Any one that knows me knows that I do not like the iron condor. (selling a call spread and selling a put spread)This in essence locks in a range bound underlying. You collect more premium than is paid out and the options expire worthless. All in theory. If the stock runs up or down you only are at risk for the spread difference of the strike prices. So you are limiting your exposure.
My apologies up front here folks to the wholesale traders. As retail traders, these are written up to excite us. But after the 4 commissions and the 4 bid/ask spreads, in order to make any money the condor has to be very tight and not allow you any range bound limits. The reason for this is a stock that is range bound will not have high premiums, therefore defeating the whole process (In my humble opinion) Take for example GE. Try doing an iron condor on that one. It fits the parameters for an iron condor.
Now a double calendar is a fancy phrase for a short strangle and a long strangle farther out in the months. The idea behind this is that you buy farther out months a strangle then sell the shorter months a strangle in essence a call calendar and a put calendar. This way you take a stock that IS range bound and can collect a few months premiums to make this work. However you have so many bid/ask spreads to make up and 4 commissions that there are better ways. Maybe the floor it works, but for me as a retail trader it is difficult to make it work.
Any comments opposing this are welcome, maybe there is a reason and a time for these but it seems to me a way for someone to sound smart about options. I certainly do not have all the answers and someone could enlighten me.
Thursday, February 28, 2008
Wednesday, February 27, 2008
How to trade inflation
Often times traders like to buy and sit back. At certain times this is ideal while other times it can spell disaster. When inflation raises its head, many run for anything tangible since that is what they have been taught keeps their value. While true, it does not mean all things act the same way. I remember friends buying gold at 850 an ounce in the 80's with the same arguments we hear today. Now I am not saying gold is topping, I am merely stating that while inflation causes tangibles to go up, not everything is the right time.
For example, wheat has formed an obvious bubble, while water is barely getting back on its feet. Gold has seen a steady incline which should continue for some time. Once the media gets all over this and we have a declared "new currency" in gold then you will know this too will become a bubble. One key factor is the junior companies (the ones you get emailed to you all the time) this is the first sign of the impending bubble.
A smarter way would be to trade the tangibles that have not seen the meteoric rises such as water as previouly mentioned, meats, sugar etc. For those that do not like to trade commodities such as I, then we trade baskets of stocks like PHO for water.
So what does this have to do with options? Finding the trend is always the best way to make money. If you can find the trend first with the smart money you can ride it out until the media frenzy that creates the bubble and get out. Using LEAPS to take advantage of the long term trend works, but you are losing to time decay with each passing day. A way to combate the time decay is to sell a front month. You can calculate how much time decay is taking place and sell the appropriate option to cover this part of options trading that is detrimental.
By doing this, you will experience the long term trend appreciation on the LEAP while offsetting any time decay with the premium collected from the short month. This strategy is called the diagonal spread. You sell the short month, higher strike that you wish to collect the premium from to offset the time decay while you wait for the underlying to move.
Later
For example, wheat has formed an obvious bubble, while water is barely getting back on its feet. Gold has seen a steady incline which should continue for some time. Once the media gets all over this and we have a declared "new currency" in gold then you will know this too will become a bubble. One key factor is the junior companies (the ones you get emailed to you all the time) this is the first sign of the impending bubble.
A smarter way would be to trade the tangibles that have not seen the meteoric rises such as water as previouly mentioned, meats, sugar etc. For those that do not like to trade commodities such as I, then we trade baskets of stocks like PHO for water.
So what does this have to do with options? Finding the trend is always the best way to make money. If you can find the trend first with the smart money you can ride it out until the media frenzy that creates the bubble and get out. Using LEAPS to take advantage of the long term trend works, but you are losing to time decay with each passing day. A way to combate the time decay is to sell a front month. You can calculate how much time decay is taking place and sell the appropriate option to cover this part of options trading that is detrimental.
By doing this, you will experience the long term trend appreciation on the LEAP while offsetting any time decay with the premium collected from the short month. This strategy is called the diagonal spread. You sell the short month, higher strike that you wish to collect the premium from to offset the time decay while you wait for the underlying to move.
Later
Tuesday, February 26, 2008
Stay the course
As mundane as it is, as boring as it is, staying the course of dollar falling natural resources gaining is the (well certainly should be) Mantra of our times.
http://online.wsj.com/article/SB120398607404892133.html This article says much more than the spin you get. Pay attention to what is really going on and what the spin want you to believe. Britain is reporting terrible housing problems as well.
It appears a race to see who can devalue their currency the quickest. Now with any volatile climate, buying and selling options has tremendous risk. I cannot express enough to ignore the swings. They are a part of the game. If you lean towards the long term such as I do, you will want to use Diagonals. The reason here for diagonals and not straight calendars is the fact that we are directional.
Hope this helps and steers folks away from the spin and into the right decisions.
Later
http://online.wsj.com/article/SB120398607404892133.html This article says much more than the spin you get. Pay attention to what is really going on and what the spin want you to believe. Britain is reporting terrible housing problems as well.
It appears a race to see who can devalue their currency the quickest. Now with any volatile climate, buying and selling options has tremendous risk. I cannot express enough to ignore the swings. They are a part of the game. If you lean towards the long term such as I do, you will want to use Diagonals. The reason here for diagonals and not straight calendars is the fact that we are directional.
Hope this helps and steers folks away from the spin and into the right decisions.
Later
Monday, February 25, 2008
Bottom Fishing with PUTS
Yahoo had an article about the possiblity of the housing showing a possible bottom. Therefore the financials that have been hit hard are due for a move up. Very logical thinking if the premise of the housing bubble has indeed hit bottom. I do not think so myself. We still have March with the largest ARM resets ahead of us. However, many times stocks are ahead of reality and just maybe the financials after being hit so hard are indeed ready to rally.
My point of all of this is that if you like to bottom fish, puts can be an excellent way to do this. If you feel that companies such as Citigroup are much to large for our government to let collapse, then you have an idea that they will be around and you will want to be involved some how.
Selling puts can generate income while the stocks languishes trying to find a bottom. Now many will say yes but if the stock still drops, then I am losing money. While this is true, it is not realized loss until you close out the trade. I am not trying to be flippant here, just that you can always buy back and sell the next month (rolling) until the stock eventually rises and the put is worthless.
Later
My point of all of this is that if you like to bottom fish, puts can be an excellent way to do this. If you feel that companies such as Citigroup are much to large for our government to let collapse, then you have an idea that they will be around and you will want to be involved some how.
Selling puts can generate income while the stocks languishes trying to find a bottom. Now many will say yes but if the stock still drops, then I am losing money. While this is true, it is not realized loss until you close out the trade. I am not trying to be flippant here, just that you can always buy back and sell the next month (rolling) until the stock eventually rises and the put is worthless.
Later
Visa IPO
If you want to play Visa's IPO (initial public offering) There are a number of ways. If you are one of the fortunate to get shares before going public hang on to those shares and sell some covered calls. You will want to sell calls far enough away (month) and far enough high (strike price) that the shares will not get hit and called away.
If you are one of the masses that does not have the inside to participate in the offering but would like to own the share, selling puts is a nice way. You can take assignment and own the share for less cost. Now mind you options wont be trading on these for awhile yet. Market makers need to know at what price to set strikes etc. which will not be establish until trading starts. Once the share price has been established, you could also do some calendars. Just some ideas to think about.
On another note, we are supposed to get some fundamental news out today. Anyone that knows me knows that I do not pay much attention to these things. Yes I am a fundamental trader, but numbers are easy to message. Enron says it all.
Later
If you are one of the masses that does not have the inside to participate in the offering but would like to own the share, selling puts is a nice way. You can take assignment and own the share for less cost. Now mind you options wont be trading on these for awhile yet. Market makers need to know at what price to set strikes etc. which will not be establish until trading starts. Once the share price has been established, you could also do some calendars. Just some ideas to think about.
On another note, we are supposed to get some fundamental news out today. Anyone that knows me knows that I do not pay much attention to these things. Yes I am a fundamental trader, but numbers are easy to message. Enron says it all.
Later
Saturday, February 23, 2008
Stagflation
Reading up this weekend I was concerned about the talk of the recession and how it would effect inflation.
Since many tend to believe that recessions take the steam out of inflation, I felt it wise to address this. Just because a recession occurs (or is occurring) does not necessarily mean deflation. Many countries and economies have seen inflation and recession at the same time. This denotes the term stagflation. Watching gold and wheat and oil make new highs as the U.S. slides into recession leads me to believe in stagflation the outlook.
This also brings up the "Decoupling" of the world economies (particularly Asia).
There is much argument of peak oil, and gold shortages and agri shortages etc.
These can be attributed to many factors one of which is billions of people waking up to a modern world.
So what to do.
Stay long the natural resource stocks with very volatile moves up and down. If you trade short term, follow your charts. Make quick moves in and out. If you are more inclined to trade for long term trends, then use diagonals. If you want to be more aggressive (which is not for me) buy the long side, wait for the run up sell the short month and then buy the short month back once the drop happens then do this again.
Please everyone this is for educational purposes. Try these on virtual accounts before undertaking. CBOE.com has a virtual account and if you want to use Optionsxpress they have the same virtual software.
Later
Since many tend to believe that recessions take the steam out of inflation, I felt it wise to address this. Just because a recession occurs (or is occurring) does not necessarily mean deflation. Many countries and economies have seen inflation and recession at the same time. This denotes the term stagflation. Watching gold and wheat and oil make new highs as the U.S. slides into recession leads me to believe in stagflation the outlook.
This also brings up the "Decoupling" of the world economies (particularly Asia).
There is much argument of peak oil, and gold shortages and agri shortages etc.
These can be attributed to many factors one of which is billions of people waking up to a modern world.
So what to do.
Stay long the natural resource stocks with very volatile moves up and down. If you trade short term, follow your charts. Make quick moves in and out. If you are more inclined to trade for long term trends, then use diagonals. If you want to be more aggressive (which is not for me) buy the long side, wait for the run up sell the short month and then buy the short month back once the drop happens then do this again.
Please everyone this is for educational purposes. Try these on virtual accounts before undertaking. CBOE.com has a virtual account and if you want to use Optionsxpress they have the same virtual software.
Later
Currency options
Using currency ETF's one can take advantage of the falling dollar. The dollar has been falling against the euro and the pound for the last few years. This will probably change over the next little while. The Canadian and Australian currency should become stronger than the dollar as natural resources continue to rise with inflationary pressures.
Ways to play this. Go long the aussie ETF (FXA). While most know me as the calendar trader, these are times for the diagonal plays.
Ways to play this. Go long the aussie ETF (FXA). While most know me as the calendar trader, these are times for the diagonal plays.
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