Investing With Options header image ≡ Menu

Just Released: Get Your FREE Iron Condor Trading Toolkit


Click Here to Download

Long Bonds is The Play Into the Fed

It's finally here.

The last Federal Reserve meeting of the year.

And after all the drama we've seen in 2016, this event seems to be approaching without a whole lot of protest from investors.

According to the Fed Fund Futures market, the odds are currently set at 95% that a rate hike will happen.

If I had told you that 6 months ago, you'd think the market would be selling off as investors throw yet another tantrum over a rate hike.

But it seems that we're taking this in stride. The Dow Jones is about to tag 20,000, the S&P 500 is at all time highs...

And the treasury market has sold off pretty aggressively into the event.

Taking a Look At TLT

tlt

This is a chart of TLT, which is an exchange traded fund for long Treasuries.

When TLT goes down, it means rates are going up. You may need to stand on your head to figure out how bonds work, but that's the general idea.

Now TLT is coming into levels that we haven't seen since July.

Some might call this a support level... at least I am.

On top of all that, there has been incredibly strong selling momentum.

Over a one month period, TLT had sold off over 9%. And it was 5% lower than its 50 day moving average.

That's statistically oversold.

Well... what happens when TLT gets that oversold? Let's take a look.

What Are The Odds?

tlt-returns

This chart shows us the 1 month returns after TLT has sold off more than 8%. As you can see from the total number of instances... it doesn't happen very often.

Other than one major selloff of 9%, the downside risk does seem to be muted. There does seem to be a slightly further negative bias, but most of the results are above the -5% mark.

Now let's just apply some common sense here.

On November 18th, TLT hit the "signal" of selling off 9% in a 20 day period. The closing price on that day is 114.80.

Assuming a lower bound of -5%, that means a "floor" should come in around 114.80. That's the low end as well.

Couple that with the clear technical support coming into play, and the momentum divergence that we've seen on shorter term charts, and it looks like good risk/reward to get on the long side of TLT.

Yet, we can't forget the Fed. This is the main catalyst that investors have been anticipating for over a month now.

When you see strong price movement into an event, often times the event has been "priced in" to the market. We see this a lot when a stock rallies hard into earnings and then doesn't move much after earnings.

It's where we get the phrase "buy the rumor, sell the news."

I think it's a high-odds bet here that as we head into support on TLT and how many sellers already came in... that it's a better bet to look for a lack of downside.

The Trade To Take

A simple bet here is to sell put credit spreads in TLT.

You'll get long exposure to TLT, and an added advantage of an elevated implied volatility environment.

I like the selling the Feb 109/106 put credit spread for a credit of at least 0.35.

tlt-risk

When I trade credit spreads, I combine analysis on both traditional technical analysis as well as my own quantitative models... but that's not where I get my edge.

Want to find out how to get your edge?

Click here to see how to become more consistent and how I can help you with your credit spread trading.

 

How to Trade the Twitter Takeover Talks With Options

After 9 months of chatter, new finally came out that TWTR is in talks to be acquired.

The stock jumped from 18.50 to the low 20's overnight.

twtr-1

This is after peaking out in the 70's a few years back:

twtr-2

We aren't sure who will take them out, but here's the current list:

  • Microsoft
  • Google
  • Blockbuster
  • Salesforce
  • Bill Gross
  • Verizon
  • Disney
  • Comcast

And probably about a dozen others.

Personally, I think there's a ton of value in the company that has been poorly executed upon.

And even if they are bought, company cultures will clash and it will not act as a "magic bullet" for the acquirer.

But that's just me as an armchair quarterback. Let's see how you can potentially profit from it.

Potential takeout prices have ranged from 24-30, and the implied volatility has jumped pretty significantly:

imp-vol

The IV is high but is on par with what we see headed into an earnings event.

There's 3 setups to consider here:

If You Are Pretty Sure The Stock Will Be Bought At A Premium

Consider this trade:

TWTR Call 1x2 Trade Setup
TypeSizeAssetDurationStrikeC/P
BTO1xTWTR21 Oct 1626Call
STCAMZN16 Sep 16720Call
STO2xTWTR21 Oct 1628Call
Total Debit:0.03

 

Now this is a call 1x2 sale that has theoretically unlimited risk. So if TWTR is bought out at $40 then you're basically hosed.

Yet if you are pretty certain that the takout price will be in the high 20's, this is a way to capture a significant amount of premium without needing to worry about if the takeover talks get pulled.

If You're Not Sure The Stock Will Be Bought But Still Want To Play Upside

IWO Premium Order Ticket
TypeAssetDurationStrikeC/P
BTOTWTR21 Oct 1622Call
STOTWTR21 Oct 1626Call
Total Credit:1.77

 

So this is a decent bet that allows you to get some decent gains on upside movement and still have wiggle room if any bids are pulled.

If TWTR is taken out, great you've got about an 80% return.

If it isn't and the stock drops, you can buy to close the 26 call and just have the 22 call on straight up. Odds are any gap-down-on-bad-news will fade a little bit so you can still earn some decent money anticipating that bounce.

If You Think TWTR Won't Be Taken Out

Proactive Spreads Order Ticket
TypeAssetDurationStrikeC/P
STOTWTR21 Oct 1618Put
BTOTWTR18 Nov 1618Put
Total Credit:0.28

 

This trade makes the bet that if the offer is pulled, TWTR will gap down hard back under 20.

Also, the October options will lose their premium and the November will stay elevated into earnings. So you get an extra "kick" with your trade.

Get An Edge In Your Trading

This is a "special case" kind of trade setup that doesn't come along very often. Yet the idea flow at IWO Premium will give you plenty of setups to trade over the next few weeks.

At IWO Premium you'll get live trade alerts, market wrap videos, and a trading chat room.

14 Days For $14-- Click Here To Signup

Why GOOG Options Are A Buy Right Now

I've been talking a lot about how options are really, really cheap right now.

And to be fair, it makes sense. The S&P is in the tightest range we've seen in something like 20 years, so the options market is responding in kind.

But we're starting to see an overshoot.

Take Google Alphabet (GOOG) for example.

goog

The stock had a nice pop on earnings, and really hasn't gone anywhere over the course of a month.

What's the options market telling us?

One quick way to measure the volatility in the market is something called "price over strike."

We take the price of the straddle and divide it by the strike price of the straddle.

The Sep 770 straddle is going for $19.

That gives us a price over strike of 2.4%.

What does that mean?

If you buy this straddle and GOOG moves at least 2.4% by Sep opex, you're going to make money.

Show Me The Odds

You may ask yourself...

Well, how often does GOOG move 2.4%?

I've ran the numbers.

Looking at a 10 day trading window... so not even 20 calendar days but 14 calendar days, this is what I see:

goog-max-change

Here's how I got this graph...

I looked at the maximum gain and maximum loss of any time during that 10 day window... and took the largest of those values.

Clearly, GOOG moves a lot more than 2.4%.

How much?

This sample is over a 5 year window... I've got 1,248 samples.

The number of times over 2.5%?

933.

That means you've got a 75% chance that GOOG moves more than 2.5% in a 10 day window.

It's not just slightly better than a coin flip... it's a flip and a half.

I don't recall many times when the options market skews the odds this far into the option buyer's favor.

Pretty good odds, don't you think?

If you want to see how I'm trading this, come join us at IWO Premium. 14 Day Trial for only $14.

 

The One Simple Trick It Takes To Get An Edge in the Market

Yet there's one question so many have trouble answering...

If everyone has access to the same information, how is it possible to get any kind of edge in the markets?

This especially holds true with technical analysis. After all, everyone is looking at the same moving averages, trendlines, and price patterns.

How can the difference between winners and losers be so big when everyone is looking at the same charts?

There is something to be said about your own psychology around risk and how you execute on your trades...

But I'm going to show you how a simple shift in your mindset can completely change how you approach the market and drastically increase your performance.

First, let's stop by the poker table.

cards

The Cards On The Table

Say you are playing a game of poker against 7 other people.

Specifically, Texas Hold'em

What information helps you make a decision?

Well, you've got the cards in your hand.

And you've got the cards on the table.

Everything else is hidden from you until all the bets are done.

And you know what? You could calculate your odds of success based on the cards on the table and the cards in your hand.

But that wouldn't make you successful.

The Mindset Shift

There's so much more going on at this poker table that can give you an edge.

What's the chip count of each of the players?

Who has a small stack and about to go on tilt, and who has a big stack that has all the time in the world?

How much has each player had to drink? Is anyone drunk enough to make stupid bets?

How long has each player been at the table? Who is looking fatigued?

Does anyone have a tell? Are they bluffing on their bets? Are they trying to slow play you until the river card?

And then you can go into your own thoughts. Are you stressed about this hand? Do other people think you're stressed about this?

There's a lot more going on, isn't there?

If all you do is focus on the cards on the table and the cards in your hand, you're going to be at a significant disadvantage.

Being successful is not about playing the cards, it's about playing the players.

How To Change Your Mindset in the Markets

Just like Texas Hold'em, everyone sees the cards on the table.

But with investing and trading, some information goes out the window.

You don't know who you're trading against, you don't know their "chip count," you don't know what kind of positioning they are coming from.

Yet, you can feel it in the markets.

In many instances, you can quantify it through technical analysis.

80% of my technical analysis is not based on the charts I see, but on how I think other people are positioned into the trade.

Where are the pain points on the chart?

Who owns this stock?

At what price will most people get stopped out or forced into the trade?

What is the overall positioning of participants and at what prices?

What new information are they waiting for to make a decision?

Being a successful trader is not about looking at lines on a chart... it's about playing the other players.

That's why there is a huge gap between winners and losers.

Get Clarity in the Markets

If you change your mindset and how you approach the market, you'll start to see things differently.

You'll realize it's not about how this moving average will support price, it's how you know it's high odds institutional buyers will step up.

You'll realize it's not about shorting a breakdown, it's how you know that there's a bunch of investors that are about to see their position go from green to red.

You'll realize it's not about chasing an earnings gap, it's how large players are being forced to chase as well and you can get in and out faster than them.

Change your mindset, change your approach, and see your performance drastically improve.

The Cheapest Options You Will See This Year

When an earnings event comes out, the premium in the options market will go down.

By a lot.

That's because the market no longer has to price in the risk of an event.

Yet there are sometimes in which the option premium gets so low that it makes sense to be a net buyer of options.

Let's take a look at an example.

vxapl

This is VXAPL, which is the VIX for AAPL options.

There really wasn't any kind of bid going into earnings, and after earnings we saw it drop below 20.

This is an incredibly rare occurrence, and it tends to revert back.

These are levels you won't see the rest of the year. And we're seeing the same kind of setup in other high beta tech stocks like AMZN, FB, and GOOG.

If you've ever wanted to buy volatility, this is the best risk/reward you're going to get.

Want to see how we're trading it? Join IWO Premium for video analysis, trade setups, and much more.