57
1 Market Taker Mentoring, Inc. Dan Passarelli Market Taker Mentoring, Inc. MarketTaker.com twitter.com/Dan_Passarelli
1
Market Taker Mentoring, Inc.
Dan Passarelli Market Taker Mentoring, Inc.
MarketTaker.com twitter.com/Dan_Passarelli
In order to simplify the computations, commissions and other costs have not been included in the examples used in this presentation. These costs will impact the outcome of stock and options transactions and should be considered. Investors considering options should consult their tax advisor as to how taxes may affect the outcome of contemplated options transactions.
Options involve risks and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (ODD). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corp., One North Wacker Drive, Suite 500, Chicago, Illinois 60606. The information in this presentation is provided solely for general education and information purposes and therefore should not be considered complete, precise or current. No statement should be construed as a recommendation to buy or sell a security or to provide investment advice.
Copyright © 2011 - 2014 Market Taker Mentoring, Inc. All rights reserved.
Disclaimer
The MTM Trading Path©
1. Observe/discover opportunities
2. Analyze technicals 3. Analyze news 4. Analyze volatility 5. State forecast 6. Select strategy
7. Plan exits 8. Execute 9. Monitor position 10. Adjust (if necessary) 11. Exit trade 12. Post mortem
The “Big Four”
1. Observe/discover opportunities
2. Analyze technicals 3. Analyze news 4. Analyze volatility 5. State forecast 6. Select strategy
7. Plan exits 8. Execute 9. Monitor position 10. Adjust (if necessary) 11. Exit trade 12. Post mortem
Volatility Analysis
• Volatility analysis “normalizes” option values
• Volatility is very important source of edge
5
Implied Volatility and Realized Volatility • Definition: Realized volatility is a measure of how
much the underlying stock has moved during the recent past – Nothing (necessarily) to do with options – Stated in annualized SD
• Definition: Implied volatility is a measure of how cheap or expensive options are, all else held constant – Market’s estimation of future vol? – Stated in annualized SD
6
Implied Volatility and Option Prices
• When options prices are rising, that means IV is rising.
• When option prices are falling, that means IV is falling.
• IV is derived from the market.
• IV is sometimes more important than directional movement.
Vega ! “Translates” IV changes to money
8
Inverse Relationship Between Stock Prices and IV
• Generally, as stocks go higher, IV goes lower.
• Likewise, as stocks go lower, IV goes higher.
Volatility and Edge
• Vol trader or not, vol is very important! • Affects your “variable cost (or income)” of
theta • MUST always analyze volatility on every
option trade • Vol analysis is part of traders holistic
forecast
10
Directional Option Trades and Edge
Directional Option Trades
• All the same analysis as trading stocks, but more
• Concerns: – Time decay – Volatility (Implied) – Magnitude of move (reaching strike or not) – Maximizing profit, minimizing loss
• The edge advantage
Trading for Edge
• Bettering your odds • Edge sources for option trades
– Technicals – News – Volatility – Strategy selection
13
The Best Strategy for the Set Up • Maximizing opportunity (maximizing profit,
minimizing loss) • Optimizing: theta, vega, strike proximity • Unique option strategies • Match strategy to forecast
– Criteria • Month
Breakout Scenarios
• Long call (or put) • Different set ups, different options
– Slow trend – Break out
• Minor • Major
Strategies
Slow Trend Breakout
Slow Trend
• Slow and steady trend • Capture small move • Need immediate participation • Confident in continuation
Slow Trend Play: ITM Strike • In-the-money call
– High-delta (70 – 90) – Stock substitute play
• Starts profiting right away • Profits well on small moves • Risk more than ATM or OTM call, but
significantly less than buying the stock • Low theta • Volatility is small, but relevant concern
Benefits and Detriments • Benefits
– Starts making money right away with stock appreciation.
– Moves in step with stock well – Low theta (the cost of gamma)
• Detriments – Starts losing money right away with stock
decline. – Moves in step with stock well
Strategies
Minor Breakout
Minor Breakout
• Maybe a flag-pattern breakout • Directional breakout but not profound • Active traders
Minor Breakout: ATM Strike
• At-the-money call – 50-ish delta – Leveraged spec play
• Profits well on small breakouts • Risk more than OTM but less than ITM call • Highest gamma • Volatility is big concern. Only buy if cheap.
Benefits and Detriments
• Benefits – Moves somewhat in step with stock – Highest gamma
• Detriments – Moves somewhat in step with stock – Highest theta
Strategies
Major Breakout
Major Breakout
• Earnings play, story stock • Spec-ing on a huge directional breakout • Active traders
Major Breakout: OTM Strike
• Out-of-the-money call – Small delta (25 – 35) – Leveraged spec play
• Profits best on big breakouts • Risk less than ATM or ITM call, lower
chance of success • Moves to (and through) high gamma • Volatility is small, but relevant concern
Benefits and Detriments
• Benefits – Very inexpensive (low absolute risk) – Moves to and through highest gamma when
there’s a big move • Detriments
– Low probability trade – Far at-expiration breakeven
Trading Iron Condors for Edge
Iron Condor • Definition: one put credit spread and one
call credit spread on same underlying, in same expiration. Both usually OTM.
• Objective(s): – Short-Term: Profit from theta while losing little
to statistical volatility. – Long-Term: Watch stock close on between
both break even points at expiration.
Iron Condor P&(L) Diagram
Long put
Short put
Short call
Long call
+
-
Stock at expiration
Iron Condor Candidates • Technical
– Stock in channel – “Bouncing off” support and resistance that coincides with
strikes • Fundamental – No news is good news! • Volatility – Implied is moderately expensive • Prices
– At least 0.30 nominal credit, – Or 15% of strike width of wings
Iron Condor Example Technicals
Source: LiveVol
Iron Condor Example Fundamentals
• Earnings: just came out • Dividend: N/A • Story: None
Iron Condor Example Volatility Source: LiveVol
Prices not current
Iron Condor Example Prices
Selecting Strikes
• Fancy math – Standard deviation – Probability of expiring/touching – Fixed percent move – Delta
• Support and resistance • Strike width – Which long strikes to buy?
Iron Condor Example Prices
Source: TradeMonster Prices not current
Iron Condor Example Buy 1 44 put at 0.51 Sell 1 45 put at 0.77 Sell 1 48 call at 0.58 Buy 1 49 call at 0.34
Credit 0.50
• Max Gain =0.50 • Max Loss =0.50 • Break Evens = $44.50 and $48.50 Prices not current
P&(L) Diagrams Iron condor example
$44 $49 $45 $48 Stock at Expiration
Iron Condor Example Buy 1 44 put at 0.51 Sell 1 45 put at 0.77 Sell 1 48 call at 0.58 Buy 1 49 call at 0.34
Credit 0.50 stock@ $46.29
• Delta = -0.00 • Theta = +0.01 • Vega = -0.02
41
Time Spreads and Edge
42
Time Spread Basics • Time spreads: aka calendar spreads, horizontal
spreads • Buy one option, sell another that is the same
type, same strike, but a different month. – “Long” time spread, means buying the option with
more time until expiration (i.e. greater value)
Typical Long Time Spread
Buying Feb-Mar 55 call time spread at 0.78 Courtesy of LiveVol
Absolute Risk – Long Time Spread P&(L) Diagram
Shared Strike Price Underlying at expiration of short-term option
Profit
Loss
Incremental Risk – Long Time Spread (Measured by the Greeks)
Delta Gamma Theta Vega
Positive or negative Negative Positive Positive
Buying Feb-Mar 55 call time spread at 0.78
46
Example: Long Time Spread
Stock Chart Analysis: MGM
47
Prices not current
Long Time Spread Buy May17-May30 24.5 put time spread at 0.35
Absolute Risk: Long Time Spread
24.5 Stock at May17 expiration
Profit
Loss
(0.35)
Incremental Risk: Long Time Spread
Delta Gamma Theta Vega
0 - 16 + 3 + 1
Buy May17-May30 24.5 put time spread at 0.35
51
Trade Criteria
Fine Tuning
• Verify vols in option chain • “Sanity check” by reading news
– Google finance – Yahoo! finance – Other
More Ways to Generate Income with Options
Income Generating Master Sessions
• Finding Great Income Trades • Secrets to Analyzing Income Trades • Legging and Execution Techniques • Complex Income Trades • Adjusting Income Trades • Adjusting Income Trades II
Video Series + Bonuses Income Trading Master Sessions ($599 normally)
Bonuses… 1 FREE 1-on-1 Coaching Session ($500 value) 1 months of Group Coaching ($332 value)
Total value… $1,431
Club Special
$1,431 value Pay only $497!
MarketTaker.com/TraderClub
This has been a presentation of … Market Taker Mentoring, Inc. MarketTaker.com
Dan Passarelli [email protected]
Twitter.com/Dan_Passarelli (815) 922-3329
