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Options-strategy

Trader's Guide to Credit SpreadsThe strategies and ideas presented in this guide have been designed to provide you with a comprehensive program of learning. The goal is to guide you through the learning experience so you may be an independent, educated, confident and successful trader. There are numerous variations of traditional options strategies and each has a desired outcome. Some are very risky strategies and others require a considerable amount of time to find, execute and manage positions. Spreads are a limited risk strategy. Spreads Spreads are simply an option trade that combines two options into one position. The two legs of one spread position could have different expiration dates and/or different strikes. Spreads can be established as bearish or bullish positions. How the spread is constructed will define whether it is bullish (rising bias) or bearish (declining bias). Different types of spreads can be used for the same directional bias of the stock. For example, if the stock has a declining bias, a call credit spread or a put debit spread could be opened to take advantage of the same anticipated move down. In this guide we will be talking about Credit Spreads , which are a limited risk strategy. Learning how to manage risk is as important as learning the details of a strategy. Credit Spreads A credit spread is created when an investor simultaneously sells-to-open (STO) one option and buys-to-open (BTO) another option. The premium received for the STO is always greater than the premium paid for the BTO thus creating a net credit to the account. Example : STO a call using the 120 strike for a credit of $5.20 BTO a call using the 130 strike for a debit of $3.80 Net credit for the spread is $1.40 = 5.20 credit - 3.80 debit The ideal construction of a credit spread is to sell-to-open (STO) an out-of-the-money (OTM) strike and buy-to-open (BTO) the strike that is 5 – 10 points further out-of-the-money (OTM) using the same expiration. When opening a call credit spread , further OTM means a higher strike. When opening a put credit spread , further OTM means a lower strike. Both legs are opened on the same underlying equity and use the same expiration month. Call credit spreads are opened when there is a declining bias and will be profitable if the stock moves down. This is because a call credit spread is opened for a credit and since the value of a call option decreases as the stock goes down, at some point the spread will be bought-to-close (BTC) for less than it was sold-to-open (STO). Here is an example: Stock trading at 500 and has a declining bias. STO 510 call BTO 520 call This spread creates a credit of $4.80 Stock declines to 490 causing the values of the calls to also decline. The position can now be closed for a profit. BTC 510 call STC 520 call The cost to buy back the spread is only $3.80. Since the stock declined in value, the call options are cheaper. The spread was STO for a credit of $4.80 and BTC for a debit of $3.80 resulting in a $1.00 profit. Put credit spreads are opened when there is a rising bias and will be profitable if the stock moves higher. This is because a put credit spread is opened for a credit and since the value of a put option decreases as the stock goes up, at some point the spread will be bought-to-close (BTC) for less than it was sold-to-open (STO). Here is an example: Stock trading at 520 and has a rising bias. STO 510 put BTO 500 put This spread creates a credit of $3.60 Stock rises to 530 causing the values of the puts to decline. The position can now be closed for a profit. BTC 510 put STC 500 put The cost to buy back the spread is only $1.80. Since the stock went up in value, the put options are cheaper. The spread was STO for a credit of $3.60 and BTC for a debit of $1.80 resulting in a $1.80 profit. Time decay is a positive factor in trading credit spreads. Since the position is opened for a credit, money comes into the traders account immediately. As time value decays, combined with a favorable movement of the stock, the value of the position will decrease allowing the trader to buy-to-close (BTC) the position for less than it was originally sold-to-open (STO). Risk and Reward on Credit Spreads Reward The maximum profit that can be earned from a credit spread is equal to the net credit received when the spread was opened. For a credit spread to realize the maximum profit, both legs of the spread would need to expire worthless which means the position would need to be held until expiration and be out-of-the-money at expiration. It is not advised to hold positions until expiration. Short term movements in the stock plus time value decay provide opportunities to close out positions for a profit of, generally, about 10%. If a position is profitable and the trader decides to hold the position hoping for a bigger profit or in an attempt to carry the position to expiration, there is a good chance that the profit can disappear, and the position could turn into a losing position. A good way to lose money is to wait for a bigger profit. Risk The maximum risk, or potential loss, from a credit spread is the difference between the two strikes minus the net credit. Example: STO 120 call for a credit of $5.20 BTO 130 call for a debit of $3.80 Net credit for the spread is $1.40 The difference between the strikes is 10 points. $10 is the max risk less $1.40 credit = risk of $8.60. The maximum profit is equal to the net credit, $1.40. Losses occur when the short strike (the STO leg) is in-the-money at expiration. This is because the trader has sold to someone else the right to buy the stock at the short leg strike. Since the trader does not actually own the stock, they will need to buy it and sell it at a loss. A maximum loss will occur when both strikes are in-the-money at expiration. The breakeven point on a bearish (call) credit spread is the lower strike price plus the net credit. Referring to the example above, if the stock settled at 121.40 at expiration, there would be no loss and no profit. Example of breakeven point on above credit spread: Stock trading at 121.40 Buyer exercises the right to buy stock from you at 120. Since you do not own the stock, you buy it at the market price of 121.40 and sell it at 120. This results in a $1.40 loss You get to keep the original credit of $1.40. This netted against the $1.40 loss results in breaking even on the position. The breakeven point on a bullish (put) credit spread is the higher strike price minus the net credit. Calculating the Return There are two ways to view the percentage return of profits from a credit spread. One is to divide the profit by the difference between the strikes. If the difference between strikes is 10 points and the trade resulted in a $1.00 profit, that would be a 10% return ($1.00 / 10). The second approach is to calculate the return based on the amount of capital that was at risk. After all, if the trade lost 100% of the risk, that is the amount the trader would no longer have. So, the profit percent is calculated by dividing the profit by the risk. In the example above, the net risk is $8.60. If the credit spread trade resulted in a $1.00 of profit, the percentage return would be 11.63% ($1.00 / $8.60). This approach shows the importance of managing risk. Lower risk drives higher returns relative to capital at risk. Opening a new Call Credit Spread The following steps should be referred to when opening a new call credit spread position: 1. Review the technical indicators on your chart and confirm there is a consensus between multiple indicators pointing to a declining bias. 2. Select an expiration that is two to four weeks out. Two weeks is generally the minimum time to expiration you want to use. Building time into options positions is advised in case it needs to be managed. The sweet spot for opening new positions is three weeks to expiration. 3. STO an out-of-the-money (OTM) call strike. 4. BTO the strike that is 5-10 points further out-of-the-money (OTM). With a call spread, further OTM means a higher strike. Generally, when properly constructed, the credit on a 5 point spread will be in the range of $1.20 - $1.80. A 10 point spread will generally be 2.50 – 3.50. The closer the strikes are to the current price, the higher the credit, while this reduces the overall risk of the position, it also increases the chances of the position moving in-the-money (ITM) which can result in an overall loss. 5. When placing the order, always use a Limit Order . A limit credit order specifies to the market the amount of the credit you will accept. A limit credit order will be filled at the specified limit or higher. Market orders should not be used. 6. With some stocks and indexes, the difference between the bid and ask is quite large. The broker will usually give you a quote called the “Mark”. This is the midpoint between the bid and ask. It is the price you should start with when submitting your limit credit order. 7. Calculate the risk of the position. Difference between the strikes – credit = risk. A position with a credit of $4.50 and 10 points between the short (sold) and long (buy) strikes would have a risk of $5.50. 8. Use the risk number to determine the number of contracts to open. Risk x 100 = the investment required for each contract. With $5.50 of risk and 1 contract, the total investment would be $550. ($5.50 x (1 contract x 100 shares per contract)). The total investment on 4 contracts would be $2,200. ($5.50 x(4 contracts x 100 shares per contract)). 9. Once you know the total investment required per contract, you can decide how many contracts to trade based on the size of your portfolio and personal risk tolerance. 10. After the trade has been opened, place a Good-til-Canceled (GTC) order to close the position. A GTC order will stay active until market conditions are such that the position can be closed for a profit. GTC orders execute automatically and do not require you to be in front of your trading platform to take advantage of the profit opportunity. Place the GTC for a limit debit price based on your desired profit target. One example is to set a GTC for 50% of the credit you received when you opened the position. With a credit of $4.50, a GTC would be placed to buy to close the position at $2.25 allowing a $2.25 profit.
SP:SPXEducation
by NewCycleTrading
3
Bollinger Band Snaps (BBS)Bollinger Band Snaps (BBS) Timing of options trades are elusive, especially during dynamic price trends. There is one technique, however, that reliably and consistently allows you to time trades. The Bollinger Band Snap (BBS) signal occurs at very precise moments during a bullish or bearish trend, and vastly improves timing of both entry and exit. The chart of Chipotle (CMG ) is highlighted with three examples. The first occurred in late February, when price moved below the lower Bollinger band for two sessions. The move then “snapped” back into range, which is predictable. Price rarely remains outside of the Bollinger Band range for long. The second event occurred in mid-March, when price moved below the lower Bollinger band. In this case, the expected retracement (snap) happened the next market day. The final incident was the longest of the three, from mid-May into end May. Price traded above the upper band for six consecutive sessions before snapping back into range. The signal is reliable because a retracement back into the Bollinger Band’s two-standard deviation range is inevitable. It can take a longer or shorter period, but it eventually occurs. The signal provides both an entry flag (when price moves outside of the band) and an exit flag (when it moves back into range). Trading this signal is also apparent at the time it begins to develop. A move outside of the Bollinger trading range generally is going to snap back within a few sessions in each instance. In the February case, price was approximately $755 per share. With the expectation of a snap back into range, a bull credit spread could be opened with puts. Buying one 735 put and selling a 740 put would have set up a small credit. Using the weekly expirations ensures rapid time value decay. In the second example, price was approximately $465 per share. A call could be opened using 4 – 6 weeks to expiration and opening an at-the-money strike. The credit spread strategy could also be applied in mid-May when price began advancing above Bollinger’s upper band at $998 per share. Buying one 1030 call and selling a 1025 call for a credit. In all of these instances, the entry point is easy to identify. It is seen where price moves outside of the two standard deviation range marked by the upper and lower bands. The exit point then occurs when price snaps back into range.
NYSE:CMGEducation
by NewCycleTrading
3
WES - neutral to bullish strategy : Bull Put Spread ( options) The Consumer discretionary sector is correcting in a Bull leg - it has done 'normal' correction so far in length and time; SO looking at a stronger leading stock in the sector - we have a similar action. As this places a slightly higher probability of the stock at least holding 'above' support zones below - a neutral to bullish options credit spread can take advantage of slightly higher options implied volatility for the past 30 day ( 33% vs 27%) ; and with only 14 days left on June 25th expiry can get the 'time-decay' before it closes below credit leg strike of 40.75. Bull Put spread June expiry : -15 shares @ 40.75 strike ( european) = -0.74 +15 @ 40.06 = +0.53 diff = + $ 464 premium paid no stops required as if stock expires 'in the money below 40.74, I will buy the stock after being exercised and hold for a recovery of any losses on the table whilst doing a covered call strategy for extra income & hold for dividend payment in 2 months time..... The entry strategy : Firstly, the consumer discretionary sector is down three bear bars without too much overlap, and it has equaled the largest correction recently of about -9.5%. As its a fairly strong uptrend, I anticiapte it won't drop to much further or if so, it will recover fairly quickly to AT LEAST present levels for the next two weeks.... ( neutral) This is because this sector is defensive in nature, and coming to end of June Quarter should see ' window dressing' by FUNDs on the conservative side. Stock analysis : WES has a similar corrective degree though only -7.5%, and is the 'Leader' in terms of strength in this sector. The entry signal is based loosely on 'The ANTY' which takes advantage of catching brief corrections in a larger trend. The modified Stochastic indicator shows its cycled down to corrective part of cycle creating a disparity in price to averages. I only haven't waited for 'confirmation of next day recovery because I wish to use an options - spread as ' protection rather than a stoploss, and I want to enter on a down- day to get the most oomph in the put premium I can sqeeze out given only 14 days left for time-decay to do the rest of the errosion in premium ( and thus my profit being a credit spread).
ASX:XDJ
by Aussie-scalper
neutral to bullish BXB ( asx) - bull credit spread This is based on ' The Anty' strategy in which after a normal correction degree, there is at least the same or better recovery in price - a neutral to bullish strategy is bull put spread ( paid a credit) and with only 8 days until expiry benefit from time-decay at a fairly high probability scenario....it needs to close below 10.98 at expiry ( using european style options) so get exercised and forced to purchase stock at this price ( 500 shares contracted). There is put protection below at 10.48 so if really falls hard the most I can lose is -$500 ( fixed loss). Of course I would hold the stock until at least recover the loss as an attractive price over 3 months...
ASX:BXB
by Aussie-scalper
SPY Calls with Risk ReductionI am more inclined to be bullish the SPY but I mitigated my risk by structuring it accordingly. Sell Calls 24 July - Strike 340, 1.14, Qty 3 Buy Calls 31 July - Stike 312, 11.50, Qty 1 This gets me a bearish risk of -$1612, Max Win of $3940. Worst case scenario is when price goes beyond 349 before my expiry. I bought different calendar dates to get a more favorable price. I am also happy for my sold contracts to expire early as there is a chance if the price is rising rapidly I can additional gains with my calls that expire later. Market Rises/Range Scenario ✔ - Cities start slowly reopen ✔ - Earnings has companies forecasting the worst of 2020. However investors seem optimistic/lukewarm ✔ - CN could report positive economic news that will encourage positive vibes ? - Europe could show positive recovery ✔ - US weekly unemployment numbers are slowing down ? - US second stimulus package (May) ✔ - Positive vaccination news ? - Lower income consumers are the most impacted, however that won’t dent investor that deem key stocks as “cheap” ✔ - US retail numbers are improving (18% in May) ✔ - Above tested 200 MA ✔ - No longer in RSI over bought Market Crash ? - Europe sinks into a clear recession ? - Breakdown of second stimulus package ✔ - CN hits a repeat lockdown or resurgence in virus ? - FED keeps pushes dire warnings of economy and this becomes an early warning ✔ - Credit card and mortgage defaults spiral (After Aug) ? - RSI goes further down ? - June Retail numbers drop due to riots
AMEX:SPYLong
by Ronin_trader
Hedge stock trades call in NCM/ Put on ASX ( ASX50 stocks) Using strategies from Street smarts - two opposite set ups to hedge out market risk on June Options Call on NCM - this is a modified ' momentum pinball ' set up anticipating a correction back up to middle of range only after ABC correction ; at money June calls 400 shares worth Put on ASX - this is a new high then correction > 20 days High failure; called' Turtle Soup plus one ; looking for typical correction based on previous negative drives and take profit above previous support ( old Highs); at money Puts 100 shares worth only ( as hedged leg of trade 1 above - not a perfect hedge as missing 30 shares so skewed delta Positive market slightly ).
N
by Aussie-scalper
IAG ( ASX ) : options Bull Put Spread strike 5.50 net credit Would I like to own IAG for a premium price? If I can pick it up for 5.50 that's historically a better than fair price in past months. However - that's only if the credit leg of options gets exercised in two weeks until expiry = plan B. Plan A _ book a net credit on Bull Put spread, with protection ( insurance) 1 strike below at 5.25 ( -0.25c) providing stock does not fall below 5.50 + put cost of 0.14 = 5.36 in next two weeks... Placed trade with 80 contracts = 8000 shares @ 5.50 strike for 0.14c = +$1120 credit Placed 80 contracts = @ 5.25 0.08 = - $ 640 debit net credit = + $480
ASX:IAG
by Aussie-scalper
Gold Potentially Retracing, Prepare to Buy LongTechnicals: -------------- $16.03 and $16.61 are approximately the short term support and resistance levels, forming a channel where the price is being pulled horizontally. This area also appears to be a price consolidation point around $16.38 following an April 20th high volume day. Fundamentals: ------------------ Gold is trending up. This momentum is due both to the medium term high VIX volatility and an overall pattern of prices rising after a market correction/downturn event. This correlation of gold to volatility and market correction follows a similar pattern from 2006 to 2011. Strategy: ----------- Longer term call options are ideal for the current market. Purchase 3-month long call options if IAU breaks through $16.60 or if it retraces to $16.03.
AMEX:IAULong
by ConfederateTrader
1
A easy way to earn money with Option (Covered Calls)A easy way to earn money with Option Requirement 1. You already have some Apple shares 2. You are willing to sell some of them at 330 3. You have an Option Trading Account Strategy: Sell Covered Calls ( the amount should be less or equal to your existing shares) Strike Price: 328-330 , the higher the strikie price the lower of the premium you will get Duration : One Month Results: 1. If Apple cant break 330 in the near future Every month you can repeat this strategy and collect Option Premium 2. If Apple break 330, you will realize profit at 330, and you still collect Premium, Warning: Do not sell naked calls (you dont have any aapl shares now) , coz your potential risk will be unlimited.
NASDAQ:AAPL
by tntsunrise
10
Trade Log NIFTY May 29First, I'll start with the review of my yesterdays post. Yesterday, I had posted my view and some important levels that I use on the chart. I had said 1) Trend is up on daily time frame. Weekly trend is up, provided we dont have huge down on Friday. I think NIFTY will gain / consolidate tomorrow. 2) Tomorrow strategy will be to see the consolidation rage. But I wont carry any near the money positions into next week. And I had marked levels on the chart, which I used in my trading decisions today.Both points were quite obvious. Good thing, market played out to the levels wells. This is no guarantee, sometimes market coincides with your point of view by chance. My trades today 1) I sold 9500 CALLs around first resistance and closed it at weak support level of the day. 2) Then when high of the day was tested multiple times, it was broken and I sold 9500 PUT which I squared off. 3) Since INDIA VIX is around 30, I attempted to take few overnight positions. I sold some 9900 CALL options. Lets see how it goes. Its risky. My observations of the day 1) NIFTY closed positive for the third day in a row. 0.95% for today and around 6.4% in 3 days. 2) NIFTY is now in kind of uncharted territory. Less price action in 9500 - 9900 has very less price history in last 2 months. 3) BANK NIFTY unperformed and did not make new high like nifty. 4) INDIA VIX increased little. 5) Advance Decline ratio 36 to 14. I dont have conclusions, as I have I would like to wait till Monday to have clear view. I'll also post detailed weekly review coming weekend. But from days action 1) BANK NIFTY is not leading the rise. So it may cause NIFTY;s momentum some consolidation and ranges. 2) Overall trend is up and typical bear market rallies are fast. 3) So far this rally has not give any gaps, so next week some surprise gaps can start occurring.
NSE:NIFTY
by Observe_Think_Act_Think
6
NIFTY weekly view May 26 - 29Before reading my point of view on the week of May 26 - 29, Lets review my monthly view posted on March 27 Monthly picture is unchanged. NIFTY is still in long term downtrend. The some much anticipated surprises like stimulus package, lockdown extension and release are no longer market driving items. Corona virus issue is progressing, but not at shocking pace so far. What I expect from June, is some recovery and attempt to go for the other end of the range that NIFTY has formed. The range is from 8800 to 9800. Volatility will keep decreasing and movement will be relatively slower compared to the month of April and May. Now lets review my last weeks review. I had said 1. NIFTY is likely to stay below 9450. 9000 is an important psychological level and in the support zone . I wont short NIFTY aggressively till it closes below 8800. 2. I do not expect NIFTY to end below 8500-8600 this month. 3. Intraday movement can be confusing in this zone. Trading light and exiting quickly is required. So far, Point 1 and 2 turned out to be as expected. Point 3 was more of a caution for aggressive positions. For this week, I have the following observations NIFTY took support from previous low 8800 and bounced. This low held for 4 days in a row. NIFTY did not show strong sentiment on either side. Volatility contracted continuously. Weekly candle is Hammer with less overlap. BANK NIFTY touched the previous bottom, which could be an important support area. Highest Open Interest at 9000. Then 10000 and then 8500. For next week, at least till expiry This is the last week, so price action can be rapid, especially global clues that can support and dictate the movement. I think we'll see a trending move in BANK NIFTY and NIFTY, which I believe on the side which we see on Tuesday. That means if Tuesday is Positive, then I;ll trade in that direction for the rest of the week. Overall, 8600 - 9400 may be the range. So some important points to remember for my daily trade plans I wont get overly bullish or bearish, but I will switch sides quickly based on Tuesday movement. I’ll assume 8700 - 9450 as my range levels for the week. But Avoid creating overnight Option selling positions, especially on the bearish side. I’ll trade with the chart and buy the breakouts and create ATM spreads.
NSE:NIFTYLong
by Observe_Think_Act_Think
1
Tiffany Puts - Upcoming reflection of the global situationI bought puts on Tiffany as I felt like the stock was buoyed by the news of the LVMH acquisition bid last year. It did not seem to be hugely affected by the Covid virus and the potential upcoming economic slowdown implications. With April's non-farm job numbers going to reflect rising unemployment numbers. Corporate and consumer debt also catching up. This perfect storm will be wrapped by the disappearance of China tourist spends on Luxury goods. I believe Tiffany's stock price will be pushed to better reflect the current and future situation and have bought 130 ITM puts at 11.62 that will expire on 15 May 2020. Implied Volume of +32% (Seems like a good price)
TShort
by Ronin_trader
6
Selling VXX call - Expiring 27 Jun 2020 Decided to sell covered VXX Calls as i'm pretty unsure about making Industry specific trades as it's very detached from the economy. But what I've learnt so far is that it is not a fact that the market needs to correlate with the economy. Trading volatility seems like a good idea, as an exercise I have tried to justify two market scenarios. Market Rises/Range Scenario - Cities start slowly reopen - Earnings has companies forecasting the worst of 2020. However investors seem optimistic/lukewarm - CN could report positive economic news that will encourage positive vibes - Europe could show positive recovery - US weekly unemployment numbers are slowing down - US second stimulus package (May) - Positive vaccination news - Lower income consumers are the most impacted. However, that won’t dent investors that deem key stocks as “cheap” Market Crash - Europe sinks into a clear recession - Breakdown of second stimulus package - CN hits a repeat lockdown or resurgence in virus - FED keeps pushes dire warnings of economy and this becomes an early warning - Credit card and mortgage defaults spiral (After Aug) Trade Risk: $4710 Trade Reward: $1290 (27%) Win Probability: 73.78%
CBOE:VXXShort
by Ronin_trader
4
Trade Log NIFTY May 20My trades Today 1. I sold 8900 PUT today as market opened with positive bias. When It faced rejection at 9000, I squared off the position. I was profited because IV dropped. 2. Then there was a consolidation in tight range. Since there was no follow through on short side after rejection, I was confident of selling credit spread. I'll let it expire/ close tomorrow. 3. Then on breakout of the range, I bought CALL and squared it off near EOD. In my Trade log post for May 19, I had said 1. Global news not helping, NIFTY is showing strength, but BANK NIFTY bearish . On BANK NIFTY chart, 17150 - 16700 is a support zone . This will be second touch of the zone, hence it can build support here. That means 8800 can be touched again, or even breached. 2. I don't expect NIFTY to go below 8600. 3. Also, I don't think 8800 is a bottom, on next touch, it may not hold, at least breached once. In this, point 2 is certainly confirmed. For point 3 I think there are chances that 8800 may be bottom for near term and pullback rally starts from here. Observations about price action today 1.NIFTY gained in the first few hours. It maintained the gains and consolidated in tight range. And then gained even more in second session. Closed 2.11% up. 2.BANK NIFTY supported 2.11% 3.VIX down 9%+ 4.Advance Decline ratio 42 to 8. 5. NIFTY formed higher low and higher high. BANK NIFTY did not form new low. For next 2 days, 1. I think, some kind of sustainable pullback may have started. It needs confirmation by holding up tomorrow. 2. Another confirmation signal is BANK NIFTY makes higher high. For confirmation of bottom, I would wait till Friday EOD. 3. Obviously, this pullback does not change long term picture right now. But now intra-day bias is clearly shifted to bullish side. 4. VIX dropping dramatically at 8800 support level, means NIFTY may make 8800 as base for this pullback rally.
NSE:NIFTYLong
by Observe_Think_Act_Think
1