Entries by Mark Fenton

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

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) orgasm retarders 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. Credit and Margin 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. Add Commissions You can simply […]

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. Wait for the Initial Move 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 […]

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. Theta 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 […]

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. Calendar 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 […]