Long Straddle and Strangles

I had an idea over the holidays to play one of the energy ETFs by watching to see if it will go higher or lower very quickly. I was late in taking this trade because I missed the opportunity when oil was going down really fast. But I now know how to play volatile markets more effectively. The strategy that I really like is the strangle option play. This is where you buy and out of the money put and an out of the money call. You are basically playing both sides of a trade.  One of the options will expire worthless while the other could potentially be a big winner. This will only happen if the stock moves quickly in one direction. Otherwise both options will expire worthless. So I call this my lottery play.  Instead of going to buy Powerball tickets I can buy options contracts when the market is really volatile.  This way I have the potential of making a lot of money very fast.  I will only allocate small amounts of money for these plays and I will only take them when I know the market is moving up and down erratically.

The straddle play is not as appealing to me because I don't want to lose large amounts of money for a risky bet. Both of these plays are betting that the market will move fast in one direction.  I would rather play the cheaper of the two. A straddle play is basically buying near the money or at the money options on either side and again hoping the market moves fast in either direction. with this play you are paying more money up front and of course you can potentially make more money but it is still a risky bet.

Trading notes 1-1-15

After watching the market over the last few days and seeing the Santa Claus rally I feel confident that my instincts are good about where the market is going.

There may be a pullback at some point these next few weeks so I am going to watch the market carefully. People are getting out of positions now that they couldn’t have at the end of the year because of tax implications.  I am of course going to play the probabilities but I want to time my trades more effectively.

The stocks I am watching are Apple, Yahoo and Facebook I think that Apple may pull back based on the lack of confidence in their upcoming products. I think that Yahoo can go either way based on what Marissa Meyer announces in the next few days or weeks about what they're going to do in regards to their Alibaba shares. I think that Facebook is the more promising company for growth because it has a lot of other businesses under its umbrella I just think the other people playing the market don't have the same confidence in the company because they don't trust a young Mark Zuckerberg. But as Facebook keeps outperforming and over delivering I think the stock will go higher.

New York HS Student Allegedly Made $72 million From Trading

The recent article about the Stuyvesant High School Student Mohammed Islam making $72 million is now under question but he still supposedly made a few million trading on the stock market.  

The reporter stated that she saw his account statements but didn't verify that all the money was from trading.  Either way the story of a high school student trading on his lunch break and netting millions is an inspiration to many who have dreams of being a successful trader.

I am the first person to champion the benefits of trading but I also want people to be safe and not lose their life savings.  I do believe that it is possible to build wealth in the markets and that if you plan and strategize effectively you will be successful.  

Here's the article:

NY Post Article

*Update: This story has since been debunked 12-16-14

Bull Market Indicators

An interesting article shows how the International Security Exchange Equity Ratio is showing that the market may be showing bullish signs.

I don't understand the angle about options traders being "fearful" but I gather that he is saying that people who are short on the market are skiddish.

He shows how there were only 4 other times since 2006 where the ratio is where it is now and most of them were key bullish indicators.

Yahoo Article

Strategy Update

I successfully exited my bull put option spread on Facebook today.  It was a volatile week and I had hoped to have gotten out yesterday, but there was a lot of negative chatter about the effect of oil prices on the market.  That kept Facebook from bouncing up on the positive news from the Instagram announcement.  Instead the bounce came today which was helped me exit my trade.  

After a month and a half of successful trading and 7 consecutive wins, I can now confidently recommend my strategy.

Here it is again if you missed it:

YCTT Bull Put Spread Trading Strategy

Current Market Conditions

There seems to be a bias to the downside in the current market because of the bottoming oil price fear mongers.  I personally (and apparently many others) think low oil prices are a good thing because the general consumer has more money to spend.  Many pundits on the other hand think failing oil companies will cause loan defaults that will bring down the banks and that will somehow reach other markets.  

I don't think low oil prices are going to be a problem but the market has it's own reason for moving which may or may not coincide with my belief.  Because my current strategy is bullish I am going to proceed with caution and look to time my trades after pullbacks.

IMPORTANT NOTE ABOUT OPTIONS

If you are trading large numbers of contracts:

NEVER LET AN OPTIONS TRADE GO TO EXPIRATION

Let me say that again NEVER LET AN OPTIONS TRADE GO TO EXPIRATION

I don’t care if you are up and you can make more money if you let them expire.  It’s not worth the risk especially if you are trying to make more money by overleveraging your trade. 

Let’s say you sold 10 contracts on AAPL and bought 10 for a put spread.  Your high strike was 114 and your low was 110.  Your thinking the most I can lose is $4,000 because of the spread.  WRONG

When you get close to expiration the 110 contracts go down to zero value and there are no bids out there for you to close your trade if you really need to.  

Once your insurance trade has gone to zero you are essentially in a naked put and you are at the mercy of the market for whatever happens.

If your 114 contracts become “In the Money” you are now on the hook for $114,000 with no way of exiting the trade.  You can’t sell or roll over to the next week because there are no bids out there for your 110 contracts. 

SO I REITERATE… If you don’t have the margin to cover the trade NEVER LET AN OPTIONS TRADE GO TO EXPIRATION