Options Trading Newsletter - Issue #120
Unleashing Greatness [Options Today...Profit From Understanding IV]
Unleashing Greatness [Options Today…Profit From Understanding IV]
“Unleashing Greatness in Every Child”… that was the quote used in the appreciation day for my kids year end school award ceremony.
I think this quote fits very much for the day and I do understand that each child is born with “greatness” within. Watching my daughter go on stage to receive an academic award is truly incredible. Although it is nothing much than just a piece of paper and a few seconds of fame on stage with hundreds of parents, teachers and friends cheering, it brings on a lot of weight into her self confidence. It also shows that she can achieve success if she just put in the right effort on what she does and focus on. In fact, I am even happier that both my kids have received the best student in one of the language subject.
The one thing that everybody needs to understand is that there is always a leash that withholds their greatness and what they can achieve. Be it the environment, friends, family, financial, and others. These so called “leashes” are never permanent. We just got to find a way to solve it or provide them with an environment that is able to unleash their greatness… That is what every parent’s job…
Work harder… see your kids grow and prosper…
"Every child is a story yet to be written, a masterpiece in the making. It is our responsibility to provide the ink and the canvas, and watch in awe as they create a masterpiece that inspires the world."
SPX (4450)
No chance… the market is not giving any chances to get in at all. The bulls are in total control as the market ended the week with a bullish engulfing pinbar on the weekly chart. It seems that the market is okay for one hike in July and then rate cuts starting next year. Lets see if it breaks 4512 this week.
This week FOMC minutes on Thursday and Non-Farm Payroll on Friday. As it seems, I doubt there would be anything different in the minutes than what the Fed Chair has said after the last hike in several post hike appearance in Senate. But a shortened trading week due to the Independence Day on Tuesday. Half day on Monday and holiday on Tuesday thereafter the minutes and data releases to end the week.
OPEC again is meeting on Wednesday. Expect some volatility on oil this week.
The trading range for the week is between 4350 and 4550.
NDX (15179)
287 points (1.6%) up for the week. Strongest being AAPL up 3.91%. Of the magnificent Nasdaq 7, some others are barely holding to its highs. Keep an eye on their development as Nasdaq is running on the Magnificent 7 fuel. When it runs out, things should also slow down significantly.
Lets see if NDX tops again to 15265 and hit a brick wall or punch above. Earnings season is starting again and if the bullish view they gave last quarter is not delivered, we are in for a big retracement.
The trading range for the week is between 14800 and 15500.
HANG SENG INDEX (18916)
It seems it is holding on at current levels 18900. Despite the strong week for the US market, the HSI seems to be on a holding position. If it proves a good support, and opens above 18916 next week, there would be some chances for it to trade up within the range 18800 to 20000.
OPTIONS TODAY [PROFIT FROM UNDERSTANDING IV]
We’ve covered many articles on Implied Volatility (“IV”) before this and we are going to talk even more about it. Why? Because it is so important that if you don’t understand it, you are just taking a gamble with options on the other side of the table. There are certain elements in Options that we can be sure of and one of it is how premium behaves with changes in IV.
Lets get back to basics again and hear what Investopedia writes about IV.
“Implied volatility represents the expected volatility of a stock over the life of the option. As expectations change, option premiums react appropriately. Implied volatility is directly influenced by the supply and demand of the underlying options and by the market's expectation of the share price's direction.”
Two key points above. #1 expected volatility of the stock #2 As expectation change, option premium changes.
We all know the higher the volatility, the higher the premium.
Following the above definition, When IV changes from high to low, what changes? Premium comes down! That’s all you need to know for now and take this to trade.
Trade Structure - Strangles
We explained strangles in Issue #112 . Make sure you read this and really understand the risk before jumping in.
Selling OTM Put and OTM Calls at preferably 16 Delta each side.
Trade Entry/Exit
If you use Tastytrade platform these are the metrics that you need to lookout for.
IVx 5DCHg - IV 5 days change. Green shows that IV has expanded over the past 5 days by x%.
IV Rank - this shows where the current IV is between the lowest and highest IV in the past year. It is shown as a percentile. (I am sure we covered IV Rank in one of our past issues, let me know if you found it).
Firstly, you’ll need to have your watchlist. From the watchlist monitor daily IVx5DCh. If you see that IVx5DCh spiked up above normal, you can consider a trade. Target to see volatility changes 8%-9% above.
Situations IV might spike is, market volatility increased (VIX spike), close to earnings or binary events.
IV Rank, we need IV Rank to be above 20 so premium is reasonable for the trade.
Trade duration 30-45 days.
Trade exit, 50% premium decay. We are looking for an IV5dCh to drop or IVR to drop lower than initial entry numbers. Once this happens, we can exit and if this happens within days of entry or within a week, exit the position even if premium decay is between 30-50%.
Trade Management
This is another topic by itself. Normally, we would enter with 16 Delta to give us more than 1 standard deviation move buffer. However, if stock price moves too fast to one direction, we can be protected a bit if IV5xCh drops or IVR drops.
If price moves too much up or down, consider rolling the untested side. ie. if stock price goes up, the roll up the short put and vice versa.
Safe Trades Tips
ETFs are much safer trades than single stocks. ETFs is a basket of stocks and big movement in 1 stock will not have much influence in the overall ETF price.
Trade on stocks which you are familiar with. Never use this strategy on Meme stocks, as risk is unlimited. Example of Meme stocks are like AMC, where stock price can move up or down significantly. Too high IV Rank, those above 40-50 also implies high risk.
Don’t trade close to earnings date or binary event, as those are the times IV tend to spike rather than drops. A good time is immediately after earnings, when earnings day IV is still high and market already captures post earning movement effects.
IV would tend to spike on red days, that’s the best time to enter trade. Watch for the IVx5DCh spike…consider taking daily recording of those on your watchlist to catch the increase in volatility.
Don’t overtrade as risk is always on the short call side, which is unlimited!!! Understand your risk before execution. Always, have an exit plan/cut loss limit.
Trade Examples
We did 2 trades using similar structures and entry strategy last week.
#1 GOOGL. Entry date, 29 June. Watch these points:-
IVx 5DCh on entry = 8.7%
IVR on entry = 25.8
2 days into trade IVx 5DCh drops to 3.5% and IVR drops to 20.5. IV drops from 28 to 20.5
Stock price hardly moved by +$0.31 only
Premium decay in 2 days by 15.3% ($32)
#2 AMZN. Entry date, 27 June. Watch these points:-
IVx 5DCh on entry = 8.7%
IVR on entry = 22
3 days into trade IVx 5DCh drops to 4.1% and IVR drops to 21.3. We did not capture IV on opening…
Stock price moved up +$2.82
Premium decay in 3 days by 28.46% ($74) despite stock price moving up over $2+
Conclusion
There are many ways to profit from trading options. Most options traders are directional traders which gives a 50-50% win probability, but for those few who truly understand options would use the best out of options behavior metrics to generate high probability and consistent mechanical trades. It might be smaller gains but with probabilities above 50%, it becomes a number game.
TRADERS TALK
I barely slept whole of last week, hearing the closing bell on most of the days. We’ll catch up after I finish up a big job, perhaps my last corporate deal that could lead to more time in trading and training in future :D.
But if you have any questions, send us an email @ support@mystlework.com if you have any questions and we can cover them during the show.
Review our past traders talk. Let more of your friends know about our show and let them benefit also. View Past Traders Talk here.
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TIKTOK VIDEOS
Understanding IV - Part 1 - Understanding IV relation to options premium and how to read different measurement of IVs.
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Understanding IV- Part 2 - How to use IV to trade GLD ETF.
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DISCLOSURES
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf
MYstyework is an Online Financial Literacy Educator and materials provided is solely by MYstylework and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. MYstylework, through its contents, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. MYstylework is not in the business of transacting securities trades or an investment adviser.