Entries by Mark Fenton

The Best Stocks for Options Trading

Many people like to trade the indices for their tax favored status whenever they trade options. Indices such as SPX and RUT get the 60/40 tax favored status. Also there are many traders who like to trade stocks. What Stocks Are the Best? Often I am asked what stocks are the best for options trading? Whenever you begin to look for a stock to trade for options strategies  you need to look for a stock that is relatively peaceful, perhaps in a trend or  post earnings release. The stock needs to have good option liquidity. What is a good liquidity  number? Strategy I like to use a rule of thumb that for any strike that I’m going to use in my options trading strategy, there is 20 to 40 times the size of my position minimum in open interest in that strike. The more open interest that you have in a strike the better your fills will be as there are more people buying and selling at that level. What to Avoid Be careful to avoid stocks that are about to have a big product announcement, take over offers or earnings of course with your options trading unless you’re placing […]

Hedging For a Market Pullback

With the market at all time Highs, wise traders are becoming concerned with developing a plan for the inevitable pull back. While there is no perfect hedge or free hedge without risk, I do think there are some opportunities with VIX calls that are worth considering. All-Time VIX Lows With the VIX trading near all-time lows and the fact that the VIX is a “fear” based product,  it is reasonable to risk buying it to hedge against what many are predicting to be a violent volatility spike. These calls of course can also be bought as a purely speculative trade. The reason that I like to buy out right calls instead of verticals is because of the relatively inexpensive price at which they are trading . While you should not trade any product you do not understand, and of course you have to adapt it to whatever is appropriate for your portfolio and risk tolerance, I like buying the calls 40 to 60 days to expiration for slower time decay. Strike The strike you choose is up to you considering cost and perhaps your opinion on where and when the VIX is headed. I like the 12 calls for SEP […]

SPX weekly Calendar Trade

With the volatility once again in a lower range I like the success possibilities of an SPX weekly calendar today. I am looking at the trade below: Sell 1 SPX June 2nd 2395 put Buy 1 SPX Jun 16 2395 put Debit for spread is approx. $9.00 with SPX trading at 2395 Total cost per spread at this level would be $900 plus commissions. Looking to close trade at a 10% gain or 10% loss. If you get filled at $9.00 immediately place good to cancel order to sell at a profit at $10.00. Close trade at a loss if you are down $100 on the spread.  

SPX weekly Calendar Trade

With the volatility in a lower range, I like the possibilities of an SPX weekly calendar today. I am looking at the trade below: Sell 1 SPX May 19 2390 put Buy 1 SPX Jun 2 2390 put Debit for spread is approx. $7.25 with SPX trading at 2390 Total cost per spread at this level would be $725 plus commissions. Looking to close trade at a 10% gain or 10% loss. If you get filled at $7.25 immediately  place good to cancel order to sell at a profit at $8.05. Close trade at a loss if you are down $80 on the spread. Mark Fenton mark@sheridanmentoring.com

Trading Options Successfully for the Long Term

Over the past ten years I have been a full-time trader and options trading mentor. I have found that becoming a mentor, and coaching students all day, has helped my own trading  immensely. Trading Successfully As a mentor I see  day in and day out what works and what doesn’t, So whenever someone asks me how can I trade options successfully I speak through the experience of the hundreds of students that I have mentored over the years. The most important component to being a successful options trader is to have a plan. The plan is what will I trade, how will I trade it, what will my profit goal be and what will my max loss be. Before Entering a Trade A very important part of the plan is to  find a valid option strategy and having a good understanding of how the chosen vehicle moves. Once I enter a trade how will I manage it if it works for me or if it happens to work against me how can I hedge my risk and how can I adjust my trade. These are all very important things you must know before you ever enter a trade. Unforeseen Conditions Many times I […]

Protecting a Portfolio Against Downside Moves

Sometimes in a long bull market trend, like what we’ve been experiencing, it is easy to overlook protecting options trades and stock portfolios against downside moves. It is easy to get complacent whenever you see the market shake off any negative news and maybe only with a pause it goes back up, but eventually the market will have a correction. Protective Measures Of course one of the best ways to protect yourself is to have some protective measures on ahead of time so that you are not  scrambling to protect yourself once the move is in play. In my mind one of the best ways to do this is to consider purchasing long verticals or long calls in the VIX options two to three months out in time. Considering VIX options currently in late May or early June  would be attractive. What I like to do is  wait for a day whenever the VIX pulls back a bit and then look at buying options at  2 to 3 points out of the money and  a few more points out of the money. For example if the VIX is at 11, you may want to consider buying 13 call options and also […]

Getting Started in Options Trading

Where to start? This is often the question many beginners of option trading ask. I’ve listed here five tips that will set you on the correct path to profitable option trading. 1. Understand how options work and move. There are many free online resources that you can use to learn about options and how they work. It is fundamental that you understand they are derivatives of another product and how that underlying  product’s price movement affects the movement of the options you’ve bought or sold. A solid understanding of the exponential benefits and dangers of trading options is key. 2. Volatility. Understanding how volatility works and how it affects the pricing of your options is very important. Volatility is really the main driver of option pricing besides the options in the money premium and time premium. Entering and exiting a trade as well as choosing what strategy to use all revolves around your understanding of volatility. 3. Know your underlying product. Whether you’re buying or selling options on an index or a stock, it is imperative that you understand the underlying, how it moves and what news may be coming to affect its price movement. Study the stock or index […]

Using the Leverage of Options for Bullish Sentiment

When you are “bullish” a stock, it is your opinion that the stock is going to go up in price. While you could simply buy the stock, it is often more expensive than using a bullish options trading strategy. You can have a lot more leverage, meaning  more potential reward with spending less money using options by simply buying the stock. There are many options strategies to employ when you have a bullish sentiment. Strategy One option strategy you can use, is to buy a call on the stock above where it is currently trading. If the stock trades higher and goes through the call strike by more than you paid in  premium you will be profitable. You could also use a call vertical. The call vertical is when you buy a call at a lower strike then you sell a call at a strike two or more higher. By doing this you still get the advantage when the price goes through the strike but you decrease your cost by selling a further out call. Reduce Cost Of course the further out call will cap your gains at the strike you sold,  but this is a simple method to reduce […]

An Asymmetrical RUT butterfly Trade

With RUT trading around 1360 and volatility up a bit, a trade that looks interesting is an asymmetrical iron butterfly entered below the current trading price as follows: RUT at 1358 Sell one May 19 exp 1330 call Buy one MAY 19 exp 1350 call Sell one MAY 19 exp 1330 put Buy one MAY 19 exp 1280 put This trade gives an upside that is profitable no matter how high RUT trades and put side with the risk well below where RUT is currently trading. Take the trade off at 10% gain or loss. Mark Fenton mark@sheridanmentoring.com

How Do I Calculate My Profit Goal?

One of the most frequent questions I get from my mentoring students is how to calculate where to exit a trade for your profit goal. Some trades have margin while others don’t and some trades are debits and some are credits. This can all lead to confusion as to what a closing order should be. Ignoring commissions for this example, if you have a trade that costs $250 debit and the margin is $1000 what would you want to sell it for to make 10%?- The trade cost you $1250 so you need $125 ($1.25) more than you paid you make 10%. So $2.50 you paid + $1.25 is $3.75. $3.75 is your sell price for 10% profit. Credit and Margin If you have a trade that gives you a $250 credit and the margin is $1000, what would you want to sell it for to make 10%?- $1000 in margin minus $250 target = $750 which is the cost of the trade. So you need to buy back this credit spread for $75 or .75 less than you paid for it. So if sold at a $2.50 credit, the closing target is $1.75. Add Commissions You can simply add in […]