! Liquidity! Implied Volatility (IV) Rank! Notable Moves/ Pending Announcements! Strategy

Transcription

1 Q: What are the most important things to look for when deciding to place a trade? A: There are 4 main things we look at before placing a trade:! Liquidity! Implied Volatility (IV) Rank! Notable Moves/ Pending Announcements! Strategy 1 of 9

2 Q: Why is Liquidity important? A: Liquidity allows us to get in and out of positions easily. It also allows us to avoid slippage and get filled at a desirable price. We can define a liquid underlying by having a bid/ask spread that is very tight, approximately of 9

3 Q: Why does IV Rank matter? A: IV Rank tells us where an underlyings current Implied Volatility is compared to where it has been over the last year. This allows us to quantify whether IV is rich or not and allows us to compare the IV of different underlyings. 3 of 9

4 Q: What should I be aware of before placing a trade? A: We always want to check for upcoming earnings announcement or dividends. Unless its an earnings specific trade, we will avoid placing trades in a cycle that has earnings pending. This is due to the large moves that are normally accompanied by earings possibly testing our short strikes. 4 of 9

5 We also want to be aware of recent price movements, as well as if the underlying is at an extreme. If the underlying is at the bottom or top of its price range, we may look to place a contrarian directional trade, looking for a reversion to the mean. 5 of 9

6 Q: How do we choose a strategy? A: After identifying a suitable underlying, we will select a strategy based on desired risk profile relative to trade assumptions, and overall portfolio. The following is a list of potential high IV, and low IV strategies we often implement: *See Market Measures Iron condors: analysis and variations 10/14/14 *See Market Measures High IV: strategy analysis 10/15/14 6 of 9

7 High IV Strategies! Strangle! Straddle! Iron Condor! Iron Fly! Butterfly (BWB)! Credit Vertical Spread! Jade Lizard Low IV Strategies! Calendar! Diagonal! Debit Vertical Spread 7 of 9

8 Q: What metrics should we be aware of after selecting a strategy?! Probability of profit! Buying power reduction (BPR)! Max return on capital (ROC)! Break-even points 8 of 9

9 Example checklist for strangles on SPY: SPY: $189 IV Rank: 56% 1 SD 1.5 SD 2 SD Probability of profit 72% 86% 95% Buying power reduction $2,975 $2,685 $2,385 Max return on capital 5.7% 2.35% 0.84% Break-even points

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