Aug 18 2008

Taking the Short Plunge

Published by Blaine561 under Options Trading, stock market

Like Slim Pickens in Dr. Strangelove, shrieking while riding an H-Bomb as it plunges down to its point of nuclear detonation, some crafty option traders take a similar plunge when riding the misfortune of some stock as its price plunges down. But traders shriek for joy and not fear from becoming extra crispy but because the intrepid trader is making money. Being in position to ride a plunging stock can be a thrilling and profitable strategy for nimble option traders.
 
Once a stock “breaks down”, there can be a stampede for the exits and this helps create a sudden and usually exaggerated fall in price. As a result of the hysteria, shorting a stock can normally produce higher profits in a shorter period of time.
 
It seems to be a natural mindset for traders and investors to constantly think about upside potential much more often than downside profit potential. Maybe it’s the paradox of something decreasing in value but at the same time increasing in value.  But when analyzing the mechanics of going short and how a profit is made can clear things up.
 
When shorting a stock, a trader will borrow the stock from the broker at a certain price and then hope to sell the stock back to the broker at a lower purchase price…..but the broker has to re-purchase the stock back at the original price when the stock was lent to the trader. In reality, the trader sells the stock back to the broker for the price it was borrowed but the trader can go into the market and purchase the stock at a lower price (after it has gone down) and make a profit on the difference between the price it was borrowed for In effect, it is the same thing as buying low and selling high.
 
For an option trader, there are several ways to make money from a declining stock. Perhaps the most simple is to purchase a put. The risk is limited to the put premium no matter what happens to the stock. Another strategy is to set up a straddle where a put and a call are purchased at the same strike price. This helps protect against an unforeseen reversal. The risk is limited to the total cost of the put and call. Yet another strategy is to short the stock and protect against an upside move by purchasing a call.
 
When using any short strategy, the trader must be nimble as most down breaking stocks are usually an overreaction as fear takes over and exaggerates the movement. Usually, when the fear subsides a bit, buyers start to creep back in and the price starts to rebound. For this reason, short players need to be quick on the trigger to take profits.
 
In some stock option strategies, writing naked puts can be part of the strategy, and this can be dangerous. As mentioned, stocks in a down break move rapidly and if a put is written without protection, the writer of a naked put may have to go into the market to cover an assignment and may pay heavily for the stock. Therefore, anytime a put is written, it is a good idea to have it hedged either with the purchase of an out-of-the money put or the stock itself.
 
For more information on the fantastic world of stock options, check out Options University (www.optionsuniversity.com) for a range of online courses, web casts, and seminars.
 

Get your free 7 Deadly Sins Report and click here, presented by Options University, and register now for the Forex World Currency Options Class with Greg MaDermott, starting August 18, 2008.


If you are interested in joining Options University’s affliiate program please sign up here.

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Aug 17 2008

Profit in Death

Published by Blaine561 under Forex, Options Trading, stock market

I know what every stock option will do at expiration. And if every stock option does it, why not make money on that certainty. What I am talking about is the fact that every stock option will expire with zero extrinsic value. Not just a high percentage, but every single stock option. That being the case, is there a way stock option traders can take advantage of this fact?
 
As you recall, a stock option has two types of value: intrinsic and extrinsic. Intrinsic value is when an option is “in-the-money” and has acquired additional value in respect to strike price. Extrinsic value is basically time value. That is to say, traders will pay a premium to have access to the rights of the underlying stock in hopes that the option will increase in value over the time period of the option. As an option closes in on its expiration date, there becomes less and less probability that the option will increase in value until there is zero chance of it increasing at the time of expiration. As a result, extrinsic value will be zero at expiration. The option is” dead” and there is no chance for any further movement of the option.
 
Another high probability event is that as the option comes within about 30 days from expiration, the extrinsic value decays at an exponential rate and really noses over within the last two weeks or so. Below is the famous option time decay chart (Extrinsic value).
Writing covered calls is one way to benefit from this phenomenon. As you may remember, writing a covered call means the trader purchases the underlying stock and then writes (sells) a call on the stock for the premium amount. If the call option expires without moving into the money, the option writer can keep the premium and the stock. Many investment advisors consider writing covered calls as a “conservative” strategy. But this strategy demands that the call writer purchase the underlying stock, which can require considerable capital. It’s a nice strategy but there is a much better strategy to also take advantage of time decay and a stagnate stock. But this system requires a small fraction of the capital required by a “buy and write” strategy. I’m talking about an option Time Spread.
 
A Time Spread involves the purchase of one option and the sale of another in different months, but with both having the same strike. You can construct a time spread using either calls or puts. The caveats are: the same strike price and an equal number of contacts.
 
For example, a trader will look for a stock that is rather stagnant and will hopefully be so for at least several months. The trader will then look for a strike price close to being at-the-money (premiums are at peak value when ATM). Then, the trader can compare the spread between different months at the same strike price. As extrinsic value does its swan dive in the last 30 days or so, as a result, the trader wants to have a front expiration month which will expire within a month or so. The back month will normally be out at least several months. When the front month goes to zero extrinsic value, which will leave the trader with one position with a little changed premium-at least in comparison to the front month. This position now represents a profit if the back month premium is more than the net cost of the spread position.
 
For example, let’s suppose a trader sells (writes) a front month call option with a strike that is just out of the money for $2.00 (a time spread can be done with OTM, ITM and ATM). Simultaneously, the trader buys a call option on the same underlying at the same strike price but several months out for a paid out premium of $4.50. The trader will buy the same number of options for each month. As the larger premium is for the purchase, there is a debit of $2.50 per share to assume the spread. When the front month expires, the trader has a debit of $250 for one call. However, the back month should still have a value near its original premium of $4.50. If the back month is closed out, there would be a net profit of $2.00 or $200 per contract. The big difference between writing a covered call and a long time spread is the cost of purchasing the stock to hedge the written call. Without the stock to protect the written call, the trader might have to cover if the stock option is exercised.
 
There is much more to learn about time spreads and they can be a very cost effective way to use what happens to every stock option.
 
For a detailed education on other advanced stock option strategies, I recommend the experienced and beginning option trader contact Options University (www.optionsuniversity.com).
 

Get your free 7 Deadly Sins Report and click here, presented by Options University, and register now for the Forex World Currency Options Class with Greg MaDermott, starting August 18, 2008.


If you are interested in joining Options University’s affliiate program please sign up here.

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Aug 16 2008

Iron Condor

Published by Blaine561 under Forex, Options Trading, stock market

An Iron Bird shouldn’t fly, but the popular Iron Condor spread can soar with the eagles. Ok, maybe this statement is a little over the top, but for stock option traders with bulging trading accounts, the Iron Condor is popular for a good reasons.
 
The Iron Condor option spread is a credit spread. As a result, option traders
need to have enough resources to cover the margin requirements. Before using this strategy, it’s probably a good idea to check with your broker first.
 
This particular strategy is employed when a stock option trader believes that there will be little movement in the underlying stock. The Iron Condor differs from the plain old Condor spread because it buys out-of-the-money (OTM) calls and puts. Because of this fact, the profit potential is higher and the potential loss is lower than the Condor.
 
Setting Up the Iron Condor Spread
                                               
Buy to Open OTM Put (Lowest Strike)
Sell to Open OTM Put (Higher Strike)
Sell to Open OTM Call (Higher Strike)
Buy to Open OTM Call (Highest strike)
 
Example: Assume IWM current price: $ 69
 
Buy X Contracts of March $68 put @ $1.70
Sell X Contracts of March $69 put @  $2.03
Sell X Contracts of March $70 call @ $1.82
Buy X Contracts of March $71 call @ $1.42
 
As you can probably  see, the Iron Condor is composed of a Bear Call Spread and a Bull Put Spread.So, if the underlying is moving up, the option spread trader could close out the Call options and leave the Put options intact. Likewise, if the price of the underlying is moving down, the Put options can be closed out and the Call options left intact.
 
A key point is that the difference between the strike price of the short call option and the short put option determines the range within which the position will result in its maximum profit potential.
 
Iron Condor Math:
 
Establishing the Net Credit
Net Credit for the example trade= ($2.03+$1.82) credit - ($1.70+$1.42) debit= .                                                                                                            .73 x 100=$73
Profit Calculation of Iron Condor Spread:
Maximum Profit% = Net Credit =$73 (Not including commissions)
Profit % = (Credit Gained From Short Legs / Greatest Difference In Strike) x 100 ; $3.85/3= 128%

Maximum Loss Possible = Greatest Difference In Consecutive Strike - Net Credit: 1-.73 x 100= $27
 
To find the Profitability range:
 
Upper Breakeven= Short Call Strike + Net Credit= $70-.73= $70.73

Lower Break Even = Short Put Strike - Net Credit= $69-.73=$68.27

 
Range: $68.27-$70.73
 
Because of the four positions going in and out, commissions can take a big bite out of the profits of this conservative option trading strategy. However, the ROI and risks are appealing if you have the assets in your account to cover the margin requirements.
 

For more information and online training in advanced stock option strategies, contact Options University at www.optionsuniverstiy.com

 

Get your free 7 Deadly Sins Report and click here, presented by Options University, and register now for the Forex World Currency Options Class with Greg MaDermott, starting August 18, 2008.

If you are interested in joining Options University’s affliiate program please sign up here.

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Aug 15 2008

Butterflies, Bulls and Bears

Published by Blaine561 under Forex, Options Trading, stock market

I recently read an interesting article comparing the various complex stock options spreads available to those of the stock option persuasion. I can’t vouch for the correctness of the table but it does provide some food for thought.
 
 
Condor
Iron Condor
Butterfly
Iron Butterfly
Debit/Credit
Debit
Credit
Debit
Credit
Max Profit
Low
High
Higher
Highest
Max Loss
Highest
Higher
High
Low
Cost
High
Nil
Low
Nil
Profit Range
Wide
Widest
Narrow
Wider
 
Considering that all of these spreads are normally used when the trader thinks that there won’t be much movement of the underlying during the period of the trade, it looks like the Iron Butterfly needs to be explored a little further. The reason why we probably don’t hear much about them is that they create a fairly large credit when opening the position. As this isn’t what most brokerages want, they may restrict their use. Check with your broker first.
Butterfly
So before we fortify the butterfly with iron, let’s talk a little about the basic butterfly strategy. The Butterfly has three legs and is composed of
 a Bull call spread and a Bear Call spread.
·         Buy (1) ITM call at lower strike price
·         Sell (2) ATM calls at mid-strike price (closest to forecast average price)
·         Buy (1) OTM call at higher strike price.
 
The same pattern is used if using a call or put but all options must be of the same type and same expiration month. The Butterfly is a Debit spread because the ITM call causes an outlay of more funds than does the credit derived by the sold contracts. Moreover, the further the legs are extended from the mid price, the lower the risk.
 
 
Iron Butterfly
Anything with the word iron in it implies strength unless you’re talking about swimming. The addition of the “iron” prefix bespeaks the superiority of the Iron Butterfly over the non iron clad Butterfly. According to the chart at the beginning of the article, The IB has a lower Max loss and the highest Max profit than the other complex spreads. That’s the kind of optimization we want.
 
There are some distinct differences between the two butterflies. The Iron Butterfly is made up of a Bull Call spread (Buy Call sell a Put) and a Bull Put spread (Buy a Put and sell a call). Also, note that the Iron Butterfly has four legs instead of the Butterfly’s three.
 
  • Buy (1) OTM Put
  • Sell (1) ATM Call
  • Sell (1) ATM Put
  • Buy (1) OTM Call
 
The Iron Butterfly is a Credit Spread because of the two ATM and no ITM purchases.
 
Advantages Of Iron Butterfly Spread:
·       Able to profit from stagnant stocks.
·        Maximum loss and profits are predictable.
·       Being a credit spread, it reduces overall risk with a higher probability of ending in a profit than a debit spread.
·       Very versatile as the position can be easily transformed into a Bear Call Spread or Bull Put Spread.
Disadvantages Of Iron Butterfly Spread:
·       Larger commissions involved than simpler strategies with lesser trades.
 
For more information and online training on how to use the advanced options strategies contact Options University at www.optionsuniverstiy.com
 

Get your free 7 Deadly Sins Report and click here, presented by Options University, and register now for the Forex World Currency Options Class with Greg MaDermott, starting August 18, 2008.


If you are interested in joining Options University’s affliiate program please sign up here.

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Aug 14 2008

Implied Volatility and Choosing a Spread

Published by Blaine561 under Forex, Options Trading, stock market

Some people’s garbage is another’s treasure. Make a silk purse out of a sow’s ear…..put lipstick on a pig. You get the picture. But for some reason, most stock and option traders seem to have a bias toward spotting the special situation where a stock price will be moving up in value and try to identify the buy low and sell high strategy.  This natural predisposition is probably because most people aren’t interested in stocks that are losing value or in a state of stagnancy. Not so for the intrepid stock option trader! In fact, there are many more stocks that do little or nothing. And an option trader knows how to make lemonade out of these “unattractive” situations. Moreover, stocks that break down and head rapidly south are more likely to make bigger moves and in a shorter time than stocks that are moving up in price.
 
Take the situation of a sideways to declining market. Most advisors may advise to stay away from the market or go to cash. But to a stock option trader, the slow and gradual downward movement offers an opportunity for an option trader to capture some time premium decay as well as the downward movement of the stock. For example, the sell-write is an excellent strategy here; however, not everyone is in a position to finance shorting a stock as this requires purchase of the full value of the shares. As a cost effective alternative, an option trader can make use of a vertical “bear spread”.
 
This strategy uses a vertical spread to allow the trader to take advantage of the stagnant to declining underlying stock movement. When constructed properly, the vertical spread will allow for premium collection in a situation where a stock has a slow, consistent, gradual downward movement. But the key to which vertical bear spread strategy to use depends on implied volatility. In other words, does the trader think the stock break down and make a rapid downward plunge or will the stock just drift lower.
 
For example, if a trader thinks that implied volatility is likely to increase, the trader can set up a vertical spread to capture downward movement in price. An option trader does this by buying an in-the-money put option and selling an out-of-the-money put option against it. The trader expects the stock to go down significantly. However, if a trader feels that implied volatility will decrease or stay relatively flat, the trader can set up a premium capture strategy by construction a vertical spread by selling an at-the-money put option (premiums are highest when ATM) and buy an out-of-the-money put option to protect against a large downside move and a possible assignment. However, in both of these particular strategies, there is some risk to price reversal.
 
To learn more on the many ways to make profits with stock options, go to www.optionsuniversity.com for a description and schedule of their excellent online courses.
 

Get your free 7 Deadly Sins Report and click here, presented by Options University, and register now for the Forex World Currency Options Class with Greg MaDermott, starting August 18, 2008.


If you are interested in joining Options University’s affliiate program please sign up here.

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Aug 13 2008

Leaping For Profits

Published by Blaine561 under Forex, Options Trading, stock market

It sounds almost too good to be true. Buy a LEAP call option and sell a near term call option and let time decay put money in your pocket. Over and over.
 
As you may recall (if you don’t, you probably need to brush up on your basic option theory), Theta-the value for time in option pricing-goes to zero as the option approaches expiration. Simply put, if an option has an extrinsic value (time value) of $3, that value will go to zero as time runs out on the option. An out-of-the-money option has only extrinsic value. An in-the-money option has intrinsic value and time value. Again, if a stock option that is in-the-money has a premium value of $8, which is made up of $5 intrinsic value (above strike price) and $3 time value, at expiration the stock option will have a value of $5 due to the total loss of extrinsic (time) value.
 
One way of using this property of time decay is to set up a strategy known as a Time Spread. A profit is made when the front decay increases the spread between the font and back months. For example, suppose a front month out of the money call is sold for $4.00 and the back month is purchased for $6.00. A profit is made when the front month expires with zero value and the back month still has value. In our example, the net cost of putting on this long time spread is $ 2.00. If the front month expires at $0 and the back month is at $5, the position has made a $3 net profit. So, logic says that the more stable the back month remains in price, the greater the spread. Thus, consider the LEAPS (Long-term Equity AnticiPation Securities).
 
Theta in a LEAP is very stable because there is a long time until expiration. On the other hand, the Theta for a near month is on the normal exponentially decreasing curve for an expiring option. Thus, the rather stable LEAP premium and the deteriorating near month can supposedly optimize the time spread.
 
When screening for a good front month candidate, a trader wants to locate a fairly stable stock but with a decent enough extrinsic value. As you may recall, extrinsic value is highest when the strike and the stock are at-the-money. So, to maximize premium value, a trader would want to locate a call option near or at the money to sell. However, the option should have a much implied volatility but not too much to move the stock too much into the money to possibly trigger an assignment.
 
For example:
IBM: Current price: $105
 
First trade
Sell (3) IBM March 08: Premium: $4.70 x 3 contracts x 100 shares= $1410             
Buy (1) IBM Jan 2010: Premium: $10.50 x 1                 x 100          = ($1050)
         
If Front month expires, trader keeps: $1450 premiums; net +$ 360
 
Second trade:
Sell (2) IBM April 08: Premium: $ 5.00 x 2 x 100 = $1000
No need to buy call to protect upside movement because you already own it.
 
If front month expires without being assigned, new balance is $+ 1360
 
Trader can repeat this reselling of OTM front month calls or puts to be as close to at-the-money as possible. The back end Leaps are perhaps traded once for each three or four front end sales.  
 

For more information about the fantastic world of stock options, contact Options University (www.optionsuniversity.com) for a listing of online courses, webinars and seminars.

 

Get your free 7 Deadly Sins Report and click here, presented by Options University, and register now for the Forex World Currency Options Class with Greg MaDermott, starting August 18, 2008.


If you are interested in joining Options University’s affliiate program please sign up here.

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Aug 12 2008

Stagnant Can Be Sweet

Published by Blaine561 under Forex, Options Trading, stock market

To me, what really makes stock options so fantastic is that a trader can make money from companies who are dead in the water and going nowhere fast. As a matter of fact, there are many more stocks in a sideways or stagnant period than there are stocks moving up or down.
 
There are many ways to make money trading stagnant stocks. The idea is to sell (write) options to other traders who believe that the stock may move and if the stock doesn’t move into the money to the extent of being exercised, the stock option will expire worthless. In this way, the option writer can keep the premium. The profits from premium collection aren’t usually very high, but they can be very repetitive. If the stock option has some implied volatility, that will help to boost premium prices and premium prices are what an option trader is after when it comes to stagnant stocks.
 
There are many strategies for stagnant stocks but perhaps the simplest one is to write a covered call. But there are others-such as the poetically named “butterfly” that really works well with stocks that are stagnant but with some implied volatility.
 
For example, suppose IBM came off an excellent quarter and prices had moved well to the upside. The stock has now moved into an over bought condition as indicated by the RSI. Moreover, there is no more anticipated good news expected to be released soon about the company. The stock has moved sideways and is still above its 30 day moving average. The near term probabilities of the stock moving up are not as high after the stock price has discounted the good news. Now might be a good time to put on a Butterfly.
 
If a trader is trying to collect premium but wants to protect against any unforeseen factors that might make the stock move, a butterfly offers some nice insurance protection. Here is how it works.  If the price of IBM has stabilized around $110, a trader would put on a long Butterfly by purchasing one in-the-money IBM call with a strike price of $107. This protects against unexpected upside moves. Then the trader would sell two $110 IBM calls.   As the highest premiums are usually found at-the-money, the selling of two contracts near or at-the-money boosts the premium and helps to offset the long purchases. To also help protect against a move above the selling prices, another one long IBM call is purchased at $112 strike. If the price goes, down, not a problem; the middle sold options will expire worthless and the premiums minus the premiums for the two calls can be kept. If the price moves up and into-the-money, the in-the-money long call and the out-of the money long call will help protect the position. The Butterfly is considered to be a very conservative strategy. Keep in mind that there are a total of four options purchased in the same month. The center two are sold for premiums and the bottom and top long calls acts as protection against counter moves.
 
A simpler strategy, which accomplishes about the same thing, is to buy the stock and sell the option. This is called a covered call. It is also hedged like the butterfly, but this strategy requires more capital than that of the conservative Butterfly. This is because to initiate a Covered Call (buy-sell) requires that the stock be owned outright and a call be written.
 
Another way to capitalize on a stagnant stock, which lies somewhere in complexity between the Butterfly and the Covered Call is to sell (write) an at-the-money call and then purchase another cheaper out of the money option call-also in the same month (a spread). Of course the spread between the premium collected for the sold ATM call, OTM call premium paid and transaction costs must justify the trade.
 
For more information on fantastic world of stock options, contact Options Universtiy at Options University.  
 

Get your free 7 Deadly Sins Report and click here, presented by Options University, and register now for the Forex World Currency Options Class with Greg MaDermott, starting August 18, 2008.

If you are interested in joining Options University’s affliiate program please sign up here.

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Aug 11 2008

I Believe in Vega

Published by Blaine561 under Forex, Options Trading, stock market

If you trade stock option time spreads, you should probably name your next daughter Vega. Vega is one of the well known Greeks spawned by the genius of the option pricing model. As you may recall, there are four principle Greeks of option legend: Delta, Gamma, Vega and Theta. Each one of these variables provides important clues about the future behavior of the stock option they constitute. Today, we talk about Vega and how it can help the stock option time spread trader.
 
As you may recall, Delta demonstrates the relationship between the movement of the underlying stock and its option. Usually, the higher the stock option approaches in-the-money, the higher the correlation between the movement of the stock and its derivative. For example, an out-of-the-money option may have a low correlation of .4 (the option will move about 40% of the movement of the underlying). As the option approaches in-the-money, the correlation increases. Somewhere a bit above in-the-money, the correlation will approach .9 to 1.00. At a correlation of 1.0, the movement of the option mimics the underlying; if the underlying moves up $1 so does the option premium. Of course, when an option is in-the-money it might be assigned or called away. This is not particularly desired in that the trader may have to lay out additional funds to place the stock if the underlying is not already owned. As most option time spread traders are long, the front month (naked call writing) is for premium collection. So, a time option trader needs to be aware of what will happen to an option when it moves from at-the-money (where time premium is at its maximum) into an area where an option might be assigned. This is where Vega can be very useful.
 
Let’s suppose you see that the front month of the option spread is moving up toward becoming in-the-money. It would be good to know when the stock price might carry the written call option into-the-money. To do this, the option trader needs to understand what Vega means and how to apply it. Vega, as you may recall, represents how much correlation- in terms of money- will the movement of the underlying affect the option. For example, a Vega of .15 would mean that a $1 increase in the underlying would move the option up 15 cents. 
 
So, if the front month option of the time spread is at-the-money and the Vega is .30, the underlying might move up a dollar but the option would move just slightly. As a matter of fact, if delta is below 1.00 at that time, it also tells the option trader that there is not a 100% probability of the option finishing in-the- money. But needless to say, once an option nears in-the-money and a delta approaching 1.00, it might be a good time to close out at least the front month to avoid being assigned. Call it being chicken but it’s the only way I know to avoid the possibility of having to hit my account to fulfill my obligation as a naked option writer. Now, I am sure there are other ways to roll into or out of the situation but I m not familiar and would like to hear how more experienced and knowledgeable option time spread traders might do it differently.
 

Maybe I need to take the Advanced Options Strategy online course offered by the Options University.

 

Get your free 7 Deadly Sins Report and click here, presented by Options University, and register now for the Forex World Currency Options Class with Greg MaDermott, starting August 18, 2008.

If you are interested in joining Options University’s affliiate program please sign up here.

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Aug 10 2008

Second Tier Greeks

Published by Blaine561 under Forex, Options Trading, stock market

According to Options University Guru Ron Ianieri, an ex option market maker and author of the University’s Advanced Option Strategy Course, most option traders aren’t being taught correctly. For instance, Ron begins with the option pricing model and builds up to strategies. Most stock option courses focus on strategy while understanding the importance of risk evaluation goes by the board in an attempt to pitch a system or software. For example, Options University’s Advanced Options Strategy Course begins up front with understanding the subtleties of the Option Pricing Model and the many treasures it reveals. For example, Second Tier Greeks are discussed in detail. Most option traders aren’t even familiar with the First Tier Greeks much less the second tier. Are you?
 
For stock option traders, it’s a must to understand the concepts of the Greeks. The most notable of them are: Delta, Gamma, Theta and Vega. These “First Tier Greeks” are key to evaluating pricing and options sensitivity to changing variables. As a quick refresher (if the Greeks are something new, you need to take the course immediately-it’s that important) let’s review the most widely known Greeks as revealed in modern stock option pricing models.
  1. Delta is known as the first derivative. Delta tells us how much an option’s price will change with a movement in the underlying stock price.
  2. Gamma tells us how much the option’s Delta will change with a one-dollar movement in the stock.
  3. Theta means time decay and tells us the rate at which an option’s price will decay on a daily basis.
  4. Vega is The amount that the price of an option changes  
 
All of the First Tier Greeks are the first derivatives of the Pricing Model and are crucial to the analysis of stock options-particularly Delta. But the Second Tier Greeks are hardly mentioned anywhere. Ron Ianieri feels that is a big mistake. What are the Second Tier Greeks, anyway?
 
The Second Tier is the second derivatives of the First Tier Greeks. More specifically, they measure, using a number, the change in a first-tier Greeks caused by changes in volatility and time. 
 
Meet the Second Tier
  1. V-Delta (V-Del) measures a change in volatility’s effect on Delta.
  2. T-Delta (T-Del) measures the passage of time’s (Theta’s) effect on Delta
  3. V-Gamma measures a change of volatility’s effect on Gamma
  4. T-Gamma measures the passage of time’s effect on Gamma.
  5. V-Theta measures a change in volatility’s effect on Theta.
 
V-Delta connects volatility and Delta. A positive V-Delta (or V-Del) tells the trader that for each tick that volatility moves, Delta position will either increase or decrease by a set amount. This becomes important when a stock has a major volatility move.   I am not talking a tick or two. I’m talking a minimum of 10 to15 ticks, a 20, 30, 40 percent increase. A trader should know what real Delta is at a new volatility level. V-Del tells you that. 
 
T-Delta, measures the Theta to Delta relationship. It tells option traders how their Delta position will change (by what amount) with the passage of time. T-Del helps when you are going to be away from your position for a time. T-Del tells traders what they can expect when they return.  
 
V-Gamma is not as important as V-Del, but according to Ron, option traders need to know what their position’s Gamma is at all times under every condition in order to trade it effectively.
 
T-Gamma works in a similar way as V-Gamma, except that the T-Gamma relationship is not evaluating changes in implied volatility. 
 
V-Theta measures the affect of a change in volatility on Theta.
When implied volatility goes up, prices go up; when implied volatility goes down, prices go down. V-Theta, or the volatility to Theta relationship, basically tells the option trader, with a number, how much your decay is going to change with a movement in implied volatility?
 
 Ron Ianieri, designer of the Options University Advanced Options Strategy  Course states upfront that stock option traders need to be properly instructed on how different changes in the different influencing factors of option pricing will affect their stock option positions and that understanding what these measurements tell the option trader needs to be understood before discussing strategies. More specifically, second tier Greeks help the option trader understand what can happen to positions before it happens-not after.
 

For more information on the courses offered by Options University, go to www.optionsuniversity.com .

 

Get your free 7 Deadly Sins Report and click here, presented by Options University, and register now for the Forex World Currency Options Class with Greg MaDermott, starting August 18, 2008.

If you are interested in joining Options University’s affliiate program please sign up here.

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Aug 09 2008

Tracking the Elephants

Published by Blaine561 under Options Trading, stock market

Remember the joke: “How do you know when an elephant has been in your fridge? Answer: By the footprints in the Jell-O.”
 
Well, how do you know when the elephants are interested in a company? Answer: by the footprints in the stock option contracts activity. When the “smart money” (elephants) smells something happening in a company, they will normally position themselves to take advantage of the play by buying stock options-either calls or puts. Some option traders like to keep it simple and have formed a strategy by “following the money”. The underlying philosophy is that smart money is usually in possession of privileged information and that regardless of what the current technicals and fundamentals might show, a notable increase in option contract volume trumps the generally accepted picture and is a harbinger of some impending action in the price. But even though this strategy sounds simple, it is a bit more complex in that to determine whether or not real option contract volume has really increased or decreased.
 
Trading volume is a relative thing and needs to be compared to the average daily volume of the stock in question. A large percentage change in price accompanied by larger than normal volume is a solid indication of market strength in the direction of the change. On the other hand, a large percentage increases in a stock price accompanied by small trading volume is less likely to indicate a market direction. In fact, this scenario may indicate that a reversal is possible.
 
Open Interest
Open interest is a concept all option traders need to understand. As a matter of fact, most option traders ignore open interest. You see, unlike stocks, where there is a fixed number of shares to be traded, option trading normally involves the creation of a new option contract whenever a trade is placed. The Open Interest category depicted in the financial pages will tell an option trader the total number of option contracts that are currently open - in other words, “contracts that have been traded but not yet liquidated by either an offsetting trade or an exercise or assignment.” Therefore, when looking at the total open interest of a particular option, there is no way of really knowing whether the options were bought or sold. So what good is this information, you might ask? Be assured that the open interest figure does provide important information when understood.

One way to use the information provided in the open interest figure is to look at it relative to the volume of contracts traded figure. When the volume of contracts exceeds the existing open interest on a given day, this usually suggests that trading in that option was high that day. In other words, open interest in comparison to contract volume can help an option trader determine whether there is unusually high or low volume for any particular option

 
When stock options have large open interest, it means that the particular option has a large number of buyers and sellers and an active secondary market; this will increase the odds of getting option orders filled at good prices. In other words, the market for the option is liquid. As a result, the larger the open interest, the easier it will be to trade that option at a reasonable spread between the bid and ask.
 

Elephants do leave visible tracks but an option trader needs to know how to read those tracks. Being able to do so may be a simple and affective way to gauge where the next option trading opportunity might appear. It’s simple and leverages the power that privileged knowledge might have. As always, paper trade first before you follow the herd. Otherwise, you might get trampled or covered in you know what.

 

Get your free 7 Deadly Sins Report and click here, presented by Options University, and register now for the Forex World Currency Options Class with Greg MaDermott, starting August 18, 2008.

If you are interested in joining Options University’s affliiate program please sign up here.

5 responses so far

Aug 08 2008

Dancing with Time

Published by Blaine561 under Options Trading, stock market

Don’t be a butt head. You know you’re going to lose trades. Not just a few but a bunch. Does that bruise your ego? Consider how trading works. It’s all about the probability of being more correct than not and not about being right.  I know it’s mincing words but an option trader must accept the fact that trading is an “educated guessing game.” For traders, all the analysis in the world will rarely reveal the big chaos factor—time. As an options trader, time is the wild card.
 
So, traders try to use sentiment to gauge the amount of emotional momentum is out there urging the stock to move. But emotion is a fickle beast and good traders can only fathom its intent about 70% of the time. But if those 30% losing trades can be cut short and capital preserved as best it can, the other 70% of successful trades should make more than enough repetitive profits to far outweigh the losses.  Option traders can make money even if they are losing 50% of the time. Flip a coin? No, the most influential factor is time and changing sentiment to usually unforeseen events. There is no way to accurately forecast the time an event will happen because it’s in the future and no amount of facts and figures can pin it down exactly-only probably. But, option traders can estimate a high probability of an event happening within a certain period of time. But- at best- it’s just an estimate.
 
Most investors who try to become option traders don’t make it. And the thing that discourages them the most is the fact that they are wrong too often. Long-term investors cope with time by mostly ignoring it. Stock option traders dance closely with its capriciousness. It’s a different game altogether. That’s why it’s important to learn to accept the losses. A trader deals with probabilities-not certainties.
 
A trader must develop a system that will produce at least a 65% win-loss ratio. Through paper trading, a system can be tested without the emotional pressure of losing money. After enough trials, a trader will see if the system is capable of recognizing and capturing a high probability trade. Not home runs, mind you, but steady singles and doubles.
 
To develop a system that will allow a trader to transfer his/her ego to the system takes time. Once a trader knows the fact that over a certain sample of trades that their system can provide a consistent win-loss ratio-at least in the 65% range- the trader will know how to mechanically deploy the system. The trader will know from experience that once a high probability trade is encountered, there is better than chance odds that the system will be correct. What the trader must be aware of is inconsistencies in the implementation of the system. The trader should “plug and chug” and implement the system the same way each time. It should become mechanical and there is nothing artistic or creative about it. Some traders leave the whole process for their computers and special programs to deal with. That would be the ultimate in mechanical trading and maybe someday we will all have a “little blue” on our desks. But by that time, there will be little risk and even smaller reward. But even with super computers, the time factor will probably never be pinned down to an exact function. 
 
In summary, if you want to be a successful options trader, pay your dues: study options and all they can do. Develop a good system that will yield an acceptable win-loss ratio. And most importantly, leave your ego at the door. Keep in mind that there is an extremely high probability you will lose many trades and it’s in the nature of the game.
 

For more about how to learn the basics to advanced aspects of stock options, I recommend checking out Options University (www.optionsuniversity.com).

 

Get your free 7 Deadly Sins Report and click here, presented by Options University, and register now for the Forex World Currency Options Class with Greg MaDermott, starting August 18, 2008.

If you are interested in joining Options University’s affliiate program please sign up here.

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Aug 07 2008

Blaine561′a daily Hollwood update for Aug 7th, 2008.

Published by Blaine561 under film, screenwriting

Blaine561 here with your Holluwood update for August 7th, movie reviews and more, …

 

Idiocracy (Movie Review)

 

 

From Mike Judge, one of the creative minds who brought you Beavis and Butt-Head, King of the Hill and Office Space, comes an outrageous comedy that’ll make you think twice about the future of mankind. Meet Joe Bowers (Luke Wilson). He’s not the sharpest tool in the shed. But when a goverment hibernation experiment goes awry, Bowers awakens in the year 2505 to find a society so dumbed-down by the mass commercialism and mindless TV programming that he’s become the smartest guy on the planet. Now it’s up to an average Joe to get human evolution back on track! Filled with razor-sharp sarcasm and outrageous sight gags, Idiocracy will make you laugh out loud whether you’re an absolute genius or a complete idiot! - DVD CASE. [Movie Review]. {Cinema Reviews}. Check Out these for additional support: http://www.imdb.com/title/tt0387808/ http://www.rottentomatoes.com/m/idiocracy/ Thanks For Watching :) P.S. I know not everyone is going to enjoy the film but it appealed to me and that’s all that matters.

The Incredible Hulk | Spill.com Movie Reviews

 

 

SEX AND THE CITY: THE MOVIE REVIEW

 

 

The Dark Knight Movie Review by Scene-Stealers.com

 

 

Wanted | Spill.com Movie Reviews

 

 

Woody’s Hollywood news update

 

 

Woody Wittman dispels the Zac Efron straight rumors, updates us on who will next be entering Angelina Jolie, and explains why Janeane Garofalo’s return to TV is as welcome as Edward James Olmos in HD.

State of Fear: Hollywood the News Media and Global Warming

 

 

Renowned science scholar Naomi Oreskes and science producer Gene Rosow discuss how Hollywood and the news media portray global warming and what responsibility scientists have to educate the public about global warming. Series: "Frontiers of Knowledge" [3/2005] [Public Affairs] [Science] [Show ID: 9387]

Paris Hilton Pokes Fun at McCain in Spoof Campaign Ad

Paris Hilton has poked fun at presidential candidate John McCain in a new online skit after the Republican used her image in a campaign video attack on his opponent Barack Obama. The socialite has filmed a spoof campaign ad for comedy …

Morgan Freeman ‘Doing Well’ After Surgery

Morgan Freeman has undergone surgery on his left arm and is expected to leave the hospital later this week–just days after he was involved in a serious car crash. Freeman and a female passenger had to be cut free from the wreckage and …

Hollywood News: Elizabeth Taylor Recovery

It seems tales of Elizabeth Taylor’s demise have been exaggerated. Hollywood 411 has an update on the screen legend’s health. Added: August 06, 2008 Duration: 00:40.

And from the Gossip mill, ….

Heath Ledger Investigation Dropped By DEA

The investigation into Heath Ledger’s death is officially case closed - the high-profile probe was closed abruptly without no charges being filed. Mary-Kate Olsen had just been subpoenaed by a federal grand jury, but her attorney had …

Mena Suvari Celebrates Andy Warhol’s Birthday

Showing off her freshly grown blonde locks, Mena Suvari was on-hand at a big birthday party in New York City on Wednesday night (August 7). The “Brooklyn Rules” actress wore a classic black dress with a spunky up-do, looking ultra …

Football’s Michael Jordan to the Jets!

He’s saying bye bye to Green Bay for good! Brett Favre has been traded to the New York Jets. On Wednesday, Favre confirmed that he was considering a move to the Jets or Tampa Bay’s Buccaneers: "We’re working on it. …

What Took Him So Long? Poppa Lohan On The Attack!

And the Cooper vs. Lohan war of the words continues! As we’ve been following closely since Tuesday, it all started when Anderson Cooper gave his.

In Defense of the (Living) Golden Girls

Betty "Rose" White is setting the record straight! As y’all know, the living Golden Girls got a bit of flack for not attending the funeral of their recently deceased co-star Estelle Getty. Betty spoke with Entertainment Tonight to …

Kelly Ripa: Back at the Late Show

She paid David Letterman a visit back in April, and on Tuesday afternoon Kelly Ripa was spotted again on her way to the Late Show. The “Live with Regis and Kelly” hostess was all about meeting fans, taking pictures, …

If that doesn’t tickle your funny bone, then check with your doctor, you may be dead, ….

Blaine561

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Aug 07 2008

Blaine561’s daily update on the stock market, forex and options trading news for Aug 7th, 2008.

Published by Blaine561 under Forex, Options Trading, stock market

Blaine561 here with your latest news from the world of financial happenings on planet earth, man is it crazy or what?  Listened to Ron Ianieri last night during his Gamma Trading class with Options University and his thoughts on how the Fed has created this "banking crisis" and that if the Fed ever even thought of raising rates the banks would fail.  I mean if they’re the ones who created this mess and the only way to continue is keep the mees going, just make it a little tidier?  Here’s what was happening yesterday and this morning, got a video for you too, …

Fed Keeps Benchmark Interest Rate at 2 percent

NEW YORK: With jobs leaking from the US economy month after month, the Federal Reserve’s policy makers decided on Tuesday to keep the benchmark short-term interest rate they control at 2 percent, a historically low level. …

Fed keeps rates steady and we are still in a negative interest …

The Federal Reserve held its key interest-rate target steady Tuesday, indicating that the central bank’s decision to support economic growth with a 2% target, rather than thwart inflation with rate hikes, has gone according to plan. …

Real Interest Rate Dips to Zero - Donga.com

NEW YORK (AP) _ An already soaring Wall Street extended its advance Tuesday after the Federal Reserve left interest rates unchanged and assuaged some of the market’s fears about the economy. The Dow Jones industrial average shot up more …

June pending home sales jump 5.3%

To whit: 30-year fixed mortgage rates — at 6.52% — are close to a six-year high. And the Federal Reserve’s survey on bank lending standards from earlier this year showed tightening across the board. Some 77.7% of banks are tightening …

Morning News - Iraq, Iran, Israel, and Interest Rates Edition

Although widely expected, the Fed’s decision to leave short-term interest rates unchanged produced a massive rally on Wall Street – the Dow was up 331 points. The Fed’s decision was 10-1, with Bank of Dallas President Richard Fisher …

Free Real Wealth Report; the Next Big Profits …

More than $3 trillion in stock market wealth has evaporated. Globally, more than $14 trillion. Third, the bond market has experienced one of its worst swoons ever, falling as much as 8 full points since last October, even as the Fed …

The Current Decline of the Russian Stock Market Is a Reason to Buy …

No bigger mistake than investing money in Russian stocks could have been made in July. Over the week of July 25th, the RTS index fell in all categories, hitting rock-bottom following Putin’s unfavorable remarks on Russia’s largest …

China’s fund managers told to silence negative comments on stock …

CHINA’S SECURITIES regulator is warning fund managers to avoid comments that might "negatively affect" China’s deflating stock market in order to ensure a "harmonious and successful Olympic Games".

Stock Market Update: Rough Start For Wall Street

There is not much positive news this morning — two Dow components reported dis…

Price of Oil and Stock Market

Do you think the price of oil and the stock market are correlated? If not, here is an interesting chart that I put together to prove you wrong. The blue line going up is the "iPath S&P GSCI Crude Oil Total Return" fund. …

Forex News: Trichet comments covers it all

The comments first focused on inflation, then growth, then both. This indicates that the ECB is sufficiently confused to keep things where they are for the foreseeable future. A couple of key comments were wage settelements will be eyed …

Daily Forex Overview

Previous session overview The US dollar gained across the majors on Wednesday as the FOMC’s policy statement failed to quell speculation of 75bps worth of rate hikes over the next 12 months. On Wednesday, the dollar hit a seven-month …

Forex Trading News Tips

I wanted to talk to you about some forex news tips I’ve collected in my time who have helped me to stay ahead of the market and profit. This market is very large with billions of dollars are traded every day. There’s a lot to learn and …

Forex Video | New York Session Review | August 6, 2008

The US dollar continued its recent strength across the major currency pairs during a day light on economic reports. A blend of fundamentals and technical analysis pointed to the EUR/USD as a viable prospect for a short trade at the open …

Gamma Trading Options Part I: Adjusting Exposure to the Market

For traders knowing the "Greeks" of your options position is the most important. In Part one of this series, professional trader John Netto demonstrates how to construct a trade using the prominent Gamma option trading.

The Rules for Removing Fear and Greed from Option Trading

Personally only 20% of my option trading account is in any one credit spread trade and that account is only 10% of my entire investment portfolio. And if I were to play a riskier trade such as a straight call play I would use less than …

Ron Ianieri on CNBC Business News June 26 2008 Complete

 

 

Complete CNBC interview with guest Ron Ianieri, Chief Options Strategist at Options University, June 26, 2008. Ron discusses the volitility in today market and the prospects for the coming year.

 

Well, more fun tomorrow, I’ll be flying out to Montreal for a few weeks, but I’ll see you online.  Check out my hubpages at http://hubpages.com/hub/Options-Trading-Strategies-Basic-to-Advanced

 

Get your free 7 Deadly Sins Report and click here, presented by Options University, and register now for the Forex World Currency Options Class with Greg MaDermott, starting August 18, 2008.

If you are interested in joining Options University’s affiliate program please sign up here.

12 responses so far

Aug 07 2008

Don’t Be a Knuckle Dragger, Go Vertical

Published by Blaine561 under Options Trading, stock market

Bill Johnson’s book is amazing. He can take a complex subject like a “surrogate call option” and explain it so well that a stock option trader can really learn new ways to make money with stock options. If you are an option trader and haven’t purchased his book Options 101 - From Theory to Application- you’re probably losing money. Like most “self-taught” option traders, I believed that “trading options” was buying an out-of-the-money call and hoping for appreciation before expiration was the main strategy. As it turns out, it is the most widely used strategy used by option traders….and compared to the myriad of option strategies available, this “main” strategy is, indeed, a Neanderthal, knuckle dragging option investing strategy-worthy of the uninformed. No wonder 90% of option traders lose money and return to investing for the masses-stocks and mutual funds.

After reading Options 101 - From Theory to Application, I felt ashamed. I had erroneously accepted the fact that I understood what options were all about. Fortunately, I “saw the light” before abandoning the most interesting and flexible investment vehicle available-the stock option. Now, my strategy is still basically the same-buy low and sell high- but the methods are like comparing Homer Simpson with Henry Kissinger. Doh!!

As a result of Bill’s tutelage, I now purchase vertical option spreads when I see a high probability bullish scenario. Here’s how it works. First, look for an in-the-money call option that has a delta of at least 85%. That means an option that will mimic the move of the underlying stock by at least 85%; if the underlying stock moves up $1, the in-the-money call option will move up at least 85 cents. You see, knuckle draggers, an out-of-the money call option may be a correct selection but the option may move only a small fraction of the amount of the underlying stock. Now comes the cool part….once you secure your in-the-money-call, you sell (write) an out-of-the-money call. The premium provides an offset for the higher costs of purchasing the in-the- money call. The caveat is that you buy and sell in the same expiration month but at different strikes.

For example, suppose you think Home Depot (HD) will go up in the next 60 days. You would purchase an in-the-money call with a delta at least above .85. Currently HD sells for $29.20. The $20 Jan 08 Call option has a premium of $9.10 per share and a delta of .99; that is if HD moves up $1 so will the premium for the $20 call. You now have effectively substituted the call for the actual stock but at less than half the cost. (to purchase 200 shares of HD would cost $5,820. Purchasing two of the $20 in-the-money high delta calls costs $1820). Now to help reduce the cost of the call options, the trader will sell two $30 out- of-the-money call options (always try to sell as close to at-the-money as possible) for a premium payment of $1.05 per share. That would help offset the call premium by $210 for a net position cost of $1610.

If the HD moves up to $32 before being called away, you would have a profit of: ($32-$20) x 200= $2400-$1610= $800 net of commissions or an ROI of 49%. If a trader had just purchase the $20 call you would have had an ROI of 43%.

Let’s say that the stock doesn’t move and is at $29 at expiration. That means the option trader would have had a profit of ($29-20) x200-$1610= $190 net of commission or an ROI of 11.8 %. If the trader hadn’t sold the out-of-the-money call option, the trader would have had a loss.

When an option trader sets up a vertical spread, this is an immediate indication that the trader understands enough of stock option theory to at least play in the arena. If you are trading options and don’t understand how spreads work, you are best to step back and purchase some education like Bill Johnson’s Options 101 - From Theory to Application. (currently # 1 at Amazon).

To learn more about options, take advantage of Options University to give you the education on everything you need to know about options-from basic to master. (www.optionsuniverstiy.com)

Get your free 7 Deadly Sins Report and click here, presented by Options University, and register now for the Forex World Currency Options Class with Greg MaDermott, starting August 18, 2008.

If you are interested in joining Options University’s affliiate program please sign up here.

3 responses so far

Aug 06 2008

In The Money Is The Only Place To Be

Published by Blaine561 under Options Trading, stock market

Damn, if only I’d known that before! It seems so clear once it’s explained. Yet for many years, I’ve been making the same mistake over and over. No wonder my option winnings have been less than satisfactory.
 
It appears that I, along with the majority of stock option traders, believe that the way to make money is to buy out-of-the-money calls or puts. They’re cheaper and thus the potential ROI is potentially larger than buying in-the-money options, which are much more expensive. As I recently found out, this misconception is what shoots down about 90% of most would-be option traders. Bill Johnson of Options University really opened up my eyes on the on the first day of the Options 101 course offered online at Options University. (www.optionsuniversity.com).
 
Bill made it so clear. You see, stock options only really emulate close to a dollar for dollar move with the underlying stock when delta is above .80; and that usually only happens only with in-the-money options. If a trader has an out-of- the-money option, that option may have a delta of only .3 meaning if the underlying stock moves up one dollar, the option may only move up thirty cents. So, even though the trader may pick the right direction and the move happens before the expiration, that doesn’t mean the option trader will have a winner. First, the stock option must move into-the-money and pass breakeven (strike plus premium) before there is a profit. The probability of an option moving from an out-of-the-money to a profit position is much less than an in-the-money option moving into profit territory.
 
Lets look at an example that will open your eyes-at least it did for me:
 
Current Price: $35
 
Strike Price Option Price        Delta               Breakeven       Extrinsic Value
 
    $30               5.20                  85                      35.20                $ .20
    $35               1.00