The Options Thread

Since the "Let's Trade Options!" thread is basically no longer active (I'll miss ya, TF), I thought I would continue with my options postings here so that I have someplace to post.

1. The old "Let's Trade Options!" thread has a ton of stuff of in it, some of it quite good. However, you're going to have to wade through a massive number of posts to get the nuggets. As an alternative, go to TastyTrade and start watching videos. The "Where Do I Start" (WDIS) videos are excellent for general background knowledge as to how options work, as are the "Market Measures," and "Anatomy of a Trade" series ... .

2. Unlike the "Let's Trade Options!" thread, I'm not going to be focusing a great deal of VIX/VIX derivative instruments. I do play them from time to time, but they don't occupy a core position in my portfolio; my two cents is that they probably should not be occupying a core position in yours either. They're finicky, particularly the derivative instruments that suffer from "contango," and if you don't have a full grasp on how these mean-reverting instruments behave, it's best that you avoid them.

Moreover, from a more practical perspective, these instruments were designed as "insurance" for long positions, to hedge against a market downturn. There's absolutely no point in using them for that purpose if you're able to hedge a bullish SPY spread with a bearish SPY spread, which you are allowed to do (i.e., an iron condor). Taking a long call VXX position to hedge your SPY short put credit spread is also capital inefficient, since you're invoking buying power once with the VXX position, and then a second time with the index spread. Hedging a SPY short put spread with a SPY short call spread uses as much buying power as a single-sided spread (assuming they're of equal strike width), so I can't see the benefit of using VIX or VIX derivative options in this manner for the ordinary retail trader.

Rather, my bread-and-butter trades are options setups in the indices, like RUT, SPX, and NDX and in individual underlyings where they are "ripe for play" (ordinarily around earnings announcements). That being said, I do look at where the VIX is at on a daily basis, since it can inform my decision of whether to pull the trigger on a premium selling play in a broad index instrument.

Naturally, however, I can see the tremendous "sexiness" of some these trades, for example, in UVXY or SVXY (oh, the moves ... ), so if you've got ideas for those, feel free to post them. Everyone is free to look at any given trade and either pull the trigger themselves or to say "not my cup of tea."

4. You Won't See Many Flies Here, Either. To me, "flies" have a particular, rare purpose that I virtually never take advantage of, since it requires that certain things happen during the life of a setup that are generally highly speculative as to timing and/or depth of movement and consequently have low probability metrics (in other words, I've been frustrated by flies in the past); I utilize them occasionally, but usually only in the form of an "iron fly" which, for one reason or another, I've been forced into due to price action during the life of a setup ... .

5. ... Or "Naked Longs." Most traders who use options are using them as a leveraging tool and use a "naked long" option (long call or long put) to play directional movement in the underlying. There are various problems with that methodology which I won't go into here, but I primarily focus on credit spreads, iron condors, and short strangles for all my plays. However, you're perfectly free to post a "naked long" trading idea here if you think it might be useful to someone ... .

6. Charts Might Be Helpful, But Not Required (Depending on the Trade). For the type of trader that I am (nondirectional), charts are virtually a useless tool and sometimes can actually bias my setups. The signal (if there is one) for me to pull the trigger on a trade is "implied volatility rank" (IVR) and/or "implied volatility" (IV), so you'll see me throwing "IVR" and "IV" around quite a bit ... . To me, all the other stuff (indicators, candle patterns, Elliott Wave) is just noise that I don't want in my premium selling trading head ... . (To be clear, I do scalp /ES on occasion; I do that in the same way I used to scalp spot, but with a couple of little twists peculiar to the stock markets (e.g., TICK)).

That being said, every so often I do take a "directional trade." For example, post-Brexit, there was a ton of stuff that just said "Trade me directionally" -- EFA, EWU, EWG, TBT, etc. ... . In that case, I will gander at a chart, 'cuz, well, it's a directional trade ... .

7. I used to trade a ton of spot, so you'll find me dabbling in "spot proxies" from time to time (e.g., FXE, the Euro proxy). However, there are literally a ton of spot forex forums here (it is, after all, called "ForexFactory"), so post spot forex setups in one of those forums unless there's some kind of options play that can be derived from it (there aren't many; most of the currency proxies are not that great from an options trader's perspective).

8. Trade Sizing is Peculiar to You. Most of the setups I've posted in the past are "one contract" setups. In reality, I use a different number of contracts that is peculiar to my risk tolerance and account size. Risk management in trading options is just as important as that for trading spot. As a general rules of thumb, keep the max loss metric of your trades to 5% of your total account size and attempt to keep 50% in cash at all times (a rule that I mildly violate on occasion depending on the instrument and market conditions).

9. I'm Not Running a Signal Service. The trades I make are my trades. You are free to copy them or not. When and if you copy them, they become "your trades"; you own them.

Some trades I make because I have different things in my portfolio I'm trying to hedge or do something with, so they may not be good "original" setups to play, and I'll try to point those out when I'm doing that.

However, the vast majority of premium sellers are doing the exact same, statistically based premium selling setups at exactly the same time in certain market conditions because the options model is the same for you, me, and the next guy; the Aug SPY 75% probability out-of-the-money call is the same for everyone at the same time ... . In that sense, my setups are hardly "original" just as the guy who's shorting EURUSD from 1.14 isn't putting an "original" idea out there; everyone's shorting that level ... .

10. I'll Critique Your Trades If You Want, But You Need to Do Your Own Homework. Homework takes time, and no one likes to do it. However, I'm not running a class; I'm just posting ideas ... .

11. Brokers. Interactive Brokers, TDA, OptionsHouse ... . There may be others. I like TDA's ToS platform for some things; TDA affiliate Dough's platform for others ... .

12. This is Not a Binary Options Thread. There are no doubt binary options threads somewhere in the Forums section. Please post any of your ideas regarding binary options in those threads.

The Week Ahead

We've got a long holiday weekend here and -- if other, recent long-holiday weekends are any indication, things can get funky pre-NY open on Tuesday. Most of the time, I don't bother tuning in that much to what the markets are doing before NY open except to glance passingly at /ES futures. I'm in options, and there's not much I can do about it anyways until NY opens.

In any event ... .

1. VIX at sub-15. Generally speaking, when VIX is sub-15, I hand sit on putting on broad index plays. There generally just isn't enough premium in them when VIX is sub-15 to bother with. Naturally, that can change in a heart beat, but my expectation is that next week I won't be doing much in SPX, RUT, or NDX ... .

2. Earnings Are Two Weeks Out (Basically). Although I don't enjoy playing earnings all that much, they can provide a diversion if broad market volatility just isn't there, since IV tends to ramp up around earnings. As with previous earnings seasons, I just have to watch what's coming up and then play the ones with the highest IV (since those are the ones that offer the highest premium).

3. Ain't Jack Diddly Otherwise. For premium selling, nothing is popping out at me in the Dough grid (you can sort it by IVR) that says "trade me ... trade me now". There is some stuff in the High Options Volume grid, but this stuff tends to have a sketchy aspect to it (odd ball strikes, no weeklies, poor liquidity). Once in a while, I find a needle in the haystack there. HSY looks interesting (high IVR, high IV), having just rejected a takeover bid for $107 a share, but I'm generally not fond of stuff that was just in takeover discussions (since the rejection might just be the first step in a back and forth ... )).

On the view for UVXY: http://www.engelwooddaily.com/prosha...crease/413696/

Last 2 times this occurred during the month of June; up it went short term.

Lol, that's an understatement The Fool has 1242 people on ignore list and I see he went on an ignoring rampage spree in the last 24 hours ...any idea what happened?

Zeebs....it truly is like the song says. I could say alot of things to qualify what is going on, drop some little turdlets of wisdom, etc, but I can't even find the energy to do that. I will say: Thanks for contributing to the LTO thread, I really appreciated having somebody to talk to about trading options, even though we are fairly different in how we approach it. I wish you all the best.

Wish you all the best, too. Take care, man ... .

Speaking of UVXY -- reverse split 5-1, effective July 25th. http://www.proshares.com/news/prosha..._07012016.html It's not a big deal if you're holding shares; it's probably a drag if you're holding options, since there are likely to be liquidity issues with the "funkified" split, nonstandard contracts that result ... .

I can surmise ... . Most of his trades were in volatility instruments. Leading up to Brexit, volatility literally got crushed, particularly in VIX derivatives (doubly crushed with contango erosion). Even the Brexit volatility pop was not enough to breathe enough life back into an instrument like UVXY (hence, the upcoming 5-1 reverse split). To add insult to injury, volatility imploded immediately post-Brexit ... . Kind of a drag, if you were counting huge on long volatility plays ... . I also had a few on; somewhat disappointing ... .

Speaking of volatility instruments, I've been having quite an active back and forth with a couple of traders over in TradingView as to how they "skin this cat." One option is to short UVXY, VXX shares outright or buy SVXY, XIV shares outright. My understanding, however, is that getting your hands on UVXY short shares can be difficult, but I may putz with it anyhow (can't hurt to put in an order and see what happens). As always, I'm thinking small and before the split. Keep in mind that UVXY's inevitable drift is toward "0" due to contango ... . The only thing that saves it from "0" is these regular reverse splits that they do, and those can actually be to your advantage if you can actually hold short shares ... . Naturally, this is not the most capital efficient approach to things ... .

Even though the split, price action will change for a few days next week. I am only saying this, for the reason that last 2 x the assets increased, the price action had upward momentum. And this time the assets have nearly doubled as opposed to the last time dated June 22nd.

I may be wrong yet historically a fact. But this momentum (if u catch it) lasted between 1/2 - 2 market days (again historically a fact).

T.F. come back soon. well done Zeebs for opening and continuing another options thread

I second that. Thank you Zeebs for picking up the baton. I don't trade options much, as you know, but I do like to dabble from time to time and will participate when I can.

The Fool will be back, I'm sure. He just needs some time away from all this craziness. Until then, have a nice break TF We're going to miss you.

yeah...prolly pretty obvious: I made and then lost a lot of money on those long vol trades. Many of those put on as far back as April are still running, but I have so far m/l broke even on VXX and UVXY trades. If we get a flush of vol coming back in the next week or so, the remaining positions could still make good money, but I ain't counting on it. Some take-aways:

1) I had big expectations for a vol rush around the Brexit vote - either just before or after, and I built large (for me) positions to catch that. These were all spreads that got rolled down as vol crashed up until the Brexit vote day. Everything up til Jun 17 was m/l a loser, the Jun 24 and beyond had mostly good winners. I took lots of trades off in fat profit, but I let alot run, thinking there would be a vol rush follow thru on the Brexit result. Of course, that did not happen. I had a few windows where I could have gone flat with remaining trades in the day or so after the Brexit vote and realized >50% equity jacks on account value. Did not pull the trigger....fml.

2) So, I let my expectations (and greed) get the better of me. It was by no means an easy trading situation - the behavior of ^VIX and related derivatives was wildly variable. Still, I could have, should have done better. Right. Another learning experience for TF. I say that sarcastically, but also seriously. These painful experiences in trading, usually where trader loses painfully large amounts of money, loses opportunities to score big, etc, etc....these are great if the trader can survive them.

3) Some lessons: a) when you have good numbers of big winner contracts, take some off, at least enough to b/e the trade, but maybe even more, even if you think you will see those go up; b) be very careful with dangerous short legs in your spreads - these are of course exposed short legs of IC's, diagonals and broke wing flys. Most of the losses I had on UVXY and VXX trades were small initial debits 5c to 15c stuff mostly. But I did have one broke wingfly in UVXY puts, went to a $1 loss.....these have been cause of the worst losses in my options trading experience.

4) Just pissed me off no end to see the coordinated CB's come into the markets right after the Brexit result. So much for "free" markets.

5) What else? idk...lotta water under the bridge now, I am setting up ER trades, DC's, I will show one.....gotta find vol where you can.... I'm not gonna chase the bullshit bull market. re: UVXY - after the split, I may have a good way to trade the puts, will show that in time maybe.

typical, BIDU....I have been trying to fill GOOGL and some others. I almost always end up making money on these. The keys are: get in cheap, buy the calendars when the iv's are low. Also, be aware of how these must be managed - theey are set up to catch rising iv up to the day of the ER, so the plan can be to close them in the week before the ER....

Kinda got a little burned on BIDU last earnings ... . I think it's an ADR, so they're a little more sloppy with their "earnings announcement" date than non-ADR's. Had a short strangle set up for scheduled earnings, only to have the thing pushed back a couple of weeks ... . But would probably do fine with a double kitty, since you're looking for the vol ramp up ... .

I hear ya, man. My long vol setups meant to take advantage of FOMC (a non-event), then Brexit (looked like it was gonna be a huge event, then immediately petered), were not "the droids I was looking for ... ". Oh, well (shrugs) (picks self up; rubs some "dirt in it") ... .

Looks to me that we're about two weeks out from the first decent earnings plays. I ordinarily think of the season as starting with AA (announces on 7/11), but some of the early announcements aren't big movers (e.g., financials), so they don't have much IV and are generally not worth playing (e.g., C, GS) because of that.

In any event, here are my basic guidelines for playing these:

1. Ideally, look for IVR>70 and IV>50. You'll want to go to Dough and use their grids to screen these. Generally, I screen by earnings date and then look for high IVR plays. This season, however, I may settle for something less than IVR>70, since we're in a generally low volatility environment (VIX <15). Last season, I barely played anything because general market volatility was low, so individual underlyings' IVR was low as well, and I could barely find anything with an IVR>70. Basically, you just have to look at each underlying has its earnings announcement comes up, play with setups, and see if they will produce a worthwhile play.

2. Look for 3 to 4 star liquidity. Goofing around with 1 or 2-star liquidity plays is a pain. It's fine if you can get in and out of the play in short order, but if you have to roll or do any broken trade management, rolling a low liquidity underlying sucks hard.

3. Don't play anything that does not have weeklies. Generally speaking, the lack of weeklies means that there's a general lack of interest in playing anything less than monthly options in the underlying, so it goes hand in hand with poor liquidity.

4. Look to get at least a $100 credit (1.00)/contract out of the setup. This is largely just me. However, playing stuff for a .50 credit generally does not turn out to be particularly worthwhile when all is said and done with fees and commissions. I generally shoot for taking this stuff at 50% max profit, so 50% max of .50 is .25, from which fees/commissions are deducted, so you're chasing nickels and dimes with those sub 1.00 credit plays.

5. Set up the play in the expiry for the Friday that follows the Friday of the announcement. In other words, if the announcement is on a Tuesday, set it up in an expiry for the Friday after the Friday expiry in the week of the announcement. I know that TastyTrade/Dough traders set these up for the Friday expiry immediately following the announcement, but I think that's just too little time to roll, etc.

6. If the announcement is to ... (a) take place before market open, try to get a fill of your setup before the NY close of the day preceding the announcement; (b) take place after market close, try to get a fill of your setup before the NY close on the day of the announcement.

7. The three setups. I play these with either (a) short strangles; (b) iron condors; or (c) short straddles (for low-priced underlyings). The short strangles are set up with the short call and short put at the 85% prob OTM strike (basically, the 1SD line for the expiry).

Similarly, the iron condor's short options are set up in the same area, with the long options setup "outside" the short options. The width of the wings of the iron condor will naturally vary depending on the price of the underlying, but I generally start out by looking at a 3-wide wing and then "putz" with the setup from there to get the metrics I want to see out of the setup (max profit; max loss, etc.).

I'll go short straddle if I just can't get enough premium out of a short strangle to make a play worthwhile. For short straddles, I look to get at least $200 (2.00/contract) in credit up front, because I shoot to take these off at a smaller percentage of max profit.

I play these all nondirectionally, largely because I suck at calling direction with earnings. For example, there's the classic "TSLA effect." Earnings announcements are generally lackluster, but the market generally eats that stuff up because it was "not as bad as expected" or there was "good forward guidance," crap I can't possibly predict with any accuracy.

8. The three take profits. With short strangles and iron condors, I look to take these off at 50% max profit. So, if you received a 1.00 ($100) credit on the front end, look to take it off when the entire setup is worth only .50 ($50). Short straddles, I look to take off at 25% max.

9. The vast majority of these work out fabulously; it's the few that don't that get under your skin. I've always said that "Earnings plays are great, except when they aren't ... ." Knowing what to do when one of these plays "breaks" is extremely important to one's success in earnings plays overall, since a couple of losers that you don't try to work out of with rolling, etc. can more than offset a long string of winners. Rolling, etc. sucks, but it's the nature of the beast. (I'll try to do a separate post on trade management at some point; I'm mechanical as all get out with "broken plays" .... ).

An example of the kind of shit I won't play: PEP ... .

PEP, an underlying with "three-star liquidity," announces earnings on 7/7 before market open. Its IVR is 34 (low), and its IV is 17 (low).

A July 15th 1 SD short strangle (a 102/109) only yields a .54 ($54) credit up front, which is tremendously crappy for a $100+ underlying ... . A three-wide iron condor would yield even less.

So, pass ... .

Congrats! FF can definitely use a decent options thread, and a good administrator of it! Best wishes.

Danke!