I am often asked as an option trading mentor, which is better, the iron condor or the iron butterfly. Both are short Vega trades meaning that they benefit from volatility lowering. However the structure is different and the pros and cons of each are different. The iron condor, is perhaps the most popular option spread trade. The structure is selling a call vertical and a put vertical, out of the money, usually by several strikes. The benefit to the strategy is that it is short one volatility and also it has a wider range for the price to move around, up or down, before you get into any trouble with the trade. It is a good trade in higher volatility markets because you paid more premium for what you are selling. However, there is no “free lunch” ,and the increased premium comes with the increased risk of large price movements in a volatile market. Think of it as selling car insurance to a 16 year old.The downside of using an iron condor is that when it goes against you, it is more difficult to repair, and you can lose more money because you took in less premium by selling […]
About Mark Fenton
As Senior Mentor, Mark mentors individuals on a one-on-one basis, teaches group classes and develops trading plans. He has been trading stocks, futures, commodities and options for over 18 years as a retail trader. Mark also formerly held series 7 and series 66 licenses. Mark is especially strong at developing traders that know how to stick to a plan and control the emotions and impulses that can hinder trading.
Entries by Mark Fenton
With the slight volatility spike today an interesting trade to enter would be an at the money asymmetrical fly. The trade would benefit from a drop in volatility once entered and also from rapid time decay. Looking at a possible trade entry as below: SPX November 24th expiration Buy 1 2535 put Sell 2 2575 puts Buy 1 2600 put Look to enter around $5.50 to $5.60 debit per spread Cost of trade is debit plus margin. Close at 10% profit or 10% loss based on the cost of the trade. Mark Fenton firstname.lastname@example.org
A few years ago I wrote an article for the Modern Trader Magazine on “The Time Bomb Butterfly“. I reference it again because I think it is a good trade for those looking for an interesting spec trade. You can check out the article below, and hopefully the trade can be of help to you as you try to take advantage of earnings opportunities. http://www.futuresmag.com/2016/02/22/time-bomb-butterfly Mark Fenton email@example.com
NFLX reports their quarterly earnings on Monday Oct 16th after the market closes. One interesting speculative play is to add a small out of the money call fly that can work if NFLX has an up move after the earnings release. Currently it looks like the expected move by the market-makers is about $16. With NFLX trading around $196, I would enter the following trade: OCT 20th Expiration Buy 1 200 call Sell 2 210 calls Buy 1 220 call Enter as a butterfly spread for around $1.50 per spread The trade is profitable on expiration from about $201.50 to $218.50. Close at whatever profit you can get on Tuesday Oct 17th. Mark Fenton firstname.lastname@example.org
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. Uncertain Direction Currently, there is a lot of uncertainty among traders as to which direction the market will head. 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 Oct 6th expiration 31 days from now, that is centered at 2420. Fly 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 Oct 6th 2440 put Sell 2 Oct 6th 2420 puts Buy 1 Oct 6th 2400 put This butterfly is currently trading at approximately 1.00 per contract. costing $100 for each 1/2/1 fly structure that is entered plus commission. If this butterfly at expiration is trading near 2420 this trade would net more than a 10 fold profit. It also has profitability from around 2440 to 2400. If you have a bearish sentiment over the next month for […]
With SPX near key support levels a bearish butterfly looks like an interesting speculative idea. The fly, being short, can increase the speed at which it can work for us if we are correct on the downward direction of SPX. I plan to take it off when I am up or down 50% on p/l based on the trade cost. With SPX trading around 2425: Buy 2 Aug 25 exp. 2420 puts Sell 4 Aug 25 exp. 2400 puts Buy 2 Aug 25 exp. 2380 puts Debit around 2.60 Max risk is the debit of the trade Mark Fenton email@example.com
Recently I blogged about buying VIX calls when the levels were near all time lows. I am looking again for an entry point to go long VIX. Looking to buy VIX calls if VIX level drops below 12. Currently with the VIX trading at approximately 12.5 the Oct 18th expiration 14 calls are trading at 2.00. This means on expiration day (if you purchased that call now) if VIX was above 16 you would be profitable. VIX Spiking If we could enter a little cheaper when the VIX was below 12 that would be even better. The VIX has been spiking to the 14/15 area about every 4 to 6 weeks over the past several months. We are now heading into September and October which are traditionally volatile months so I expect the same should be happening again. If you purchase the call(s) look to sell them on a VIX price spike, which can be short lived, so you have to monitor this trade closely. I have no set profit target, just looking to let the calls be in place to sell at a nice profit when volatility rises. Mark Fenton firstname.lastname@example.org
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? Strategy 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 […]
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. Strike 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 […]
With the volatility once again in a lower range I like the success possibilities of an SPX weekly calendar today. I am looking at the trade below: Sell 1 SPX June 2nd 2395 put Buy 1 SPX Jun 16 2395 put Debit for spread is approx. $9.00 with SPX trading at 2395 Total cost per spread at this level would be $900 plus commissions. Looking to close trade at a 10% gain or 10% loss. If you get filled at $9.00 immediately place good to cancel order to sell at a profit at $10.00. Close trade at a loss if you are down $100 on the spread.
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The information contained on this website is for educational purposes only: no representation is being made that the use of any trading strategy or trading methodology will generate guaranteed profits. Past performance is not necessarily indicative of future results. There is substantial risk of loss associated with trading options. Only risk capital should be used to trade. Trading options is not suitable for everyone. You must be aware of the risks and be willing to accept them in order to invest in these markets. Please review the document- http://somurl.com/KnowYourRisk before trading options.