Using the Leverage of Options for Bullish Sentiment

When you are “bullish” a stock, it is your opinion that the stock is going to go up in price. While you could simply buy the stock, it is often more expensive than using a bullish options trading strategy. You can have a lot more leverage, meaning  more potential reward with spending less money using options by simply buying the stock. There are many options strategies to employ when you have a bullish sentiment.

One option strategy you can use, is to buy a call on the stock above where it is currently trading. If the stock trades higher and goes through the call strike by more than you paid in  premium you will be profitable. You could also use a call vertical. The call vertical is when you buy a call at a lower strike then you sell a call at a strike two or more higher. By doing this you still get the advantage when the price goes through the strike but you decrease your cost by selling a further out call. Of course the further out call will cap your gains at the strike you sold,  but this is a simple method to reduce the cost/risk whenever you buy a call vertical. Another bullish strategy is to sell a put vertical. Meaning you sell the put closer to the money and buy another further away from the money as a spread. If the price of the stock stays the same or goes higher, you make money. If the price declines you would have to close or adjust the trade.

When and how you buy these different option strategies and how to manage them is what we teach at Sheridan mentoring every day. With our options education you can learn to take your sentiments whether bullish or bearish and know how you can use options and the leverage they afford, to your best advantage.

Mark Fenton

mark@sheridanmentoring.com

Successful GOOG Trade in 1 Day!

Yesterday in the Blog I talked about a Live GOOG Pre-Earnings Calendar I did. Today I took off the trade for about a 7% profit in 1 Day. I bought   1 April 28 Expiration 835 Call and Sold 1 April 21 Expiration 835 Call for $10.80 Debit and sold it out today for a Credit of $11.54 . The price of GOOG was 834 yesterday when I bought the Calendar and the price of GOOG today was 835 when I took off the Calendar for a profit. I made $74 for every 1 Calendar, that would be a yield of 6.8% ( $74 divided by $1080).Why did the Calendar do so well in 1 Day? The implied Volatility of the long option went up more than the short option did.

What would be an explanation of why that happened? Referring to yesterday’s Blog, we originally bought an expiration that will be affected by Earnings and sold an expiration that would be expiring before earnings comes out. Therefore as each day passes, our long options may increase in Volatility while our short options may do nothing.

Dan Sheridan

dan@sheridanmentoring.com

An Asymmetrical RUT butterfly Trade

With RUT trading around 1360 and volatility up a bit, a trade that looks interesting is an asymmetrical iron butterfly entered below the current trading price as follows:

RUT at 1358

Sell one May 19 exp 1330 call
Buy one MAY 19 exp 1350 call
Sell one MAY 19 exp 1330 put
Buy one MAY 19 exp 1280 put

This trade gives an upside that is profitable no matter how high RUT trades and put side with the risk well below where RUT is currently trading. Take the trade off at 10% gain or loss.

Mark Fenton

mark@sheridanmentoring.com

GOOG Pre-Earnings Calendar

Buy 1  GOOG  April 28  835 Call  and Sell 1 GOOG April 21  835 Call for $10.80 Debit with price at $834.43.

I just executed this order live at 1:17 pm central Chicago Time today, Monday. Why did I do this? Why would I pay 26 implied volatility for my long call and sell my short call at an 12 implied volatility?  Because Earnings is coming next week and that will keep the April 28 Expiration Options high while the April 28 Options expiring this Friday will not be affected by next weeks earnings and the Implied Volatility should stay low or go down. How does this benefit me? For this Calendar Trade, I will have very little concern that I will lose money from Volatility decreasing and thus hurting the trade. Will I still have Price Risk? Absolutely.  I paid $10.80 Debit or $1080 for this spread for every 1 contract. My goal would be to make 8-10 percent profit on my investment of $1080. So, I will have an order in immediately to sell out this Calendar for around $11.65 Credit for the rest of this week. That would be about an 8% profit on Capital used for this trade. If this spread trades around $9.60 or lower, I would get out and take my loss, around 10% on the Calendar cost of $1080. Obviously, if the spread is trading lower than the initial debit of 10.80  but hasn’t got to 9.60 yet, I could adjust or try to fix this trade by re-positioning the Calendar. This involves taking off the 1080 Calendar completely  and entering a new Calendar at the strike closet to the current price of GOOG when you are making this adjustment.

Conclusion: This trade is a Calendar trade that tries to eliminate one of the two main foes of this strategy, Volatility, by buying an expiration affected by earnings and selling an  expiration that expires before earnings. This strategy still has Price Risk, so we need to have a plan and exit the trade if the Debit of the Calendar decreases too much as the price of GOOG moves too far above the strike of 1040 or too far below the strike of 1040.

Dan Sheridan

dan@sheridanmentoring.com

How Do I Calculate My Profit Goal?

One of the most frequent questions I get from my mentoring students is how to calculate where to exit a trade for your profit goal. Some trades have margin while others don’t and some trades are debits and some are credits. This can all lead to confusion as to what a closing order should be.

Ignoring commissions for this example, if you have a trade that costs $250 debit and the margin is $1000 what would you want to sell it for to make 10%?-
The trade cost you $1250 so you need $125 ($1.25) more than you paid you make 10%. So $2.50 you paid + $1.25 is $3.75. $3.75 is your sell price for 10% profit.

If you have a trade that gives you a $250 credit and the margin is $1000, what would you want to sell it for to make 10%?-
$1000 in margin minus $250 target = $750 which is the cost of the trade. So you need to buy back this credit spread for $75 or .75 less than you paid for it. So if sold at a $2.50 credit, the closing target is $1.75.

You can simply add in your commissions to the cost of the trade and set your closing order appropriately.  I hope this helps traders with this frequent question.

Mark Fenton

mark@sheridanmentoring.com

Took Profit from GOOG Calendar Trade from Monday Blog!

In Monday’s Blog, I talked about a Live GOOG Earnings Calendar I traded. I bought the April 28 Expiration  830 C and sold the Apr 21 Expiration  830 C for $9.55 Debit. GOOG was 828 when I executed the trade. Today, with GOOG around 823, $5 dollars lower, I sold out the spread for $10.05 Credit. That’s a 5.2 % yield in 2 Days! For every 1 contract, the profit was $50 on capital of $955, the initial debit. If you added in Commissions, our Community pays $ 1 per contract, the yield would be 46 divided by 955 = 4.8% yield (Commissions  barely affected the yield). Will  look to re-enter GOOG for another Earnings Calendar in tomorrow’s Blog.

Dan Sheridan ~ dan@sheridanmentoring.com

The War Drums are beating! Pre-Earnings Play in GOOGL

As of 12:35 PM central today, SPX is 2361  +6  and VIX is 13.52  +.65. That is unusual for VIX to increase on an up day, why is it happening?  Because there is unrest in the world and people want some insurance .  With the US bombing the Syrian Air Base last week, and the bombing of the Christian Churches in Egypt, people are a bit nervous. Throw in the fact that the SPX is up about 15% since November, and you can see why folk, especially fund Managers , would want some downside insurance with the VIX, and are willing to pay up. Any Trading Opportunities?  With this Friday a Holiday for the market, I am a little lighter in trades this week.

In GOOGL, here is  an pre-Earnings Calendar Play. Buy 1 April 28 Expiration  830 Call  and Sell 1  April 21 Expiration 830 Call . Total Debit $9.55 . I just bought this live at 12:59 pm central today with GOOGL trading at 827.79. Earnings will be the week of Monday April 24. The purpose of this Calendar is to put on a trade that shouldn’t have any Implied Volatility Risk. We are buying the long option at an Implied Volatility of around 22  and selling the short option at an Implied Volatility around 12. Why would anyone buy a high volatility and sell a low volatility? Because we are buying our long in an expiration that will be affected by earnings and we are selling are short Option in an Expiration that won’t be affected by Earnings. Net affect, the long options should stay at the current implied volatility levels or go higher and the short options implied volatility  won’t go up much and will start to decrease because they short options won’t be around to experience the wrath of earnings. As I said, I paid 9.55 Debit and would sell this out for around 10.30 credit, about 8% yield. My short expiration is in 11 days, I would like to be out of this trade by this Thursday if possible. If GOOGL goes against me, too far under 830 or too far above 8.30, and  the spread trades over $8.55, would probably get out.

Check out the big banner on Sheridanmentoring.com regarding our 2 Day Chicago Seminar, Jun 15-16.

Dan Sheridan ~ dan@sheridanmentoring.com

Trading the Monthly Jobs Report

One monthly report that generally moves the stock market is the NFP or nonfarm payroll report that is issued the first Friday of every month. The report is issued at 8:30 am Eastern time 7:30 am central time before the market opens. When the market opens, often the market will make a hard move one way and then come back the other way over the first hour or so. This can make for an interesting speculative play using options. This is not normal non-directional income style options trading.

The way to play these moves with options is to wait for the initial move to move hard in one direction and then sell option verticals above or below that. Then whenever the market moves back the other direction you can close those option verticals that you sold profitably or continue with them if the market stabilizes. Often the market will move one way and then the other and continue that  way the rest of the day. For instance, if the market opens up you could sell call verticals in a broad-based index like SPX once it is moved up about 10 to 15 minutes, then watch for a market reversal to buy those back or you may be able to continue with a market reversal the rest of the day. Conversely if the market opens down  you could sell put verticals on SPX or a broad-based index and then when the market stabilizes or goes the other direction cover those verticals or maybe continue with them the rest of the day. This is often easier to do than buying a straddle, where you buy an at the money call and put the day before, because often times the volatility will come out of that straddle which will crush the profitability of the play.

There is also an income style trade that could possibly be set up using these moves. You would simply sell the vertical in the SPX calls or puts depending on which way the market opened and then when it went back the other way sell the other vertical and you should have a fairly broad structured iron condor. Of course, this is not without risk and this kind of move needs to be done small and practiced a lot on paper before doing it live. Whether you sold just the verticals or are creating an iron condor I would sell my shorts at a delta between 14 and 18 so that you are far enough away from the market and not too close.

Both of these can be done on  paper tomorrow when the jobs report  comes out.

Mark Fenton

mark@sheridanmentoring.com

Bullish Crude oil Butterfly

There are reasons fundamentally to be bullish crude oil in the current market. Summer driving season approaches and the oil supply glut has been diminished. If you share that point of view and wish to speculate with /CL, below is a trade you may find interesting.

May /CL trading around $50.60

Look to buy a call butterfly structured as below at a debit of around $2.30 ($2300 trade cost).

Buy one May 47 call
Sell two May 51 calls
Buy one May 55 call

Consider closing the trade if a profit of $230 is reached(10%).
Close the trade if loss reaches $200

 

Mark Fenton

mark@sheridanmentoring.com

Option’s Trading with the “Greeks”

A very popular method of managing options trades, particularly complex ones, is the Greeks. The “Greeks” that we use are Delta, Gamma, Theta, and Vega. Delta tells us the rate of change and the profit and loss of our position for the next point move in our underlying. It gives us a number that tells us what that change will be. Gamma tells us how much the Delta will change after a one point and can also be beneficial in letting us know how fast things may be moving for or against us. And then, Theta which is a popular one for Sheridan mentoring traders, who want to be positive Theta, shows the effect of time in either benefiting or detracting from your option position p&l. Vega of course monitors the volatility of our position and the effects that implied volatility changes will have on our position. It also is a number that tells us how much profit or loss our position will have with a one-point move in the implied volatility of the options that we are trading, but keep in mind that there is more to the management of options than just using the Greeks. Many times I’ve seen traders who thought they could look at the Greeks alone to manage a position, which often leads to problems. Certainly we would use the Greeks, but you also want to evaluate where you’re at with your P&L and looking at a risk graph to monitor. Also, It’s very important if we are going for, a 10% profit, you wouldn’t want your position to go against you more than 6% or 7% before you did something about it.

 

We know that the Greeks are important for giving an idea of where we are at in a position and where we are going to be at in a position, but they can also be helpful if you want to adjust a position. One popular technique is to cut the Delta of your position. For instance, if your Delta was -1000, we know that if the underlying went up one point you would lose a thousand dollars, so in this instance you may want to cut that risk down by buying extra options or another adjustment to cut it perhaps to where you only lose $250 with the next point move thereby cutting your risk by 75%. In conclusion, remember to incorporate Greeks P&L and a risk graph into your position management and don’t rely on any one component to make all your trading decisions.

 

Mark Fenton

mark@sheridanmentoring.com