Entries by Mark Fenton

VXX Bearish Put Butterfly Trade

July 1, 2015 /3 Comments/in , , /by

It looks like the problems with Greece and “Grexit” may be behind us. Volatility of the market is still overall a little bit high. An interesting play here would be for a further pullback in the VIX. Already, after comments coming from Greek leaders, it appears they will be willing to except their creditors terms or most of them. With the holiday weekend coming and of course summer normally having a lower volume, volatility could see a short-term pullback. The ETF, VXX is a very liquid an easy way to play options in market volatility. The strategy I like here is the bearish put butterfly in the VXX. While a trader could structure the trade in different ways, one way would be to use the July 17th expiration for all the legs of the trade. Buy one July 21 put, sell two of the July 18 puts and buy one of the July 15 puts. Trade Profit With the VXX trading currently just above the $119 level, the trade would profit either from the VXX staying here in price or a further drop in price. The butterfly currently would cost around $1.40 per contract. This would give you a range […]

GOOGL Iron Butterfly

May 13, 2015 /4 Comments/in , , /by

Today, I am looking at an interesting trade set up in GOOGL. For over the last month, GOOGL has been trading in the 530 to 560 range. The strategy would look to take advantage of that continuation. I’m looking to enter into a GOOGL iron butterfly in May 5 expiration period that is 16 days from expiration (expiring on May 29th). GOOGL is currently trading in the 542 area. Look to sell the 540 put and buy the 520 put, and then sell the 545 call and buy the 565 call. This gives the trade a 45% probability of profit or probability that the price will stay between the breakeven of the strategy. Currently, you can put the trade on for a credit of around $11. It will be $2000 in margin if doing 1 contract and you will subtract your credit from that so the cost of the trade should be around $900-$1000. Take the trade off at a 10% profit or a 15% loss. Again, look for GOOGL to continue being range bound through the rest of the month.

Dealing with Market Volatility Spikes

May 7, 2015 /0 Comments/in , /by

One of the most daunting tasks for the option trader is dealing with a spike in market volatility. The situation is particularly difficult because of option’s leverage and risk. It is further compounded if you are also short volatility and dealing with large price movements. Often panic can set in for the new trader, as the price and volatility keep moving against a position. There are things you can do both in the short-term and longer-term to help protect your position. First, “stop the bleeding”. By that I mean buy long options or long option verticals to immediately stem the tide that is going against you. If you have a spread type trade on and the price and volatility are running hard one way against you, pick up a long option immediately to at least slow down the damage while you further analyze a more appropriate adjustment to your position. Long options and simple verticals often have less slippage and you can get a quick execution of your trade even in a market that is volatile. At this point you have at least reduced the risk on the bad side of your trade. Once you have slowed down the damage, […]

Bullish Strategy for the Silver Market

March 18, 2015 in , /by

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 […]

The Double Calendar vs. The Double Diagonal Option Strategy

March 4, 2015 in , /by

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). Benefits for Your Trade The Double Calendar trade is long Vega— meaning your […]

VIX Options Strategies

February 16, 2015 in , /by

The CBOE market volatility Index, also known as the VIX, can be a very rewarding trading vehicle. 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. Ratio Butterfly Example 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: With the VIX trading around the 15 level, you sell 4 VIX 15 Puts, buy 1 VIX 16 Put and buy 4 VIX 11 puts. Place all of these orders in the same expiration, which is approximately 20 to 40 days from expiration. 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 […]

3 Options Trading Secrets

February 11, 2015 in , /by

Today I will review three option trading secrets that everyone should know… These are the keys to your success! They may seem very basic, but are frequently overlooked, to the extent that traders miss critical information, which could cost them in their trading.     Secret #1- ALWAYS have a plan! It is very important before you place any options trade, to have a plan. The plan would include: a profit target a max loss exit target a plan for repairing the trade (if it begins to go against you) If the trade starts to go against you, one repairing technique would be to stay in the trade a little longer to see if it will work for you. Without a plan, emotion begins to take over and traders make very poor trading decisions. Fear and Greed are a traders worst enemies! Secret #2- Place the proper size trades for your account. Basically like the old phrase, “don’t put all your eggs in one basket,” try placing trades that are small. A single trade should be no more than 5 to 10% of your trading capital. Further, you might consider diversifying them a bit for volatility changes. Sometimes when traders have […]

Options Trading the Monthly Jobs Report

February 5, 2015 in , /by

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 ET and 7:30 am CT, 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 next 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. 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 to sway 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, watch for a market reversal in order to buy […]

Option Trading with the “Greeks”

February 3, 2015 in , , /by

A very popular method of managing options trades, particularly complex ones, is to use 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 one point and can also be beneficial in letting us know how fast things may be moving for or against us. Theta, which is popular in the Sheridan Community [theta positive], shows the effect of time in either benefiting or detracting from your option position Profit/Loss. Vega 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. There is more to trading and managing options than just using the Greeks. Many times I’ve seen traders who thought they could look at the Greeks alone and manage […]

Iron Condor or Iron Butterfly, which is better?

January 22, 2015 in , , , /by

Often I am asked as an option-trading mentor, “Which is better, the Iron Condor or the Iron Butterfly?” These are both 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. This is what you might call a “strangle”. The benefit to this strategy is that it is one short 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. This is a good trade for higher volatility markets and if you feel you need more room for the price to roam. Which is Better? The Iron Condor would be better than the more narrow strike Iron Butterfly. The downside of using an Iron Condor is that when it does go against you, it is more difficult to repair and/or you can lose more money because you took in less premium, by selling options that were further from the money. […]