Loading...

Follow Option Samurai's Blog on Feedspot

Continue with Google
Continue with Facebook
or

Valid

Earlier in the week, we sent a special analysis for our premium users that discuss recent global macro events, and what we think it means you should do as a trader.

Since many users ask us about this, and we’re seeing many pundits calling ‘top’ we wish to share it with you in our blog as well. This analysis will take a more bird’s eye view on the market, rather than a specific look at sectors/equities due to the special situation we’re in:
On one hand, the S&P500 is about 1.2% from all-time high (a very bullish sign), on the other, the bond market shows very bearish signs, especially the reversal of the equity curve that happened for few days. Because of that – we wish to take time to talk about how we should look at trading on a macro level, rather than micro.

While the 1st quarter was very positive for the equities market (especially in the US) and almost regained the losses from Q4-2018, the bond market showed a very pessimistic stance – 1.6 Trillion USD poured into bonds in March alone, and the 10 year yield dipped below the 3 month yield (meaning the interest investors receive for ‘locking’ their money for the longer term is LOWER than ‘locking’ it for the shorter term).
Early April the bond investors got a confirmation for their fear as the FED and the EU central bank took a U-turn from their previous stance and froze the planned interest hikes. The EU even resumed its plan’s for cheap loans for banks – effectively decreasing rates. Before that, the IMF lowered the projected global economic growth rate and Citigroup’s’ ‘surprise index’ is negative for the longest term since 2008 (The indicator measures the number of positive surprises in economic indicators vs the negative surprises on a global scale).
The most significant bearish indicator was the yield curve reversal late March to early April. This indicator is considered pretty reliable when trying to predict economic downturns. However, we are in a very unusual interest rate regime (IR never been so low for so long) so there are some good arguments for those who think it won’t correctly predict a recession.

A logical investor could say – that with the accumulation of negative signs, and the market is at an all-time high, it might be a good time to take profits off the table. A trader might consider going short. We think there is a better way:
It is important to note that most analysts and economist’s don’t see a recession in the future, just slower growth. Also, most agree that the US economy shows strength with the lowest levels of unemployment and inflation within the Fed range. The market can also stay illogical longer than we can stay solvent, so it is a bad idea to go against the market.
As options traders, we usually sell premium and keep our delta positive when the trend is bullish. We are still doing this, but we’re now opening smaller positions, and we buy put spreads to hedge against unexpected downturn that will let us adjust our positions.
We think that we shouldn’t try to guess when the market will turn (as the probability is against us) and just try to hedge our portfolio.
For longer-term traders – we think it will be a good idea to implement a kind of a stop-loss mechanism (temporarily) so for example – if the S&P drops below its 10-month moving average, exit to cash (or market funds) until it rises above it again.

To summarize, we will use our advantage of being small and the ability to change our position relatively quick, to stay bullish until the market tells us to be bearish, but we’ll still hedge our position from a strong downturn.

If you’re looking for specific hedge ideas, you can use our scanner to find OTM bear call spreads (that have a high probability of profit) or OTM bear put spreads (that have a lower probability of profit but explosive profit ratio if you’re right). Click the button to start:

Go to Option Samurai

The post Special Macro analysis for Q2 2019 appeared first on Option Samurai's Blog.

Read Full Article
  • Show original
  • .
  • Share
  • .
  • Favorite
  • .
  • Email
  • .
  • Add Tags 

Just before March, we’re happy to announce the release of the new version of Option Samurai. We are constantly adding new features and you can expect another version end of April. Please feel free to contact us and suggest more features you’d want to see.

New Strategy: Naked Call Naked calls strategy

We’ve added another bearish strategy – Selling naked calls. The most common use case for this strategy is to sell calls above the current price of the stock so the position will show a profit if the stock’s price stays the same or goes down.

We use this strategy with combination of our ATR to Strike filter and ask that the sold strike will be above the price, at least 3 times the average move. We sometimes buy a further call to reduce the margin requirements and reduce the long tail risk (stocks can go up much further than go down).

Another use-case will be for hedging or selling a call option for a stock you already own (turning a stock position to covered call).

New Filter: Earning date calendar Earning date picker

We’ve added a new filter to set specific dates for earnings using a calendar. We use it for a weekend scan that shows all the earnings events in the upcoming week. You can integrate this filter into your saved scans and the dates will advance with the passing days since you created it.

More data: New data points for spreads

One of our most popular features is the Expected Value. It is a statistical measure that tries to quantify the edge in a trade. We’ve written about it in the past (for example here) and we think it is a good metric to check when trading.

We’ve expanded on this matric and added some more information to make it more usable.

Expected Value / Max Loss: This metric is calculated by dividing the EV by the maximum loss of this trade. This lets you sort and filter trades according to how risky the trade compared to its edge. The higher the value the better the trade (less risk compared with its edge).

Expected Value Per day / Max loss: This metric is identical to the previous one but it also divides by the days left to the trade. This measure helps compare trades in different expirations.

Credit/Debit per day: This measure helps to compare trades between different expirations. It divides the cost or premium of the trade by the number of days left to expiration. This allows you to compare trades with different expirations to find the best trade.

General improvements

We’ve added some general improvements, bug fixes and speed enhancements to the site.

As always – Feel free to contact us if you have any question or idea. We are working on more features and you can expect more improvements in the coming months, so stay tuned.

Go to Option Samurai

The post New version: February release notes appeared first on Option Samurai's Blog.

Read Full Article
  • Show original
  • .
  • Share
  • .
  • Favorite
  • .
  • Email
  • .
  • Add Tags 

As you might know by now – we are traders ourselves, and we built SamurAI as we felt the tools out there are not satisfying for our needs. We use our scanner daily and share some of the actual trades we make with our subscribers. All trades we share are found with the scanner. Follow us on Stocktwits or join the newsletter to be kept in the loop.

We keep a public trade log where everyone has access and can see the trades we preformed, and more important – their outcome.

We will try and keep an updated infographic and details in this link, but if you want to see most recent results you can go to the spread sheet and analyse the results. This is the most recent summary for the end of 2018 (Q3):

Samurai Trade Log inforgraphic

The interesting result is not only the high return (that beat the benchmark) but also the distribution of the results – we can see a positive skew in the P&L distribution.

Since that report we added 26 more trades:

  • 1 trade closed in a loss
  • 6 trades are still open
  • 19 trades closed for profit

Some of our recent trades:

  • Selling puts on GE mid December. Fear levels were high, but it didn’t look like GE would go bankrupt. We got 5.3% return on risk which was 63% annualized.
  • We traded UVXY 4 times (betting the fear index will not  continue to climb) and won all the trades with ~50% return in ~3 days (each).
  • Check the full trade log
  • Follow us  on Twitter and Stocktwits to see the trades

All the trades are found on our scanner. Check out the scanner here to start your free trial and find more trades suited for your needs:

Go to Option Samurai

The post Trade log update – More than 150 trades and 87% win rate appeared first on Option Samurai's Blog.

Read Full Article
  • Show original
  • .
  • Share
  • .
  • Favorite
  • .
  • Email
  • .
  • Add Tags 

Just as 2019 is starting, we are happy to announce that we’ve rolled out some of the features we were testing over the last few weeks.

IPO Date filter:

We’ve added an IPO date filter that allows you to search option trades on stocks that just IPOed. Often, stocks have sharp moves after IPOs and this will allow you to find the optimal options trade on them.

To add the IPO filter: In the scan window, go to the ‘add filter’ and search for ‘IPO’ in the search window.

Analyst target price:

As continuation of the previous release, we’ve added the analysts’ target price for each stock. This will allow you to scan stocks according to the distance of current stock price from the target price. Traders can capitalize on this data in order to help them assess the potential p/l of a strategy. For example: If we see that a stock has buy rating from analysts and distance of more than 30% between current price and the target price, we can aim to buy calls in order to capitalize on that.

To add Analyst target: In the scan window, go to the ‘add filter’ and search for ‘Target’ in the search window.

Save as new
Save as New

Many users asked us to create a ‘save as new’ button to allow to create and save similar scans with small changes (for example – same criteria but different watchlists).

Export all options

Option Samurai automatically groups different trades of the same symbol in one row. Clicking on that row will show all potential trades on this symbol. Export all options to excel will export all trades, and not just the best trade per symbol. This will allow better excel analysis.

General improvements

We’ve added some general improvements, bug fixes and speed enhancements to the site.

As always – Feel free to contact us if you have any question or idea. We are working on more features and you can expect more improvements in the coming months, so stay tuned..

Go to Option Samurai

The post New version for Option Samurai appeared first on Option Samurai's Blog.

Read Full Article
  • Show original
  • .
  • Share
  • .
  • Favorite
  • .
  • Email
  • .
  • Add Tags 
INTRODUCTION

Let us consider a put vertical spread structure. It is formed by simultaneously selling a put and buying a put below the strike price of the put. The same structure can be created without selling and buying them simultaneously. You can choose to buy the put first, then sell the higher strike put at a later date and vice versa. That is legging into a vertical spread. Legging into your positions is usually considered an advanced manoeuvre for more experienced traders.

Why would you want to consider legging into option structures? The main reason is to improve the reward to risk ratio of your options structures. However, you need to be pretty accurate in timing your actions in relation to the direction of underlying stock movements. If the stock doesn’t move according to your outlook then the reward to risk ratio can be worse off than not legging them in. To leg into a position successfully, you need to have a good sense of market direction. You can ride on the short-term mean reversion edge that exists in most underlying to anticipate the direction of the next move. You can refer to this article for more details on the concept of mean reversion.

LEGGING INTO AN IRON CONDOR

We will explore this legging in concept in greater detail by looking at the vertical iron condor structures. Suppose you intend to create an iron condor structure by legging in. You can choose to enter the put credit spread or the call credit spread depending on the current market condition.

If the underlying has been bullish been recently retraced back to a support, you can enter the put credit spread in anticipation that it will continue to resume its bullish trend. After it has moved up and has reached an overbought condition, you can now enter the call credit spread. This is how you can leg into an iron condor.

EXAMPLE ON SPX (10th Oct 2018)

This image is taken on 10th Oct 2018 before the market opens.

SPX is currently supported at the 50SMA(green) after several 3 days of down move. It is currently oversold on the 3-period RSI.

This is a good time to leg into a put credit spread. You can position the short strike at the white line which is approximately 1 ATR (grey box) below where SPX is currently trading.

If SPX moves up from here and approaches near all-time high of 2940 or when 3-period RSI registers an overbought signal, this is where you can look to leg into the call credit spread and complete the iron condor structure by positioning the short strike on the yellow line.

By legging into your call credit spread only after SPX has moved up, your spread will now be at a higher strike price as compared to if you had not legged in (blue line). This will give you a higher probability of success.

HOW TO LEG IN SUCCESSFULLY
  • Plan your trades thoroughly before execution.
  • Have a market bias. Use your charting skills.
  • Identify areas of support, resistance.
  • Identify overbought, oversold conditions.
SUMMARY

Legging into your position is an advanced manoeuvre which requires good timing in order to achieve a good execution. When the market behaves according to your bias, a structure that is legged into will give you a better reward to risk ratio and a higher probability of success. As this is an aggressive approach, you might want to look at the scaling into your trade article for something more conservative.

Go to Option Samurai

The post Legging into your trade positions appeared first on Option Samurai's Blog.

Read Full Article
  • Show original
  • .
  • Share
  • .
  • Favorite
  • .
  • Email
  • .
  • Add Tags 
WHAT DOES IT MEAN TO SCALE INTO YOUR POSITIONS?

Imagine you are bullish on a stock and assume you have set aside $2000 capital to purchase 10 contracts of long calls. However, instead of deploying all $2000 at one go, you choose to split it up and purchase the long calls at different stages. That is scaling in.

Scaling into a trade position is generally a conservative approach. If you are wrong about the stock being bullish, then you will suffer lower losses as you did not deploy all the capital at one go. If the stock went against you and yet it has not breached the danger zone as depicted in your charts, you can use the remaining unused capital to be more aggressive in your adjustment. In other words, scaling in can be viewed as a “defence first” approach to trading.

Also, do note that options are leveraged instruments by nature and therefore lesser capital is needed to achieve the same reward as compared to non-leveraged instruments. That is an added benefit.

SCALING-IN CONFIGURATIONS (based on 10 contracts)

Assuming you are planning to do 10 contracts of Put Credit Spread on an underlying, you can choose a variety of scaling-in configurations. A 5-5 configuration means that you initially put in 5 contracts and then add in another 5 contracts later.

Here are some configurations for your consideration.

  1. 3-7
  2. 2-2-6
  3. 1-2-3-4
  4. 4-6
  5. 2-3-5
  6. 5-5
  7. 3-3-4

Personally, I use the 2-3-5 configuration. I will first enter 2 contracts, and if the trade goes against me but still well within my boundaries, I add in another 3 more and then subsequently another 5 more.

INTEGRATING TECHNICAL ANALYSIS INTO SCALING-IN CONFIGURATIONS

You can consider defining some criteria based on technical analysis to decide if want to scale-in or exit the trade altogether and take the small losses.

  1. Identify long-term trend
  2. Identify support/resistance
  3. Identify the buffer zone below support/above resistance
  4. When the trade goes against you, scale into your position if the buffer zone is not breached.
  5. When buffer zone (1 ATR) is breached, long-term trend bias is invalid. Exit the trade and cut losses.

It is important that you do not convert an obvious losing trade into a scaling-in opportunity. That will only further increase your losses. If the support and the buffer zone has been breached, it is clearly a sign that your original bias is wrong. Exit the trade and cut the losses. Do not attempt to scale in to save the trade.

EXAMPLE (RUT INDEX: 1 OCT 2018 Before Market Opens)

The long-term trend is bullish. 50SMA(green) above 200SMA(red). Candlesticks above both 50 and 200SMA.

Candles recently held at lower price channel. This is a good day to enter a bullish put credit spread trade. Enter 2 contracts

However, the next candle subsequently broke below the price channel for a day. However, it is still within the buffer zone (grey) and the bullish bias still holds. Scale in another 3 more contracts.

If there isn’t any opportunity to enter the next 5 contracts on any further down moves then this trade will just have 5 contracts scaled in.

IMPORTANT THINGS TO NOTE

The scaling-in approach may resemble the martingale strategy but there is one main difference. In the scaling-approach, your total capital allowed at risk is already pre-defined before the trade starts. You do not simply add more and more capital into your trade indefinitely.

In some sense, you may want the trade to go against you. That is because you can now put more of your capital at work and scale into your position at a better price. This lowers your cost basis. When the trade does recover according to your longer-term bias, you find your trade bringing more profits. This explains why scaling-in approach can increase your probability of success.

In the event the trade goes in your favour and you did not get to scale-in, then the unused capital and be deployed in other trades when the opportunities present itself.

The absolute values of your losses and winners will be different from each trade as you may or may not scale-in in each of these trades. Therefore it is important that you plan your trade before the entry. Keep a record of your trades and analyse if the increased size of the average losses due is manageable due to the scaling-in and subsequent cut loss process.

There are always trading opportunities around. There is no need for you to chase after the enemies of a losing trade and deviate away from your plan. The Option SamurAI scanner always presents many trade opportunities for you. To illustrate this point, I did a scan for selling out-of-the-money put spreads and many trade opportunities are available.

SUMMARY

Scaling-in is a good habit and discipline to adopt as a trader. It keeps us on our toes, reminding us to always be on the safe side. We never start big on entry and assume that every trade will turn out to be a winner. Instead, we protect our capital by trading small on entry and we also protect our psychology by not losing big on a big entry when the trade goes wrong. Remember, making money is easy, but losing money is even easier!

Go to Option Samurai

The post Scaling into your trades appeared first on Option Samurai's Blog.

Read Full Article
  • Show original
  • .
  • Share
  • .
  • Favorite
  • .
  • Email
  • .
  • Add Tags 

One of the prominent features in SamurAI are the predefined screens. The screens (over 20 of them) allow you find trade ideas in one click in different market conditions. We’ve created the screens for 3 main reasons:

  1. Help users find trade ideas for different market conditions easily.
  2. Teach users how to use the platform.
  3. Give ideas on how to improve and find better trade ideas.

When we build predefined screens we pair together an edge or a catalyst (reason to act) with an option structure that can capitalize on that edge/catalyst. Some catalyst are options based and could primarily be capitalize with that option structure (dividend capture + covered calls or buying cheap calls with extreme low break-even vs ATR). Some catalysts are stock based and might be capitalize by different strategies. An example of these could be recent monthly analyst upgrades that, while we paired with buying calls, can be traded with any bullish structure – depends on market conditions and outlook.

In this article we want to give some guidelines and variables to consider when checking how to implement and edge/catalyst. The following table describes bullish considerations ONLY for clarity reasons. Reversing the rules would work for bearish edges.

Scenarios to consider when analysing trade ideas

The above table describes different aspects you might consider when analysing potential trades in the market. It is not meant as a guide to use as is. The scenarios column represents different aspects you might want to incorporate in your trading. The suggested strategies give you a helpful direction to how you might be able to capitalize on that aspect. If something is not clear please feel free to chat with us or email us (we will cover more on this in future articles).

Example I

If you run the analyst recommendations upgrade scan and saw a stock that distributes high dividend – you might want to consider a covered call instead of the predefined long call. Similarly, if the stock is near support, it might be better to sell OTM put below it to increase your probability of profit.

Example II

 If you run a scan for buying cheap calls, the system will suggest options where the breakeven point is really close compared with average volatility of the asset. If you wish to maximize the ROI, or you are sure in the trend, you might want to buy calls that are further OTM but increase the quantity to keep the cost the same. That way if the stock continues up your profit will increase, while the risk will stay the same.

Summary

Our predefined scans pair trading edges with an option structure that can capitalize on it. However, markets are dynamic and you might want to incorporate more advanced concepts in your trading. The table provided in this article gives you thinking points on what to consider and how to capitalize on it when trading.

Check our FAQ article to see how you can change the scan and save it in your dashboard so you’ll be able to access it in one click.

Go to Option Samurai

The post Changing option structure in predefined scans appeared first on Option Samurai's Blog.

Read Full Article
  • Show original
  • .
  • Share
  • .
  • Favorite
  • .
  • Email
  • .
  • Add Tags 
INTRODUCTION

Vertical spreads are perhaps the most fundamental option structures besides the single calls and puts. A trader can be profitable just purely by trading strategies using only vertical spreads. If you wish to, you can also take vertical spreads and construct more advanced structures that fit your style and market outlook. Therefore it is very important that a trader is well versed in some technical details behind the construction of a good vertical spread.

There are several approaches to construct a good vertical spread. If you do not have a specific market direction bias, you can make use of the expected move factored into the options pricing to find strike prices that give you a high probability of winning that trade. You can also create vertical spreads on underlying only when the IV rank is at a high level.

A vertical spread can be constructed to take advantage of your directional bias in the market by factoring in support and resistance, together with the expected move. When you structure a vertical spread this way, there are some guidelines to consider to ensure that you are not overpaying for it. If you are an advanced trader, you can also look into the volatility skew to find optimum strikes for your vertical spread. In this article, we will discuss these matters in detail with the exception of volatility skew.

A QUICK RECAP: WHY VERTICAL SPREADS?

Single calls and puts can be expensive and vertical spreads can be considered as an “extension” to reduce the buying power and in some cases to provide a hedge.

A short vertical spread is essentially a short option position (credit) with an additional long position (debit) to act as a hedge. The net effect is a credit received on opening that spread. A short vertical spread has a significant reduction in buying power compared to a naked short position. This is one advantage of vertical spread.

Short Vertical Spread

A long vertical spread is essentially a long option position (debit) with an additional short position (credit) to reduce buying power. We can see the short position as a way to “partially pay” for the long position. The net effect is a debit on opening that spread. Similarly, the advantage of this vertical spread compared to a single long position is the reduction in buying power. In other words, it is a cheaper alternative.

Long Vertical Spread

FINDING YOUR COMFORT ZONE

A common issue that many beginning options traders face is the selection of the short and long strikes in a vertical spread. Where to place the short strike? After that where do I decide how far apart should the long strike be?

The answer, in short, is it depends on your comfort level. There are two inversely related outcomes when it comes to vertical spread. The probability of profit and Max Reward are inversely related. If you want a higher probability of success in your vertical spread, then you will have to settle for lower max reward and vice versa. You cannot have the best of both worlds unless you factor in trade adjustments and that requires another article for further discussion.

The probability of success, loosely speaking, is dependent on the position of your short strike. Let us consider the case of a vertical spread where the short strike that is far away from the at-the-money. This will create a trade with a higher probability of success but a lower amount of credit received. If the short strike is near at-the-money, the probability of success is lower but the total credit received is higher.

The long leg acts as a hedge for your short leg and it also controls the margin required by the sale of the short strike. The long leg will provide a hedge for the short leg but that will mean it comes with a cost resulting in a reduction of the total amount of credit received. If the long leg is near the short leg, the cost of this hedge will be larger and hence the credit reduction is larger but in exchange, the hedge is stronger and requires lower margin. The opposite is true. With the long leg further away from the short leg, the credit reduction is lesser but the hedge is weaker and hence the margin required is more.

Summary Table of Probability of Profit and Max Reward

             

SYNTHETICALLY SPEAKING

Short and long vertical spreads can be constructed to be synthetically equal. In other words, their risk graphs will look exactly the same though they are constructed using different types of options (Puts and Calls). For example, a put credit spread is synthetically equal to a long call spread.

PUT CREDIT SPREAD

CALL DEBIT SPREAD (SYNTHETICALLY EQUAL TO PUT CREDIT SPREAD)

OPEN INTEREST COMPARISON

If you are bullish on a stock and intend to do a short vertical spread, then selling out of the money put vertical spreads will be a better option than buying in the money call vertical spreads due to the liquidity issues as mentioned above. Similarly, if you are bearish on a stock, selling out of the money call vertical spreads will be a better option than buying in the money put vertical spread.

As a general guide, we want to buy and sell strikes that have a tight bid-ask spread. This can be achieved by looking out for strikes that have higher liquidity. Out of the money strikes tend to have higher open interest and thus they provide more liquidity. In fact, our option scanner at Option SamurAI includes a filter that helps you zoom in on a tight bid-ask spread.

Bid-Ask Spread filter in Option SamurAI Scanner

EXPECTED VALUE

We always want the odds to be on our side. The best way to achieve that is to execute trades that have the best probabilities. The expected value statistically estimates the profitability of your option structure and by factoring market conditions, such as option prices, implied volatility, stock price, dividends and more to give a dollar amount of the expected profit (or loss) of the strategy. By factoring the expected move in the construction of your vertical spread, the expectancy of your vertical spread strategy will increase.

You can break up a vertical spread into 3 ranges as shown below.

Each range has its own

To calculate the expected value we add:

  • The probability of being above A * max profit (positive)
  • The probability of being below B * max loss (negative)
  • For the area between A and B, we use log-normal distribution and multiply it by the payout.

The sum of the 3 components is the Expected Value (EV).

You can also review the expected value article to have a more in-depth understanding.

Without getting too involved in the technical details about which value to look for, you can use the Option SamurAI scanner to simply scan for profitable EV.

THE IV RANK FACTOR

The IV rank of the underlying is an important consideration. Some traders prefer to trade underlying with high IV rank. The option premiums are higher when IV is elevated. When you sell a vertical spread under high IV conditions, the credit received is higher. You are expecting the high IV to revert back to it’s lower mean and when that happens, the value of the spread decreases quickly and you can make a profit quickly. High and low IV rank is a subjective thing but as a guideline, anything above 50% is considered to be in the high range and vice versa.

Another key advantage of deploying vertical spreads on high IV rank underlying is the fact that your short strike can be positioned further away from at-the-money while retaining the same probability of profit as compared to the one with low IV rank.

Let us compare TSLA and LMT both having almost the same price (321) but of different IV ranks. With TSLA having a higher IV (82.04), the expected move of 55.84 is also larger. LMT has a lower IV (24.39) and thus a smaller expected move of 12.35.

TSLA expected move (55.84)

LMT expected move (12.35)

You can also see from the risk graph the difference in the distance between the short strike and at-the-money when IV rank is high compared to when it is low.

Higher IV Rank

Lower IV Rank

You can easily use the Option SamurAI scanner to find trades with your preferred range of IV rank.  

FINDING THE ACCEPTABLE “PRICE”

Some other traders prefer to use the relative pricing of the short and long leg as a consideration when it comes to the construction of a vertical spread. They ultimately want to create vertical spreads that come with reasonable “price tag”.  If you belong to this category, you might want to consider the 25% guideline.

When constructing a short vertical spread, ensure that the reward is a least 25% of the risk. This is to establish a baseline for an acceptable reward to risk ratio of 1:4.

25% rule on the Short Vertical Spread

When constructing a long vertical spread, ensure that the short leg will pay for at least 25% of long leg. This establishes a baseline for an acceptable price for the spread.

25% rule on the Long Vertical Spread

NO STRONG DIRECTIONAL BIAS

When you do not have a strong directional bias, it is advisable to trade with the prevailing trend of the market and the individual stock. Alternatively, you can consider your entire portfolio and decide if you want to add long or short deltas to balance your portfolio (to be covered in future articles). You can use the expected move of the underlying as an estimate to position the short strike of your short vertical spread.

Assuming you have no directional bias on a stock but you wish to ride on the general bearish sentiment of the market, you can create a Short Call Vertical (Call Credit Spread).

  1. You can filter out the best bearish call spread for the underlying by using the Option SamurAI scanner using the various factors discussed above.

Alternatively, If you wish to do this manually, the key thing is to position the short leg beyond the expected move.

  1. Determine the expected move to the upside.
  2. Position the short leg such that it is one strike away from the expected move. If you want a greater probability of profit, you can shift it even further away.
  3. You can find the long leg that can control the risk to your personal tolerable level and check that the reward to risk ratio is to your liking.
  4. Alternatively, you can consider the 25% guideline to position your long strike.

DIRECTIONAL BIAS

When you have a directional bias, it is still important to consider the expected move. However, you can factor in significant support or resistance levels to provide additional probabilities on your side and create vertical spreads with the short strike beyond that level. This is where you might want to consider creating the vertical spread from the “price” perspective.

Assuming you are bullish on a stock and stock has yet to bounce off a support,  you can create an OTM Short Put Vertical (Put Credit Spread).

  1. You can filter out the best bullish put spread for the underlying by using the Option SamurAI scanner using the various factors discussed before.

Alternatively, If you wish to do this manually, the key thing is to position the short leg beyond the expected move. The key thing is to position the short leg within the range of appropriate strikes.

  1. Identify key support.
  2. Decide on the expiration cycle.
  3. Position the short strike below the support. It is even better if the expected move is larger than the distance between support and the current candlestick.
  4. Find the nearest long strike that can give you a vertical spread with reward to risk ratio of 1:4
  5. If the current expiration cycle do not provide you with the reward to risk ratio of 1:4, look at  the next expiration cycle further out in time.

USING OTM DEBIT VERTICAL SPREADS

Assuming you are bullish on a stock and stock has already bounced off a support, you can create an OTM long call vertical using the 25% guideline for long vertical spreads. It is important to note that a bullish OTM long call vertical spread is more aggressive than a bullish OTM short vertical spread as it doesn’t have positive theta and therefore you will need the stock to be moving in the right direction preferably right after the vertical spread is put on. That is why this is suitable when the stock has bounced off a support as mentioned earlier.

PUTTING IT ALL TOGETHER

Let us do a case study on MS. This image was taken on the 30 Aug 2018. Using the mean reversion concept, you can now consider a bearish call vertical spread.

You can see that MS is trading below its 200 SMA (red line) which is a long term bearish trend. It is currently overbought (84.27) based on RSI(3 period). Let us assume that MS will revert it’s movement towards the bearish mean.

You can now enter a Call Credit Spread. Consider the resistance lines in dotted yellow. If you are aggressive, you can position your shorts just above the 51 strike, which is the region of the lowest yellow resistance line. It also coincides with the 50 SMA (green) resistance line.

However if you are less aggressive, you may want to position your short strike above the 52 strike, which is the region of the 52 resistance line.

If you are very conservative, you may want to position your short strike above the 55 strike, which is the region of the 55 resistance line.

IN A NUTSHELL

    • You want to take advantage of expected moves and construct a high probability trade.
    • Find your comfort zone, find your own sweet spot between probability of success and max reward.
    • Always trade on stocks with high liquidity, aim for tight bid-ask spread.
    • Trade on stocks with high IV rank.
    • If you are more conscious of relative pricing of the strike of the vertical spreads, consider the 25% guideline.
    • Any approach you take is fine as long as it has a positive expectancy.

Go to Option Samurai

The post Creating an optimum vertical spread appeared first on Option Samurai's Blog.

Read Full Article
  • Show original
  • .
  • Share
  • .
  • Favorite
  • .
  • Email
  • .
  • Add Tags 

Earlier this month we released some new features and we want to take a minute and describe them. Stay tuned as more things coming next month!

Analyst Recommendation

This filter aggregates Wall St. analysts recommendations for every stock. The data is standardized between Strong buy (1) to Strong sell (5). Analysts recommendations often move the stock, so we’ve added it to our stock filters (under fundamental data filters). In addition you can use 3 filters that track the change of this indicator over time (week/month/6 months). These changes can indicate a new momentum in stocks and we’ve added a new predefined scan that capitalizes on it.  See more in our FAQ.

Tool tip

We added an explanation of the filters on the filter pane. It appears as a tool tip when hovering over the filters

Alphabetically order of predefined scans

Following many user request we changed the order of your saved scan. Now you can find them in the dashboard sorted by alphabetical order.

Save sorting order for saved scans

This feature is another request we got from users. When you build a custom scan (or edit a predefined one) you can sort the results before you save. We will then save that order and will present the order next time you click on the scan in your dashboard or edit mode.

Bid/Ask Level filter

Our bid/ask level filter refers to multi-legs strategies. By default when we calculate strategies profit or loss we use mid prices. This makes it sometimes hard to execute the trades in the market, especially if the bid-ask spread is wide.

This filter allows you to control what price we use for calculations: from conservative (use bid-ask against your) to best-case (use bid-ask in your favor).
User can select one of several predefined levels:

  1. Conservative (use bid-ask values)
  2. 25% price improvement
  3. mid
  4.  75% Price improvement
  5. Best-case (use bid-ask value for your favor)

New predefined scans

We added Three new predefined scans to help you find trade ideas in a single click and help you build scans that are better suit your style.

The predefined scans are:

  • Buy cheap Calls on Analyst Upgrades Last Month – This scans looks to buy calls on companies that have a buy rating or a strong buy rating from analysts AND analyst action is positive in the last month. We look to buy calls that the ATR is greater than the breakeven point on those stocks, but you can change the strategy to naked put or any other if market conditions will be better to those strategies
  • Continuous Covered Calls on dividend paying stocks – This scans looks for companies that will be suitable for selling covered calls in a continuous manner, meaning rolling the short call option at expiration and setting up a new position. The scan looks for companies with stable dividend yield of over 3% and covered call income that is greater than 1% a month
  • Covered Calls on Stocks that will be profitable (Market cap 1B+) – This scan looks to buy covered calls on companies that didn’t show profit in the previous year but analysts expect them to show profit next year. We also implement fundamental ratios filter to make sure the stock will not be too expensive with the new profit. We limit to companies with market cap of >$1B.

As always – Feel free to contact us if you have any question or idea, and stay tuned for the next features coming up.

Go to Option Samurai

The post New Month New Features appeared first on Option Samurai's Blog.

Read Full Article
  • Show original
  • .
  • Share
  • .
  • Favorite
  • .
  • Email
  • .
  • Add Tags 
Option Samurai's Blog by Rotem Yifat - 10M ago

To all our users, followers and fellow Samurais –  Happy labor day!

And remember not to wear white after Monday!

The post Happy Labor day 2018 appeared first on Option Samurai's Blog.

Read Full Article

Read for later

Articles marked as Favorite are saved for later viewing.
close
  • Show original
  • .
  • Share
  • .
  • Favorite
  • .
  • Email
  • .
  • Add Tags 

Separate tags by commas
To access this feature, please upgrade your account.
Start your free month
Free Preview