Friday, August 31, 2012

Profit On Any Price Change With Long Straddles

Article talks about COSTS AND BREAK EVEN POINTS which is very important. Also straddles can be profitable because of the nature of option pricing and implied volatility.

Long straddle and Price consolidation

What Is a Long Straddle?A long straddle is one option trading strategy that offers option traders a unique opportunity not available to individuals who only trade underlying securities. Specifically, a long straddle affords a trader the opportunity to make money regardless of whether the underlying security advances or declines in price. The tradeoff is that the long straddle will lose money if the underlying security remains close to the price it was at when the trade was initiated. However, the trader can position the trade to give the stock enough time to make a meaningful move. (For more on long straddles, see Profit On Any Price Change With Long Straddles.)

A long straddle is entered into by simply buying a call option and a put option with the same strike price and the same expiration month. A call option gains value as the underlying security rises in price and a put option gains value as the underlying security declines in price. However, both options have limited risk. Therefore, the goal is to have the underlying security either:
  1. Rise far enough to make a larger profit on the call option than the loss sustained by the put option, or
  2. Decline far enough to make a larger profit on the put option than the loss sustained by the call option.
This is how a long straddle makes money. (To keep reading about straddles, see Straddle Strategy A Simple Approach To Market Neutral.)

One of the two options must advance more in price than the other option declines in price. In addition, the maximum profit potential on a long straddle is unlimited. As long as the stock keeps moving further and further in one direction, the long straddle can continue to accumulate greater and greater profits.

Option prices are comprised of intrinsic value and time premium. Intrinsic value is the amount that an option is in-the-money. The remainder of the price of an in-the-money option and the entire price of an out-of-the-money option is comprised of time premium. Therefore, the risk in buying a long straddle is that the underlying security will not make a meaningful move in either direction and that both the options will lose time premium as a result of time decay. The maximum risk for a long straddle will only be realized if the underlying security closes exactly at the strike price for the options.

Looking for the Next Big MoveIf you look at a price chart of virtually any security, you will find periods of price consolidation followed by price trends in one direction or the other. This trending period is then followed by another consolidation and so forth. If you look at enough charts, you will also notice that some securities are inherently more volatile than others. Because you need some type of meaningful price movement in order to make money on a long straddle, it then makes sense to consider buying a long straddle on a typically volatile security after it experiences a price consolidation.

A consolidation phase can often be quite subjective, but in the end the idea is simply to identify a period of time during which the stock in question has "gone nowhere". In addition, the more "tightly wound" the price action is during the consolidation - or, the longer and more narrow the trading range - the more likely the eventual breakout will involve a meaningful price movement. Some traders use various indicators to measure and identify consolidation, but it is possible to identify significant trading ranges simply by inspecting the price action for a given security on a price chart.

The first step is to identify a stock that has a history of making significant movements in price. Stodgy old blue chip stocks or utility stocks typically are not the best candidates for the long straddle strategy because they simply do not move significantly enough in price to generate a profit. What you really want are the high fliers that routinely make significantly large percentage price movements. In 2009, one such stock is Microstrategy (Nasdaq:MSTR), which appears in Figure 1 below. As you can see from a simple visual inspection of this chart, MSTR has a tendency to wind into a tight trading range and to then break out of that range with a large move.
Figure 1: Microstrategy (MSTR
Source: ProfitSource

Buying a Long Straddle Following ConsolidationOnce a stock establishes a trading range over a 10-day period at least, the thing to watch for is a breakout in either direction. Many traders will attempt to play the breakout in the direction of that initial breakout: they will get bullish if the stock moves to the upside and bearish if it breaks to the downside. However, breakouts often have a high failure rate and whipsaws can leave those initial buyers or short sellers with a quick loss. This is why a long straddle can be quite useful in this situation.

For example, if the stock breaks out to the upside and keeps going, a long straddle will make money. Likewise, if the upside breakout fails and the stock turns and runs to the downside, the long straddle can make money in that case also. In Figure 1, there are three consolidation periods marked for MSTR. Each consolidation was followed by a significant move in price. If you look at the second set of parallel lines, which occurred during the month of May, you can see that the stock broke to the downside on June 2. In Figure 2, you see a long straddle trade that could have been entered using options on MSTR.

In this example, the trade involved buying one October 80 strike price call option for $7.80 and simultaneously buying the October 80 strike price put option for $9.30. Thus, this trade costs $1,710 to enter [($7.80 + $9.30) * 100 Shares per options contract].

Figure 2: Long Straddle using options on MSTR
Source: Optionetics Platinum

The Particulars of the Long StraddleWhen you enter a long straddle, there are always three certainties:
  1. You have unlimited profit potential.
  2. Your risk is limited to the amount you pay to purchase the call and put options.
  3. Your breakeven points are equal to the amount you paid added to and subtracted from the strike price of the options purchased.   
You can see these factors reflected in the risk curves that appear in Figure 3, below. On the left-hand side is the price chart for MSTR. On the right-hand side are the risk curves that depict the expected profit or loss at any given stock price as time goes by. You can see in these risk curves that the higher or lower the stock moves, the greater the profit. You can also see that the maximum loss is $1,710. This will only occur if MSTR is trading exactly at $80 at the time of option expiration. You can also view the effect of time decay, or the process by which an option loses whatever time premium was built into its price as expiration approaches. This is reflected in the fact that the risk curves shift to the left (reflecting either a smaller profit or a larger loss) as time goes by.

Lastly, if it is held until option expiration, then you can see that the breakeven points for this trade will be 62.90 and 97.10. These points are arrived at by adding and subtracting the amount paid to purchase the straddle (17.10 points) to the strike price of 80.

Figure 3: Risk Curves for MSTR Long Straddle
Source: Optionetics Platinum

Managing the TradePrior to entering a long straddle, it is essential to determine what would cause you to exit the trade
with a profit or with a loss. Regarding risk control, some traders will set a percentage of the amount paid as a stop-loss point. Another possibility is to set a time limit. For example, a trader might decide to risk, say, 50% of the premium paid to enter the trade. For the MSTR example, this works out to about $850. As you can see above in Figure 3, if this trade was held until September 1 and the stock was about unchanged, then this trade would show a loss in the $800+ range.

In regards to profit-taking, different traders use a variety of different methods, but one of the simplest and most useful is a simple profit target. For example, a trader might decide to exit the position if a profit of a given amount or percentage is achieved. This comes down to personal preference and also depends on one's expectations for the underlying stock. However, it is not uncommon for a trader to target a 20-50% return. For the MSTR long straddle example, a profit target of 20% would mean that one would look to take a profit once the profit on the trade exceeds $342 ($1,710 * 0.2).

It took close to two months, but on July 28, MSTR finally fell far enough to generate an open profit of $430. The buyer of this long straddle could have exited the trade at this point and garnered a profit of 25% in just two months' time. The risk curves in Figure 4 are updated to reflect the change in the stock and the value of the long straddle position as of July 28.
Figure 4: MSTR stock drops, long straddle becomes profitable
Source: Optionetics Platinum

SummaryTaking advantage of unique situations is one of the benefits that option traders enjoy. One of those unique situations involves taking advantage of the fact that stocks - especially those that are extremely volatile in nature - will "pause" and consolidate from time to time. Eventually, that consolidation period ends. When it does, quite often it will be followed by a strong trend in the price of the stock. The problem is that it can be difficult to accurately forecast whether that new trend will be to the upside or to the downside. This is exactly the situation in which a long straddle can be quite useful. By buying a long straddle, or simultaneously buying both a call and a put option, a trader does not need to accurately forecast the direction of an impending price movement; he or she only needs to feel confident that a sufficiently meaningful price movement is likely to occur.

Rule NO 1. Back yourself up always in every single trade

1. Simple rules

a) For stocks use stop loss or hedge with options, prefer to use stop loss or buy out of money options both are good.

b) for  Options use a straddle at least during the initial big position during consolidation phase of 6 days. Of course invest money when there is a trend. But trends can also be uncertain. Future is always uncertain even in best trends. So back yourself up always.

Implied volatility has a big or singular role in options. Only buy options during consolidation phase of trend when the volatility is low and option price is low.

stop loss does not work in options because by the time you open the computer next day the option is down 50 percent if the underlying is down 10 dollar for example.

So stop loss is stupid in options only way to do it is to hedge it with opposite option at same strike price.

buying weekly options is stupid idea for consolidation phase of stocks uptrend or downtrend

these are the most dangerous for consolidation phase. Within 1 week, the value of the weekly option can go down a lot more than 60 percent.

How do you know that 6 days is for certain the stock is going to move in the desired direction. One does not know. That is the reason why there is no point in buying the weekly options when the stock is consolidating.

Another point is about rolling over the weekly options , which is again a waste of money for buying and selling transactions which can be a lot if one is buying big positions.

What a waste of time and money!!!

Weekly options is a horrible idea. Even buying 1 weekly option is a waste of money. That means selling weekly options becomes a good idea. 

Never take big positions in OPTIONS without hedging or straddle

Straddle with 1-2 month options when the stocks is in consolidation. This is a fine example why options with big positions are so dangerous. Even a small move like 10 dollars can wipe out 50-60 percent of capital money. Why would any one take such a risk???

Straddling would have eliminated the risk. During the consolidation phase stocks move within the 6 day window. Since the probability of the movement is in the trend direction and from this example even a minor change in price would eliminate most of the capital, one has to straddle position always.The market is too uncertain and one cannot guess which side it will take. So weekly options is a stupid idea.

Apple is down again to 658 has broken the 660 range.

Remember, this is a very important lesson. Never go overconfident and try to judge the market. The market can go any direction even with the best indicator may be saying otherwise.

Apple was consolidating on the 675 range. Look at what happened. In two days it is at 658. If you have call options your fingers are burnt.

Do not have big positions in OPTIONS. One way is to hedge your options with opposite options like a put. So that if your guess does not turn right atleast you have hedged your position. 

Do not take any trade without hedging it.

If you have stocks, then a stop loss does it. But in options a stop loss does not mean anything. Already you have 30 percent loss. And if you have big positions you are screwed.

You have to hedge your initial big OPTIONS position with an opposite options. Once the directions is established you can remove the hedge. Initially you need the hedge. Without the hedge it is pure gambling.

Take the same Near the money hedge for the same time period. Then any downside will be made up by the upside. This is only if you are taking a big position in options. If it is a couple of options or a single options there is no need. 

Once the direction is confirmed you can take away the hedge for a loss and continue on the options that are in the directions of the following trend. This way you would not have lost so much and would get into profits. I THINK THIS IS ONE OF THE BEST WAYS TO MAKE MONEY BY OPTIONS.


So....may be next time. Never trade weekly options when taking big positions. 

Thursday, August 30, 2012

Game over

Down jones is down 100 points. What a bad day for me. I lost all my best and I am down 40 percent. So I decided I am out of the markets for now.

Big mistake was to buy too much WEEKLY options. It was just gambling. Anything can happen in the stock market. This is a lesson for me.

I should have got the 1 or 2 month options but still they are risky but not as bad as the WEEKly options.

Weekly option is down to 1.46 when I sold. I bot for 3.71. More than 70 percent loss.

Its all screwed. I will just live with what I have. Bad idea to get into OPTIONS without proper risk management. As the rule goes do not risk more than 1 percent in any trade. It should be applied for OPTIONS specifically. These are too dangerous instruments.

I am learning not to be greedy. Not to take high risks. Anything is possible in stock market. Not to take big positions in options.
Losses in Stocks was really not bad. One has to stick to a trending stock till the trend is over. That is the only way to make money. If you use options use 2 month expiration. Do not use options more than 10 percent of portfolio.

Lesson learned by losing. Hmmm too costly.

Wednesday, August 29, 2012

cost price for weekly options AAPL

20 contracts for average of 3.71, 675 weekly call
5 contracts for average of 9.0, 670 weekly call.

I am going to wait.

I understand what can happen. There is resistance at 270. So the stock  can go down a lot more but the chances of going up are more, talking probability.

Volume was low today around 7 million shares. It is a tight consolidation at 270 range. Anything can happen. But since it is in an uptrend the probability of going up is high rather than down ward.

Lets see. I have to roll over everything tomorrow anyway.

Roll over Weekly AAPL options

One has to just roll over weekly options. I know I am in a loss situation but that does not matter.

The consolidation goes on to a maximum of 6 days, it can be longer but usually 6 days. Now today is the 3 rd day for AAPL.

It is very important to be in a position when AAPL takes off 10 points. The weekly 675 option that is now ranging from 3.5 to 4.5 ie as AAPL moves from 673 to 675 intraday.

My average on this option is 4.01 . That is a good average price for this option. I have to roll over the weekly option at that price or what ever is very close to it so that I do not lose money.

Roll over on Thursdays. If deep in the money then buy closer to in the money options. Do not worry about the fluctuations. I know it is too high but that is the risk I have taken when playing with options.

Like last week options, If I just kept the 660 and 665 options as it is I would have got all my losses back by this time.

The day to sell the weekly options is the day when apple moves 10 dollars. Just wait out, it will happen. If it does not happen just roll it to the next week.

Tuesday, August 28, 2012

The plan for option Apple trading

Since Apple is in uptrend, it is good to buy CALL options. Since the action is not guaranteed to be this week, it is better to buy 1 or 2 month expiration IN THE MONEY OPTIONS. Either September or October.

When to buy?

Since AAPL is showing consolidation at 675 range, I would wait for a down day around 1 percent down. I would average down option price from 675 to 670. The average should be around 672-3.

Then I would wait for it to to higher. Since the resistance is at 670, I would get a max pain loss of 15 percent loss.

If i get lucky and if the stock goes to 665 range that would be a great buy.

So this is the plan for this week of option buying.

I should have done that today. But I did not have a plan. I was doing weekly option super volatile trading. But it is time to go long with 1-2 expiration during consolidation and to average down.

One has to go by Intraday moving average to understand the intraday mood of the market.


I should buy some call options for different months more money in october options. The volume is low today and it has been study. Good sign.

This stock can go to 700 in 2-3 weeks. So buy and hold options.

No problem. Can get a good deal tomorrow. if it keeps steady, just buy it and forget it for 2 weeks.

Options are volatile and one needs to be hold them even with 30 percent loss. Hmmm

thats a lot but the trend is upward.

The DELTA of the stock  options is 0.5 AT THE MONEY. So if apple stock moves from 270 to 280 or 10 points the options is going to move 5 points. That can be a very big change if it is a weekly. For a weekly that could be upto 70 percent change.

For a 2 month expiration it could be like 30 percent range. So for a account of 25 K, it can come down to 17 thousand. Thats a 7 k down. But one has to be ready for it in this case only because Apple is showing uptrend.

Going down 7 K is an extreme situation usually it is around 20K on a down day.

I am just being ready for the reality that can happen. Talking in probabilities. One cannot think that it is going to be only one side. Anything can happen so one has to be prepared for the worst.

On the good side, if apple goes up 10 dollars in 2 weeks, Options go up 30 percent. thats like 32k in the account.

Sunday, August 26, 2012

Typical Intraday price action AAPL

I am reading an important book about the psychology of trading and the mistakes we make due to it. It is clearly evident in my trading loss problem.

First of all one has to learn to think in probabilities and learn to think that anything is possible. When I comes AAPL and option buying, I did not realise the volatility range options can take. The closer the date the more volatile the trade becomes and the risk.

I bought the october options, which are not that volatile like the weekly. When I started last week I bought 2 contracts of weekly first with out looking at the IV, implied volatility.  I guess at a price of 674, the IM must be like 35 or so but the price was 11 dollars. Then immediately after buying the stock started to like and during a huge sell off the price came down to almost 650 then closed at 655. But the market recoverd the next day.

Anyway, now when I bought it, I got into the trade because I thought it was the right price and there will be sustained buying during the bull trend. But there are too many variables and any thing can happen during an intra day trade. And that is the reason one has to be very careful buying the Weekly because unless the price is right one can get into a lot of losses. So how do you know your price is right. During the consolidate phase the price varied from 650 to 670. Now one has to first
find find out the range one is willing to purchase the stock. One should also accept that this is going to happen for sure that the the stock can move in either direction. But the important point in trend analysis is that there is high probability of the stock moving up in 1 week or two weeks but not on a particular day. One should be willing to hold the stock for 2 weeks for the stock to move up. And if one is invested in options one should have the willing ness to hold a atleast 20 percent paper loss because of the volatility of options.

Anyway, I sold everything and got even because my buy points were to high and even the best range price was not meeting my options buying points. So I cut my losses and retained my capital to get into a better trade another day.

Unfortunately there was some good news about apple winning the court case and the stock now moved to 675 after market.

There are plenty of opportunities, nothing to worry. But one has to have strong guts to understand that probabilities work in 1 week or 10 days but not on a day to day basis and that is the need for holding the options or buying options 2 months to expiry. If one is buying a weekly one has to make sure that the buy point is close to the lower range of the consolidation range.  Otherwise it can show 20-30 percent paper loss and one may sell it.

It is hard to buy closer to the lower point but one should try. One should understand that after a big move in the uptrend, the stock may go either direction. One has to hold the options with strong guts unless the stock is coming down. But if the stock is moving in the consolidation range one has to hold the options for at least 1 week. I know it.

Still, I made a mistake because of the wrong buy points. Any way I will try to buy better next time and learn to hold for a week or more. Unless there is a top or some problem with the uptrend. I knew the chart showed uptrend but was not strong enough to hold paper loss and bad buying points.

I am learning from my mistakes. Since no one know for certain in short term range but one can know the trend for sure in 7 to 10 days one needs to have patience and also one needs to buy at good buying points so that the there is not too much paper loss and one can easily hold for 1 week without stress.

Greatest Reward

The Greatest reward, I have even seen is with the weekly stocks. If one can get into Apple weekly stock when the stock is down 1-2 percent when it is consolidating on the uptrend one can get intraday low point and get it at the right time then, one can expect it to move 3-4 times.

I have seen this happen in the intraday trade. This was the most amazing thing I have seen. One has to be a master of INTRADAY chard reading and just follow the 30 day moving average. Just follow the moving average. Only shoot the arrow when one understands the chart and when the charts behaves the way it behaves in the standard model, one can buy the intraday options may be purchase with 5 thousand dollars.

I have seen a 2 dollar intraday weekly option go to 8 dollars. It is highly speculative but if one can master it and follow the charts and do it once in a while this can give great rewards.

Of course, as humans we make mistakes but as humans we can also exceed our mistakes with disciple and study.

Friday, August 24, 2012

Trading weekly strategy

I am keeping 5k reserve so that when the market gives a jerk to AAPL when it comes down 10 points then I am going to dive in and buy some weekly and sell the same day after the stock recovers.

For buying the weekly using the 30 day moving average is a must. If done properly, this can give great profits in a single day or a couple of days.

Also I have seen that during an uptrend some days AAPL can lose 10 points expecially early in the morning. That can be a good time to buy the weekly at cheap price and hold it.

Buy the weekly on the day of selling and look at the moving average. Until the stock is sitting below the moving average do not buy. Once it starts to settle down and starts to emerge out of the average, that is the exact time to buy.

If done properly on the correct days, it is a major weapon. 

One has to be super super careful. If one does not do the right thing than burning your hand can be very painful.

Wednesday, August 22, 2012

Apple 1 month graph. Analysis to buy Call options

When the stock was around 220 to 230, there was consolidation for several days. These are the best days to buy CALL options since they are cheap when the volatility is low.

Unfortunately I did not have option buying ability in my trading account at that time.But this monster is going to move up with a week even from this 650-660 range.

Tuesday, August 21, 2012

lost trading weekly options

lessons to learn

1. After 2 days of rally the AAPL share closed at 665. In the morning it opened at 674. There was tremendous volatility in the options and the weekly option ITM I bought was 665 for 11 dollars. The main problem was I did not put a stop loss immediately. This is a horrible mistake when it comes to options especially.

There was selling and profit booking and the stock came down within 2 hrs to around 660 then came down to a low of 650 and closed at 656.

This was my first option trade after a long time and I was not cautious. Options can burn you if you do not have a stop loss especially when it is so volatile after 2 days of rally.

It is advisable not to buy any weekly after 2 days of rally because it is already highly priced because of high volatility. Then the options expire in 2 more days. Now I have to take loss because the options closed at  4 dollars. I got a loss of  700 per contract. Any way I had only 2 contracts and I put a sell limit on it at 6 dollars on it. hopefully the stock move up tomorrow and I can get some of the losses back.

weeklys are good when the rally starts but can be overpriced after 2 or 3 days of rally. I think it is not worth buying it at that time.

A good idea would be to sell weekly far out of money and make a lot of money. that is the easiest thing to do for extra cash.

There should always be atleast a 25 percent stop loss on options or a 500 dollar limit. To lose more than that is not worth it. These are very important for money management.

I also bought a next month option at the same strike price but it declined only 15 percent. This is because weeklys are very volatile and decay fast with time.

graph for 3 days

Friday, August 3, 2012

Past short Idea

OPEN last year would given me a lot of money. The point is why we miss opportunities like this. Need to be patient at the same time understand the Earning and technical analysis and patience.

Study the past graphs . very important

Have to try our something a little different

I need to use the money more efficiently and wisely. My main problem has been putting large amounts of money in the stocks that move in the wrong direction.

There is a rule that says When in uncertainty cut your position. Especially if the stock is showing strong RS in the case of shorting.

Start with a small position in uncertain position or better do not enter the position.

There are plenty of opportunities in the market. I almost make 20 percent in ARNA but there was not much money invested in it. This is a problem because cash was stuck with other stocks. I need to have cash available when I need it.

This diversification is not a good strategy. It is good to put money where you are making money. Do not buy more unless the stock moves in you direction or you are super confident technically.

I have to put my money where I can get money. I have to choose the best stocks instead of jumping around and losing money.

Thursday, August 2, 2012

Why is ARNA going up on a Down day

Why would a stock going down from 3 days like ARNA and having a bad Relatives strength move up on a down DOW day.

One reason I think is there are people selling other stocks and trying to get into ARNA for a fast return to cover up losses from other stocks or what ever reason.

This stock will go down on a good DOW day since people will again take money out of ARNA and go back to other stocks to trade.

Since most of the people are on the buy side this kind of thing happens with stocks moving down like ARNA. These false peaks are good time to short.

flop show with KCG

There was no need to touch this stock. It just got out of hand and there was not even a stop loss. Wow!!

Bad trade. The market did what it did. Never buy a stock going down. I broke the rule and it burnt. It was a stupid mistake.

I was deceived by the early spike in price to 4.30 cents. That was obviously the shorts covering in the morning. When a stock falls this big like 50 percent don't you think some shorts are going to cover and there is going to be a initial price jump???

What a stupid mistake.

I should have just stayed with ARNA where I made good money.

Wednesday, August 1, 2012

Trading PCYC

I am coming to understand that Highly speculative stocks do come down from their high soon. It takes atleast 3-5 weeks for the stock to go down.

In the case of PCYC which does not have any earnings yet, this stocks has moved from 10 dollars to 60 dollars in a couple of months. I shorted the stock at 50 dollars. The stock was on the 30 day moving average.

1. One mistake I did is to not understand that the stock was consolidating on the 30 day moving average.
This is a tricky situation. How do you know if the stock is going to move up or down.

There is one way to say that which I understood now and it is very important to understand it. The consolidation took 3-4 days on the 30 MA at 50 dollars and in the mean while the DOW was moving up and down. One of those days the DOW when down 188 point. and PCYC was not at all budging. This means the Relative strength is strong and people are holding the stock and the probability of falling is low and the probability of moving higher or dancing in that range is higher.

I did not understand this point and why RS is so important in understand if people are holding or selling or buying.