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 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.
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!
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.
www.tradeking.com/PrivateView/services/Services/commissions.tmpl
Madeira Investments LLC
D/B/A Trading Puts And Calls
8770 Sunset Drive # 201
Miami, Florida 33173-3512
Tel: 786-462-5616
Fax: 305-279-0532
Copyright © 2008 Trading Puts And Calls. All rights reserved
Autotrade our alerts at:
Take a look at our spread trading newsletter!
www.tradingoptionsforincome.com
www.tradingoptionsforincome.com
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.
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.
Live Chat Available! |
 |
Live Chat Available! |
|
Market Wrap Up And Week Ahead 2/6/2010
C.J. Mendes
The market ended the 4th losing week in a row something we have not seen for some time. The last four week consecutive drop came while we were making our way to the March lows of 2009. The trading actions was fast and furious with volume picking quite substantially to the downside.
The earnings and economic news were mostly mixed for the week with better than expected job loss numbers reported on Friday and better ISM service and manufacturing numbers. Cisco, the tech giant, reported much better than anticipated numbers and John Chambers, Cisco's CEO, commented on what he perceives to be a much better than expected rebound.
Even so, the market had a one track mind and that is to focus on the credit problems in Europe. Portugal, Greece and Spain all made headlines during the week with Portugal suffering through a failed auction of its short term bonds. The concerns about a credit meltdown in Europe has driven the Euro currency down substantially against the dollar and this has caused a spike in the value of the greenback which in this recovery has meant weaker equities and commodity prices.
The ECB will, in my opinion, not allow the Euro to collapse and will step in with measures to stop the bleeding. The European Union will not allow this crisis of its weaker members to take down the rest of the European Union. The IMF is also at play here and they may very well step in with a targetted approach to deal with the issues of nations such as Portugal and Spain. Because of this, I have said I believe this recent "dollar strength" will prove short lived and we will soon give back most of these recent gains.
If my thesis is correct, the resumption of the weak dollar trade will return at least until the Fed begins to signal that it is about to start a tightning cycle which I believe is still some time away possibly as late as late 2010 or early 2011. That should give way to real sustainable strengthning of the dollar and add pressure to equities and commodities.
This does not mean that I am expecting a major rally from these levels to new highs but I do expect us to hold our heads above 1000 on the S&P 500 for the near future. The scenario of a range bound market for the remainder of 2010 is still very much my forecast with the S&P 500 trading between roughly 1000 and 1160.
The focus next week will continue to be the situation in Europe. All eyes will be on the ECB and in particular Jean-Claude Trichet, the head of the European Central Bank, for signs of any actions to stem the crisis. I am expecting a brief oversold rally will eventually give way to more downside. Eventually taking the market to test support at 1035 and then 1000, which is a very important psychological level. I believe that is when we will see some sustained buying from institutions.
C.J. Mendes
The market ended the 4th losing week in a row something we have not seen for some time. The last four week consecutive drop came while we were making our way to the March lows of 2009. The trading actions was fast and furious with volume picking quite substantially to the downside.
The earnings and economic news were mostly mixed for the week with better than expected job loss numbers reported on Friday and better ISM service and manufacturing numbers. Cisco, the tech giant, reported much better than anticipated numbers and John Chambers, Cisco's CEO, commented on what he perceives to be a much better than expected rebound.
Even so, the market had a one track mind and that is to focus on the credit problems in Europe. Portugal, Greece and Spain all made headlines during the week with Portugal suffering through a failed auction of its short term bonds. The concerns about a credit meltdown in Europe has driven the Euro currency down substantially against the dollar and this has caused a spike in the value of the greenback which in this recovery has meant weaker equities and commodity prices.
The ECB will, in my opinion, not allow the Euro to collapse and will step in with measures to stop the bleeding. The European Union will not allow this crisis of its weaker members to take down the rest of the European Union. The IMF is also at play here and they may very well step in with a targetted approach to deal with the issues of nations such as Portugal and Spain. Because of this, I have said I believe this recent "dollar strength" will prove short lived and we will soon give back most of these recent gains.
If my thesis is correct, the resumption of the weak dollar trade will return at least until the Fed begins to signal that it is about to start a tightning cycle which I believe is still some time away possibly as late as late 2010 or early 2011. That should give way to real sustainable strengthning of the dollar and add pressure to equities and commodities.
This does not mean that I am expecting a major rally from these levels to new highs but I do expect us to hold our heads above 1000 on the S&P 500 for the near future. The scenario of a range bound market for the remainder of 2010 is still very much my forecast with the S&P 500 trading between roughly 1000 and 1160.
The focus next week will continue to be the situation in Europe. All eyes will be on the ECB and in particular Jean-Claude Trichet, the head of the European Central Bank, for signs of any actions to stem the crisis. I am expecting a brief oversold rally will eventually give way to more downside. Eventually taking the market to test support at 1035 and then 1000, which is a very important psychological level. I believe that is when we will see some sustained buying from institutions.
