Entries by Mark Fenton

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.  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 calls at […]

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. 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. Of course the further out call will cap your gains at the strike you sold,  but this is a simple method to reduce the cost/risk whenever […]

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. 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. You can simply add in your commissions to the cost […]

Trading the Monthly Jobs Report

One monthly report that generally moves the stock market is the NFP or nonfarm payroll report that is issued the first Friday of every month. The report is issued at 8:30 am Eastern time 7:30 am central time before the market opens. When the market opens, often the market will make a hard move one way and then come back the other way over the first hour or so. This can make for an interesting speculative play using options. This is not normal non-directional income style options trading. The way to play these moves with options is to wait for the initial move to move hard in one direction and then sell option verticals above or below that. Then whenever the market moves back the other direction you can close those option verticals that you sold profitably or continue with them if the market stabilizes. Often the market will move one way and then the other and continue that  way the rest of the day. For instance, if the market opens up you could sell call verticals in a broad-based index like SPX once it is moved up about 10 to 15 minutes, then watch for a market reversal to […]

Bullish Crude oil Butterfly

There are reasons fundamentally to be bullish crude oil in the current market. Summer driving season approaches and the oil supply glut has been diminished. If you share that point of view and wish to speculate with /CL, below is a trade you may find interesting. May /CL trading around $50.60 Look to buy a call butterfly structured as below at a debit of around $2.30 ($2300 trade cost). Buy one May 47 call Sell two May 51 calls Buy one May 55 call Consider closing the trade if a profit of $230 is reached(10%). Close the trade if loss reaches $200   Mark Fenton mark@sheridanmentoring.com

Option’s Trading with the “Greeks”

A very popular method of managing options trades, particularly complex ones, is the Greeks. The “Greeks” that we use are Delta, Gamma, Theta, and Vega. Delta tells us the rate of change and the profit and loss of our position for the next point move in our underlying. It gives us a number that tells us what that change will be. Gamma tells us how much the Delta will change after a one point and can also be beneficial in letting us know how fast things may be moving for or against us. And then, Theta which is a popular one for Sheridan mentoring traders, who want to be positive Theta, shows the effect of time in either benefiting or detracting from your option position p&l. Vega of course monitors the volatility of our position and the effects that implied volatility changes will have on our position. It also is a number that tells us how much profit or loss our position will have with a one-point move in the implied volatility of the options that we are trading, but keep in mind that there is more to the management of options than just using the Greeks. Many times I’ve […]

The Time Bomb Butterfly: High Profit Potential, High Risk, but Low Cost

The butterfly is one of the most popular options strategies. There are many different structures for a butterfly, from neutral to more bullish or bearish structures. Also, in the set-up you can have iron butterflies that involve the selling of a put and call vertical and also the all-call or all-put option butterfly. One of the best butterfly strategies is what we call a “time bomb butterfly.” With this strategy you will be buying an all-call or all-put butterfly in an expiry and a strike price of your choosing. Below are two examples. The first is an earnings play, which is one of the best times to use the time bomb butterfly. In this example GOOGL made a large move to the upside. The day before an earnings release we purchase an all-call butterfly centered 50 points above the current market price. With GOOGL trading at $680 our all-call butterfly is centered at $730. The number of contracts and the width of the fly are up to you. The more contracts and the wider your fly the more expensive the fly will be. In this example, we have 10-point wide wings. The trade put on in this manner can be done […]

A RUT Calendar Trade Idea

3/7/17 Rut Calendar RUT is trading now at 1383. I would look to establish a calendar position by selling one March 24 exp 1380 put, and buying one  Apr 7 exp 1380 put at around $7.00. My profit target is 10% so I would enter an order to sell my calendar for $7.70 When do I adjust? I will adjust when the price comes within a 5 point range of break even which would currently be 1355 on the downside and 1406 on the upside. Create another calendar with the midpoint 15 to 20 points away from where RUT is trading at that time, which would cut the position delta by 2/3 with the adjustment. I would then take off at a 10% gain or loss. If you would like to learn more about calendars, take a look at a recent webinar that we did on calendars. Mark Fenton