Friday, January 30, 2009

Exploiting Price Patterns

In today's video I review a 30 min bear retracement pattern on the NDX.



Thursday, January 29, 2009

Market Recap

After having a 4 day, 70+ point rally, the S&P 500 index failed to muster up sufficient strength to close higher for a fifth consecutive day. In doing so the S&P has now formed a lower pivot high, which shouldn't be surprising considering this rally was preceded by a lower pivot low. Remember, lower pivot lows are generally followed by lower pivot highs! Conversely, higher pivot lows are typically followed by higher pivot highs!

Here's a snapshot of how the major market indices and sectors finished the day:


Exploring Index/ETF Options

Just had a few thoughts I wanted to share regarding the benefits of trading options on an Index or Exchange Traded Fund versus stock.

1. Don’t have to worry about company events or news such as earnings, product releases, FDA announcements, etc…
Let’s say I’m playing an income type strategy on a stock like AAPL. Every quarter I’ve got to deal with an earnings announcement which serves as a catalyst to drastically increase the realized volatility of the stock (albeit it short term). That can be a pain in the neck when playing a strategy where I’m looking for stagnation, like say a calendar/iron condor. Playing an Index/ETF avoids all the drama and unknowns involved with earnings.

2. Typically have a lot more strike prices to choose from, which enables more flexibility in not only placing the trade, but adjusting as well.
If I’m placing a vertical spread on SPY I’ve usually got about 10 different strikes I could use to place a trade with risk-reward parameters I’m comfortable with. On the other hand, if I’m trying to place it on MSFT I’ve got maybe 2 to 3 strikes that have enough premium to make it worthwhile.

3. Depending on the index/etf, they typically exhibit less volatility than individual stocks within the index/etf.
When playing income type strategies, less volatility is serves as a benefit. For example, today the XLE (sector spdr energy ETF) was down 3.53%, but COP (ConocoPhillips) was down almost 6%.

4. The super liquid ETF’s (SPY, DIA, QQQQ, IWM.. etc.) have very tight bid/ask spreads.
To fully appreciate this advantage, try trading options on illiquid stocks for awhile. Ever traded an option with a $2.00 bid/ask spread? Kinda sucks being down $200 per contract right of the bat! Tighter bid/ask spreads should result in less slippage which can make the trade profitable a lot quicker.

This list is far from comprehensive, so feel free to add in other benefits you think I've left out. Furthermore, anyone want to play devil’s advocate by taking the other side of some of these assertions? Feel free to pipe in on the comments board. . .

Tyler -

Tuesday, January 27, 2009

Above the RIMM

Today I want to highlight a bull call spread strategy using RIMM. Recently RIMM has exhibited relative strength vs. the broader market and vs. the technology sector.

The bull call spread is considered a vertical debit spread. It is constructed by buying a lower strike call option and simultaneously selling a higher strike call option of the same month. The credit received from selling the higher strike call helps partially finance the cost of the long option, thereby reducing the overall cost and risk of the trade. Furthermore, by being both long and short call options, it helps mitigate the volatility and time decay risk-

Let’s look at an example:

RIMM @ $51
Buy March 55 call for $3.50
Sell March 60 call for $1.50
Net Debit = $2.00
Max Risk = $2.00
Max Reward = $3.00
ROI = $3.00 / $2.00 = 150% return

As the risk graph portrays, to capture our maximum reward we need for the stock to be above the higher strike price ($60). If at expiration the stock is below the lower strike price ($55), both calls expire worthless and we lose our entire net debit.
There are multiple ways to manage this bad boy & I'm interested in your thoughts.....
Namely, what's a typical target, stop loss, or perhaps adjustment technique for this type of spread?

Monday, January 26, 2009

Naked Put Video

To kick off my blog, I wanted to review a naked put trade on the USO.

Let me know your thoughts-