#1 use stocks you would buy 100 shares of in your retirement account
#2 use very liquid stocks near $100 or higher: Examples would be AAPL, NFLX, AMZN, GOOGL, PNRA, XOM, DIS, IBM, TSLA, LNKD, PCLN, etc.
#3 If I did 4 stock Iron Condors every month, I would trade 2 with implied volatility levels under 25 and 2 with implied volatility levels over 25.
#4 Diversify Stock iron Condors into at least 2 different industries
With SPX near all time highs at $2116 and VIX very low at 12.85, this is a trade I am considering in SPX. Looking at June Expiration.
Buy 1 2180 call Sell 4 2190 Calls and Buy 3 2200 Calls. Looking to do for total credit of $190 and margin or risk of $1801.
Expiration Breakeven on the upside is around $2194, haven’t been there yet! No downside risk and an expiration yield of around 11% as long as we are 2190 or lower at expiration.
Covered Writers are nervous! SPX is $2100 today, 20 points off the all time highs. VIX is around 14, in the lower end of the range. With prices in the upper end of the range and VIX levels in the lower end of the range, I would want more downside protection for my covered writes. Solution? Sell Calls at-the-money or 5% in-the-money to get more downside protection. In many cases, going at-the-money or In-the-money for your short strike with Covered Writes, you can get between 4-7% more downside protection than traditional covered writes which sell out-of-the-money options.
Doesn’t mean much yet! What has happened is we have had 2-3 days in a row where SPX has backed off the highs of $2120 a bit. Too get the VIX cranking up near 18, we would need 2-3 more days down with a little more speed. What do I mean? We need 2-3 days down where SPX moves 1.25% or more, over 25 points in a day. That would stir up VIX and get it moving toward 16-18 level. With Volatility levels still relatively cheap, if I needed to adjust a short Vega trade like an Iron Butterfly, Put Credit Spread, or Iron Condor, I would adjust my position deltas with a long put in today’s environment.
I apologize, used wrong price information on AAPL. Was looking at AAPL in our back testing software and had the wrong date. What to do today. AAPL is backing off again today and sits around the $126 level. Shock? No, the stock is still up 15% over the first 4 months of the year! I still like the stock and am comfortable in this 124-126 area establishing a slightly bullish limited risk strategy like an Bullish Call Butterfly. Focusing on the calls in the May 29 expiration series. I’m considering this Bullish Call Butterfly. Buy one 126 strike, Sell two 128 strike, Buy one 130 strike. Total debit is $20. If I do the trade 1-2-1, total debit or cost or risk is $20. If I do the trade 10-20-10, the total debit, cost, or risk is $200.
TWTR is currently at $39.40, down from 53 level about 3 weeks ago. Low in the stock the last 6 months is around $35, this level was reached in early December. That’s a 26% drop from the $53 level! I am looking at a cheap play for a slight up move. Looking at May 29 expiration Calls, about 30 days from expiration. Buy one 40 call Sell two 42 strike calls and Buy one 44 strike call. Total Debit or cost of $25 per spread. If I do the trade 1-2-1, the cost is $25. If I do the spread in a quantity of 10-20-10, the total cost would be $250. This is a bullish butterfly and costs me very little to speculate on a neutral to slightly up move in TWTR over next 2-3 weeks. Most I would pay for this Butterfly today would be about $30.
Silver is trading near one-year lows. One interesting way to play it would be for an upside movement using SLV, an ETF (Exchange Traded Fund) for silver. This is a very liquid ETF and the fills are usually good.
If you are bullish in the near-term, an option a strategy you could a strategy called the “call butterfly.” An example of this strategy would be to buy one April 13 call, sell two April 16 calls, and buy one April 19 call. Currently, you could get this trade filled for around $1.70 (of course, the price will fluctuate). If silver holds at around $15 and even goes up toward 16 by April expiration, you can have a very nice return.
A simple risk management plan would be remove the trade if it goes down by 10% or take profits on the p/l if it goes up 10% (the percentages are in relation to the butterfly’s total cost). For all three of this butterfly’s strikes, the open interest is high. Of course, greater open interest for a particular strike usually equals better fills because there are more people buying and selling at that point. This is just one strategy to keep in mind if you want to play SLV (with a slightly positive bias). Keep in mind that silver is driven by both its inherent metal value as well as its industrial uses.
The Double Calendar Spread and the Double Diagonal Spread are two popular option trading strategies with the more advanced option trader. These two trades, while similar, have distinct differences. Let’s define these strategies and see how each can be used to your advantage.
The Double Calendar Spread is an offshoot of the very popular calendar (time) spread. In a normal calendar spread you sell and buy a call with the same strike price, but the call you buy will have a later expiration date than the call you sell.
With a Double Calendar Spread you buy a calendar with a strike price below the market and another with a strike price above where the market is trading.
By getting above and below you widen your trade’s risk range by making more room for the price to move and still keep the trade profitable. For example, if the SPX is trading at 2100 you might buy the 2070 put calendar and the 2130 call calendar.
Of course, this is all done in the same short month and the same long months (for instance, selling March and buying April).
The Double Calendar trade is long Vega— meaning your trade will benefit if the net Vega of the options in your position rises and your trade will suffer if the Vega falls. You can widen or narrow the width between your two calendars based on what you think price movement may be.
The Double Calendar trade is best utilized whenever the IV of the underlying is in the lower range of the last 3 to 6 months.
The Double Diagonal also involves selling options in a near expiration and then buying options in a further out expiration. With the Double Diagonal though you buy options that are higher on the call side in the further out expiration than your near option strike and lower on the put side then your near option strike option.
Thus the strikes are diagonal to one another on each side.
The Double Diagonal trade is generally set up wider than the strikes will be in a Double Calendar. It will still usually be long Vega as a strategy though. Of note with a Double Diagonal: the closer your long options are to your short options in strike price the longer the Vega of the position will be.
With the trade being diagonal on each side though you will be less long Vega then you would be with a Double Calendar.
The Double Diagonal works best in periods of lower volatility but it is less susceptible to volatility moves than the Double Calendar.
The current volatility environment of the market makes both of these trades attractive. If you are more comfortable with being longer Vega, utilize the Double Calendar. If you would like a little more width to your trade and room for the price to be able to move, then the Double Diagonal may be your better choice.
You can manipulate the width of both of these trades to suit your price opinions.
You can use option trades on the VIX to take advantage of the different moves and volatility in the broader markets. The VIX can mirror the same volatility of the S&P 500. Playing this index long or short can take advantage of these moves without as much risk as in the outright buying or selling of the VIX futures.
One of my favorite strategies in the VIX, is the Ratio Butterfly. This trade is entered when I feel the VIX is much more likely to move higher than lower. An example of the structure of this Butterfly can be as follows:
I have had consistent profits with this strategy whenever the VIX begins to trade around 15 or even lower. In the 12 to 14 area, you could also sell your Butterfly around the 14 strike. This trade is put on as a net credit and can be relatively inexpensive to adjust, based on the size of your risk tolerance. You could place the trade small and then risk 50% to 100% of the cost of the trade. I often have this trade on near the options expiration. This trade is positive theta and the closer to expiration, the more time premium profit I will accumulate.
The trader can also speculate on the VIX, by simply buying long Calls or long Puts. They are often not very expensive. You could also buy long Call Verticals and long Put Verticals to decrease your capital outlay and your amount of risk. I have not utilized Time Spread strategies on the VIX and am not aware the risk or rewards of that type of set up.
One other thing I would caution against, is being short on the upside of the VIX. VIX upward moves are often quicker and much more dramatic than VIX moves, where volatility is lowering. If you decide to do this, be sure to have longs backing up any shorts and do not enter naked short Calls. Be sure you understand VIX futures and VIX options well before you place any live trades.
-Mark Fenton, Senior Options Mentor
You can use option trades on the VIX to take advantage of the different moves and volatility in the broader markets. The VIX can mirror the same volatility of the S&P 500. Playing this index long or short can take advantage of these moves without as much risk as in the outright buying or selling of the VIX futures.
One of my favorite strategies in the VIX, is the Ratio Butterfly.
This trade is entered when I feel the VIX is much more likely to move higher than lower. An example of the structure of this Butterfly can be as follows:
I have had consistent profits with this strategy whenever the VIX begins to trade around 15 or even lower. In the 12 to 14 area, you could also sell your Butterfly around the 14 strike.
This trade is put on as a net credit and can be relatively inexpensive to adjust, based on the size of your risk tolerance. You could place the trade small and then risk 50% to 100% of the cost of the trade.
I often have this trade on near the options expiration. This trade is positive theta and the closer to expiration, the more time premium profit I will accumulate.
The trader can also speculate on the VIX, by simply buying long Calls or long Puts. They are often not very expensive. You could also buy long Call Verticals and long Put Verticals to decrease your capital outlay and your amount of risk.
I have not utilized Time Spread strategies on the VIX and am not aware the risk or rewards of that type of set up.
One other thing I would caution against, is being short on the upside of the VIX. VIX upward moves are often quicker and much more dramatic than VIX moves, where volatility is lowering.
If you decide to do this, be sure to have longs backing up any shorts and do not enter naked short Calls. Be sure you understand VIX futures and VIX options well before you place any live trades.
-Mark Fenton, Senior Options Mentor