How to view the entire chart:
1. Try clicking on the name of the most recent article in the column on the right. This will remove the "Archives" list.
2. Try right click on the chart itself and open it on a separate window.
I am sorry that I cannot always make the chart small enough to fit neatly on the left column. I want you to be able to see the details I want to point out.
I Hope this helps,
Juan
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Perhaps the most important part of the selection process is a powerful catalyst, second to that would be a strong technical indicator. Use advanced Get or any other technical analysis to complete your choice. Take a look at the chart of MA. Associated with the strong fundamental catalysts, we find strong technical indicators.
With the assistance of some technical indicators, MA was chosen for a bullish trade. For short to intermediate term trades, I prefer the Call Ratio Calendar (CRC) because it provides some protection for a temporary sideways motion. The downside protection would have to be provided by stop loss orders. The short position assures that the monthly rollovers provide some compensation for the time decay of the long option.
The volume spike implies that the volatility of the stock may be high. However, I have experienced that right after earnings, IV may decline, particularly in the short-term options. Carefull consideration should be given to the IV in both short- and long-term options when trading CRC's or PRC's. Simply buying calls or puts after a volume spike may not be a good idea because IV may tend to decrease shortly thereafter. However, the CRC or PRC may provide some protection against IV decline.
Note in this MA trade that the IV of my shorts is higher that the IV of my long options at the onset. This means that in addition to any Delta gains, I may have some Vega gains as well, not to mention any theta decay that may affect my short more than my long options
Note how the IV declines right after earnings. This means that I am entering options that will decline in value, everything else being equal. This means that my position is swimming countercurrent. This is not uncommon after a news release. The CRC allows me to trade my expectation without being too affected by what IV might do.
By expiration, the stock did move up but then down and sideways. Nevertheless, I have a 100% return in my investment in less than 1 month.
You can always rollover the shorts and continue on the trade for 1 month. I would only recommend that you establish clear and definitive exit rules. Leave the human factor as out of your trading system. 100% in one month is a very good return.
Be sure also to limit your losses by placing a stoploss. My recommendation is that you exit at 50% of the value of the trade. Do not place too much risk on an individual trade. I use 2% at risk of the total capital in my account.
Suppose I have a $12,000 account. Never put more than $240 at risk. If you work with options, you could enter trades of $480 each, and you should have a stoploss at 50% of the invested capital per trade. This will keep your capital protected.
You never know when the great opportunity will show up. It pays to save your capital for those occassions.
Be sure to create a system you can trust. Back tested sufficiently to gain confidence in it, and then let the rewards come...!
11 comments:
Hello Juan,
I am still following your blog and applaud you for your generosity.
I have put on a few CRC such as LH and CPB but I missed out on PCLN as I did not get filled. I find that there is quite a bit of slippage.
Do you buy ATM, OTM or ITM? I have been doing ATM mostly, if possible.
In your papers, you usually entered the CRC day after Vol spike if it closes above the High of Vol Spike day. Is this still the case as you did not mention it here.
Thank you in advance,
Mary
Mary, slippage may have to do with the volatility of the underlying. That means that you may be better serve avoiding stocks with a wide bid/ask spread in their options.
This is important for two reasons:
1. It is harder to get a good price.
2. It is harder to close the position when it is time to exit.
This is why I do not trade stocks with an average of 1,000,000 shares traded/day over the last 90 days.
Mary said: you usually entered the CRC day after Vol spike if it closes above the High of Vol Spike day
You should have a method of entry that will help you avoid "noise". Do that at your discretion. Do some backtesting and do what you believe in.
I use the CRC adn PRC instead of long options when the IV is high. If you simply bought options they may be too expensive.
Hi Juan,
Thank you for your prompt response. You opened my eyes to why slippage is huge. It has to do with volatility and liquidity of the options. I am careful in selecting low IV for the long option. However, even at the lowest, IV can still go lower but the probability is lower I suppose.
I was a bit confused. Do you mean to say that you only trade stocks with average volume of 1M in the last 90 days?
Do you prefer ATM options for CRC and PRC?
Thanking you in advance,
Mary
Hello Juan,
Would you recommend doing back to back months for CRC and PRC? eg Sell Mar and Buy April if I'm planning on exiting when Mar expires?
Regards,
MAry
That is right, Mary, I don't bother with thinly traded stocks, no matter how attractive the set up may appear. My searches always include a filter for stocks with at least 1M shares traded on average for the last 90 days.
I prefer ATM options for CRC, PRC, long options and even PCCRC's I always prefer ATM options. I prefer to make little money consistently, that a lot of money once in a while. I may even avoid a trade if I cannot find an ATM option >30 < 90 days before expiration. Thinly traded stocks have few strike prices too.
Mary said: Would you recommend doing back to back months for CRC and PRC? eg Sell Mar and Buy April if I'm planning on exiting when Mar expires?
I would say yes, but this would not be a all-or-none rule. Each case may be different. If you'd like we can look at specific examples. Even the fundamentals may play a role in my decision. Feel free to post your own trades, so we can discuss. Also, try to SELL front month, high IV, and Buy back month with low IV.
In his book, Trade Your Way to Financial Freedom, the renowned American psychologist Dr. Van Tharp discusses the role psychology plays in your trading success. He divides trading into three 'Ingredients of Trading'. In his pie chart, System is 10%, Money Management is 30%, and 60% is psychology
Thanks Juan.
Co-incidentally, I m reading Van Tharp's book.
At times, the long option has an IV that is higher than the short option, even though the long has the lowest ever IV in its time period, eg, 60-90 days.
Would you still trade this stock?
Would you use CRC on bullish stocks and PRC on bearish stocks, if it was triggered by EW or other indicators, other than earnings?
I am asking this because you said you generally use CRC if the IV is not low.
Can the CRC or PRC survive if IV is within 20% of the lowest IV?
Here are my CRC's:
20/2/07
Buy 2 May 80 Call @$3.24
Sell 1 Mar 80 Call @ $1.62
Lowest IV for 60-90 days = 17.5%
IV for long option = 16.65%
IV for short option =15.17
20/2/07
Buy 2 May 42.5 Call @$1.17
Sell Mar 42.5 Call @ $0.48
Lowest IV for 60-90 days = 14%
IV for long option = 14.73%
IV for short option - 13.22%
I look forward to your response.
Regards,
Mary
Mary, you forgot to give me the ticker of the underlying stocks in your examples.
My entry points are generally after earnings, these days.
I also trade long options.
The CRC's and PRC's are good when the Option price is too high (high IV) to simply play it long.
If the IV in the long options is high, and the short options is low, I would consider the long option alone. The purpose of CRC's and PRC's is to enter a trade even when options are expensive, if I am motivated enough to trade a specific stock.
Both your examples have low IV. I'd like to see the historical IV chart, but these are really low IV options. There wouldn't be too much of a benefit from selling front month.
If you BUY May 42.5 calls for $1.17, there is no point in selling a short here.
If you BUy May 80 calls, now that would make a little more difference in price as you'd sell 1.62, but this is because the price of the underlying is high (around $80). The issue here is that the IV is low, and selling that short would reduce your DELTA unnecessarily.
Please feel free to post the Underlying so I can comment further, if needed.
Hi Juan,
Thanks again for your valuable comments.
Sorry I forgot to include the ticker synbol.
The first one is LH and the second one is CPB.
Regards,
Mary
Hi,
Can we use this system for credit spread? since IV drops, we sell at high IV and the price should maintain or above the gap.
Happy trading
Happy, why don't you backtest it and paper trade it and let us know what your observations are?
Thanks
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