Entries by Mark Fenton

The Time Bomb Butterfly: High Profit Potential, High Risk, but Low Cost

The butterfly is one of the most popular options strategies. There are many different structures for a butterfly, from neutral to more bullish or bearish structures. Also, in the set-up you can have iron butterflies that involve the selling of a put and call vertical and also the all-call or all-put option butterfly. One of the best butterfly strategies is what we call a “time bomb butterfly.” With this strategy you will be buying an all-call or all-put butterfly in an expiry and a strike price of your choosing. Below are two examples. The first is an earnings play, which is one of the best times to use the time bomb butterfly. In this example GOOGL made a large move to the upside. The day before an earnings release we purchase an all-call butterfly centered 50 points above the current market price. With GOOGL trading at $680 our all-call butterfly is centered at $730. The number of contracts and the width of the fly are up to you. The more contracts and the wider your fly the more expensive the fly will be. In this example, we have 10-point wide wings. The trade put on in this manner can be done […]

A RUT Calendar Trade Idea

3/7/17 Rut Calendar RUT is trading now at 1383. I would look to establish a calendar position by selling one March 24 exp 1380 put, and buying one  Apr 7 exp 1380 put at around $7.00. My profit target is 10% so I would enter an order to sell my calendar for $7.70 When do I adjust? I will adjust when the price comes within a 5 point range of break even which would currently be 1355 on the downside and 1406 on the upside. Create another calendar with the midpoint 15 to 20 points away from where RUT is trading at that time, which would cut the position delta by 2/3 with the adjustment. I would then take off at a 10% gain or loss. If you would like to learn more about calendars, take a look at a recent webinar that we did on calendars. Mark Fenton  

What is Your Trading “Intention”?

Each time I go to my yoga class the instructor has a word of the day, and I wanted to apply that to options education. The word of the day is intention. The dictionary defines “intention” as an aim, a plan or a purpose. While naturally many people would think, well my intention is to make money. I think through lack of planning many people lose sight of their trading intention. Let’s take a look at what should go into our trading intention. Trading Goals Besides learning different strategies to utilize, the first thing we need to do is determine a long-term trading goal. Where do we want our trading success to take us, is our goal to have a monthly income stream? Or a nest egg to retire with? Of course these goals could be simultaneous. Whichever goal you choose it’s important to keep a record of your trading results and where you are at on your path to your intention. Trading records should be looked at daily, monthly, quarterly and yearly to give us an overall view of whether or not our current plan is working. This will give us a chance to make adjustments in our trading […]

Are you a market bear? Here is a trade for you.

Recently I wrote an article about the “time bomb butterfly” that was published in the March issue of Modern Trader Magazine. The butterfly option trading strategy has many different structures and uses. The time bomb butterfly involves buying an out of the money all call or all put butterfly in the direction you think an underlying asset is going to trade. Currently in the market there is a lot of uncertainty among traders as to which direction the market will now head. Time Bomb Butterfly This can be a good set up for the time bomb butterfly in the SPX. One example would be an all put butterfly placed in the April expiration 37 days from now, that is centered at 1940. While the width of the fly is up to the individual trader, using a 20-point wide wing could be structured as follows:   Buy 1 APR 16 1960 put Sell 2 APR 16 1940 puts Buy 1 APR 16 1920 put   This butterfly is currently trading at approximately 1.25 per contract, costing $125 for each 1/2/1 fly structure that is entered plus commission. Profit If this butterfly at expiration is trading near 1940 this trade would net […]

Why is my trade losing money?

By: Mark Fenton  mark@sheridanmentoring.com Do you ever ask yourself why is this option trade losing money? As a trading mentor I get this question frequently. When you are in an option trading strategy there are three components to making or losing money. Price movement, volatility changes, and time decay. Price Movement First, price movement. If you are in a directional trade then you need the price to move towards the options that you bought and/or away from the options that you sold. I think that concept is easy enough to understand. Many traders however use strategies that are “non directional”. Strategies such as iron condors, calendar spreads and butterflies allow for some price movement in either direction, as long as it’s not too extreme. These strategies are trying to take advantage of time decay, which we will cover in, a bit. It’s important for directional and non-directional traders to keep an eye on their position delta. Your position delta tells you how much money your trade will make or lose with the next dollar in price movement of the underlying. You can use the Delta number to get a sense of how well an up or down move will benefit […]

How to Successfully Trade Options

Over the past eight years I have been a full-time trader and options trading mentor, and have come to the realization that my time as a mentor has helped my trading more than any thing else could have done to improve my trading. As a mentor, I see day in and day out what works and what doesn’t. So whenever someone asks me how they can trade options successfully, I think I can speak with some experience. The most important thing to being a successful options trader is to have a plan. The plan is what will I trade, how will I trade it, what will my profit goal be, and what will my max loss be. Find a Valid Option Strategy A very important part of the plan is that it has to be a sound one, meaning I have to find a valid option strategy and I have to understand how the stocks or indices that I use, move. The plan must involve which options I’m going to use, which underlying, the strategy, and finally, when am I going to enter the trade. Once I enter a trade how will I manage it if it works for me […]

Hedging a Futures Option Position

The benefits/drawbacks of trading equity options vs Futures options is a frequent question I receive as a trading mentor. While there are several points to that question, I want to talk about one of the advantages of Futures options trading over equity options. Provided you select the correct market, futures and futures options trade nearly 24 hours a day. One way to take advantage of that in an option position is to hedge that position with contingent orders to go long or short futures contracts at extreme points of your risk range. Everyone who trades options has experienced the “gap” opening at the beginning of an equity trading session. The price can move beyond your established risk parameters and you cannot easily protect your position. Since futures trade nearly 24 hours a day the gap risk is very small. Further, having contingent futures orders in at the extreme edges of your risk range can protect you and can get filled even in overnight moves at the time the price breeches your range. Once the future contract(s) order is filled, it can help hedge any losses until you have time to repair or exit your option trade. A butterfly position is […]

NFLX Pre-Earnings Option Strategy

NetFlix (NFLX) is scheduled to report their 3rd quarter earnings and have a conference call on October 14th after the market close. If you are bullish on NFLX, post earnings report; here is an interesting options strategy you can utilize. The goal of this strategy is to own a long call when earnings are released and to purchase this call before hand, at a reduced price. To do this, use a call diagonal. Call Diagonals You can enter this order all at once as a spread or, buy and sell the legs individually. To enter the trade at once, place an order to sell one Oct2 expiration (8 days from expiration) 107-strike call and purchase one Oct15 (15 days from expiration) 110 strike call. This spread is currently trading around a debit of $3.75. The plan is for the sold 107 call to expire worthless the week before earnings are released, and then you hold the one 110 call the week of earnings, that can increase in value if NFLX has a bullish reaction to the report and trades at $113.75 or higher. Of course you can trade this with different strikes if your opinion varies. Bearish Reaction If NFLX […]

Using Volatility to Time Your Trade Entry

With the recent spike in market volatility it has become obvious to all option traders that a fundamental knowledge of implied volatility is mandatory. For the positive theta trader, implied volatility levels are one of the key elements to consider and watch before and after trade entry. The profitability of positive theta trades, meaning those where the passage of time and option value time decay are beneficial, is affected by time, price movement and implied volatility of the options that are part of the position. Timing trade entry to day-to-day movements in implied volatility as well as overall market volatility can enhance trade profitability. The primary way to watch volatility of the broader market is the VIX. The VIX reflects the implied volatility of the SPX  (S & P 500). Since most of the market is highly correlated to the SPX, the VIX is a useful tool to get an overall market volatility weather report. Considering VIX levels as well as the implied volatility of the underlying you are trading is key. You can also watch the ETF (electronically traded fund) VXX, which trades like a stock and closely follows the VIX. The VXX Is My Favorite Way To Trade […]

Using options to take advantage of a market pullback

With the recent plunge in the equity market, traders are often puzzled with what to do next. One strategy to employ, if you wish to get long a stock, is to sell cash secured puts or put verticals below the market at a price that you wish to buy the stock. This is a good way to collect premium and perhaps acquire a stock at a low price. Let’s go through an example. NFLX over the recent months has been on a meteoric rise up until it’s split a couple of months ago. Since then it has settled steadily above 100 dollars, except for the large down move day that took it down into the 80’s intraday. The stocks then bounced back up over a 100 where it has been since. With NFLX trading around 100 dollars per share today, a trader looking to get long at a lower price may wish to consider selling puts at the Oct. 80 strike. Premium The further out in time you sell this put, the more premium you would take in. Currently the trader could take in premium around $3.50 for selling the October 80 put strike that is 43 days away. If you […]