Tasty Trade Brokerage

The fine folks over at the Tasty Trade Network are going to open their own brokerage firm this coming January 2017 called Tasty Works.  Now you will be able to trade on a platform using their concepts and philosophies.  They have integrated a lot of functionality of the Dough platform into their new one to help you make decisions while trading and have made it remarkably user-friendly.  Have a look at the site for yourself and sign up if you want to be notified when they go live.

Double Calendars

To increase your probability of success for a longer duration you can increase the width of your profit window by deploying a double calendar spread.  This is similar to an iron condor but with spikes on the end for greater profit, sort of like a double tent.  A double calendar contains a calendar spread on the call and the put side. The profit potential in the middle of the profit window gets smaller as you increase the distance between the strikes on the call and put side.

Again only deploy calendars when there is low volatility and look to exit the trade earlier rather than later.

Probabilities of Calendar Spreads

When looking at calendar spreads you still have to take into account the probabilities.  A regular calendar spread has a low probability of success and the curve is not wide enough to keep the trade on for any extended length of time. This is why you have to exit the trade early say within 3-4 days because you mitigate the inherent low probability by not holding on to the trade for long. Shorter time frames increase your probability of directional success.

Earnings Season

Earnings season is here again so this is the time to cue up the volatility plays.  Premium will be richer during earnings season because of the potential for big moves.

For a complete calendar listing of earnings you can check here:

http://www.bloomberg.com/markets/earnings-calendar/us

Calendar Spreads

I've been gone for a while trying to develop a strategy that fits my personality and temperament. I had studied so many differents strategies and I needed to simplify.

The one I came to that caught my attention was Calendar Spreads.  I heard it was Tom Sosnoff's (from the Tasty Trade network) first trade.

Calendar spreads involve buying an option in a "back" month usually 40-70 days until expiration and selling an option in the "front" month usually 15 days until expiration.  The point of a calendar spread is to take advantage of time (theta) decay which begins to exponentially take effect 15 days from expiration.  Because the back month options are more expensive you will have a debit from your account and you are using the front month option to bring it's cost down.

The trade is usually put on during low volatility because you are essentially buying an option.  You want volatility to increase so it will also increase the value of your option.

After doing some back testing I came up with a sweet spot that seems to work for max profit and max success.

• Implied volatility (IV Rank) of 12 or less
• 40-70 days til expiration for the back month
• 15 days til expiration for the front month
• 25% Probability in the money on the front month
• Exit the trade at 10-12% profit 
• Exit the trade between 3-4 days or if negative hold closer to expiration for theta decay
• Trade liquid underlyings of at least 500,000 daily volume trades 
• Trade underlyings that don't have wide moves

You have defined risk because you can not lose more than the cost of your investment.  I tried my back tests on DIA and SPY and most of the trades were successful. The thing to keep in mind is that the trade is directional, meaning, your best chance of success is to make the right assumption at the direction of the underlying but what helps you out even if you are wrong in your assumption is if the underlying moves sideways after it moves. You make up any losses on the time decay feature of the trade. Of course the optimal situation is if the underlying moves in your direction, then you can take profits.

Brexit and What to Do Now

Last week the market got broadsided and no one saw the Brexit coming.  It goes to show you that the market is unpredictable and that trends don't last long.  When you have your profit take it.  If you have been down for a while just wait and things will change.  

As for this coming week, I think the volatility will continue but be more dramatic.  It's not a good idea to put on any iron condors because one leg will be hit hard.  

It will be difficult to gauge the fair market value of anything in these market conditions because the European economy is in limbo until key decisions are made about the countries that make up the UK. You also have the Fed who will probably hold off on raising rates because of the uncertainty.  These and other opposing forces could swing the market wildly next week.

If I had to make a trade (and I think I'm going to sit this one out) I would probably play the extremes. Since we dropped hard on Friday, I would look for a short bounce on Monday and then a drop.  As for the rest of the week I would have to wait and see.

The one thing that is very appealing is that the IV rank across the board is medium to high and options prices are very lucrative at the moment, so if you have the stomach for it, you could make a nice profit.

Buying Options

For the longest time I have been of the mind that I will never buy options because of the time decay feature that exists.  I’ve since amended my stance on buying options because there are circumstances when they may be useful.

These situations are when the stock is experiencing low volatility thus making the options prices cheaper.  When this occurs you can benefit greatly when the stock moves big in one direction.  Volatility will increase dramatically when if the price falls and decrease dramatically if it rises.  Being on the right side of the move can be very profitable in a short space of time.

When buying puts or options because of low volatility environments make sure you pay attention to the following:

• Get filled at the right price
• Buy further than 30 days till expiration so time decay won’t hit you as much
• Look for explosive opportunities for when the stock is going to move quickly in one direction
• Don’t hold past a few days because time decay will eat away at your intrinsic value
• Use the TTM squeeze to time your entries