Long Vol in Low Vol Environment

On Monday I posted that I moved to 95% cash and that I thought short term that we could see some weakness in the markets. I also added a comment to that post that because of this thesis, I decided to get long volatility via the VXX. I sold 5 May '13 puts @ $1.24 with a $19 Strike price.

Above I have a 4 hour chart of the VIX. The thing I want to point out is that the VIX has been below 15 for all of 2013 except for 2 days. One of those days was the 35% spike on February 25th. I have 44 days til expiration to see a spike in volatility and plenty of time for theta to work for me. My goal is to capture about 50-70% of the premium I sold.

My break even is $17.76 and I would look to roll if we actually continued lower towards my break even before I close the trade. Remember when we had the spike in VIX in February I was short vol with a covered put position in the VIX. At these prices I don't like that trade as much, which is the justification of being long.

Remember I took off the VXX, I think last week for most of the max return with plenty of days til expiration.

Good Luck Trading!

In The Money Trades

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Tasty Trade Interview with Tim Sykes

The above interview is only about 15 minutes long with Tom Sosnoff (of TastyTrade.com) and Tim Sykes. Tim Sykes got his fame in trading penny stocks after he turned his $12,415 Bar Mitzvah money into $2 million bucks. He is character to say the least. Although he has done well trading penny stocks and training his students to do the same. Tom Sosnoff argues that he is an outlier and that over time the statistical change of trading directionally and doing better than 50/50 is zero. As anyone who has watched Tom speak, he is all about increasing your probability of success (increasing your edge), doing this by selling premium and reducing cost basis. 

Its an interesting video and very entertaining to listen to two very outspoken people in the trading space.

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Retail Trader with $105MM in profit

I didn't get a chance to see this interview when it first aired, but all I can say is WOW! The funny thing is the comment that Tom makes about the fact that professional SPX pit traders don't even know this lady exists and wouldn't believe that there is a retail trader that has made this much money. The video is about 52 minutes, but is really interesting and worth your time.

Oh and by the way if you are not already a tasty trade member you should check it out here! This is the best education you are going to find on trading, I personally don't think you could find a paid service that beats what Tom and Tony give each and every day. Look the membership is free when you sign up for a free account at think or swim.

Good Luck Trading!

In The Money Trades

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Covered Short Put in VXX

Reading Jason's post about how he is trading his position in the /ES along with the segment that I caught the tail end of this morning on TastyTrade.com got me thinking about a short position in volatility via the VXX. Being that both VXX and options are a decaying asset I just love the idea of this. With that said I am selling 100 shares of VXX and the Apr '13 $24 put against it for $2.46 giving me an effective short price of $26.46.

And here is a chart that really gives you a visual of what I was refering too with respect to VXX being a decaying asset:

This should be a fun experiment. We have 49 days until April expiration. My break-even is my short price of $26.46, which is only about 40 cents shy of the recent high that printed this week when the volatility popped more than 30% in a day. As I continue to see a long bias in the market I don't see a real threat of volatility getting way out of control. And if I am wrong, due to the nature of this particular product I would feel comfortable waiting it out as not only is volatility mean reverting but this asset really can only decay overtime due to how it is composed.

Good Luck Trading!

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Selling Option Premium

When it comes to trading options I have to admit that I have a pre-disposition to selling option premium vs buying it. My brain goes to great lengths to prevent me from buying option premium. Now this has not always been the case. When I first started trading options I was mostly a buyer, except for the old covered call strategy. Now theoretically you can find an option strategy that you pay for that has the same risk profile and probability for success. For example, you could buy a callspread vs selling a putspread.

So why do I prefer to sell options? The first reason I prefer to sell option premium is because of theta or time decay. Every option that trades is a decaying asset. By selling an option I get paid for everyday that goes by. Additionally I am selling an option that has no real or intrinsic value, based on the way I choose what to sell. What I mean by this is that lets say I sell a $25 put on MSFT for $1 when MSFT is trading for $27. The option has no intrinsic value because it is out of the money. MSFT would have to fall $2.01 to be in the money by a penny and would have to fall greater than $3.00 before I even begin to lose any money. I refer to this as my downside protection or cushion. You can think of it this way I am buying a stock with a fair market value of $27/share for $24, I know have an edge over every other market participant that went and paid $27 for the stock.

I especially like the fact that when I sell options I have more than one way to be right. Lets stick to the example of selling a $25 put on MSFT. I can make money the following ways:

1) MSFT continues to trade higher = Money in the bank
2) MSFT doesn't move and stays at $27/share at expiration = Money in the bank
3) MSFT trades lower but stays above my breakeven of $24.

So as you can see in this example I make money at any price greater than $24/share. Now lets compare that to buying options. When you are a buyer of options now you have time working against you. Now instead of making money for every passing day, you are now losing money through the theta or time decay of the option purchased. When you buy options you have to be right about the following: Direction, Timing, and Volatility. And as we know timing the market can be like catching a falling knife.

And then there is my least favorite way of trading...buying or shorting a stock outright with no options traded against the position. This is the way most retail investors trade. You know have a 50/50 shot at making money. And you only have one way to make it, if you buy the stock it has to go up in value to make you money (unless its paying a dividend of course), and if you short a stock it has to go down in value to make you money.

I don't know about you but selling options still sounds way more favorable to me. I will take multiple ways to making money on a trade vs a single way every day of the week.

Good Luck Trading!

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Long Volatility via VXX

As I have been talking about over and over for the past few weeks. Right now the market direction is up and  I am trying to sit on my hands and not add to any new long positions. The risk/reward to adding new positions with markets at the upper end of their range and at 5+ year highs is very hard to justify. The SPY is possibly starting to show signs of getting a bit tired. With that Volatility (VIX) is at the lower end of its range and is currently in the 13% percentile.

With that, this morning I sold the Mar '13 $22 put @ $1.28. In other words I collected a $1.28($128 bucks), betting that volatility is not going much lower and could go higher between now and March Expiration. By break even is at $20.82. I really like the fact that my Theta is about $2.33/day.

After adding this to my overall portfolio I am net long about 42 SPY deltas.

Additionally this week PBI will be paying its quarterly dividend. /The covered call I sold against my stock position is about $2 ITM. So I will update the original post on this position as to whether I get exercised to sell the stock or if I go under the radar and keep the dividend. Either way I make money :)

Good Luck Trading!

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How do you decide what to trade?

I know one question that I get frequently is how to find what to trade. Its a hard question to answer because the answer really depends on a lot of variables. But there is probably one universal rules to follow:

1) Make sure the stock is liquid. My rule of thumb is that the stock trades at least 1 million shares a day on average. You want a liquid stock because you want to make sure you can get in and out of the stock easily. But on top of the stock being liquid you are going to want to make sure the options are liquid as well. I like to look at open interest to gauge this. If you look at the 8 closest strikes you should see a couple thousand contracts in open interest.

Other than that the sky is the limit. There are so many sources of ideas out there. They range from free to paid services. It really depends how active you want to be and what you cash flow situation is like. I personally like to come up with my own ideas, and I honestly don't like to pay for trade ideas. So I navigate towards free tools for idea generation. But with the internet this is very easy. And if you follow our advice on this blog and get a think or swim account through TD Ameritrade, you will have more tools for idea generation than you know what to do with.

I think a great place to start is to look at companies that you know. What companies do you interact with in your personal life. Write down a list of those companies and look up there stock symbol on www.google.com/finance. Do they pass the liquidity test? You might have some good trade ideas.

As I have blogged about a lot lately I have gravitated towards leap covered call positions on high yield dividend stocks. The first thing I do to identify a candidate to trade is use a free service called dividata (www.dividata.com). Its a really great tool that allows you to set filters, see stocks that are going ex-dividend soon, high yielders...etc. I really like the dividend history and rankings that it provides. After I find some candidates that peak my interest I take those stocks over to the TOS platform and look at the price chart, to decide if it technically looks like a good entry point.

If the timing looks good to enter into the position from a technical standpoint I then precede to the options tab on the platform to scope out the nearest out of the money call option that I can sell against it. Typically I am looking 1 year out on this type of position. I am looking to collect about 7-10% of the current stock price as a "cushion" or a reduction to my cost basis. I should also point out that I am targeting dividend stocks yielding 5-10% (sometimes a little higher), that have a good stable payment history of at least 5 years (preferably 10). All in this sets me up with about 12-20% cushion.

Now this is for just one type of trade idea generation. I also like to look at the popular ETF's for trade ideas. One of my go to index ETF's is the SPY, which for those of you that are not familiar is the index that tracks the S&P 500. I typically look at trading this instrument from the short side when I think the market is a bit overdone.

Other places you can get trade ideas: Tasty Trade, Think Or Swim Scans, Onn.tv, CNBC, stocktwits.com, google.com/finance, investingwithoptions.com, t3live.com.

This is only a small list of the endless pool of opportunity that awaits you.

Good Luck Trading!

The Trend is your Friend...so don't fight it!

The markets continue to move higher. I thought for sure we were finally set for a decent correction of 5-7% after Fridays move lower of more than 1% on the S&P 500. But mine along with all the hopes and dreams of the market bears were crushed after Fridays gains were all but a distant memory as the bulls came in to support the market back near 5 year highs. As tempting as it is to get short, I am fighting the urge and sticking to what has been working...and that is to remain long.

I have a short hedge in place, that is very small compared to my long position. But I also have the downside protection from the calls I have sold agains my positions, as well as the extra cushion I am receiving from the dividend from those positions. All in all I am protected in the tune of a 15-20% down move in 2013 based on the positions I have on. So I feel pretty comfortable with the positions I have on. As I have no expectations of a move so sever this year.

I am conscious every day I check into the markets to leave a sizable amount of my portfolio in cash for future opportunities (currently around 35%). The last thing I want is to be fully invested when the market does decide to correct. Or at the very least to be ready when some decent volatility comes back into the options market, so that I can sell some premium.

I tentatively have plans to get a little more short if we get to all time highs on the SPY of around $157, and not earlier unless the markets significantly change their tune.

So for now I continually remind myself that the trend is your friend....until the END!

Good Luck Trading!

What goes up...must go higher?

The markets continue to ride this bull run higher. As we all know, the market is just one big auction where buyers and sellers take turns being in control. But there are times when it seems like one side or the other takes a longer term than they deserve. It is times like these where the market seems one sided. But as they say, the trend is your friend and being long is working in this market.

As I have been saying over and over again the last few weeks since I started blogging again, the only real positions that I have been able to initiate in this low vol environment are long dated high yield dividend plays with covered calls. I am slightly short some SPY's via a short call spread, but my short delta exposure here is very small. I don't plan on adding to this position until we get signs that the market is ready to let the bears into the driver seat for a while.

This morning we are going to see markets gap higher as the overnight markets trade higher and a well accepted US jobs report. I think the report said the private sector added some 157,000 jobs with the unemployment rate at 7.9%.

I will admit that its been a struggle to sit on my hands. But it is honestly hard to initiate new longs at these levels. I did however put on a covered call position in AT&T (T). I know currently have about 40% cash in my portfolio.

Don't get emotionally attached and don't try to force a position. The market doesn't care what your position is or what you think.

Good Luck Trading!!!

ISE to introduce mini options on March 18th

Hey Traders! I am not sure how many of you may be following this story or if you are even aware that its happening. But a while back the ISE exchange announced that it had created a new option product that they are calling mini options. The mini options are going to open up the playing field for people with smaller accounts to play big names like: AAPL, AMZN, GOOG, GLD, and SPY.

The new mini contracts are going to be identical to the regular option contracts with the amount of shares it represents being the only difference. The mini option contracts will represent 10 shares vs the typical 100 shares.

I don't know about you but I am pretty excited about this. Because there are times where I would love to play some of these names but the capital required to take delivery of 100 shares of say AAPL by selling a naked put at current prices is about $45,000, which is a significant portion of my portfolio. But with the new mini's it will be a tenth that size, which would make me more comfortable playing those names.

Here is the release for November of last year:

The International Securities Exchange (ISE) today became the first exchange to confirm a launch date of March 18, 2013 to commence trading in Mini Options. Since receiving Securities and Exchange Commission (SEC) approval for this innovative new product offering, ISE has been coordinating with its member firms to determine an appropriate date for launch readiness.

Mini Options will represent a deliverable of 10 shares of an underlying security, whereas standard contracts represent a deliverable of 100 shares. ISE will initially list Mini Options on the following securities: AAPL, AMZN, GLD, GOOG, and SPY.

“We are very pleased to announce a launch date of March 18, 2013, to begin trading Mini Options,” said Gary Katz, President and CEO of ISE. “This exciting new product will make trading options on popular, high-priced names like Google and Apple more affordable and more flexible for the retail segment of the market. We look forward to coordinating with our member firms to achieve a smooth rollout of Mini Options in March and to broadening the reach and appeal of the options product to retail investors with this new offering.”

Mini Options will have the same expiration dates as their standard counterparts, including Weeklies and Quarterlies. Strike prices will also align to those of the standard contracts, as will the quoted bids and offers. The fees associated with Mini Options will be filed with the SEC and announced at a later date.

I also heard on the Tasty Trade show yesterday that these option will be available to all of us that currently trade on the Think or Swim trade platform the day they go live. 

To read more follow this link:http://www.ise.com/assets/documents/OptionsExchange/legal/ric/2012/RIC-2012-18$Mini_Options$20121203.pdf

This is not only excited for my own personal trading, but it also comes at a great time. As many of you who have been reading, I am currently teaching a few friends about options trading. So these might be a great product for them in the event they want to trade some of these big names.