While in the process of preparing for this week’s live Options Jam Session, I came across an open trade in $HMC that has been performing quite well for us.
It reminded me that when I wrote about the trade back on May 15th for subscribers, I began the piece with this:
I’m filing today’s trade under the category of “Hard Trades.” Not because it’s particularly hard to execute or because it’s a complicated multi-legged spread. It won’t require an excessive amount of margin to get positioned nor is there any risk of unlimited losses.
It’s hard because people might look at the trading action of the past few days and think that it’s “gone too far” and “I should wait for a pullback.”
But this isn't really about Philip and his cancer sticks.
Instead, I'm going to sell premium in his Philip Morris stock options, betting on the company going nowhere for at least the next month.
First up, look at this chart:
We can clearly see the range contracting all year in $PM. Given what the broader stock market is doing, my bet is this range contraction continues.
Now the wrinkle we have to deal with is that Philip Morris is slated to release their next quarterly earnings statement on October 19, which is ONE DAY before October monthly options expire! That makes it tricky to be selling premium in the regular monthly options.
But the good news is, we can select the October 13 WEEKLY expiration options to express our trade.
We're adding another bullish leg to an existing position we already have on the books in Google.
In early May, we purchased December 120 calls that have performed nicely for us. In fact, we already sold half of our position and are #FreeRiding on the remaining portion of that initial trade. We can't lose!
Given the price action and relative strength we've seen in $GOOG this summer, we're ready to put on another fresh position to take advantage of even more upside.
As I mentioned last week, we're in an environment where we want to be collecting delta-neutral options premium. Unfortunately, we can either pick instruments that are in well-defined ranges or we can sell high implied volatility, but it's getting increasingly hard to find both.
With this in mind, today's trade is in an instrument where options pricing may not be as elevated as it was earlier in the year, but it's still giving us a lot of room to be wrong.
Today's trade was crowdsourced in the All Star Options Telegram chat. Thanks to those of you who brainstormed with me.
As you know, I'm on the hunt for rangebound instruments to sell delta-neutral premiums in. The problem is -- it's getting harder to find charts that check all the boxes. I find myself having to make compromises. I can either find good premiums (often at the risk of an earnings event on the horizon), or I can find a stock in a good range. But it's getting harder to find both.
At the risk of sounding like a broken record, I'm continuing my theme of the past week of looking for opportunities to sell premium in mostly delta-neutral options trades.
"Delta-neutral" basically means I'm looking to collect income in sideways consolidations while the broader markets sort out this current correction.
Not only is this a good tactical bet for sideways, sloppy, and messy markets, but it also provides nice portfolio diversification if you have a book of long positions like I do.
We've got a well-known mega-cap stock to use as our vehicle today, so let's get to it.
The longer I’ve been in this business of trading, the more I’ve come to realize that “get better at smarter trading” is not the answer to the question: “How do I make more money as a Trader?”
Yes, we can all be better at regime detection, trade selection, strategy selection, optimal position sizing, risk management, and profits management. There will never not be room for improvement in these realms.
However, to me, the real answer lies somewhere off the charts. Away from the screens. Outside of our office or wherever we get work done.
The answer is located someplace closer to where we unwind. Where we exercise. Where we meditate. Where we reconnect with the important people and places in our lives. Where we rejuvenate our souls.
It’s becoming all too clear to me that one of the keys to optimal performance is to make sure our bodies and minds are right. And that ain’t gonna happen while hunched over a computer screen or mobile device.
As I and the team have discussed on The Morning Show and this week's Options Jam Session, I'm on the hunt for opportunities to sell delta-neutral option premium with $VIX exploring higher levels than we've seen in recent months.
Today's trade is in a sector ETF exhibiting elevated options premiums and signs for extended rangebound action.
And October options are offering us enough premiums to trade strikes sufficiently far away from current action, beyond significant support and resistance levels.
As far as setups for delta-neutral premium collection go, this one checks all the boxes.
A reader recently reached out to me, asking about a trade I put on.
I’m paraphrasing, but the conversation went something like this:
Reader: “The implied volatility of the MSTR June 450 calls is 64.7%. That is far from cheap, no?”
Me: “The absolute number of implied volatility is meaningless to me. I’m paying attention to its relative value. I want to know where IV is now compared to where it’s been.”
Reader: “Wow. That amazes me. I always thought the implied volatility was an indication of how expensive an option was. Could you write an educational piece on this sometime please?”
Dear reader, your wish is my command.
Here’s the thing about options premiums (and implied volatility, or “IV,” which measures premiums) – they mean revert.
When IV spikes, it’s only a matter of time before it comes back down. And when IV is low, it’s likely that any sudden premium moves will be to the upside, not the downside.
As is common when the stock market is moving lower, we're seeing rising options premiums. We aren't seeing any big volatility spikes yet, and $VIX is still relatively muted, but the recent rise coupled with setups that appear to be ripe for some sideways action in the coming weeks and months has me on the hunt for delta-neutral premium selling opportunities.
Today's trade is in a metals and materials stock that appears to be stuck in a year-long range that we're betting on continuing.
Check out this chart of Freeport McMoran $FCX for a visual of what we're seeing:
No matter how you measure volatility, there is no ignoring the fact that the daily moves (both realized and expected) have shrunk dramatically in the cryptocurrency space, most notably in granddaddy Bitcoin $BTC.
Here's Strazza this morning on twitter:
Implied volatility can remain muted for as long as it wants to. It's not going to expand on my schedule. But at least when we're range bound and options prices are relatively cheap, we can position ourselves further out in time to take advantage of the next big move.
