For last week I thought markets could continue to soar to new high (2500) if SPY can hold 2400. SPY held 2400 nicely and it's already almost half way there to 2500. I see no reason preventing SPY to test 2500 in coming weeks as post election rally continues.
One way to source Optionable Ideas
In this article, I'll showcase one way to build a scenario to find options trading ideas. Every options trader has their own strategy out of many that are available which is beyond the point of this article.
Let's quickly jump into our prospecting engine and configure the scenario with a specific set of criteria. The overarching theme here is to find stocks that have options available (not all stocks are optionable) and have slightly higher volatility (Flux) than normal. Higher volatility results in stronger price movement. Note that Flux is different than Implied Volatility (IV). We don't want to be in stocks that don't move specifically when options have an expiration date attached to it.
Here are the filters applied to our scenario -
- Optionable : Enabled
- Type: Equities
- Min Avg Volume : 100K
- Price > $10
- Flux : 6 (minimum)
- Past Berserker : At least 1 spike with a minimum score of 10 in last 5 days.
Past Berserker spike here is important because it denotes a recent supply and demand imbalance and normally results is accelerated price movement in either direction.
SignUp Here for free trial.
So the platform surfaced 5 ideas based on Friday's activity. Feel free to explore these filter for other days to back test. Now let's analyze the charts for each stocks. Remember, always take the time to understand the story and catalyst behind each of these names. Specifically for options always be sure to check Implied Volatility (IV), Delta, liquidity etc among other things to qualify the suitability of trading these name in brokerage of your choice.
XBIT - XBiotech Inc.
Click here for free trial.
ALDR - Alder BioPharmaceuticals, Inc.
Click here for free trial.
PBYI - Puma Biotechnology Inc
Create a free trial account.
AKAO - Achaogen, Inc.
EMES - Emerge Energy Services LP
Click here to create a free trial account.
Example of winning and losing 100% with options
As most options traders know, you have to be right on both time and direction to make any money trading options. Here are couple of examples of trades I've put on recently where I enjoyed both boom and bust. These examples demonstrate a fairly simple strategy of buying call and puts. Most options trade utilize multiple options trading strategies which again is beyond the scope of this article.
SIMO - Silicon Motion Technology Corporation
SIMO got into my radar on late April which I mentioned in this blog post. Here is the chart I was looking at then. I was expecting SIMO to break $50 and hold that level and then run to $54 as shown in the chart.
After SIMO broke $50, I bought a $50 strike In The Money (ITM) 5 call option with June 16 expiration. I anticipated SIMO would continue to hold $50 and run to $54 (next resistance) within a month.
Position Opened Total : $1.88 (premium) X 500 (5 contracts) = $940 which represents less than < .05% of my portfolio total for this account. My risk is limited to $940 which is the maximum I would lose on this trade.
SIMO tested $54 a month later and I scaled out of my position. As you can see from my transaction screenshot from my brokerage account below.
Position Closed : $4.30 (premium) X 300 = $1,290 and $3.80 X 200 = $760
Total : $ 1,290 + $760 = $2,050. 118% profit in 1 month
WB - Weibo Corporation
I noticed Weibo mid March when I wrote this article about Chinese stocks. You can read up on my rationale on that blog post on why I thought Weibo could go further down to $42 and I was wrong. Weibo now trades in mid $75.
I bought 4 ITM $50 strike put option with April 21st as expiration and had to close out the position for a 82% loss. Sure I could have closed the position earlier but with my analysis hinting strongly to the downside I gave it some more time, I normally stop out of my option position when I start to lose 30% - 50% of my options position. I didn't cut losses quickly enough and time decay ate into my premium and I finally caved in.
As you can see from these examples, options trading can be very profitable with least amount of committed capital per trade if you find the right opportunity and buy the contract for the right premium. On the flip side, you can also lose money in similar magnitude. Thus, positing sizing and risk management is very critical. My rule of thumb for position sizing is I don't put money in buying or selling options that I'm not comfortable losing per trade. I always assume my options are going to expire and be worthless by default. You can also use options as an insurance to hedge against your long or short stock position which I tend to do from time to time.
That's it for now folks. Hope you enjoyed this article. Happy and Profitable trading for next week.
Finally, If you aren't already a member and you're interested in finding highly actionable Options trading ideas everyday like the ones in this blog post, sign up for an account at buysellshortcover.com, our new idea generation platform. We're offering a 15 day free trial and a deeper membership discount while we are still in open beta.
Feel free to contact us if you have question, comments, or feedback by visiting http://buysellshortcover.com/contact
Image credit - random-google-image | disclaimer.