With everything that is currently happening in the markets and in the world – it seems as though this could be a good time to take a look at different ways to trade volatility – not only as a way to hedge trading positions that we might already have on – but also as a way to take advantage of potential rises and declines in volatility levels through the use of various option trading strategies – like iron condor trades, calendar spreads, credit spread plays and numerous weekly options trading strategies.

The traditional way to use options in regards – or in response – to volatility is to use them as protection for our investment portfolios.

The most basic example of this is a retail trader who might own some shares of stock and who might be afraid of a market decline which we know and have seen can happen so suddenly and to such a great degree in this more volatile market environment.

In a scenario where a retail trader might be looking for some sort of insurance against a decline – they can simply buy a put option. Buying a put option will allow the trader to ‘sell’ their stock at a certain level – which is whatever level they purchased the put option at – regardless of what happens.

For example – let’s say that Grampa Joe owns 100 shares of XYZ stock at 80 dollars – and due to numerous factors both in the news and the market – Grampa Joe wants to protect his 100 shares from a potential crash or big sized decline.

What he can do is simply purchase the 75 Put option – either a short dated option or a longer dated option (for example a LEAP option). What this will do is allow him to sell his 100 shares at 75 either before or at the expiration date of that option.

So, if there were a sudden crash and the price of XYZ stock fell to 40 dollars per share – rather than realizing a 50 percent loss in his stock position – Grampa Joe can take advantage of the put option that he bought at 75 – which is like his ‘insurance policy – and he can sell out his stock for 75 dollar instead.

The other thing to consider now that the weeklys are available – is that weekly options can also be used as shorter term insurance vehicles.

This is just one of the many option trading tools that can be used having to do with volatility – and perhaps the most basic.

In an upcoming post we will get into more complex and what I consider much ‘cooler’ option trading tricks and tools for trading volatility. Stay tuned…

A lot of traders have heard of the VIX and i’d be willing to bet that most of us option income traders use it. If we don’t trade it – we take a good look at it to get an idea of the ‘temperature’ of the market while trading our core strategies like the calendar spread, credit spreads, iron condors and more.

However, what a lot of option traders don’t realize is that there are numerous VIX products. In fact, there are 20 to 25 of these VIX related trading products available.

Some of these new VIX related products that are actually seeing a lot of trading ‘action’ is the VIX on Emerging Markets, VIX on Gold, VIX on oil, on Brazilian stocks, and more. These are products that basically ‘track’ the volatility for each of these individual indexes.

What these types of trading products can do is help traders get an idea of what the ‘sentiment’ is on each underlying. It can assist the trader in better tracking the underlying and then helping them to choose the appropriate trading ‘tool’ or trading strategy that best fits the current ‘Volatility’ environment that exists.

For example, let’s say that an option trader takes a look at the Volatility index on a particular ETF and notices that the VIX for that underlying is at a 52 week low point. That could indicate to the trader that should perhaps look for an option strategy that would benefit in a steady to rising volatility environment – such as putting on a weekly calendar spread or double calendar.

Another interesting development is that the CBOE is now tracking the volatility on 5 individual stocks – AAPL, GOOG, GS, IBM, and AMZN – which could be considered sort of ‘benchmark’ stocks that a lot of traders follow. This will allow traders – both of equity and options – to start looking at trading these stocks in a different way. Rather than just looking at price movement and where the actual stock is trading at – we can now start to look at these options from another angle – or dimension – the ‘volatility dimension’ and start to consider making trades or adjustments to trades based on that.

An example of how this could be used is for example let’s take AAPL and it is trading along and we own shares of it. Now, along with keeping up with the normal price chart for our position, we can also keep track of the volatility levels – and if say for example we come to find that the volatility level on AAPL is reaching some new longer term lows – that might be an indication that we might want to consider either hedging the position or maybe even selling off part of our position in anticipation of an upcoming corrective move.

You can learn more about these new VIX tools at the CBOE

This week our Free Options Income Trading Newsletter (you can join this for FREE by CLICKING HERE ) showed a great little video on weekly options, how they are continuing to explode in popularity and 3 different ways to trade them.

The weekly option trading vehicle has really taken off recently – actually since they were first introduced just a year or two ago – and they continue to soar in volume as retail option traders take to them.

The CBOE is showing that sometimes ten to twenty percent of the overall volume of options that are being traded are in the weekly options products – showing that these shorter term options are being really well received and used by not just professional traders but the retail crowd as well.

Individual investors are using these trading vehicles in a variety of different ways – just about any type of option strategy that be used with regular monthly or longer term dated options – can also be used with the weekly product.

This includes being used as calendar spreads – or variations on the calendar spread, more like diagonals. Also covered call trades where the weeklys are being sold against stock that is owned. Vertical spreads are being used – butterfly trades – even short term iron condor like trades.

There is also plays being made with the weekly option around earnings reports, product announcements, news events, FDA announcements, etc – where traders are making both long and short direction trades.

For more on how to learn a VARIETY of DIFFERENT option income trading strategies that can used with the weekly options, be sure to join our FREE option income trading newsletter by clicking here.

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‘Timely’ Options Strategy

An option income trade that we have recently been ‘testing’ in our weekly options trading lab with good success – is the weekly options calendar spread – or the ‘compressed’ calendar spread.

The calendar spread is an option income trading strategy where the trader sells a short term option and then purchases a longer dated directly behind it at the same strike price.

Before weekly options came to be, option traders would usually sell a monthly option (front month option that expired in roughly 30 days) and then buy an option at the same strike price behind it – one that expired say two months away – or even 3 or 4 months away.

The way this trade makes money is through the difference in time decay between the front month option and the longer dated option. Options lose value at an accelerated rate the closer they get to expiration – so in a calendar spread the option that is being sold – the front month option – loses value at a much faster rate than the longer dated option that is purchased behind it.

When this method is applied to weekly options – the returns can be extraordinary. When using these shorter term derivatives, the options that are being sold are experiencing their FASTEST rate of decay as they are in the last week of expiration.

In addition, using the these options instead of the monthly options for this options trading strategy, option traders can now put this trade on every single week – four times a month – or potentially 52 times a year – where before we could only place them once per month – or 12 times per year.

Lastly – calendar spreads perform best in lower volatility environments – where volatility rises. Right now, the VIX is at ridiculously low levels – and over the last month to two months we have been experiencing extraordinary results with a specific weekly options calendar spread strategy that you can see how to learn more about by joining our free options income trading newsletter / website through the link below.

To learn more join our free options income trading newsletter by clicking here

SPXPM Weekly Options

A fairly new weekly options trading product that was recently introduced is the SPXPM options.

Before this new SPX trading product was introduced, option traders could either trade the SPX options – which are not electronically traded and that have an ‘awkward’ Friday morning settlement – or the SPY options, which are a tenth of the size of the actual SPX and have an American Style way of expiring that could potentially wind up causing the option trader to find themselves with a bunch of unwanted stock.

Here’s a great video on the basics of this cool new CBOE SPX trading product…

Some of the highlights of this new SPXPM weekly options trading vehicle are:

1. These new options are electronically traded giving weekly option traders fast and accurate ‘point and click’ access to the SPX market. Many option traders consider this method to be far superior to the old school pit method.

2. The Settlement method for the new SPXpm options are settled at the close of trading on Friday just like most options on stocks – rather than at the opening print like the SPX and RUT options. I think most option traders would agree this is far superior as well as these options can be played right up to the closing bell and we know exactly where the options will expire – and if they will be in or out of the money. With options that trade on the opening print – no one ever knows where the opening print will be at – and in cases where there is a news event or some other type of market moving event – option traders could (and have) get burned with options that were out of the money at the close the previous day – but suddenly at the opening print because of a big opening move or opening gap – are suddenly IN the money and options positions are at a loss. The new SPXpm options will now keep that from happening.

3. Cash Settled Remains the same. Most options that expire  on the close of day Friday have been American Style options – which means that if they are in the money they can be exercised which would cause the option trader holding the position to suddenly find themselves either long or short a ton of stock that they never wanted. The SPXpm options – just like the SPX and RUT options – are Cash Settled – meaning that there is no exercise of stock possible. The positions are simply settled at the end for cash in the account.

4. An advantage of trading SPXpm options versus trading SPY options include both the cash settled aspect touched on in the previous point – and also the issue of size. SPY is one tenth the size of the SPX and SPXpm – meaning that you could trade the same amount of capital with many less contracts saving a lot on commissions.

If you like to trade option income strategies on the SPX or RUT – be sure to check out these new SPXpm options as a great potential alternative way to trade the SPX.

And if you haven’t already, be sure to join our free option income trading newsletter / website to discover how to learn a ton of unique option income trading strategies that can be used with weekly options as well as standard options on a variety of stocks and indexes including these new SPXpm options.

To join our free option income trading newsletter / website click here

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Weekly Options Resources

Whether you are trading weekly options or option trading strategies with standard monthly options – or even longer term leaps – here are a couple of great resources that all option traders should be aware of to help ‘better’ their game.

Each of these are from the CBOE – which can be found at cboe.com – which is a huge ‘rich’ site with tons of option – and ‘option income’ trading resources and content.

Among this great content – especially important for weekly options traders – is the resources that are available that describe in detail how option trading settlement procedures work – such as when and how they finally settle (for example standard american style options vs. european style options – along with the new SPXPM options, etc)

The CBOE offers a free excel download of the weekly options every week that they come out. You just go to their website and download the new list of weeklys every Wednesday. It comes available to download in an excel sheet with a lot of data for each underlying that has the current weekly options available on – which you can sort, slice, and dice in a variety of ways to help you make better decisions on which trades to make.

You can also subscribe to an email from the CBOE that will keep you up to date with the new weekly options as they come out. You can have them sent directly to your email box rather than having to head over to the site and look them up.

And also – there are literally hours and hours of great options trading educational that can be accessed for learning.

For a carefully put together list of the VERY BEST of these option trading educational programs and videos (there are so many that it is definitely worth your time to get this list and cut right through all the ‘not so amazing’ stuff) be sure to visit our options resource center inside our FREE options trading members website – or just email us and we sill send you the .pdf.

To join our free weekly options / options income members trading website CLICK HERE

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Weekly Options – SPX PM

There’s a new weekly options trading vehicle in town based on the SPX called the SPXPM.

Traditionally the SPX options expired on Friday mornings along with options on other major indexes like the RUT. For us option income traders, who like to trade credit spreads, iron condors, butterflies, etc – this Friday morning settlement always caused potential problems and headaches as we never really knew where the underlying would ‘finish’ trading at.

For example if we were playing an option income trading strategy on an underlying like the SPY or a stock – we could literally take the trade right into expiration without necessarily having to take the trade off. If we were able to watch the market – and if we felt nimble enough to get out of the trade if we suddenly had to – we could simply watch the underlying tick away into the final moments of expiration and if were safely ‘out of the money’ we could simply let the options expire worthless without having to pay extra commissions to take the trade off.

Not so with the bigger indexes like the RUT and the SPX. These options expired on Friday morning – at the ‘opening’ price. The final ‘number’ where the underlying came in at based off of an aggregate of a total of all the stocks in that underlying – based at where they opened Friday morning.

This ‘opening price’ settlement makes it impossible to make any sort of hedge or adjustment based on where that opening ‘settlement’ price came in at – presenting a situation where if we decided to take a trade into expiration on any of these indexes – we were really pretty much gambling and hoping that some sort of bigger than an expected move – or gap – wouldn’t occur to suddenly take a trade that was ‘out of the money’ – ‘into the money’ – and into an option trading loss.

In fact, I know of many option traders who would take their SPX or RUT positions and hold them over Thursday expiration night – thinking that they were clearly ‘safe’ and in a winning trade – only to have a huge opening move – or gap – throw their trades into  a major loss – without them being able to do anything about it.

Enter the new SPX PM options.

This new option trading product is the same size as the SPX, is electronically traded and expires on Friday ‘PM’ just like other ‘normal’ stocks.

And it comes in a weekly options version too.

This is a great addition – allowing us option income folks more ‘options’ in trading the SPX and playing it right into the close without having to exit early or be subjected to an ‘unknown’ type of settlement like the older SPX and RUT options present.

Now – they need to do the same thing with the RUT.

To learn more about a very SIMPLE way to trade options for income that can be used with these new SPX PM options (as well as the older traditional SPX, RUT, and ETFs like the SPY, IWM, etc) be sure to join our free option income trading newsletter by clicking here.

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There is a new article on weekly options in our free members resource area (link can be found in our free members area resource area – join our free option income newsletter by clicking here) – that talks about when is the best time to place a weekly options trade.

Selling option premium is what is being talked about – and covered are two possible scenarios – either placing an option selling trade (like an iron condor, butterfly spread, calendar spread, etc) as soon as the new weeklys are introduced on Thursday morning – or waiting until towards of the end of trade day on Friday right before the market closes.

The argument is a bit skewed towards waiting until end of day Friday – and place the trade right before the market closes – with the thought being that the sold options will be allowed to decay over the weekend as if they will continue to decay at the same daily rate while the market is closed and there is basically no risk on any movement.

This sounds nice in theory – however for those of you who might have tried this you will probably agree that that is not exactly how it works. Too many times I have closely watched the profit and loss levels of these types of option positions from the end of day Friday until the opening bell on Monday – and have not found any decay at all. It’s the same as a normal one day change – because the market makers adjust the pricing on Friday afternoon to take into account the closed weekend days.

I do wish it were that easy, however, unfortunately there’s still no free lunch on Wall Street.

In my own experience I have found best results with placing my theta positive ‘option selling’ strategies on Thursday – the same day they come out – about two or three hours into the trading day.

I DO usually find a significant decay happen over that first day period – and if by Friday afternoon at market close, if I still haven’t reached my profit targets on my iron condor, butterfly spread, or calendars – I will usually carry them over the weekend.

To learn more about a very simple way to trade options for income, be sure to join our free option income trading newsletter by clicking here.

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One weekly options trading strategy I like to use is to mix selling weekly options in with my traditional monthly income trades.

For example, last month in our Options Income trading lab we had on a monthly iron condor trade. This trade was just a standard ‘vanilla’ type of iron condor – however due to the big run up we have seen in the stock indexes over the last month we did have to employ some adjustment strategies to the upside.

At one point in the trade our position was lopsided as we had bought back all of our put credit spread trades and only had on a hedged call spread above where the underlying was trading. When we got to the weekend – Friday (this was with a few weeks still to go until option expiration) we realized we had an opportunity to bring in some additional credit / premium to help out our trade.

Normally at this point – before the weekly options were around – we would consider selling some same expiration monthly put spreads agains the position over the weekend to try and bring in a quick short ‘cash infusion’. The thing with making that type of trade however, is that there is still some good time / life left in those monthly options and if the underlying were to quickly start moving down we could find ourselves in a position where we would need to begin managing those new put spreads – and even potentially baby them all the way until expiration.

We were just looking for a quick ‘over the weekend’ cash infusion – where we could sell a few put spreads – bring in some additional credit – and then get out of them early in the next week.

Weeklys are perfect for this. True, you may not get as far away from the money as you might with the monthlys – but the weeklys will decay so quickly – if you place the trades appropriately most likely you’ll be able to get your ‘quick cash boost’ and then get out of the trade before any heavy duty management needs to be done.

To learn more about our unique way of trading options be sure to join our free options income trading newsletter by clicking here

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