My option trades

On the VIX it was 20 yesterday, but when I went to calculate premium moves on the option calculator the VIX was actually 17. This number in the QQQ denotes a scalping minimal trade.

On your method. Found the earnings reports and been looking at them. You have me interested in trading STRANGLES. Investopedia says strangles are cheaper than straddles. Be interested in what you find out about that?

Been perusing bid and ask prices on tomorrow´s earnings report stocks and then looking at TRUE RANGE daily price swings. Kind of interesting. Looking for parameters to make a judgement call on choosing a stock for a STRANGLE. Maybe I can learn something here? Will paper trade again today for tomorrow and see what happens?
However important things first. It is nearly 11 a.m. here and the sun is shining and time for me to pop over to the beach and take my swim. Us old men have different priorities. :)
 
Made out with 1394 in profits alone for RAX position. I was only going to set up a trade for DE, but the extra profits mean I will try to test the strangle vs. straddle trade.

My patient will be WTW where it has done +47, -10, -23, -11 the past 4 quarters. I'll need that kind of move for a strangle or straddle play.
 
Quote from jeffalvinson:

Ryan,

That's interesting that you mentioned straddles and strangles.
In the 1990's my wife and I would place a new set of 4 straddles or strangles every month after expiration.
We learned from Don Fishback and then as we gained experience we applied some of own refinements.
This wasn't our primary trading method (buying long calls and puts was on), it was just a monthly sideline.
Here's what we learned:
1: Find a stock that normally has a good monthly price range, but has recently gone quiet for some reason. This usually means its closer to its 52 week low for implied volatility than its 52 week high. That will give you the cheapest options to buy.
2: Don't spend more than $250 for a call/put pair (under $2 is even better). Remember, the stock's price movement needs to be high enough to overcome your total call/put debit.
3: Don't buy less than 2 months time before expiration. That way
you can let the trade play out for a month and if nothing has happened 30 days before expiration, close the trade (a time stop).
Here is an example of what I am talking about:
YHOO stock price 15.98
YHOO APR 16 CALL at .87
YHOO APR 16 PUT...at .86
TOTAL DEBIT................. - 1.73

Look for the stock to be in the middle of its trade range (look at attached YHOO chart.
YHOO currently has an 8 point trade range (11-19).
Let the stock move in one direction at least enough to pay for the entire debit and sell that direction, and then let the stock move in the other direction and sell the other half of the trade when you have a +50% to 100% profit on your total debit.


Jeff
More...

Hope you don't mind me asking, but how were the result of your trades using this strategy? I guess I'm trying to figure out how often a stock will move in the way you mentioned where it trades to the top or bottom of range, then reverses all the way back to the opposite end.
 
Quote from ryanpatrick:

Made out with 1394 in profits alone for RAX position. I was only going to set up a trade for DE, but the extra profits mean I will try to test the strangle vs. straddle trade.

My patient will be WTW where it has done +47, -10, -23, -11 the past 4 quarters. I'll need that kind of move for a strangle or straddle play.
More...

The atm combo is over $8. Do you have the cash to hedge in the AH? At least partially?

You might want to buy the 70/80/90 fly here small as a hedge of neutrality in case the stock goes nowhere.
 
Quote from atticus:

The atm combo is over $8. Do you have the cash to hedge in the AH? At least partially?

You might want to buy the 70/80/90 fly here small as a hedge of neutrality in case the stock goes nowhere.
More...

Yeah, the ask price added up to $8.80 when I last checked. I'm looking at how I should put this trade. First and foremost would be whether WTW could make that 8 point move. At $77, $8 point comes to about a 10% pop. I think I might just have a possible 4% gain on the overall trade in either direction.

Of course, the chart is tricky here too....it topped out here at $77.50-$80 last time around and may very well do the same. But then we also have the chart showing WTW holding here for a bout 3 weeks now almost to say that its ready for a push higher. Guidance for FY12 will be key, and I already know what a good surprise did to WTW last year around this time. What I do know is that estimates for FY12 and Q1 have been lowered by analysts over the past 2 months. My question to answer now before the market closes is whether the new estimates are low enough for WTW to beat, because a beat will send the hogs wild and we'll get a nice gap up especially with 20% of the float shorted. I'd much prefer a straddle with some sort of bias to the upside instead of neutral on my direction.
 
Too bad you paper traded Jeff, I bet those FOSL calls would look nice in your account by now. I'm surprised myself as I was looking for a max swing up to $112 only. Instead, FOSL is above $114 and trying to test $115.
 
which brings me to this question.....anyone who had a chance to buy the FOSL feb 115 call at 0.25-0.35 this morning has a nice 10-bagger in the pockets already. That's amazing.
 
Quote from ryanpatrick:

Hope you don't mind me asking, but how were the result of your trades using this strategy? I guess I'm trying to figure out how often a stock will move in the way you mentioned where it trades to the top or bottom of range, then reverses all the way back to the opposite end.
More...

Ryan,

We did these over a period of years and we got better as we refined our rules. An average 4 trade month would result in 2 winning trades, 1 break-even trade, 1 small to medium loser.
Normally it looked like this:
Two 50% to 100% winners.
1 Break-even.
1 Loser of -10% to -33%.
Our total investment in all 4 monthly trades only represented 10% of our total option trading account, yet month after month we returned an average total account return of 10% (one month hit 25%!)
On the one month our total option trading account went up +25%, we bought a strangle on Clorox before it was to announce earnings (1999).
Clorox at $112
115 calls @ $3.00
105 puts @ $2.00
On the morning it was suppose to announce earnings the stock didn't open until 11:00am!
When it finally opened at 11:00am the stock opened at 88 and the 105 puts opened up a $1,680!
It turns out they had been losing a lot of money on a company they had recently purchased call First Brands and nobody expected it.
$1,680 profit per put contract
-$500 total debit per pair
$1,180 net (+236% profit per pair)

Yes, you weren't the only one doing earnings plays. These Straddles and Strangles were the most effective when bought before an earnings announcement if the Implied Volatility hadn't already blown up on the options. That means we had to buy them weeks before the earnings announcement before the Implied Volatility got to blown up. That's why extra expiration time was necessary.
Also on the Clorox play we broke our < $250 rule on the call/put debit. We actually liked this company a lot (and profited several times previously on good earnings) and this trade started out as a straight bullish call options trade (with the puts bought as a protective afterthought).


Jeff
 
Quote from ryanpatrick:

Yeah, the ask price added up to $8.80 when I last checked. I'm looking at how I should put this trade. First and foremost would be whether WTW could make that 8 point move. At $77, $8 point comes to about a 10% pop. I think I might just have a possible 4% gain on the overall trade in either direction.

Of course, the chart is tricky here too....it topped out here at $77.50-$80 last time around and may very well do the same. But then we also have the chart showing WTW holding here for a bout 3 weeks now almost to say that its ready for a push higher. Guidance for FY12 will be key, and I already know what a good surprise did to WTW last year around this time. What I do know is that estimates for FY12 and Q1 have been lowered by analysts over the past 2 months. My question to answer now before the market closes is whether the new estimates are low enough for WTW to beat, because a beat will send the hogs wild and we'll get a nice gap up especially with 20% of the float shorted. I'd much prefer a straddle with some sort of bias to the upside instead of neutral on my direction.
More...

Maybe go with the 70 straddle as a proxy for long shares and take the risk. If the stock trades to 70 you'll be out 7 handles or so. Are you willing to risk $700 per?

You could also structure a cheap fly from 75/85/95. I don't think it trades much beyond 85 (if that) on the report. You can get that for $3.25 on calls and you're 40D on the upside on the vol-crush (to neutrality). If we touch 85 you will have nearly a double tomorrow. Risking $3.25 below $75.
 
The SPY opened below its Pivot Point (135.20) and has so far
been working its way down to Support Level 2 (134.41).
I suspect it will bounce at or near S2 and at least head back to the PP.
 
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