Option Trading Articles

Monday, October 5, 2009

[TheOptionClub.com] Re: Ron Ianieri's Options GPS Update

I remember watching a movie with Reese Witherspoon called "Sweet Home Alabama," in which Reese's character is torn between two men and can't decide whether to marry the rich New York Senator's son or the childhood sweetheart from her home town in Alabama. The line I remember out of that movie was her father giving her the following advice...

"You can't ride two horses with one ass, sugarbean."

Made me laugh at the time, but there is apparently always an exception to the rule...

On Wednesday, Options Univeristy is hosting a live webinar presentation featuring Ron Ianieri. Brett Fogel got a hold of me this weekend and confirmed that the live Options Mastery classes are a "go" and invited all of us to attend the live presentation this week.

http://www.optionsmasterycourse.com/webinar

If you would like to attend or get more information about the presentation, make use of the above link. My curiosity is peaked so I'm trying to set aside the time myself to attend.

The presentation is supposed to be instructional. Ron is supposed to share some insights about how options might be used in the current market conditions and review some of the strategies he favors.

Anyone who has attended Ron's presentations in the past know that he is a very popular speaker and that the capacity of the on-line presentation platform seems to always get maxed out. The best advice I can give you is to get yourself registered and then log into the webinar at least 10 or 15 minutes early.

Christopher Smith
TheOptionClub.com

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The goal of TheOptionClub is to provide a forum for members to work together for the purpose of furthering our individual understanding option trading. All messages and postings, and any materials circulated are provided for discussion and educational purposes only. No statement contained in any materials from TheOptionClub should be considered a recommendation to buy or sell a security or to provide investment, legal or tax advice. All investors are encouraged to consult a qualified professional before trading in any security. Stock and option trading involves risk and is not suitable for most people. There is no guarantee that any information provided is accurate and, may in fact, be wrong. It is understood that the participants in TheOptionClub have varying backgrounds and degrees of experience in option trading, and that regardless of experience each member is considered a student. As such, any information distributed through TheOptionClub should be considered with a critical mind and not relied upon as an authoritative source.

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[TheOptionClub.com] Financial Bloggers and Others May Have to Disclose Compensation for Reviews

FTC: Bloggers must disclose payments for reviews

Oct 5, 10:23 AM (ET)

PHILADELPHIA (AP) - The Federal Trade Commission will require bloggers to clearly disclose any freebies or payments they get from companies for reviewing their products.

It is the first time since 1980 that the commission has revised its guidelines on endorsements and testimonials, and the first time the rules have covered bloggers.

But the commission stopped short Monday of specifying how bloggers must disclose any conflicts of interest.

The FTC said its commissioners voted 4-0 to approve the final guidelines, which had been expected. Penalties include up to $11,000 in fines per violation.

The rules take effect Dec. 1.

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Sunday, October 4, 2009

[TheOptionClub.com] Technical Analysis Question: Early detection of Double Top vs Bull Flag?

My response in blue text.

Has anyone noticed that a Double Top (imagine a Figure M) "/\/\" looks very similar to a Bull Flag on the first section of the pull back?

Yes, and it is also similar to a "V" top, falling wedge, box range or simply a normal pullback in an up trend. The "first section of the pullback", as you put it, can become any form of reversal, congestion or consolidation. Probably the best indication of possible, future, price action during this "first section", will be volume. If volume decreases during this "section" we are likely looking at a continuation pattern, such as a bull flag. If volume is not lower on this first descending section, we could be looking at a possible trend reversal. We never know what pattern is forming until that pattern is complete. In the meantime we can only make conjectures and rule out other possibilities.

So the question is how do you spot before the full double top has formed that it is not a bull flag? Is there some other indicator that should be used (MACD, Volume, etc)?

First, let's put some labels on your "Figure M" ("/\/\"). / = Wave A or WA, the existing up trend. \ = Wave B or WB, the first pullback or reaction. / = Wave C, or WC, the rally after WB. And finally, \ = Wave D, or WD, the next reaction. P1 will represent the pivot high formed by WA and WB. P2 is the pivot low between WB and WC. P3 is the next pivot high.

Now, in your question, we have WA (existing up trend). Assuming WB has not given us a lower low (indicating a possible trend reversal), we look to WC for clues of what may happen next. If WC is part of a bullish continuation pattern, we would expect to see an increase in volume. We can guess that we have a possible bull flag at this time, but can not rule out a double top forming. Flat or decreasing volume would lead us to suspect a possible reversal pattern, or at least, additional consolidation. If we break above the previous high (P1), we have a trend continuation signal and the WA - WB formation becomes a confirmed bull flag. As the P1 level is approached we can look at various technical indicators for clues. You mentioned the ever popular MACD and this indicator can easily be used for our example. Whether you use the two line MACD, the histogram or both, a bearish divergence is the clue we are looking for. As the P1 level is reached, a higher high should be appearing on the MACD. If P2 is higher than P1, we have a confirmed bull flag and can rule out a double top. If the MACD has made a higher high at this time, we can anticipate the continuation of the bullish trend. A bearish divergence on the MACD at this point could indicate a possible break out failure in the works. If We have a bearish divergence and P2 is equal to, or close to, P1 in height, then a possible double top could be forming. At this point we can not rule out further consolidation, perhaps in the form of an ascending triangle or box range. A double top can not be confirmed until a close below P2.

If I was trading credit spreads and saw the Bull Flag, I would then put a Bull Put spread on. Depending on where it was placed, I could lose on that.

I hold to the school of thought, that believes a credit spread should not be held until expiration. You hold an increasing amount of risk, for an ever decreasing additional reward. As the stock forms P2, I would consider taking my profits off the table, or at the very least, morphing the trade into some reduced risk, or risk free strategy.

Hope this answered your question.

Dave

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Thursday, October 1, 2009

RE: [TheOptionClub.com] rules for adjusting

Frankly, given the odds, ANY profit is remarkable. And the key is how leveraged you are (i.e. position size) to get the returns you seek. If you can achieve say a modest 0.1% per month return by risking just 5% of your trading capital you can start a hedge fund. A hedge fund is by definition designed for leverage and they might risk 100% or 200% or 300% of trading capital. at that leverage ratio the 0.1% per month becomes 2% to 6% return per month which gets you to the trading stratosphere.

What am I happy with? 15%-25% annually if I never risk more than 30%-50% of my trading capital at any time. Normally I never even focus on percent returns. It's all about slogging out some net positive income month after month. The percent returns are for somebody with a scorecard to boast about.

From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On Behalf Of Mojo
Sent: Thursday, October 01, 2009 7:36 AM
To: OptionClub@yahoogroups.com
Subject: Re: [TheOptionClub.com] rules for adjusting

I never really thought about looking at my trades from the other side (when that person has the potential for a risk free lock). Great point!

At the end you mentioned 'winning the game'. I started my option career thinking that a good rate of return for winning the game would be 100%+ a year. Each year that's been going down (currently at 30%+). What would you say is a decent rate of return for winning the game?

Thanks,
Mojo

From: mcatolico <mcatolico@mindspring.com>
To: OptionClub@yahoogroups.com
Sent: Wednesday, September 30, 2009 10:39:04 PM
Subject: RE: [TheOptionClub.com] rules for adjusting

To me it's all about trading your position and seeing what the market offers. The rule is basically "no rules."

My little pdf file on vertical adjustments (in files section) was intended to show a battery of potential defensive and opportunistic adjustment strategies based on what the underlying and of course the relative options are all doing. In a nutshell, if you can ever get a locked risk-free position that offers more upside potential, it never hurts to pounce on that opportunity.

Conversely, if you can maintain a "funhouse mirror" mindset and you flipflop your position to see where someone holding the completely opposite trade would have the opportunity to enjoy a locked in winner, then that is usually the time you need to make a defensive adjustment.

To me that's all there really is to understanding "market timing." Whatever position you have, there will come a time where an adjustment can be made that will turn it into a sure winner or where someone holding the opposite side of your trade would have that same type of opportunity. That's when you have to decide to act. Combine this with a solid grasp of position sizing and a dose of phenomenal option strategy fundamentals and the game is easily won.

From: OptionClub@yahoogro ups.com [mailto:OptionClub@ yahoogroups. com] On Behalf Of David Steele
Sent: Wednesday, September 30, 2009 4:03 PM
To: Option club
Subject: [TheOptionClub. com] rules for adjusting

Did anybody make a list of rules for adjustments for different spread trades. like when to adjust and why. like on moving average crosses, standard deviations, or between your breakeven and short, when a trendline breaks , or when your short goes in the money by a certain percentage, or adjusting when your greeks are showing certain percentages. who in the group have been doing adjustments base on these factors for calendar spreads, bull puts, bull calls, bear puts, bear calls, diagonals, and iron condors.

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RE: [TheOptionClub.com] rules for adjusting

Obviously to each her own. However, I would argue that style has nothing to
do with good risk management (which is what adjustments are really all
about). The reason a condor trader has fewer decisions is because of the
nature of the trade. Almost by definition a big "90% probability" type of
trade like a condor means that you have much greater latitude in waiting on
any action you have to take in order to defend the trade.

But again I'd urge anyone wanting to learn how to trade seriously to at
least figuratively take the other side of your position. if you are short a
condor and that decay is working against you, you need to figure out some
way to make the trade work out profitably. If you get some favorable
movement, you have to do something decisive.

So let's take a small example. Let's say abcde stock is trading at 90 and
the 80/85/95/100 iron condor is trading at $1.00. if you are short the
condor (i.e. -80p/+85p/+95c/-100c for a $1 debit) you will start to look for
ways to mitigate or eliminate your $1 at risk. let's say that abcde rises to
93. There, the 95/100 call vertical is now trading for $1. This gives you
the opportunity to sell the call side of your condor and then own the
+85p/-80p for a net zero debit. the short condor player now has the market
yelling for her to lock in the opportunity. Most novices would say, "why
should I lock in that trade when it looks like the market is moving higher
and all I'd be left with is that far otm put vertical?" but that's
completely wrong headed thinking from a risk perspective. A long time trader
will see that the market has presented a gift and it shouldn't be refused.

Meanwhile now look at how the long condor player is thinking. If the
traditional condor was traded for that original $1 credit (i.e.
+80p/-85p/-95c/+100c for $1 cr) and the market has moved as above to 93,
that condor might now be valued at $1.50. the novice might say, "well it
hasn't really threatened my short strike enough so I will just wait things
out a bit further and the market should come back my way." (hopefully in
this caricature-ization you can see how I'm trying to show that poor trading
is based on what you hope the trade will do rather than what it is actually
doing; in the first case the do-nothing short condor trader is hoping the
market will continue to rally while the long condor do-nothing trader is
hoping the market will fade). But again, the market is shouting to the long
condor trader, "time to act and defend your position!" what to do is of
course the challenge but the path at this point is basically to either
double down by adding more risk (e.g. +95c/-2 100c/+ 110c for zero debit to
kick away the localized threat) or do something like take some of your
original credit and buy some protection (e.g. pay maybe $0.50 and buy an
extra 100c).

So for me it really doesn't matter how aggressive or active your trading
style happens to be. It's all about taking a cold hard look at your position
relative to the market and then acting when decision time is there.

-----Original Message-----
From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On
Behalf Of Ricky Jimenez
Sent: Thursday, October 01, 2009 8:18 AM
To: OptionClub@yahoogroups.com
Subject: Re: [TheOptionClub.com] rules for adjusting

Michael, I think the OP was asking for adjustments to basic spreads,
like vertical calendar, condor. I believe he is from the mindset that
a spread of a month's duration should not have have more that a couple
of modifications before it is closed.

On the other hand, your trading style starts with a spread and adds
and subtracts to it at a rate of perhaps once per trading day, with
the dual goal of increasing the size of the position and making it
risk free by expiration. There just might be a difference in the
answers.

On Wed, 30 Sep 2009 21:39:04 -0500, "mcatolico"
<mcatolico@mindspring.com> wrote:

>To me it's all about trading your position and seeing what the market
>offers. The rule is basically "no rules."
>
>
>
>My little pdf file on vertical adjustments (in files section) was intended
>to show a battery of potential defensive and opportunistic adjustment
>strategies based on what the underlying and of course the relative options
>are all doing. In a nutshell, if you can ever get a locked risk-free
>position that offers more upside potential, it never hurts to pounce on
that
>opportunity.
>
>
>
>Conversely, if you can maintain a "funhouse mirror" mindset and you
flipflop
>your position to see where someone holding the completely opposite trade
>would have the opportunity to enjoy a locked in winner, then that is
usually
>the time you need to make a defensive adjustment.
>
>
>
>To me that's all there really is to understanding "market timing." Whatever
>position you have, there will come a time where an adjustment can be made
>that will turn it into a sure winner or where someone holding the opposite
>side of your trade would have that same type of opportunity. That's when
you
>have to decide to act. Combine this with a solid grasp of position sizing
>and a dose of phenomenal option strategy fundamentals and the game is
easily
>won.
>
>
>
>From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On
>Behalf Of David Steele
>Sent: Wednesday, September 30, 2009 4:03 PM
>To: Option club
>Subject: [TheOptionClub.com] rules for adjusting
>
>
>
>
>
>
>
>
>
>Did anybody make a list of rules for adjustments for different spread
>trades. like when to adjust and why. like on moving average crosses,
>standard deviations, or between your breakeven and short, when a trendline
>breaks , or when your short goes in the money by a certain percentage, or
>adjusting when your greeks are showing certain percentages. who in the
group
>have been doing adjustments base on these factors for calendar spreads,
bull
>puts, bull calls, bear puts, bear calls, diagonals, and iron condors.
>
>
>
>
>
>
>
>

------------------------------------

The goal of TheOptionClub is to provide a forum for members to work together
for the purpose of furthering our individual understanding option trading.
All messages and postings, and any materials circulated are provided for
discussion and educational purposes only. No statement contained in any
materials from TheOptionClub should be considered a recommendation to buy or
sell a security or to provide investment, legal or tax advice. All
investors are encouraged to consult a qualified professional before trading
in any security. Stock and option trading involves risk and is not suitable
for most people. There is no guarantee that any information provided is
accurate and, may in fact, be wrong. It is understood that the participants
in TheOptionClub have varying backgrounds and degrees of experience in
option trading, and that regardless of experience each member is considered
a student. As such, any information distributed through TheOptionClub
should be considered with a critical mind and not relied upon as an
authoritative source.

To unsubscribe from TheOptionClub, send an email to:
OptionClub-unsubscribe@yahoogroups.comYahoo! Groups Links

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Re: [TheOptionClub.com] rules for adjusting

Michael, I think the OP was asking for adjustments to basic spreads,
like vertical calendar, condor. I believe he is from the mindset that
a spread of a month's duration should not have have more that a couple
of modifications before it is closed.

On the other hand, your trading style starts with a spread and adds
and subtracts to it at a rate of perhaps once per trading day, with
the dual goal of increasing the size of the position and making it
risk free by expiration. There just might be a difference in the
answers.

On Wed, 30 Sep 2009 21:39:04 -0500, "mcatolico"
<mcatolico@mindspring.com> wrote:

>To me it's all about trading your position and seeing what the market
>offers. The rule is basically "no rules."
>
>
>
>My little pdf file on vertical adjustments (in files section) was intended
>to show a battery of potential defensive and opportunistic adjustment
>strategies based on what the underlying and of course the relative options
>are all doing. In a nutshell, if you can ever get a locked risk-free
>position that offers more upside potential, it never hurts to pounce on that
>opportunity.
>
>
>
>Conversely, if you can maintain a "funhouse mirror" mindset and you flipflop
>your position to see where someone holding the completely opposite trade
>would have the opportunity to enjoy a locked in winner, then that is usually
>the time you need to make a defensive adjustment.
>
>
>
>To me that's all there really is to understanding "market timing." Whatever
>position you have, there will come a time where an adjustment can be made
>that will turn it into a sure winner or where someone holding the opposite
>side of your trade would have that same type of opportunity. That's when you
>have to decide to act. Combine this with a solid grasp of position sizing
>and a dose of phenomenal option strategy fundamentals and the game is easily
>won.
>
>
>
>From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On
>Behalf Of David Steele
>Sent: Wednesday, September 30, 2009 4:03 PM
>To: Option club
>Subject: [TheOptionClub.com] rules for adjusting
>
>
>
>
>
>
>
>
>
>Did anybody make a list of rules for adjustments for different spread
>trades. like when to adjust and why. like on moving average crosses,
>standard deviations, or between your breakeven and short, when a trendline
>breaks , or when your short goes in the money by a certain percentage, or
>adjusting when your greeks are showing certain percentages. who in the group
>have been doing adjustments base on these factors for calendar spreads, bull
>puts, bull calls, bear puts, bear calls, diagonals, and iron condors.
>
>
>
>
>
>
>
>

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Re: [TheOptionClub.com] rules for adjusting

Thanks,
Mojo

From: mcatolico <mcatolico@mindspring.com>
To: OptionClub@yahoogroups.com
Sent: Wednesday, September 30, 2009 10:39:04 PM
Subject: RE: [TheOptionClub.com] rules for adjusting

To me it's all about trading your position and seeing what the market offers. The rule is basically "no rules."

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