Tag: option trading

  • 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…)

  • How High Netflix (NFLX) will Go?

    Netflix (NFLX) has been a shining star and shorts have been pushed against the wall time and again. After lingering between $20-$40 for several years, NFLX has gone from $50 to $200 YTD alone, in a 45degree straight line. See attached chart for YTD performance-

    After watching it for sometime, I am amazed by the wonderful performance of NFLX. 300% in a year! If there was anything like “recession proof investment” then I think NFLX will rank amongst the top.  The ride wasn’t a smooth sailing though as there were pull backs good enough to throw the weakest of the pack out of the race.

    From business fundamentals, I am not impressed. But that’s me because I like to buy things cheap. Here is a snapshot of fundamentals from MorningStar.com and see for yourself if this is something you would like to hold for long term. This is just the big picture and by no means is a complete fundamental analysis of the company.

    Courtesy MorningStar.com

    Don’t the forget stock investing one-on-one  that stock price is essentially a claim on “long term” cash flow. There is a big IF for such rich valuations for NFLX and that is “growth”. I won’t go into what their “economic moat” or “sustainable competitive advantage” is because I am not sure if there is one really, but recent developments may at least raise some concerns. While NFLX lovers may say that @75+ P/E, NFLX is still priced for growth, be my guest. There are greener pastures.

    If I am not bullish that doesn’t mean I am going to start shorting it.  NFLX is known to kill shorts. I would rather trade NFLX via technicals using Option Trading Strategies; in the two giant channels as shown in the charts above. While some may say that closing above $205 was a breakout, I would rather open-up some bearish spreads (as speculative trades) as opposed to being bullish. Albeit, with only a fraction of capital as speculative trade.

    Disclaimer– As of this writing I hold bearish speculative positions on NFLX but I may change anytime. Pls do your due diligence before investing or following this idea. NFLX is not for the weak hearts. Make sure you have a good plan to trade it.

    Profitable trading, OP

  • How to Trade Japanese Yen via Options

    Forex market is a big market providing round the clock trading as well as huge leverage. Leverage is a double edge sword. If you are not hedging properly, then forex trading could also mean a ticket to emptying your trading account quickly. So if you want to trade forex but still want to limit your risk exposure without gluing to screen, Forex options can offer a good alternative to trading FX spot.

    Japenese Yen is currently trading at 15 year low levels. A strong yen hurts Japan which is a export driven economy. Part of the reason why it is strengthening so much against the US dollar is also attributed to Japanese govt not doing enough to stop to the rise. If I refer to USD/JPY currency pair, it is in a downtrend, a very strong one which is very close to almost 20 years low when US$1 amounted to only 79.75 JPY. As of this writing, JPY is trading almost at 1US$=83 JPY.

    If you have a bullish out on JPY, YUK (Yen FX Index, Traded on ISE) can offer a better alternative as opposed to directly trading with FX spot market.

    Let’s take a trade example-

    If I decide to buy Oct 84 YUK calls, it was trading for $1.06 (mid price) when YUK closed at $83.7. Assuming these prices, maximum risk is only $106 and no matter how low USDJPY pair go, once can not lose more than this. However, if USDJPY rises to even ~86.5 in the next 30 days one is looking at almost doubling his/ her gains on these options.

    This example is to show that without taking unnecessary risk of FX spot market, you may still benefit should the Yen rise from the bottom. Now what if it doesn’t go up but trade in a sideways range? That’s even better for option traders as you may design as many market neutral or range bound strategies for example Double Diagonals, Iron Condors, Calendars and so on which has limited risk/limited reward potential.

    So next time you think of trading forex, but are scared by the negative side of leverage, give options a try. You may unearth some real money making opportunites without rising too much.

    Profitable Trading, OP

  • 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.

  • Ms Vega is Here to Stay

    Pls allow me introduce you to Ms Vega.

    Ms Vega is my personification for Implied Volatility.  As of this writing, there is almost 3% IV difference for SPY ATM options, VIX is at 24, VIX Oct futures are at 30, a 25% difference!! Though nothing is certain in the markets, this skew does indicate that market participants are “unusually uncertain”.

    Stock markets are an interesting place as Market participants tend to have a short memory. With a few percent market rally, bears turn into bull and vice versa and most often the reason is “when the facts change, I change too, what do you do sir”?

    A lot of technical chartists have turned bullish, Dow Theorist Mr Richard Russell has indicated that both Dow Industrial and Dow Transports have indicated bullish signal by closing above June high. Mr Russell also gave dire warnings and suggested members to tell friends that hard rain is coming, they sell everything and that by the end of this year they won’t recognize America as it appeared to him that it was one of the most predictable and dire market top. Don’t get me wrong, my intentions are not to disrespecting anyone here, but the point I am making is that Mr Market can humble anyone, anytime. Now just because Dow and Transports bettered June High, doesn’t mean we are in a primary Bull market, both of these needs to prove by crossing their April high first before anything meaningful can be concluded, else we are stuck in this sideways zone.

    One of my favorite thinker is John Hussman. He doesn’t like what he sees from the economic fundamental perspective. Once ISM Purchasing Manager’s index data drops below 54, it is highly likely that we are about to see double dip. Pls click here to read in details. Another thinker, Bond King, Bill Gross of PIMCO thinks that world is lacking in “aggregate demand” and has not yet adjusted to the new normal. His latest investment outlook discusses the impact that slowing world population will have in the “new normal” environment.

    PIMCO’s continuing New Normal thesis of deleveraging, reregulation and deglobalization produces structural headwinds that lead to lower economic growth as well as half-sized asset returns when compared to historical averages. The New Normal will not be aided nor abetted by a slower-growing population nor by cyclical policy errors that thrust Keynesian consumption remedies on a declining consumer base. Current deficit spending that seeks to maintain an artificially high percentage of consumer spending can be compared to flushing money down an economic toilet. Far better to create and mimic other government industrial policies aimed at infrastructure, clean energy, more relevant education and less costly healthcare services. Until we do, policymakers will continue to wave their hands in front of the electronic eye – waiting for the flush, waiting for the flush, waiting for the flush, with very little success. Try another way, Washington. El-Erian, Sachs and other 21st century policy thinkers have a better way to push the handle.

    Pls click here to read the full outlook.

    We are in a range 11,250 and 9,600. Unless any of those are gone, we are in a range. We may expect sudden burst of euphoria or panic sell-off but nothing is really being achieved. For option traders, this can be a good thing depending upon how one uses it and what sort of risk management strategy is used. There are lot of option trading strategies that can be used for sideways markets including the most widely followed Iron Condor strategy. Calendars can be tricky unless chose carefully. Though the strategies that worked in traditional markets may not work so well and returns may not be spectacular but I think Option Traders are still probably better placed to benefit from this sideways move.

    (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)

    Until then, keep trading the options way and start to love as I call Mr. Theta and Ms Vega.

    Profitable Trading, OP

  • 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