In today’s Webinar for Ally Invest ( previously Trade King), which we do every Monday at 11 am central, the trade today was a Back spread or Back ratio trade. With SPX at $2472 , I bought 2 Sep 1 expiration2535 calls and sold 1 Sep 1 Expiration 2510 calls for $1.80 Credit. I like these type of trades when SPX is near all time highs and VIX is 11 or under. This was a Live trade. I executed this trade by doing a credit spread and then buying the extra call. I like to keep the position deltas near zero or a little long at the onset to combat the Volatility risk of this long Vega trade on the upside. My position Greeks right nowwith SPX at 2473 are: Deltas-5.46 Theta.61Vega-3. This is an OTM Call back spreadthat starts out short Vega but picks up quite a bit of long Vega on the upside from the extra long call. I would of rather started out position deltas nearzero or a tinge long but this is OK for now. I hope to buy this spread in for a debit of around $1.00. This trade ties up about $2000 of capital in a Reg T account at most Brokerage houses. If I buy in this tradefor $1.00 debit, that would be about a4% yield. This is a 32 Day trade and I would get out of this by Aug 8 to avoid time decay risk on this trade ,especially if SPX moves up toward my long strike.
/wp-content/uploads/2015/04/logo_svg_full_name_white.png00Dan Sheridan/wp-content/uploads/2015/04/logo_svg_full_name_white.pngDan Sheridan2017-07-31 18:36:562017-07-31 19:50:50Backspread live trade
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?
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 speculative strategies on that event. Those events can all cause larger movement in the stock price.
One last word of advice. Be careful not to be short in the money calls whenever a stock is paying a dividend. That will often be an event that will get you exercised early and you will be forced to pay the dividend.
Some good stocks for options trading that I and my mentoring students regularly employ include GOOG, AAPL, NFLX and AMZN to name a few. The best stocks to use will be the higher-priced, generally over $100 and many times many hundreds of dollars because those stocks generate larger option premiums due to their size.
These stocks can all be used for both directional and non-directional option trading strategies.
/wp-content/uploads/2015/04/logo_svg_full_name_white.png00Mark Fenton/wp-content/uploads/2015/04/logo_svg_full_name_white.pngMark Fenton2017-07-25 18:50:052017-07-27 18:28:36The Best Stocks for Options Trading
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.
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 20th expiration myself. If you choose to, you can buy whatever quantity seems appropriate.
You can sell half of them on a quick spike in volatility to maybe around the 12 the 14 level and maybe save some for later for an even larger move or however you want to capitalize on them.
With the VIX trading just under 10 the September 12 calls currently have an ask of $1.65. Take a look and see if this is right for your outlook and portfolio.
/wp-content/uploads/2015/04/logo_svg_full_name_white.png00Mark Fenton/wp-content/uploads/2015/04/logo_svg_full_name_white.pngMark Fenton2017-07-20 20:37:372017-07-27 18:34:48Hedging For a Market Pullback
Trade: IBM currently at $153.40 Sell 1 IBM July 28 Expiration 150 Put at $2.00 (Short Put is 34 Delta and IV 22)
Analysis: Stock has been in a range over the last 12 months of 147.79 and 182.79. By selling the 150 Put at $2, you are committing to buy the stock at expiration at $148, if the stock is under $150.
You would be buying the stock at about the lows over the last 12 months. Because IBM Earnings are coming during the week of July 17, we get a little more premium than usual for selling a 21 Day Put that is about 3 ½ dollars out-of-the money.
The 34 Delta of the short put simply means that there is only a 34% probability we will be below $150 in IBM at expiration. What if you don’t want to buy the stock at expiration under $150 because of the big capital outlay of owning the stock?
Then I would just have an orderin to buy the put back for $ 4 ½if IBM has big down move. Since my credit is $2, I would be trying to limit my loss to not much more than I would of made.
Sell the Put
If I sell the put for $2 and IBM doesn’t go under $150 at expiration, I keep the entire credit. If IBM declines and I get out of the put at $4 ½, I limit my loss to 4 ½ minus my initial credit of $2 or $2 ½, not much more than my potential gain. That’s what we call Risk Management.
/wp-content/uploads/2015/04/logo_svg_full_name_white.png00Dan Sheridan/wp-content/uploads/2015/04/logo_svg_full_name_white.pngDan Sheridan2017-07-07 18:20:152017-07-27 18:41:07Cash Secured Put in IBM
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.
With SPX currently at $2393, about 12 points from the all time highs, I am looking at a Call Credit Spread. I am looking at a 24 day trade in the June 16 expiration. Sell 12430 Call and Buy 12440 Call for an $1.90 Credit.Just filled this trade live at 11:35 am central time with SPX at 2393.
The Delta of the short call is 20, that meansthere is only a 20% probability that SPX will finish over the short strike of 2430 in 24 Days. The margin or risk on this trade is $810.
I am looking at making around 10% or around $80 on my risk capital of $810 for every 1 contract. I will have an order in to buy back the credit spread at $1.10 Debit as a profit target.
If SPX continues up, I will have an order in to buy back the spread at 2 times my profit target of $80. So I will buy the credit spread back for a loss if the credit goes from the initial $1.90 credit to $1.90 plus $1.60 or $3.50.
Always have a Plan before you start each trade! The position Greeks of the Trade for every 1 contract:Deltas -6.66Gamma-.14Theta6.22Vega-40.42.
/wp-content/uploads/2015/04/logo_svg_full_name_white.png00Dan Sheridan/wp-content/uploads/2015/04/logo_svg_full_name_white.pngDan Sheridan2017-05-22 16:54:132017-06-21 19:48:04Live Trade for today: Call Credit Spread in SPX
AAPL is at $155 today. The at-the-money 31Day Call in the June 16 Expiration is trading at $3.30 with an Implied Volatility of 17.41.
What is Implied Volatility?
In the above example, the market price is $3.30. The 17.41 Implied Volatility is the input you put in the Options Pricing pricing model that spits out the market price of $3.30.
If I put in 15 into my pricing model, it might spit out a price of $2.00. That wouldn’t be the Implied Volatility. Remember, Implied Volatility is the input you put in the pricing model that equals the current market price.
How can knowing Implied Volatility help me?
Now that I have the implied volatility number as a metric of the current option price, if I can compare the number to Historical numbers ,it will mean something useful. The Historical Implied Volatility Range in AAPL over the last year is around 11-29. Now having some Historical perspective, historically, I can see 17 is in the lower end of the range.
A Practical application is this:
If I am bullish , buying a Call at around 17 volatility isn’t a bad buy from a Volatility perspective. Analogy: It’s like buying a pint of raspberries at Grocer for $7. I come home and ask my wife if it was a good buy. She grimaces! She says” The range over the last year for a pint of Raspberries is $2- $7. I paid the top!
/wp-content/uploads/2015/04/logo_svg_full_name_white.png00Dan Sheridan/wp-content/uploads/2015/04/logo_svg_full_name_white.pngDan Sheridan2017-05-16 19:09:032017-06-21 19:53:50What is Implied Volatility and How Can it Help Me?
When VIX is at 10 and SPX is near all time highs, I like Call out-of-the-moneyBack spreads .Here is the trade in SPX at the $2390 price: Buy 2June 192450 Call and Sell 1June 192420 Callsfor $3.40 Credit.
Position Greeks: Deltas -3 Gamma.21Theta-4.70 Vega71. Total Risk or Margin $2600. Total potentialYieldif SPX under 2420 at Expiration in 38 Days is 14% ( credit divided by Risk or Margin).
Vega and Time Decay Risk
Because of the Vega and Time Decay Risk, would only stay in this trade till next Thursday or Friday. Lookingfor about 6% profit on risk of $ 2420 or about $145. Just executed this trade live at 2:11 pm central time on Friday ( today)May 12. Watch Blog next week for updates on this trade.
/wp-content/uploads/2015/04/logo_svg_full_name_white.png00Dan Sheridan/wp-content/uploads/2015/04/logo_svg_full_name_white.pngDan Sheridan2017-05-12 19:21:422017-06-21 20:06:14VIX at 10, time for a Back spread!
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.
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.
Many times I see traders who have a plan, but the plan goes out the window once they are confronted with any unforeseen conditions and recklessness and indecisiveness ensues. So stick with your plan and adjust only if needed, not following every emotion and whim that arises while you are in a trade.
I think it’s also important with the trade not only having a strategy and a plan but to have trading goals. You should keep a written record of your trading goals and your trade results over time so you can see for yourself what works for you and what doesn’t, and make changes along the way.
Risk management is so key as well as a max loss number and adjustment plans.
Many times when you are trying to make a monthly living in options trading it’s really not how much money you make when you win, but losing the least amount on a loser.
If you have a 10% profit goal a month and you are successful most months, that will work if you keep your losses to 10 or 15% the months you lose, but if you are losing 30% and 40% in bad months that will become a problem.
Lastly, you need some accountability. I found for myself and for other traders if you have someone to talk to about your trades and to give you a second set of eyes to look at them and give you some guidance will do great things for your trading and take you to new levels of ability and success.
One on One Mentoring
At Sheridan Mentoring that’s why we feel that one on one mentoring is the best process for developing traders. Trading can often be solitary and being on your own you can tend to lose your way.
Having someone checking in with you that can keep you accountable will keep you on the right track and make your trading much more successful. We at Sheridan options mentoring are here to help you with your planning and educational needs.
/wp-content/uploads/2015/04/logo_svg_full_name_white.png00Mark Fenton/wp-content/uploads/2015/04/logo_svg_full_name_white.pngMark Fenton2017-05-09 17:17:482017-06-21 20:20:14Trading Options Successfully for the Long Term
Sheridan Options Mentoring Corporation 558 Revere Ave. Westmont, IL 60559
“I just wanted to send you a quick note of "Thanks" for everything you have done for me with Sheridan Options Mentoring. I have had a really good 2015 and it would not have been possible without your creating the classes and system to teach me the craft. It has taken me the better part of 3 years to really figure it out and own it (slow learner ;O) ), but I really feel like I can continue trading this way for the rest of my life. The hardest part for me was stopping the dumb mistakes, like "I hope, I hope, I hope" trading, thinking I was smarter than the market, and revenge trading trying to get my money back... - Read More
IMPORTANT NOTICE! The information contained on this website is for educational purposes only: no representation is being made that the use of any trading strategy or trading methodology will generate guaranteed profits. Past performance is not necessarily indicative of future results. There is substantial risk of loss associated with trading options. Only risk capital should be used to trade. Trading options is not suitable for everyone. You must be aware of the risks and be willing to accept them in order to invest in these markets. Please review the document- http://somurl.com/KnowYourRisk before trading options.