Selling Naked Put Options - AAPL

Selling naked Put Options can be very rewarding on this market situation. However, you really have to know the stock and really want to own it when you were assigned. 

I have written the Sell Put Options methodology before, and the following video is one of my trade at AAPL.

When you Sell PUT Options, you need to ensure that your break-event point has strong support. During this volatile market, premium is rich and your risk is compensated. Your decision to pickup the strike price is important and by deducting with the premium, you will get your break-event point. 

What is good about this strategy is that your win ratio is relatively high. You will win on 3 out of 4 probabilities. When the stock went up, stayed, and went down (a little bit), your trade will win. You will loose if the stock sold-off and went through your support (break-event point). But, as you believe on the stock and you want to buy it, think that you get the stock on discount.

The margin of Selling Naked Put is also friendlier that Covered Call strategy. Brokers only keep 20% from the strike price. Since it is only one leg options strategy, your commission is lower and less slippage. So, why searching for other strategy? Just search and scan stock that have good positive  Relative Strength Index and fundamental and get the monthly income strategy.

Good Luck...

Market SOLD OFF - What to DO Next ?

Today: October 24th, 2008

My prediction on breakout possibility yesterday was happen today. Following global recession fears and Asian & European stock market slid, SPY sold off by 5.50 points on market open. The VIX jumped to high level of 80, showing signs of market biggest fear.
There is support on SPY 85 (see above chart) and market rebound a bit. If this support line is breached, I assume market will go a free fall.

So, what to do next for an Options Writer? This market is unforgiven so you need to be patient. I will not dare to go long as a contrarian (as usual), but will wait market to rebound. If that is so, a decending triangle is formed. It is wise to go short when market rebound approaching the resistance line (SPY 97/98), however, you just need to be patient.

Options Writer - Wait for a Breakout

Today 23/10/2008

I just want to give a brief comment about Writing Options on Volatile market. If you read my last article, you must be very careful to be an Options Writer on this market condition. Yes, you may get very rich premium, however, the volatility index (VIX) is so high currently on the 70 level. Anything can happen, i.e big rallying on good news and sell off on bad news. This is always happen on Bear Market, very strong move on either side.

Looking at one hour chart, the market is consolidating. A triangle is formed by higher low and lower high. Buyers and sellers are consolidating, and this can bring a potential breakout when it is approaching 2/3 of the triangle.
So, I suggest to wait and see a breakout before you put any position. The breakout can be upward or downward, regardless of bearmarket condition.

Use PUT OPTIONS to get GOOD Bargain on Buying Stock

The Dow made its third 300-point swing of the week Thursday. This time it finished near its worst point of the session after trending lower throughout the day. The two days previous reversal was not supported by public confidence on the impact of $700 billion bailout plan, amid the dismal jobless claim for the week ending 27 September, increased 1,000 to 497,000, exceeding the 475,000 claims that were expected.

Now the question is do we on the bottom yet? Do you wish to buy your favorite/good stock, but you are afraid to do so because of current volatility that might push the stock price even lower again? But, on the other side, the market has big possibility to rallying at any time once House of Representative approve the bailout plan and you will feel miss the train.....

Well, to buy stock even at larger bargain, you can SELL PUT OPTIONS. This options strategy is very simple, yet provide us with lower break-even to get our favorite stock. Sell Put is a synthetic of Covered Call, however, we use differently on different situation.

Say APPL (Apple Corp)is currently at 100.10 on yesterday closing (Thursday). The stock has been depressed lately because analyst lowering the stock grades in anticipation of lower earnings due to lower demand on products. Well, traders and analyst has different opinion. Traders just buy low and sell high. The price of APPL can be a bargain for us since the company is a rich cash company with great product and innovation.

If we look at 95 PUT, we can sell options with premium of 11.05 (1 lot)for November expiration (49days). The huge premium is due to high stock volatility - 101%. If you SELL PUT OPTIONS, your account will be credited by $1,105. If the stock does not go beyond 95 on the expiration date, the premium is yours. Therefore, if you believe that current stock position is on the lowest capitulation, why not SELL PUT?

If the stock goes beyond 95 on the expiration, you will be assigned 1 lot (100 shares) with the price of 95 per unit. However, you have receive in advance 11.05 so the net stock price that you buy is 83.95. I still remember that when APPL on the high of 180, and people still chased the stock as they believed it would hit 200 very easily.

The analogy is like this.... I went to a department store and I like Apple computer and wish to buy one. The price is $1,200 (stock price). Then, I bargain again to $1,000 (strike price, for 49 days). While the store owner is still considering my proposition, I walked out from the store with $132 advance payment (since I put commitment to buy at $1,000). The advance payment will be mine whether he agrees or not on my proposition. If he agreed on my bargain price, my net Apple computer price will be $868 ($1,000-$132).

If you love the merchandise, why not using PUT OPTIONS to get good bargain on buying your favorite stock? Consider this while it is not too late......

Options Trading Opportunity in Volatile Market

For some people, volatile market is very scary and they tend to run away. However, there are quite a number of them also believe that there are huge opportunities to trade in a volatile market. For me, it all depends on your believe and conviction. If you see this situation is an opportunity to trade, you will get it. But don't forget that you must have trading methodology, money management, and discipline, otherwise you plunge yourself on gambling trading situation.

Below are the situations that create opportunity in Options Trading:

- Market is very Liquid.
I like to trade on liquid market. On current volatile market, the liquidity is there and spread bid/ask is on penny. Therefore, it allows me to get in and out easily and reduce my slippage.
- The volatility is high.
When volatility is very low, we only see dry paint picture on our screen. This current volatility provides excitement on trading. When volatility is very high and everybody is scared, to be a contrarian, I always want to be an insurance provider.
- When market is on choppy trading, there is tendency price spike one to the other very wide. You can take your safely spot (strike price) and put a limit order (with acceptable risk/reward). Be patient and market will consequently grab you. So, you will be a liquidity provider to the market.

This is a one lifetime opportunity to see volatile market like this. If you can survive trading on this market, you will be a better trader tomorrow. Therefore, dare to step in is the course of action that you need to do. Only watching on the sidelines does not do any good. You just see things are moving back and forth which does not mean anything.

Options Trading - in Volatile Market (part 2)

One of forum member commented that he could not get filled when he wanted to close his position. He was very upset since he got quite a big loss since he could not cover his position fast.

Later, I found that he traded stock that trade very thinly. During volatile market like this, it is very important to find stocks that very liquid. If you used to trade with volume stock above 1 million shares, you have to seek stock with volume more than 3 million shares. Liquidity is one main important keys on options trading in volatile market. You have to ensure that bid-ask very tight so you avoid any slippage. Bigger spread means you reduce your profitability and this will not make you around very long to trade on this situation.

So, consider this advise, look for LIQUIDITY with the underlying assets that you trade, especially on this bear market/volatile market.

OPTIONS TRADING IN VOLATILE MARKET

Options trading in Volatile market can be frustrating, especially when you are a premium seller. Market can easily go one to another way very fast. There were several Forum readers asked me how I trade in a volatile market. Well, there are some advise from me:

1. Trade small
Do not trade more than you can afford. It is easy to say but sometimes it is very difficult to apply. It needs self discipline not too greedy when you look for opportunities. Beginner always see profits first and risks second. This pitfall can really make a hard hit to your account. There are 3 things can happen: you will act slower to cut your loss, your mind is not clear as usual, and your account can be easily wiped out.

2. Do “Guerilla” Battle with the Market
In volatile market, it is good not to chase a rally or a sell off to sell premium (as an Options Writer). This is due to big slippage on a wider bid and ask. You also do not know when the rallying/sell off will be ended. Therefore, people usually buy top and sell bottom, a contradiction of basic trading rules. I used to put my position in a such way with price that I want. I let the market get it, instead of chasing it.

3. To be a Contrarian
To be a contrarian in a volatile market sometimes is very difficult. It needs trading experience and expertise on chart reading. However, this is where that professional traders usually do. When market sell off and go to low capitulation, people are buying insurance (Buy Put Options). Therefore, volatility is increasing and options premium pushed up. If I convince a strong support line and it is on a very low capitulation, I will sell Naked Put or Put Spread. If I like the stock, selling a naked put is a synthetic of Covered Call Writing. However, if I want a define risk with positive time decay, I will write Put Spread instead.

4. Loose a bit of your Stop Loss
Well, it is also a contrarian belief that you must loose your stop loss during volatile market. Stock trader will tighthen their stop loss, but I as options trader will loose my stop loss. This is because when market has big move, sometimes your short position will be threaten temporarily and market will come back again. Since I trade small with defined risks, I can play with this strategy properly psychological burden.

5. Expect more Return to your Position
When you trade small on volatile market, you can expect more return on your position. Sometimes I can double my return with probability of win almost 70%. Well, it is still a good bet. By doing so, your position can provide you with a yield as the same as when you trade big when market is not volatile.

Well, I hope this can provide you some information how I trade Options on a Volatile market.

Happy Trading…..