What We Do
Using our proprietary technical analysis, we trade short term directional moves in the major broad based indices using in the money options on ETF's such as the DIA, SPY, QQQQ, and IWM. No spreads just individual in the money puts and calls. We aim to publish an average of 4 to 8 trade ideas per month with no more than 4 live positions at a time.
Why Trade In The Money Options?
Deep in the money puts and calls are a great alternative to trading stocks. If you are bullish or bearish on a particular stock or index, a deep in the money option will simulate the performance of its underlying stock with substantially less capital outlays. Deep in the money options are much less sensitive to volatility and time decay than at the money options. Have you ever been right about the direction of the movement in a stock or index only to see your ATM option lose value or not move at all? Well if you have, more than likely what you experienced is what is called “volatility crush”, a sharp decrease in the implied volatility of an at the money or out of the money option which has the effect of crushing the value of the contract.
Another very common occurrence to novice traders is not understanding the concept of time value of an option. Have you ever purchased an at the money call and held it too long expecting a bullish move in the underlying only to see the value of the option plummet during the last couple of days or weeks until maturity? Well in this case you were robbed by father time! Options, being wasting assets, will lose value everyday as the expiration date nears. If the option is out of the money, the rate at which the options lose value daily is magnified. The further you are away from being "at the money" the more exposure you have to time decay and volatility crush.
On the other hand, deep in the money options feature very little sensitivity to either swings in implied volatility or time decay. Why? deep in the money options have deltas extremely close to 100 meaning that for every 1 dollar move in the underlying you get close to a 1 dollar move in the value of the option contract! Deep in the money options allow you to simulate the move of an equivalent purchase in the underlying instrument at a fraction of the cost.
Because deep in the money options are not sensitive to shifts in volatility, they are an ideal instrument to trade in times of high implied volatility. Take a look at our site and review the examples page. Deep in the money options trading can be an excellent way to profit in volatile directional trading environments.
Strategy
Take for example our 15th trade this past year. We got a signal on 07/28/08 pointing to a short term oversold condition on the Standard & Poors 500 index. A stock or ETF trader wanting to take advantage of the potential directional move could approach this by buying shares of the ETF directly or buy deep in the money calls (among several others) . Lets take a look at the differences between these two simple strategies.
In our trade on 7/28/08, we purchased 1 Aug SPY 90 CALL @ 33.88. This purchase cost us $3,388.
We could have also approached it this way:
Buy 100 shares of SPY @ the price of 123.54 for a debit of $12,354
Because the deep in the money option carries a delta of 1 (or very near to 1), every $1 move in the SPY is mirrored exactly in our deep in the money option. In our case, we spent only $3,388 whereas by buying the stock ETF, we would have spent $12,354.
The result of the play was a move on the SPY from $123.54 to $128.36. A $4.82 move in 8 days. Here is the big difference between the strategies
In case of the SPY ETF purchase, the trade yielded $482.00 and on an outlay of $12,354 that represents a 3.9% gain. Pretty nice trade!
In our trade, we also netted the same $482 (remember nearly equal delta to stock) but because our position only cost us $33.88, our resulting position was worth $38.70 at the time of our closing transaction on 8/5/08 representing a 14.2% increase based on our capital at risk of $3,388.!!
Take a look at our full performance page.
How much does our subscription cost?
No contracts, no long term commitments. You are automatically billed every month and if you decide to cancel your membership, do so prior to your next billing date and you will owe us nothing!
$59.00 per month - We offer discounts for quarterly, semi annual and annual subscriptions as well as major discounts for subscribers to both newsletters! Click for more info
Using our proprietary technical analysis, we trade short term directional moves in the major broad based indices using in the money options on ETF's such as the DIA, SPY, QQQQ, and IWM. No spreads just individual in the money puts and calls. We aim to publish an average of 4 to 8 trade ideas per month with no more than 4 live positions at a time.
Why Trade In The Money Options?
Deep in the money puts and calls are a great alternative to trading stocks. If you are bullish or bearish on a particular stock or index, a deep in the money option will simulate the performance of its underlying stock with substantially less capital outlays. Deep in the money options are much less sensitive to volatility and time decay than at the money options. Have you ever been right about the direction of the movement in a stock or index only to see your ATM option lose value or not move at all? Well if you have, more than likely what you experienced is what is called “volatility crush”, a sharp decrease in the implied volatility of an at the money or out of the money option which has the effect of crushing the value of the contract.
Another very common occurrence to novice traders is not understanding the concept of time value of an option. Have you ever purchased an at the money call and held it too long expecting a bullish move in the underlying only to see the value of the option plummet during the last couple of days or weeks until maturity? Well in this case you were robbed by father time! Options, being wasting assets, will lose value everyday as the expiration date nears. If the option is out of the money, the rate at which the options lose value daily is magnified. The further you are away from being "at the money" the more exposure you have to time decay and volatility crush.
On the other hand, deep in the money options feature very little sensitivity to either swings in implied volatility or time decay. Why? deep in the money options have deltas extremely close to 100 meaning that for every 1 dollar move in the underlying you get close to a 1 dollar move in the value of the option contract! Deep in the money options allow you to simulate the move of an equivalent purchase in the underlying instrument at a fraction of the cost.
Because deep in the money options are not sensitive to shifts in volatility, they are an ideal instrument to trade in times of high implied volatility. Take a look at our site and review the examples page. Deep in the money options trading can be an excellent way to profit in volatile directional trading environments.
Strategy
Take for example our 15th trade this past year. We got a signal on 07/28/08 pointing to a short term oversold condition on the Standard & Poors 500 index. A stock or ETF trader wanting to take advantage of the potential directional move could approach this by buying shares of the ETF directly or buy deep in the money calls (among several others) . Lets take a look at the differences between these two simple strategies.
In our trade on 7/28/08, we purchased 1 Aug SPY 90 CALL @ 33.88. This purchase cost us $3,388.
We could have also approached it this way:
Buy 100 shares of SPY @ the price of 123.54 for a debit of $12,354
Because the deep in the money option carries a delta of 1 (or very near to 1), every $1 move in the SPY is mirrored exactly in our deep in the money option. In our case, we spent only $3,388 whereas by buying the stock ETF, we would have spent $12,354.
The result of the play was a move on the SPY from $123.54 to $128.36. A $4.82 move in 8 days. Here is the big difference between the strategies
In case of the SPY ETF purchase, the trade yielded $482.00 and on an outlay of $12,354 that represents a 3.9% gain. Pretty nice trade!
In our trade, we also netted the same $482 (remember nearly equal delta to stock) but because our position only cost us $33.88, our resulting position was worth $38.70 at the time of our closing transaction on 8/5/08 representing a 14.2% increase based on our capital at risk of $3,388.!!
Take a look at our full performance page.
How much does our subscription cost?
No contracts, no long term commitments. You are automatically billed every month and if you decide to cancel your membership, do so prior to your next billing date and you will owe us nothing!
$59.00 per month - We offer discounts for quarterly, semi annual and annual subscriptions as well as major discounts for subscribers to both newsletters! Click for more info
No statement in this web site is to be construed as a recommendation by Trading Puts And Calls to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).
TradeKing is a nationally licensed online broker with a mission to help investors become smarter, more empowered stock and options traders. In addition to our fair and simple pricing - just $4.95 per trade, plus 65 cents per option contract - we offer all clients the same white-glove customer service, intuitive trading platform and advanced suite of trading tools no matter how often they trade, or the size of their account. In August 2007, SmartMoney Magazine rated TradeKing the "Best Discount Online Broker" for the second year in a row.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options available at www.tradeking.com/ODD
$4.95 for equity and option trades. See our Commissions + Fees for commissions for low priced stock and other securities.
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How Does Our Service Work?
With our newsletter, you have the ability to have our trade ideas sent to your broker for autotrading, an arrangement where you and your advisor allocate funds to our strategy based on criteria set by you and your broker such as maximum individual trade amount, maximum amount of contracts etc. We are proud to submit our trade ideas to purposes. Each of these brokerage firm have slightly different capabilities so please check with your broker to get more info. Also, we recommend you check out our autotrading page and our terms and conditions and the section regarding autotrading.
What we can't do...
We are not financial advisors. We cannot provide any advice as to whether or not options or our trading ideas are a suitable investment for your particular financial situation. We are in the business of publishing our trade ideas and market analysis only. We highly recommend that our subscribers review their trading allocation with a qualified registered financial advisor/planner. Every one trading or planning to trade options should read the Characteristics and Risks of Standardized Options. A link to this document is posted at the very bottom of this page.
With our newsletter, you have the ability to have our trade ideas sent to your broker for autotrading, an arrangement where you and your advisor allocate funds to our strategy based on criteria set by you and your broker such as maximum individual trade amount, maximum amount of contracts etc. We are proud to submit our trade ideas to purposes. Each of these brokerage firm have slightly different capabilities so please check with your broker to get more info. Also, we recommend you check out our autotrading page and our terms and conditions and the section regarding autotrading.
What we can't do...
We are not financial advisors. We cannot provide any advice as to whether or not options or our trading ideas are a suitable investment for your particular financial situation. We are in the business of publishing our trade ideas and market analysis only. We highly recommend that our subscribers review their trading allocation with a qualified registered financial advisor/planner. Every one trading or planning to trade options should read the Characteristics and Risks of Standardized Options. A link to this document is posted at the very bottom of this page.
Market Update 3/04/2010
C.J. Mendes
Short term over bought conditions have the markets stuck in neutral. Traders are adopting a cautious stance ahead of the Jobs numbers due out tomorrow morning which could be a market mover. Many analysts had been predicting a turn around number for this month where we turn to actually creating a few thousand jobs as opposed to the shedding them. The recent snow storms may push that turn around a bit further out but consensus is that we will begin to turn the corner very soon.
The daily saga humorously referred to as the "Greek Drama" is again in full force. Another day another strike and/or work stoppage...The Dollar had softened somewhat overnight but has quickly reversed course and is now much firmer. The reflation dynamic that I have spoken about is still very much in force although lately it seems we need to see bigger moves in the currency trades to drive equity markets.
Gold also traded higher overnight and after the turn in the dollar, has also reversed course and is currently trading lower. Other commodities are fairing about the same posting small losses. Oil is also trading slightly lower although still above $80.00 a barrel.
Advancers and decliners are almost evenly split on the NYSE and NASDAQ and volume is very subdued. The 1125 level on the S&P 500 still hasn't been broken on a close in this snap back rally and the longer we fail to push above, the stronger this resistance becomes. The market may rally tomorrow on a benign Jobs number and get the market above 1125 but if not, we may go through a few trading sessions of consolidation of the recent gains and unwind oscillators. The situation in Europe will keep rallies subdued especially at these levels until we get more clarity on the course of action adopted by the EU.
C.J. Mendes
Short term over bought conditions have the markets stuck in neutral. Traders are adopting a cautious stance ahead of the Jobs numbers due out tomorrow morning which could be a market mover. Many analysts had been predicting a turn around number for this month where we turn to actually creating a few thousand jobs as opposed to the shedding them. The recent snow storms may push that turn around a bit further out but consensus is that we will begin to turn the corner very soon.
The daily saga humorously referred to as the "Greek Drama" is again in full force. Another day another strike and/or work stoppage...The Dollar had softened somewhat overnight but has quickly reversed course and is now much firmer. The reflation dynamic that I have spoken about is still very much in force although lately it seems we need to see bigger moves in the currency trades to drive equity markets.
Gold also traded higher overnight and after the turn in the dollar, has also reversed course and is currently trading lower. Other commodities are fairing about the same posting small losses. Oil is also trading slightly lower although still above $80.00 a barrel.
Advancers and decliners are almost evenly split on the NYSE and NASDAQ and volume is very subdued. The 1125 level on the S&P 500 still hasn't been broken on a close in this snap back rally and the longer we fail to push above, the stronger this resistance becomes. The market may rally tomorrow on a benign Jobs number and get the market above 1125 but if not, we may go through a few trading sessions of consolidation of the recent gains and unwind oscillators. The situation in Europe will keep rallies subdued especially at these levels until we get more clarity on the course of action adopted by the EU.
Market Update 3/05/2010
C.J. Mendes
Better than expected Jobs numbers and some sense of stability from Greece has the market solidly higher today. Advancers are besting decliners by a 5 to 1 margin and volume for advancers is higher at a 10 to 1 pace over decliners on the NYSE. Again not to sound like a broken record but overall volume is weak, surprisingly weak today once again.
We have been saying that the market has been showing signs of wanting to push higher and that the credit concerns in Europe had overshadowed a very good earnings season. As the crisis abates, if indeed it does, then I would expect the market will make another push higher.
The market is dissecting the jobs number and there are aspects of the release today to support economic arguments for both bulls and bears. The bears will hang on to the fact that we still lost 36,000 jobs and that January was revised higher, whereas bulls will say that we ONLY lost 36,000 and December was revised to lower by almost 50,000 jobs. I think there is a good chance that this months number will be revised higher come April and looking back it will be marked as the month where we turned the corner on Job losses. The trend is improving and there is no question about it.
Overnight the dollar firmed up against the Euro but the reflation trade is not in full effect today as commodities, Gold and equities are all higher at the moment. This dynamic should correct itself as we move on to the afternoon trading session and I would not be surprised if the dollar gave up some of the ground gained overnight.
I still am very concerned that we have not seen the worst out of the European credit crisis although we may have seen the worst from a market standpoint for at least the next few weeks or maybe even months. I do not believe that the current political structure in Greece will be able to deal with the tremendous pressure being exerted by the unions against the austerity measures. Even today as the Greek government approves austerity measures, several work stoppages have been called for by the unions and Greeks are out on the streets protesting in full force. The EU will certainly call for similar measures for Portugal, Spain and Italy.
Keep your size small, maintain tight stops and barring a meltdown in Greece, we will continue to head higher although a very short-term consolidation period at these levels is a real possibility. We will more than likely close above 1125 today and that opens the door to 1150 which is the recent high and potential for a move to challenge 1200.
C.J. Mendes
Better than expected Jobs numbers and some sense of stability from Greece has the market solidly higher today. Advancers are besting decliners by a 5 to 1 margin and volume for advancers is higher at a 10 to 1 pace over decliners on the NYSE. Again not to sound like a broken record but overall volume is weak, surprisingly weak today once again.
We have been saying that the market has been showing signs of wanting to push higher and that the credit concerns in Europe had overshadowed a very good earnings season. As the crisis abates, if indeed it does, then I would expect the market will make another push higher.
The market is dissecting the jobs number and there are aspects of the release today to support economic arguments for both bulls and bears. The bears will hang on to the fact that we still lost 36,000 jobs and that January was revised higher, whereas bulls will say that we ONLY lost 36,000 and December was revised to lower by almost 50,000 jobs. I think there is a good chance that this months number will be revised higher come April and looking back it will be marked as the month where we turned the corner on Job losses. The trend is improving and there is no question about it.
Overnight the dollar firmed up against the Euro but the reflation trade is not in full effect today as commodities, Gold and equities are all higher at the moment. This dynamic should correct itself as we move on to the afternoon trading session and I would not be surprised if the dollar gave up some of the ground gained overnight.
I still am very concerned that we have not seen the worst out of the European credit crisis although we may have seen the worst from a market standpoint for at least the next few weeks or maybe even months. I do not believe that the current political structure in Greece will be able to deal with the tremendous pressure being exerted by the unions against the austerity measures. Even today as the Greek government approves austerity measures, several work stoppages have been called for by the unions and Greeks are out on the streets protesting in full force. The EU will certainly call for similar measures for Portugal, Spain and Italy.
Keep your size small, maintain tight stops and barring a meltdown in Greece, we will continue to head higher although a very short-term consolidation period at these levels is a real possibility. We will more than likely close above 1125 today and that opens the door to 1150 which is the recent high and potential for a move to challenge 1200.
Market Update 3/08/2010
C.J. Mendes
Over the weekend, several EU officials released comments regarding the importance of keeping Greece and other EU members in financial peril from further market deterioration. The French in particular seem very determined to show the world that it views unity within the EU members as crucial to the future success of the union. Over the weekend, Portugal announced as well that they too will be adopting austerity measures in order to reduce their debt load.
As I mentioned last week, whether or not these measures will work and make an impact in the long run are a big question mark but nonetheless, on the surface the news is market friendly.
The economic calendar is quiet this week and there isn't much upcoming to dramatically impact the market. Domestic politics may get the bulk of the headlights this week with the administration making a full, all or nothing push to get health care reform and financial services reform legislation passed. These measures are certainly not market friendly and that may throw some cold water on the rally. President Obama is in Pennsylvania today speaking about health care reform and will make several other stops this week making speeches on this same subject. When Washington speaks, the market has chosen to err on the side of caution and move to the sidelines.
From a technical standpoint the market is very short term overbought after Friday's impressive gains which leads me to believe we may have a hard time picking up steam this week. We will more than likely consolidate some of these recent gains and very possibly slide down just a bit to test downside support at 1125.
C.J. Mendes
Over the weekend, several EU officials released comments regarding the importance of keeping Greece and other EU members in financial peril from further market deterioration. The French in particular seem very determined to show the world that it views unity within the EU members as crucial to the future success of the union. Over the weekend, Portugal announced as well that they too will be adopting austerity measures in order to reduce their debt load.
As I mentioned last week, whether or not these measures will work and make an impact in the long run are a big question mark but nonetheless, on the surface the news is market friendly.
The economic calendar is quiet this week and there isn't much upcoming to dramatically impact the market. Domestic politics may get the bulk of the headlights this week with the administration making a full, all or nothing push to get health care reform and financial services reform legislation passed. These measures are certainly not market friendly and that may throw some cold water on the rally. President Obama is in Pennsylvania today speaking about health care reform and will make several other stops this week making speeches on this same subject. When Washington speaks, the market has chosen to err on the side of caution and move to the sidelines.
From a technical standpoint the market is very short term overbought after Friday's impressive gains which leads me to believe we may have a hard time picking up steam this week. We will more than likely consolidate some of these recent gains and very possibly slide down just a bit to test downside support at 1125.
Market Update 3/09/2010
C.J. Mendes
The low volume grind higher continues today. Trade's, the few who seem to be willing to put money to work, are pushing the market to test the highs of the year at 1150.
Yesterday we had the lightest volume day so far this year and this is beginning to make some headlines. Persistent low volume for an extended period is not condusive to longer term sustainable gains. Much has been made of the fact that retail investors have not participated in the rally, which started exactly one year ago today, and this is clearly apparent in the reluctance of many to put money to work.
Volatility has been sucked out of the market. The VIX is sitting at around 17.50 and I don't believe we will get much of a spike unless we get a major market moving event. Funny how many traders refuse to buy "insurance" when the market is "healthy" and yet choose to pay substantially more for it way too late...
This week the economic releases are very light with only the jobless claims and retail figures due out. Neither should move the market. As I mentioned yesterday, the domestic political headlines have the potential to disrupt markets this week as rumblings regarding the Healthcare and Financial Services reform legislation make their rounds in the media.
These low volume, narrow markets can be treacherous. Stops are very tight and there is little room for error. The broad market is overbought but there does not seem to be any indication that we are ready to unwind oscillators. Overhead resistance is building at the 1150 mark and we should at least spin our wheels at that level for a few more trading sessions.
C.J. Mendes
The low volume grind higher continues today. Trade's, the few who seem to be willing to put money to work, are pushing the market to test the highs of the year at 1150.
Yesterday we had the lightest volume day so far this year and this is beginning to make some headlines. Persistent low volume for an extended period is not condusive to longer term sustainable gains. Much has been made of the fact that retail investors have not participated in the rally, which started exactly one year ago today, and this is clearly apparent in the reluctance of many to put money to work.
Volatility has been sucked out of the market. The VIX is sitting at around 17.50 and I don't believe we will get much of a spike unless we get a major market moving event. Funny how many traders refuse to buy "insurance" when the market is "healthy" and yet choose to pay substantially more for it way too late...
This week the economic releases are very light with only the jobless claims and retail figures due out. Neither should move the market. As I mentioned yesterday, the domestic political headlines have the potential to disrupt markets this week as rumblings regarding the Healthcare and Financial Services reform legislation make their rounds in the media.
These low volume, narrow markets can be treacherous. Stops are very tight and there is little room for error. The broad market is overbought but there does not seem to be any indication that we are ready to unwind oscillators. Overhead resistance is building at the 1150 mark and we should at least spin our wheels at that level for a few more trading sessions.
Market Update 3/10/2010
C.J. Mendes
Oil and Gold are getting slammed today even though the dollar is relatively flat. The market in general has developed this "heavy" feel to it and even though we are trading about 3 to 2 advancers versus decliners on the NYSE, it feels like we are pushing a very heavy cart uphill.
Volume continues to be extremely thin and it seems the entire market is trading a very narrow group of stocks. Yesterday Citibank traded around 1 billion shares which is about what we usually see on an average day at the entire NYSE. Where is everyone??
Sentiment has also gotten very bullish as measured by put/call ratios and it seems everyone is expecting a continued move higher. Since when has the majority been right about the direction of the markets? Doesn't happen folks...
The situation in Europe has stabilized for the moment and it seems the Euro in relation to the USD has found some support at the $1.35 level and I believe unless we get some deterioration in the credit crisis, this level will hold for the immediate future. Longer term the trend is for continued Euro weakness against the dollar.
As I have mentioned, thin markets are dangerous markets for traders. As long as the news flow is benign the grind higher should continue for a bit longer. Resistance is building and with options expiration around the corner, trading activity should start picking up. At the moment options expiration looks be bullish next week but with strong resistance building at the highs, that may change very quickly in the next few days... Sometimes the best trade is no trade at all.
C.J. Mendes
Oil and Gold are getting slammed today even though the dollar is relatively flat. The market in general has developed this "heavy" feel to it and even though we are trading about 3 to 2 advancers versus decliners on the NYSE, it feels like we are pushing a very heavy cart uphill.
Volume continues to be extremely thin and it seems the entire market is trading a very narrow group of stocks. Yesterday Citibank traded around 1 billion shares which is about what we usually see on an average day at the entire NYSE. Where is everyone??
Sentiment has also gotten very bullish as measured by put/call ratios and it seems everyone is expecting a continued move higher. Since when has the majority been right about the direction of the markets? Doesn't happen folks...
The situation in Europe has stabilized for the moment and it seems the Euro in relation to the USD has found some support at the $1.35 level and I believe unless we get some deterioration in the credit crisis, this level will hold for the immediate future. Longer term the trend is for continued Euro weakness against the dollar.
As I have mentioned, thin markets are dangerous markets for traders. As long as the news flow is benign the grind higher should continue for a bit longer. Resistance is building and with options expiration around the corner, trading activity should start picking up. At the moment options expiration looks be bullish next week but with strong resistance building at the highs, that may change very quickly in the next few days... Sometimes the best trade is no trade at all.