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350f5faf9155-0 | he can have it for the last 12. “Deal,” he says. Five hours go by, and he comes back to your seat, ready to switch. He hands you $1,200.00. “Wait a second,” you say. “I thought we agreed on $1,500.00.” He gives you a funny look and says, “Well, yeah, that was when there was a 17-hour flight in front of us; now it’s onl... | Page 1126 |
b772cd7b9da1-0 | running out.” You tell him you want to think about it. Disgruntled, he walks off. You unwittingly pass out in your seat. Later, after 9 hours of glorious sleep, you wake up. “Hey buddy,” he says, looking as if he’s been stuck in coach for 14 hours, “Are you ready to switch seats yet?” Sure, you say. He hands over $300.... | Page 1127 |
dff5c54751e2-0 | you slept for 9 hours, and there are only 3 hours left in the flight. At this point, he might as well sit in coach, but he’s still willing to give you $300 to have possession of your seat for the last few hours. You think about it, realize that in 3 hours your seat will be worthless (this guy isn’t going to pay anythin... | Page 1128 |
d30ad0f472bb-0 | essentially premium decay in action on an “at-the-money” call. The closer you get to the end of the flight, the lower the price you could get for your first-class seat. In my first options trade, I bought call options on Intel (INTC), and I hadn’t the foggiest notion what they were or what that meant. Later I found out... | Page 1129 |
bf0633e678da-0 | the underlying stock moves higher, and a put option increases in value if the underlying stock moves lower. So buying a call is like going long, and buying a put is like going short. And one option represents 100 shares of stock. So when you see a stock option priced at $4.30, that is per share of stock. Since each opt... | Page 1130 |
66f85bd80a8c-0 | costs $430.00. Easy enough? Then I learned about strike prices, and how options were either in the money, at the money, or out of the money. Great. So if AAPL (Apple) is trading at $399.26 per share, and I’m looking at call options, then the $390 call is in the money (trading below the current stock price, also called ... | Page 1131 |
9db92f91df8d-0 | the money (trading at or near the current price, also called ATM for short), and the $410 call is out of the money (trading above the current price, also called OTM for short). The $390 call is “in the money” because it gives the option buyer the right to buy the stock for $390. Simple math shows that if the stock is t... | Page 1132 |
a2002743d069-0 | the $390 call option is worth $9.26. It works like this. If that option gives me the right to buy the stock at $390.00, and the stock is trading at $399.26, then I can immediately go out into the open market and sell the stock I acquired for $390.00 for $399.26, thus making a $9.26 profit. This portion of the option pr... | Page 1133 |
fc7807d30c7b-0 | simple, then wouldn’t both the $400 and the $410 strike be worth nothing, since the stock is actually trading at $399.26, below both of those levels? | Page 1134 |
4a9bd3d6aac2-0 | Figure 5.1 And that is where premium comes in. Figure 5.1 shows the actual prices of these options. These options have 24 days of life left, at which point they will expire. When an option expires, it is literally worth only the real value that a person would get if he exchanged it for stock. That is, if it was expir... | Page 1136 |
5bc5aeb7b1a9-0 | $400.00 a share, then any call options above that price would be worth zero (expire worthless, since they have no intrinsic value), and any call options below that price would be worth the price of the actual stock less the strike price. So, in this case, the $390 calls would be worth $10 (if AAPL closed at exactly $40... | Page 1137 |
71370e83771f-0 | AAPL at a price of $410.00, would be worth zero. After all, you can go out in the open market and get it for $400.00, so why would you pay anybody for the “right” to buy it at $410.00? And yet when we look at the prices of these options 24 days out from expiration, we notice a very strange thing. The $390.00 calls are ... | Page 1138 |
7b4af78d7fb5-0 | value of about $10.00; they are trading at a whopping $22.75, well above the $10.00 they would be worth if this were expiration day. The $410 calls, which would be worth zero in this example if it were the close of options expiration day, are trading for $12.30 ($1,230.00 per option contract). The $400 calls, which wou... | Page 1139 |
858b7ead23cc-0 | expiration day, are trading at $17.00 ($1,700.00 per options contract). What gives? Just as with that first-class seat, there are people out there who will pay a premium to buy the option, even if it’s trading out of the money. Why? The stock could have a huge rally, and the option could be worth a lot more in the futu... | Page 1140 |
96ecaa0b23a9-0 | the further out the expiration date (that is, the longer the flight), the more premium they are willing to pay. Why not just buy the stock? Because they don’t want to shell out a lot of money to buy the actual stock. Thus they are willing to pay a premium to own the right to buy the stock and to take advantage of the l... | Page 1141 |
c96695781643-0 | while the $390.00 option has some real value priced in, the $400.00 and $410.00 options are pure premium. The in- the-money call is a mixture of intrinsic value and premium. On the flip side, someone who owns the stock has to make a similar decision. Does she sell an option against it and collect the premium? She wants... | Page 1142 |
e955e74af5f9-0 | the stock, so her goal is to sell an option against it that will expire worthless. That is, she hopes that the stock price doesn’t close above the strike price by the expiration date. As a buyer of an option, just like the guy who wanted to buy the right to sit in your first-class seat, you are buying with the expectat... | Page 1143 |
f00954f6d976-0 | of AAPL at $400, you could pay $1,700.00 to buy a $400.00 call option. With each passing day, the premium on that option erodes a little bit. And the closer that option gets to expiration (that is, the closer the plane gets to the airport), the faster that premium starts to lose value. Your bet in this case is that AAP... | Page 1144 |
1886aa2f09df-0 | does, at expiration, your $400 option will be trading at $50.00, and your profit on the trade will be $3,300.00 (the $5,000.00 sale price less the $1,700.00 purchase price). In other words, you were able to participate in AAPL’s rally without having to shell out all the money required to buy the stock. In fact, in trad... | Page 1145 |
5a17954cbda6-0 | On the flip side, the woman who sold you the option does not want to see AAPL go to $450. She is hoping that the stock stays near $400 and that the option you bought for $1,700.00 expires worthless. Where did your $1,700.00 go? To the person who sold you the option. That goes right into her pocket. It’s like the AAPL s... | Page 1146 |
99d759505099-0 | just charged you $1.700.00 for a month’s rent, thank you very much. Everything that we’ve just talked about has focused on the “call” side of the options world, but the same story holds true for the put side. In Figure 5.1 , where AAPL is trading at $399.26, we can see that the out-of-the-money put at $390.00 is tradin... | Page 1147 |
86368f56839d-0 | at $400.00 is trading at $16.95, and the in-the- money” put at $410.00 is trading at $22.25. Why Wouldn’t I Buy These Particular Options with My Mother-in-Law’s Trading Account? Okay, up to this point, I’ve been talking about what options are and how they work. Now let’s talk about | Page 1148 |
c61ddbb99c62-0 | the main reason that people lose money trading options. It’s very simple: it’s because they focus mainly on buying cheap out-of-the-money call options. In Figure 5.1 , the $410.00 AAPL call options are trading at $12.30. This is 100 percent premium. There is zero intrinsic value here. In this case, the trader looked a... | Page 1149 |
5924093c5797-0 | is currently at $399.26. Let’s say it had a nice steady move into expiration, rallying just over $10.00 per share, and closed at $409.75. A trader bought the $410.00 call option because he thought AAPL would go up. He was right. It did. How much money is his option worth at expiration? A big goose egg. He lost every di... | Page 1150 |
759d86046872-0 | to make a profit on this trade. At $422.30, the $410.00 call option at expiration is worth $12.30—the exact price that he paid for the option. Although he didn’t lose money on the trade, he didn’t make anything either. In other words, when buying out-of-the-money call options, not only does a trader have to be right, ... | Page 1151 |
9fb248dec3bc-0 | do. It has to be explosive. In this same scenario, had the trader bought the “expensive” $390.00 call option at $22.75, a move to $422.30 would price the call, at expiration, at $32.30, resulting in a profit of $9.55 ($955.00) on the trade. Would you rather buy an option for $2,275 and make $955 or buy an option for $1... | Page 1152 |
6ceb25e4a44a-0 | Buying an option “just because it’s cheap” is a ridiculous trading strategy. In the options world, a fairly common scenario is (1) retail traders buy out-of-the-money calls (without paying attention to fair value or implied volatility; more on that later), and (2) professional traders gladly sell them these calls all d... | Page 1153 |
078404385b49-0 | “Because we’ve got more to sell you.” I’ve known guys who have traded options on the floor for more than 20 years. They have never bought an out-of-the-money call. Not one. To them, there could be nothing worse on this planet than buying an out-of-the-money call. That’s not to say that out- of-the-money options don’t h... | Page 1154 |
5d0b1dbb5683-0 | not, there are scenarios where it can make sense to buy them, but these are the exception rather than the rule. And this brings me to my first options strategy. Directional Plays: Why Is Delta 0.70 or Better Superior? Buying a cheap out-of-the- money option is enticing because if it works out, the | Page 1155 |
06b626f87aba-0 | trade could win in a big way. Everyone wants to be able to buy an option for $1.00 and sell it for $15.00. That’s the “quit your job and travel the world” trade if it’s done right. Yes, this could happen with an out-of-the-money option, just like you could get a royal flush when you’re playing poker. The odds aren’t... | Page 1156 |
8f26efe0f48a-0 | interested in increasing the odds for creating a consistent income stream than crossing my fingers and swinging for the fence. Figure 5.2 lays out an option diagram with “the Greeks,” known as delta, gamma, theta, and vega. The good news is that, for what I like to do, a trader doesn’t need to know too much about thes... | Page 1157 |
35e7f11f0b10-0 | talk about here is delta. This is important. Delta simply tells us how far the option price will move in relation to each $1.00 move in the underlying stock. A delta of 1.00 means that the option price will move right along with the stock, dollar for dollar. If the stock moves up $1.00, then the option will move up $1.... | Page 1158 |
1c260a12cf62-0 | option will move up only 10 cents. The deeper in the money the call option is, the higher the delta. The further out of the money it is, the lower the delta. For purely directional plays, I simply view the option as a cheaper way to participate in the price movement of the underlying stock. One of the plays I’ll talk a... | Page 1159 |
7c6b5ef153a3-0 | (the squeeze play) is a favorite of mine for option plays. This setup indicates a high probability that the stock is ready to make a larger-than-average move. In this case, I simply want to participate in the movement of the stock, without having to fork over all the money required to buy the actual stock. For these tr... | Page 1160 |
f128016d9dd8-0 | higher. This means that as the stock price moves in my favor, the option will move right along with it at the rate of 70 cents for every dollar the stock moves. As a bonus, as the stock moves my way, placing my option even deeper in the money, the delta also increases. For the first 2 points of a move, my option might ... | Page 1161 |
f1cef2b559c1-0 | $1.60, as the delta increases from 0.70 to 0.80. A far-out- of-the-money option, on the other hand, will stay at a low delta for quite some time. Buying far-out-of-the-money options is a lose/lose, unless you have some inside information, such as Bear Stearns being about to collapse. Someone actually bought $1.4 millio... | Page 1162 |
ac45fc067492-0 | Stearns went bankrupt. He knew what was coming down the pipeline, and he made a fortune. | Page 1163 |
b52028b78849-0 | Figure 5.2 In Figure 5.2 , on the left- hand side, we can see the corresponding delta values for the AAPL call option strike prices from $375.00 up to $430.00. At point 1, we see the strike prices with a delta of 0.70 or higher (the $395.00 call has a delta of 0.69, which is close enough). These are for the recently | Page 1165 |
59487456c5db-0 | introduced September weekly option series, which have 2 days left till expiration. As a side note, up until recently, all stock options traded monthly, expiring the third Friday of every month. Now we also have “weekly options” on some of the bigger names, like AAPL and AMZN. These options have a very high premium beca... | Page 1166 |
c3146d2f9901-0 | clamoring to buy these “cheap” options. I would never buy one, ever, ever, ever. But I’m happy to sell them to anyone who thinks she’s getting a bargain. A glance at point 4 shows the deltas for the monthly options, which expire in 23 days. Note that the delta levels are not the same for each strike price. The further ... | Page 1167 |
60869de1163c-0 | in the money a trader needs to go in order to achieve a delta of 0.70. At point 3, we see the delta levels for the out-of-the-money options, which fall precipitously the further away from the current price we move. That is, a trader could buy the $430.00 call option for a nickel, and if AAPL moved $10.00 a share the ne... | Page 1168 |
9030992e4d08-0 | just in reverse. The delta levels we want for puts are – 0.70 or greater, as highlighted at point 5. | Page 1169 |
a6857e01ec00-0 | Figure 5.3 I’m the first to admit that purely directional plays aren’t sexy. They are just simple, and they work. Let’s take a look at Figure 5.3 , which details one of my favorite “short-term swing trading strategies” in options. By short-term, I mean a trade that I’m generally in for one to three days. For these typ... | Page 1171 |
dc29d10308ef-0 | charts, and one of my favorite setups on the hourly charts is a “squeeze.” 1. At point 1, a squeeze sets up on the hourly chart of GS (Goldman Sachs), as indicated by the darker-colored dots within the square. When the dots turn back to lighter- colored, the trade is | Page 1172 |
1b3bb4a836ab-0 | a buy if the histogram is above zero and a sell (short) if the histogram is below zero (note: there is more about the squeeze in a later chapter). In this case, it’s a buy. 2. At point 2, GS is trading near $159.00. I want to | Page 1173 |
90adcdb725a9-0 | buy calls, as the squeeze has generated a buy signal. Of course, I want to go for a delta 0.70 call, which in this case turns out to be the 155 strike price. I buy over the course of the next hour at prices of $7.25, $7.35, and $7.40. I’m willing to risk a | Page 1174 |
7d44534ff458-0 | move of $2.00 against me on the underlying stock, at which point I would close out the options at their current price. With a delta of 0.70, I already know that means that the option would drop about $1.40 if the stock dropped $2.00. | Page 1175 |
b552a84aae9f-0 | Figure 5.4 3. At point 3, the squeeze indicator has issued a sell signal, as the move has started to lose momentum. This is indicated by the darker-colored histogram. As a result, I start closing out this position at point 4. | Page 1177 |
74e65b88d32f-0 | 4. For this particular trade, as seen in Figure 5.4 , I scaled into 300 contracts at prices of $7.25, $7.35, and $7.40. I then scaled out of these 300 contracts at prices of $9.05 and $9.25, for an average profit of $1.85 (+$185.00) per contract. This trade was done | Page 1178 |
391e4da07055-0 | during one of our quarterly live trading mentorships, so I was able to take screen shots of it as the trade unfolded. The main idea here is that when I’m looking for a stock to move a few dollars, I want my option to move up as much in lockstep with that price movement as possible. With a delta of 0.70, a $2.60 | Page 1179 |
aabcca9ea71b-0 | move in GS resulted in a $1.85 move in the price of the option. I’m more than happy to buy an option for $7.30 on Thursday (GS October 155 call) and sell it for $9.20 on Friday. There is no need to hold it to expiration to “see what happens” or hope that the option will quadruple in value. I buy based on an underlying ... | Page 1180 |
d9964436a5f8-0 | option based on an underlying signal in the stock. And that’s the last point on this trade. Most of the literature on options talks about buying or selling an option and “holding it until expiration.” I rarely do that. As traders, it is perfectly okay to make a living practicing what I call BASAARP: buying and | Page 1181 |
06bad31a2de6-0 | selling at a reasonable price. For more advanced options traders, there are of course a couple of ways to play this GS trading signal. The signal gives a high probability that the “stock will move up a point or two.” Traders who are more familiar with option strategies could also initiate a variety of spreads on this p... | Page 1182 |
91a035acdb54-0 | talk about shortly. This list could go on and on, but hopefully you get the idea. The key is first having a clean signal on the underlying stock, and then stepping in with option strategies in an attempt to leverage that move. For the most part, I’m fine with a pure directional move, where I just buy a delta 0.70 optio... | Page 1183 |
b3cbe02d3e71-0 | based on the underlying movement of the stock. It’s simple and clean. The Importance of Implied Volatility Crush, or “Look, Ma, They’re Panicking!” The biggest mistake newer option traders make is not understanding the role of implied volatility (IV) and how it affects the price of an option. Although a portion of | Page 1184 |
6d8ad6e4b936-0 | the option price is calculated based on the underlying stock, another significant portion of the price is based on its implied volatility. Have you ever bought a call option on AAPL the day before earnings, watched AAPL trade $20.00 higher overnight, and then been unable to sleep because you were mentally counting all ... | Page 1185 |
6b0f9e4d6d5f-0 | next day, you looked on in horror as your option actually opened lower in price than where you bought it, and you ended up losing money on the trade instead? WTF? Welcome to the world of implied volatility. In this case, the market makers know that the earnings report is going to be a high-volatility event, so they p... | Page 1186 |
0f9afdc9a696-0 | higher to account for this anticipated volatility. In other words, they are pricing in the expected stock movement. If a trader bought AAPL calls the day before earnings, then the earnings report came and went, and AAPL opened the next day at about the same price where it had closed, the options price would actually op... | Page 1187 |
93d96a0a2294-0 | reason for this is that the event that caused the price gouge has now disappeared. And once that happens, the options price gets crushed. Hence the term IV crush . Implied volatility increases with panic, uncertainty, or a looming big event. Implied volatility decreases right after those events, and also remains low w... | Page 1188 |
9075beb7388e-0 | horizon to be worried about. For example, implied volatility on AAPL options is currently around 35 percent (this is a number that is available on most option trading platforms). Right before earnings, this can jump to 100 percent, which essentially triples the premium portion of the options price. In general, a trader... | Page 1189 |
f3449b1cf645-0 | is low. If implied volatility gets too high, it’s really a losing proposition to buy the option, though it does become attractive to sell (more on that in a bit). Just how important is implied volatility? Here is a story courtesy of Jeff Roth, from our office. During the 1987 crash, when the stock market dropped 20 per... | Page 1190 |
ed7f5d2799ed-0 | dropping more than 2,300.00 points in one day in 2011, a total and utter panic), some of the floor traders who owned call options on the market actually made money. Uh, say that again? Aren’t calls supposed to make money only when the markets go up? Yes, but if the implied volatility explodes, it increases the price of... | Page 1191 |
2dfc468b3f9b-0 | unprecedented level … to the point that even the call options, the very options that should have collapsed in value, made money. Here is one way a trader can utilize this knowledge to her advantage. Figure 5.5 shows an hourly chart of GS (Goldman Sachs). On August 18, 2011, the stock gapped down more than $3.00 per sh... | Page 1192 |
acaad7ba52ac-0 | a situation where some panic ensues at the open. People who own GS panic to buy puts to protect themselves, and the gap itself creates uncertainty in the market. There is a window of about 5 to 10 minutes at the open when the put option prices are artificially high because of all this—in other words, the implied volati... | Page 1193 |
1df86e343d0d-0 | option expands accordingly. | Page 1194 |
b02028e09776-0 | Figure 5.5 The thing about gap downs is that most of the news is already in the price once the stock opens. After the gap down and the initial flurry of activity, a stock will often spend the rest of the day trading in a choppy, quiet range. As things quiet down, the implied volatility drops … and so does the | Page 1196 |
786bc6992b4b-0 | price of the options. This is called an implied volatility (IV) crush. And there is a way to take advantage of this. In this particular trade, we aren’t looking to buy puts; we are looking to sell them to someone who is panicking. Since this person is panicking, he will pay up to buy the puts. We will gladly sell those... | Page 1197 |
f49938ca4388-0 | then buy them back when the market quiets down. The trade goes like this: 1. About half an hour before the cash open at 9:30 p.m. eastern, I scan for stocks that are gapping down of their own accord. This is mostly due to a news event specific to that stock. In Figure 5.5 , | Page 1198 |
f7dd4f4d6040-0 | we can see at point 1 that we have a nice gap down in GS from the previous day’s close. 2. Within a few minutes after the open, I sell puts that are one strike out of the money (remember, we want to buy in-the-money | Page 1199 |
7711e6b2a50b-0 | options but sell out- of-the-money options). In this case, GS opened at $114.07 and quickly traded lower. The first out-of-the- money puts are the $110.00 strike, and I sell these at current market prices at point 2. 3. The goal with this | Page 1200 |
c7d36fdd9cbb-0 | trade is to then close it out that day. As we near the close at point 3, GS rallies back toward the $114.00 level. At this point, the uncertainty is no longer there, and the implied volatility gets “crushed” back to what it had been the day before. The option that I sold for | Page 1201 |
cc6840b5f952-0 | $1.20 drops back down to $0.60 by the close, even though the stock hasn’t really moved since the open. 4. For stop losses, I’m looking at a 1:1 risk/reward ratio. That is, if I’m looking to make $1.00, then I am willing to risk | Page 1202 |
904711e231fe-0 | $1.00. It’s important to figure out a stop, because there will be instances where the stock could just keep falling. Selling a naked option is risky in this regard. In this case, if GS kept selling off and ended up down $10.00, the option I sold for $1.50 could be trading for $5.00 | Page 1203 |
2b06849fe0cc-0 | or even higher. (Of course, I could also buy the next strike out-of-the-money put as protection against this situation.) As a seller in this case, any price over $1.50 represents a loss, and it’s wise not to let that loss get carried away. This is why selling naked | Page 1204 |
db746ffea26a-0 | calls and holding them overnight is inherently dangerous; it is the riskiest option strategy alive. If a trader sells 20 naked call options at $5.00 (collecting $10,000.00) on a stock, and then wakes up the next morning to see that the stock is up | Page 1205 |
106063ca6646-0 | $80.00 a share on a takeover, then that trader is hosed. That option is now worth $160,000.00, and the guy who sold it has just lost $150,000.00. This is where “verticals” and “credit spreads” come into play, because they protect an option seller against a “takeover | Page 1206 |
60140447929b-0 | situation.” To summarize, if I’m buying options, I try to avoid buying them when IV is high. This is typically right after a huge move (wow, AAPL is up $10.00 today— I’d better buy some out-of- the-money calls!) and right before earnings. I’d rather wait for a “quiet period” to buy options, such as a squeeze play, whic... | Page 1207 |
5921223e4896-0 | when a market is quiet. However, high IV does give a trader the opportunity to sell options. For example, back in the day, there was a period of several years when every time IBM approached $280.00, it would then sell off. Thus, every time IBM approached this level, the floor traders would sell naked the $280.00 call o... | Page 1208 |
0a335912ae30-0 | Of course, the retail traders who bought these call options (hoping that IBM would blast through $280.00) got hosed. The saying for years was, “Sell the 80s and buy a Mercedes.” This party ended the day IBM finally broke through $280.00 and kept on going. In the GS example, I sold “naked” puts (they weren’t backed by u... | Page 1209 |
5b39d55fe22e-0 | at a high IV, and bought them back when the IV normalized. How Do You Know When to Hold ‘Em and When to Spread ‘Em? When you’re trading options, you have two choices: buy an in-the-money option during a quiet IV period for a directional play, or sell options during high-IV | Page 1210 |
92d877629b72-0 | periods. As we have already seen, selling naked options is riskier than buying options, even though they have a higher probability of working in our favor. When buying an option, we are limited to losing only the amount we paid for the option. If we sell a naked call, our loss is theoretically unlimited, as the stock c... | Page 1211 |
4cf070a80c41-0 | could happen. Other than an IV crush situation, the main reason to sell options, especially out- of-the-money options, is that they are literally losing premium value each and every day. Think of the premium portion of the option as a bright, juicy peach … covered with ants. Every day those ants are going to work on th... | Page 1212 |
a50c72898864-0 | little by little, stripping away the flesh, until at some point there is nothing left but the seed in the middle. This happens all the way to options expiration until the premium portion of the option price is zero, and all that’s left is the real or intrinsic value of the option. If that option is out of the money, t... | Page 1213 |
7b5c6fb40bc9-0 | This premium decay is actually measured by theta, which is one of the “Greeks” that is readily available on most option platforms. If a call option is trading at $11.50 (total value is $1,150.00) and the theta is 53.80, then this option is losing $53.80 in premium each and every day. That is, the $11.50 option is losin... | Page 1214 |
b3a2f71ec08f-0 | in perspective, if the underlying stock traded sideways for three days and didn’t budge in price, this option price would plummet to $10.00, a loss of $150.00 per contract, even though the stock hasn’t budged. If this option had a delta of 0.50, then the stock would have to move up $1.00 a day just to keep this option ... | Page 1215 |
9a9d554aa861-0 | but has a fierce $3.00 rally the next day, your option is back at … merely breakeven. The closer an option gets to expiration, the higher the theta— that is, the faster the premium erodes. This is critical to keep in mind, and it’s why buying far-out-of- the-money call options a few weeks out from expiration is such a ... | Page 1216 |
47ddd729c6e5-0 | selling options is so attractive. They literally lose value each and every day. The only problem in selling them is that the risk of loss is great should the stock have a big move against you. You could literally have 15 winning trades in a row and then get wiped out on the sixteenth trade. The way around this risk is ... | Page 1217 |
9f9659aff84c-0 | because a trader doesn’t have to be “dead right” in order to make money on the trade. I’m not going to spend a lot of time on this concept because there are entire books written on the subject. Let’s take a quick look. If we revisit the GS trade from Figure 5.3 , I could have initiated a bullish vertical spread on thi... | Page 1218 |
cc5bc85df3cd-0 | purchased the $155 calls at $7.30, but instead of having a $2.00 stop based on the underlying movement of the stock, I could at the same time have sold the same amount of $160 calls at the then-current price of $3.80. Remember, this out-of-the- money call is all premium, and the ants are eating away daily at that juicy... | Page 1219 |
f2551e35c093-0 | position traded sideways for a few days, I could still have closed out the position for a small profit, making money on the premium erosion. I could also have 1. Legged into the same spread as described earlier, instead of initiating it all at once. That is, I could have bought in-the-money calls | Page 1220 |
4bd3f0299939-0 | initially, and then, when the squeeze signal finished the next day, stepped in and sold out-of-the- money calls. Once the signal finishes, a stock will generally trade sideways for a few days. The small price spurt gooses the IV, thereby increasing the pricing on the out- | Page 1221 |
38ca34e3fea8-0 | of-the-money calls. In other words, it’s a good time to sell them. Ideally, the stock then trades sideways for a few days, and I’m able to close out both legs of the trade for a profit. 2. Sold a naked at-the- money or one strike out-of-the-money | Page 1222 |
0b5ac16fc4a0-0 | put, buying it back when the squeeze signal was done. The risk with this is if GS receives bad news (for example, an SEC investigation) and drops $20.00 a share quickly, this trade can get very ugly very fast. 3. Initiated a vertical | Page 1223 |
21ac89681d0b-0 | bull put credit spread. Once the squeeze signaled a long trade, I could have sold an at-the- money put and then bought an out-of- the-money put. This is similar to strategy 2, except that now I have downside protection in the event of a disaster. | Page 1224 |
f5bebd2c8c1e-0 | This list could go on and on. The more a person knows about option strategies, the more she can do with this, but I want to emphasize that it’s not necessary to make this that complicated. With the advent of weekly options on some of the highly liquid stocks such as AAPL and AMZN, a unique opportunity has been created.... | Page 1225 |
837eadd32794-0 | the-money monthly option, and then each week initiate a vertical spread by selling an out-of-the-money weekly option against it. There are times when a trader can sell a weekly option each week for three or four weeks and have it expire worthless each week. During this entire time, the trader can still hold on to the m... | Page 1226 |
62c0875fb7c2-0 | both worlds. Holding a deep- in-the-money option is like owning a piece of real estate. Selling the weekly options against it is like collecting rent on your property each and every week. It beats working for a living. A final note for those of you who are interested in commodity options: these take a while to get your... | Page 1227 |
e302c016b4a7-0 | used to them. Whereas one stock option represents 100 shares of stock, one commodity option represents just one futures contract. For pricing, just take the current price and multiply it by the multiplier of the underlying futures contract. For example, if you see that an at-the-money call option on the E-mini S&P 500 ... | Page 1228 |
026bed275e17-0 | per point price), and you get a price of $2,612.50. This means it would cost you that much to buy the call option, which represents one futures contract. Of course, you could buy the actual futures contract for about the same price. This is why I’m not crazy about futures options. You might as well just buy the actual ... | Page 1229 |
d0f4c7eab31a-0 | hedging a futures position, and also for anticipated bigger moves (like a weekly squeeze, as discussed in Chapter 11 ), where it makes sense to buy an out-of-the- money option. Otherwise I’ll tend to stick to the actual futures contract. Now that we understand how all these different futures and options markets work an... | Page 1230 |
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