OptionPundit

Category: Option Greeks

  • Trading Monster Beverage’s Boom And Bust, All In A Day

    Monster Beverage Corp (MNST) recently traded in a very volatile manner. Just before lunch on April 30th, MNST spiked sharply due to an M&A rumour that The Coca-Cola Company (KO) was in talks to buy Monster. As a result MNST spiked almost +30% to $83.96 from ~ $64

    Later, for several hours it then traded around $75 level before giving back all the gains when Coca-Cola denied discussions to acquire Monster Beverage. During last 10mins of trading, MNST shares dropped to close at $65. This kind of volatile, uncertain situation can be rewarding for traders who are day trading options and are equipped with proper strategies to trade such opportunities.

    There are three ways to trade options on M&A plays

    1. Pre- announcement (rumors)
    2. During announcement (when a news surfaces in mainstream media but is not yet confirmed) and
    3. When news is confirmed but M&A is not yet approved.

    In this article, I shall show you how one could have profited from in situations like the one Monster’s stock experienced.

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  • How Implied Volatility Can Make Money, A Lot of It

    The most powerful force is an “invisible” one; because you can always prepare for the visible forces but the one that can cause most gain or pain is the one that you can’t see. Implied volatility is one such force when trading financial markets. I introduced Ms Vega as personification for Implied Volatility. Depending upon which side are you at, Ms Vega can either bring lot of money to your portfolio or can easily make you cry. Those who don’t know about implied volatility, pls click here to know more about it.

    It is a commonly known fact amongst options traders that before earnings announcement, implied volatility of underlying increases. Let’s stay with the simple facts-

    1. Implied Volatility rises before earning.
    2. For the stocks that tends to move a lot (how to play) usually there is Implied Volatility skew between the earning month and the month before/after.

    Insiders/Outsiders who might have “earnings date” can make a lot of money. All one need to know a) the earning date with certainty and/or b) changes in the earnings date before those are announced to the public and bingo!!! Let me explain this more with the following two examples-
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  • Opportunities Abound, Either Way

    For the past few days, Markets have shown amazing resilience to make a comeback from triple digit losses (I am referring to Dow) netting out no significant change. But one thing is for sure, intraday moves are becoming larger.  So pls start to pay close attention to market internals. I don’t know which direction markets are headed, but what I sense is a nervousness on the part of market participants. Neither bull nor the bears want to take any strong position. As I mentioned earlier, Ms Vega is here to stay for while and it’s better that I start to pay more attention to her.

    I haven’t seen wider media mentioning an important change that has occurred and is continuously changing option trading landscape, and it is introduction on weekly options. Sometimes, opportunities are better without much fanfare. Earlier what used to be a monthly opportunity, is now being offered 4x. Welcome to the amazing world of weekly options.

    The introduction of weekly has offered options traders far more opportunities. Albeit, it is a double edged sword. If not managed properly, it is also a recipe to lose money faster. I have been analyzing weekly and posted some nice real time free ideas where we booked gains like +25% on AAPL, +13.6% on FSLR, +19% on BIDU and many more. However, due to recent increase of volatility and intraday move, a stable income generating strategy is not in place yet. I shall update here once we have something in place, I am continuing to experiment with real money. Click here to stay connected for real time alerts.

    So you don’t miss the power of weekly, let me give you an example– next week’s GOOG 490 Call, as of this writing when GOOG is at 482, is $4, so google needs to move $12 before these calls will be in the money. If you are a premium seller and look at Theta alone, that can bring about 10% of the cost of options/day, of course assuming GOOG remains below 490 by next Friday. While on the surface, it doesn’t seem like a big deal, but when you start to think of rolling weekly over to next which is hedged by leaps, the results can simply be amazing with potential to deliver over 15-20% /month. For the latest list of weeklies, pls click here.

    Watchout– The theta and gamma are something to watchout for. Pls ensure you understand greeks well before you plunged into the weeklies.

  • Did You Notice This?

    US Stock market registered a positive 1st full week for the Year 2010. For background, this is a week that is closely watched by market participants for if as goes the 1st week, so is the year; some say that probability rate is greater than 85% (Feel free to dig past data to see the worth). If only markets were so simple to understand; we all know this surely wasn’t the case last year when Dow closed 15% higher vs. the performance of 1st trading week of 2009.

    The Dow, S&P 500, and the Dow Transports all closed at new high for the year. So technically, from Dow Theory Standpoint, Markets are now in a continued Bull Market phase.

    The most noteworthy news last week was Friday’s December Nonfarm Payroll report which slipped 85,000. It was far worse than economists’ anticipated.  Not all was good. According to Briefing.com-

    However, the details of the unemployment rate are not good. The total number of employed workers declined 589,000. Unfortunately, the labor force declined by 661,000 and negated the drop in employment from the unemployment rate statistics. If the labor force had declined by only 134,000 — the change from October to November — the unemployment rate would have increased 0.3 percentage points to 10.3%… Those that do have jobs saw minimal gains in income. The average workweek held at 33.2 hours in December. Manufacturing and overtime hours also posted no change from last month… Average earnings increased 0.2% over the last month as hourly earnings increased from $18.77 to $18.80. Average weekly earnings grew by $1.00 to $624.16.

    So all is well till it is not. There is, however, some change in the past few months, that requires little extra attention.

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  • OPNewsletter (Outperformance)- May’09 +6.1%

    Option Trading is equally useful to retail traders and can generate consistent income if used properly. Hope you enjoyed the free trade alerts for some earnings play (You may sign-up for the Basic membership that is free till Dec 2009)

    A Fantastic week for OPNewsletter! We played HAL, IBM, UPS and AMZN for earnings and all these one day players nicely added value to the portfolio. We chose to close HAL and AMZN and to keep IBM and UPS for further gains. These were special circumstantial opportunities and we took full advantage without having to worry which direction stocks will move post earnings.

    After many months of waiting, we crossed our 60% portfolio investment guideline. Maximum investment incurred was +64.4% and we shall continue to use that as basis for returns calculation even though we are now in credit generation phase. We have 42.5% in cash (assuming 10 k portfolio). The capital preservation strategy worked nicely. We moved out of markets in early when OPN subscribers were clearly warned of the upcoming market meltdown when I shared the need to stay away should Dow slips below 10,697. That was on Sept 15th, well in advance before the real disaster struck. As I always say, if you know how to preserve trading capital, you can always make it back to market. At OPNewsletter, Capital preservation is always a higher priority than missing a potential investment opportunity.

    Net, overall OPNewsletter is up +8.62% (x- brokerage commissions) and +6.13% (including commissions). We are nicely positioned to reap further gains and we still have 3 weeks to go for May expiration. I don’t have to worry so much about the market fall as that will further benefit our portfolios.

    • USO is down -1.34%
    • UPS is up +3.67%
    • IWM is up +6.08%
    • GDX is up +8.46%
    • X is up +13.01%
    • IBM is up +19.88%
    • HAL was closed for +22.69% and
    • AMZN was closed for +15.83%

    (If you would like to join for “No Profit, No Fee” OPNewsletter, pls click here to sign-up for the waitlist)

    We have reached our investment capital deployment goal for the month and I am not planning to add any more investment capital unless there are opportunity that I don’t want to miss at all. I am not expecting any major adjustments except in IWM if markets make strong move up. The probability favors downside.

    Looking forward to 16th positive month for OPNewsletter.

    Profitable Trading, OP

  • Jan 19, 2007; So what?

    Today is Jan’07 options expiration day. Those who would like to trade the whole day, options may offer great opportunity. All the theta gains as most will have zero time value by the end of the day. High theta ATM options may offer dramatic percentage gains. The option will move in tandem with the stock, so for those technical charts lovers who are looking for rebound or sell-off, maybe a great day to leverage. Other thing to note is the “pinning action”. So look for stocks that you might think will be pinned down to nearest strike. Not a list to recommend, some great names to start are Google (GOOG), IBM (reported earning last night so you may advantage of the movement it is about to offer), Apple, Goldman Sach(GS), etc.  Watch out : Before placing any trades, I would suggest please run a complete risk/reward analysis. The whole investment may also be lost without understanding well on how to take advantage of options expiration. Till then, profitable Friday folks,