OptionPundit

Category: Investment Strategy

  • How To Trade Gold Now?

    After failing to breach a critical level of 1350, Gold has been falling steadily since 14th July and has fallen to its current level at 1284.80. Since Gold has fallen so much, is it time to go short? Let’s analyse the daily chart.

    Firstly, in the medium term (3 to 6 month period), gold is moving more sideways than trending downwards. This means there are no strong and obvious directional bias yet.

    Secondly, there are 2 important support levels, 1280 and 1260 just under current price level. (please see attached daily chart) These 2 levels have acted as bother support and resistance and go all the way back to Jul last year. Since gold is in a sideways mode, it is harder to tell if sellers will gather enough strength to break support. (I doubt bears will break support right away)

    So what’s the trading plan then? For directional traders, it would be more prudent to observe how Gold behaves at support before jumping in. If support is really taken out, then we can start looking for shorting opportunities.

    Regards
    Ethan

  • Trading Options at Expiration for Big Gains

    Trading Options at Expiration can bring big gains. How?

    Equity and index options expires on Fridays (weeklies) and third Fridays of each month (for monthlies). As options expiration approaches, time value component of the option price approaches to zero creating a multiple trading opportunities. Jeff Augen has actually written a complete book on trading options at expiration. That excellent book can introduce you to many strategies that you can use to trade price distortions that appears on expiration day.

    However, at OptionPundit, we would like to trade Options at Expiration especially when it coincides with Earnings announcement thus increasing our chances of success. For information, We trade all kinds of earning trades and been doing so for almost 28 quarters!!

    1. Pre-earning Direction and Volatility based Options Trading
    2. Through earning and
    3. Post earning Options Trading

    Usually Pre and through earnings fall into “income trading” and #3 falls into as we define “speculative trading”. The reason why it is called speculative because though risk/rewards are huge but the occurrence of a succesful event is not sure (even though we have a large winning ratio).

    Here is an example of our very recent trade on Google (GOOG) which generate +278% to +372% gains, all within a day!

    User-1: +278% gains

    Trading Options at Expiration

    And from user-2: +372% gains

    Trading Options at Expiration

    So how did we do it?

    It is actually a simple strategy where we purchased an Out of the Money Strangle on GOOG after earnings were announced. Based on our assessment, we reviewed that GOOG’s post earning move will be sufficient to pay for owning a strangle.

    What is a strangle option strategy-

    The long strangle, also known as buy strangle or simply “strangle”, is a market neutral strategy in options trading that involve the simultaneous buying of out-of-the-money put and a out-of-the-money call of the same underlying stock and same expiration date.

    The long options strangle is an unlimited profit, limited risk strategy.  If you have any questions pertaining to this STRANGLE strategy, please feel free to e-mail me at-> ask@OptionPundit.com and I shall be glad to answer your questions.

    Trading such strategies is just one of the strategies that we use to capitalize on opportunities in Options market. And in fact, we don’t even count these profits into our official OP Income Newsletter performance.

    Our primary focus is to trade market neutral income generating spreads for example Credit spread, Iron Condors, Calendar spreads, Back Spreads, Butterfly spreads and many more in a way that increases our probability of success as we structure our trades using Implied volatility as main factor (not direction).

    Option Trading Directionally, or Non-Directionally

    If you would like to benefit from our 65+ months’ experience to find such trades and grow your profits steadily, you may want to join our OP Income Newsletter. Currently there is no waiting list Fee and you will have immediate access of all historical trades, adjustments, commentary etc.

    Profitable Trading, OP

  • Don’t Confuse Luck with Reality

    Sandy superstorm is one of the biggest natural disasters to have struck east coast during recent times. My Prayers and Best Wishes for all the people in the Sandy’s Path. I wish all a safe stay and speedy recovery of the places affected by this storm.

    As superstorm Sandy slams east coast, it’s leaving floods, millions without power across the US east coast. New York Stock Exchange (NYSE) and Nasdaq remained closed for the 2nd consecutive day. This is the first time since 1888 that the exchanges have been closed for two consecutive days because of weather. First time since 1888!! This “once in more than 120 years” event puts this into a “Black Swan” category. GOOG earning announcement during the mid day for “whatever” error probably was another event (impacted mostly GOOG trader’s though). But haven’t you noticed that Black Swans have been seen rather too frequently these days?

    Some will blame poor results to this “once in generations” event, while others who benefit from this event will pat their shoulders for outsmarting the markets (while the truth may be something different).

    My friend and I had a significant position on Google earnings alone (personal NON-OPN portfolios) when the earning news broke, and our portfolio took a sudden beating. By the next Friday close, however, we converted into green but it was quite a task! Though I don’t underestimate power of luck, this conversion to green did require a lot of manoeuvring, adjusting, capital consumption etc. (topic for another article) and was hugely stressful to say the least.

    Let’s not confuse luck with reality. Unpredictability and uncertainty are the norms of the day.

    Sandy Superstorm is a reminder. This is one of one of those times that one should evaluate his strategy tool box rather more thoroughly.

    • Is your portfolio built upon strategies that let you sleep peacefully even if the market is closed for time comparable to documented past?
    • Was your capital allocation right?
    • Did you know what you were trading and what can affect your results when you invested that capital?
    • Was chasing alpha the priority or preserving the capital?
    • What was the risk management plan?
    • Were you in touch with what was happening? (there were several reports by Friday close that Sandy is not normal)

    Going into weekend, I was trading only two underlying for earning events i.e. SWKS and BIDU (when there are so many companies reporting earning, than why only two? to be discussed some other day). SWKS was for OPNewsletter and BIDU for personal portfolio. I was in BIDU trade since Oct 24th via straddles (screenshot of first trade attached). But going into the weekend, I converted that into a double calendar by selling strangle from the front week (a strategy I have been using for very long time). BUT premium gain wasn’t the point for conversion, the point was to PRESERVE CAPITAL of the long strangle for a “weekend what if”. Markets are closed today while BIDU already announced earnings as of yesterday. Had I been only in strangle/straddle (original trade), I would have been sitting on losses as Implied Volatility would have plummeted. Double calendar would reduce risk significantly and in fact increase the probability of success. I am now waiting for markets to open so as to close the positions but I am glad that my capital isn’t going to take a hit because a black swan flew over the weekend. I was lucky to have done that “what if”.

    So what’s the bottomline?

    Know what you are doing and know it well. This is even more important if you are trading options as options have limited life. There are no short cuts in trading. It’s hard work and requires continuous sharpening of the saw. It’s one of the toughest professions. Get real. Will you be right all the time? No. But try to increase the occurrences of being right.

    At OP Income Newsletter chasing alpha is NOT the aim, profitable growth is. 

    Just to restate, subscription are currently open and there is no wait listing fee. The objective is still the same as it was 60 months ago i.e. 5-7% monthly gains. OP Income Newsletter is NOT a GET-RICH-QUICK-NEWSLETTER. The market neutral and volatility strategies that we trade are scalable and diversified. Try it completely RISK FREE i.e. there is no subscription fee for your first month if OPN doesn’t make money

    Take care and continue to sharpen the saw, continously

    Profitable Trading, OP

  • Protect Your Portfolio Before AAPL Falls Further

    Apple (AAPL) closed below 50dma level again. Apple has pulled back almost $53 from the high since latest earning announcement. When a company announces earnings that almost doubled smashing even the most bullish expectations and the stock was already selling well below the average P/E ratio of the market, how can it continue to fall day after day?

    After pulling back ~$80, there are a lot of theories supporting why AAPL has been falling. Some of those are-

    1. This is profit taking as stock has almost doubled from lows since November.
    2. AAPL shares are being unloaded to generate cash for Facebook (FB) IPO and once FB starts trading, money will flow back to AAPL.
    3. Options are driving AAPL share pricing depending upon where market makers’ interest lies.

    Whatever be the reason, do take a note that it is down just a 15% from the top on April 10th. Usually when a stock drops 10-15% from the high, it doesn’t create as much buzz. However, since AAPL is in completely different league thus everything around AAPL creates buzz.

    So, where is it headed next? No one knows. And those who do don’t talk about it. This article is not to predict where AAPL is headed but rather to give you few “what if” scenarios which might potentially help you in preparation should that “what if” comes true.

    First here is a chart summarizing daily price action of AAPL shares during recent past-

    1. The Highest level is $644
    2. Recent low prior to earnings is $555
    3. On May 5th, AAPL closed at $565.25

    (click to enlarge)

    [Source : TD Ameritrade Charts]

    After a 15% pullback, the key question now is where it can go next? There are three possible scenarios- (more…)

  • Don’t Trade Apple Earnings Without Reading This First

    Apple Inc. (AAPL), the biggest publicly listed company on the planet is about to announce earnings on Apr 24th, after markets are closed. It is estimated that nearly 200+ Hedge funds have AAPL shares in their portfolio. And it is one of the most commonly talked about stock on almost every main stream financial media, website, forums, blogs, etc.

    Here are some of the interesting things you may want to know before you go for that option trading strategy.

    Since the last quarter earnings announcement, AAPL stock is up roughly 40% as of now (@$586 current market price). During this time, normally one would expect implied volatility (IV) to drop (and rise before next earning announcement). However, AAPL’s implied volatility (IV) almost doubled during this period!! (Find out what is Implied Volatility)

    What's in Apple's store during this earning announcement?

    What does that mean? (more…)

  • Another Way to Play Priceline (PCLN) Earnings

    Priceline (PCLN) is set to report it’s earning after market close today. According to briefing.com, consensus is $9.29 for EPA while revenue consensus is $1.416 billion. During the past 8 quarters PCLN has consistent outperformed the expectations, usually by a wide margin.

    Based on current Implied Volatility, it is expected to move roughly $36-$38 in either direction. If you look at the IV profile, there is a huge SKEW between Nov weekly and Nov, and then in Dec and Jan series as well. Going into earings, IV is highly elevated as well.

    It’s no secret that IV will crash after the earnings. Generally by 40-45 points in the front and roughly 10-15% in the 2nd back months (in this case Dec).  By the way, if this happened in the past, that doesn’t mean it will happen again in the future as well….it’s just that, based on past experience, IV crash, in this pattern, is likely to happen.

    So how could one possibly play PCLN earnings?

    If you are willing to take directional risk, then 440/450/460 Put butterfly for roughly $0.40 debit (mid quoted as of this writing) could be an speculative play assuming you are bearish like me. The watch out here is-> if PCLN moves positively, then this fly is a toast. You will lose all the capital invested. You might choose similar type butterfly say 550/560/570 call butterfly as well (for a what if on the upside). The watch out with such a strategy is that you will lose capital on both sides if PCLN doesn’t move as much.

    There is another popular alternatives as well e.g. Selling an ATM money straddle which will cost roughly $14K (you may reduce that cost by buying wings, essentially converting into a fly) but again you may have to weight the pros and cons of an strategy vs it’s potential rewards.

    While there are a lot of choices to play e.g. Calendars, back spreads. ratio spreads and so on, I prefer to play via a  Dec 2011 Iron Condor. Specifically, the Trade structure is like this-

    (more…)