/USD usd is in a free call currencies are leading indicators for stock market

The Art of Tape Readinghow does tom trade ? watch currencies,futures, volatility if market volalitility is sucked out , market will not go down, probably close at same level [ up 12 , down 5 ]● e.g. umemployment report , 3 day volatility taken out in first 30 minutes whenever market opens like 20 up , then 8 down ● most anticipatory traders think of shorting the weakest market ~ but which one ~ nasdaq -20 , s&p -5 , choose nasdaq to short ● filter out head fakes , a particular stock going against the market

Calendar Spread don kaufmann - apr 09 2011 marketcast, shadowtrader - get an idea of orderflow

Guest Technician John Carter for stocks which pin set up thurs afternoon 2 pm goog - look at open interest , pick ones with highest open interest 498.37 tendency to pin at 500 [ calls since current price is less than pin target ]

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buy 490 call sell 500 call bidu - 73.15 usually pins at 70 after verifying open interest buy put 73sell put 70 delta of atleast 70 to get capital appreciation

Managing Riskstart using prob of touching get out of a trade 4-10 days before expiration use 3-5% of your amount for each trade beta wiegthingbeta is relative to s&p. beta for s&p is 1. put calendar when volatility is low to reduce negative delta , buy stock , put spreads

Vertical Spreads selling call spreads - bearish

Tom Sosnoff - Friday Wrap Up 21 Apr 2011 interest rates when they are going down , xlf goes downusually financials and spx go up or down, not the case today

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