In the video clip below, I am discussing the OTM butterfly as a moderate bullish trade with a great potential for profits (as long as the stock moves in the right direction. My Elliott wave analysis shows me that both SNDK and AAPL are in excelent Elliott wave projections to take advantage of this approach. There is plenty of room to the upside.
to view the video, enter this URL in your browser's address field:
http://www.pathometrix.com/Movies/OTMButterfly.mov
You can download this and any other of my videos by simply going to the directory menu, locate the title of interest, right click on the title and download the link file. If you have a video iPod, you COULD view these clips. Simply drag the file into iTunes. Since all these are Quicktime files, the would work as podcasts. Here is the Directory's URL:
http://www.pathometrix.com/Movies/
If you would like to see each chart separately, here are the links:
http://homepage.mac.com/paperprofit1/.Pictures/SNDK/SNDK.png
http://homepage.mac.com/paperprofit1/.Pictures/SNDK/SNDK1.png
http://homepage.mac.com/paperprofit1/.Pictures/SNDK/SNDK2.png
http://homepage.mac.com/paperprofit1/.Pictures/SNDK/SNDK3.png
http://homepage.mac.com/paperprofit1/.Pictures/SNDK/SNDK4.png
http://homepage.mac.com/paperprofit1/.Pictures/SNDK/AAPL.png
http://homepage.mac.com/paperprofit1/.Pictures/SNDK/AAPL1.png
http://homepage.mac.com/paperprofit1/.Pictures/SNDK/AAPL2.png
http://homepage.mac.com/paperprofit1/.Pictures/SNDK/AAPL3.png
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2 comments:
Juan,
I have been reading and following a lot of your posts and I am learning a lot. I really enjoyed your video clip on OTM butterflies.
Do you look for these type of trades just before earnings announcements or any time the volatility is looking high.
Thanks
Hi newtrader, thanks for joining us. Earnings are ALWAYS a wild card, so any trade that you place BEFORE earnings can hurt you. However, there will be the situations in which you are reasonably sure of what is going to happen, and thus you place your BET. BUT be sure to realize that it is nothing more than a BET.
IN the case of AAPL, which I have been following carefully for years, I expected a bounce to $80 (at least). However, traditionally, the April quarter is the worse for AAPL, particularly following the christmas quarter. AAPL had been going down from the $80's without any strongly negative news. Then at the bottom, the stock completed a double zigzag. I was convinced that AAPL had made a bottom. It was no surprise for me that the earnings were positive. So going forward, I was looking for a rally, eventhough it did not materialize right at earnings report.
JUST before earnings, volatility spikes and that makes for an excelent butterfly for a reason: Investors are nervous about the report and may fear that they are either too bearish or too bullish, so the buy puts or calls to hedge their positions, which they quickly sell after earnings. Hence the drop in volatility. So you ARE being a contrarian. Being a contrarian is a dangerous game. BUT I think it is OK if you realize that you are buying a lottery ticket (with the odds in your favor, though). I invested $1000, which is less than 1% of my trading capital. BUT I COULD MAKE $6000.
I would suggest that you backtest this strategy. If you hit the mark 50% of the time, you are likely to be profitable, with very little capital.
JUST REMEMBER, volatility is HIGH for a very good reason. BE SURE to know and undertand what that reason IS.
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