TIG Workshop Wednesday, April 6, noon ET
Debby Clowney Workshop Coach: Debby Clowney Our goal today is to provide a workshop where we discuss how to translate the Trade Idea Generator s ideas into profitable trades. We will talk both concepts and practical tips to make and manage the trades. We encourage you to ask questions throughout the workshop. If you have a question, likely others have the same question. MBA, Chicago Booth BA, U. of Pennsylvania 20+ years options experience Worked on Wall Street Consultant for KPMG To get the most out of today s workshop, I will ask that you have your Trade Idea Generator or Investors Observer website launched. And if you can have your broker s screen in front of you, that s great.
Disclaimer Today s webinar is for educational purposes only. Nothing in today s presentation should be considered a recommendation to buy or sell any security. All stocks and options shown are examples only. Any pricing or potential profitability shown does not take into account your trade size, brokerage commissions or taxes which will affect actual investment returns. Stocks and options involve risk and are not suitable for all investors and investing in options carries substantial risk. Past stock or option performance is no guarantee of future price appreciation or depreciation. Prior to buying or selling options, a person must receive a copy of Characteristics and Risks of Standardized Options available at:http://www.cboe.com/resources/intro.aspx.
EARNINGS SEASON! Volatility index S&P Dow Volatility has plummeted as markets are less fearful. Nasdaq Daily market moves Russell Markets hit lows of last August and October 2014, and have experienced a big bounce since. Toppy? The S&P isn t moving nearly as much per day, actually below its normal 1%
Strategy In the money ITM Up market Flat market Down market Moderate returns, but high consistency Moderate returns, but high consistency Some risk, but still likely to be profitable At the money ATM Good but will almost certainly trail the market Good returns, may beat market, some risk Moderate risk, could result in profit or loss Out of the money OTM Very good but may trail the market More risk, odds favor beating the market Significant risk, profit possible but not likely Previously we were in a down market. Recent action suggests a flat or up market. Any strategy changes should be gradual. STRATEGY FOCUS early 2016 Low cost in the money diagonals on sleepy stocks, defensive stocks In the money covered calls on stocks strong after earnings Consider each of the Featured Trades MODIFICATIONS last workshop Consider legging in to covered calls on positions where you are especially bullish Consider selling ATM or OTM calls rather than ITM calls NOW Be cautious of stocks that are extended. Have GTC exit orders in place on your winners Be cautious of stocks about to report earnimngs
Covered Calls Your max gain on a covered call is the strike price on the call you sold what you paid to enter the position
Strike prices Diagonals Stock price: 28 Sell 28Call May 2016 Buy 23 Call TIME Jan 2017 Buy Jan 2017 23C + Sell May 2016 28C The diagonal order
How do you know which strikes to pick for a diagonal? How do you know how much you should pay for the diagonal? Let s say you paid $4.30 = $430 for this diagonal. What would your break even be? What is the max you could expect to sell this diagonal for? What is your max profit? What is your percent gain on the max profit? Long leg strike + what you paid to enter Difference between the strikes Diff between strikes what you paid to enter Profit $ / amount you paid to enter 23+4.30 = 27.30 28-23 = 5.00 5.00 4.30 =.70.70/4.30 = 16.3% What is your annualized percent gain? Profit % * 365/Days held 16.3% * 4= 65% When would it make sense to take profits early and at what price? When you can get a higher annual return % say, 4.85 or 4.90 GTC order
Since the strike width on this diagonal = 6, the most we could expect to sell this diagonal for is 6.00. We paid 4.86 on entry. Those of you at one of our previous workshops know that we entered a Good Til Canceled order to exit this position at 5.90. We picked this price as near the maximum of 6.00 we look for in a diagonal that is 6 wide (i.e., the difference between the strikes of the bought and sold calls). A week and a half later, we got filled at the 5.90 price for a profit of 1.04 per contract while we were paying no attention to the position whatsoever. That $104 profit per contract is a 21.4% return for the 60 days we were in the position, or 131% annualized.
Earnings Case Study: Bed Bath and Beyond BBBY reports today ATB Bed Bath and Beyond options are 42.8% more expensive the day before earnings than they have been historically. Why would that be? How much does the market expect BBBY to move after it reports earnings? Does it expect BBBY to go up or go down after earnings?
Earnings Case Study: Bed Bath and Beyond BBBY reports today ATB Let s look at options that expire this Friday that have a strike about equal to the stock price How much does the market expect BBBY to move after it reports earnings? Do you agree with the market s prediction? Does the market expect BBBY to go up or go down after earnings?
Pro s and Con s about trading options before earnings BUYING OPTIONS before earnings: Pro s You might make a big return if you are right SELLING OPTIONS before earnings: Pro s You will be able to collect more for the option you sell BUYING OPTIONS before earnings: Con s You are overpaying You could lose 100% of your investment SELLING OPTIONS before earnings: Con s You may not collect sufficient premium to give you the downside protection you need
Investors Observer View on Trading Before Earnings Now that you know how to figure out what sort of move the market expects a stock to make after earnings, you may wish to make an option trade consistent with your view. As far as our strategies here at Investors Observer, we find these trades create excessive risk that is incompatible with our goals of consistency. The TIG Featured Trades exclude any names that are reporting earnings within the next month. Immediately after earnings, options prices will drop dramatically, even though the stock may make as big or bigger move AFTER earnings.
Blog Posts on Earnings access from your main menu How a covered call can beat a directional play on the big Netflix earnings beat How to get the inside scoop on earnings predictions from the options market What should l know before making trades during earnings seasons?
New Features for TIG Subscribers TIG Enhancements for the Trade Finder See Company Name in Trade Finder by hovering over the symbol Scroll all results instead of having to page down Sort by any field in the Trade Finder results. For example, sort By dollars required for the trade (net debit) By annualized return By downside protection By dividend percent Double sort by any two fields For example, sort By S&P stars and then annualized return
New Features for TIG Subscribers Powerful chart features on Company Page Redirected to Investors Observers new website Features now available to TIG subscribers at no additional cost Dashboard landing page Morning update Stocks to watch ((5 per week with analyst commentary)
New chart feature on the Company page
Let s go hunting examining these chart features
Next Workshop: Wednesday, April 20 at noon ET You also may want to check these Blog Posts Selecting an options broker. Questions you should ask Exiting diagonals early to maximize your annual returns Calculating the maximum profit and target price for a diagonal What determines the bid/ask spread? Know your order types: Limit or Market Orders, Good til Canceled Orders Know your order types: Can I protect myself with a stop order? Or a conditional order? What is the role of margin in options trading
Transitioning to the new website Redirected to Investors Observers new website Features now available to TIG subscribers at no additional cost Dashboard landing page Morning update Stocks to watch ((5 per week with analyst commentary)