On Sunday, besides these handouts, there will a lot of ... · Sell bull put spread (front month expiration) So we will try to sell a bull put with a shorter expiration in order to
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Risk Reversal TradeRisk Reversal Trade
Risk Reversals are one of the most directionally strong option trades.The standard risk reversal can be bullish or bearish:
1. Bullish risk reversal consists of being long (buying) an out-of-the-money call and being short (selling) an out-of-the moneyput, both with the same expiration date.
2. Bearish risk reversal consists of being long (buying) an out-of-the-money put and being short (selling) an out-of-the moneycall, both with the same expiration date.
Due to the unlimited risk of naked short calls and the very largemargin requirements for short calls, we will not be discussingbearish risk reversals
Example of Bullish Risk Reversal(Assuming ABC is trading for $72.50
Short ABC April 70 Put at $2.10Long ABC April 75 Call at $1.80
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Modified Risk Reversal Steps
1. Identify support and resistance levels
2. Identify a support level you would buy the stock at
3. Find the strike price at or lower than that support level
4. Find the credit for a 2 or 3 strike wide bull put at theabove strike that is in the front month expiration
5. Find the debit for an ATM 40 to 50 delta long call with anexpiration 2 - 3 months from now
6. Compare the credit from the bull put to the debit of thelong call. Look at how many bull puts would have to besold to pay for the long calls debit. Ideally it should beonly 2 bull puts for each long call or 3 maximum
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Modified Risk Reversal
Buy ATM or OTM call 2 or 3 months out
Sell bull put spread (front month expiration)
So we will try to sell a bull put with a shorter expiration inorder to pay for buying a call: Result should be a credit
Buy 1 XYZ 2 to 3 month expiration 95 Call @ 3.50Sell 2 - 3 XYZ 30-day or less 85 Put @ 2.75Buy 2 - 3 XYZ 30-day or less 75 Put @ .75Max Risk is bull puts risk (85 – 75 = 10 – 2.75 + .75) = 8Credit to do trade is .50 (2.75 - .75) * 2 – 3.50This is a trade you do not want to hold until expiration:
Maximum Profit = Theoretically unlimited
Breakeven is calculated by adding the credit/debit to the strike prices so 95- .50 = 94.50 and 85 - .50 = 84.50 are the breakeven levels
Concept: Buying a longer term call avoids rapid time decay while a bullput is time decay positive and should decay faster than the long call
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Considerations for choosing strike prices
• The goal of a risk reversal is to put on the tradewith a credit or a small debit
• It’s important to sell the bull put at a strike youbelieve to be strong support
• It’s important to buy a long call at a strike youbelieve will be ITM during it’s expiration
• You have some discretion as to how to structurethe trade but if the trade doesn’t fit a reallystrong bullish setup, do not force the trade.There’s a limited amount of times when this isthe best strategy to use
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
When to use outrights vs. risk reversals
For outrights look for charts with (we are ignoring IV):
Potential move that doesn’t limit profit potential. Thereshould be a really high risk to reward
In a low implied volatility environment, it’s can be morebeneficial to buy options and not create spreads –especially if implied volatility might rise
For outright buys... a big fast move works best but if thetrend isn’t very strong, a risk reversal can benefit fromsideways trends since the time decay will help.
If buying power is a concern, a long call will use less buyingpower than a risk reversal
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Non-Standard vertical - TimeNon-Standard vertical - Time
Changing Expiration
• Modify verticals to fit your view morespecifically – If you’re bullish for the next 3months should you sell a bull put each monththe next 3 months or sell a 3 month to expirybull put now?
• Potentially less time intensive to manage
• Can benefit more from implied volatilitychanges depending on how the trade isstructured
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Non-Standard vertical - TimeNon-Standard vertical - Time
Example
• Modify verticals to fit your view morespecifically – If you’re bullish for the next 3months should you sell a bull put each monththe next 3 months or sell a 3 month to expirybull put now?
• Potentially less time intensive to manage
• Can benefit more from implied volatilitychanges depending on how the trade isstructured
Changing Strikes – ITM, OTM, ATM• If you want to spend less time managing trades, put a
trade on and only modify it before expiry if it hit acertain price. Consider selling a bull call ITM
• If you’re willing to buy a stock and it’s trading at a 52week low plus it just formed a hammer, you could sellan ATM bull put if you were willing to take assignment
• If you’re considering buying a bull call spread ATM orOTM but you’d prefer to be short rather than longimplied volatility and the spread is expensive, youcould sell a bull put ITM at the same strikes for acredit.
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Non-Standard Vertical - Strike
Example
• If you’re bullish on a stock and think it will goback to resistance in the next 2 months butyou’re less certain if it’ll make it there thismonth or next so a bull call is less appealingsince they require a strong move byexpiration. What if a bull put could be soldITM with the short and long legs both beingITM ?
• If you’re willing to sell a OTM bull put, youshould be willing to sell an ITM bull call withthe same strikes since they’re the same trade
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
• You really want the short leg to expire OTM atexpiration so technical analysis is key to howwell this trade will work
• Be aware of any upcoming dividends since ITMshort options – especially calls are subject toearly exercise risk. If the extrinsic value of ashort option is less than the amount of thedividend, assignment is likely
• A steady trend is more favorable to this tradesince rising/falling windows can cause significantchanges to ITM options
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Non-Standard Verticals & implementation
Strategy When to Use Implementation
Long Term BullPut
You have a strongsupport level or want tobe in a trade longerterm. Implied volatilitybeing high and decliningis an additional benefit
Sell a 2 to 3 monthout bull put OTM ata strong supportlevel
ITM Bull Put Chart shows strongbullish setup but notsure when it will go upso a bull call isn’tpreferred. Impliedvolatility being high isan additional benefit
Sell a 45 to 60 day(however long youthink the move willtake) put with thelong ATM and theshort at resistance
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Vertical Spread ReviewVertical Spread Review
Vertical spreads can be debit spreads (bear put, bull call) or creditspreads (bull put, bear call). An iron condors is two credit spreads:
1. Bear Call –Have two different strikes with the same expirationperiod for both strikes. The long option has a higher strike andthe short option is at a lower strike closer to ATM than long
2. Bull Put– Have two different strikes with the same expirationperiod for both strikes. The short option has a higher strike andthe long option is at a lower strike closer to ATM than long
Example with ABC at 60
Long ABC February 75 Call at $1.20Short ABC April 70 Call at $3.10Short ABC April 50 Put at $3.10Long ABC February 45 Put at $1.20
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Iron Condors
Identifying support and resistance is key to this tradeAll option strikes have the same expiration – near monthAll option strikes are placed OTMSell calls and puts closer to ATM than the long optionsBuy calls and puts 1 or 2 strikes farther OTM than shorts
Buy 1 XYZ 30-day 100 Call @ .50Sell 1 XYZ 30-day 90 Call @ 1.25Sell 1 XYZ 30-day 70 Put @ 1.25Buy 1 XYZ 30-day 60 Put @ .50Max Risk is the width of the widest spread – credit100 – 90 -.50 + 1.25 + 1.25 - .50 = 8.50
At expiration:
Maximum Profit = Credits received from both credit trades
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Considerations for choosing strike prices
The short call option strike should ideally be one or tworesistance levels away from the ATM price
The short put option strike should ideally be one or tworesistance levels away from the ATM price
A minimum credit to fit your commissions should be established –probably around 10% for each vertical
Stock is at in a box range or has recently established support andresistance with 45 being the middle of the box range withresistance at 50 and 40 being support
•Sell 50 call (or farther out strike) in front month•Buy 52.50 or 55 strike call to hedge the short call•Sell 40 put (or farther out strike) in front month•Buy 37.50 or 35 strike call to hedge the short put
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Iron Condor Uses
• Good to use if your view is range bound until optionsexpiry
• Creates two trades that benefit from time decay
• One of the trades will be profitable since the underlyingcan only expire at one price
• High implied volatility that declines is beneficial
• Can create income if successfully traded consistently
• Can also leg into this spread by selling one of the verticalsfirst by either selling the bear call first on a rollover or bullput after a bounce off of support
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
• Iron condors are typically shown as marketneutral trades but it is possible to bias one“wing” i.e. vertical making up the iron condor
• One of the verticals can be placed closer tobeing ATM than the other vertical i.e. if ABC isat 80 selling a 90/85/70/65 iron is more bearish
• One of the verticals can be wider than the othervertical i.e. if ABC is at 80 selling a 90/85/75/65iron is more slightly more bullish. In this case$10 in margin will be withheld since the wider ofthe two verticals is how margin is usuallydetermined but it can vary with brokers
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
When to use Calendars vs. irons
For calendars look for charts that (we are ignoring IV):
Typically don’t stay in a box range for long and typicallytrend
Less confidence that support or resistance will hold butmore confident that price will eventually hit the short strikeprice to maximize the calendars profitability
Have a lot of rising or falling windows. A volatile priceenvironment like this typically is less favorable to ironcondors
Provide a likely target that the calendar can reach. Ironcondors don’t have targets but want to stay away from theshort strikes.
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Calendar StructureCalendar Structure
It’s possible to sell a calendar spread but due to the unlimited risk ofnaked short calls, we will be discussing long put and call calendars only
•Both the short and long legs use the same strike but have differentexpirations which is where the name calendar spread comes from
•While time decay is a primary benefit to long calendars, a rise in impliedvolatility would also be beneficial
•Calendars are typically opened and closed as a combined spread tradebut the legs of the spread can be opened and closed individually
•Calendars are an “open ended” spread – meaning that multiple shortoptions can be sold against the long option over time since the long legin the calendar has a longer expiry so it’s important to keep track of thecost basis of a calendar in order to ensure profitability
•The goal of a calendar is for the short leg to expire and provide enoughcredit to compensate for the smaller time decay in the long option. Thelong can also benefit from directional movement
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Calendar DifferencesCalendar Differences
Disadvantages• High Cost
• Less Certainty of potential profitability since theamount of premium that will be received when sellingshort options against the long in the future is uncertain
• Requires more careful management and typicallymore time to manage than other spread trades
• Long leg is susceptible to volatility crush – If the longoption is bought at periods of high IV and IV goesdown over time, the long may lose more money thanthe shorts take in in premium
• Potential risk of assignment if the short option goesITM. If the short leg goes ITM it can lose more moneythan the long can make
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Considerations for choosing strike prices in Calendars
Calendars are not a very strongly directional tradesince the strikes are the same so the strike chosengives the trade it’s directional strength.
Short options are typically placed OTM to avoid anearly assignment risk
Call Calendar Example:Stock is at support area @ 45 with resistance at 50•Buy 50 call 90 days or longer to expiration•Sell 50 call in front month or weekly (to lessencost of trade and the stock will likely slow down atresistance
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Call Calendar
Buy OTM 95 strike call 3 or more months out
Sell OTM 95 strike call (front month or weekly)Which of these two strikes will be more worth more?
So we will be buying the more expensive farther expirationstrike call - and selling the front month call: Result is netcost to you - hence a debit call spread
Buy 1 XYZ 90-day or longer 95 Call @ 3.50Sell 1 XYZ 30-day 95 Call @ .75Max Risk is Net Debit (2.75)At expiration:
Maximum Profit = Net Debit (2.75) plus any future short options sold
Breakevens for the downside and upside can’t be done in a single equation. Delta andimplied volatility are the primary inputs. Use a risk graph tool.
Breakevens also change as more short options are sold.
Concept: Buy a longer term call to benefit from a longer termmove but give up profit potential to lower risk
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Put Calendar
Buy OTM 95 strike put 3 or more months out
Sell OTM 95 strike put (front month or weekly)Which of these two strikes will be more worth more?
So we will be buying the more expensive farther expirationstrike put - and selling the front month put: Result is netcost to you - hence a debit put spread
Buy 1 XYZ 90-day or longer 95 put @ 3.50Sell 1 XYZ 30-day 95 put @ .75Max Risk is Net Debit (2.75)At expiration:
Maximum Profit = Net Debit (2.75) plus any future short options sold
Breakevens for the downside and upside can’t be done in a single equation. Delta andimplied volatility are the primary inputs. Use a risk graph tool.
Breakevens also change as more short options are sold.
Concept: Buy a longer term put to benefit from a longer termmove but give up profit potential to lower risk
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Types of Calendars & implementation
Strategy When to Use Implementation
Put Calendar You have a slightlybearish/stagnant trendor want to hedge somedownside risk. Ideal fora longer term trade withflexibility to changestrikes later
Buy a OTM longerterm put and sell aOTM shorter termput with a lowerstrike and shorterexpiration at asupport level
Call Calendar You have a slightlybullish/stagnant trend orwant to hedge someupside risk. As a longerterm trade with flexibilityto change strikes later
Buy a OTM longerterm call and sell aOTM shorter termcall with a higherstrike and shorterexpiration at aresistance level
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Spread ReviewSpread Review
Every option spread contains one or two of the basic types of spreadsthat more advanced spreads consist of:
1. Vertical Spreads – Have two different strikes i.e. higher andlower strikes for the bought and sold options hence the nameverticals with the same expiration period for both strikes
2. Calendar Spreads – Have the same strikes for the bought andsold options with two different expiration periods hence thename calendars
What is a diagonal then? It combines a vertical and calendarspread with a spread with different strikes and differentexpirations
Example
Long ABC April 70 Call at $3.10Short ABC February 75 Call at $1.20
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Diagonal DifferencesDiagonal Differences
Disadvantages• High Cost
• Less Certainty of what premium will be received whenselling short options against the long in the future
• Requires more careful management and typicallymore time than other spread trades
• Long leg is susceptible to volatility crunch – If the longoption is bought at periods of high IV and IV goesdown over time, the long may lose more money thanthe shorts take in in premium
• Potential risk of assignment if the short option goesITM. If the short leg goes ITM it can lose more moneythan the long can make
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Considerations for choosing strike prices for bull call Calendar
Think of bull call calendar as a long call trade witha lower cost and the ability to continue to lower thecost by selling short calls over time.
Stock is at support area @ 45 with resistance at 50•Buy 45 call 90 days or longer to expiration•Sell 50 call in front month or weekly (to lessencost of trade and thereby reduce the trades risk)
Using resistance:• Higher strike should be resistance area.• Rationale: Max profit (at expiration) when higher
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Bull Call Calendar Uses
• Good to use if your view is that IV is low and may rise
• Lessens time decay issues involved with buying outrightcall.
• Selling calls lessen the cost of a trade.
• More important for market to rally than with bull putspread but less important than a bull call spread
• Can be a good alternative to an outright buy when there isa target move of 5% to 10% so premium on short call isworth selling and you don’t expect to give up too muchupside potential.
• Can also leg into this spread after a favorable movebuying the long option first and later selling a short call.
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Considerations for choosing strike prices for bear Put calendarspreads
Think of bear put calendar as a long put trade with a lowercost and the ability to continue to lower the cost by sellingshort puts over time.
With the market at resistance area @ 45:Buy a 45 put around 90 days to expirySell a 40 put in the front month or weekly at a support area
Using resistance:• Higher strike put should be resistance.• Rationale: Max profit (at expiration) when underlying
price is at lower strike (short) since the short put wouldexpire worthless and keep entire credit plus allow foradditional selling of short puts and allow for long put gain
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
When to use outrights vs. diagonals
For outrights look for charts with (we are ignoring IV):
Potential move that doesn’t want to limit profit potential aswith a spread.
Higher confidence support (for calls) or resistance (puts)will hold (as compared to diagonal spreads where if I haveless confidence may want to be able to leg out if I switchforecast or directional bias)
For outright buys... a big fast move works best but if thetrend isn’t very strong, a diagonal can benefit from slightlybearish or bullish trends since the time decay will help.
Outrights need room to move while diagonals benefit frombox ranges and clear support/resistance
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Chart Challenge
1) What is the most recent candle signal?2) What support or resistance seems strong here?3) Given what you know about options now, you canchoose a directional trade or non-directional i.e.range-bound trade. Which type would you choose ?4) What is the stop?5) Which option strategy would you do and why ?
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Chart Challenge
1) What is the most recent candle signal?2) What support or resistance seems
strong here?3) Given what you know about optionsnow, you can choose a directional trade ornon-directional i.e. range-bound trade.Which type would you choose ?
4) What prior candle signals can be aguide for how to structure a trade?5) Which option strategy would you doand why ?
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Chart Challenge1) What are the most recent candle signal(s)?2) What support or resistance seems strong here?3) You can choose a directional trade or non-directional i.e. range-bound trade.Which type would you choose ?
4) Where should a stop be placed?5) Which option strategy would you do and why ?
Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012
www.nisonoptionsacademy.com
Chart Challenge1) What is the most recent candle signal?2) What support or resistance seems strong here?3) You can choose a directional trade or somewhat-
directional i.e. profitable up and sideways or down andsideways trade. Which type would you choose ?
4) Where should a stop be placed?5) Which option strategy would you do and why ?