dan passarelli boston 2014
TRANSCRIPT
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Market Taker Mentoring, Inc.
Dan PassarelliMarket Taker Mentoring, Inc.
MarketTaker.com
twitter.com/Dan_Passarelli
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In order to simplify the computations, commissions and other costs have not been included in the examplesused in this presentation. These costs will impact the outcome of stock and options transactions and should beconsidered. Investors considering options should consult their tax advisor as to how taxes may affect theoutcome of contemplated options transactions.
Options involve risks and are not suitable for all investors. Prior to buying or selling an option, a person mustreceive a copy of Characteristics and Risks of Standardized Options (ODD). Copies of the ODD are available
from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corp., One North Wacker Drive,Suite 500, Chicago, Illinois 60606. The information in this presentation is provided solely for general educationand information purposes and therefore should not be considered complete, precise or current. No statementshould be construed as a recommendation to buy or sell a security or to provide investment advice.
Copyright 2011 - 2014 Market Taker Mentoring, Inc. All rights reserved.
Disclaimer
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The MTM Trading Path
1.
Observe/discoveropportunities
2. Analyze technicals
3. Analyze news
4.
Analyze volatility
5. State forecast
6.
Select strategy
7.
Plan exits
8. Execute
9.
Monitor position10.Adjust (if necessary)
11.Exit trade
12.Post mortem
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The Big Four
1.
Observe/discoveropportunities
2. Analyze technicals
3. Analyze news
4. Analyze volatility
5. State forecast
6. Select strategy
7.
Plan exits
8. Execute
9.
Monitor position10.Adjust (if necessary)
11.Exit trade
12.Post mortem
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Volatility Analysis
Volatility analysis normalizes optionvalues
Volatility is very important source of edge
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Implied Volatility and Realized Volatility
Definition: Realized volatilityis a measure of howmuch the underlying stock has moved during therecent past
Nothing (necessarily) to do with options
Stated in annualized SD
Definition: Implied volatility is a measure of howcheap or expensive options are, all else heldconstant
Markets estimation of future vol?
Stated in annualized SD
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Implied Volatility and Option Prices
When options prices are rising, that means IV isrising.
When option prices are falling, that means IV isfalling.
IV is derived from the market.
IV is sometimesmore important than directionalmovement.
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Inverse Relationship Between
Stock Prices and IV
Generally, as stocks go higher, IV goes
lower.
Likewise, as stocks go lower, IV goeshigher.
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Volatility and Edge
Vol trader or not, vol is very important!
Affects your variable cost (or income) of
theta
MUST always analyze volatility on everyoption trade
Vol analysis is part of traders holisticforecast
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Directional Option Trades and
Edge
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Directional Option Trades
All the same analysis as trading stocks,but more
Concerns:
Time decay
Volatility (Implied)
Magnitude of move (reaching strike or not)
Maximizing profit, minimizing loss
The edge advantage
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Trading for Edge
Bettering your odds
Edge sources for option trades
Technicals News
Volatility
Strategy selection
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The Best Strategy for the Set Up
Maximizing opportunity (maximizing profit,minimizing loss)
Optimizing: theta, vega, strike proximity
Unique option strategies
Match strategy to forecast
Criteria
Month
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Breakout Scenarios
Long call (or put)
Different set ups, different options
Slow trend
Break out
Minor
Major
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Strategies
Slow Trend Breakout
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Slow Trend
Slow and steady trend Capture small move
Need immediate participation Confident in continuation
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Slow Trend Play: ITM Strike
In-the-money call
High-delta (70 90)
Stock substitute play
Starts profiting right away
Profits well on small moves
Risk more than ATM or OTM call, butsignificantly less than buying the stock
Low theta
Volatility is small, but relevant concern
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Benefits and Detriments
Benefits
Starts making money right away with stockappreciation.
Moves in step with stock well
Low theta (the cost of gamma)
Detriments
Starts losing money right away with stock
decline.
Moves in step with stock well
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Strategies
Minor Breakout
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Minor Breakout
Maybe a flag-pattern breakout Directional breakout but not profound
Active traders
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Minor Breakout: ATM Strike
At-the-money call
50-ish delta
Leveraged spec play
Profits well on small breakouts
Risk more than OTM but less than ITM call
Highest gamma
Volatility is big concern. Only buy if cheap.
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Benefits and Detriments
Benefits
Moves somewhat in step with stock
Highest gamma
Detriments
Moves somewhat in step with stock
Highest theta
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Strategies
Major Breakout
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Major Breakout
Earnings play, story stock
Spec-ing on a huge directional breakoutActive traders
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Major Breakout: OTM Strike
Out-of-the-money call
Small delta (25 35)
Leveraged spec play
Profits best on big breakouts
Risk less than ATM or ITM call, lowerchance of success
Moves to (and through) high gamma
Volatility is small, but relevant concern
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Benefits and Detriments
Benefits
Very inexpensive (low absolute risk)
Moves to and through highest gamma when
theres a big move
Detriments
Low probability trade
Far at-expiration breakeven
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Trading Iron Condors for Edge
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Iron Condor
Definition: one put credit spread and onecall credit spread on same underlying, insame expiration. Both usually OTM.
Objective(s): Short-Term: Profit from theta while losing little
to statistical volatility.
Long-Term: Watch stock close on between
both break even points at expiration.
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Iron Condor P&(L) Diagram
Longput
Shortput
Shortcall
Longcall
+
-
Stock atexpiration
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Iron Condor Candidates
Technical
Stock in channel
Bouncing off support and resistance that coincides withstrikes
Fundamental No news is good news! Volatility Implied is moderately expensive
Prices
At least 0.30 nominal credit,
Or 15% of strike width of wings
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Iron Condor Example
TechnicalsSource: LiveVol
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Iron Condor Example
Fundamentals
Earnings: just came out
Dividend: N/A
Story: None
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Iron Condor Example
VolatilitySource: LiveVol
Prices not current
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Iron Condor Example
Prices
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Selecting Strikes
Fancy math
Standard deviation
Probability of expiring/touching Fixed percent move
Delta
Support and resistance
Strike width Which long strikes to buy?
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Iron Condor Example
PricesSource: TradeMonster Prices not current
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Iron Condor Example
Buy 1 44 put at 0.51Sell 1 45 put at 0.77
Sell 1 48 call at 0.58
Buy 1 49 call at 0.34Credit 0.50
Max Gain =0.50
Max Loss =0.50
Break Evens = $44.50 and $48.50 Prices not current
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P&(L) Diagrams
Iron condor example
$44 $49$45 $48Stock at Expiration
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Iron Condor Example
Buy 1 44 put at 0.51Sell 1 45 put at 0.77
Sell 1 48 call at 0.58
Buy 1 49 call at 0.34Credit 0.50 stock@ $46.29
Delta = -0.00
Theta = +0.01
Vega = -0.02
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Time Spreads and Edge
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Time Spread Basics
Time spreads: aka calendar spreads, horizontalspreads
Buy one option, sell another that is the same
type, same strike, but a different month. Long time spread, means buying the option with
more time until expiration (i.e. greater value)
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Typical Long Time Spread
Buying Feb-Mar 55 call time spread at 0.78
Courtesy of LiveVol
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Absolute Risk Long Time Spread
P&(L) Diagram
Shared Strike Price
Underlying atexpiration ofshort-term option
Profit
Loss
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Incremental Risk Long Time Spread(Measured by the Greeks)
Delta
Gamma
Theta
Vega
Positive or negative
Negative
Positive
Positive
Buying Feb-Mar 55 call time spread at 0.78
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Example:
Long Time Spread
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Stock Chart Analysis: MGM
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Prices not current
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Long Time Spread
Buy May17-May30 24.5 put time spread at 0.35
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Absolute Risk:
Long Time Spread
24.5
Stock at May17expiration
Profit
Loss
(0.35)
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Incremental Risk:Long Time Spread
Delta
Gamma
Theta
Vega
0
- 16
+ 3
+ 1
Buy May17-May30 24.5 put time spread at 0.35
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Trade Criteria
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Fine Tuning
Verify vols in option chain
Sanity check by reading news
Google finance Yahoo! finance
Other
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More Ways to Generate Incomewith Options
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Income Generating Master Sessions
Finding Great Income Trades
Secrets to Analyzing Income Trades
Legging and Execution Techniques
Complex Income Trades
Adjusting Income Trades
Adjusting Income Trades II
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Income Trading Master Sessions($599 normally)
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This has been a presentation of
Market Taker Mentoring, Inc.MarketTaker.com
Twitter.com/Dan_Passarelli(815) 922-3329