Entries by Mark Fenton

How to Successfully Trade Options

Over the past eight years I have been a full-time trader and options trading mentor, and have come to the realization that my time as a mentor has helped my trading more than any thing else could have done to improve my trading. As a mentor, I see day in and day out what works and what doesn’t. So whenever someone asks me how they can trade options successfully, I think I can speak with some experience. The most important thing 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. Find a Valid Option Strategy A very important part of the plan is that it has to be a sound one, meaning I have to find a valid option strategy and I have to understand how the stocks or indices that I use, move. The plan must involve which options I’m going to use, which underlying, the strategy, and finally, when am I going to enter the trade. Once I enter a trade how will I manage it if it works for me […]

Hedging a Futures Option Position

The benefits/drawbacks of trading equity options vs Futures options is a frequent question I receive as a trading mentor. While there are several points to that question, I want to talk about one of the advantages of Futures options trading over equity options. Provided you select the correct market, futures and futures options trade nearly 24 hours a day. One way to take advantage of that in an option position is to hedge that position with contingent orders to go long or short futures contracts at extreme points of your risk range. Everyone who trades options has experienced the “gap” opening at the beginning of an equity trading session. The price can move beyond your established risk parameters and you cannot easily protect your position. Since futures trade nearly 24 hours a day the gap risk is very small. Further, having contingent futures orders in at the extreme edges of your risk range can protect you and can get filled even in overnight moves at the time the price breeches your range. Once the future contract(s) order is filled, it can help hedge any losses until you have time to repair or exit your option trade. A butterfly position is […]

NFLX Pre-Earnings Option Strategy

NetFlix (NFLX) is scheduled to report their 3rd quarter earnings and have a conference call on October 14th after the market close. If you are bullish on NFLX, post earnings report; here is an interesting options strategy you can utilize. The goal of this strategy is to own a long call when earnings are released and to purchase this call before hand, at a reduced price. To do this, use a call diagonal. Call Diagonals You can enter this order all at once as a spread or, buy and sell the legs individually. To enter the trade at once, place an order to sell one Oct2 expiration (8 days from expiration) 107-strike call and purchase one Oct15 (15 days from expiration) 110 strike call. This spread is currently trading around a debit of $3.75. The plan is for the sold 107 call to expire worthless the week before earnings are released, and then you hold the one 110 call the week of earnings, that can increase in value if NFLX has a bullish reaction to the report and trades at $113.75 or higher. Of course you can trade this with different strikes if your opinion varies. Bearish Reaction If NFLX […]

Using Volatility to Time Your Trade Entry

With the recent spike in market volatility it has become obvious to all option traders that a fundamental knowledge of implied volatility is mandatory. For the positive theta trader, implied volatility levels are one of the key elements to consider and watch before and after trade entry. The profitability of positive theta trades, meaning those where the passage of time and option value time decay are beneficial, is affected by time, price movement and implied volatility of the options that are part of the position. Timing trade entry to day-to-day movements in implied volatility as well as overall market volatility can enhance trade profitability. The primary way to watch volatility of the broader market is the VIX. The VIX reflects the implied volatility of the SPX  (S & P 500). Since most of the market is highly correlated to the SPX, the VIX is a useful tool to get an overall market volatility weather report. Considering VIX levels as well as the implied volatility of the underlying you are trading is key. You can also watch the ETF (electronically traded fund) VXX, which trades like a stock and closely follows the VIX. The VXX Is My Favorite Way To Trade […]

Using options to take advantage of a market pullback

With the recent plunge in the equity market, traders are often puzzled with what to do next. One strategy to employ, if you wish to get long a stock, is to sell cash secured puts or put verticals below the market at a price that you wish to buy the stock. This is a good way to collect premium and perhaps acquire a stock at a low price. Let’s go through an example. NFLX over the recent months has been on a meteoric rise up until it’s split a couple of months ago. Since then it has settled steadily above 100 dollars, except for the large down move day that took it down into the 80’s intraday. The stocks then bounced back up over a 100 where it has been since. With NFLX trading around 100 dollars per share today, a trader looking to get long at a lower price may wish to consider selling puts at the Oct. 80 strike. Premium The further out in time you sell this put, the more premium you would take in. Currently the trader could take in premium around $3.50 for selling the October 80 put strike that is 43 days away. If you […]

Will Volatility be High Forever?

Yesterday we tweeted that we were looking for option trades that would “get short” volatility. Meaning, a trade that would benefit from a decline in general market volatility. As if on cue, volatility spiked even higher this morning giving traders an even better entry point. If you are like me and do not believe that vol levels will remain this elevated for an extended time; one on my favorite instruments for playing vol levels is VXX. VXX is an etf (electronically traded fund) that is reflective of the movements of the VIX futures. Put Butterfly A trade we are looking at for this is the out of the money put butterfly. Using the September options that expire 17 days from now, a trader could buy one put at the 28 strike, sell two puts at the 24 strike and buy one put at the 20 strike. AT the time of this writing you could buy this debit spread for .95 cents or so. Max risk is the price you paid for the trade and you have a wide profit range once VXX gets below $27 again. Analyze the trade yourself and see if getting short volatility in this manner appeals to […]

How do I deal with trade losses and when do I get back into the market?

One of the toughest things that traders have to deal with is handling their emotions after losses. I am sure many traders over the last week have experienced some pressure in their trading account with the large market moves in both directions. Processing that mentally and emotionally as well as deciding how and when to get back into trading is something you must learn to be successful in your trading business. Everyone Has Winners And Losers The first thing you must realize is everyone has winners and losers no matter how good they are at trading. It’s important, in the heat of the moment to try and limit those losses, but sometimes there are inevitable. One of the best ways to get over trading losses is to get back into the market once it settles down and trade smaller. Perhaps waiting for a day or two when the market has not moved a standard of deviation. You can also change up the way your trading style, for example, if you were trading non-directionally maybe do some spreads that are directional. Trade Directionally Also selling puts on beaten-down stocks that you would like to own is another way to trade directionally, […]

SPX Flat Fly credit spread

How would you like a theta positive, non-directional trade, with risk on only one side? The SPX “Flat” butterfly is a good candidate. With this trade set up, you will have very little risk to the up side, which leaves you with only having to defend a downside move. The trade is entered as follows. With the SPX trading at around 2100, use the September option that expires 30 days from now. Sell one 2100 call, buy one 2130 call and sell one 2100 put, and buy one 2050 put. Asymmetrical Iron Butterfly This constructs an “asymmetrical” iron butterfly as the call long wing is closer to the call short strike than the put long wing is to the put short strike. If this trade is entered at present for a credit of $30.10, no matter how high the SPX goes you would make $10 if the price left the body of your fly. Adjust or Close the Trade Of course if the price stays near the 2075 to 2120 area you will also be profitable. Only if the price goes below 2070 do you need to adjust or close the trade. This makes for an interesting trade that leaves […]

CMG bearish butterfly trade idea

I am looking at a speculative option trading opportunity in CMG (Chipotle Mexican Grill). The stock has been selling off a bit since releasing its 2nd quarter earnings release and following a 23% rise in July. The strategy I am looking to use is a bearish “put” butterfly. A butterfly spread with this structure looks to gain value as the stock goes lower. Using the put options that expire in 10 days, on August 21st. I like buying one 760 put, selling two 740 puts and buying one 720 put. Currently with CMG trading at the $741 area, this spread is trading at a mid price of $6.75 per spread. I look to close the trade when it reaches a 15% profit based on the cost of the trade. I will also close it if it reaches a 15% loss. This is a speculative play so I will keep trade costs low. Mark Fenton

Setting Trading Goals

First, we want to determine our long-term goal. Two examples would be as follows. Perhaps you either want to generate a certain monthly income or build a certain dollar value in your account. Set a Monthly Goal Whichever of these you choose it is important to set a monthly goal to track how you are doing in reaching your goal. That way if things are getting off track you can address any problems before you get too far off your success path. Secondly, setting realistic goals is key. Let’s say for instance that you want to generate a monthly income of $5000. If you are trying to reach that amount using a $100k account size it will be easier than to reach it with $20k account size. A simple idea to understand is, the lower the percentage of your return on capital you require the easier it will be to succeed. Be Realistic So be realistic in what goals you set for yourself in order for them to have a more realistic chance of attainment.   Finally, what trading strategies and portfolio allocation of will I use each month? With option trading you can utilize both monthly and weekly option […]