AAPL Trade Idea

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Oh, how I miss the expensive AAPL stock price before the split, let me name the ways: More premium for credit spreads, less commissions because I didn’t have to do as many contracts with a $500 stock price. Any positive things about the split? Yes, liquidity, which was great before the split, should be better. Why? Option bid/ask spreads will be narrower and more folk will be trading options with these cheaper stock prices. Option Volatilities are a bit higher, maybe 15%, than before the split. At-the-money Implied volatilities are around 20 now and they were around 17 before the split. This is pretty normal when stocks get less expensive after a split, moderate increases in Implied Volatility usually result.

Range Bound Trade with great risk/reward? Iron Butterfly (2 Credit Spreads). AAPL price around $91.90

Using the July 3 expiration, Buy one 95 call and sell one 92 call. In the puts, buy one 89 put and sell one 92 put. Total Credit around $210. The total risk if AAPL goes to zero or up to a billion is $90. How did we get $90 Maximum loss? If AAPL goes to zero, I did a 3 point wide put credit spread that will max out at a $300 loss. Subtracting the credit of $210, that leaves us with a potential $90 loss. Great risk/reward to bring in a potential profit of $210 with risk of only $90. I like Iron Butterflies for shorter term trades, (the July 3 expiration for this trade is about 16-17 days from expiration). Where would I worry a bit about this trade and either exit or adjust the trade? Near the expiration Breakeven points of roughly $90 on the downside and $94 on the upside. How much money would you probably put up at your Broker for this trade? Depends on your Broker, but the number should be around $90, the risk of the trade. Should I try to make the entire Credit? No, that would require AAPL being exactly at short strike of $92 in about 17 days, tough to hit the Bulls eye like that. I would shoot for maybe 25% of the credit or $50 per 1 Contract . That would give us about $50 profit on $90 of risk or capital if I did this 1 contract.

Work on the Craft and have a great day!
Dan Sheridan
dan@sheridanmentoring.com

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AAPL June Bullish Play

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This is a Bullish play in AAPL for the June expiration. It is inspired by one of the Sheridan mentoring resident AAPL experts and my friend , Leo Andrade. With AAPL at around $518 , I am going to take a bit of a bullish bias as I look out to June. The strategy is a Bullish Butterfly: Buy 1 June 530 call , Sell 2 June 540 calls, Buy 1 June 550 call for a total debit around $70. The good the bad and the ugly: if the stock goes to 540 over next 30-66 days, great! If it goes to $540 over next week, we yell ” Where’s the beef”! In bullish Butterflies, we want the stock to go near the short strike, but closer to expiration , not right away.Total risk is $70 cost, just like a long option. Directional Butterflies are very forgiving. If we go outside profit area of 530 and 550 over next 30 days, the spread doesn’t go against us nearly as bad as if we go out side our profit area of 530 and 550 near expiration. This is a cheap speculative trade of $70. If I did it 3 times, 3-6-3, it would cost 3 times $70 or $210. My plan is to make 50-60% on the cost of the trade.

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Can I trade an Iron Condor with VIX at 12?

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Answer is yes! The question posed in the title implies that you might trade Iron Condors some months and possibly not others.

Maybe when the implied Volatility is up a bit you will sell the Iron Condor, but when it’s  low you won’t. That’s what Volatility Trading is all about, selling high volatility and buying low volatility. Though in last few years, option volatilities have basically been low consistently. I teach Retail traders to trade Iron Condors in the same vehicle every month or every week, depending on your preference of Weekly versus Monthly Iron Condors.

The Iron Condor is a Probability trade and when you have probabilities in your favor , you need to play every hand and you expect to win over time. So the long winded answer is yes, we sell Iron Condors when VIX is 12, 15, 18, 24, etc. How we manage them when VIX is 12 versus 25 may be a bit different, I will explain. I will look at an example of an Iron Condor in SPX for the February Expiration( 42 days from expiration). With SPX at $1836 I am looking at the 1890-1900 Call credit spread and the 1745-1755 Put credit Spread. I am picking the strikes in this example by selling the strikes at about 16 delta, making this roughly a 1 standard deviation Iron Condor.Combining the two spreads to make an Iron Condor, the current credit for this would be around$2.60. Is this a little lower than a normal 42 day Iron Condor with the short strikes sold at about 16 delta?

On October 4 when VIX was around 17, a similar 42 day Iron Condor with shorts sold at around 16 delta, the credit was around $2.80, a bit higher than the current day $2.60 credit, but the short  strikes I would be selling on Oct 4 were 15-25 points farther out-of-the money, giving more price protection also. So on October 4, would we get more credit and room for a 42 day Iron Condor in SPX than we would today? Yes.  But does that mean we shouldn’t trade Iron Condors when Implied Volatility is low? No, I advocate trading every week or every month. I also advocate having a profit and loss plan when you start. But how might I trade an Iron Condor a bit differently when VIX is 12 and premiums are low? 3 Choices: #1 Just do the call side  #2  Do both sides, but if we start going down , and I need to adjust, would grab a long put. This would really help me survive a further Volatility expansion and big price decline.  #3  Don’t do the Iron Condor. I would choose #1 or #2, probably #2,and buying a put if we start declining. The key is to trade Iron Condors every week or month, but how we adjust or tweak them depends on the price and Volatility levels in the market.

Covered Writes for the Downside?

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    2013 has been a banner year for Covered Writes. The market is up big and this bullish strategy has been like an ATM machine. The S and P’s have climbed from the 1400 level to its current peak around 1800. That’s an increase of over 25%!

What are your expectations for the rest of 2013? How about 2014? Maybe you are still bullish, but you would like to have a little less exposure on the downside in 2014? If you did 4 covered writes per month in 2013, maybe you’d like to cut back a bit and take a little capital off the table? How can I diversify my covered write risk? One way is to have a few covered writes for the downside to diversify my exposure in my retirement portfolio. Most stocks are in the upper end of their 12-24 month price range. I will show you an example of a covered write type strategy for the downside that doesn’t involve stock. This will keep the cost and margin down significantly.

Before I give an example for the downside, let me give an example of a covered write and Long Diagonal for the upside to lay the proper foundation. Using XYZ stock at $100 as our example, a covered write example would be to buy 100 shares of stock at $100 and sell 1 January 110 call at $1.00. This would be very expensive in an IRA account with your broker because of the cost of the stock. To do this strategy using an in-the-money call instead of the stock purchase would be called a Long Diagonal, and it would reduce the margin at your Broker significantly. The Long Diagonal alternative might look like this: Buy 1 March 85 Call and Sell the same January $110 call. Because the cost of the long call would be much cheaper than the cost of the long stock, the margin on the Long Diagonal would be much cheaper than the Covered Write. The graphs would look similar.

The following example is a Put Diagonal with a covered write type graph, but on the downside:

Put Diagonal example in AMZN: $390. Amazon started the year around $250 and is currently around $10 from the highs of the year. The stock is up around 55-60% for the year. Not all stocks are up this much for the year but many are up significantly. Even if you still like AMAZON, you might not expect similar returns next year, and might even think it could pull back a bit. A Put Diagonal would fit the bill. With the stock around 389-390 level, I might buy 1 April 440 put for $62 and sell 1 January 385 put for $13. The net debit for this put Diagonal would be $49. If I did this 1 time at my broker in an IRA account, it would cost about $4900, the cost of the debit. On the downside, at expiration, I could make from around $1000 at the short strike of $385, to around $600-$800 if we go down even near the $300 level. On the upside, we have an expiration Breakeven around $401, which I would use as a trigger to either take off or adjust. One adjustment idea if we are wrong, as we approach $400 level on the upside would be to roll the short 385 puts up near the 400 strike in the same expiration month.

Conclusion: This is a timely strategy to discuss in this market environment because many people might want to lighten up a bit on their long exposure with covered writes and cash secured puts, and this is one way to do it.

Have a wonderful Day!

Dan Sheridan

Call Sheridan Options Mentoring to learn how we can help you. 800-288-9341

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Setting Your Trading Goals

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As traders many times we tend to only look to the short term and what trades we have on or are about to enter.

To be successful with any longer term goal you not only have to know where you are headed but how best to get there.

Having a plan and setting mile posts to mark progress along the way is fundamental to a successful trading business.

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Determine a Long Term Goal

First, we want to determine our long term goal. To give two trading examples perhaps you either want to generate a certain monthly income or build a certain dollar value in your account.

Whichever of these you choose it is important to set a monthly goal to track how you are doing in reaching the goal.

That way if things are getting off track you can address any problems before your get too far off your success path.

Realistic Goals

Secondly, setting realistic goals is key. Let’s say for instance that you want to generate a monthly income of $5000.

If you are trying to reach that amount using a $100k account size it will be easier than to reach it with $20k account size. A simple illustration to understand.

The lower the percentage of your return on capital you require the easier it will be to succeed. So be realistic in what you set for goals to give them a better chance of attainment.

Trading Strategies

Finally, what trading strategies and portfolio allocation of them will I use each month. With option trading you can utilize both monthly and weekly option expiration chains in your plan.

You may for instance want to do a weekly calendar or butterfly and well as a monthly calendar or butterfly and also employ iron condors, etc as part of your over all strategy.

Try to have a mixture of these strategies each month to take advantage or hedge the changing volatilities in the marketplace.

Good Risk Management

To properly understand and have good risk management as well as deployment of a plan you will find that proper education from an experienced mentor and trading education program can help reduce your learning curve and give you better accountability in your trading business.

Taking advantage of the trial and error of another experienced trader has been through helps you avoid many pitfalls traders often fall prey to.

Putting all of this together is what separates the successful trading business from the failed one.

Mark Fenton (Senior Options Mentor)

Dan’s New Class Just Started

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Dan’s newest class “How to Manage a $30,000 Portfolio” kicked off yesterday with a 2-hour session by Dan.

Dan covered the three strategies to be familiar with:

1. Monthly Calendar
2. Directional Butterfly
3. Iron Condor

For each strategy, Dan outlined what vehicles to use, trading plans, adjustments and more.

We started using a new template to track class trades that summarizes the information about the trade.  Here’s an example:

This new format tracks collects the trade information for you in one place.    As Dan makes updates to the trades, they will be immediately available on the class web page and emailed to you so you have them as soon as possible!

The class just started so there’s still time to join by clicking here.

Using Volatility to Time Trade Entry

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Pink piggy bank beside alarm clock on dollars on white backgroundFor the positive theta trader, implied volatility levels are one of the key elements to consider and watch before and after trade entry. The profitability of positive theta trades, meaning those where the passage of time and option value time decay are beneficial, is affected by time, price movement and implied volatility of the options that are part of the position. Timing trade entry to day-to-day movements in implied volatility as well as overall market volatility can enhance trade profitability.

The primary way to watch volatility of the broader market is the VIX. The VIX reflects the implied volatility of the SPX (S & P 500). Since most of the market is highly correlated to the SPX, the VIX is a useful tool to get an overall market volatility weather report. Considering VIX levels and as well as the implied volatility of the underlying you are trading is key.

Now that we have talked about what implied volatility to monitor, the question is what to do with the information and what does it mean? A trader should look to enter positive Theta, long Vega (volatility) strategies at a time when the IV of the underlying is over all in mid to lower part of the last 3 to 6 months range. Additionally, entering a long Vega trade on a day when IV has dropped even further is also helpful. The IV will usually go down a bit on a day when the underlying’s price has risen. As most of the stock market positions are long (benefit from the market going up) when the market goes up implied volatility normally goes down. And of course the opposite, when the market goes down volatility normally will rise. Therefore entering short Vega trades at a time when the IV of the underlying is in the upper part of the last 3 to 6 month range and on a day when volatility is up will enhance the strategies chances of success.

The most frequently utilized long Vega trade is the calendar or time spread. This involves the selling of an option at a strike in the near term expiration and buying of the same strike in a further out expiration. These are commonly done using both weekly and monthly options. The most frequently used short Vega trade is the iron condor. The iron condor involves the selling of a put vertical and call vertical in the same expiration period. There are many different ways to choose the strikes for both of these strategies and that will be the topic of further discussion on this blog from time to time in the future I am sure.

If you are familiar with and comfortable trading these types of trades considering daily and over all implied volatility levels is a must. Using this information effectively should increase your profitability.

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How to Manage a $30,000 Portfolio

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Wednesday Dan rolled out his new online class. How to Manage a $30,000 Portfolio.

Take advantage of our limited EARLY BIRD PRICING!!!

 

To learn more about this class, click here: http://somurl.com/30k

The class starts Wednesday, Oct 2nd, Don’t Miss out!

EARLY BIRD PRICING!!! BUY NOW

Questions? Call Johnny or Jeff at 800-288-9341

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