Why Premium Sellers Typically Short Delta

Yesterday I tuned into "Where do I start" @ TastyTrade.com. And during this 15 min segment Tom explained to Case why premium sellers like himself are typically delta short. In a nutshell it has to do with the fact that as a premium seller you are short volatility which rises in in a down market, so being short delta helps offset that a bit when markets move lower.

Put another way, first you have to realize that volatility and market direction typically have an inverse relationship. When the market goes up volatility typically falls and when the market goes down volatility typically rises. As a premium seller you are selling or shorting volatility, so in a vaccuum your short vol position (short option) will make money as the market rises and lose money as the market drops. However we do not live in a vacuum and there are other factors that move your position's P&L.

Delta is the equivalent position in the underlying and gives you an estimate of how much your P&L will move up or down for each $1 move in the underlying. This is why you can be short premium and when the market goes down, assuming you are also short delta, your P&L is not down nearly as much as your short vol or vega may suggest.

If you are interested in learning more check out the where do I start video on the TastyTrade.com website. It was uploaded on 7/2/13.

Good Luck Trading!

In The Money Trades




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Broad Markets are Building New Range

The /ES has been setting up a new trading range since hitting a low of 1,553 in the most recent and much overdo corrective move to the downside. I know that many people point to the feds hints at pulling back at quantitative easing as the trigger...but lets also be fair that the market was just plane overbought and was due for a corrective move lower. Over the next few weeks and maybe few months as we move through summer I believe that the trading range is going to be between 1,550 to 1,645.

I have highlighted the proposed trading range in grey in the above chart screen shot. We have to realize that this market has had a massive move to the upside and is need of some digestion before further direction up or down can be decided.

Good Luck Trading!

In The Money Trades

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I Give A Lot Of Credit To Tom Sosnoff At Tasty Trade

I have been trading for over 7 years now and I took many wild rides both up and down in my trading in the early days. When you first get started you are in search of the holy grail of trading...which you eventually find out actually does not exist.

However there are many ways of trading that can make money. The important thing is to find YOUR style and choose the ASSETS you're most comfortable trading. It probably makes a lot of sense to choose instruments and strategies that MATCH the size of your account.

When I started I did a lot of things the hard way. But in today's world you have tasty trade with veteran trader Tom Sosnoff. I thank him for starting his network and for snowballing a revolution for the self directed trader/investor. I have learned a lot since first meeting Tom back in 2010 at the traders expo.

The lessons preached over and over on the show:

1. Trade Small, Trade Often! You don't want to trade too big relative to your account and risk blowing up. And you want to trade often so that you can allow the probabilities to work in your favor.
2. Sell into strength. This is true when selling long positions to take profits...but it is just as true when you want to get short. It is hard to sell into strength as it is counter intuitive. But it gives you edge over selling into weakness. 
3. Buy into weakness. You can buy to close profitable short positions. But you can also get long into weakness. Again very hard to do psychologically. 
4. Be mechanical about your trading...trade based off probabilities and don't get emotional.
5. Its all about cost basis reduction. In one sentence this is what premium selling is all about. So sell premium to reduce cost basis, increase probability of success, and give yourself more than one way to win.

So if you have not already done so make sure you head over to TastyTrade and open up a free account and start learning so that you can start earning!

Good Luck Trading!

In The Money Trades

And 1 favor that we ask: 

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8% Corrective Move On /ES, Whats Next?

We have had a very nice corrective move on the /ES the past few sessions. And since topping out at 1,685 (the all time high), we have traded off about 130 handles or about 8%. The question is whether the move is over or will we see lower prices?

I continue to be short the /ES (net delta position) as I believe we could see a bit more downside until we see 1,530 on the /ES and then that will likely be followed by some consolidation through the rest of the summer. In the above chart you can see the profitability range I have highlighted in grey based on my aggregated position in the /ES. To date I have collected about 100 /ES points in premium over 52 contracts traded. Although I have collected 100 points my max gain is only 70 points or $3,500 on this aggregated position with 66 days left to expiration.

Good Luck Trading!

In The Money Trades


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I AM ALIVE!!!

It has been a couple of weeks since my last post. If you look through the feed you will likely notice that my last post was on May 23rd. I really can't believe that it has been almost three weeks. Never fear I am alive and well and have continued to trade the markets. But over the last few weeks I have been pretty busy with work in both my day job and in my side pursuits. More recently I have been teaching myself programming skills. Before we break off into market analysis I will leave you with this quote I live by from Jim Rohn: "A formal education will make you a living, but self education will make you a fortune".

My last post was the first of what would be the first corrective move to the downside after hitting all time highs at around 1,685 on the /ES.

Chart from May 23rd

And 3 weeks later...

Looking at the chart above you can see that the markets pulled back about 90 points and have found support around 1,597 on the /ES. During this time we finally got a pull back and a awesome move lower in JNJ:

Remember JNJ had an incredible run of 19 strait weeks to the upside without a single down move. Although the above chart is not a weekly chart, you can see that JNJ topped out a penny shy of $90 and hit a low at around $82.50 11 days later. Only to remind us that there is cycality in the market...meaning that the market goes up AND it also goes down.

As public as I have made it, it is no secret that I have been net short the market place. But over the recent pull back I have been selling puts in NLY which finally showed some life today. I am short 20 put contracts that have an equivalent delta of about 30 SPY. If you look back in the archive you will see numerous posts about my fascination of NLY for its juicy dividend. I made really good money until exiting the trade in March and have been since been patient to build up a healthy position again. My effective long price puts me long the stock around $13.30/share. The current yield at this price is around 13.5%. There is ton's of chatter about rising interest rates and reform to fannie mae and freddie mac....I don't care!

I have continued to play in and out of VXX as a compliment to my short position in the /ES. I have mostly been short puts to get long volatility since my position in /ES is short premium which by its very nature is short premium. So although intrinsically I am up a little money...the expansion in volatility that has happened over the past few weeks doesn't show me up as much as I would be at expiration. But that is fine with me, I am currently getting paid $33/day in theta in my aggregated position. My profit range on this position is 1,537 to 1,645. I think the recent high at 1,685 has given us something to trade against to the upside.

Getting back to VXX...with a pop volatility I covered the latest short puts I had and turned around and sold out the Aug '13 $21/strangle for $5.15.

Good Luck Trading!

In The Money Trades

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Big Reversal Yesterday

Yesterday I started a new chart of the day series to record this epic move, which now looks like it may be a short lived series. We did however go on to make another all time high after my morning post yesterday. The new all time high put in on the S&P 500 via the /ES was 1,685.75...the day started out very well for the bulls until fear finally showed up in the market bringing with it close to a 40 point reversal on the day:

Before we made any new highs on the session this morning I went ahead and sold a 1,610 put for 20 points against my much publicized short /ES position. I also bought in my short 1,555 put for a small gain as I continue to believe and operate that staying small with no more than one contract of exposure the prudent thing to do in this trade. My new effective short price as of the close yesterday is 1,635 and my aggregated position looks like a giant short call spread:

Looking at the risk profile above you will notice that I have hedged off my risk at the 1,700 level via a long call. Additionally although I sold the 1,610 put I do own a 1,600 put that keeps me positioned well to profit for an accelerated move to the downside. And just for the record if I were to sell out my long call and put, my effective short position would be around 1,640, but that would also expose me to unlimited upside and downside risk.

To date I have collected a total of 80 points over 26 trades. And as I write this the market is about 100 points off where I got short around 1,555.

Good Luck Trading!

In The Money Trades

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S&P 500 New High Chart of The Day

Starting today I will be posting a daily chart with the new high of the day. And in the event that I post the chart to early and we make another high from the time I posted the previous chart I will post a new chart the following day. This should be fun documenting this epic move to the upside.

Good Luck Trading!

In The Money Trades

And 1 favor that we ask: 

If you like the hard work we put into our blog posts and videos, PLEASE help us out by sharing them. Click the share links below and share them on FB, twitter, etc. It really helps us get more exposure and grow IN THE MONEY TRADES!