Since its IPO, GOOG has been trading in an impulse series, and has recently completed a corrective wave II (in purple in the chart below). This means that the stock would go to new highs in short order and in an aggressive manner. If I am right, GOOG may easily approach $600/share, and possibly higher. Note the bottom of wave II concluded in April 2006 concluded and has been followed by a wave I of a lesser magnitude (in red), and part of a wave III in progress.
Next, I have selected the area starting at the bottom of wave II as described above, and reanalyze. The chart below indicates that there is a high probability that wave II (red in the chart below) may have concluded too, and wave III is already in progress.
I am ready to enter a PCCRC, because of my Elliott wave analysis. My alternative would be to BUY 10 share of the stock at $470 or $4700 with a stop loss to limit the risk and a delta of 10. A long call ATM would be a $3210 at risk. This is important when calculating YOUR risk in the GOOG position.
My paper account is now at $144,203. I am willing to risk 2% of that capital in a single trade, or $2884.06. Either with a stoploss or with a max investment of 2%.
Here is the position I propose:
Here is the entry in the paper trading account
34 comments:
Juan,
Have you been able to configure a way of scanning for these trades now without using Platinum?
I know it was one of your aims a while back, so I am wondering if you were successful?
There are three basic types of PCCRC candidates:
1. Stocks that jump >10% in stock price as a consequence of earnings announcement. You can easily use IB's market scanner to select stocks with an average vol >1M shares and >10% gain in stock price. Using the option's trader, you can easily see the IV of the options you intend to form your trade. If the front month option's IV is NOT larger than the front month IV then pass. TOS offers also a SCAN tab that allows to select for the same stocks. Once identified, go to YAHOO financial and try to see what is the reason of the jump. If it is fundamentally good, then enter the trade.
2. IV skew: You can easily use Platinum to select these. You may run across one of these by coincidence using the IB or TOS software, but only Platinum would allow a proper search for them.
3. The high fliers are stocks that are reaching 52 week highs, so that is easy to find using technical analysis software like Telechart 2007 or IQ charts. Then, once you locate those, then look for the proper IV configuration. Be sure to sell high IV and buy low IV, never to exceed 40% on the buy side. I prefer not to go below 30% IV because such stocks are not going to jump strongly.
Once you decide to go for it, TOS will show you a risk graph under the ANALYSE tab which is excelent in my way of thinking. The structure of your trade can be easily examined there.
Finallly, there are two items that only Platinum can give you...
a. IV/SV ratio. You don't want to be above 1.0 in this trade.
b. IV historical chart.
Both of these are important items to consider. Not having them in your arsenal might be a bad handicap. I would be careful with that. Only a thorough paper trade evaluation can show you the impact of these measurements.
Juan,
If only Platinum can give you IV/SV ratio and IV historical chart, then it's somehow necessary for finding PCCRC candidates?
Also, how do you get rid of the right side window from your post so that I can see the entire risk graph?
Dan
Juan,
Well, it's nice that you believe that GOOG is set to move, and a good choice for PCCRC. I don't have your expertise in EW, so it's hard for me to say anything about your analysis.
If I look at what the analysts say about GOOG, the stock is expected to be at least 550$, but not sure the time frame.
By the way, when the analyst give their opinion, do they use a timeframe in mind?
I'll look and see if I'll be able to find another way to trade the expected up move.
Dan
Juan,
I've been looking at your trade. At the close of today the ATM PCCRC would be at 480.
I am not sure what can we really add to your work. For instance, we can look for other trades that would benefit from a forceful move of GOOG in one direction before Sept.
Other than that I'm not sure how can we really improve your system.
Tell us more what you expect, please.
Dan
Juan,
Let's say we believe GOOG would move higher before expiration in Sept.
What if we buy an OTM call spread 590/600 for 60$ per vertical. We risk $60.
How is this trade in your view?
Dan
Dan Said: If only Platinum can give you IV/SV ratio and IV historical chart, then it's somehow necessary for finding PCCRC candidates?
Dan, I thiink that the historical IV is very important when trading PCCRC's. If you run accross any software that would do that cheaper, then by all means.
The Think or Swim platform gives you very good risk graphs, the problem is that once you make an an adjustment to your trade, the picture does not take into consideration all portions of the trade, past and present.
I don't want you to go buy a Platinum subscription in my account. The TOS platiform might be all you need.
Dan said: Also, how do you get rid of the right side window from your post so that I can see the entire risk graph?
This is easy, if you have a Mac, right click on the image and the contextual many will give you the option to open the image in a new window or tab.
In explorer any right click image can be saved as a picture.
Alternatively, on the right column, there is a list of my articles, including near the top the most recent ones. Click on that link and the list of articles will collapse, letting you see more of the images.
Dan said: By the way, when the analyst give their opinion, do they use a timeframe in mind?
Dan, the trapezoid in red at the right top corner of the graph is the target in time and price. The RET gives a range of price and dates. For representation purposes, the trapezoid works for me.
I prefer to trade based on gains and not on targets. I like to take my profits whenever possible and never count too much on the software.
Dan Said: Juan, I've been looking at your trade. At the close of today the ATM PCCRC would be at 480.
The trade did not fill on Friday. I could enter the trade at a higher strike price on Monday. I will keep you informed.
Dan said: I am not sure what can we really add to your work. For instance, we can look for other trades that would benefit from a forceful move of GOOG in one direction before Sept.
Dan, why don't you tell us about your trades in which you felt successful? what did you do right? It won't hurt to count our successes and thus gain confidence.
Dan Said: Let's say we believe GOOG would move higher before expiration in Sept.
What if we buy an OTM call spread 590/600 for 60$ per vertical. We risk $60.
How is this trade in your view?
Dan, what if GOOG goes to 589? don't you think you would like to take some profits in case the stock does not go all the way to $600? and what if it goes to $700 in one single jump, you have essentially limited your gains. Unless of course you close the position and open a new one at a higher strike price.
I want to make my profits UNLIMITED and the sooner the better, that is the advantage of options.
One other thing I don't like about spreads is that they don't make you money immediately, but only after a lag period (caused by the short) is consumed.
I know, Optionetics will teach you all this strategies, they teach you their pros, but they don't teach you their cons, it is up to you to learn them.
Here are some reasons why I trade options:
1. Limited risk. I only risk 2% of my account on every trade.
2. Potentially huge gains with big gainers (leverage). I trade option calls, buts, ratio calendars or PCCRC's.
This is not to say that I would not trade a spread if I believed they could make me profits consistently.
We could see some examples of spreads in which you made good money and then compared with a long call, for example, and then discuss the alternatives.
Juan,
We're here to learn, of course, and share what we know and what we don't know, and try to find answers and systems that work.
Are you 100% sure we don't have all that we need in TOS? I'll look for it and get back.
Dan
I am 80% sure. I have explored their "analyze" tab. You can see the IV distribution of all options available for an underlying, but I don't see the historical IV or the IV/SV ratio.
However, it is very easy to ask them to be absolutely sure, I will do that first thing on monday.
The other good thing about TOS, is that they endeavor to improve their platform and they do it fairly routinely, if any of you wish to see this in TOS, please send me an e-mail with this text:
"I support Juan Sarmiento's goal to see historical IV and IV/SV ratios for options in the Think or Swim Analyse tab"
Once I have a few of these, I will write to them with the supporting e-mails to see if they will put that functionality in their platform.
feel free to e-mail me at
Paperprofit1@mac.com
Juan,
look here and see what if we don't have something useful:
http://www.interactivebrokers.com/optionsCommentary/elitetrader/
dan
Juan,
TOS has Prophet charting tab.
ProphetCharts can give you a chart of GOOG for instance, and then you go to
1.Studies
2. Apply Studies
3. Historical Volatility
Also, in ProfitCharts on the left hand side you have the last item on the list, "Option Controls" Clic on it and you have there the first box, Avg. Imp. Volatility for Stocks. Indices.
Let me know if you found it and if it's useful.
Dan
JUAN: Dan, what if GOOG goes to 589? don't you think you would like to take some profits in case the stock does not go all the way to $600? and what if it goes to $700 in one single jump, you have essentially limited your gains. Unless of course you close the position and open a new one at a higher strike price.
How do you take profits in a PCCRC?
Can't we do the same thing with a BCS? If we have 10 contracts for $60 each, and GOOG moves up by 20$, we should be able to sell 5 for profit, and maybe pay for the entire spread if it doubled. We sell 50% and we have the other 5 contracts for free.
dan
JUAN to Fortitude:
IV/SV ratio. You don't want to be above 1.0 in this trade.
How do you get this ratio? It is a simple division, IV/SV.
For instance, if IV is 6.35%, and SV is 51.59%, then
IV/SV is 0.12.
Is this calculation right?
Do we need more than this ratio in order to sense that it's a great entry time?
Dan
http://www.interactivebrokers.com/optionsCommentary/elitetrader/
Here this is how they explain the table:
Implied vs. Historical Volatilities
The 30-day Implied Volatility is divided by the 30-day historical volatility. This ratio highlights those symbols in which the market prediction of future volatility is much different from the volatility in the market over the last 30 days. The formula for historical volatility as defined by Garman-Klass. The top twenty symbols with the highest ratios as well as the top twenty symbols with the lowest ratios are displayed.
Implied volatility, historical volatility, closing price, and change in price from the prior day are also displayed.dan
Juan,
If your analysis on GOOG is on the way up and not going to move in either direction, would it be better to put in one side of the position ? Buy 4 Sep 470 Call and Sell 2 Jul 470 Call.
Second question GOOG option chain carries a lot of premium, will it be better to sell Jun 470 Call instead and roll to Jul 470 Call later to earn some premium.
Dan: look here and see what if we don't have something useful:
http://www.interactivebrokers.com/optionsCommentary/elitetrader/
Juan: All I see is a table that I cannot reproduce in my own platform for IB. I am not sure that this is what we need, it looks more like a selection of high and low ratios. I don't see a way to enter a stock ticker to obtain the ratio we need. In addition, the SV goes back 30 days, that is not what we need either.
Dan: TOS has Prophet charting tab.
ProphetCharts can give you a chart of GOOG for instance, and then you go to
1. Studies
2. Apply Studies
3. Historical Volatility
Also, in ProfitCharts on the left hand side you have the last item on the list, "Option Controls" Clic on it and you have there the first box, Avg. Imp. Volatility for Stocks. Indices.
Juan: When a Stock jumps 10% of its value, the historical volatility is immediately skewed. Alex Jacobson says that the true important statistical volatility is that of the last trading day, and the Statistical volatility of days ago is irrelevant. When you create the ratio, you are investigating if the options are expensive compared to the volatility of the stock. Following earnings, IV decreases and SV increases, the ratio declines. This is almost a constant, this is why I choose to trade these on the day after earnings.
DAN: How do you take profits in a PCCRC?
Can't we do the same thing with a BCS? If we have 10 contracts for $60 each, and GOOG moves up by 20$, we should be able to sell 5 for profit, and maybe pay for the entire spread if it doubled. We sell 50% and we have the other 5 contracts for free.
Juan: I take profits on a PCCRC in many ways. You can for example, roll some of your calls to a higher strike price as the stock moves up. You can sell more front month or back month calls, and take more profits if the stock declines. I refer you to some other discussion in my blog, or simply watch some of the examples from here on.
You are right that you could sell a portion of your spread an hence make a partial profit. I should not be so quick to criticize. The truth is that you LIMIT your gains when you buy a spread like that and that full profit only occurs near expiration. The short gets in the way. That is my experience. Vertical spreaders typically go out 3 months, but a stock may rally strongly in the first few days, then you are frustrated by the slow reaction in the spread.
If you trade long calls or ratio calendars or PCCRC, you may make your profits in days, and your gains can be strong. Perhaps I am an aggressive trader. I lose patience with spreads.
I have found that waiting for 3 months to find out that you may have been right early on, but that a decline in the stock wipped out your profits, is not a very satisfying way to trade. What has been your experience in this regard?
JUAN to Fortitude: IV/SV ratio. You don't want to be above 1.0 in this trade.
DAN: How do you get this ratio? It is a simple division, IV/SV. For instance, if IV is 6.35%, and SV is 51.59%, then IV/SV is 0.12.
Is this calculation right?
Do we need more than this ratio in order to sense that it's a great entry time?
JUAN: Since you have TOS, you can go to the Historical Volatility as you explained in a previous post, that is:
From the PROPHET tab select the Studies menu and then Apply Studies. Select Historical Volatility.
This brings up an entry window with the default HV(20,262). This is the average daily change in the price of the stock over the last 20 days compared to the average change of the last 262 days (trading days of a year). If you follow Alex Jacobson's recommendation to only use the last trading day to define your HV, you'd have to change the parameters to HV(2,262). I use 2 because that would be the minimum that would show you a number, 1 day would give you a HV=0. Platinum only shows a minimum of 6 days, so it would be equivalent to HV(6,262). The ratio the is no more than the division of the option's IV by the HV(2,262) on the day in question.
Since we picked stocks that jumped more than 10% after earnings, we now that the HV(2,262) is quite high.
Go to TOS and display the HV(2,262) for AMZN, and you'd see the spike on HV on the day after earnings (April 25), soon thereafter HV declined.
So it may appear that we can calculate the ratio using the TOS platform. We still are not able to display the IV of options overtime.
Chiu: If your analysis on GOOG is on the way up and not going to move in either direction, would it be better to put in one side of the position ? Buy 4 Sep 470 Call and Sell 2 Jul 470 Call.
It is a matter of risk management. If we are all wrong and the stock goes to 300, you lose all your money, I would MAKE money.
If I place this trade:
BTO 4 Sep 480 call
STO 2 Jul 480 call, I could probably do it for:
$8516. That is my risk. If GOOG falls 30% overnight, I am losing pratically all of that money.
If, on the other hand. I place a PCCRC,
BTO 4 Sep 480 call
STO 2 Jul 480 call
BTO 4 Sep 480 put
STO 2 Jul 480 put
Then my cost (debit is higher), $14180, to be sure, but my risk (assuming IV does not change), is much less, $3355, according to the platinum risk graph.
This is comforting to me because that amount is well within my risk tolerance level of 2% of my account value.
If we want to be rich one day, we need a trade that will let us trade safely, reduce our risk tolerance, give us the potential for unlimited profits, and allow us to invest large sums of capital without hesitation. The PCCRC fits the bill. This is the goal I have been pursuing since my first Optionetics seminar in Sept. 2002.
Using the PCCRC on earnings price spike also seems to match my understanding of Fundamental and Technical Analysis. So I am content in using my knowledge to pursue my goals.
JUAN: So it may appear that we can calculate the ratio using the TOS platform. We still are not able to display the IV of options overtime.
Juan, what exactly are we looking for when we want a display of IV of options overtime?
DAN, I wrote this few posts above:
TOS - Also, in ProfitCharts on the left hand side you have the last item on the list, "Option Controls" Clic on it and you have there the first box, Avg. Imp. Volatility for Stocks. Indices.
Juan: have you looked at this? dan
Juan,
Do you believe that the TOS Analyze tab is not displaying some things the way you would like them to be displayed?
Is this something that Platinum has and TOS doesn't? dan
DAN said: TOS - Also, in ProfitCharts on the left hand side you have the last item on the list, "Option Controls" Clic on it and you have there the first box, Avg. Imp. Volatility for Stocks. Indices.
Juan: Yes, this is what you would need. Altough it displays the average volatility of all options on the stock, it gives you a good picture, which should be complemented with the real time IV of short and long term options before entering the trade. I will be examining this from now on, to confirm that they reflect what I see with Platinum.
Dan said: Do you believe that the TOS Analyze tab is not displaying some things the way you would like them to be displayed? Is this something that Platinum has and TOS doesn't?
There is one more thing, when you rollover or partially sell a position that started as a PCCRC, Platinums let's you see the resulting trade, after all items are considered. This is quite common in my form of trading.
TOS only reports the chart on the resulting trade. For example, if you exit 1/3 of the long calls as a way to take profits, TOS displays the risk on the resulting trades, without giving you credit for the portion you exited. Perhaps this is a way of helping you see whether the resulting trade is worth pursuing or you may just as well leave the trade. Keep that in mind.
Dan said: Do you believe that the TOS Analyze tab is not displaying some things the way you would like them to be displayed? Is this something that Platinum has and TOS doesn't?
There is one more thing, when you rollover or partially sell a position that started as a PCCRC, Platinums let's you see the resulting trade, after all items are considered. This is quite common in my form of trading.
TOS only reports the chart on the resulting trade. For example, if you exit 1/3 of the long calls as a way to take profits, TOS displays the risk on the resulting trades, without giving you credit for the portion you exited. Perhaps this is a way of helping you see whether the resulting trade is worth pursuing or you may just as well leave the trade. Keep that in mind.
Juan,
Thanks for the video again.
What do you use to make them? dan
I use Snapz Pro from Ambrosia Software for the Macintosh. I am not sure if they have it for PC's.
Juan,
Thanks! I don't think they have the same thing for PC.
I love Mac but I don't own one yet.
It seems that you were right about GOOG. What a move today, and it may keep moving.
Dan
Dan, please visit my second web blog, I am sure it would be of your interest for Elliott wave analysis and long call or put trading.
http://stockofthedayii.blogspot.com/
Hi,
Sorry I repeat my question here. Why the GOOG PCCRC Theta is -ve? not +ve?
Happy Trading
Happy, the answer is simple:
You have more longs than shorts. In essence, you have a long-term straddle (the ultimate trade, sort of), which is moderated by the shorts.
The whole trade is not a calendar, although It could make money if the stock stays around the strike price by expiration. Closer to expiration, your Theta may become positive.
The Risk Analysis is not strictly what you are going to get. Volatility is likely to change, and the risk graph will change with it. The same can be said of the passage of time.
You need to do a lot of backtesting and paper trading to fully understand what to expect. However, it is well worth the effort.
Post a Comment