Happy Friday, or as we’ve come to know it here in the Market Minute… Happy Mailbag Day.
Let’s take a look at what’s on subscribers’ minds this week…
Over the last month or so that I have subscribed to your service, I have finally felt that I am part of a service I will benefit from the most. I am more confident in the options trades. Your way of market analysis is amazing, and is in line with how I have used them for Forex trades.
One quick question. Do you pay attention to gamma/delta or other variables at all when you select the trades? Or you don’t pay attention to them when analyzing if the option and strictly operate based on risk/reward and the great technical levels for your trade consideration?
– Srini
Hi Srini. Thanks for an excellent question.
When selecting an option to trade, it’s important to understand how the “Greeks” will affect the price of that option. The “Greeks” are the mathematical price derivatives of an option. For example, the term “delta” refers to the expected price change in an option for a $1 move in the underlying stock. “Gamma” refers to the expected price change in the “delta” for a $1 move in the underlying stock. Many option trading platforms have this information calculated and available for customers. But, I suspect a lot of folks just ignore this information because they don’t understand the value of it.
I use technical analysis to find a stock I’d like to trade and determine the potential move for that stock. Then, in the option market, I use the Greeks to help me identify the option that will give me the most favorable profit scenario if the underlying stock reaches my target.
Just wanted to say I LOVE your service! Watching the market through your eyes is an invaluable experience. I appreciate your insistence on preserving capital for only the best setups and not getting too aggressive, while still taking good speculations along the way. I hope the opportunity to become a lifetime subscriber comes around again someday when I'm better prepared! Thanks Jeff!
– Chris
Thanks for sending in such a nice comment, Chris. I’m glad the service is working out for you.
Jeff, I'm a subscriber to your services (Jeff Clark Direct/Delta Report) and sorry for sounding ignorant but when you tell traders to consider shorting the SPX, are you suggesting to buy long put options? And if so, what expiration (short-term options, intermediate-, or long-term)?
– Dave
Hi Dave. Almost all of my option trading is either short-term (one day to two weeks) or intermediate-term (two weeks to three months). I rarely ever trade longer-term options. In cases where I have a strong conviction that a stock will push higher (or lower) over the long term, I prefer to make a series of short-term trades – where I can hopefully make consistent profits over time as the stock moves in my long-term direction.
So, if I expect the S&P 500 to move lower over the next few months, then I’m not going to make one longer-term trade. Instead, I’ll take a short position – preferably when conditions are overbought. Then I'll take profits quickly when conditions get extremely oversold, even if the S&P hasn’t reached my downside target. I’ll look to re-enter a similar short position when the market relieves the oversold conditions and then just keep repeating similar trades until my final target gets hit, or the market stops me out of the final position.
That said… trading options on indexes is a bit trickier than trading options on individual stocks. I’ve found that index options often have an “anticipation” premium. In other words, an index may stay at the same level it was just a moment ago, but the options will trade slightly higher or lower as traders – who may be watching the exact same indicators I am – try to anticipate the next move.
Then the index moves, but the option price doesn’t do anything because the move was already priced in. So, to be successful trading index options, you have to anticipate the anticipators.
That’s just too hard to do.
So, when I’m looking to trade the S&P 500, or the Russell 2000, or any of the other broad-based market indexes, I’ll usually stick to trading the exchange-traded funds like SPY, or IWM. And if I want a little more leverage, then I can always trade one of the double- or triple-levered ETFs offered through iShares, ProShares, ProFunds, or any of the other ETF companies (you can google the ETF company names and get a list of levered funds).
One note of caution on levered funds, though…
Most levered funds use futures and options. As such, the net asset value (NAV) of these funds is constantly decaying. So, they’re really not suitable for trades lasting more than a few days. I’ve made the mistake of holding levered funds for a few months before, and even though the underlying index did what I thought it would do over that time frame, I didn’t make any money on my trades because of the NAV decay.
Best regards and good trading,
Jeff Clark
P.S. You can send in your questions, suggestions, and trading stories to me right here. While I can’t respond to every question, I do read each one. And I’ll respond to some of the most frequently asked ones here in the Market Minute.