dan passarelli boston 2014

8/10/2019 Dan Passarelli Boston 2014

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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

5


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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

6


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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

10


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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

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

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 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

47

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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Adjusting Income Trades II


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This has been a presentation of

Market Taker Mentoring, Inc.MarketTaker.com

Dan [email protected]

Twitter.com/Dan_Passarelli(815) 922-3329

dan passarelli boston 2014

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