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Smb options tribe_5_28_2013
The document provides an overview of using vertical spreads to increase returns from options trading. It discusses selecting stocks and parameters for bull call spreads, including buying an in-the-money call with higher delta and selling an out-of-the-money call to benefit from time decay. The strategy aims to profit if the stock stays above the short strike by expiration. Risks include losing the entire investment if the stock moves adversely, while upside is limited. Homework, checklists, and experience are emphasized to trade successfully.
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Smb options tribe_5_28_2013
- 1. Increasing Your edgewith Vertical Spreads Jared A Levy Senior Derivatives Specialist, Zacks.com Jaredlevy.com
- 3. Jaredlevy.com 18years experience Member of 3 major exchanges Traded tens of thousands of option contracts daily Senior equities strategist for Zacks.com ◦ Whisper Trader, TAZR Formerly with PEAK6 & ONN.tv Managing Partner of Belpointe Alternatives Featured on CNBC (Fast Money), Fox, Fox Business, Bloomberg TV, CNN Radio Author of “Your Options Handbook” & “The Bloomberg Visual Guide to Options”
- 4. Successful tactics Forming your trade checklist Idea generation basics Grading your trades Vertical spread basics (example) Live selection process
- 5. Homework Experience(pitfalls and advantages) Statistics Technicals Strategy Selection Psychological control Money Management Exit Strategies (profit and loss) USE A DAMN CHECKLIST!!
- 7. • Find Targets •Confirm Fundamentals • Filter Technicals • Check News • Check Earnings • Check Volatility • Check ATR, Beta, etc • Run Theoretical Risk Scenarios • Set Targets, Stops, Set GTC wish orders • Execute
- 9. • Economic Environment •Where are We in the Economic Cycle? • Earnings Trends /Corporate Fundamentals • Technical patterns • News /Blog Flow • What are the Talking Heads Saying? • What are your peers saying?
- 11. Step 2 :Finding Your Target
- 12. • Scanning • Finviz.com •Zacks.com • Ranking System • Zacks.com • CANSLIM • Trademonster.com • Fundamental Triggers • Finviz.com • Yahoo finance • News Triggers • Marketwatch.com • Wsj.com
- 13. • Corporate Triggers •Earnings.com • Sec.gov • Technical Triggers • Tc2000.com • Finviz.com • Volatility Triggers • Optionshouse.com • Trademonster.com • Livevol.com
- 16. • Details canbe forgotten in heat of the moment • Ensures consistency • Helps with allocation, strategy selection • Rationalizes every trade • Weeds out the crap!
- 17. • A RatedTrade - Risk up to 10% or more of your total portfolio Okay to use riskier strategies (risk reversal, synthetic, double vertical spread, etc.) • B Rated Trade - Risk between 5-9% of account, but use more caution Okay to use basic verticals and limited risk, higher probability trades • C Rated Trade - Risk between 2-5% of account, use high caution and only low risk, high probability trades (out of the money verticals) Exit quicker than usual • D Rated Trade - Risk less than 2% of your total portfolio. This trade is more high risk or what we call a flier. Trades with lower probability can generate a profit, but probability will generally be less because there are more than a couple issues. • F Rated Trade - Don’t do it if at all possible.
- 19. • Use astrategy guide! • Strategy selection • Substituting options for stock • Findings in macro & stock analysis • Another layer of analysis • Greeks • Alternative Vertical Spread • Volatility and Standard Deviation
- 21. • Trend following •Trade the signals • Exits • Don’t excessively pyramid! • Losing • De-correlate • Journal • **Get to know common trading mistakes
- 22. Vertical Spread Trading Onemajor tool in your arsenal
- 23. “Vertical Spread” A “Debit”Spread That Favors Time Decay An Alternative to the Bull Put Credit
- 24. • Purchase CallGreater Delta (lower strike) • Sell Call Lower Delta (higher strike) • Both in-the-money • Same Expiration Month • Mildly Bullish Sentiment • Max profit, Stock Above Short Strike At Expiration • Debit Trade (can’t lose more than you pay) • Stock can stay flat & spread can potentially attain maximum profit • Same risk as Bull Put Spread Front Month ITM Bull Call Spread Defined
- 25. Delta: .70 -.99 Expiration: DTE 1-30 Premium: Spread .20 or less Open Interest: Above 100 Position: Below short call, distance determines risk and alters Greeks Front Month Bull Call Spread *Following these parameters will not guarantee profitable results. You must make your own investment decisions.
- 26. Delta: .10 -.80 Expiration: DTE 1-30 Premium: Spread .20 or less Open Interest: Above 100 Position: At or below stock price, above long call Front Month Bull Call Spread *Following these parameters will not guarantee profitable results. You must make your own investment decisions.
- 27. • All OptionsDecay over Time. • Decay accelerates drastically in the last month. • Short ATM call premium is greater and is decaying faster than the ITM call. • Stock needs to stay at or above short strike by expiration
- 28. I I II I I I I +4 +3 +2 +1 $ -1 -2 -3 -4 Buy Jan 15 Call for $6.10, Sell 20 Call for 2.80 (BCS $3.30) - Stock @ $21.00 Breakeven $18.30 ………………………..I I I I I I I I I 16 17 18 19 20 21 22 23 24 STOCK PRICE P R O F I T & L O S S * $1.70 Max Profit Entered Spread here $3.30 Max Loss
- 29. • Stock toexpire at or above the short call • Take advantage of inflated ATM Option Time Value • iVol to drop • Look for a target of 8-15% profit in trade in less than 15 days • Buy a Spread that has a minimum profit potential of 10% • Good for directional earnings plays
- 31. More aggressive? ◦Widen distance between strikes ◦ Place short strike closer or even at spot price ◦ Delta, Gamma, Vega increased Less aggressive? ◦ Narrow strikes ◦ Create more distance between short strike and spot price ◦ Delta, Gamma, Vega decreased
- 32. • Is Assignmenta Risk here? • Can I lose more than what I pay? • Do I have to have money to buy the stock? • Will I have a margin Call? NO! *Contact your broker about expiration procedu
- 33. • You canlose your entire investment • Trade may have an upside-down risk/reward ratio • Limited upside • Subject to volatility • You want volatility to fall as a general rule Risks
- 34. • Cost oftrade must not be MORE than max profit. • The closer the Short Call strike is to the stock, the more volatile the spread’s P&L will be. (Gamma) • Check your broker’s exercise costs; may be more cost-effective to exit trade on Expiration Day. • (Long Call will have to be exercised)
- 35. • Chart Startsto Weaken Substantially • Stopped out / Acceptable Loss • -Determine before entry • Profit Target Met • Expiration Friday • -On expiration, if the stock is above the call that you sold you will attain max profit
- 36. More AdvancedConcepts ◦ Standard Deviation as a form of a stocks typical movement ◦ Target “normal” range of stock ◦ Sell call outside that range LEARN ADVANCED TECHNIQUES IN MY VIDEO SERIES!
- 37.