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May 9, 2013

Stock Option Picks Require Analyzing the Overall Market as Well as Individual Stock Assessment

Filed under: Options Education — Tags: , , , , , , , , , — Dan Passarelli @ 2:31 pm

Making stock option picks with huge profit potentials, whether the market is up or down, depends on diligent market research and a thorough understanding of stock option fundamentals.

Finding profitable trading opportunities can be tough. But you don’t have to do all the work yourself. Some professional trader services, such as Market Taker’s Group Options Coaching, make stock option picks that they share with protégés, saving individual traders time and effort.

But whether you do your own research or rely on a seasoned professional for your stock option picks, its essential to understand some basic facts about options trading.

Making stock option picks based on individual stock assessment requires an understanding of specific fundamental parameters. Traders may learn how to read an annual report and 10K stockholders report for income statements, past earnings, sales, assets, new products, and overall industry trends.

Stock option picks based on technical analysis is essential for success and requires the investor to examine the historical price movement and volume in order to determine price patterns and extrapolate future price movements. The single most important technical analysis technique is the simplest: Support and resistance lines. Specifically, horizontal support and resistance lines at the same price level in two or more time frames.

Stock option picks based on broad market analysis examines overall activity based on performance indices. Is the overall market bullish (moving up), bearish (moving down) or neutral (moving sideways)? The broad market will affect individual equities.

Stock option picks based on psychological market indicators attempts to interpret the facts and gauge whether a change from bullish to bearish (or vice versa) is in the wind. Successful options traders are frequently contrarians who buy puts in a bullish market and purchase calls in a bearish market — against convention.

Bottom line, a lot goes into stock option picks. The help of a professional with experience in “putting it all together” can make the process easier and can result in better trade ideas with greater profit potential.

Right now, you can get 20 trade ideas a day by attending the Market Taker LIVE Advantage Group Coaching at an incredible. This might just be the best trade you make this year!

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With the limited-time coupon codes, the 3-month class is an incredible value. You’ll get over 1,200 trades in that three months you sign up for. That’s less than 50 cents a trade idea given to you by a 25-year options industry veteran. Save even more with the 6-month enrollment.

Enroll today and take a step towards better trading.

May 2, 2013

Delta Explained in Simple Terms

Filed under: Options Education — Tags: , , , , , , , , — Dan Passarelli @ 1:06 pm

If you have been on an options trading floor, you may have heard comments like these for example. “What’s your delta of of the Cubs winning today?” (not good of course) or “What’s the delta the broker comes back and buys more of these?” Option traders have probably used the word delta in this context every single day of their life and if you learn to trade options like a professional, you may too.

It’s the “traders’ definition” of delta—that is, delta is the likelihood of an option expiring in-the-money. Though this definition actually has a few mathematical and theoretical shortcomings, making it not entirely technically correct, every professional option trader I know or Dan knows thinks about delta this way. Many if not most traders borrow the concept of delta being the likelihood of success and adapt into their every-day speech.

The idea is every option has an associated delta figure attached to it. Like, at the time of this writing, the Google Inc. (GOOG) May 830 calls have a 0.30 delta. That means that they change in value 30 percent like the GOOG stock. But it can also be interpreted by traders to mean that the GOOG May 830 calls have a 30-percent chance of expiring in-the-money.

This practical and “traders” use of delta helps guide traders’ expectations and helps them make better trading decisions by factoring probability into their decision-making process. I encourage retail traders to think about option delta this way. You should start today and see if it affects how you think about options and the possible different strategies that can be implemented. I’m 100 delta that you’ll be happy you did.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

April 4, 2013

Historical and Implied Volatility

Filed under: Options Education — Tags: , , , , , , — Dan Passarelli @ 2:05 pm

Dan mentioned recently in a blog that VIX (CBOE Implied Volatility Index)  was hovering around a six year low. With the market seemingly on the edge lately due to global events like North Korea and Cyprus, it is important for option traders to understand one of the most important steps when learning to trade options;  analyzing implied volatility and historical volatility. This is the way option traders can gain edge in their trades. But analyzing implied volatility and historical volatility is often an overlooked process making some trades losers from the start.

Implied Volatility and Historical Volatility
Historical volatility (HV) is the volatility experienced by the underlying stock, stated in terms of annualized standard deviation as a percentage of the stock price. Historical volatility is helpful in comparing the volatility of a stock with another stock or to the stock itself over a period of time. For example, a stock that has a 20 historical volatility is less volatile than a stock with a 25 historical volatility. Additionally, a stock with a historical volatility of 35 now is more volatile than it was when its historical volatility was, say, 20.

In contrast to historical volatility, which looks at actual stock prices in the past, implied volatility (IV) looks forward. Implied volatility is often interpreted as the market’s expectation for the future volatility of a stock. Implied volatility can be derived from the price of an option. Specifically, implied volatility is the expected future volatility of the stock that is implied by the price of the stock’s options. For example, the market (collectively) expects a stock that has a 20implied volatility to be less volatile than a stock with a 30 implied volatility. The implied volatility of an asset can also be compared with what it was in the past. If a stock has an implied volatility of 40 compared with a 20 implied volatility, say, a month ago, the market now considers the stock to be more volatile.

Analyzing Volatility
Implied volatility and historical volatility is analyzed by using a volatility chart. A volatility chart tracks the implied volatility and historical volatility over time in graphical form. It is a helpful guide that makes it easy to compare implied volatility and historical volatility. But, often volatility charts are  misinterpreted by new or less experienced option traders.

Volatility chart practitioners need to perform three separate analyses. First, they need to compare current implied volatility with current historical volatility. This helps the trader understand how volatility is being priced into options in comparison with the stock’s volatility. If the two are disparate, an opportunity might exist to buy or sell volatility (i.e., options) at a “good” price. In general, if implied volatility is higher than historical volatility it gives some indication that option prices may be high. If implied volatility is below historical volatility, this may mean option prices are discounted.

But that is not where the story ends. Traders must also compare implied volatility now with implied volatility in the past. This helps traders understand whether implied volatility is high or low in relative terms. If implied volatility is higher than typical, it may be expensive, making it a good a sale; if it is below its normal level it may be a good buy.

Finally, traders need to complete their analysis by comparing historical volatility at this time with what historical volatility was in the recent past. The historical volatility chart can indicate whether current stock volatility is more or less than it typically is. If current historical volatility is higher than it was typically in the past, the stock is now more volatile than normal.

If current implied volatility doesn’t justify the higher-than-normal historical volatility, the trader can capitalize on the disparity known as the skew by buying options priced too cheaply.

Conversely, if historical volatility has fallen below what has been typical in the past, traders need to look at implied volatility to see if an opportunity to sell exists. If implied volatility is high compared with historical volatility, it could be a sell signal.

The Art and Science of Implied Volatility and Historical Volatility
Analyzing implied volatility and historical volatility on volatility charts is both an art and a science. The basics are shown here. But there are lots of ways implied volatility and historical volatility can interact. Each volatility scenario is different. Understanding both implied volatility and historical volatility combined with a little experience helps traders use volatility to their advantage and gain edge on each trade which is precisely what every trader needs!

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

March 14, 2013

Six-Year Low in the VIX? What’s It Mean to YOUR Options Trading?

Filed under: Options Education — Tags: , , , , , , , , , , , , — Dan Passarelli @ 10:38 am

The VIX, or CBOE’s Implied Volatility Index, hit a six-year low this week. What’s that mean to options trading? Lots!

Options trading is greatly affected by implied volatility. At its most basic level, when the VIX is low, it tends to mean lousy options trading.

Option traders are not incented to trade when the VIX is low. Traders generally don’t want to sell options when premiums are so low. There is no reward and still there is always the specter of the risk of an unexpected market shock. And, option traders don’t want to buy options either. Why? Because when the VIX is low, the VIX low is for a reason: Because market volatility is low. Why would traders want to buy options (and endure time decay) is the market isn’t moving?

And so, as always, the devil is in the details. Right now, there actually exists a somewhat atypical pattern in many stock options. Many stocks have their implied volatility trading decidedly below historical volatility levels. Though this volatility set up can be seen here and there at any given time, it is more common than usual. That means cheap volatility trades (i.e., underpriced options) are more abundant.

Stocks like CRM, C, GE, F, and even the almighty AAPL all have implied volatility below their historical volatility.

That means that even though overall stock volatility (as measured by historical volatility) is low, the options are priced at an even lower level. That means time decay is very cheap per the level of price action in these stocks. And, implied volatility in these stocks (and probably the VIX as well) is likely to rise to catch up to historical volatility levels—assuming the current price action continues as it is.

So, traders should be careful not to sell too many option spreads (i.e., credit spreads) at these fire-sale levels. Instead, traders should look to positive vega spreads (i.e., debit spreads), at least until implied volatility rises offering worthy premiums to option sellers.

Dan Passarelli

CEO

Market Taker Mentoring

January 3, 2013

The Influence of Option Prices

Filed under: Options Education — Tags: , , , , , , , — Dan Passarelli @ 11:02 am

Perhaps the most easily understood of the options price influences is the price of the underlying. All stock traders are familiar with the impact of the underlying stock price alone on their trades. The technical and fundamental analyses of the underlying stock price action are well beyond the scope of this discussion, but  it is sufficient to say it is one of the three pricing factors and probably the most familiar to traders learning to trade.

The price influence, time, is easily understood; in part because it is the only one of the forces restricted to unidirectional movement. The main reason that time impacts option positions significantly is a result of the existence of time (extrinsic) premium. Depending on the risk profile of the option strategy established, the passage of time can impact the trade either negatively or positively.

The third price influence is perhaps the most important. It is without question the most neglected and overlooked component: implied volatility. Implied volatility taken together with time defines the magnitude of the extrinsic option premium. The value of implied volatility is generally inversely correlated to price of the underlying and represents the aggregate trader’s view of the future volatility of the underlying. Because implied volatility responds to the subjective view of future volatility, values can ebb and flow as a result of upcoming events expected to impact price (e.g. earnings, FDA decisions, etc.).

New traders beginning to become familiar with the world of options trading should spend a fair amount of time learning the impact of each of these options pricing influences. The options markets can be ruthlessly unforgiving to those who choose to ignore them.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

August 8, 2012

What’s the Delta of that Happening to AAPL?

Filed under: Uncategorized — Tags: , , , , — Dan Passarelli @ 1:11 pm

It is standard trader lingo on the trading floor. “What’s your delta of making it to the party tonight?” “What’s the delta the broker comes back and buys more of these?” “I’m about 90 delta I’m going to dump Sheila tonight”. Option traders have probably used the word delta in this context every single day of their life and if you learn to trade options like a professional, you may too.

It’s the “traders’ definition” of delta—that is, delta is the likelihood of an option expiring in-the-money. Though this definition actually has a few mathematical shortcomings, making it not entirely technically correct, every professional option trader I know thinks about delta this way. And, in turn most traders borrow the concept of delta being the likelihood of success to adopt into their every-day speech.

The idea is every option has an associated delta figure attached to it. Like, at the time of this writing, the Apple (AAPL) September 655 calls have a 0.25 delta. Yes. That means that they change in value 25 percent like the underlying stock. But it also is interpreted by traders to mean that the AAPL September 655 calls have a 25-percent chance of expiring in-the-money.

This practical use of delta helps guide traders’ expectations and helps them make better trading decisions by factoring probability into their decision-making process. I encourage traders to think about option delta this way. You should start today. I’m 100 delta that you’ll be glad you did.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

June 10, 2012

Back to Basics: Part II

Filed under: Options Education — Tags: , , , , — Dan Passarelli @ 10:53 am

Perhaps the most easily understood of the options price influences is the price of the underlying. All stock traders are conversant with the impact of the underlying stock price alone on their trades. The technical and fundamental analyses of the underlying stock price action are well beyond the scope of this discussion, but suffice it to say it is one of the three pricing factors and probably the most familiar to traders learning to trade.

The price influence, time, is easily understood; in part because it is the only one of the forces restricted to unidirectional movement. The core reason that time impacts option positions significantly is a result of the existence of time (extrinsic) premium. Depending on the risk profile of the option strategy established, the passage of time can impact the trade either negatively or positively.

The third price influence is perhaps the most important. It is without question the most neglected and overlooked component: implied volatility. Implied volatility taken together with time defines the magnitude of the extrinsic option premium. The value of implied volatility is generally inversely correlated to price of the underlying and represents the aggregate trader’s view of the future volatility of the underlying. Because implied volatility responds to the subjective view of future volatility, values can wax and wane as a result of upcoming events expected to impact price (e.g. earnings, FDA decisions, etc.).

New traders beginning to become familiar with the world of options trading should direct their attention to understanding the impact of each of these options pricing influences. The options markets are ruthlessly unforgiving to those who choose to ignore the impact of the valuation metrics that underpin daily life in their world.

Edited by John Kmiecik

Senior Options Instructor

Market Taker Mentoring

May 31, 2012

Back to Basics: Part 1

Filed under: Options Education — Tags: , , , , — Dan Passarelli @ 11:20 am

In an attempt to understand the complexities of the world they observed in daily life, ancient Babylonian philosophers considered all things to be constituted of one or more of the four classical elements of: earth, air, water, and fire. In this world view, the natural environment was considered to consist of various objects composed of varying portions of each of these fundamental elements or forces. While modern atomic theory has supplanted this early concept, these historic constructs can provide a helpful organizational structure within which to consider the importance of fundamental primal forces impacting various option trade structures.

Similar to the early view of the Babylonians, the options world is ruled by three primal forces consisting of: price of the underlying, time to options expiration, and implied volatility (IV). Trades are most profitably constructed when the trader considers the impact each of these three forces has when designing the anatomy of the options trade under consideration.

For the new options trader, learning about options and the impact of these three fundamental forces may be confusing and the magnitude of the influence of each on the profitability of trades is easily underappreciated. Failure to consider each of these forces and its individual effect will reduce the probability of a successful trade. Since most option traders come from the universe of stock traders where “only price pays” the initial reluctance to consider additional factors impacting a trade is easily understood.

In order to help understand the initially confusing manner in which options respond to their milieu, it is helpful to dissect an option’s price into its two components: extrinsic value and intrinsic value. Remember that the quoted price of an option reflects the sum of the intrinsic (if any) and extrinsic values. Intrinsic value of an option is that portion of the premium which is in-the-money and is impacted solely by the price of the underlying. Extrinsic value is also known as time premium (or less generously “sizzle” as opposed to “steak” of the intrinsic value) and is impacted by both time to expiration and IV.

Edited by John Kmiecik

Senior Options Instructor

Market Taker Mentoring

April 19, 2012

Maximizing Fade Plays With AAPL and Others

Filed under: Options Education — Tags: , , , , , , , , , — Dan Passarelli @ 11:55 am

Do you feel like you’ve seen this movie before? Trouble in the Europe especially Spain. People in the streets; panic in the market. Is this recent wave of trouble going to last forever? Not likely. Perhaps there is an opportunity to fade this fall. But how should an option trader play the fade to maximize chances of success and maximize option-trading returns? Trade ideas like this are discussed weekly in the MTE newsletter.

The obvious starting point for a trader to fade this fall is to take a positive-delta position. This is fancy options speak for a bullish trade. There are lots of different ways to take a bullish stance given all the various types of option-trading strategies out there. So, the question really is: Which is best?

There are a few major considerations here. First, traders must strive to maximize reward by minimizing risk. In order to do so, option traders must define their expectations. Am I looking for an extreme turn around? A mild retracement? A dead-cat bounce? The more a strategy can be tailored to expectations, the more risk can be controlled and reward can be maximized.

Next traders need to consider implied volatility. This is where option traders can get an edge in their options positions. If implied volatility is high (overpriced), option traders should consider option-selling strategies. If implied volatility is low (underpriced), option traders should consider option-buying strategies.

In the current market scenario we have a situation where if the turmoil in the Europe and Spain subsides, the market should rally somewhat, but it’s not likely to go to the moon. Further, with the levels and implied volatility of individual stocks at inflated levels, it’s easy to find overpriced options. Any clever fader trader should be looking for put credit spreads to sell. Put credit spreads have positive delta and take a short position on implied volatility. Great candidates for this sort of play are AAPL, GOOG, PCLN, et. al. Traders are best off staying away from bank stocks and precious metals that might be adversely affected by European instability.

Edited by John Kmiecik

Senior Options Instructor

Market Taker Mentoring

March 8, 2012

A Penny Here, A Penny There on AAPL

Filed under: Options Education — Tags: , , — Dan Passarelli @ 10:52 am

One of the more difficult problems with which to deal for an options trader has historically been the broad bid-ask spreads quoted for options. Experienced traders have routinely negotiated the bid-ask spreads downward with varying success when trading individual positions, but the non-economic price has been the significant effort and time required to achieve these negotiated results.

Beginning in January2007, CBOE initiated a Pilot Program to reduce bid-ask spreads to as low as 1¢. As of February 28th of this year, there are currently 360 in the series (including such big names as Apple (AAPL), Microsoft (MSFT) and more) quoted in these penny increments. CBOE maintains an Excel file of option series currently included within this “Penny Pilot” program at: http://www.cboe.org/hybrid/pennypilot.aspx

Because option positions are frequently constructed with several individual legs, the impact of the ability to trade with tighter bid-ask spreads can have significant impact on the aggregate slippage of positions. Combined with the falling commission rates resulting from the increasingly intense completion amongst brokers specializing in options, significant trading efficiencies have resulted.

Edited by John Kmiecik

Senior Options Instructor

Market Taker Mentoring

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