Presents Mastering the Markets Trading Earnings

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Moris Lloyd
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1 Presents Mastering the Markets Trading Earnings 1

2 DISCLAIMER Neither MasterMind Traders or any of its personnel are registered broker-dealers or investment advisors. We may mention that we consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because we consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that we are telling you to trade these exact strategies or securities. Keep in mind that we are not providing you with any specific recommendations or personalized advice about your own trading activities. The information we are providing is not tailored to any particular individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security, or a suggestion that it is suitable for any specific person. Keep in mind that all trading ALWAYS involves a risk of loss, even if we are discussing strategies that are intended to limit risk. Also MasterMind Traders personnel are not subject to trading restrictions. Myself and any others at MasterMind Traders could have a position in a security or initiate a position in a security at any time.

3 Practice First There is risk involved in any form of trading! The strategies taught in this workshop are designed to teach advanced direction neutral Option trading strategies. You must practice these concepts and apply them in unfunded trading until you understand them and are comfortable with them before you ever use them in a funded trade!

4 Let s review Strangles

5 The Basic Strangle Strategy Basic Concepts The basic Strangle is an Option Strategy that is direction neutral at the onset of the trade. It is typically done when the trader expects a large move, but does not have a bias on the direction. The trader buys an OTM Call and an OTM Put. Max risk is realized if the Stock price stays between the two Option Strike prices.

6 Basic Strangle BTO 105 Call Stock $ BTO 100 Put

7 Basic Concepts Many of the Strangle strategies require a basic understanding of the Greeks. This will be a very basic review and traders should seek a deeper understanding of these concepts.

8 Basic Concepts The Greeks are metrics that measure sensitivity (rate of change) of Option pricing to four factors of the pricing model. Changes in Stock Price Changes in Time Changes in Volatility Changes in Interest Rates For our Earnings Strategies we won t be concerned about Interest Rates.

9 Delta We can measure Option sensitivity to price movement of the Stock with DELTA. DELTA helps determine how much an Option price will move relative to the underlying Stock price movement. The easy way to see this is: If the Stock moves $1, the Option price will move by the DELTA.

10 Gamma DELTA is not constant, it will move if the underlying Stock price moves. If the Stock price moves up, the DELTA on the Call Options tend to also move up, while the Put Option DELTA moves down. If the Stock price moves down, the DELTA on the Put Options move up and the Call Option DELTA moves down. The rate of change of the DELTA is called the GAMMA. ATM has the highest GAMMA. One Strike OTM tends to have the next highest GAMMA.

11 Implied Volatility Implied Volatility is specific to the Option. Is an estimate of the Stock s volatility as determined by the Option Market Maker. Represents the risk premium priced in by the Market Maker. Determines the Time Value portion of the Option price. Can change dramatically as market conditions change.

12 VEGA VEGA measures the Option price sensitivity to a move in Implied Volatility. It represents how much the Option price will change based on a 1% change in Implied Volatility. EX: Option has a VEGA of.15 and the Implied Volatility increases by 1%, the Option will increase in value by $.15.

13 Gamma Strangle The Gamma Strangle is an Option strategy that is direction neutral at the onset of the trade. It is typically done when the trader expects a large move, but does not have a bias on the direction. The time frame for the move is one to several weeks. The strategy allows the traders to capture large moves and trends.

14 Considerations The Option selection typically has a high Gamma (rate of change of the Delta). High Gamma will change the Delta of the winning leg up and the losing leg Delta will move down. Beware of unusually high Implied Volatility as this can adversely affect the outcome. Max risk is realized if the Stock price stays between the two Option Strike prices for the duration of the Option cycle.

15 Trade Entry The Stock should be a volatile Stock, ATR 22 should be above $5. The Stock must be between Strike prices, preferably $5 Strikes. Entry should be when Stock price is as close to evenly split between Strikes as possible. Entry should balance position size on each side. One Strike OTM Call and one Strike OTM Put are selected with at least one full month of time before expiration.

16 Gamma Strangle Entry BTO Mar 105 Call for $7 Stock $ Feb BTO Mar 100 Put for $7

17 Trade Management The trade should not be over-managed. Allow the Stock to select a direction and trend in that direction. Exit the entire trade when the trade is profitable overall. Once overall profitability is reached, the trade could be managed with stop to exit both positions if the trend reverses. The trade can also be managed using the Strangle/Spread Combo.

18 Gamma Strangle Exit Gain $21.00 Loss - $6.80 Profit $14.20 Stock $ days later Stock $ Feb STC Mar 105 Call now at + $28 (+ $21.00) minus - $7.00 cost $7.00 cost - $.20 STC Mar 100 Put now at $.20 (-$6.80 loss)

19 Weekly Gamma Strangle The Weekly Gamma Strangle is an Option strategy that is direction neutral at the onset of the trade. It is typically done when the trader expects a relatively large move in a short time, but does not have a bias on the direction. The time frame for the move is one to three days with a possible limit of five days. The strategy allows the traders to capture fast relatively large moves and trends.

20 Considerations The Option selection typically has the highest Gamma (rate of change of the Delta). High Gamma must change the Delta of the winning leg up and the losing leg Delta must move down for the trade to be successful. Due to the short time frame, unusually high Implied Volatility can adversely affect the outcome. Bid x Ask spreads need to be less than $.60. Max risk is realized if the Stock price stays between the two Option Strike prices for the duration of the Option cycle.

21 Trade Entry The Stock should be a volatile Stock, ATR 5 should be approaching $10. The Stock should be between $5 Strike prices. If using less than $5 Strikes, match ATR. Entry should be executed when Stock price is as close to evenly split between Strikes as possible. Entry should balance position size on each side. One Strike OTM Call and one Strike OTM Put are selected for the weekly Option series.

22 Weekly Gamma Strangle Entry BTO Weekly 305 Call for $3 Stock $ Entry: Monday or Tuesday BTO Weekly 300 Put for $3

23 Trade Management The trade should not be over-managed. Allow the Stock to select a direction and move in that direction. Exit the entire trade (both legs) as soon as the trade is profitable overall. If the trade binds up between Strikes, consider the Strangle/Spread Combo potentially to reduce losses.

24 Weekly Gamma Strangle Exit Gain $7.00 Loss - $2.00 Profit $5.00 Stock $312 (2 days later) At expiration Stock $ Feb STC Mar 305 Call now at $10 (+ $7.00) minus $3.00 cost $3.00 cost - $1.00 STC Mar 300 Put now at $1.00 (- $2.00)

25 Strangle Spread Combo The Strangle Spread Combo is an Option strategy that is direction neutral at the onset of the trade. It is typically done when the trader expects a large move, does not have a bias on the direction but wishes to offset losses on the losing leg of the trade. The time frame for the move is one day to several weeks. The strategy allows the traders to capture large moves and trends while minimizing losses on one leg of the trade.

26 Considerations The Option selection typically has a high Gamma (rate of change of the Delta). High Gamma will change the Delta of the winning leg up and the losing leg Delta will move down. While high Implied Volatility can adversely affect the outcome, this is minimized by the selling of premium against the losing leg. Max risk is realized if the Stock price stays between the two Option Strike prices for the duration of the Option cycle.

27 Trade Entry The Stock should be a volatile Stock, ATR 22 should be above $5. The Stock must be between Strike prices, preferably $5 strikes. Entry should be when Stock price is as close to evenly split between Strikes as possible. Entry should balance position size on each side. One Strike OTM Call and one Strike OTM Put are selected with at least one full month of time before expiration.

28 Strangle Spread Entry BTO Mar 105 Call for $7 Stock $ Feb BTO Mar 100 Put for $7

29 Trade Management The trade should be actively managed. Allow the Stock to select a direction and trend in that direction. As the Stock moves through the next Strike price, consider selling the Option at that Strike for the front week series against the losing side. This creates a profitable directional trade on one side, and a Horizontal or Diagonal Calendar Spread on the other side.

30 Strangle Spread Combo Management Stock 105 Mar 105 Call now at $9 Stock $ Feb STO Weekly 100 Put for $1.80 Mar 100 Put now at $5 $2 Loss on Mar 100 Put and a Gain of $1.80 on selling the Weekly 100 Put to create a Horizontal Calendar Spread.

31 Strangle Spread Combo Management Stock 106 Mar 105 Call now at $10 Stock $ Feb STO Weekly 105 Put for $5.80 Mar 100 Put now at $1 An additional Loss of $4 on Mar 100 Put with a Gain of $5.80 from selling the Weekly 105 Put to create a Vertical Spread.

32 Trade Management The winning leg can be managed with a Stop. Move the Stop as the trend progresses. Allow the Stock to trigger the Stop on the winning leg. Close Short positions as they become profitable or allow them to expire worthless. Continue to sell premium against the losing leg until expired.

33 Strangle Spread Combo Exit Stock $112 Mar 105 Call now at $14 Stock $102 Feb P & L + $7.00 Mar. 105 Call + $1.80 Weekly Short 100 Put + $5.80 Weekly Short 105 Put + $4.00 Weekly Short 110 Put - $7.00 Long 100 Put + $11.60 STO Weekly 110 Put for $4 Mar 100 Put now at $0

34 As Eric would say, Let s git to EARNINGS!!

35 There are a number of strategies to take advantage of Earnings. In this presentation I will show you how I apply three strategies per Stock when that company is reporting their Earnings. 1.) Long Vega Strangle: 1 4 weeks prior to Earnings 2.) Iron Dragonfly: Pre-Earnings 3.) Post Earnings Strangle: Post Earnings #1 #2 EARNINGS #3 (1 4 weeks before Earnings)

36 1.) LONG VEGA STRANGLE (1 4 weeks prior to Earnings Announcement)

37 Long Vega Strangle The Long Vega Strangle is an Option Strategy that is direction neutral throughout the trade. It is typically done when Implied Volatility is low and the trader expects a large move up in Implied Volatility. This typically means week(s) ahead of Earnings Announcement. The time frame for the move is one to several weeks. The strategy allows the traders to capture a large increase in Implied Volatility without regard to movement of the underlying Stock.

38 Considerations The Option selection typically has a very low Delta and Gamma (rate of change of the Delta). The Option should also have some Vega. Low Gamma and Delta ensures that the Option price is less sensitive to Stock price movement. Higher Vega ensures the Option price will increase as the Implied Volatility goes up. Max risk is only realized if the Implied Volatility does not move up. A significant move in Stock price could cause this strategy to act like a Gamma Strangle and should be handled as such if the Stock price moves beyond one of the Strike prices.

39 Trade Entry The Stock should be a volatile Stock, ATR 22 should be above $5. The Stock must have an Impending Earnings Announcement in the next 3-4 weeks. Implied Volatility should be historically low, less than 20 is ideal but Implied Volatility less than 30 can still be successful. Delta should be in the single digits to low teens. This will mean several Strikes OTM for Call and Put. Typically these Options will be inexpensive. DELTA breaking point: 6, 8, 14. Take the 8.

40 Long Vega Strangle Entry BTO 430 Call for $2.10 Delta.18, Gamma.055, Vega.33, Imp. Vol. 28 Stock $385 Three weeks before Earnings BTO 330 Put for $3.10 Delta.11, Gamma.034, Vega.23, Imp. Vol. 31

41 Trade Management Can exit anytime profit is realized. In most cases the trade should not be managed until just before Earnings unless one Strike goes ITM. Set alerts before ITM. The day before Earnings is the day you re likely to see the highest I.V. therefore best to exit just before Earnings. If one side goes ITM, exit that side and reposition that side if not both sides. Follow same guidelines for repositioning. Allow the Implied Volatility to rise as Earnings approach. Exit the entire trade when the trade is profitable overall. If the Stock moves enough to take one Strike price ITM, manage the trade like a Long Gamma Strangle or a Strangle/Spread Combo.

42 Long Vega Strangle Exit STC 430 Call for $4.80 Paid $2.10 Delta.30, Gamma.07, Vega.63, Imp. Vol. 100 Stock $398 One day before earnings Call Profit $2.70 Put Profit $.90 STC 330 Put for $4.00 Paid $3.10 Delta.09, Gamma.023, Vega.4, Imp. Vol. 100

43 2.) IRON DRAGONFLY (Pre- Earnings Announcement)

44 IRON DRAGONFLY Breakeven Point BTO 165 $.50 $158 STO 145 $7.00 Stock $145 $14.00 STO 145 $7.00 Breakeven Point $132 BTO 125 $.50

45 IRON DRAGONFLY Breakeven Points is the total Credit received ($14) minus total Long cost ($1) which is $13. Add the $13 to the Short Call and subtract from the Short Put. As long as the Stock remains between both Breakeven Points, we are profitable. There will be varying degrees of profitability depending on where the Stock trades. The closer the Stock trades near the Short legs, the more profitable we are.

46 IRON DRAGONFLY The $14 premium received is not what the Market Maker priced in for his own protection. Rather, it is the sum of the Asking prices that he built in from having to make a payment. The high prices ATM (increased Implied Volatility) is to protect the Market Maker from making a pay out so if you want to buy, you buy high. Let s assume the sum of the Asking prices equals $15. This $15 is how far the Market Maker is expecting the price to move upon Earnings Announcement. The $15 is not predictive, it s not telling us how much the Stock will move, it just shows how much the Market Maker is protecting himself. If the Stock moves anything less than the $15 he won t have to pay out anything because he s pumped in $15 of protection for himself.

47 IRON DRAGONFLY BTO 165 $.50 Breakeven Point $158 STO 145 $7.00 STO 145 $7.00 $14.00 Stock opens at $140 Breakeven Point $132 BTO 125 $.50 Best case scenario is that the Stock gaps in one direction and then heads back towards the Short Strikes.

48 IRON DRAGONFLY Criteria: 1.) Pending Earnings Announcement close to expiration. 2.) Stocks should be over $ ) Extreme Implied Volatility. ATM legs must be 100% or greater. 4.) Ideally, the best case scenario is that Earnings is announced on Thursday after market close or Friday before market open. 5.) Weekly Options 6.) Margin requirement.

49 Set Up: IRON DRAGONFLY 1.) Consider ATM Short Straddle as extent of price movement the Market Maker is expecting. Ex: if combined Short Option premium (Asking prices) is $15, that s the anticipated move, at the most, the Market Maker expects. Could the Market Maker be wrong? YES!!! Most often right than wrong. 2.) STO the ATM Straddle and BTO beyond the range anticipated by the Market Maker. 3.) Enter up to minutes preferable before market closes. 4.) Exit Short legs about 5 15 minutes into next trading day when volatility has collapsed. Might be 5 min. into the market, might be near 30, maybe even up to but definitely before market close. 5.) Manage Long legs accordingly.

50 3.) POST EARNINGS STRANGLE (Post Earnings Announcement)

51 Post Earnings Volatility is pumped into the Options price as Earnings Announcement approaches. As soon as the Earnings are announced, after market close or before market open, then the Implied Volatility collapses in which we see at next days open (Post Earnings). This strategy will take advantage of this severely reduced Implied Volatility collapse after an Earnings Announcement. Strategy will be a Long Strangle. Choose first Strike OTM Options with highest Gamma. High Gamma must change Delta of winning leg up and the losing leg Delta must move down for the trade to be successful. If implied volatility does drop dramatically after earnings, Options prices become cheap. We then buy a Long Strangle. As Implied Volatility re-enters the Option price we sell at a profit. Typical time of entry is immediately upon open of market. Time in trade will be a few minutes to a few days. Can use Weekly or Monthly Options, whichever expires first.

52 Post Earnings Set-up Play only on volatile Stocks. Check the Implied Volatility just before Earnings on an Options chain near the money for levels near 100% or higher. Use Weekly or Monthly Options, whichever expire first. Can be placed 2 3 days before expiration day and even on expiration eve, but probably not on expiration day. If Implied Volatility is in the 20 s (lower is better even mid 20 s will work), enter immediately upon market open (Post Earnings only). Choose highest Gamma first Strike OTM. Enter when Stock is trading evenly between two Strike prices. Can buy cheap Options due to volatility collapse. BTO 150 Call EXAMPLE: BTO 145 Put Be sure to actively manage the trade once entered. When profitable, exit both legs of trade. This could be within a few days, or even a few minutes.

53 What if Implied Volatility does not drop? If Implied Volatility does not drop significantly, then we Sell a Spread in reverse direction of gap if Implied Volatility is greater than OR - We Sell an Iron Condor using the same pricing advantage as used in the Iron Dragonfly if the Implied Volatility remains greater than 60. Perhaps even sell another Iron Dragonfly. The higher the Implied Volatility, lean towards the Iron Dragonfly (example: IV is 72%). We look at the ATM Options and add the Put & Call premiums (Asking price) together and sell that Strike distance for the Iron Condor.

54 Stock gaps down to $ with Implied Volatility at 42% after dropping from 167%. Implied Volatility did not collapse. Can sell a Credit Spread in reverse direction of gap. The strategy can be placed based upon the combined sum of the $ ATM Options. Best done if only one or two days until expiration. Even if Stock moves towards the Short leg the Implied Volatility can drop to it s norm and prices may decrease if having to BTC the Short leg. $ Gapped down Post Earnings $ Call 3.20 x Put 3.20 x 3.50 $7.00 Implied Volatility can collapse into the very day this trade is placed. Exit Short Options when they collapse. Watch the pricing and perhaps Implied Volatility. STO 140 Put $.60 BTO Put $.20 $.40 Credit

55 Stock gaps down to $ with Implied Volatility at 63% after dropping from 167%. Implied Volatility did not collapse. Can sell a Credit Spread in reverse direction of gap or sell an Iron Condor. Either strategy can be placed based upon the combined sum of the $ ATM Options. Best done if only one or two days until expiration. Better yet, one day before or on exp. Day. Even if Stock moves towards a Short leg the Implied Volatility can drop to it s norm and prices may decrease if having to BTC a Short leg or the full Spread position. $ Gapped down Post Earnings $ BTO Call $.20 STO 155 Call $.60 $.40 Credit Call 3.20 x Put 3.20 x 3.50 $7.00 Implied Volatility can collapse into the very day this trade is placed. Exit Short Options when they collapse. Watch the pricing and perhaps Implied Volatility. STO 140 Put $.60 BTO Put $.20 $.40 Credit Total credit of $.80

56 Stock gaps down to $ with Implied Volatility at 72% after dropping from 167%. Implied Volatility did not collapse. Can sell an Iron Condor or sell an Iron Dragonfly. Either strategy can be placed based upon the combined sum of the $ ATM Options. Best done if only one or two days until expiration. Better yet, one day before or on exp. Day. Even if Stock moves towards a Short leg the Implied Volatility can drop to it s norm and prices may decrease if having to BTC a Short leg or the full Spread position. $ Gapped down Post Earnings $ BTO Call $.20 $ STO Call 3.20 x 3.50 STO Put 3.20 x 3.50 $7.00 BEP Implied Volatility can collapse into the very day this trade is placed. Exit Short Options when they collapse. Watch the pricing and perhaps Implied Volatility. $ BEP BTO Put $.20 Total prem. of $ $.40 Long legs = $6.00 credit

57 DISCLAIMER Neither MasterMind Traders or any of its personnel are registered broker-dealers or investment advisors. We may mention that we consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because we consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that we are telling you to trade these exact strategies or securities. Keep in mind that we are not providing you with any specific recommendations or personalized advice about your own trading activities. The information we are providing is not tailored to any particular individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security, or a suggestion that it is suitable for any specific person. Keep in mind that all trading ALWAYS involves a risk of loss, even if we are discussing strategies that are intended to limit risk. Also MasterMind Traders personnel are not subject to trading restrictions. Myself and any others at MasterMind Traders could have a position in a security or initiate a position in a security at any time.

58 Presents Mastering the Markets Your Path to Financial Freedom 58

Strategic Trade Management. A Comprehensive Trading Plan for Managing Risk in Option Trading

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