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It's been a while since I wrote just a pure column for members, and I think it is about time to update everyone on where my firm is, how the Anchor strategy is performing, and my general thoughts on the markets before the end of the year. Since most people care more about the markets, I'll give my general thoughts on those, and I'll save the professional updates to the end.
As always, note these are my opinions only, I am not able to predict the future, and you should form your own opinions before making any investment decisions. If anyone has any questions, I welcome your posts, emails, and even calls.
Welcome to Steady Condors!
We are pleased to introduce an addition to SteadyOptions - the "Steady Condors" monthly income strategies. Steady Condors is a combination of low maintenance and market neutral options income strategies with a strong emphasis on risk management and proper position sizing, as well as minimizing drawdowns. In addition to providing trades and education on the forum, we are offering the Steady Condors portfolio as a separate service. We intend to autotrade it in 2014 with Global Auto Trading and potentially more brokers.
We would encourage everyone to read the Steady Condors Frequently Asked Questions and the Steady Condors Strategy (members only) topics. Those two topics should provide answers to the majority of your questions, as well a detailed discussion on what the Steady Condors is all about.
Those who have been trading options on major indexes like RUT, SPX or NDX know that those options behave differently from regular options. They usually stop trading on Thursday however the settlement value is not determined until the market opens the following day (Friday). But that's not all.
Last year I wrote an article for Seeking Alpha Google Options Underestimated The Risk Again. Looks like history repeats itself. On Thursday Google reported blowout quarter and the stock rallied the next day a whopping 122 points (13.8%). The options markets implied a 33 points move.
Over the last few years, Apple used to report earnings during the week after the monthly options expiration, meaning the fourth week of the first month of the earnings cycle (January, April, July and October). This cycle was expected to be no different. However, two days ago Apple surprised the trading community and announced that they will report earnings on Monday, October 28. What does it mean for the options traders?
This article includes a simplified explanation of the basics of options trading
Stocks, mutual funds, and gold are some of the common forms of commodities in the stock market today. Unfortunately, not a lot of people know about options trading, especially the non financial-savvy people. Coming across the term and researching about it on most financial websites may be difficult for most due to the number of jargons that are only used in financial circles. As such, this article provides a basic explanation about it for those who are interested in learning about the topic. Basically, options trading is similar to trading the aforementioned commodities but with a different risk.
As some of you know, Investimonials.com is "a place to discover the best financial products...and to weed out the worst." In fact, many of current and former SteadyOptions members found us on Investimonials.
What you might not know is that SteadyOptions is currently ranked #1 out of 705 newsletters on Investimonials. This is a remarkable achievement after being in business for less than 2 years. Many newsletters post testimonials on their website, and you not always can know how real those testimonials are. Our reviews are posted by a third party website, so you can be sure they are all real, from members that actually have used the service.
So please check out what our members say about SteadyOptions.
A mathematician who lived from 1170 to 1250 named Leonardo Pisano Bogollo introduced the Fibonacci sequence to the West, and tools based on that number sequence are still used by traders and other occupations today. What Leonardo found was a mathematical property that exists throughout nature and his sequence of numbers, called the Golden Ratio. This ratio is found in sunflowers, the Pantheon spiral galaxies and other natural and manmade structures. Nature, and humans which are a part of nature, seem to gravitate toward the Golden Ratio in such ways as how we assess beauty and buy and sell to determine market prices.
The following post is presented by TraderMinute to SteadyOptions members and readers. SteadyOptions members and readers will get one month for free, please see details below.
TraderMinute.com launched in March of 2013 with its 1st public $100K challenge. The Challenge is a unique concept where we try to turn $3,000 into $100,000 in only 4 months! We use a live brokerage account and allow active subscribers to follow each and every trade in real time via email, text, and real-time video.
I'm pleased to present a guest post from Mercedes Oestermann van Essen.
Mercedes is a trader, author and trading psychology coach. She has traded her own account since 2001, trading stocks, futures, FX and commodities. She is an author of the Buddhist Trader.
I'm pleased to introduce the Ez Trade Builder to SteadyOptions members.
Ez Trade Builder was developed by EzTrade, company that since 1996 has been a leading player in the Option Analytic Software space. EzTrade was founded by Vladimir Furman, mathematician by training who worked with world famous option traders to developed cutting edge software and advisory services.
SteadyOptions members will get a special discount when purchasing the Ez Trade Builder.
When we are looking at potential options trades, one of the most important things we need to consider is the options liquidity.
There are few factors that impact the options liquidity:
- The bid/ask spread.
- The volume.
- The Open Interest (OI).
- The strikes.
- The time to expiration.
In the first half of 2013, SteadyOptions produced a 75.6% ROI (Return On Investment), based on maximum of 6 open trades. By allocating 10% per trade (and leaving at least 40% of the account in cash), the account would grow by 45.3%. Please note that those results are based on real fills, not hypothetical performance, and exclude commissions, so your actual results will be lower.
2006 was an interesting year. I had great wins and great losses as well. During the 1st half of 2006, most of my trading was based on predicting where the market was going. This required hard work, real-real hard work vs. what some might say that it’s easy. However, still the rewards weren’t consistent. So I started my search for consistency and started to lower my expectation on returns. I met with my friend Krishna S. whose thinking made me rethink about my way of trading and transformed me into an “income trader”. Starting Sept’06, I have been trading spreads and mostly “market neutral spreads”. I no longer speculate where the market is going and don’t look for making 100% in a jiffy. This doesn't mean one style is better than other; it’s what suits your style best. Contrary to popular belief, Options’ trading is not easy. As Dan Sheriden says, it’s a craft and it takes time. One needs to learn craft, readjust and master it before you start sailing in the sea.
A credit spread is an options strategy in which the premiums received from the short leg(s) of the spread is greater than the premiums paid for the long leg(s), resulting in funds being credited into the option trader's account when the position is entered. When used correctly, credit spreads can be a very profitable strategy resulting healthy monthly returns. When you combine a bull credit spread with a bear credit spread, the resulting position is called an Iron Condor.
A lot of option trading websites promise you to make 10% per month with Iron Condors. Is this true? Well, it is actually not that hard to make 10% per month with iron condors. The problem is, in order to make 10% on your entire account, you would need to place ALL capital into Iron Condors. If you do that, it's only matter of time till your account is toast.
Does the Holy Grail even exist?
Internet is full of hype from people who claim that they found the Holy Grail of Investing. "Make 10% per month in just 10 minutes per week". Do you really believe that? Some people do. I can tell you with full responsibility that whoever claims to have the Holy Grail is either lying or has not been in this business for long enough.
This is why when my good friend and hedge fund manager Chris Welsh told me about his Anchor Strategy that aims "to prevent loss of capital in market downturns while still generating a positive net return in all market conditions", I was a bit skeptical. Isn't that the Holy Grail, which we know does not exist?
I'm pleased to announce that SteadyOptions has launched a new portfolio called "Anchor Trades". This is a stocks/options portfolio tailored for longer term conservative investors. It requires much less monitoring than the current SteadyOptions portfolio while still targeting positive returns in all market conditions on an annual basis.
A while ago I got an email from one of my Seeking Alpha readers. He told me that he is a big fan of my articles and asked how he can learn more. Then he said that he is new to trading options, he set aside a small amount of money in hopes of doubling it at least yearly.
Did you get it? The guy admits to be new to options, but expects to double his account at least yearly? I told him that for someone who just starts options trading, preserving your capital during your first year of trading would be a great achievement.
April was an excellent month for SteadyOptions. We closed 16 trades in April, 13 winners and 3 losers. Total gain in April was $2,032 based on $1,000 allocation per trade. Assuming maximum of 6 trades open (the average number is lower), that's 33.9% non-compounded gain. Most Fund Managers don't make those returns in a full year.
Despite a healthy beat and dividend hike, shares of Apple (AAPL) are slightly down in after hours trading. They have lost now almost half of their value in the last 6 months.
During 2012, I warned several times that Apple has gone up too far too fast. When the stock was going up almost every day for no visible reason, I asked a simple question: what do we know today that we didn't know a month ago?
When a fellow Seeking Alpha contributor Kevin O'Brian promised back in September to write an article "on Kim Klaiman's/Steady Options trading approach and why it doesn't work as advertised.", I was pretty excited. I have over 10 years of experience in the stock market. However, unlike Kevin who claims to "know basically all there is to know about options", I'm still learning. I will be learning as long as I breathe. So despite my 152% ROI in 2012, I really wanted to know why my approach doesn't work. Maybe it was all just a fluke?
I just finished reading Option Strategies for Earnings Announcements book by Ping Zhou and John Shon. It introduces several ways to exploit option trading opportunities around earnings news.
Chapter 8 is especially relevant to what we are doing at SteadyOptions. It examines a strategy of "buying volatility" in the days or weeks prior to the earning announcements by longing straddles/strangles and closing the positions a day before the announcements when implied volatility is at its highest level.
It never stops to amaze me. I'm talking about the creativity of some options "guru" when it comes to presenting their track record. "Maximum profit potential", "Cumulative return", "90% winning ratio", "Annualized return" are just few of the tricks used in the industry to entice you into joining their website.
This article describes some of the tricks used to make performance numbers much better than they are.
Happy New Year everyone! Wishing you and your families a lot of health and happiness in 2013.
It's hard to believe that it has been a full year since SteadyOptions (SO) started as a public service. Overall, we had an excellent year. We did 271 trades which produced a $9,149 gain, based on fixed $1,000 allocation per trade (non-compounded). Assuming maximum of 6 trades open (the average number is much lower), that translates to 152.5% ROI. We had only two losing months and the maximum drawdown was around 10%. Check out the Performance page to see the full results. Please note that those results are based on real fills, not hypothetical performance.
I'm glad to present a guest contributor article from Marcus Holland, the editor of FinancialTrading.com – a new but fast growing education resource on all aspects of financial trading
To understand how the expiration date of an option influences the price, one first needs to understand how the price of an option is calculated in the first place. While the standard formula to calculate options prices, the Black-Scholes model, is very complex and requires advanced knowledge of statistics, for most traders it is sufficient to understand the basics involved.
November was a good month for SteadyOptions. We closed 35 options trades in November, 20 winners and 15 losers. Total gain in November was $1,000 based on $1,000 allocation per trade. Assuming maximum of 6 trades open (the average number is much lower), that’s 16.7% non-compounded gain.
There is a lot of confusion and misconception about debit and credit spreads. One of the most common misconceptions:
"One of the many drawbacks of a credit spread is that it will tie up so much capital."
“Selling credit spreads is like picking up pennies in front of a steam roller.”
Options trading is becoming more and more popular every year. The options become more liquid and more traders use them for hedging, speculation, income etc.
Weekly options, first introduced by CBOE in October 2005, are one-week options as opposed to traditional options that have a life of months or years before expiration. Not every stock or index has weekly options. For those that do, it basically means that every Friday is an expiration Friday. That opens tremendous new opportunities but also introduces new risks which can be much higher than "traditional" monthly options.
Google (GOOG) reported earnings on Thursday, July 19, 2012, after the market close. My favorite way to play Google earnings is by placing a reverse iron condor few days before earnings and selling it before the announcement when IV (Implied Volatility) spikes. This cycle the strategy played out especially well for Google.
As we all know, risk and reward are directly related in trading. You must take more risk to get a larger return on the trade. There is a third parameter, which is related to a potential return: probability of success. A higher probability of success translates to lower potential return and vice versa.
There are many ways to play earnings. Some people prefer to play them directionally, buying calls or puts. I think that earnings are unpredictable; hence I prefer to play them non-directionally.
I decided to check how some of the popular high flying stocks performed this earnings cycle.
As a non-directional trader, I'm trying not to be dependent on the market direction. My goal is to make money in any market. To achieve that goal, I need to constantly balance my portfolio in terms of direction and volatility.
When playing the pre-earnings trades, it is very important not to overpay in order to increase our odds. Determining what is a good price is not easy. Lets try to see what are the factors impacting our decision.
Apple (AAPL) closed April 16 at $580.13, down 10% from its all-time high of $644. It is now down for five consecutive days, something that hasn't happened since last October. What is behind the selloff and what does it mean for the stock?
In one of my previous articles, I argued that Apple might have become a speculative stock. Today I must ask the same question I asked a week ago: What do we know today that we didn't know a week ago? What caused the stock to lose $65 billion in market cap in just one week? The obvious answer is: speculation.
Apple (AAPL) reports earnings on Tuesday, April 24, 2012, after the market close. There are many ways to play earnings. Some people would bet on the direction of the stock movement after the announcement and then buy or short the stock. Others will buy call or put options.
My opinion is that predicting the market reaction to earnings is an extremely difficult task. In the case of Apple, the options expiration is just few days after the announcement, so if you are wrong, you are likely to experience a very big loss.
Last week, I presented 5 ways to play Google's (GOOG) earnings non-directionally. The stock moved 4.06% after the announcement, much less than expected. I would like to do some analysis how those trades turned out and what we can learn from them.
Apple (AAPL) will report earnings on Tuesday, April 24, 2012, after the market close. Will it be another blowout quarter? Many people are sure it will.
Looking at the last couple years, the stock has a tendency to run up at least 3-5% during the last couple of weeks before earnings. Simply buying OTM (Out Of The Money) calls two weeks before earnings and selling them before the announcement would work well most of the time.
About six months ago, I came across an excellent book by Jeff Augen, “The Volatility Edge in Options Trading”. One of the strategies described in the book is called “Exploiting Earnings - Associated Rising Volatility”. Here is how it works:
- Find a stock with a history of big post-earnings moves.
- Buy a strangle for this stock about 7-14 days before earnings.
- Sell just before the earnings are announced.
Options can be risky, even very risky, but they don't have to be. Today I'm starting a series of articles about options trading. I will show you how options can be less risky or more risky, depending on your risk tolerance. I will show you that there is more than one way to make money with options. I will expose some of the myths and misconceptions about options trading.
Let me begin by saying this: I think that Apple (AAPL) is one of the greatest companies in history. I love the company and own some of its products. But I wouldn't trade it right now.
In this article, I will try to describe the price action on Apple from an options trader perspective.
I'm asked many times how I choose between Straddle, strangle or RIC for my pre-earnings plays.
It's always a balance between risk/reward. As we know, those trades are supposed to be sold before earnings. They benefit from IV jump and/or price movement. The biggest (and basically the only) enemy is the negative theta.
In one of my previous articles, I described the craziness around Apple (AAPL) options as reflected by the options premiums. At some point, the IV (Implied Volatility) jumped to 41%.
I presented the following butterfly trade as one possible way to take advantage of this inflated IV:
In my article Why I Wouldn't Trade Apple Right Now, I argued that Apple (AAPL) has gone up too far too fast with no visible reason or significant news.
The article provoked a very healthy and long discussion. Unlike many other public forums and discussion boards, the discussion was very civilized and intelligent. This is the power and the beauty of the Seeking Alpha community.
Last week, I came across an SFO Weekly Column by Jeff Augen, a well known private investor, educator and author of several investment books.
Google (GOOG) reports earnings on Thursday, April 12, 2012, after the market close.
There are many ways to play earnings. Some people would bet on the direction of the stock movement after the announcement and buy or short the stock. Others will buy call or put options. My opinion is that predicting the market reaction to earnings is an extremely difficult task. In case of Google, the options expiration is the next day after the announcement, so if you are wrong, you are likely to experience a 100% loss.
There is no doubt that Apple (AAPL) had a remarkable run in the last three months. It reached another all time high Thursday at $633.
Some people would argue that it's gone up too far too fast. Others say this is only the beginning, based on the fact that the stock is still cheap. Maybe you fall somewhere in between. You think that the company is going to have another blowout quarter and the stock will easily go up another 10% after earnings. But you are also cautions and realize that any mistake or earnings miss might cause a selloff.