In today’s Webinar for Ally Invest ( previously Trade King), which we do every Monday at 11 am central, the trade today was a Back spread or Back ratio trade. With SPX at $2472 , I bought 2 Sep 1 expiration 2535 calls and sold 1 Sep 1 Expiration 2510 calls for $1.80 Credit. I like these type of trades when SPX is near all time highs and VIX is 11 or under. This was a Live trade. I executed this trade by doing a credit spread and then buying the extra call. I like to keep the position deltas near zero or a little long at the onset to combat the Volatility risk of this long Vega trade on the upside. My position Greeks right now with SPX at 2473 are: Deltas -5.46 Theta .61 Vega -3. This is an OTM Call back spread that starts out short Vega but picks up quite a bit of long Vega on the upside from the extra long call. I would of rather started out position deltas near zero or a tinge long but this is OK for now. I hope to buy this spread in for a debit of around $1.00. This trade ties up about $2000 of capital in a Reg T account at most Brokerage houses. If I buy in this trade for $1.00 debit, that would be about a 4% yield. This is a 32 Day trade and I would get out of this by Aug 8 to avoid time decay risk on this trade ,especially if SPX moves up toward my long strike.
Many people like to trade the indices for their tax favored status whenever they trade options. Indices such as SPX and RUT get the 60/40 tax favored status. Also there are many traders who like to trade stocks.
What Stocks Are the Best?
Often I am asked what stocks are the best for options trading? Whenever you begin to look for a stock to trade for options strategies you need to look for a stock that is relatively peaceful, perhaps in a trend or post earnings release.
The stock needs to have good option liquidity. What is a good liquidity number?
I like to use a rule of thumb that for any strike that I’m going to use in my options trading strategy, there is 20 to 40 times the size of my position minimum in open interest in that strike. The more open interest that you have in a strike the better your fills will be as there are more people buying and selling at that level.
What to Avoid
Be careful to avoid stocks that are about to have a big product announcement, take over offers or earnings of course with your options trading unless you’re placing speculative strategies on that event. Those events can all cause larger movement in the stock price.
One last word of advice. Be careful not to be short in the money calls whenever a stock is paying a dividend. That will often be an event that will get you exercised early and you will be forced to pay the dividend.
Some good stocks for options trading that I and my mentoring students regularly employ include GOOG, AAPL, NFLX and AMZN to name a few. The best stocks to use will be the higher-priced, generally over $100 and many times many hundreds of dollars because those stocks generate larger option premiums due to their size.
These stocks can all be used for both directional and non-directional option trading strategies.
With the market at all time Highs, wise traders are becoming concerned with developing a plan for the inevitable pull back. While there is no perfect hedge or free hedge without risk, I do think there are some opportunities with VIX calls that are worth considering.
All-Time VIX Lows
With the VIX trading near all-time lows and the fact that the VIX is a “fear” based product, it is reasonable to risk buying it to hedge against what many are predicting to be a violent volatility spike. These calls of course can also be bought as a purely speculative trade.
The reason that I like to buy out right calls instead of verticals is because of the relatively inexpensive price at which they are trading .
While you should not trade any product you do not understand, and of course you have to adapt it to whatever is appropriate for your portfolio and risk tolerance, I like buying the calls 40 to 60 days to expiration for slower time decay.
The strike you choose is up to you considering cost and perhaps your opinion on where and when the VIX is headed. I like the 12 calls for SEP 20th expiration myself. If you choose to, you can buy whatever quantity seems appropriate.
You can sell half of them on a quick spike in volatility to maybe around the 12 the 14 level and maybe save some for later for an even larger move or however you want to capitalize on them.
With the VIX trading just under 10 the September 12 calls currently have an ask of $1.65. Take a look and see if this is right for your outlook and portfolio.