Market Wrap, 9-2

• Posted by: stevenplace, September 2nd, 2010 at 8:44 pm
• Comments: 0

Whitepaper Wednesday: Trading Performance in Taiwan Index Options

• Posted by: stevenplace, September 2nd, 2010 at 8:49 am
• Comments: 0

I know it’s Thursday, but I’m going to try and start a new series, where I review an options-related whitepaper on Wednesdays and publish a review and findings. Honestly, you can only read introductory options textbooks so many times, as they are all about the basics and don’t really delve into the nuances of options.

This whitepaper was brought up last night during my subscriber’s Happy Hour, where we discussed risk management and disposition effects when trading options. The title of the paper is “Investor Trading Behavior and Performances: Evidence from Taiwan Stock Index Options.”

Essentially, what they looked at was all trade data in Taiwan Index Options and looked for asymetric (they exist) returns and their causes. They wanted to analyze this because there are different behaviors that occur in the options market due to the “decaying” nature of options. They used Taiwan because it was traded by mainly nationals and the data they used contained unique investor IDs, so they could track investor performance.

The whole paper is a really nice read (surprisingly) and may help you to be a better options trader. I find this particular quote a great guideline:

We find that the following individual investors tend to have superior trading performance: those that trade more often; those that make larger-sized trades and those that usually hold multiple option positions at the same time. In addition, individual investors who trade both index futures and index options significantly outperform those that trade only index options. Finally, individual investors who made combination trades (e.g., straddles) significantly outperform those that do not. We interpret these findings as evidence that individual investors’ trading performance improves with experience and sophistication. [emphasis mine]

Fortunately, most of those characteristics are incorporated into IWO Premium Trading strats!

You can download the whitepaper here.

Today’s Tape in a 1 Min Video

• Posted by: stevenplace, September 1st, 2010 at 4:03 pm
• Comments: 0

You had all your shorts lined up, waiting for a breakdown of SPX 1040, when all of a sudden, you catch an elbow to the sternum.

Are Correlations Really that High?

• Posted by: stevenplace, August 30th, 2010 at 1:58 pm
• Comments: 0

Adam Warner over at the DoR (now part of the Stocktwits family) has  a post up about how high correlations are in stocks. We’ve seen this giant macro conveyor belt drive the risk trade on and off for the past 18 months, so it is reasonable that liquidity and performance will be correlated across the board. This can also be a fear gauge, as no matter how good of a stock picker you are, it’s no fun when correlations head to 1– see 2008 for instance. Read through for the whole post.

But the measure used may not be indicative of the entire market. The original source (MKM Partners) uses JCJ as a measure of correlation. This is known as an implied correlation index, and it’s very helpful for firms who are tryinig to run dispersion trading/vol arb books. However to Johnny Retail it might be a little more misleading.

JCJ (and KCJ) are derived from looking at the top 50 components on the S&P and their options– you can see the actual whitepaper here – if you have insomnia, this will cure it!

Here’s the thing– we already know that a lot of the large companies are going to have high correlations. Unless there’s fresh news in a sector or a company, they generally run on the same track– the futures arb firms make sure of that.

So the death of stock picking? Probably not. The high beta small caps aren’t really included in this reading, and so I’m more inclined to think that correlations really aren’t running that hot– especially when you see ARST or FIRE from the past week. Besides, stock picking is much more sexy when you buy DDRX instead of XOM.

Tickers: arst, ddrx, fire, jcj, kcj, vix, xom

Great Review of EarningsTrades by a Satisfied Customer

• Posted by: stevenplace, August 30th, 2010 at 1:01 pm
• Comments: 0

Teaching traders has been one of the stronger skills that I’ve developed over the past few years, and I put a lot of work and dedication into my video product, EarningsTrades. It’s great to see that customers are getting definable value out of the information and techniques I teach.

Randy was one of the first customers to buy EarningsTrades, and he just sent me his thoughts about the product. You can follow Randy on twitter here.

His full review can be seen below:

Hi Steve,

As I finished your EarningsTrades Course I wanted to send you an overall thank you. In this course you covered everything that I could think of when it comes to earnings. I started trading options in July 2007. I consider myself mostly an income trader using option spreads but also occasionally trade speculative plays using single puts and calls. With experience in trading income and speculative, there was still 4 times a month in a security’s life I wanted to stay away from, and that was earnings.

I’ve tried in the past to play earnings off of direction and it just never worked out. I had little understanding of the nuances that go into the markets pricing of options during the earnings cycle. I found out quickly through time that there is a lot more to it than just trading straddles or strangles or the occasional “lottery ticket”. Believing there was no real way to gain an edge as a retail trader, I just avoided earnings season.

When I recently saw that you have compiled a course on strictly earnings, I wasn’t hesitating on the purchase. This was going to be another tool that I could use and help my development into becoming a trader during these times. I wanted to take advantage of earnings and the option intricacies instead of sitting out on earnings.

All I can say is that your course is complete. It is nicely laid out in the three modules of theory, strategies, and examples and it follows a good chronological order.

1) Theory

In the theory module you started from the straight basics of options and technical analysis you use and then quickly accelerated into the volatility crush and other deciding factors. I  liked the 4 step process of you use in your trades for earnings. I learned a lot from how you showed to use past quarters and volatilities to analyze the expected range of what the option market is pricing in for the earnings move.

It is also a plus in how you showed to use the thinkorswim analyze tab with respect to volatility crush and expectancy.

In other deciding factors two things that stand out is how you show to use competitor earnings and the options tape. In particular with the options tape, I really learned a lot in not to just look for big blocks of options trades but how to really use that and how to tell if these trades are tied to stock. This was particularly helpful in how you showed this in your SYMC example.

2) Strategies

Your strategies module was very complete and you were able to show how and when to use specific spreads. The pre and post earnings video was helpful as well as you showed that these strategies just don’t end after the earnings came out but how to take advantage of moves and how to hedge yourself as well. I particularly liked how you highlighted how the option squeeze can occur and how to take advantage of it on the way up and the way down.

3) Examples

You provided good examples and were even able to show some that didn’t work and how you can adjust to create less pain when the play doesn’t go your way. It was also beneficial to show your thought process before the earnings and after the earnings came out (ie. AA) . These examples were helpful as you went through he whole process you talked about throughout the course.

Conclusion

Overall I am very pleased with the course and do not regret the purchase at all as I believe this will be a great return on investment, after all ROI is what it is about. Starting out I will use papermoney and thinkOnDemand in testing what earnings trades work for me.

This course was very complete and you really helped define the edge in the earnings trades that a trader can make and what to really look for before putting them on and what strategy to use. Just showing how to measure the implied volatility crush and expected range is worth the price of the course itself because there is a lot more to it than just looking at the at-the-money straddle (as I previously believed).
Earnings make for a difficult time as option volatilities and price action can be frustrating, but you were able to teach how to take advantage of these times. In your course you were very detailed and showed every nuance that I could think of. I really appreciated how you show more strategies than just buying/selling straddles or strangles. As you showed, these are not always the best trade. Also with selling straddles, there that higher margin requirement but you were able to point out other spread strategies that reduce that margin requirement. Overall, I cannot say enough how glad I am to have purchased your course as earnings season was a missing link in my trading strategies and you were able to fill that space. Every piece of content you provided was informational and full and never too repetitive or boring. I can honestly say that the information you provided has not been put in a book or blog that I have read. Thanks for putting this course together and I would recommend this to any trader I come across.

-Randy Redman

**I know this may have been a little lengthy and feel free to cut/edit/rearrange/leave out any piece of this testimony. I wanted to be able to give you a review as well as in the conclusion give a basic synopsis and opinion of the course. Also I just wanted to get across to others that come across your site that this course and purchase is worth it. This is definitely going to help me in my trading and the price you are charging is unbelievable for the content provided. This is definitely a no-brainer. Thanks Steve and from one trader to another, great job as I am very thankful for what you have put together.

EarningsTrades is an online video course that will teach you how to profitably trade options around an earnings event. You can learn more about it here.

Stocktwits Brunch, 8-29

• Posted by: stevenplace, August 29th, 2010 at 9:52 am
• Comments: 0

Tickers: aeo, aig, akam, apkt, bidu, bke, btk, cl_f, cy, dxcm, dx_f, ebay, eem, es_f, f, fcx, fxe, fxi, fxy, GDX, gld, hg_f, lqd, mmr, ndx, oih, pff, pwer, rifin, rth, rut, RVX, sbac, slv, smh, sohu, spx, swks, tk, tlt, tnx, trlg, uso, vix, xlb, xlf, xxia

IWO Into the Close, 8-27

• Posted by: stevenplace, August 27th, 2010 at 7:34 am
• Comments: 0

Tickers: crm, crox, dow, es_f, ffiv, gg, mmr, spx, spy, vix, VXV

4 Charts You Need to Watch Besides the VIX

• Posted by: stevenplace, August 25th, 2010 at 4:47 pm
• Comments: 0

Since the crash of 2008, the VIX has become the favorite “fear gauge” of TV pundits and individual investors. But like many other indicators, they are best used when reinforced with other data. In other words, you can’t look at the VIX in a vacuum.

I bring this up because many are pointing to how the VIX is cheap and how it isn’t reflecting any fear yet– this isn’t exactly true, when you look at some other readings. There are many charts you need to watch alongside the VIX; 4 are mentioned below:

SPX Options Skew

Remember, the VIX is simply a normalized 30 day reading of the demand for SPX options. But that number in and of itself doesn’t tell the entire story. To do that, you need to look at the premium of each SPX option. The higher the premium, the higher the implied volatility– which means investors are paying up for protection. You can also see how the skew is– the skew shows how much higher the premium of OTM options are being bid up. The steeper the skew, the higher the fear. Also, you need to watch how premiums are being bid on different months.

RVX – the Russell Volatility Index

Since the SPX only shows the S&P, it isn’t indicitave of the full risk in the market. The RVX measures the supply and demand of RUT options– smallcaps. This generally has a higher reading than the VIX because smallcaps are supposedly more volatilie than the S&P. You can draw some interesting conclusions when comparing the two charts.

VXV

The VIX only measures volatility on a normalized 30 day basis; however, it might be worth a look to see how longer term options are behaving. You can view this directly through the SPX options skew, but VXV is a quick reading of 3 month (90 day) vol readings.

VIX Futures Curve

source: surlytrader.com

This chart is a little hard to come by as I don’t have a bloomberg terminal, but you can graph it yourself by pulling data from the CBOE VIX website. When the curve is steep, it tells us that there is an expectation of more volatility further out in time relative to the near term expiration.

So what does all this mean? Volatility really isn’t that cheap– if you want to protect yourself in the short term, I guess it’s a little inexpensive, but if you want to roll your protection further out in time, it’s going to cost you as the premiums are a little higher. So this isn’t a bearish sign (yet).

Tickers: spx, vix

My Favorite Analog

• Posted by: stevenplace, August 24th, 2010 at 9:19 am
• Comments: 0

Edit: Before anyone starts telling me why I’m wrong, I have this to say:

Place your bets.

2004:

2010

August Performance

• Posted by: stevenplace, August 20th, 2010 at 2:51 pm
• Comments: 0

Returns and position sizing are based on an initial capital of $40,000.

Many of these trades were earnings trades. If you want to learn my system of how to trade earnings, click here.

If you like how I trade and want in on the action, get a 14-day free trial to my service.