OptionPundit

Category: Butterfly spread

  • How to Play Google (GOOG) Earnings

    How to play Google (GOOG) earnings and how to benefit from Implied volatility crush post google earnings is on the minds on almost every option traders I have met or spoken to. But before I proceed further let me share that earnings are usually 50/50 at best i.e. in-spite of complete detailed research you may still end-up being wrong. The chances of win are 50%. If you go with that assumption and are willing to take increased risks for potential windfalls, Google (GOOG) Certainly offers great opportunities for option traders.

    I have been covering Google earnings for almost 4 years. I also provided 4 different option trading strategies on how to play google earnings. For additional reference, LiveVol has done has done an excellent job on explaining past earings and Google’s move post earnings. You may want to check that out as well.

    So let’s begin the current journey. Let’s first look at the IV skew; There is almost 40+% IV skew between Oct and Nov options most of which will narrow by tomorrow (Chart is from LiveVol.com). So a simple inclination will be to sell the expensive IV and buy the cheaper IVs. That’s a good conclusion except that is not without its own risk. Here are a couple of options that you might look into playing (Ref- GOOG last traded price was $543.3)

    1. Buy straight call or straight put. Based on recent past history you may conclude that Google (GOOG) tends to move say $20. So you may want to buy Straight Out of the Money (OOM) Oct 560 calls or 520 Puts. Last mid quote for 560 call was $5.00, and for 520 put, it was $3.00 either google needs to be above $565 or below $517 before you can make money if you purchased straight calls or puts. But here you are assuming a directional as well as movement risk.
    2. You may choose to buy a strangle i.e. Google (GOOG) Oct 560 call AND Oct 520 Put, thus costing $8.00 combined. In this case google needs to be above $568 or below $512 before you can make money. But at least you are not taking any directional risk.

    I personally wouldn’t want to take #1 and #2 options. If I were to choose, I might then choose even further OOM and that too as lottery ticket assuming 100% capital loss upfront.

    So How can one increase chances of success while still hoping for good yield from Google earnings move. Here are few more examples.

    • Sell Google (GOOG) ATM Oct 540 straddle i.e. Sell Oct 540 Call and Puts, as of the market close yesterday it was $22.65/spread i.e. you will receive $2,265 credit but need to keep about $11,000 for margins. This trade will make money if Google is in between $517.4 and $562.6. The maximum gains are equivalent to the credit you received and if GOOG is pinned at 540 on Friday. Expected yield is 2265/10,900= 21%; the risk is that you might lose all the margins if GOOG moves wildly beyond the break-even points.

    • Well you may think that you don’t like above risk reward, but you still think that Oct ATM is pricing the Google move appropriately and hence would like to keep the same break evens but with a better yield. So how about selling an Iron Condor say Google (GOOG) 560/570 Bear Call spread and 520/510 Bull Put Spread. This will generate $367 credit on a $633 margin thus yielding 58% gains assuming Google remains between 520 and 560. The Breakevens are $516.3 and $563.6. The max loss will be if google is below 510 or above 570. Certainly a better option than #1.

    • Still don’t like the yield but willing to trade-off risk for even better yield. Other ways to play is that you can choose 10 points Butterflies with the mid strike at 540, 530 or 550 depending upon your outlook. Butterflies offer fantastic yield but then Google has to settle within that zone. Here is an example of GOOG $570 Call Butterfly (You may check out past examples here).
      • Buy +1 GOOG Oct 560 call and
      • Sell -2 GOOG Oct 570 Call and
      • Buy +1 GOOG Oct 580 Call

    Google Oct 570 Butterfly

    This can be done for only $83. If GOOG is pinned at 570, this trade will yield $917 that’s almost 1,100% returns. This trade will still make money if google is in between ~561 and 579. The risk is, you will lose 100% of the capital if google is beyond these breakeven points.

    • A little more advance option will be to combine a butterfly with either straddle or Iron Condor. That will result in better gains assuming you are right-on for the ATM strike. But even if you are not then remaining Straddle or condor can still make money.
    • These are just some of the examples how Google earnings can be played. Others include Calendars, Double Diagonals, Backspreads and ratio spreads and many more.
    • If however, you are willing to spend time and make even more educated guess, then don’t forget to check out these articles

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    Happy Googling and wish you all the best

    Disclaimer– This post is for information purpose only. Please do your due diligence before investing even a single dollar based on any of the contents on this site including this article.

  • OPNewsletter Aug +8.4% (closed), Sept +4.3% (Open)

    OPNewsletter delivered +8.46% for the Aug 2010 Income portfolio on a 51% portfolio capital investment. As you may know, since mid of April 2010 we reduced our capital allocation to trading as we were anticipating this market meltdown which started around 3-4th week of April. For Sept 2010 opened portfolios, we are up +4.3% and these results do not include results from speculative/bonus trades.

    This is our 31st positive month, out of a total 33 months of Paid Subscription based OptionPundit newsletter throughout the phase-1 and phase-2 and these times include one of the worst market conditions since the 1930s.

    At present, OPNewsletter clients include ordinary part-time traders to professional Wall Street traders (trading their personal accounts) from over 20 countries and their trading experience varies from a few years to almost 2 decades of options trading. The live forum lives to help where community of traders share ideas and comment on other’s trades as well. Not only we do Iron Condor, we also invest Calendars, diagonals, double diagonals, backspread and many more. We have also started reviewing (with real-money) option trades for newly introduced weeklies (currently AAPL is up +24%, AMZN is up +30% and GOOG is almost breakeven). This is how whole trading experience comes to live real time.

    Trade what you know, learn what you don’t know !

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    Delivering consistency isn’t about trading 1 Iron Condor/month for a small size capital account. When you are trading a US$100,000 account that requires patience, discipline, a well defined control over greed & fear and strategies that are beyond just 1 Iron Condor. And there are many traders in OPNewsletter who trade with over US$100,000 capital. Preserving capital then takes higher priority order as opposed to investing every opportunity you see. At times, you will let go opportunities (hindsight bias) in anticipation of major market moves that might derail the portfolios. We place hedges, which sometimes are one of the dampeners for higher results but that’s ok, that’s part-n-parcel of trading life.

    No matter how much marketing blitz would like you to believe, there is no “secret” to trading success; it is the EXTRA DEGREE of perseverance, EXTRA DEGREE of risk management, EXTRA DEGREE of disciplined trading, EXTRA DEGREE of what if scenario planning and EXTRA DEGREE of “Rational Expectations”.

    Welcome to OptionPundit! The EXTRA DEGREE in your option trading.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

  • OPNewsletter Jul 2010 Up +8.3%

    We are on track for our 28th positive month of OPNewsletter phase-2, as of last Friday close OPNewsletter Jul 2010 portfolio is up +8.3% on the maximum investment of almost 60% of portfolio capital. We have started opening Aug 2010 portfolios and our first portfolio is already positive.

    Let’s talk consistency first, especially on trades like Iron condor which is probably the most widely used option trading strategy. OPNewsletter has lost only 1 month of RUT iron condor since May 2008, and the drawdown was only 7.15% while gains have been around 12% on average per month. RUT Iron Condor for July 2010 resulted into +23% gains. If someone has invested US$10K, only in OPN RUT Iron Condor, this 10K would have grown over 5 times to $56K since May 2008. This period includes probably one of the most volatile stock market moves of our lifetime. Of course, I don’t recommend traders to invest all the money in iron condors only and which is why we have portfolio approach at OPNewsletter, to diversify risk/rewards.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    During the month of July, we also opend, for first time, an Income portfolio on Google. Just for perspective, since our opening of this portfolio on June 14th, google moved from $480 to $506 and then from $506 to $434 almost without a pause. This portfolio has provided a great deal of learnings e.g. during this period, one of our backspread we opened for only $0.65 debit moved past to show $10 gains!!! Though it was tough and very volatile move, we still managed to gain 4% gains as of Friday close (still open) and we are in for the earning week and out theta gains are a few % points per day.

    Even though VIX and other implied volatility fell through the cliff in general, our Double calendar resulted into above +20% gains and Double Diagonal in positive (still open).

    These results do not include gains/losses on the speculative trades. It also feels good when I find adding value to subscribers as OPNewsletter members were already warned of the coming meltdown since mid April via constance market updates/projections. Though no one can be perfect or correct all the time, so far OPN has been able to serve well.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    Profitable Trading, OP

  • What Exactly is Option Trading?

    A Fascinating Friday ! That’s how I can think about Market’s action on Friday. Option trading is not only about attending a seminar, do some paper trades, get some winning trades and the stage is set. It is also about constantly evolving your own trading style and continue to sharpen your saw. With this post I hope you pick up one or two important nuggets that might add value to your trading style, so pls just relax and continue to read.

    First a simple one VIX– I mentioned on April 15, that I was not convinced of rally when markets are overbought for 6 continuous weeks; and shared my bias for bearish stand via $VIX bullish spreads.  Those OPN Members who followed it generated about +28.5% returns for 2 days holding. It could have been done with straight calls, but I wanted to minimize risk exposure without compromising delta.

    The King of Earnings- Google (GOOG)
    It was once in 6 months (if not 3) type event i.e. earning announcement just before Option Expiration. Those who have been with OPNewsletter for past 3 years, or at least have been reading OptionPundit blog, know how much I love trading Google.

    To begin with, I shared 4 different types of trades that could have been done on Google. Nothing much has changed Feb’07. However, this time, for OPNewsletter members I used one of my high yield/low risk/technical/intuition based strategy, Double Butterfly. We opened Google 540/550/560 Put Butterfly and 600/610/620 Call butterfly; for roughly $1.40 to $1.70 price combined.

    Google opened at $568 thus panicking some members, as it means 100% “potential loss” on this speculative trade. Based on “what if” scenarios I shared before markets opened, few members could still get out of the trade in “style” for break even or minor gains/loss even though Google was still out of our profit zone.

    But guess what, Google was pinned at $550, those who held till close, yielding almost +588% gains!!!

    But that’s not the end of the story, I traded Google almost live (though not recommended to members). I kept on switching between Calls and puts, resulting into +46% gains (bearish), then +21% (Bullish), then +95% (bearish), then +54.6%, (Bullish) then -12% loss (Bullish). Those who were following the thread live and could trade speculative (though not intended), could have still converted $1 into $10 by the end of the day!

    Google again, 95% gains; again out, i need to see if it can hold $560, if not, next may be $557…i am sharing almost real time to share how quickly i am changing my opinions….pls note, at one time, i have only one direction either bearish or bullish..i am not mixing two..(i have already close the 550 puts (i further broke the Bull put spread into individual options leg and purchased the short 550 puts, and still kept the 540 puts)

    added later, by the time i finished my msg, google was already below $556 and those puts were already quadrupled.

    Here is the screenshot of key trades I mentioned above-

    Google Intraday Transactions

    We didn’t even touch on Google Stock pinning as otherwise it would have just too much of trading to handle for a single trading day. Here are some excellent reads for OPNewsletter members on how to successfully play stock pinning, especially on Google. I also run a separate experiment (income trading strategy) with Google for following set of conditions – 1) Expiration week, 2) Earnings in that week but before expiration day; the gains were +18% within a few days even though google moved significantly against the “market neutral” strategy, before the earning day. I shall share this in another post.

    Here is another example of ISRG–

    Another stock I am looking at is ISRG, I had expected it to move about $20-$25, but it hasn’t…I don’t know if it will if drops below $372…I didn’t share it yesterday (i mentioned my bias on twitter though– http://twitter.com/OptionPundit/status/12171040022 ) as the options are not very liquid.

    ISRG closed at $360.39!! I am not mentioning Goldman Sachs (GS).

    Now the key points, why am I sharing all this? Recall back in early 2008 I shared on key factors that contributed to a record year (till then) for OptionPundit. Here are some additional thoughts.

    The Formula for Long Term Success
    Speculative trades should only be done with what you can feel comfortable losing, I must add, losing 100%. This is not income trading which many OPNewsletter members trade with over $100,000 and anything x 0=0

    This is a high risk/high yield scenario. The formula of long term success is

    Long Term Success = (Profit $$ x Winning Trades) > (Loss $$ x Losing Trades)

    Don’t be stubborn with your opinion–
    One shouldn’t marry to a single opinion. Markets can humble anyone, anytime and it has demonstrated time and again. No one will always be right else there won’t be a trading market. Keep agility and flexibility as your competitive advantage. Remember, the end goal is not to be right rather it is to make money. I encourage OPNMembers to re-read the whole speculative thread (May 2010) how often I changed my opinion between bullish and bearish, the same day, often in less than 30mins.

    Trade with a plan and be nimble
    I didn’t send alerts for these Google trades for OPNewsletter Members, only demonstration. I don’t put stop loss on the screen as I don’t want it to be shown to brokers. I keep a mental stop loss and write it down and close it. Why am I sharing this? Because one may say, with “hindsight bias”, that there was no need to trade so much, you would have made a 1000% gains (10times) if you just held those 560 puts till expiration; I was not in for a 1000% gains, I was trading and time value was against me, and I was just following my trading plan.

    Option Trading is both Art and Math
    The twin butterfly we opened would have been a 100% loss if Google were to close above $560. But breaking the flies into vertical spread, then finally into singles achieved great result for even those who panicked and wanted to get out to collect “whatever” was left. Options are very versatile, so just don’t 100% loss. Create “what if” scenarios for if it goes up, goes down or move sideways. No one is much more in touch with your trades as you are and hence prepare in advance yourself and don’t just panic. Panic never helps, it about keeping the big picture mind and bringing that to trading world. Trading is equally tough like any other business, if not more.

    Here are some additional thoughts on how to become a more profitable trader.

    More trades to come. There are more companies announcing earnings in next few weeks so stay Tuned,

    Profitable trading, OP

  • OPNewsletter April (Open) +9.8%, May (Open) +2.6%

    Though we shifted our option trading strategy in way so that more trading alerts can be sent during “pre and post market hours” vs during market hours to allow even working professionals to benefit, OPNewsletter is still not about “make money” in 5min per day. It still requires one to think and act vs let robots do it for them (at least to begin with). There are no short cuts for making money, consistently. Making money is a hard work and requires one to be patient and to learn and continuously sharpen the craft. OPNewsletter April portfolios are up +9.8% while May portfolios are up +2.6% (both are still opened). If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the wait list as OPNewsletter subscription is open via invitation only.

    Let me use an analogy on why I say making money requires discipline and hard work especially for new traders-

    Before one get to a earn say $5-$7k/month; an engineer need to go through 4 years of professional education including one or two summer projects before he is allowed to be even called an Engineer Trainee. Medical professional is required even much more rigorous training before one is allowed to even touch knives for first surgery. Then why do people think trading is any different if it were to give you $5-7k/month to start? It’s because the “barriers to entry” are almost nothing; give a call to a broker, he can do the paper work for you, set you up with an electronic trading account, help you personally to transfer funds and all set and most novice traders can enticed by the marketing sales pitch that you sign-up for blah/blah and you can make money in 5mins/day. It doesn’t take long before one starts to realize that trading is not easy as it seems on the surface (sadly after either account is wiped out or suffered a major loss) . Making big %  may be fine for small capital account, but when it comes to large capital accounts, it is a completely different game. (How large are the investments via OPNewsletter Portfolio?)

    Let me ask a question, assume you make $10k/month; assume a good job with perfect work life balance; assume you work for 40hrs/week, 4 wk/month, that’s 160hrs/month, and this your monthly profit before tax. Have you spent 160hrs before investing $10K in that “idea/hot tip”? If not, why do you expect results to be different assuming you are not a professional trader/investor and are not equipped with “investment/trading” training?

    More on this later. Let me comeback to OPNewsletter performance.

    One of the ways I manage OPNewsletter is through capital allocation. I use US$10 K as the model portfolio (I invest my real money in those portfolios, and then in some more) which I then allocate across multiple portfolios, multiple option trading strategies to diversify the risk.

    We invested a maximum of 88.15% of $10k this month; and April portfolio is up +9.8% as of Thursday close. I use maximum capital employed as a base for calculating results even though the cash is available through closure of some portfolio; thus my results are conservative. As of Thursday close, we have 28.93% cash from April portfolio; and 95% of this (~27.6% of 10K) is invested for May portfolio which is also up +2.6%; Net, we have 1.26% cash available from $10K and have both April as well as May income portfolios both of which are up as of Thursday close. Option Trading strategies used were Double Diagonal, Iron Condor, Iron Fly, Butterfly Spreads, Credit spreads, Calendar spreads, Vertical spreads and some more.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    We closed some April portfolios and then reinvested the cash into other portfolios for the same month or for the next month thus effectively multiplying returns on our money. To share an example, we opened FDX income portfolio with 9.5% of $10K capital; the portfolio was closed for +27% gains, part of the cash thus generated was redeployed for opening an Iron Condor for Russell 2000 (RUT) for May 2010.

    We had earlier opened Iron Fly of Nike (NKE), ATM butterfly on Pepsi (PEP) which resulted into +24% gains and +62.3% gains respectively and the cash thus generated was used for placing a hedge for our April NDX Iron Condor. The Hedge was placed on Thursday before market close to protect our portfolio against any sharp move might result from unemployment report. Thus by effectively managing the hedge, we are fine (short term) regardless how much NDX moves on Monday.

    To put things into a different perspective, if you were to go for a seminar/workshop to just learn how to trade Iron condor (and some other strategies we use) and how to protect those (theoretically), that learning itself is worth several month’s (if not years) OPN subscription fee.

    Portfolio insurance (aka Hedging) costs money (reduces returns) but that’s always in the hindsight. Just like insurance, you do it to safeguard against any disaster. You spend this money for the things you don’t want to happen.

    Our first hedge was against any sharp downward move that were to happen due to Health care bill being either approved or disapproved. Markets didn’t react thus we lost some money on that, but then we converted into a bullish spread and reduced the hedging expense. We could have still kept it till April expiration and completely eliminate the expense, but I chose to close it to redeploy the capital to open other portfolios for a better risk/reward ratio.

    Our 2nd hedge was against our Nike (NKE) income Iron Fly. This hedge cost us about 19% of the NKE income portfolio; but we still netted with a +24% return on portfolio. Excluding the hedge, the returns would have been above +42%. The portfolio still had potential to double the gains, but I decided to take it off before the unemployment report; when trading is a business, operating discipline is important and one needs to follow a plan to make money consistently. Speculation is fine but that has a separate place and completely different game.

    Not all the portfolios are winners. There are losing ones as well and the returns are net of winner and losers. In order to make money consistently one has to keep in mind that Profit Volume (=Winning Occurrence X $$ profit) should be greater than Losing Volume (=Losing Occurrence X $$ loss).

    I don’t count speculative trade’s returns into monthly returns. Even though we had >75% winners and sometimes fairly large returns than losers, the result probabilities before placing the trade don’t favor investing large amount of capital (more spec updates here)

    So far for the month of April, we have 100% success rate on speculative trades. Our BIDU bearish trade resulted into +17.6% gains for two days holding, SLGN (shared it for free) resulted into +26.9% gains for two days holding and we just opened a straddle on WMB.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    Profitable Trading, OP