Trading Options for Profit

Limited risk, uncapped earnings and being paid when markets move sideways. These are just a few of the reasons trading options is so appealing to retail investors.

Options enable investors the opportunity to make bets on rising and falling markets without having to provide the full capital upfront to buy/sell shares....



Compare Stock vs Option Payoff

Education

Start here if you're new to options trading. You will learn what option contracts are, why you should trade them and understand the mechanics of what makes up option prices.

Options101 »

Iron Condor Option Strategy

Strategies

Here is where you will learn how to combine calls and puts to construct specific price outcomes for stocks/futures.

Option strategies provide the flexibility to profit from rising, falling and also directionless markets.

Option Strategies »

Option Scanner Screen

Option Scanner

Go ahead and jump straight to the Option Scanner. This software will show you volume spikes in contracts that often precede large price movements in stock prices. Many refer to these volume buys as being the result of inside information. You be the judge!

Option Scanner »

CEO Files for $20m Share Purchase

Option Scanner Results

The CEO of Energy Transfer Partners (ETP), Warren Kelcy, has filed a SEC Insider Form 4 declaring his purchase of $20 million additional shares of the company. Kelcy bought 1 million shares on the 6th July for $20.33. FYI, I just discovered a great site for finding insider transactions called Open Insider.

Now, taking a look at the Option Scanner, a company called Energy Transfer Equity (ETE), which owns equity interests in ETP (above), looks to have seen a massive $18/$19 call spread trade during Thursday's trade. Approximatley 29,000 spreads went through over only 2,582 in open interest. This volume spike together with ETP's CEO share purchase is a strong bullish sign for both stocks.

I placed an order for the $18/$19 call spread @ 0.35, which was the midpoint from the closing prices.

Expect a Quiet Week Ahead

Backing off from its' all time highs a week ago, the S&P finished Monday's session down slightly from the open to close at 2438.91. The NASDAQ also closed lower than the open but is trending up over the past week or so.

There isn't too much going on by way of economic data this week; Crude Oil Inventories on Wednesday, Japan's unemployment rate Thursday and US core PCEPI out of Friday. Although, Fed Reserve Chair Janet Yellen will be attending a panel in London on Tuesday, however, many don't think she will offer anything new on the Fed's outlook on monetary policy so soon after the June FOMC meeting.

Only two big name stocks are releasing earnings this week; Nike (NKE) and Micron (MU). Both announce Thursday after market.

MU's shares are up 40% this year alone and expectations are that their release will continue to show positive sign for the memory chip manufacturer. Check out the July call options though...10k options went through the $29.50 strike during Monday's trade, which is an in-the-money call option (10% ITM) at around $3.70. Volatility is high though at approximately 56.67%.

UPS Option Strangle

Option Scanner Results

The Option Scanner showed $112 calls trading 12,442 over 137 at 16.11% implied volatility. When looking on my broker terminal I see 11.7k in total open interest for both $110 puts and $112 calls, i.e. a 110/112 strangle.

Earnings for UPS aren't out until July 27th but at the money implied volatility is in 14.1% from my IB terminal and the strike range to breakeven is only 1% away on either side.

I placed an order for that spread too at 2.38.

COH Earnings Pump Call Option Prices

May 3rd, 2017

The $40 call options that saw unusual volumes pre-earnings have spiked more than 200% in Tuesday's trade. Last paid for the calls on Friday was 1.07 with over 12k contracts trading that day.

Option Prices Before Earnings

COH Option Chain 28th April

Option Prices After Earnings

COH Option Chain 2nd May

Today those options closed the session at 3.48, which is a 225% return!

This was the top result for the June series from the Option Scanner results.

Option Scanner Results 28th April

AAPL releases Q2'17 numbers after market close today, Tuesday the 2nd May and investors are still expecting big things from the company; their shares are up 2% from Thursday, closing out last week's trading at $146.58. AAPL's rally helped boost the NASDAQ index, which is also at all time highs, trading at $5,629.63.

Other notable names to release this week are GILD, FB, TSLA, FIT, ATVI and ZNGA.

In addition to these big name stocks releasing numbers this week, the Federal Reserve also kicks off its May policy meeting from Tuesday. Although the markets are not expecting a rate hike, the markets may still react to Fed comments about the state of the economy.

Going from the latest chart of the S&P 500 Volatility Index, it would seem the market has been quietening down before a week of potential ups and downs:

GLW Chart

Volatility is at a one year low for the S&P 500 Index. But the volatility of the volatlity has recently spiked up 30% to 131%. This tells me that the market expects volatility but for now the levels remain low.

How to Adjust a Losing Iron Condor?

January 25th, 2017

Looks like my pre-earnings Iron Condor strategy was indeed a bad idea. GLW released their earnings before the market opened Tuesday 24th January to the surprise of analysts.

GLW Chart

Core EPS turned out to be $0.50 on a predicted $0.44. The stock opened strong and rallied higher throughout the day to close the session up 5.7% to $26.18.

The stock is now outside the upper breakeven point of $25.38 and if it continues I will realise my max loss of $186 ($62 per contract).

What Options do I have to Adjust?

I have a few alternatives to consider as to how to manage this trade at this point:

  1. Do nothing and hope that the market pulls back from now until expiration
  2. Sell a higher strike put spread
  3. Sell a higher strike put spread in the next expiration
  4. Reverse the existing short call spread into a long call spread
  5. Close the short call and leave the long call to run
  6. Double down with another Iron Condor

In considering the above, I looked at the option prices at the close for the Feb 17th options:

GLW Option Chain for 24th January Close

Since the pop in stock price due to earnings, the uncertainty has since been remove and can be seen in much lower option prices. Implied volatility has dropped to 18% so 2, 3 and 6 don’t look like bringing in much premium. Plus, putting on another Iron Condor in March would mean having to put it with narrow strikes in order to make it worthwhile but also means a lower chance of the stock staying between the bands.

Also to consider is the sentiment since the report, which was very favorable for the future outlook of the stock. I would say that I am now bullish on the stock.

Pre-market activity also shows a strong open with the stock having traded $26.30 with an hour before the open. So what I’m going to do is go with #5 above; close out the short $25 call and leave the $26 long call open. The $25 calls closed at $1.32 but with the pre-market looking to open higher, I’m not sure what price to go with. Perhaps yesterday’s offer price of $1.35?

Iron Condor Pre-Earnings

January 19th, 2017

It's not always a good idea to take on short volatility strategies pre-earnings, but take a look at this Iron Condor setup for GLW.

GLW Iron Condor Setup

B/SStrike C/P Price
 Sell $25 Call 0.48
Buy $26 Call 0.20
Sell $23 Put 0.23
Buy $22 Put 0.13
Total Credit $38

GLW Iron Condor Payoff

The stock has earnings out January 24th and the options expire February 17th. The implied volatility suggests there is some uncertainty leading into the announcement; IV is relatively high at 25% compared to historical vol of 15%.

GLW Volatility Chart

Max profit on this is $38 per contract, which is the net credit received at the time of trade. Max loss is $62. At the current volatility level, there is a 69.27% chance of success with this trade.

The Most Important Option Greek

Call and Put Delta vs Changes in the Underlying Price

The Delta of an option does more than approximate the price move compared to the underlying; it also describes your directional bias, serves as a proxy position for the underlying instrument and estimates the probability that the option will expire in-the-money.

Delta isn't static though; it changes constantly with other pricing factors and it's important to know what they are.

Read more...

Make Time Decay work for you

Time Decay Graph - shows the erosion of value accelerates past the 30 days mark

As options approach their expiration date, their value can erode quickly. If you're long out of the money options then this effect can be quite dramatic; you can lose money even when the market moves in the right direction.

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HRB Move an Inside Job?

HRB Stock tanked on Wednesday the 27th after the company reported a disappointing tax season. Outlook remains bleak for the stock and their next report is due out in June.

However, it appears someone knew of the pending downward move in the stock.

Option scanning tools showed that the $23 put option had significant volume trade the day before the stock plummeted. 19k options traded through one strike, which saw the puts outnumber the calls traded by 5 to 1. The next day, HRB drops 13.56%.

The Puts rose 386%

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