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Two very popular options to trade are in the SPX S&P500 cash settled index and the SPY S&P500 ETF. Each offers unique benefits for options traders. Listen to this week's podcast to hear about the key differences between the SPX and SPY and some strategies for trading each.

Podcast Transcript

Sarah: Hi everybody, this is Sarah Potter welcome to the SCT podcast. We are in episode 36 and while I completely understand that when we do podcasts everybody is listening to podcasts at different times. TJ and I definitely wanted to highlight and have a discussion about something that's very relevant for this week. Now certainly our topic is going to be good for any of the weeks that are trading but it's especially important this week. So this week if you look at the market there's a lot going on. We have a lot of news, a lot of earnings, we have FOMC does a lot. So if you are even if you're not even an options trader, if you just trade stock, if you're just investing in the market this is a big week and we want to expect or anticipate that we will have relative moves to that. So what that means then is we're going to have many perhaps many of the stocks or trading instruments that you look at might look a little different. So what we decided to do is talk about some different opportunities to trade or different instruments to look at. So we're going to talk today about the differences between a cash-settled index versus ETFs. Now you guys know that we both like to trade those and certainly those are different instruments and they have different characteristics so we thought let's get into that so that people understand what they are like to trade and perhaps those are things you might want to go look at when you have a week on deck that has a lot of different news. So hi TJ.

TJ: Good afternoon.

Sarah: You like to trade the SPX a lot and I know that that's something that you do in the trading room and I would definitely say that you're really good at that. So could you start us off by explaining a little bit about what is a cash settle index and its characteristics?

TJ: Okay, sure. I guess let's compare how to trade indexes. So the two basic ways our cash settle index like the SPX and any TF like the SPY so the major difference between the two is the SPX is cash settled. So that means you will never be assigned shares of the SPX, there are no shares to be assign. The SPX you can only trade options on the index. So at settlement if you are in the money, you either have money put in your cash, put in your account or cash taken out of your trading account instead of a typical option where you would have shares assigned to you. The SPY is an ETF so you can buy shares in the SPY so if an expiration day you are assigned you actually get the shares so that is the main difference between the two. The other differences is just the size of the contract the SPX is about ten times the value of the SPY so that comes into position sizing as well and we can talk a little bit more about that maybe later in the podcast. And the other major difference is how they expire and we'll about that a little bit I guess later or we can get into that right now, what do you think Sarah?

Sarah: Sure, I mean I think expiry is a really important piece because that's something that when we get questions about when we're trading these instruments people don't sometimes realize that things can expire at different times especially in the SPX. So let's get to that. So this is a week that has a lot of earnings and new so especially Wednesday's FOMC and then SPX has expired on Wednesday. So in particular you like to trade SPX. Would you ever trade an SPX trade and have it expire on the same day that you have an FOMC announcement?

TJ: You could, that would be a lot like an earnings trade you know the market has expectations and obviously you're expecting a big move so you can definitely set it up. Is that my strategy? No, that's typically not my strategy. The two strategies I really like are overnight trade in the SPX so basically holding it, buying at the day before expiration, setting up the trade holding it overnight and letting it expire the next day. The other trade that I really like is also today trade. So to look for you know potential credit spreads on a Friday. However we do have to look at and we can talk about this as well that those two trades primarily work best when there's higher implied volatility in the market and right now if anyone's paying attention to the SPX, I mean we know that I mean IV was you know a couple weeks ago even if the last week was 8, 9 which is extremely-extremely low. So the credit is just not necessarily there for those types of trades but definitely those are the two setups that I prefer when I do trade it.

Sarah: But when the implied volatility be going up this week like perhaps this is a week that you want to pay attention to SPX because of all the news?

TJ: Yeah, you would you would think that that FOMC would actually you know really make a difference in it, but it's actually it's not, it's not changing implied volatility, we're just even if we look at the VIX it's just pegged it right at the lows I mean we were talking about it in the trading room a couple weeks ago how you know we were down in the low 9s on the VIX and you know we had to look back 11 years, we had to look back you know almost 11 years back to 2007 before we really saw levels below 9 and I think it was a VIX with eight and a half, 8.5 I think was approximately the number that we saw and that was back in 2007 and we know what happened. You know I have you know six months to a year later we had the big crash of 2008 and no I'm not saying that what we're seeing now is it all the same, I'm just trying to say that you know we're at really-really low levels and you know the VIX doesn't really want to go lower but it doesn't want to go higher either because the market does keep going up. So you know it's kind of stuck in a range and Daphne you know events that we would typically see an increase in volatility a little bit but not enough to really make a difference in trading.

Sarah: Okay. So those kind of change gears and start talking about ETF. So I know that in the trading room I get asked about SPY a lot it seems to be very popular instrument to trade and I want to specifically talk about it, obviously you guys all know that we both look at the ES which is the futures contract but they all represent the same thing, right? So this is the SNP and SPY in particular it is ETF so it's cheaper. So I think a lot of people really like to trade it because it doesn't cost as much to trade but I don't know about you but sometimes I find if I place trades or if I even look for trades and SPY it can be actually difficult to be able to actually get filled on a tray that you really like the charts can look really nice but when we move into the options chain sometimes to just things don't really line up. So a lot of times I'm not actually going to follow through on that trade because we can't see stuff except for weeks like this when you now have more news, more events that might potentially move the market if you are fearful of placing a trade, a futures trade in the ES or the SPX business setting up SPY can actually be a really good instrument right now.

TJ: Yeah, I mean absolutely. I think that we have to keep in mind too what you brought up is absolutely right. So I mean we think about if we're getting say we're doing a credit spread in SPX and we're getting 30 cents you know we're potentially looking at 3 cents of credit in the SPY so it really doesn't make sense to almost trade for that 3 cents. So I think you know we may differ in that opinion is, I really rarely look at the SPY and I don't I don't really see the advantage to it.

Sarah: Really? I can buy a call and SPY and have so much less risk because I don't have to put up as much in the trade and still be able to take advantage of the moves that can happen in the broader markets obviously the ETF is a representation of that. So I don't know, I like that, so to me looking out it this week and seeing, oh yeah, I expect the market to move quite a bit I think SPY is actually a really great trading instrument that I do want to be involved in because I don't have to put the risk up. Now you're probably talking about spreads, right? And trying to place a spread trade in SPYs almost impossible sometimes.

TJ: Exactly and I think too that. Yeah, I guess if you're looking to buy puts and calls I do agree that we’re, yeah so it's a little bit cost prohibitive in the SPX. I mean you can be 20 points out on a put or a call you know risking two thousand dollars on per contract whereas you could do that risk two hundred dollars per contract in the SPX which is probably more in alignment. So I guess if you think about it that way, yeah I guess they're useful for different reasons.

Sarah: Yeah, so a piece about SPY that I definitely want to mention is that, just because those are cheaper calls and puts to buy again they don't necessarily mean that they're going to turn into crazy profits, right? So if you're buying something and you see risked a dollar and you make thirty to fifty dollars on that trade that is a huge return on investment and so I think where people get wrong, go down the wrong way there with SPY is they start saying well I'm not risking that much but I still want to make a huge amount so I'm just going to let that run, run and run and you need to keep that all relative to how that instrument likes to move. So remember that SPY is cheaper than the other ones for a reason and that also is going to mean at that range that you're looking for needs to all be aligned with what is realistic. So realistic set realistic profit targets in SPY and I think that can be a really great trading instrument especially for just buying straight calls and puts. But you don't ever do SPY you do SPX so if we were to ask you like of the ES the SPX and SPY, which one is your favorite and why?

TJ: That’s a really good question. I think I'm tied between the S&P, the ES contract, the options on futures, and the SPX depending on how I feel in terms of position sizing on that day, the ES contract is about half the size of the SPX give or take. So you can kind of fine-tune position sizing that way as well. So I'm kind of tied between the kind of between the two of them. One thing I do want to mention as well is that the cash settle index is like the SPX you have to remember that on monthly expiration, you have to trade a different contract. So every third week is a month if you want the contract that expires on Friday, you do need to trade the SPX p.m. contract because the SPX contract expires Thursday at the close but the pricing is based on Friday's open. So there's been quite a few traders who have been locked in, stuck in positions on you know overnight Thursday as the market gaps up Friday morning and a max profit goes into a loss and because the option stops trading on Thursday at the close but is still pricing Friday so you still see it in your account, the price is changing but you can't trade it. So it's really an odd situation if anyone's ever traded the SPX the third week and not realized that it expired the Thursday. Well that it stops trading the Thursday but again it's still pricing based on Friday's open and it's not even the open, it's the open of all 500 stocks in the S&P 500. So that doesn't even give you satisfaction when the market opens, it could be 5 or 10 minutes before they or 15 minutes before they figure out an actual settlement price. So just a little wrinkle there.

Sarah: A little wrinkle. I think that's why a lot of people are afraid to trade SPX because of the expire reason and all the rules and trying to keep that in mind. So I mean if it was what you just heard TJ described was too stressful for you just to keep that in mind I mean remember you can still trade SPY or you can do the ES and sometimes even though with the size of the ES if you're doing a futures contract you might think, oh gosh, remember it's still an auction too, right? You're still doing an option on the futures contract, it does the same thing as the options and everything else it's just a different underlying a different trading instrument. So you know if SPX and understanding all of its different expiries is not something you're interested in then don't forget that you can also do options on futures on the ES. However I also want to mention with the SPX because it does have the different expiry, there's times during the week where the Friday expiry doesn't look good on the options chain but the Wednesdays do. So it really just depends of that week, what actually looks to be setting up and don't forget that I went like, it’s almost like double the trade opportunities there so you can be pickier about the ones that you really want and when they do setup definitely pick the one that's tailored for you.

TJ: Exactly and one other thing too is I think that you know if we draw a line and we've got premium on one end and no premium on the other, you've got a stock like PCLN where there's ton of premium, there's a ton of people with different ideas, the index is like the SPX used by a lot of institutions for various reasons and they're priced pretty fairly in the market, there's not a lot of arbitrage, there's not a lot of you know a lot of profits, you know the sneaky profits if you want to call that to be had, it's pretty well traded, there's a lot of volume, a lot of institutions, a lot of big trading in the SPX, so if you see a lot of premium at a strike that you think is way out of the money and it'll never ever get there by Friday you know chances are there may be a good chance that it does, you know you don't get a lot of those opportunities to get that bonus premium like you might in a in a PCLN

Sarah: Yeah, I mean I think that's good. Remember, they all have different characteristics but there's always going to be times when each of those are good to trade. So if you're afraid of the market swinging too much then adjust to the contract size that you like but make sure you remember that within each of those contracts that your profit targets need to be relative to how those individual stocks move. I think that's a good discussion this week. Don't be afraid this week if the market don't be afraid of news just make sure you're tailoring your trades to make to remember that we do have news and that volatility will change things. So happy trading everybody.

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Sarah: Hi everybody, this is Sarah Potter from “She Can Trade” and this is the SCT podcast, we are at episode 35, I have TJ here

TJ: Good Morning

Sarah: And today we are going to talk a little bit about how the market shapes in the summer and what to do through the summer months particularly in the market, so we are really in the middle of the summer now, we are moving into mid end of July and then especially as we roll into August, sometimes we can get questions about whether it’s worthwhile to actually trade in the summer or whether we should just avoid it and move back in the fall. And obviously since TJ and I are both trading, we would obviously suggest that yes, there are still great trades to be had in the market, it’s just about being aware of what’s happening in the market and adjusting your trade strategies according to what you are seeing as opposed to may be being too determined and focused in only looking for the same set up over and over again in the summer, so I will suggest the biggest thing that you need to think about summer is you need to be flexible, flexible with your mindset of what you see in the market and then what strategies can work accordingly as opposed to saying, I don’t have a trade calls, I do really well in calls, so you only look for is calls. So I don’t know how is your summer been so far TJ?

TJ: So far it’s been great, trading has been still really great, I don’t know when to really step away from trading in this summer, I think there’s still lots of opportunity obviously, I think I agree with what you say, you do have to match your strategies and market conditions but I think that’s any time of the year, we really have to pay attention to what the markets are doing. I think it was two years ago, memory service we woke up two or three mornings in a row in August and I remember distinctly one morning, the S&P was down over a hundred points premarket and that was in August, that was supposed to be a slow summer time to trade and we were still seeing lots of volatility. Governments don’t shut down, countries don’t stop bickering over the summer, you know there is definitely presidential issues that will continue in September, they are not taking a back seat or a vacation, so I think there’s tons of events that can move the market and that we can trade, we are in earning season right now and it’s the summer that’s creating the volatility for a lot of stocks, so you know, I do agree that, we do need to pick some time to kind of step away and recharge and if that’s the slow week in the summer to recharge your batteries and come back and focus, then absolutely, but I think just a step away from the market because it’s summer, I don’t know, I think things have changed lately, I think with the retail trading and more and more online trading, the more retail traders that are out there trading the market, trading all it around, there is no real season now to it, what do you think?

Sarah: yeah, especially, It’s to know that retail trading and we should mention that, right, we are professional retail traders, you are all retail traders by being involved in the market with someone who is not managing other people’s millions of dollars, you are basically trading for yourself, so that makes you retail trader. Remember, you are basically most likely trading with other retail traders as well and in fact, lot of people might be on vacation so they actually might be bumping up their trading more than ever because a lot of retail traders might have more time through December to actually focus on this, perhaps things are lighter for you at work and so you have more time to really focus on finding stocks or getting better at trading, finding more trades, all of those things can happen in the summer. They can actually be a really great time to test strategies too and I don’t know if it’s just about, depending on where you guys live, just having more sunshine, generally more people are happy through summer, may be if they are getting more because they are on vacation, I don’t know. But I think that means that, there’s lot more people interested in looking at the market and paying attention to it and sometimes when you are not as busy, you can still find trading opportunities as well. So certainly there’s a lots that we have in summer and just because the weather is warm outside, it doesn’t mean you can’t take your laptop outside and trading too right.

TJ: Yeah, that’s absolutely right, I think you make a good point there, how many people have taken some vacation in the summer up at their cottage or the way they pull up their laptop at the dark right on the deck and actually spend time trading or in the markets where, they normally have that 9 to 5 job where they don’t have that time. So, definitely some advantages there, I do think that we need to discuss kind of few pointers and a few things that we kind of should look for in summer trading because, yes, we will have those weeks where, it is just, the volume is just so low and the markets really don’t move. So I think that’s the key point, it’s we need to look for volume, look for those low days, look for those sideways weeks and when we get into those weeks or those days of trading then absolutely those are days to maybe go and improve your golf game. I think we do need to pick and choose when we trade but there is still with 3000 stocks in the NYSE, there is still ample opportunity every week to find your four, five, six trades.

Sarah: so on top of that, my tip would also be in terms of summer is, if you normally trade, let’s say six or eight trades every week, don’t go out to the market and say, I need to find my six or eight trades this week, it has to be six or eight and that’s what I mean by flexibility, this week you might find three because things are slow but next week you might have 14 on, so just be flexible with the numbers, don’t get too caught up in looking for a certain amounts of trades every week, you want to look for good quality trades. Another tip I think I would suggest is being flexible with the industries you are trading as well. Just because, say, you can’t find something in one industry and you love to let’s say only trade technology stocks but things are a little slow in that or they are just not as accountable as they usually are, then look through different industries. Summer can be a great time to try different areas and to try different stocks as well. Certainly the evidence you are looking for still looks the same, so I am still going to look for stocks that have a history to them, I am going to look for something that has a long term trend that I could take advantage of and I am going to mirror that with some other shorter terms charts to find nice entries and exits, I am going to look for a mixture of trades that have momentum as well as the mixture of trades that are pretty well standing still but I might do that in some new stocks that may be I don’t normally look at other times of the year.

TJ: Yeah, absolutely, that makes sense and I think that’s the way I look at it as well, maybe I have been trading Amazon every week through the spring, may be Amazon is a stock that starts to slow down in the summer and July or August, may be it doesn’t, but if it does, I will just move to something else. I think it’s more about, we need to pay attention to and I think be aware of when, which stocks are slowing down and when they are slowing down and just having that flexibility to trade and not be stuck in one strategy or one stock and just keep doing the same trade over and over again for six weeks and when or why it stop working or why price isn’t moving as much as it did three weeks ago.

Sarah: One thing though, I definitely want to mention in the summertime is, for people that look for trade set ups where you are looking for the whole of the market to change directions completely, sometimes because the volume is lower, those kinds of trades at the time is going to eat out a little bit, so what I mean by that is over the last few weeks, we have had a lot of stocks that have started to trend lower, so there’s a lot of people out there who I think are looking for everything to reverse and to start moving up higher again and what they are spending time is buying calls on dips and suggesting, ok, well this has to go up, this has to go up and I would just throw it out there in the summer because we are going to have some weeks that are going to move sideways, if that stock price has a lot of resistance specially on a weekly chart as a result of the last couple of weeks that are sold off, I would suggest it’s actually better to wait for those positions to get through that resistance first and then by the calls, so that traditional philosophy of buying on dips, it still good but I would suggest you really need to look at something like a weekly chart and just make sure that when the stock did sell off that there isn’t some established resistance there, because there is nothing worse than sitting in something like a call, so the assumption that’s going to move higher, but price just moves sideways through the summer because there is not enough volume to get that through that resistance. So may be waiting an extra week before you place trades like that, you could put them down on your short list but don’t buy, don’t get into calls and expect things to pop up right away when it’s moving into resistance through the summer especially.

TJ: Right and I would like to ask you questions well, and we can discuss, this is about expiration and I think that we do, that’s another point that we have to, that trader should look for in the summer is expiration Fridays because it is a Friday, people are leaving work early, they are stopping trading, they have got other things to do on Fridays, that we will see, there is a tendency for a little bit of kind of a slow Friday where we are not getting the moves on Friday that we would see on a normal expiration day, but we can also see what happens is, we get a move and then it kind of just drifts sideways on low volume and then we will see at the end of the day where there is a counter trend move to that, so I think we do have to pay attention to on low volume Fridays to expiration and just keeping an eye on how things are moving and with low volume may be support and resistance that would have held, had there been a lot of traders trading at that levels, you may not hold as well, so depending that we see on a high volume day during the year might not happen in that low volume just because there is nobody trading, not enough people trading those levels to keep price above or below those key areas of support or resistance.

Sarah: Yeah, that’s a good point, expiration can act a little differently in the summer, especially with long weekends too, that’s something to be aware of, but I think most people know that anyways those Fridays can be tricky days in particular, so if you are looking at trades and was thinking about now, we move into August and even into the end of August, and September, when you are setting up your trades also keep in mind of when that long weekend is, may be you want to take the week before or the week after as well and not even deal with that Friday because those don’t characteristically work as well as they would any other Friday throughout the year just because of volume things will now, that can be good or bad but if you want to increase the probability of what generally happens, then I would suggest taking the trade out to expire not on the long weekend, the Friday of the long weekend but take it out another week.

TJ: yeah, that makes sense, absolutely that makes sense, so I guess leave that with one or two trade take aways that our listeners can use over the next few months, so for me, I think it would be watch volume, watch the ATR as well, how much is the stock per moving, is it in a quiet period, is it not in a quiet period and just make that you are trading according to what the stock’s dealing, not what the stock has done three or four months ago, what it’s actually doing right now this week, today.

Sarah: Well, on that and I might may be just agree a little bit, is that I want to definitely be trading only stocks that have lots of history, so that is also very helpful because I do want to know what it has done in the past, I do want to use the but I also need to be setting up my trades to be realistic about what’s going on and you are right, like if it hasn’t happened, may be things to happen the fall, you see things move more than you do in the summer, you don’t expect that the price is going to move like it does in the fall, but we can still expect that it will move as it normally does through the summer time, so you can go back in history and see that stocks do still move in the summer and we still can trade those ones, but I would definitely stay away from newer stocks, I want to take stocks that are trending nicely and then I think my biggest step is looking for trades that are already moving in that direction as opposed to looking for trades that are going to switch directions, you are going to have much more probability of success in the summer because we don’t really know which week or day is going to be slow, we can’t anticipate but that will happen though because it is summer time, so generally trading in the same direction that it’s already moving in is helpful without having to do with any resistance, save the trades for pops and momentums into the fall and into the winter. Alright, another great podcast, I look forward to see you all, remember you can see us trading live in the live trading room at Shecantrade.com and all of your reviews are really helpful up on iTunes and anywhere you can post them. Happy trading everybody.

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Sarah: Hi everybody this is Sarah Potter from she can trade. And this is SCT podcast. We are at episode 34. Today's discussion is going to be focused around earnings and specifically how do you adjust and trade sorry how do you adjust and focus on your trades through that earning season. Obviously we'll talk a little bit about actually placing trades for earnings as a result of those. But also what do you do with all your other trades what to expect in the market when we have to go through an earnings season. So I have T.J. here.

T.J: Hello!

Sarah: And we're going to discuss this together. I think it'll be interesting also to hear our various perspectives on these kinds of things. So let's start off with a little kind of a definition of a basically an idea of what is earnings and how do you basically think the market moves through earnings season versus when we're not in earnings.

T.J: All right. So earnings we're talking about corporate earnings so every quarter financials companies release their financials and there's a lot of anticipation and a lot of excitement around the numbers or are sales up or sales down. Our earnings up earnings down how’s the company doing and obviously how does that link the stock price. Well, if you're a fundamental investor obviously the more the company's earnings and the better their financial ratios the higher the stock price. So people look for those numbers they look. They read through them they look for a lot of details to see whether the stock price is accurate. If it's a fair representation of where the stock should be trading and if not obviously do they think the stock price should be higher or lower? And the reason we need to watch for earnings is because it's a high volatility event. It's a pretty binary event. So the day before the earnings are announced or the day of there's excitement earnings are announced and as soon as the numbers come out you generally see a decent a big move in the in the stock's price either up or down. So what we need to do is options traders are we need to look for two things coming into earnings. One is we need to look for increased volatility. So we will see on our options chain that the week of earnings and especially coming into the day of earnings the implied volatility of that stock will increase. The other thing we need to watch out for is obviously if we're holding options positions through earnings so if we have put or a call or a spread or any trade that expires after the earnings date that that earnings date can significantly influence the price of the stock. And we just need to be aware of of those potential kind of potential influences when we go through earnings. So Sarah are there any websites or how do you find out, what do you look for where do you look to see when companies are going to have earnings.

Sarah: Yes, so I'm going to SCT up my trades differently through the earnings season than I will other times. And I do think that it's very important to always be paying attention to looking for when those earnings announcements are going to be because it's really going to change the flavor of how that stock is moving. So you guys know when we're trading in the trading room you'll often see us looking at the history of price how it's moving in relation to the broad market and those are really ways that we can identify opportunities to trade. But when we have earnings and earnings season that that announcement is going to change things. It's gonna do it also leading up to it. So you'll notice that I will still trade stocks a couple weeks before their earnings but we're gonna have to deal with higher implied volatility and if I'm buying a collar put I'm gonna have to deal with paying more than what I usually would in anticipation of that. And now a lot of times I can trade really well earnings actually before their earnings announcements so there's some good trades there when we look at how that stock has been behaving moving up to his announcement. We might have an expiry after the earnings but we can definitely take an opportunity to take advantage of a move prior to earnings. So generally stocks especially the more and more there in the media will have a nice move prior to its earnings announcement so we could definitely capitalize on that. So I mean it's tough to find them though right it's not about just okay well it's the next quarter. So all the stocks are gonna be moving because they have earnings announcements, there's going to be times when those stocks actually don't move they're gonna have less of a reaction than what market makers had anticipated would be in that option. And so that's also something to be paying attention to but when we're first looking for trades you can look at something like Yahoo Finance or a market watch or I think actually even some trading brokerage platforms have earnings announcements in them if I am correct on that. Did that do they have earnings announcements right in the platform?

T.J: A lot of platforms do. Definitely they do have the earnings dates. Obviously the other one too is nasdaq.com. They list the earnings dates you do have to generally current earnings date. If I'm going to be trading the earnings and I really need to make sure that it is that exact date whether it's before the market or after the close. I generally check two different sources because you'll find out as well if you look comb through earnings dates that different websites list may have a day earlier a couple days later. It may not always be that accurate. So I do like to double check there the one thing I do like about earnings I guess we can real really get into some strategies is what happens at earnings? There's two things there's the actual result of what happens and there's a move based on the result of what happens but there's also a move based on the expectations and that's how most stocks move. So if Nike moves up say they've got 75 cents per share of earnings and Nike so if the expectation was only 50 then that look great stocks gonna move up. If expectations were say 85 or 90 cents then the stock could move down as well so we can't look at just the absolute number. It has to be we have to look at expectations we have to look at was it sales was it revenue how do those compare?

And I think that's really what makes kind of earnings such an exciting time because there's so many variables involved. So with so many variables, so many inputs, so many unknowns what are some strategies that we can look at to give us kind of a shot at the best outcome because obviously saying hey I think let me guess I think the stocks gonna go up after earnings that's really a 50-50 trade at best guessing in the direction and we'll probably most likely guess in the wrong direction. So what can we do obviously out of the money credit spreads those are that's a great way to trade earnings you can limit your downside on that by keeping this spread nice and tight so maybe you don't want to do a five or ten dollar spread maybe you want to do a dollar or 250 wide spread. Keep your risk reasonable look for something out of the money as standard and a hat 1.5 standard deviation away staying wait far away from where the expected move is on that earnings announcement. Same thing with iron condors those work really well as well you can also just I mean you can also sell straddles. You can sell a strangle they work out really well again you're playing to the fact that the market thinks there's gonna be a bigger move and then really what's priced in and that's usually what happens. The trouble is they're unlimited loss. So we do have to be careful with that and if we are trading strategies where there is no stop-loss on them or where there is no limitation on what you can lose, we do need to be very careful because nine times out of 10 you're fine but those one or two trades where the earnings is two or three times the expected move. You might see yourself in a loss situation but I do think that there is a lot of opportunity out there to trade earnings. We just have to come at it with kind of a from a standpoint of this is these are some fun extra trades that we're doing. This isn't bread and butter meat and potatoes this isn't how I generate my reliable weekly income.

Sarah: Yeah, I wanted to mention that so when you're trading earnings I think the biggest tip is that you don't want to expect that all of your earnings trades are going to work and I think you need to kind of account for that. So when you're SCTting up trade strategies through earnings let's say you're placing one earnings trade a week through the earnings season that if you look at the collective of all of those at the end you can't have a goal of making eighty percent of those work. Because they won't because those trades at the end of the day are really more 50-50 trades. So as long as you're realistic about that and if you test the strategy over different quarters through the year and let's say you're coming out ahead sixty-five percent of your trades are right through earnings then that is a time that that you want to be adding all more contracts but you certainly want to test that through more than one quarter. So trading earnings is fun because yes it's pretty hyped up everyone talks about it. There's all this great opportunity, absolutely but remember many people don't talk they're losing trades. They only talk about their winning trades and it's with earnings you're gonna have winners and losers to betting regardless of what strategy you pick. But you can still make it work as long as you're very aware of what your percentage is as you move through each earning season. And so perhaps a goal closer to about 65% so you're getting more winners than losers so that overall you're still coming out with profit is important you don't want to just put trades on. And just pay commissions or come out at zero no your opportunity cost is important as well you've spent time looking for those trades and that's really relevant as well.

T.J: Yeah, exactly and I think that is I think that's the key to trading is everybody tries to do the same thing. And I think if you have to find something that works for how you feel comfortable trading and if earnings is a strategy that you can make money at that's fantastic I mean that that's great that's what you need to be focusing on. For somebody else doing the exact same trades they might not look at it the same way or be able to enter or exit at the same time and they may not, they may do the same trades but not but end up losing money on that series of trades. So it's really something that's very personalized and if you can make it work fantastic you just need to realize that with earnings there is a ton of anticipated and unanticipated things that are happening. And it makes it really exciting and there's that potential to make to make some really quick money. As you make that money you place the trade five minutes before earnings are released at five minutes after four and it's usually either max loss or max profit. There's usually not a lot of difference in between and if that's how you like to trade. Then yeah, what earnings is something that you can dip your toe into.

Sarah: Yeah, I think that's a good point let's end on that so we're moving into earnings season now so there's lots of opportunity and I think TJ's got some good examples here on how to kind of keep that risk a little tighter and I do like the idea of still trading but trading out of the money. And keeping that spread a little tighter so that if you some of those trades work great, if they don't that's fine. You're not blowing up any accounts. So look forward to you guys remember we do have our live trading room which is the opportunity for you to see both of us trade live all the time showing our real accounts real, trades, real money. Look forward to seeing you there and happy trading everybody.

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Sarah: Hi Everybody and welcome to the SCT podcast, this is episode 33 and we are going to have a nice little conversation today about what to do with the stocks that are trading around $1000 and TJ and I are each going to explain a little bit about how, what are approaches and how to get the most out of these very expensive stocks, so I have TJ here.

TJ: Good afternoon.

Sarah: Now TJ, as we all know especially if you follow in the trading room he is very good at a particular stock and that name is PCLN and he has been doing day trade in this PCLN stock for years, so I think we should kick it off there with your perspective and this stock has actually been sitting around $1,000 for a long time too. Can you tell us a little bit about why you like to trade PCLN which is so expensive and why you like to trade it as a day trade?

TJ: Yeah absolutely, you are absolutely right, I mean PCLN is almost $2,000 now and we have been day trading it since it was under $1000, it was $800 or $900. The reason I really like PCLN as a day trade and that's I guess we should be needing backup and talk about a little bit of how we do it. So, the setup is a Friday trade looking to cash in on the tremendous amount of premium that is still left in NPCLN because it's a really expensive stock on Friday. So the day of expiration placing the trade either in the morning or early afternoon and holding the trade a couple of hours into the close. Primarily, what I will do it either a call credit spread or a put credit spread. Just looking to capitalize on the available premium on Fridays and the reason it works is because the stock is so expensive

Sarah: You have really been trading PCLN since it was below $1,000 and now it is up to $2,000, my gosh time flies.

TJ: It's been a long time. Well the PCLN over the last little bit, it’s really, really ramped out it's been on fire lately.

Sarah: Ok so just curious then, if you think back when you just started day trading the PCLN and today, do you do it any differently like is something changed now that it's almost $2,000?

TJ: No, not at all spreads very expensive anything over $1,000, it just needs to get expensive enough that the time value of that remains on Friday is 20 to 40 cents. Obviously a stock that’s trading at $100 like IBM or Apple. On Friday, we will not have 30 cents or 40 cents of time value in a credit spread, that’s way out of the money, so obviously you need that high price and the higher it goes actually the easier it is to get more and more premium in it.

Sarah: Ok, so I think this is, to me it’s an obvious question but I want to articulate it anyways, is there reason why you are only day trading this as opposed to doing this further out, because it is so expensive and there is a bit of a sweet spot in that day trade.

TJ: There is, the reason we don’t tend to trade PCLN early in the week is that, it doesn’t trend necessarily all that well during the week, it will trend on expiration nicely but what we found is that, you kind of get website in and out of trades during the week, it will be up one day, down the next, up the next, down the next. It’s not a very consistent stock and with it being so expensive, it has really large dollar moves, so we have just found that for efficiency and profitability sake, it’s better to focus on it as a day trade.

Sarah: so, I find that quite interesting because I think what’s also relevant in the market today is we have Google and Amazon that have also crept up close to this $1000 mark and let’s just kind of focus on Amazon here for a second, what’s interesting about it is, it’s characteristics about how price moves in this stock, I think is changed as it has moved up to a $1000 and I find it interesting that you are mentioning that in PCLN, it can rip around quite a bit during the week, it doesn’t trend as much. If we look at how Amazon has been moving and we think about it really over the last, at least couple of months it hasn’t been trending as well either. And do you think, that’s a result of it getting up to about $1000?

TJ: I do think so, I think that $1000 mark is a big number. I think it does have some, I don’t want to necessarily use the word psychological but I think it does weigh on investor’s minds when it gets that expensive and I think that most investors buy stocks are foolishly concerned about the price of the stock, obviously investing you need to be concerned about the relative price of the stock compared to its financials obviously with, looking at it to be a value, compared to itself. Most traders will look at those $1000 stocks and say that they are too expensive and that they are way overpriced, when based on fundamental ratios, at $1000, it may not be overpriced, so I think there is a policy that we can kind of explore but I do think the $1000 mark does keep price, does keep traders and investors away from it and I think because of that, prices have hard time getting through it and stocks have a hard time through that hurdle.

Sarah: Yeah, Looking at Amazon for Call credit spreads now is a great idea and it will be interesting to start up applying your trades that I have seen PCLN to Amazon and Google, now that they are moving into that, that category and I would want to mention something here, I think you brought up something which is important to highlight and that is just because price in Amazon has come up to $1000, I don’t think you want to assume that, that’s just going to go and continue to move higher without any kind of resistance, that is a big marker and not a lot of stocks get up here in terms of price, so absolutely, I think to expect some resistance there is important. Now, the other piece I think also changes for the average traders is when the stock price is getting up to about $1000, that is certainly changing their risk profile for that trade, which means that because it’s going to move back and forth, you obviously have opportunities for gains and record, but there is going to be risk involved there too, because you can get really whipped out of that trade quite quickly. Do you think there is still a case for Calls and Puts in stocks like Amazon, Google or PCLN?

TJ: For me not as much, I would like to trade in the money, Puts and Calls and if I am looking at any in the money Put or Call in Amazon, I mean we could be looking at it being worth $20, $30, $40 per contract, so per contract you are looking dollar risk, anywhere between $2000-$4000, so it becomes a big trade and it does become one of those kind of limiting factors where you really have to think about, is your capital best used for that risk reward profile or is it better utilized in may be trading in two or three moderately priced stocks.

Sarah: Ok, so I kind of have to disagree a little bit because I do think that there is some opportunities in these larger stocks to still trade directionally but yeah, I agree just buying the Call and Put, it becomes too expensive and I would rather be able to spread some of that risk out, but what I can do is do a debit spread, so we can basically look at those stocks, have the assumption that it’s going to move, trade with the same strategy but have far less risk and of course the reward is cap 2 in debit spreads and certainly there is an argument there for debit spreads but it’s a great way for me to be able to take advantage of some of that volatility and still wait for those opportunities to pop, so I can buy debit spreads may be with a little bit larger or longer term expiry date and still have some nice money in debit spreads.

TJ: yeah absolutely, I think debit spreads are a great way of looking at the higher price stock and as well, you have got to think about that too is people look at debit spreads and don’t want to trade them because their profits are limited but honestly, if you look at the last protocol that you bought, did you make $2 or $3 or $4 or $5 on that per contract? Probably not, so if you limit yourself to say $2 $2.50 max profit in a debit spread, you are not even really looking for that anyway but people just tend to seem, oh I can only make $2, so they decide not to do the debit spread, hoping to buy the Put or a Call and making two or three times of that, but how often do they actually make that money, I don’t know, what do you think about that?

Sarah: Well, that’s why, like I said, I like debit spread, it’s because you still have the opportunity. I don’t understand why people will give away the idea of saying well $2 isn’t enough in this trade but if you traded at smaller or cheaper stock or call, you would be ecstatic with that amount of money, so debit spreads provide you a lot of risk and they do think that it gives you also the opportunity to hold a trade a little bit longer as well, right. So, I can still take a debit spread out a few months or weeks, whichever time line you want and still be able to make money, so I actually prefer these days, I have been doing more debit spreads in these larger stocks as opposed to anything else because I just think it has a really nice risk free profile.

TJ: Yeah, opposite there, I don’t do very many debit spreads, I am more of a quick in and out credit spread, overnight Thursday and a Friday or day trade Friday, and we were talking about Amazon and actually Amazon, we have done the last couple of weeks in the trading room on Friday and those trades have actually worked out really well for us, we managed to get 25, 30 cents of credit day of and that expiring for max profit being able to keep that for trade that last in may be 5 or 6 hours at the most. I do still like the credit spreads, credit spreads out of the money definitely, if you look at the chart of the Amazon right now, do you want to be in that stock for a long time, do you want to hold that for 2 weeks in a credit spread, probably not. I mean, it makes highs, it makes drops down, it makes comes back up all-time highs, drops right back down again, one day it’s an uptrend, one day it’s a down trend. So again really changed my focus in shorter time frame with the expensive stocks, so that’s how I trade them, it seems like we kind of approach it in a different way.

Sarah: yeah and I would say that, yeah, with the debit spread because you have protected yourself with the amount of risk, you can hold it through a day that it is moving down because the next day can pop right back again and ask me to take tradeoff for profit and we can end up with the same results, so I mean that’s interesting that we both are approaching these $1000 stock a little differently, both have good success rates in them and I think that’s also a really great reminder to everybody when we are trading, is there isn’t just one way to do it, there’s a lot of different ways to look at the market and it’s all about collecting the evidence and the reasons as to why you want to trade one versus another. Every trade is going to be a little different and it should be tailored based on what you like and so, you and I can look at these stocks and think, ok, yeah, it’s going up, it’s going down. But our approach, our strategy to be involved in the market is different.

TJ: Absolutely and I think that there’s many strategies, whether it’s debit spreads or credit spreads, day trades, long term trades, there is ways, definitely ways to effect the trade that mark expensive stocks with options and that’s the beauty of trading options is, you have choice and you are able to trade a $1000 stock and limit your risk and really make it still a stock that can stay on your watch list.

Sarah: Awesome, great stuff everybody, this was a great talk today about how to be involved in these more expensive stocks and remember that is, the best thing about auctions is we can still trade these regardless of how expensive the underlying gets, there’s still lots of ways to really take advantage of the trade, the movement in auctions even if you do it differently. So I appreciate all of your time coming to the podcast today. I would really appreciate it if you can post a review and honest reviews are the best reviews and it really does help the podcast moving forward and also please share it with your friends. This is something that TJ and I, both enjoy doing and spreading the word about trading. So we will see you in Amazon, Google and PCLN this week, right TJ?

TJ: Absolutely.

Sarah: Happy trading.

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Sarah: “Hi everybody, this is Sarah Potter, from She Can Trade. This is the SCT Podcast, and this is episode 32. Very excited to have you all here, the markets have been moving quite a bit lately, so we’ve had a number of really nice trades in the trading room at She Can Trade. So I have TJ here :

TJ: “Hello!”

Sarah: “And today’s topic, we’re going to talk about the differences, the advantages/disadvantages of weekly options versus monthly options. Now, you guys all know, (who’ve been following me and TJ in the trading room) that we do a lot of weekly options. We do that because they produce really great results. But we’re going to get into it in a little bit more detail today, why we do that, and what is the main differences between weeklies and monthlies. So, I think we should kind of start it all off with just kind of giving a bit of context about weekly options, and, for those of you who’ve been trading a while, weekly options is a relatively new feature for trade. I think it’s really only been around, what, three, four years? Since they really introduced weekly options. And really, it’s only been the last couple of years that it’s really gaining in popularity. What I've found is when I go and talk to different people, whether they’re from the COE, or I’m doing different talks, is a lot of professionals, a lot of them out there who will trade weekly options with their own money. I think that’s a really glaring great advantage right there, if you talk to a lot of professional people who are always making money from the market, and where they choose to put their money is in weekly options, to me is just a first advantage that’s’ very obvious as well. If they can make money, we can make money, we can all do well using weekly options. So, that’s something that I think is a pretty good advantage. And then, obviously, thinking about the fact that there’s [sic]lots of people trading it, so weekly options are quite liquid. That can sometimes be a good advantage for everybody when you’re trading; because you want to always have somebody to go back and forth with. So TJ, have you ever had that occasion where you’ve been trading in an option and the stock or the underlying might have moved in the direction you want, but the option doesn’t necessarily produce the financial results that you want?”

Sarah: “Ok, well this has happened to me, which is why I was kind of bringing it up, so sometimes when you’re getting involved in trading options that don’t have the same volume, sometimes the stocks can look so enticing on a chart, it looks really good to trade. So, I’ll go and trade the option, but sometimes I get caught in being involved in something that I’ve made a little bit of money in, but had I done something like Apple, or Facebook, or something in a weekly option, then generally I would have made more money in that stock as opposed to something that doesn’t get traded back and forth. There’s nothing more frustrating about being involved in a chart, when you see, and you look at it, and it’s taking off, but that option strike that you traded isn’t trading as much as you want. So I kind of find that weekly options, because there are lots of people trading them, make it easier to get in and out of trades.

TJ: Yeah, I think you’ve brought up a good point in that, with the popularity of weekly options, there is a ton of volume in the weeklies. You’ll almost see that in a lot of stocks, there’s as much volume in the weeklies as there is the traditional monthly expiration, in the third week of the month. Some stocks you do see a difference in open interests in volume in the monthlies, but, for a lot of the big stocks, the Amazons, the Googles, people are trading the weeklies and there is a ton of volume, there’s a ton of liquidity, you’re getting great fills in the weeklies, you’re getting all the advantages of a traditional option, but you’re able to trade those options four times a month. So, I think the discrepancy, the disparity between a weekly and a monthly expiration is that gap is narrowing, and really, we should be thinking of monthlies as just another expiration, as just another weekly expiration. Whether it’s the first week of the month or the third week of the month, that expiration for options is really all the same. Sometimes on the monthlies you’ll see a little bit of difference in terms of hitting or in terms of volatility on expiration day, just because it is traditionally the monthly expiration. You also get (on the monthlies) you’ll get contract rollover, you’ll get other types of options, not just equity options expiring as well on some of those dates. So, sometimes there is a little bit of difference but I would argue that right now, the gap between the weeklies and the monthlies is really closing and we just need to realize that yeah, you know what, we’re trading an option. Also, you know, I don’t have the stats with me, but most of the stocks on the S&P 500 right now have weekly options as well, and even now I mean if you look, we’ve started to (on the options on futures, on the cash settle indexes like the SPX) we’re now having three expiration dates per week. There’s sometimes with the SPX a Monday and a Wednesday expiration as well, so, the Exchanges have really looked to add product, and to give people really a lot of, you know, advantages of variety. What do you think the advantages of trading the weeklies are? Trading a short term? I mean, I think one of the biggest advantages for me is just how much the market is moving. I’m able to pick a smaller market trend and and trade that micro-trend that week and not have to, you know, sit through a weekend, or two weekends until the option expires.”

Sarah: “Yeah, I mean, the market likes to move, right? I’ll make money because everything goes up and down. So I think when you have more choices of when something expires, you’re able to tailor your trade a little bit more, like almost refine it more, because you can make more money in that, by getting in and out of those trades more often and looking for opportunities to really pop. Of course it depends on the strategy you’re using but rather than sitting in something, like let’s say doing a credit spread on a monthly option, which really doesn’t have the premium decay acceleration that we’re looking for, that you can really take advantage of in a weekly option, it just, to me, seems like you have far less risk. You just analyze and create the reasons for why you want to enter something like the credit spread in the first place, and then you get to place your trade and have an accelerated amount of premium decay in the weekly, as opposed to the monthly where, sure you might say ‘oh yeah, you can get more credit’, but you’re just sitting in it, like you’re just sitting there, a week, or two, and nothing’s really happening. I also think there’s a little bit more ‘give’ in a weekly option versus the monthly. So, with monthlies, let’s just talk credit spreads first : With monthlies, the credit spread has to, um, I think you have to be better at the direction, almost. You have to be pretty sure that, if you think a stock is going down, and you’re selling the call credit spread, you really need that stock to go down, because that’s where you’re going to see the premium come out and where you’re going to make some money off that trade. Versus, in the weekly option, because you already have an accelerated amount of premium decay, you can kind of be a little wrong. The stock can just stay still, and you can still make money in a short amount of time, which I think is so key. You don’t really have that advantage with monthlies. What are some advantages, you think? Let’s talk specifically in terms of strategies like credit spreads or premium time trades.”

TJ: “Yeah, as we mentioned before I think the advantage to the weeklies is just – I can get in a trade Wednesday or Thursday that expires Friday, and I can get in that trade and I can pick up, say, 30 cents a contract on a credit spread. If I go out a month, I may be able to get 50 or 60 cents, so it almost, to me, makes more sense to be in the trade a day or two, or three days, rather than three or four weeks, and do that same trade week in and week out, and even generate a little bit more in terms of, you know, if the strategy is working out and more credit – 30 cents a week times 3 or 4 weeks versus trying to get 50 or 60 cents out on the next monthly expiration. I think the advantage is that over those three weeks or four weeks that you’re trading, the market isn’t necessarily doing the same thing every week and you can tailor your trades. If I’m trading Wednesday and Friday there’s less of a chance of the market having a big move or abruptly changing direction than if I’m trading this week for three weeks out. I think we’ve seen it in the S&P, I mean everything looks great, we’re above the 21, we’re above the 8, we’re pushing higher Monday Tuesday Wednesday. Thursday we drop and Friday we drop and it’s completely changed how the market looks that week and by trading a shorter term I think we’re able to stay on the right side of the trend more often than not.”

Sarah: “Yeah, and that’s a good point too: the market has been moving around quite a bit, and you don’t want to be stuck in trades in the wrong direction. There’s not much you can do with those other than lose money. Whereas, if you’re getting in and out and actually cashing out of your trades, profiting on them and putting that money in your pocket, and then the following week you look to do it again, you can work with whatever direction the market’s moving in that week, as opposed to trying to hope that over the next few weeks or the next few months it continues to move in that direction. I think there’s far less times when you’ll open your account and you’ve seen that the trade has actually swung down into a losing position, because you’re not holding the trades as long, you don’t need to. You really get to capitalize on the moves. Now, I mean, that’s being said too: Do weekly options work when a stock underlying is moving quite a bit? So, you’re going to have, obviously more premium something as the implied volatility is higher, so things are moving around. Would there be an argument for buying calls and puts in monthlies, then, giving it a bit more time, versus the weeklies?”

TJ: “Yeah, I think there is, I think yeah absolutely. So for long puts and calls, yeah, I think you do need to give the stock time to move so I absolutely will buy it, typically buying it three to four trading weeks out, but I’m not going to be looking solely, saying, ‘okay well I can only buy an expiration of the third week of the month, the traditional monthly.’ No, I’ll be buying it, you know, maybe 3 or 4 weeks out, but the expiration will still be in a weekly option a lot of the time. I’m not focused solely on that third week of the month expiration. I’m just going to go out 3 or 4 weeks no matter where that falls. But yeah, I think definitely you do need to give trades a little bit of room when you’re trying to buy a call or a put.”

Sarah: “Yeah, I mean you do need some time, but you can still pick your weeks. And, I think the more choice you have, the better. And don’t get overwhelmed by choice, I think a lot of traders, because you do have, in options there are so many different things you can choose, make that a way to really focus on your own strategy, to make it really your own, and test the different ideas so that you’re really maximizing what you’re getting out of the market. There’s no sense in being in one stock when you can make more money in another. I would say that with weekly options, whether you want to trade it within that week or you want to go out a couple of weeks and still use the weekly option as your choice for expiry, there’s way more opportunities to tailor trades based on how you like to personalize things, how you like carry a risk, what rewards you like to work with. Regardless of whether the implied volatility is up or down, regardless of whether the market is moving or not, all of those advantages are still very relevant in weekly options. So, why not get into those and cash out of your trades more often? To me, it just makes way more sense. There’s far less risk than sitting in something and letting it go day after day, after day in the wrong direction when the market’s moving all over the place. So, I think this was a good talk and honestly, I actually believe that moving forward, we’re really not going to see new trading instruments come on, with only monthlies – I just think that weeklies is just the future. Or, it is the way that people trade now and it’s important to be able to adapt to those strategies in a modern market that we’re seeing today, because of all the advantages that we’ve outlined. So I did want to make sure that I’m mentioning in this podcast that reviews are really important and I would really appreciate if you guys enjoy the podcast, then post a review up on iTunes or any place that you like to post reviews about not only our podcast, but of course our trading room for many of you who are also members. Feedback is really important and an honest review is very helpful for everybody so I would appreciate that, if you guys could do that. Do you have any last minute words?”

TJ: “No, I think we’ve covered it! I think weeklies… the one thing that I’ll leave with is that I don’t think we should be thinking of them as weeklies and monthlies – they’re just options. Pick the expiration date that you want to trade!”

Sarah: “Good point. Alright everybody, have a great week in the market. We look forward to talking with you again. Take care!

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Sarah: Hi everybody, this is Sarah Potter here for the SCT podcast, we are at episode 31 and I have TJ here.

TJ: Good morning

Sarah: And today we are going to talk about Theta, all about time and the option and how that influences it, how do we use that to our advantage and what are some things we can look for when we are trading. So, to start us off here TJ, do you want to explain to everybody just couple of sentences what is Theta.

TJ: Theta is the time value in the price of an option, so when you look at the price of an option there are two components, the intrinsic value based on the price of the stock and time value which is based on the time to expiration, so the longer an option has to expiry, the greater the percentage of time value in the price of the option, obviously the shorter the expiry, the less time value there is. So as you are holding an option, if the price of the stock doesn’t change, the price of the option will go down every day till expiry and theta is the reason the price is going down because that time value that chunk of money in the option that is based on the amount of time to expiry is decreasing. So if you have an option and price doesn’t move, that option price will go down.

Sarah: Right, yeah, remember when you are trading options, we have to deal with time as an options trader or somebody who, let’s say is buying a stock, doesn’t really have to pay as much attention to it. So certainly time is going to influence the value of that option. So there is also different ways that you can deal with it and to take advantage of it depending on what strategy you are trading. When you look at Theta, obviously you can put that on your options chain, you want to use it, at least I want to use it not necessarily to pick the strategy that I am going to use because I am generally going to make that decision based on the direction of where I think the underlying is going, but it can be very helpful with how long you want to hold an option for, so do you have any specific rules about Theta in terms of how it influences the expiries that you are trading?

TJ: Yes, absolutely. I think that we want to make a distinction about it, I really found this interesting when I first started trading options is that when you look at a textbook or when you look at an options payoff diagram, it shows that Theta expires in a nice consistent way all the way to expiry, but what I found is that the through implied volatility, the price of the options still remains high into expiration a lot of times and that will affect the premium, the time value that’s elapsed, so it’s not necessarily a linear line or a straight line of expiration, I find that, let’s talk about weekly options, that generally in time value comes out fastest usually in the last three or four days of the options life and the same thing with, if you look at monthly option, that time value is going to decrease most rapidly in really the last week or last week and a half of that option’s life. So I really like to trade weeklies, weekly options in the same week that they expire. If I am going out maybe two or three weeks, I usually like to keep it within a month, I find that if you keep it within the last month of expiry, usually the last three weeks, three or four weeks, you get the biggest bank for your buck in terms of time value expiration. If you trade an option that expires in six months, you are really not going to see a lot of time value come out of that option for the first really long time. I think that’s important to know because a lot of people try and sell options or credits spreads that are 4,5,6 months old hoping that they are going to hold this for the first three weeks and they are going to see all this time value come out, but it really doesn’t work like that.

Sarah: Yeah, I know, tell me about it, I feel like that’s pretty common that people, and sure that can work sometimes but I think the influence there if you sold a spread or you done where you have collected credit and you are just sitting on because the expiry is way far out month or two out, you have either traded something and you got the direction right but it really isn’t the difference in the option value that is changed in those periods of time when you are so far away from expiry. So I actually think that sometimes you really just become a pile on out there in the market, you really are just saying, hey guys, hey everybody, hey market makers, I am just going to stay at this stagger right here and take whatever premium and I really hope that, I hope you guys don’t know this because I am here because you just become a sitting tuck. With credit spreads once you place the trade there is isn’t any more value to that trade, so you are not making any more for holding it any longer, so sometimes they can look to really great, the whole idea of I have just taken more credit and go further out in terms of expiry but then you are just sitting there, so your money essentially isn’t working for you, you have just kind of tied it up and it’s sitting there, hoping that price doesn’t come to you. I think also, when you think about Theta decay in terms of time, its different for weekly options but then also even in terms of buying, how far out is too far out, I guess, what do you think?

TJ: It really depends, that’s a difficult question to answer, how far out is too far out, I think it really depends on your philosophy, I think it’s same as the saying, how far in the money is too far in the money, I think there is a sweet spot there as well, so for me personally I think three to four weeks what I am buying an option. I know people will buy 3,4,6 months out, I mean they offer leaps, I mean people will buy options two years out, three years out in a longer holding strategy and I have never really come to a good conclusion as to whether that is profitable on long run, what works for me is keeping it short, keeping it tight, staying within the bounds of what the market is doing right now, because as we know, in three or six months from now it could be a whole different market.

Sarah: Yeah, I think that’s a really good point. So when we are looking at multiple time frames which we both do when we are trading, it’s easier to get a kind of feel for what cycle of the market is in now, so if you think about the market moving within a year, there is going to be time where it’s going to trending really nicely, there will be other times where things are transitioning and there will be other times when the market is just not moving at all and throughout, let’s say one calendar year, you are going to have different periods of time in the market moving that way, so the further out you go in terms of the expiry or not having to deal with Theta case, let’s say you buy a call or a put, you have to keep in mind that the history that you are looking at to decide for how the market is moving now, we can gather that information, we can use the weekly charts but once you start getting out in two months out, it becomes a lot more difficult to get a feel for what cycle that market is in at that time and so, actually, I think really what you are doing is using less information with higher risk, the further out you are going because you don’t have anything, you don’t have as reliable tools to get a sense of how the market is moving.

TJ: Yeah, exactly. We spoke about that in the previous podcast as well, the illusion of credits of few months out and you get a lot more credit, but really if you look at the probability of success, it’s no more than, it could even be less than trading the current week or the next week, so it was a lot of illusion out there and you really need to understand the data or the options chain and look into, what the numbers are really, what the data is really saying, I think deltas are really quick and easy way to do that or a lot of platforms have probability of success programed in and I think those are couple of measures that people can look at to give themselves a good benchmark of yes, I am getting all those credits or yeah, the trade looks really good, I can make $20 on this option but the chances of probability of it actually working might be very low.

Sarah: And so that’s even more true, especially the closure we guess, so we both like to trade weekly options granted but let’s talk about options in terms of day trading and how Theta then becomes very important because that’s really going to influence the success of your trade and a lot of times why you might buy something and think well, this is really cheap, I am just going to buy something in the morning, I am going to try to get out of it by the end of the day and sometimes the direction might be correct but you don’t really end up with a lot of money and that really has to do with how much data is influencing the value of that option because at that time, it’s going to be much more influential. So in that respect, if you think about just Theta in terms of day trading, do you think the data hurts it too much, is there still possibilities of day trading options?

TJ: Absolutely, I think you need to look at Theta when you day trading option, you will be trading the Theta trade, so you need to be selling on a day trade, you need to be taking advantage of that rapid time decay, there is a lot of the time on Fridays the higher price stocks, virtually the entire premium that you are getting at a certain strike is time value, it’s an order the money protocol that you can sell and it’s all time value which means that, within that day the price doesn’t really move all that much, you got to collect the entire credit. I think we also have to look too is we have to look at a lot of cheaper stocks too and we have to be careful at our trading less expensive stocks and that, if you are looking at say, you may have to actually buy a put or buy a call, if you are looking at something right at the money or just slightly out of the money, that entire premium can be time decay on a lot of inexpensive options. And that can disappear very quickly with a slight change in price that’s not favorable, so we have to remember that too that if your option has a lot of time premium in it, the price moves slightly against your trade, that time value will come out very quickly.

Sarah: Yeah and so in that respect as well, theta can actually be very helpful than when you are managing trades because if you have done something like sole deed and let’s say it’s pretty close to your strike, theta can be more influential because you want to see how much time is actually embedded in the option, we are looking for that to decrease quickly, so that can be helpful tool if you are day trading, use your theta to help remembering that premium decay will go away like premium is going to happen and disappear a lot faster obviously as we get closer and closer to expiry, so that can also be very helpful with management. Are there specific numbers and levels for theta, like I don’t think I have a number that I am looking specifically for those strikes, what about you?

TJ: No, not at all, I am not looking at specific number, it’s not like delta where for example, I want to buy a put or call, you are doing to 60s or 70s, I am really not looking at theta in terms of percentage, I am just looking at it in terms of what is the price of the stock, what’s the strike price of the option and how much of the option’s price is time value, so I am looking at it kind of in a general sense and not for any specific levels.

Sarah: yeah, me too, I think it’s a good guide and remember it’s just like a slide, sliding wheel, almost like it’s going to go back and forth, then we are just looking to see how influential is it at that time, is it moving, is it changing all the time or is it pretty steady and consistent, so those numbers can be helpful when you are trying to figure out whether you are in enter trades, stay and trades or look to exit trades as well. But it is a really important thing, I think it’s kind of an underdog element to trading options it’s not always discussed but it is at the root of all of your trades because the value of what you are paying or looking for to sell is ultimately what we are doing with trading, so theta is a very important element in trading options.

TJ: That’s true, absolutely. Another thing too, that I think we can leave on this note and may be this is a great feature of podcast is option pricing models and I think we have to keep in mind too that option’s theoretical price based on model such as like black shelves or binomial pricing or any of the calculations can be different than what we are actually paying for in the market, what it’s trading for and I think a lot of times we have to understand that the price that the option is trading for in the market is based on supply demand, it’s based on market makers and traders who are going to take the other side of the trade, so sometimes the price can be different than what we think it should be.

Sarah: That is a very good point, remember, to everybody. Whatever is text book and theoretical isn’t necessarily what’s actually going on in the market. And when you are actually trading, your expertise is very valuable because actually having your money there, actually getting filled, actually exiting, actually profiting , those are the things that are really important when you trade, it doesn’t matter what it says in the textbook, it matters what you can do in the market every single day. That is an excellent theme and let’s talks about that next time. Have a great week of trading everybody and take care.

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