What can I say that you have not already read on every other web site, in a newspaper, or heard on radio or television?
This was a huge sell-off!
Let's get a couple things straight. You could not have predicted this. These things can and do happen in the market and you need to plan for them. It has to be part of your trading methodology.
If you were short a put spread on one of the indices, chances are you'll experience a loss this month. Your job is not to avoid the loss, your job is to minimize the loss.
We have experienced a change in trend. This is when our credit spread strategy is vulnerable to a loss. Limit the loss and earn it back over the remaining months.
So, how is CROX doing? Like the rest of the market it sold off, too. My trading plan has me holding the position unless the stock breaks below my long strike. That gives me the option of taking assignment on the stock, closing the spread for a partial loss, or rolling the spread forward.
This market changed my thinking somewhat. I am short the 45/50 bull put spread. I decided to roll into an iron butterfly by selling a 50/55 call spread. This increased my credit by more than double. The bigger credit has reduced my maximum risk. The "price" I paid is that my profit is now dependent upon CROX remaining in a range.
If CROX holds current price levels I'll hold the trade heading into expiration.
The futures are trading higher this morning. Let's see what happens!
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Wednesday, February 28, 2007
Tuesday, February 27, 2007
SPX Selling Off and Implied Volatility Spiking
Wow! It's ugly out there. I'm looking at March, yes March, bull put credit spreads on the SPX.
What has changed?
Implied volatility has spiked with this morning's sell-off. The VIX is at 12.91, reflecting a desire in the market to buy put options.
Be cautious, however. This sell-off may be signaling a change in market direction, which is a dangerous time for us index credit spread traders. March options have just a bit more than a couple weeks left in them.
By the way, CROX is down but is still above our short strike.
Good trading!
Christopher Smith
TheOptionClub.com
What has changed?
Implied volatility has spiked with this morning's sell-off. The VIX is at 12.91, reflecting a desire in the market to buy put options.
Be cautious, however. This sell-off may be signaling a change in market direction, which is a dangerous time for us index credit spread traders. March options have just a bit more than a couple weeks left in them.
By the way, CROX is down but is still above our short strike.
Good trading!
Christopher Smith
TheOptionClub.com
Monday, February 26, 2007
Market Update and CROX Trade Review
The market has been non-commital lately. We do remain in an overall bull market, but the market has been difficulty making new highs and maintaining its gains.
These are difficult markets to trade. The low implied volatility makes it difficult to trade credit spreads. It's not a bad time to stay on the sidelines, which is exactly what we have done with our SPX trading, by virtue of our trading rules.
Our CROX trade is now demanding some of our attention. I looked at it over the weekend. My sense is that the shorts are trying to pressure to stock.
Today it opened below its 20-day moving average and is current down about .65 - .70. The 50-day moving average is below the level of our short strike, but not tremendously. We still have a small profit in the trade. CROX's primary trend is still up, so we are in a "wait and see" mode.
Tomorrow evening we have a complimentary tele-seminar scheduled. Visitors to this blog are welcomed. Additional information was posted yesterday on this blog and you can register here:
http://www.theoptionclub.com/support/ianieri-seminar.html
I am registered for the presentation and hope you can find the time to join us.
Good trading!
Christopher Smith
TheOptionClub.com
These are difficult markets to trade. The low implied volatility makes it difficult to trade credit spreads. It's not a bad time to stay on the sidelines, which is exactly what we have done with our SPX trading, by virtue of our trading rules.
Our CROX trade is now demanding some of our attention. I looked at it over the weekend. My sense is that the shorts are trying to pressure to stock.
Today it opened below its 20-day moving average and is current down about .65 - .70. The 50-day moving average is below the level of our short strike, but not tremendously. We still have a small profit in the trade. CROX's primary trend is still up, so we are in a "wait and see" mode.
Tomorrow evening we have a complimentary tele-seminar scheduled. Visitors to this blog are welcomed. Additional information was posted yesterday on this blog and you can register here:
http://www.theoptionclub.com/support/ianieri-seminar.html
I am registered for the presentation and hope you can find the time to join us.
Good trading!
Christopher Smith
TheOptionClub.com
Sunday, February 25, 2007
Stock Options Trading Tele-Seminar!
I just finished reading an article in this weekend's edition of Investors Business Daily about the rapidly changing landscape for the financial exchanges.
It seems that stocks are no longer the sole darlings of the NASDAQ, NYSE, or other powerhouse exchange floors. Options, FOREX, and futures, are receiving increased attention from both exchange operators and investors.
The world is changing. It is changing rapidly.
The big question for you, and me, is whether we are adapting along with this rapidly changing landscape. It is not easy, but you are not alone and there are some solid resources out there to help you keep pace.
When the exchanges went digital several years ago, professional floor traders became a dying breed. One floor trader, Ron Ianieri, knew he had to adapt and decided to take his years of experience and expertise, and teach retail traders how to trade options the right way.
I can tell you that Ron is one of the best in the world. That is why well known experts like Steve Nison, Jon Najarian, Price Headley, and Bill Johnson, as well as other experts like Tom Sosnoff, want to work with him.
This coming Tuesday, Ron Ianieri is putting on a complimentary tele-seminar designed to answer a couple questions you should be asking yourself.
http://www.theoptionclub.com/support/ianieri-seminar.html
Should you be trading options? What about futures or FOREX? Do stocks still play a role?
Obviously, we think options are a key component to both investing and trading success. But, what role do these other products play?
What role should they play?
These are the questions Ron will tackle for us Tuesday evening.
Please note that there is a practical limit to the number of people that can call in for the tele-seminar. So, while there is no charge for attending, space is limited.
I do not know what the limit of their dial-in service is, but I do know our membership alone is approaching 3,000 and I also know Ron's company has invited others, so there is no time like the present to register:
http://www.theoptionclub.com/support/ianieri-seminar.html
I also suggest calling in a little early, if possible.
It should be an interesting call, so if you can set aside the time I encourage you to attend.
Good trading!
Christopher Smith
TheOptionClub.com
It seems that stocks are no longer the sole darlings of the NASDAQ, NYSE, or other powerhouse exchange floors. Options, FOREX, and futures, are receiving increased attention from both exchange operators and investors.
The world is changing. It is changing rapidly.
The big question for you, and me, is whether we are adapting along with this rapidly changing landscape. It is not easy, but you are not alone and there are some solid resources out there to help you keep pace.
When the exchanges went digital several years ago, professional floor traders became a dying breed. One floor trader, Ron Ianieri, knew he had to adapt and decided to take his years of experience and expertise, and teach retail traders how to trade options the right way.
I can tell you that Ron is one of the best in the world. That is why well known experts like Steve Nison, Jon Najarian, Price Headley, and Bill Johnson, as well as other experts like Tom Sosnoff, want to work with him.
This coming Tuesday, Ron Ianieri is putting on a complimentary tele-seminar designed to answer a couple questions you should be asking yourself.
http://www.theoptionclub.com/support/ianieri-seminar.html
Should you be trading options? What about futures or FOREX? Do stocks still play a role?
Obviously, we think options are a key component to both investing and trading success. But, what role do these other products play?
What role should they play?
These are the questions Ron will tackle for us Tuesday evening.
Please note that there is a practical limit to the number of people that can call in for the tele-seminar. So, while there is no charge for attending, space is limited.
I do not know what the limit of their dial-in service is, but I do know our membership alone is approaching 3,000 and I also know Ron's company has invited others, so there is no time like the present to register:
http://www.theoptionclub.com/support/ianieri-seminar.html
I also suggest calling in a little early, if possible.
It should be an interesting call, so if you can set aside the time I encourage you to attend.
Good trading!
Christopher Smith
TheOptionClub.com
Thursday, February 22, 2007
Implied Volatility on the SPX and a down day for CROX
Today I am seeing some selling in CROX. It is hovering around its 20-day moving average and a scan of the news shows me nothing that raises concerns. The position remains open.
Back to the SPX, now. With implied volatilities so low, selling credit spreads is not the easy pickings we would prefer. For us, March is a closed chapter. April's expiration is less than 60-days away, so we can start looking there.
Because we are selling additional time, make sure you receive an additional reward for extending the time horizon. I have looked at the chain and the premiums are not particularly rich right now. The SPX is off a bit more than 4 points today, but the VIX still remains low at 10.43.
Christopher Smith
TheOptionClub.com
Back to the SPX, now. With implied volatilities so low, selling credit spreads is not the easy pickings we would prefer. For us, March is a closed chapter. April's expiration is less than 60-days away, so we can start looking there.
Because we are selling additional time, make sure you receive an additional reward for extending the time horizon. I have looked at the chain and the premiums are not particularly rich right now. The SPX is off a bit more than 4 points today, but the VIX still remains low at 10.43.
Christopher Smith
TheOptionClub.com
Wednesday, February 21, 2007
Implied Volatility and In-The-Money Options
Let's talk more about implied volatility.
A recent question I received touched upon the concept of in-the-money options and how, or if, they are affected by changes in implied volatility. It is a good question and one that deserves a little exploration here on the blog.
Below is a graphic, courtesy of ChartBender, that illustrates a key feature of in-the-money options. Each panel in the graphic reveals the value of a $35 XYZ call option.
Figure 1 assumes that our call option is worth $3 while XYZ is trading at $37 per share. Our $35 call option is $2.00 in-the-money. That means that the options has $1 worth of time value.
Intrinsic value is equal to the amount by which the option is in-the-money. It is not effected by implied volatility, the passage of time, the rise or fall of interest rates. It is simply equal to the amount by which the option is in-the-money.
When buying in-the-money options, it is worth noting that a portion of the option's value is comprised of intrinsic value. That intrinsic value is not effected by implied volatility. As a result, the overall price of the option is less vulnerable to changes in implied volatility.
However, prior to expiration, some portion of an in-the-money option will also consist of time value. In Figure 1, the option has $1.00 worth of time value. That time value can and will be effected by changes in implied volatility. If the option is comprised of a relatively small amount of time value, changes in implied volatility will probably have little effect, positive or negative.
In Figure 2, XYZ is trading at $36 per share. The option has lost $1.00 worth of its intrinsic value. However, the option price has only dropped from $3 to $2.25; a difference of just .75. The extra .25 is now comprised of additional time value. Since more than 50% of this in-the-money option's value consists of time value, implied volatility and theta decay will have a bigger impact upon it.
Figure 3 demonstrates an out-of-the-money contract. Naturally, there is no intrinsic value and the entirety of the option's $1.00 valuation is subject to changes in implied volatility.
It is time to start thinking about the significance of all this and how you might incorporate a better understanding of options pricing into your trading. Should you be buying in-the-money options? Are out-of-the-money options a better value? Does it depend upon whether implied volatility is relatively high or low?
We will talk more about this is later posts. In the meantime, do spend some time grappling with the issue and do feel free to jump onto our discussion board. If you have done so already, you may also want to take the time to watch a training video about using implied volatility to value options.
Good trading!
Christopher Smith
TheOptionClub.com
A recent question I received touched upon the concept of in-the-money options and how, or if, they are affected by changes in implied volatility. It is a good question and one that deserves a little exploration here on the blog.
Below is a graphic, courtesy of ChartBender, that illustrates a key feature of in-the-money options. Each panel in the graphic reveals the value of a $35 XYZ call option.
Figure 1 assumes that our call option is worth $3 while XYZ is trading at $37 per share. Our $35 call option is $2.00 in-the-money. That means that the options has $1 worth of time value.
Intrinsic value is equal to the amount by which the option is in-the-money. It is not effected by implied volatility, the passage of time, the rise or fall of interest rates. It is simply equal to the amount by which the option is in-the-money.
When buying in-the-money options, it is worth noting that a portion of the option's value is comprised of intrinsic value. That intrinsic value is not effected by implied volatility. As a result, the overall price of the option is less vulnerable to changes in implied volatility.
However, prior to expiration, some portion of an in-the-money option will also consist of time value. In Figure 1, the option has $1.00 worth of time value. That time value can and will be effected by changes in implied volatility. If the option is comprised of a relatively small amount of time value, changes in implied volatility will probably have little effect, positive or negative.
In Figure 2, XYZ is trading at $36 per share. The option has lost $1.00 worth of its intrinsic value. However, the option price has only dropped from $3 to $2.25; a difference of just .75. The extra .25 is now comprised of additional time value. Since more than 50% of this in-the-money option's value consists of time value, implied volatility and theta decay will have a bigger impact upon it.
Figure 3 demonstrates an out-of-the-money contract. Naturally, there is no intrinsic value and the entirety of the option's $1.00 valuation is subject to changes in implied volatility.
It is time to start thinking about the significance of all this and how you might incorporate a better understanding of options pricing into your trading. Should you be buying in-the-money options? Are out-of-the-money options a better value? Does it depend upon whether implied volatility is relatively high or low?
We will talk more about this is later posts. In the meantime, do spend some time grappling with the issue and do feel free to jump onto our discussion board. If you have done so already, you may also want to take the time to watch a training video about using implied volatility to value options.
Good trading!
Christopher Smith
TheOptionClub.com
Tuesday, February 20, 2007
Credit Spread Trading Update
A little downside in the market this morning. Nothing concerning and it seems that the selling has subsided.
I am still standing aside this month on the SPX credit spread strategy. I am not seeing anything compelling, and there are opportunities elsewhere that better justify the risk. We are already up for the year, so we will still be finishing the first quarter showing solid profit.
The volatility is better in some of the individual stocks. While this blog is primarily concerned with index trading, I have elected throw in some other material because it is important to realize that you do need to be flexible as a trader.
Good trading!
Christopher Smith
TheOptionClub.com
I am still standing aside this month on the SPX credit spread strategy. I am not seeing anything compelling, and there are opportunities elsewhere that better justify the risk. We are already up for the year, so we will still be finishing the first quarter showing solid profit.
The volatility is better in some of the individual stocks. While this blog is primarily concerned with index trading, I have elected throw in some other material because it is important to realize that you do need to be flexible as a trader.
Good trading!
Christopher Smith
TheOptionClub.com
Saturday, February 17, 2007
Implied Volatility Chart Training Video
I have received some questions about implied volatility and the role it plays with trade selection. I have shared with you two of the tools that I use to assess implied volatility, there are certainly others, but if you plan to trade options you will need something to help you understand where implied volatility is relative to recent historical measures.
Stock options are derivative securities. They have no value innate to themselves. All of their value is derived from other factors. Those factors, commonly referred to as the "option greeks", include the price of the underlying security, the amount of time left until the option expires, interest rates and dividend risks, and the collective expectations of the market for future price movement of the underlying security.
No one knows what the price will be in the future. However, if the consensus among market participants is that a stock is likely to move significantly, up or down, that consensus will be reflected in their willingness to pay a higher price for options on that stock. Conversely, if the market believes that future price movement will be minimal the option prices will fall lower.
What is happening is that the market participants are anticipating future price volatility. What will GOOG's price be in 30 days? I do not know, either. However, the stock price is prone to make big moves. It is a volatile stock. Option prices reflect that, and rightfully so.
We can look back in time to see what price movements a stock actually made. We can measure that historical volatility. Historical volatility is derived from the actual price movements the underlying security has made in the past. Options prices change with the market's changing expectations of future price volatility, however. Those option prices imply what the market's expectation is for future price movement. Hence, that component of an option's price is called "implied volatility."
I have made arrangements for you to view a training video for Volcone users. Ron Ianieri and Bill Johnson cover some of the theory behind option pricing and demonstrate how a volatility cone can be used to assess the relative price of an option.
Valuing Options with Implied Volatility Training Video
Volatility plays a huge role in option pricing. If you assess volatility correctly, you stand a very good chance of not losing money even if you are wrong about where price is headed. On the other hand, if you are wrong about volatility you may lose money on your trade even if you are right about the underlying price movement.
I hope you find the video helpful.
Christopher Smith
TheOptionClub.com
Stock options are derivative securities. They have no value innate to themselves. All of their value is derived from other factors. Those factors, commonly referred to as the "option greeks", include the price of the underlying security, the amount of time left until the option expires, interest rates and dividend risks, and the collective expectations of the market for future price movement of the underlying security.
No one knows what the price will be in the future. However, if the consensus among market participants is that a stock is likely to move significantly, up or down, that consensus will be reflected in their willingness to pay a higher price for options on that stock. Conversely, if the market believes that future price movement will be minimal the option prices will fall lower.
What is happening is that the market participants are anticipating future price volatility. What will GOOG's price be in 30 days? I do not know, either. However, the stock price is prone to make big moves. It is a volatile stock. Option prices reflect that, and rightfully so.
We can look back in time to see what price movements a stock actually made. We can measure that historical volatility. Historical volatility is derived from the actual price movements the underlying security has made in the past. Options prices change with the market's changing expectations of future price volatility, however. Those option prices imply what the market's expectation is for future price movement. Hence, that component of an option's price is called "implied volatility."
I have made arrangements for you to view a training video for Volcone users. Ron Ianieri and Bill Johnson cover some of the theory behind option pricing and demonstrate how a volatility cone can be used to assess the relative price of an option.
Valuing Options with Implied Volatility Training Video
Volatility plays a huge role in option pricing. If you assess volatility correctly, you stand a very good chance of not losing money even if you are wrong about where price is headed. On the other hand, if you are wrong about volatility you may lose money on your trade even if you are right about the underlying price movement.
I hope you find the video helpful.
Christopher Smith
TheOptionClub.com
Friday, February 16, 2007
CROX Credit Spread Trade Update
Hey,anyone open a credit spread on CROX yesterday or the day before?
Today CROX rebounded nicely off of support. The March 45/50 bull put spread has lost more than .50 of its value. That's a 10% return on risk in two days...
Christopher Smith
TheOptionClub.com
Today CROX rebounded nicely off of support. The March 45/50 bull put spread has lost more than .50 of its value. That's a 10% return on risk in two days...
Christopher Smith
TheOptionClub.com
Stock Options Trade Advisory Service With Promise
Not much going on with the SPX worth talking about. With less than 30-days until the March expiration I will soon write the month off and begin looking toward April for trading possibilities. You should also note that on February 20th, CROX will be reporting earnings.
I do have something to tell you about, however!
Last night I sat in on a presentation by Ron Ianieri about a new service he is involved with and in the process of launching. I have worked with Ron and his team for a few years now. They guy is really pretty incredible when it comes to options and has taught me a great deal.
In any event, he has teamed up with a guy by the name of Shay Horowitz who is a chart reading wizard, apparently. Shay, I don't know him, but I know Ron and know that he chooses his company selectively. So what these guys did is put together an options trading advisory service.
I have never recommended an advisory service. Candidly, when I first started trading options I signed up for a few of them. I never made money from any of them. The problem is that these services don't manage your account, but simply publish a series of trades and there isn't much in the way of oversight. Fortunately, I wizened up and discovered that either you've got to manage your own account or you have to hire a real live registered investment advisor.
I have consider starting an advisory service myself, but if I did I wanted it to be something different. I would want it to be a place where subscribers could learn to use the information being provided to responsibly manage their own accounts. Who knows? I may still do it.
Ron Ianieri is doing it. I sat in on a "pre-launch" presentation last night to see what Ron and his crew were up to. As he described it, the service consists of Shay Horowitz identifying stocks that he things ripe for the trading. He passes those along to Ron with his assessment of what he things the stock is going to do and when it is going to do it. Ron applies his skill as an options strategist and trader, selecting a strategy that not only captures the anticipated price action but that also sets the trade up for future adjustment. They put all of this together in a detailed video, which you grab from their web site.
There is more, but what you should understand at this point is that you're not simply getting instructions to pass along to your broker. You are getting a video presentation by two highly skilled people, showing how and why they are doing what it is that they are doing. You not only get their trades, but you get to learn how they find them and think their way through them.
They are also going to offer a "Platinum" service, which has a live trader available during market hours watching the trades. If things get a little dicey intra-day and you're getting nervous, wondering what Ron will be doing in the evening video, you can express yourself live!
I am excited by this new service. No small part of my enthusiasm is due to the fact that Ron Ianieri is behind it. The concept behind it all is that Ron wants to empower his subscribers with enough knowledge and understanding that eventually they can go out and trade on their own, without the need for his service.
Anyway, it was a good presentation and I thought I would pass it along. You can get more information at:
Good trading!
Christopher Smith
TheOptionClub.com
I do have something to tell you about, however!
Last night I sat in on a presentation by Ron Ianieri about a new service he is involved with and in the process of launching. I have worked with Ron and his team for a few years now. They guy is really pretty incredible when it comes to options and has taught me a great deal.
In any event, he has teamed up with a guy by the name of Shay Horowitz who is a chart reading wizard, apparently. Shay, I don't know him, but I know Ron and know that he chooses his company selectively. So what these guys did is put together an options trading advisory service.
I have never recommended an advisory service. Candidly, when I first started trading options I signed up for a few of them. I never made money from any of them. The problem is that these services don't manage your account, but simply publish a series of trades and there isn't much in the way of oversight. Fortunately, I wizened up and discovered that either you've got to manage your own account or you have to hire a real live registered investment advisor.
I have consider starting an advisory service myself, but if I did I wanted it to be something different. I would want it to be a place where subscribers could learn to use the information being provided to responsibly manage their own accounts. Who knows? I may still do it.
Ron Ianieri is doing it. I sat in on a "pre-launch" presentation last night to see what Ron and his crew were up to. As he described it, the service consists of Shay Horowitz identifying stocks that he things ripe for the trading. He passes those along to Ron with his assessment of what he things the stock is going to do and when it is going to do it. Ron applies his skill as an options strategist and trader, selecting a strategy that not only captures the anticipated price action but that also sets the trade up for future adjustment. They put all of this together in a detailed video, which you grab from their web site.
There is more, but what you should understand at this point is that you're not simply getting instructions to pass along to your broker. You are getting a video presentation by two highly skilled people, showing how and why they are doing what it is that they are doing. You not only get their trades, but you get to learn how they find them and think their way through them.
They are also going to offer a "Platinum" service, which has a live trader available during market hours watching the trades. If things get a little dicey intra-day and you're getting nervous, wondering what Ron will be doing in the evening video, you can express yourself live!
I am excited by this new service. No small part of my enthusiasm is due to the fact that Ron Ianieri is behind it. The concept behind it all is that Ron wants to empower his subscribers with enough knowledge and understanding that eventually they can go out and trade on their own, without the need for his service.
Anyway, it was a good presentation and I thought I would pass it along. You can get more information at:
Good trading!
Christopher Smith
TheOptionClub.com
Thursday, February 15, 2007
Analysis of Stock Chart on CROX
I need to follow up on the CROX trade because I have had several questions about it. First off, no you do not want to trade based solely on the IV or relative cost of the option position.
You need to do you homework and be smart about the positions you open, those that you take a pass on, and how you manage your risk. It is also true that CROX has sold off the last few days and I did receive one or two "catch a falling knife" comments.
Let's back up and take it from the top. Even with the selling over the last few days, CROX remains in an overall up-trend. For affirmation of my opinion you could always turn to the MarketClub Smart Scan analysis which says:
So, what's the over all picture?
The primary trend is up. CROX has pulled back to support. IV has pushed some additional value into the options. (See my prior post.) Following the Smart Scan advice, we would want to use tight money management stops for any trade. We might keep an eye on CROX and wait for a buy signal or for it to turn higher before opening a trade, but how you choose to time your entry is up to you.
Just make sure you have a plan should CROX break out of its longer term trend.
Trade well and mind your risk.
Christopher Smith
TheOptionClub.com
You need to do you homework and be smart about the positions you open, those that you take a pass on, and how you manage your risk. It is also true that CROX has sold off the last few days and I did receive one or two "catch a falling knife" comments.
Let's back up and take it from the top. Even with the selling over the last few days, CROX remains in an overall up-trend. For affirmation of my opinion you could always turn to the MarketClub Smart Scan analysis which says:
"Uptrend - CROCS INC (NASDAQ:CROX) - Smart Scan Chart Analysis is showing some near term weakness. However, this market remains in the confines of a longer term uptrend. Uptrend with tight money management stops."If you look at the above chart, you'll notice that CROX broke out, and has traded back to support. You'll notice that it has pretty well tracked with its moving averages. You will notice a red sell signal triggered a few days back, which may be a signal for short-term profit taking but it probably should not be used as a signal for getting short unless you are comfortable with counter trend trading. Stochastics demonstrates an oversold condition.
So, what's the over all picture?
The primary trend is up. CROX has pulled back to support. IV has pushed some additional value into the options. (See my prior post.) Following the Smart Scan advice, we would want to use tight money management stops for any trade. We might keep an eye on CROX and wait for a buy signal or for it to turn higher before opening a trade, but how you choose to time your entry is up to you.
Just make sure you have a plan should CROX break out of its longer term trend.
Trade well and mind your risk.
Christopher Smith
TheOptionClub.com
Implied Volatility and Options Trading
It is another quiet day for the SPX and I do not expect that I'll be placing an order for either call or put option spreads. Implied volatility levels are too low to allow me a sufficient credit at a price level I am comfortable selling a spread.
There are other trading opportunities, however. Yesterday, I shared one of the tools I use to assess implied volatility. Another tool I use a service provided by ChartBender.
If you've been following this blog, you'll remember that I opened a position on CROX a few days back. That position turned profitable very quickly, but CROX has been retracing after its recent breakout and the position is being effected not only by the price movement of CROX, but also increased implied volatility.
The ChartBender graphic helps us see when a given options position is relatively expensive or growing cheap. Cheap positions are typically candidates for a purchase, while the more expensive positions are ripe for selling. If your outlook on CROX is bullish and the stock holds support, it makes a nice candidate for a bull put credit spread. As you can see, the value of the 50-45 bull put spread has been steadily increasing providing a nice credit.
You can check out the ChartBender service on their web site. If you're interested, you can get a nice discount on any of their product line by simply identifying "TheOptionClub" as your referrer and as the promo code. They'll knock a fair piece off of their pricing for you.
In the meantime, we'll keep an eye on the SPX to see if an opportunity develops. Low volatility levels makes it difficult to sell option premium profitably. If you're a credit spread trader, it is time to exercise some patience and to pick your trades carefully.
Trade well and mind your risk.
Christopher Smith
TheOptionClub.com
There are other trading opportunities, however. Yesterday, I shared one of the tools I use to assess implied volatility. Another tool I use a service provided by ChartBender.
If you've been following this blog, you'll remember that I opened a position on CROX a few days back. That position turned profitable very quickly, but CROX has been retracing after its recent breakout and the position is being effected not only by the price movement of CROX, but also increased implied volatility.The ChartBender graphic helps us see when a given options position is relatively expensive or growing cheap. Cheap positions are typically candidates for a purchase, while the more expensive positions are ripe for selling. If your outlook on CROX is bullish and the stock holds support, it makes a nice candidate for a bull put credit spread. As you can see, the value of the 50-45 bull put spread has been steadily increasing providing a nice credit.
You can check out the ChartBender service on their web site. If you're interested, you can get a nice discount on any of their product line by simply identifying "TheOptionClub" as your referrer and as the promo code. They'll knock a fair piece off of their pricing for you.
In the meantime, we'll keep an eye on the SPX to see if an opportunity develops. Low volatility levels makes it difficult to sell option premium profitably. If you're a credit spread trader, it is time to exercise some patience and to pick your trades carefully.
Trade well and mind your risk.
Christopher Smith
TheOptionClub.com
Wednesday, February 14, 2007
Credit Spreads and Implied Volatility
This is sort of like one of those fishing stories about the one that got away. For two days I had an open order to sell my put spread and had provided what I thought was more than sufficient room to allow the market maker to make a profit. I was well off the mid-point of the bid / ask spread. In fact, I had lowered by limit to my lowest acceptable credit.
Needless to say, I was not filled but it would have been a beautiful thing if I had been because I would now be poised to open a call spread with the market rebounding yesterday and again today.
With the rally, my plans for the put spread are discarded and I will have to evaluate everything from square one. The closest I dare sell a put spread is 1,385 and today I would receive a very slim price for the sale.
In selling a put spread, not only am I battling against the directional move of the index but I am also having to contend with a volatility level, as measured by the VIX, that is currently at its historic lows. The story is the same on the call side. There simply is not enough premium available at the strikes I would want to sell.
The above graphic reveals a Volcone demonstrating where Implied Volatility lies relative to historic volatility of the index measured over the last 12 months. The two dots represent current IV readings for the ATM March put and call options. The puts carry slightly more IV.
I do not want to push things and try to sell a spread closer to the money because if this rally has legs it will cost me. It is better I simply miss out one month and avoid the potential loss.
I am in a "sidelines" mode. I missed the opportunity to sell a put spread when the market corrected within its trend and the premiums are too thin on the call side. No order will be placed, but I will continue to watch things on the SPX to see if opportunities develop.
In the meantime, the extreme low reading on the VIX does suggest that it may be an good time to get long on Vega. That does not help us with a credit spread strategy, but there are other strategies that can take advantage of low volatility environments.
Christopher Smith
TheOptionClub.com
Tuesday, February 13, 2007
Using Fibonacci To Assess Market Pull-Back
There have been a few questions about specific methods I use to select strikes and time my trade entries. One tool I am using right now to assess a potential pull-back, so as to provide sufficient cushion for my short options, are Fibonacci retracement levels.
Fibonacci was an Italian mathematician who discovered that in nature certain numerical patterns repeat themselves. The retracement levels are projected using his ratios. If you would like to see how they are used, Bill Poulos has done a video demonstrating their use.
I do not spend a lot of effort trying to time market entries, but often will favor one side (bull put spread or bear call spread) and enter that side first. I then look for an opportunity to open the opposite side. With the recent selling and the fact we are in a bullish trend, I will try to open a bull put spread and then look for an opportunity to open a call spread. That has not worked the last two months and I have only been able to get into one side of the trade. That's okay. Some months it just does not work out.
My limit order did not fill yesterday. It will be open again today, but I am on the road so I will not be able to watch it.
Christopher Smith
TheOptionClub.com
Fibonacci was an Italian mathematician who discovered that in nature certain numerical patterns repeat themselves. The retracement levels are projected using his ratios. If you would like to see how they are used, Bill Poulos has done a video demonstrating their use.
I do not spend a lot of effort trying to time market entries, but often will favor one side (bull put spread or bear call spread) and enter that side first. I then look for an opportunity to open the opposite side. With the recent selling and the fact we are in a bullish trend, I will try to open a bull put spread and then look for an opportunity to open a call spread. That has not worked the last two months and I have only been able to get into one side of the trade. That's okay. Some months it just does not work out.
My limit order did not fill yesterday. It will be open again today, but I am on the road so I will not be able to watch it.
Christopher Smith
TheOptionClub.com
Monday, February 12, 2007
Picking Up From Yesterday's S&P 500 Analysis
The market is off slightly today and I am trying to get filled on a fairly distant bull put spread. As I discussed yesterday, there I want to give the S&P 500 a good deal of cushion to the downside. We are still in a bullish trend, but with recent short-term weakness I want to play it safe.
The new March bull put credit spread is being sold five point below where I sold the February spread. My limit order is priced right about the mid-point between the bid and ask. My thinking was that if there is more selling that they order may fill, but so far we've remained fairly steady at a 2 point loss for the day.
Christopher Smith
TheOptionClub.com
The new March bull put credit spread is being sold five point below where I sold the February spread. My limit order is priced right about the mid-point between the bid and ask. My thinking was that if there is more selling that they order may fill, but so far we've remained fairly steady at a 2 point loss for the day.
Christopher Smith
TheOptionClub.com
Sunday, February 11, 2007
Market Analysis for S&P Iron Condor
There was no post on Friday because I had an appointment that had me leaving the house early. I missed Friday's sell-off since I was without computer access until after market close. After assessing the accounts, I have one position that I will close on Monday but nothing major.
Sunday is usually the day I take some time to assess the week's market activity. My family and I usually have things planned on Saturday and we all need some time to decompress after a busy week. Sunday tends to be a bit quiet for us and I can take extra time to read and consider events.
The S&P 500, the overall market in fact, has been in a sustained bull market rally since July of 2006. The larger bull market trend dates back to March of 2003. Rallies and bull markets can last for significant periods of time, but nothing lasts forever. When you have a sustained rally, you need to start questioning whether it is due for a correction.
Friday's sell-off begs that very question. Is the S&P 500 poised for a correction? Well, of course no one knows the answer to that question with any certainty. Pundits on CNBC, cranks on Internet discussion boards, and many of the gurus will no doubt have their opinions. Nonetheless, not one of them knows with any degree of reliability as to whether this latest rally is ready to roll over.
Here is what I know, however. I know that we've been in a nice strong upward trend since breaking out last July. I know that eventually the market will correct at some point, changing its trend. That change in trend may be a sideways consolidation, but more likely it will involve a pull-back in price. I also know that when the market corrects it is then that my credit spread strategy is most likely to result in a loss or require a costly position adjustment.
Here are my current market opinions. These are opinions, not factual recitations. My opinion is that if the market corrects, I expect to see a pull-back to a price level in the range of 1,400 to 1,365. That's not to say that we'll see those levels in an immediate sell-off, and I would expect to see the market pause along the way at various levels of support. On the other hand, if the market continues in its trend I do not expect to see an acceleration taking the SPX outside of its current trend channel, absent a short-term climax run.
Those opinions are the basis upon which I will construct my next round of credit spreads. My goal will be to sell spreads at price levels that I believe have a low probability of being reached by the SPX between now and March expiration, while still producing an adequate credit to justify my risk.
I will have to wait until the market is open to truly assess option premiums, but based upon my preliminary analysis today I will be looking to sell a bull put spread and a bear call spread for a combined credit of $1.20 to $1.70. If I can accomplish that at appropriate strikes, we should have a good chance of adding to our year-to-date gains.
Good trading!
Christopher Smith
TheOptionClub.com
Sunday is usually the day I take some time to assess the week's market activity. My family and I usually have things planned on Saturday and we all need some time to decompress after a busy week. Sunday tends to be a bit quiet for us and I can take extra time to read and consider events.
The S&P 500, the overall market in fact, has been in a sustained bull market rally since July of 2006. The larger bull market trend dates back to March of 2003. Rallies and bull markets can last for significant periods of time, but nothing lasts forever. When you have a sustained rally, you need to start questioning whether it is due for a correction.Friday's sell-off begs that very question. Is the S&P 500 poised for a correction? Well, of course no one knows the answer to that question with any certainty. Pundits on CNBC, cranks on Internet discussion boards, and many of the gurus will no doubt have their opinions. Nonetheless, not one of them knows with any degree of reliability as to whether this latest rally is ready to roll over.
Here is what I know, however. I know that we've been in a nice strong upward trend since breaking out last July. I know that eventually the market will correct at some point, changing its trend. That change in trend may be a sideways consolidation, but more likely it will involve a pull-back in price. I also know that when the market corrects it is then that my credit spread strategy is most likely to result in a loss or require a costly position adjustment.
Here are my current market opinions. These are opinions, not factual recitations. My opinion is that if the market corrects, I expect to see a pull-back to a price level in the range of 1,400 to 1,365. That's not to say that we'll see those levels in an immediate sell-off, and I would expect to see the market pause along the way at various levels of support. On the other hand, if the market continues in its trend I do not expect to see an acceleration taking the SPX outside of its current trend channel, absent a short-term climax run.
Those opinions are the basis upon which I will construct my next round of credit spreads. My goal will be to sell spreads at price levels that I believe have a low probability of being reached by the SPX between now and March expiration, while still producing an adequate credit to justify my risk.
I will have to wait until the market is open to truly assess option premiums, but based upon my preliminary analysis today I will be looking to sell a bull put spread and a bear call spread for a combined credit of $1.20 to $1.70. If I can accomplish that at appropriate strikes, we should have a good chance of adding to our year-to-date gains.
Good trading!
Christopher Smith
TheOptionClub.com
Thursday, February 8, 2007
Trading CROX while waiting on the S&P 500
We are seeing some sell off in the broad market today. That will actually help us get into our next bull put spread on the SPX.
I am not planning on placing a trade today, however. I took a quick look at the option chain this morning and did not see something I was ready to get into. We have time right now to be patient.
I am also trading other positions. One such position is CROX, which is a fairly new stock. They make shoes out of a proprietary resin. My daughter and her friends love them, and so do a lot of other folks.
I got into the position last week and expect to turn a tidy profit in the 20% to 30% range on a limited risk trade. I'm not the only one trading this stock. Adam Hewison and the MarketClub folks have put together a recent video, which will give you an idea of what I saw when I jumped in.
I did not catch the big move shown in the video, but I should still make some money on this one. The market is full of opportunities, so if the S&P 500 does not give us a good entry we can still add to our account.
Christopher Smith
TheOptionClub.com
I am not planning on placing a trade today, however. I took a quick look at the option chain this morning and did not see something I was ready to get into. We have time right now to be patient.
I am also trading other positions. One such position is CROX, which is a fairly new stock. They make shoes out of a proprietary resin. My daughter and her friends love them, and so do a lot of other folks.I got into the position last week and expect to turn a tidy profit in the 20% to 30% range on a limited risk trade. I'm not the only one trading this stock. Adam Hewison and the MarketClub folks have put together a recent video, which will give you an idea of what I saw when I jumped in.
I did not catch the big move shown in the video, but I should still make some money on this one. The market is full of opportunities, so if the S&P 500 does not give us a good entry we can still add to our account.
Christopher Smith
TheOptionClub.com
Wednesday, February 7, 2007
Stock Option Trading Results for February '07
Closed the bull put spread today for a .10 debit. This options trade was originally opened for a .70 credit, so we made .60.
Trade risk is calculated by subtracting the credit from the distance between the two strikes. The most we could lose on the 10 point spread was 10 - .70 = 9.3 or $930, per spread. Our profit was .60, to our return was .60 / 9.30 = 6.45%.
The January spread brought in a 5.3% return, so we have a year-to-date return on risk of 11.75%.
In comparison, the S&P 500 began the year with about a 1,418 open and is now trading at 1,452. The year-to-date return on the S&P 500 is 2.4%, which means that we're out performing the market by a factor of almost five times.
Okay. Enough reminiscing and back patting...
Let's look for March spreads!
Christopher Smith
TheOptionClub.com
Trade risk is calculated by subtracting the credit from the distance between the two strikes. The most we could lose on the 10 point spread was 10 - .70 = 9.3 or $930, per spread. Our profit was .60, to our return was .60 / 9.30 = 6.45%.
The January spread brought in a 5.3% return, so we have a year-to-date return on risk of 11.75%.
In comparison, the S&P 500 began the year with about a 1,418 open and is now trading at 1,452. The year-to-date return on the S&P 500 is 2.4%, which means that we're out performing the market by a factor of almost five times.
Okay. Enough reminiscing and back patting...
Let's look for March spreads!
Christopher Smith
TheOptionClub.com
Tuesday, February 6, 2007
SPX Credit Spreads for March
Our SPX Bull Put Credit Spread is still open, but then so is our limit order to close. I am estimating that we are about a nickle or dime away from a fill. Theta is eroding the trade quickly, now. We may see it close in a day or two, if not today.
You should now be looking at possible March credit spreads. We still have a bullish bias for the index, although a short-term consolidation back to 1,440 - 1,435 would not be uncharacteristic right now.
Call Spreads are not particularly tempting right now and should be entered cautiously. Be sure to give yourself adequate room for a continued market advance. If an adequate credit is not available, standing aside is always a good choice.
Good trading!
Christopher Smith
TheOptionClub.com
You should now be looking at possible March credit spreads. We still have a bullish bias for the index, although a short-term consolidation back to 1,440 - 1,435 would not be uncharacteristic right now.
Call Spreads are not particularly tempting right now and should be entered cautiously. Be sure to give yourself adequate room for a continued market advance. If an adequate credit is not available, standing aside is always a good choice.
Good trading!
Christopher Smith
TheOptionClub.com
Monday, February 5, 2007
Credit Spread Close and March Trading Assessment
The S&P 500 is off about 2 points. We have about a 70 point cushion for our short put option. There is better than a 95% probability that our bull put spread will expire worthless.
With just 10 days left until expiration, theta is really biting into the value of our credit spread. Our plan is to close the position before expiration. While we wait for our price, we can start looking at the March option chain and begin planning our credit spread trading for the next month.
Christopher Smith
TheOptionClub.com
With just 10 days left until expiration, theta is really biting into the value of our credit spread. Our plan is to close the position before expiration. While we wait for our price, we can start looking at the March option chain and begin planning our credit spread trading for the next month.
Christopher Smith
TheOptionClub.com
Friday, February 2, 2007
Closing A Credit Spread, Patiently
The SPX Credit Spread is still an open trade, despite the limit closing order having been in place since yesterday. I did not think it would fill, but it does not hurt to have the order in place.
Today, the mid-price is about .15 and the market is not doing a whole lot. Theta will continue to erode this trade and there is a chance we could get filled toward day's end as traders begin looking at what prices will be on Monday, after the weekend. If not, I expect that we'll be able to close it out next week.
Once this trade is closed, it allows us to re-direct our capital to the March contracts. There is plenty of time between now and then, which means that we can bide our time and look for the right trade entry.
Mind your risk, folks!
Christopher Smith
TheOptionClub.com
Today, the mid-price is about .15 and the market is not doing a whole lot. Theta will continue to erode this trade and there is a chance we could get filled toward day's end as traders begin looking at what prices will be on Monday, after the weekend. If not, I expect that we'll be able to close it out next week.
Once this trade is closed, it allows us to re-direct our capital to the March contracts. There is plenty of time between now and then, which means that we can bide our time and look for the right trade entry.
Mind your risk, folks!
Christopher Smith
TheOptionClub.com
Thursday, February 1, 2007
Credit Spread Analysis Following Big SPX Move
The Federal Reserve hinting at moderating inflationary pressures and a visit by George W. Bush to the NYSE constituted pleasant news for the market. Boy, it was a good day for the bulls yesterday.
If you've been following this daily blog, you know I was concerned about sell a call spread. I'm no prophet, but when everyone is worried about earnings, inflation, interest rates, etc., it leaves a lot of room for some good news to push things higher.
Earnings have been good. The economy is expanding. Easing concerns over inflation means that the Federal Reserve can leave interest rates alone, which is exactly what they did. A good dose of good news... If we had sold a call spread, we would have had to do it at about 1,440 to get a decent credit and would have the market sitting on our doorstep this morning.
So here we are with a 1,365 - 1,375 bull put spread. The SPX is now at about 1,440. I would be willing to close this spread right now for a .10 debit, allowing me to net .60, less commissions. In fact, I have placed a limit order that I'll leave open today.
That limit order will probably not fill today. The mid-price between the current bid/ask is roughly .30, and it is unlikely that the market will be so generous as to fill my order 67% below that mid-price.
This ties into yesterday's post about delta and why favorable directional movement, while a welcome development since it gives us more cushion and greater comfort, is not the heart of the profit engine driving our trade. It is time decay.
Trade well!
Christopher Smith
TheOptionClub.com
If you've been following this daily blog, you know I was concerned about sell a call spread. I'm no prophet, but when everyone is worried about earnings, inflation, interest rates, etc., it leaves a lot of room for some good news to push things higher.
Earnings have been good. The economy is expanding. Easing concerns over inflation means that the Federal Reserve can leave interest rates alone, which is exactly what they did. A good dose of good news... If we had sold a call spread, we would have had to do it at about 1,440 to get a decent credit and would have the market sitting on our doorstep this morning.
So here we are with a 1,365 - 1,375 bull put spread. The SPX is now at about 1,440. I would be willing to close this spread right now for a .10 debit, allowing me to net .60, less commissions. In fact, I have placed a limit order that I'll leave open today.
That limit order will probably not fill today. The mid-price between the current bid/ask is roughly .30, and it is unlikely that the market will be so generous as to fill my order 67% below that mid-price.
This ties into yesterday's post about delta and why favorable directional movement, while a welcome development since it gives us more cushion and greater comfort, is not the heart of the profit engine driving our trade. It is time decay.
Trade well!
Christopher Smith
TheOptionClub.com
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