Protecting Portfolio for Downside Moves

    Sometimes in a long bull market trend as we’ve been experiencing it is easy to overlook protecting options trades and stock portfolios against downside moves. It is easy to get complacent whenever you see the market shake off any negative news and maybe only with a pause it goes back up, but eventually the market will have a correction it always has.  Of course one of the best ways to protect yourself is to have some protective measures on head of time and not beginning to scramble to protect yourself once the move is in play. In my mind one of the best ways to do this is to consider purchasing long verticals or long calls in the VIX options two to three months out in time. Considering VIX options currently in September or October or even November I think can be attractive. What I like to do is maybe wait for a day whenever the VIX pulls back a bit and then look at buying options at maybe 2 to 3 points out of the money and maybe a few more points out of the money for instance the VIX is at 11, you may want to consider buying 13 call options and also calls at maybe 17 or 18. I think that those are all attractive levels to look at to protect yourself. You will see the Vicks moves very quickly whenever the market makes down moves and often you have many chances to be profitable in these options on the market pullback, particularly a quick one. And you can do this by either purchasing long calls or long call verticals, your choice. Of course long call verticals can lower the cost of the trade but with slightly more brokerage fees.

          When you have individual strategy option plays on such as butterflies or calendars you can also consider buying an out of the money put below a position to protect yourself some if the market makes a quick pullback. Once the down move is underway look for an opportunity for a slight pause or like I said a pullback in the VIX to make your entry, you can still protect yourself even on some slight spikes. And this is just a few of the ways you can give yourself some peace of mind against the coming downtrend or a quick bearish market move. We at Sheridan Options Mentoring are prepared to help with this and further developing your options trading business.

-Mark Fenton
Senior Mentor
Mark@SheridanMentoring.com

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Dan’s New Class Just Started

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.

How to Manage a $30,000 Portfolio

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

How to Manage a $30K Portfolio - Sign Up Now

New 4-Week Class: Managing Stock and Option Trades Through the Fiscal Cliff

Dan Sheridan is teaching a new 4-week class:

Managing Stock and Option Trades through the fiscal cliff.

We know congress and the President haven’t solved this crisis yet…just kicked it down the road until the end of Feb 2013. If they can actually come up with a solution to the financial bloodshed and restore confidence to the market that the USG won’t turn into another Greece, the pent up demand will explode the market upwards.

On the other hand, if things are business-as-usual in Washington, nothing meaningful will be accomplished and our situation will continue to deteriorate. This is bearish for the markets..and could be a huge sell off.

Either way, the potential exists for BIG moves in the markets UP or DOWN.

Are you ready for it?

Join Dan in his new 4-week class as he goes over ways to tweak your stock and option trades to protect yourself from these BIG moves.

To watch the first class and sign up for class, go to

http://info.sheridanmentoring.com/classes-and-courses/fiscal-cliff-class/

And please see our options trading definition page.

Options Synthetics Quiz Answers

How did you do taking the quiz on Option Synthetics? In case you want a refresher, here’s an article I wrote about them that is a good summary: What everybody ought to know about Option Synthetics. We can use an easy equation to remember the synthetic relationships:

C = U + P

The relationships can be summarized in this short table:

1. Long Call = Long Stock + Long Put (C = U + P)
2. Short Call = Short Stock + Short Put (-C = -U – P)
3. Long Put = Long Call + Short Stock (P = C – U)
4. Short Put = Short Call + Long Stock (-P = -C + U)
5. Long Stock = Long Call + Short Put (U = C – P)
6. Short Stock = Short Call + Long Put (-U = -C + P)

Armed with this information, let’s go through the quiz:

1. How would you create a synthetic SHORT CALL?
That’s #2 on our summary: Short Stock + Short Put

2. How would you create synthetic LONG STOCK?
That’s #5 on our summary: Long Call + Short Put

3. How would you create a synthetic LONG PUT?
That’s #3 on our summary: Long Call + Short Stock

4. How would you hedge an out-of-the-money SHORT CALL with a synthetic position?
To completely hedge the position, use a synthetic LONG CALL at the same strike as your SHORT CALL.
Buy LONG STOCK and a LONG PUT at the same strike as your SHORT CALL.
You now have zero risk and are perfectly hedged.

5. If your underlying is near your upside expiration on a butterfly trade, how would you reduce your delta risk with a synthetic position?
If you are near the upside expiration of a butterfly, you have negative Deltas.
New need to crease your deltas. Positive delta synthetics are #1, #4 and #5 on our summary list above. Any of them should give you more positive delta. If you need a fine adjustment, use #1 or #4 as #5 (Long Stock) is +100 deltas, which might be too much, depending on your butterfly size.

6. How can you completely neutralize a 100/110 call credit spread with puts?
Create a box spread. The 100/110 call credit spread is -1 100C and +1 110C. If you add +1 100P and -1 110P you would have synthetic Short stock at 100 and synthetic Long stock at 110. This position has zero risk.

7. You are long a futures contract at $100. The contract is now at $125. How can you lock in the $25 profit without selling the futures contract over the weekend with a synthetic option position?
To lock in the $25 profit, you just need to add a synthetic short future with futures options:
-1 125C and +1 125P should give you a synthetic short future contract, which will neutralize your long future.

I hope you enjoyed the quiz. It’s good to know these relationships and practice from time-to-time with a quiz like this!

free resources, free options education, free options help, options education,

And please see our options trading for beginners page.

Options Synthetics Quiz

Multiple choice examination form or customer satisfaction surveyA friend was taking an exam to get Customer Portfolio Margin for his option trading account recently.  He showed me the exam and I noticed that 20% of the exam were questions about option synthetics!  If it’s that important to an option broker, it should be important to us.

My two youngest children attend the German school system.  There are no multiple-choice exams: they are all essay questions.  You have to show your work.  Let’s do the same thing.

Write down your answers for each question.  
Explain WHY the answer is what you say it is.  Don’t just say, ___ .  Show your work…you’ll learn a lot more.   This is an open book exam since I can’t watch you, but try to answer the questions without looking anything up.  You’ll get more out of it.

Here we go

1. How would you create a synthetic SHORT CALL?

2. How would you create synthetic LONG STOCK?

3. How would you create a synthetic LONG PUT?

4. How would you hedge an out-of-the-money SHORT CALL with a synthetic position?

5. If your underlying is near your upside expiration on a butterfly trade, how would you reduce your delta risk with a synthetic position?

6. How can you completely neutralize a 100/110 call credit spread with puts?

7.  You are long a futures contract at $100.  The contract is now at $125.  How can you lock in the $25 profit without selling the futures contract over the weekend with a synthetic option position?

Good luck with the quiz!  I’ll post the answers next week.

free resources, free options education, free options help, options education,

And please see our options trading for beginners page.