Happy New Year everyone! Wishing you and your families a lot of health, prosperity and happiness in 2016.
2015 marks our fourth year as a public service. We had a fantastic year. We closed 129 trades in 2015 which produced 195.6% ROI (117.3% gain on the whole account based on 10% allocation). The ROI is based on fixed $1,000 allocation per trade (non-compounded) and 6 trades open. The winning ratio was pretty consistent around 75%. We had only one losing month in 2015. Check out the Performance page to see the full results. Please note that those results are based on real fills, not hypothetical performance.
We are getting a lot of questions about our auto-trading program. Specifically, people want to know how it works, why we auto-trade some strategies and don't auto-trade others etc.
Auto-trading is basically money management, but vast majority of newsletters are not licensed to manage money. Would you give your hard earned money to amateurs? I assume most people would give a negative answer to that question - yet, by participating in Auto-trading program, this is exactly what they do. Is it stupidity or ignorance? You decide.
Thirty years ago, legendary trading coach Dr. Van K. Tharp sat down with two top traders Ed Seykota and Tom Bassoand and discussed the importance of psychology in trading. They decided that the factors of trading could be broken down as:
- 10% Trading System
- 30% Money Management
- 60% Psychology
We can argue about the exact percentage, but there is no doubt that Psychology plays HUGE role in trading success.
In our continuous effort to expand our strategies, few weeks ago I presented a new exciting strategy to SteadyOptions members. The strategy is buying a Reverse Iron Condor (RIC) before earnings on stock with history of big post-earnings moves. RIC benefits from a big post-earnings move, but requires less movement than a straddle or strangle.
The assumption is that with careful stock selection, this strategy has a very high probability of success. I performed extensive backtesting on number of stocks, and the results were very promising. Stocks like AMZN and LNKD showed average gains of 30-35%. However, I also mentioned that this strategy has higher risk than other strategies that we use since earnings are unpredictable. High Probability High Risk is the right definition of this strategy.
Many people say that it's too good to be true after looking at our performance page. In fact, if you had a nickel for every time you heard some investing “guru” cherry-pick advice to look good, you wouldn’t need to invest anything because you would have a fortune.
SteadyOptions provides great options trading education, but is also striving to be one of the industry leaders in terms of honesty and transparency. Our performance reporting is on the whole account and based on real fills. We put our money where our mouth is. Our members already know that we execute all trades that we share with members in our personal accounts. You can read here what our members think about us.
But today I'm going to take one more step toward complete transparency. I'm going to provide an additional reference to the current and prospective members and share with you my personal account performance. I'm going to show you the summary of my actual 2015 account statement, directly from my broker.
This week we closed our December trades with gains of 6.7% on margin, and 5.1% return on 20k unit. This makes the 2105 year non-compounded return 46.7% on a whole account (including commissions). If we reported returns like most other services do (Compounded ROI before commissions), we would report 80.8% gain.
As you noticed, we closed our December trades two weeks before expiration, to reduce the negative gamma risk. We recommend reading the Why You Should Not Ignore Negative Gamma article to understand the gamma risk.
Gamma measures the rate of change for delta with respect to the underlying asset's price. The gamma of an option is expressed as a percentage and reflects the change in the delta in response to a one point movement of the underlying stock price.
Like the delta, the gamma is constantly changing, even with tiny movements of the underlying stock price. It generally is at its peak value when the stock price is near the strike of the option and decreases as the option goes deeper into or out of the money. Options that are very deeply into or out of the money have gamma values close to 0.
The option's delta is the rate of change of the price of the option with respect to its underlying price. The delta of an option ranges in value from 0 to 1 for calls (0 to -1 for puts) and reflects the increase or decrease in the price of the option in response to a 1 point movement of the underlying asset price.
Far Out-of-The-Money options have delta values close to 0 while Deep-In-The-Money options have deltas that are close to 1.
Investopedia defines vega as:
The measurement of an option's sensitivity to changes in the volatility of the underlying asset. Vega represents the amount that an option contract's price changes in reaction to a 1% change in the volatility of the underlying asset. Volatility measures the amount and speed at which price moves up and down, and is often based on changes in recent, historical prices in a trading instrument. Vega changes when there are large price movements (increased volatility) in the underlying asset, and falls as the option approaches expiration. Vega is one of a group of Greeks used in options analysis, and is the only one not represented by a Greek letter.
The options theta is a measurement of the option's time decay. The theta measures the rate at which options lose their value, specifically the time value, as the expiration date gets closer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option's value will decrease every day. In other words, an option premium that is not intrinsic value will decline at an increasing rate as expiration nears.
In my previous article I described why we sell our earnings straddles before earnings.
As a reminder: “There are many examples of extraordinary large earnings-related price spikes that are not reflected in pre-announcement prices. Unfortunately, there is no reliable method for predicting such an event. The opposite case is much more common – pre-earnings option prices tend to exaggerate the risk by anticipating the largest possible spike.”
So if options are on average overpriced before earnings, why not to sell those options and hold the trade through earnings?
Our regular readers know that buying a straddle few days before earnings is one of our favorite strategies. IV (Implied Volatility) usually increases sharply a few days before earnings, and the increase should compensate for the negative theta. If the stock moves before earnings, the position can be sold for a profit or rolled to new strikes. I'm asked many times why we sell those trades before earnings.
By Gagan Gautam, CEO & Founder @ www.optionsherald.com
U.S. Market has seen a bullish run since 2009 after its tragic collapse in 2007-2008. It has been more than 5 years of partying on Wall Street and now it looks like the market needs correction and “introspection”. There are various economic indicators that rationalize our belief that the market is now headed for a correction.
This article is presented by Dan, founder of Theta Trend, a site focused on simple, objective options trading with an awareness of trend.
The other day I was having a conversation with an options blogger and he asked me how I traded. When I told him that my primary trade is the Butterfly, he was surprised and said I was one of the first people he met who regularly traded Butterflies. In a world where Iron Condors get all the love, it wasn't the first time I had that conversation. I've traded a wide range of options strategies, but, for a number of reasons, the Butterfly is my preferred trade.
There are about 72 options trading strategies. There are three most commonly used options strategies: bullish, bearish and neutral or non-directional.
The following infographic describes the top 10 options strategies: Covered Call, Protective Put, Long Call, Long Call Spread, Long Put, Long Put Spread, Long Straddle, Long Strangle, Collar and Iron Condor.
August is finally behind us. It was a worst month in 3 years, with most major indexes down 6-8%. The Dow Jones Industrial Average ended August with the steepest monthly loss in more than five years. At some point the markets entered the correction territory, after declining more than 10%.
What's ahead of us? Are the markets going to retest the August lows? Or we are going to see a rebound? Will it be another V-shaped recovery?
Experienced traders know that nothing teaches you more than losing trades. And the bigger the loss, the more you learn.
Today I would like to dissect our biggest loser in the last 2 years.
This year's sideways market has been very kind to calendar trades. We booked few very nice winners with SPX and RUT calendars. When we opened another SPX calendar on August 5, I expected another nice winner. But the market had very different plans.
Our regular readers already know that pre-earnings straddle is one of our favorite strategies. The idea is to buy a straddle few days before earnings and take advantage of increasing IV (Implied Volatility) before earnings. IV usually increases sharply a few days before earnings, and the increase should compensate for the negative theta. If the stock moves before earnings, the position can be sold for a profit or rolled to new strikes.
You can read more about this strategy in my post How we trade straddles and strangles.
Tesla reported earnings this week, and the stock took a hit due to weak guidance. The bears will tell you that this is the beginning of the end. The bulls will see it as a buying opportunity of the century.
No matter how you see it, there is no doubt that this is a very risky stock, both for the bulls and for the bears. As a non-directional traders we don't really care. I would like to present a less risky way to trade TSLA, with a good chance to make money no matter what the stock does.
This video provides an introduction to options trading concepts and options types. The video also demonstrates the difference between options and stocks.
Options trading represents a world of investment opportunities to traders and investors. In basic terms, an option is a contract/deal which lets a person to buy or sell an underlying asset before or on the specific date and at a specific price. A trader can trade options by two ways; either by buying a certain asset at a specific price within a specific time period called Call Option or by selling an asset at certain price and within specific time called Put Option.
Since I started an options trading newsletter over 3 years ago, I met a lot of interesting people. I also learned a lot about human psychology.
I would like you to take a look at this article. It provides some good perspective about Wall Street and human emotions.
Today we closed our VIX calendar trade for $0.80 credit, after opening it just two weeks ago for $0.25 debit. What percentage gain did we make?
This is not a tricky question. Well, maybe a little bit. Any high school student would tell you that 0.80/0.25=220% gain. Correct?
Not so fast.
While most major indexes continue to straggle, SteadyOptions continues to deliver strong gains. SteadyOptions flagship service produced 121.5% ROI in First Half 2015, based on fixed $1,000 allocation per trade (non-compounded) and 6 trades open. This translated to 72.9% return on the whole account, based on 10% allocation per trade. The winning ratio was a remarkable 82%. Check out the Performance page to see the full results. Please note that those results are based on real fills, not hypothetical performance.
In simple terms, implied volatility is the amount of stock price fluctuations. Being on the right side of implied volatility changes can enhance the chances of success.
In general, implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets.
Trading options without an understanding of the Greeks is like flying a plane without the ability to read instruments. Unfortunately, many traders do not know how to read the Greeks when trading. This puts them at risk of a fatal error, much like a pilot would experience flying in bad weather without the benefit of a panel of instruments at his or her disposal.
In this article, I will try to describe how to use the options Greeks to your advantage.