ETF Option Trading

option pricing model

ETF Option trading method that combines the directional trading of the ETF with the counter trading of the ETF Option 'against' the underlying trade.

2/20/2009 - feb expiration:  since the 2/9 synthetic option sell -89c|+86p against the open long AND then the 2/10/09 spy reverse into sell - the market has continued to sell off giving a sell addon on 2/19 - the trade being a pmd failure through the 2 blue squares triple break. 

expiration continued the selling giving an addon profit AND a synthetic option buy for march expiration done against a trailing addon short +77c|-74p - the position still an initial short-addon short uncovered for additional partial profit or option trades if the selling continues.

 

2/10/2009:  the open spy etf long with the spy synthetic long continued to a price momentum divergence high test of left side resistance, which was additionally a mex extreme - giving partial profits for the etf and for the options AND a synthetic short against the remainder of the option position. 

i had left the trailing etf long 'uncovered' against the stimulus-financial plan unveiling for the possibility of more upside - the 'plan' or lack there of reversed the market AND a gave a mode reverse to the spy.  as the reverse channel had already hit, and there was a spike up from that price with mex flow down, there was a trade setup at the red dot to reverse the buy - this synchs with a faster 'timing' chart which was already 'in sell' at the time - this followed by a 15 min addon.

 

2/6/2009:  trading has been choppy with the green dot1 buy done on the next day after the mode reverse missing a partial profit AND a 'hard' reverse giving an exit at a loss - there was then another V reverse back up BUT in this case there was never a setup to consider after the mode reverse --- there had been another mex extreme to do a synthetic long against what was then an open short AND 'against' the synthetic short shown below.

there had been another mode reverse back into buy BUT no setup before the close - the buy was then done the next day at the green dot as a centerline shift reject with mex flow that was into-through the 2 yellow square triple top breakout AND with 'lots' of left side room to trade through.

 

1/29/2009 red bar:  going back to 1/26/09 there was a mode reverse into buy without setup AND then the green dot buy was done as the entry on 1/27/09 - the move going to the yellow line for a profit AND an option trade selling the 90 call and buying the 87 put. 

the mode reverse to sell was without setup AND with the synthetic short 'against' the trailing buy i still held the long overnight - then 1/30/09 the reverse was done at the red dot.

1/23/2009 red bar-yellow dot mode reverse:  exit 82.44 long at 82.58 after 83.98 partial - there was no sell setup after the mode reverse.  the spy etf underlying is flat with an open option position = long a short jan 96 call-long jan 94 put exited and rolled to a short feb 88 call-long feb 84 put - short feb 84 put - long feb 83 call.

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At the time of the dia 15min yellow circle the 60min mode chart was still in buy-this was before the red bar - this then became the sell entry to that mode at the red dot as a right side pmd failure break of the left side support area where the period went to its highs.  After this trade was done there was a subsequent retrace after the 60min extreme BUT the mode remained in sell - red dot2 was a momentum resumption sell addon as a reject of the left-right blue line with mex flow and the ttmf hook.

 

The iwm discussion below from talks about how the iwm 60m sell was a time where a 'core' trading method setup was taken ahead of the actual mode reverse - that setup being a double top pmd high reject-purple square triple break with diagonal breakout potential.  Then red dot2 was done as an addon - a pmd failure break of the left-right price with the momentum resumption-ttmf hook - very similar to the dia addon except that was a price reject-failure where this is a price-failure break - these are setups from the same method concept of trading left-right prices from previous price action.

Now compare this to chart2 from yesterday's trade journal AND the repeat of the same trade setups used for day trading - where red dot1 was also a pmd swing reverse-an additional setup component coming from the floor pivot reject into the entry AND where red dot2 was an addon as a pmd failure of the left-right price from the buy price action - this setup also including a price reject component so it is a combination price reject-failure AND price failure break. 

Further compare the euro addon sell to the dia 15 min chart - where in that case the same setup was used to enter the swing because it was the first setup available after not trading around the initial reverse - in the case of the euro since there was an initial trade setup-trade the setup became and addon.

 

Still wanting to compare repeated method setups -vs- time frame and position trading or day trading - consider the euro chart AND are you flat in the area of the green circle initial reverse because you didn't have a trade setup on this chart or your 62t timing chart?

The green dot is another pmd failure setup - either as an initial entry if not long around the green circle-an addon setup if already long - the setup being a shift reject of the 2 yellow squares-blue line where the breakout was now as chart support entering at the green dot as a pmd failure.

This is a price reject-failure entry AND IF the entry area synched with a left side price from the price action of the sell swing this would be combined with a price failure break like the euro chart2 above - look to the left of this area AND do you have the 12508 price on your chart which then becomes the yellow circle area and where the sell swing reversed was --- having a pmd as a retest of this area 'trying' to reject as resistance is a very common occurrence AND the combination setup exists where this is additional a price failure break entry of that price.

 

Buy the rumor-sell the news has been the recent move centered around the election - moves that have been 'captured' both with underlying and option trading --- the buy being a mode reverse then shift-reject with mex flow up through the 2 yellow square triple top breakout with left side breakout potential - AND the sell being the reason for this chart.

Technically this isn't a mode related trade as it occurred before the reverse BUT it is a method selective base setup - pmd high double top start point - triple break entry with left side diagonal breakout potential --- synched with the fast chart focus line sell into the 2 right side points which is additionally a left-right triple bottom breakout. 

I won't usually trade before the mode reverse if for no other reason than there is an option trade participating in that direction IF I don't get a setup after the reverse - BUT this is a case where the method setup 'overrides' the mode.

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Ratio Option Trading

A couple of weeks ago I was discussing-showing some ratio put trades that I was doing where I was buying 1 put-selling 2 out of the money puts – the point of the trades were to take advantage of the volatility where these could be done at a nice credit, have directional participation to the short strike, buy stocks well below their current price if they were put to me-with that cost basis being lowered further by the profit-credit that would first be gained before this point. 

As the market has had a big recent move up – what do you think about doing the same trade BUT on the call side where you bought 1 call-sold 2 calls – is this the same essential trade that had been done with the put ratios when the markets were down so far BUT done with calls in the direction the recent market move?

 

Ratio Option Trade - Buy 1 Put Sell 2 Puts

rimm:  the stock was up all day against market direction AND i decided to include this with the 1:2 ratio put buy-sells that have been done recently.  the trade was done using december options after the initial reverse at a stock price of 52.00 --- what would the strikes-prices be using 97.5% volatility - what-where would your maximum profit be if the stock wasn't put to you - what would your stock cost basis be if it was put to you?

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when i had written previously discussing a 1:2 ratio put buy-sell in order to first gain directional participation AND then to possibly have a stock that you want in your portfolio put to you at a cost basis well below current price - i showed an IBM trade that i did when the stock was 86.92 and the stock IF put to me would have cost 64.80.

after doing this someone else showed me 2 similar trades that they did BUT using a 5 point spread on 1 and a 2.5 point spread on the other.  yes the ratio was done at a credit however they did go to january instead of november to get the fill AND yes this did give them a stock at a lowered cost basis - BUT besides having to wait to january they also didn't get the same kind of directional without being put.

since then we have seen some additional market movement - the 10/10 low-10/16 higher low AND although i am in not trying to say that there had been a bottom made OR that these prices were going to hold - they do give some areas to make some additional trade decisions around. 

for instance consider the top chart of xyz which closed 10/17 at 62.75 - had a 10/10 low of 52.00 AND a 10/16 higher low of 58.30 --- IF i now buy 1 60p 3.50 sell 2 55p 2.00 - i am selling the put below the higher low price AND my cost basis if put to me is 49.50 which is below the 10/10 low - i also have directional participation on a break of the higher low-hold of the low.

now i would still rather try to find stocks where i could do this kind of trade with 10 points between the long-short put BUT wanted to show an example of a trade that i could do with some of the decision parameters in a 5 point width --- always assuming that i want the stock in my portfolio if it is put to me.

Anyone have stocks – either personally OR in retirement – where the retirement account also allows you to sell puts against cash? 

Consider:  you want to buy xyz which is currently at 86.25 but don’t want to do this as a stock buy AND also don’t want to simply sell an 85.00 put for instance to get the stock put to you at a lower price --- you want to give this room to go down another 10% BUT you want to do the trade today – would you do the following: 

Buy 1 85 put – sell 2 75 puts --- model this for november options using 68% volatility – noting that the otm put has 75% miv.  After you do this the key thing I want you to know-understand – what would your cost basis be for the stock if it was put to you?

 

Option Trading Modeling

Model the trades-question on the following charts.

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ETF Options Trading - Training Introduction

Audio:  audio1  audio2

i mention trading options AND some people tune out thinking they are too confusing or risky

 

position trading -vs- day trading - not an either-or

something that could be traded profitably before real money day trading

what to trade

sector participation that wouldn't futures day trade

single etf - portfolio approach

 

 

 

Option

 

buying options - selling options

basic strategy - option buys OR covered sells

 

expiration math -vs- directional math

multiplier

delta

at the money

intrinsic value

 

call option

put option

underlying -vs- call option

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