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…..

Options Trading: Can You Trust The Rally ???

Wow….. last week I wrote beware to pick any bottom, and now the market has been rallying for 3 consecutive days. Positive earnings from leading companies and plunged oil price boosted the rally. Now the interesting question is: “Is it a true rally?

I still believe it is a minor rally. We are in the Bear Market and it needs time to heal the economic conditions, particularly the subprime mortgage turmoil. My technical indicator shows a nice upward move, a consistent higher high and higher low trend at SPY. If the market breaks SPY 130 and passes 50EMA, I expect market will be getting stronger. Otherwise, it will fluctuate around SPY 125 – SPY 130.
Pick your trade carefully and do with good money management. Indeed, you can use the minor bullish trend to take some profit, but remember, use tighter stop if market reverse back down. On this situation, beware to put position against the trend (bullish). If oil price keeps going down, I expect the rally will persist.

Options Strategy: Don’t Pick Any Bottom…

If you follow what I advised last month (June 23, 2008), I hope you are ok with all of your options position (I was on cash position when market heavily sold off). The market was sold-off due to high and fluctuated energy price (broke USD 147 and is assumed to reached USD 150-155 in July) and many problems and issue on the financial market due to sub-prime mortgage.

The largest mortgage creditor Fannie Mae and Freddie Mac traded lower and lower this week and government need to rescue both of them from further catastrophic conditions. In an unprecedented move, the government stated that they would go as far as buying equity on both agencies. This helped to calm the fears and market jumped higher on the open. However, on the late trading day, the selling pressure was still there and made market slipped again on higher low.

For Options trader, be-aware of picking any bottom. We as a trader usually got a contrarian opinion about market. When the market sell-off, it is opportunity to go long and when market rallying, it is opportunity to go short. However, we have to remember that we are currently on the Bear market and we are still on the bottoming process. The banking industry coupled with high fuel prices made everything difficult for a reversal. Therefore, you need to be more patient.

My advise is to trade small, preserve your hard earning capital and always wait for technical confirmation for an entry.

I see that VIX has been pushed up to 28.48 today. This means that VIX has jumped almost 30% since I wrote my last blog. It is an opportunity for options seller to get richer premium, but you can be always wiped out by the volatility of the underlying assets. Therefore, control and manage your position tightly and always do what options sellers/writers do for strategy: define your risks, positive theta for time decay, and a flat delta.

OPTIONS Trading…. Step aside and wait for a Reversal

I wrote to my forum (http://options.forum2u.org/) about 10 days ago and recommended readers to cover long position (Options Spread – Bull Put) since SPY would break down SPY 135, which was the support line. My argumentation was the fluctuation of Oil price during the past weeks and SPY experienced lower high and lower low on technical indicator.

On my surprise, the VIX did not get higher despite the downturn and writing options was not my strategy on this situation. It was very hard for me to find acceptable risk-reward on writing options since market was fluctuated but the VIX was low. Since the implied volatility/options premium that market maker priced did not corresponding with the actual situation….. so it was time for me to step aside (I converted most of my position to cash).

Up to this writing, the index has been depressed for 4 days in a row. It was really bearish condition and it could reach the lowest point SPY 126 like in November 2007. My advise is don’t take any bottom before a good technical indicator confirmation. To know this, I would look at multiple time frames graph and ensure there is no conflict one to the other. I also usually look for good stocks that depressed obecause of negative news and fears surround the whole situation. If the VIX is not so high, buying long term Options with deep in the money can be a choice (this will show you that an Options Writer can also do straight Buy Options to leverage profit).

Time to go for GOLF and COLLECT your OPTIONS Premium

It has been quite sometime I have not updated my blog. Do you know why……? Well, I’m too busy to do other things and not concentrate on market movement. One of my friend asked me how can I trade Options without looking at my position closely? I told him that no matter where market moved, my position was safe and I collect premium options everyday. Even… I collected options premium during my sleep and weekends !

Current market movement is on “Trading Ranges”, means it is going up and down on a range bound by strong resistance and support line. This condition is really heaven for traders who have style “Market Neutral” and/or “Write Options” on their portfolio. After wild movement on the past months, market is on consolidation phase. A relatively good news or bad news usually made the market went up and down a bit, and no wild volatility.

VIX or volatility index on the S&P is relatively low, ranging from 18-20. I believe the VIX will be on this range for about couple of months. This means, I still can relax and get the money every month without concentrating to the market.

My friend asked me: “how do you that? Well, it is easy if you know the methodology. On Market Trading Range movement, I did not go for bullish nor bearish. I have many combinations of Vertical Spreads, Iron Condor, Calendar Spread, Unbalanced Butterfly and even Sell Put if I like the stock. I aligned the “Delta” position as neutral as possible so that market movement did not hamper my profit and loss position. Since the VIX is low, the entry point must be precise, means I will sell / write options if VIX is on increasing trend to get “rich premium” on that spot. If the VIX went down, the options that I sold were certainly profitable already.

If the VIX is very low, I went for spread positions that help me/ increase in value when volatility is increasing. By doing this, I hedge myself no matter volatility is increasing or decreasing.

Other most important thing that I have to do is to watch the overall portfolio. I need to adjust properly if my “Delta” is far too positive or negative. This is what I call “Risk Assessment” toward a portfolio where every professional trader must understand this. Ok, I hope you can take profit out of the market on this trading range market and I will continue my other activities…..

BULLISH SIGN (short) in mid of BEAR MARKET ?

please click picture to make larger...

This article is a continuation of what I wrote two weeks ago about SPY (spider). As we know that S&P 500 is the pulse of overall market direction/condition, it is worth to see its price action. For the consistency of analysis, I also used two past weeks data. Despite price broke down from the rising wedge (see April 9,2008 article), price was able to rally again to SPY 139 due to good 1^st Q earnings from leading companies. 30 dma has more conviction on the upward move. Despite it is still a process to cross the 50 dma, but the angle upward movement was getting steeper. Double bottom presence was replaced by the forming reverse Head and Shoulder pattern. Once the price have technical break out of SPY 140, we will have more conviction on this sign.

I still believe SPY 140 is still a strong resistance line. However, price has tested 200 dma and this made this resistance line getting weaker and weaker. SPY 145 will be the next resistance point should price break out SPY 140. It would be hard to surpass this line since we are still on Bear Market and market needs more time to recover.

For Neutral Options Player, watch out for the break-out SPY 140. You may reduce the short (bearish) position should technical show this conviction. I will be more comfortable having neutral to bullish sentiment on this short time period. But......always look for price action..... (as quoted by Brian Shannon).

A Heaven for Market Neutral Options Players?

click for a larger picture...

“I was quite doubt that market will surpass SPY 140 level in the short time as subprime mortgage problem is still big…..” That was my comment in an article that I wrote on March 25, 2008.

The followings are what I see from the technical point of view now:

Despite many bad news on the market (i.e. recession slashed 80,000 jobs in March and national unemployment rate increased from 4.8% to 5.1%), SPY broke 50 dma after passing 30 dma.

30 dma has an upward movement and may crossing 50 dma. It is still a process and once it is happen, market will have more conviction on the move.

There was a presence of a rising wedge (triangle). Prices edged steadily higher in a converging pattern. The inability of prices to accelerate on the upside despite continued probes into new high ground suggests the existence of strong scale-up selling pressures – due to many bad news coming into the market.

There was a presence of forming double bottom. Despite it was not a strong indication market will move higher, the process had been taken months.

SPY 140 will still be a strong resistance point. If market gets a technical break out of this level, it will test the 200 dma and will reach SPY 145.

Any bad news from earnings this week will initiate pressure to the market and a sell signal may occurs when prices break below the wedge line.

Nevertheless, the bottoming process has been made and Fed will do everything to save the market. Therefore, I will not see that market will be easily drop to SPY 132 (the crossing of dma 30 and dma 50) or even the strong support line of SPY 125.

VIX (Volatility Index) is on decreasing trend to a low of 22.36.

Knowing that market is on a trading ranges, it can be an ideal situation for Market Neutral Options players. Iron Condor with high probability (i.e. 80%) can provide you with consistent income strategy. Be careful on market rally once it has a technical break out of SPY 140.