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Trading Education Articles

 

Flash Boys and the Tower: FCC License Number 1215095

Amy Boggs, Traders Excluisve

Michael Lewis’ Flash Boys gives us an interesting, yet somewhat biased glimpse about life as a high-frequency trader. As controversial as it may seem, it is an entertaining book that has roots in reality. In all its glory, Lewis’ book offers the secrets of the insider, an elite group known as high-frequency traders (HFT). But some secrets are not all laid out. Some are ... [more]

 

The Iron Butterfly

Randall Liss, The Liss Report

No, not the 1970's heavy metal band (I really date myself here, don't I?). I mean one of my very favorite trading strategies. It is particularly useful when the market or a stock is range bound, or as now, going back and forth between... [more]

 

The "Greeks"

 Ross Barnett Terry, Contributor

Options are dynamic animals governed by a set of theoretical variables known as “Greeks.” Together they assume the dynamics of the sensitivity of the option with regards to a one point move in the underlying...[more]

Creating a Low Cost Collar

 Ross Barnett Terry, Contributor

When investors get to a point where they have substantial gains in a position, they may want to start to look at protection against loss. One of the most creative low cost ways to achieve this is through an options play known as a collar trade. The trade consists of buying a put option and financing the cost of that put option with a call option that has a higher strike with the same expiration. The call option... [more]

 

What's Happening To The Smaller Banks?

Tim Melvin, Contributor

Consider the life of a banker running a small bank today.

It used to be a great life running one of these little banks. You oversaw a network of 10 or 15 branches in smaller towns or suburbs across the country and were a well-liked business leader of your community.

More than likely you weren't just a member of the Rotary and other civic groups, you... [more]

 

How Patience Will Earn You Money In The Stock Market

 Tim Melvin, Contributor

That seems to be the attitude that infects all too many investors. When the opening bells ring on the NYSE every morning at 9:30 am EST, traders seem to feel the need to do something.

The ticker tape is running, the talking heads on the media are cheerleading different stocks and sectors. The advertisements are almost constant, urging out... [more]

 

Be Careful What You Wish For.... When The Jobs Picture Improves and Wages Rise, Look Out, Inflation is Around Corner!

Floyd Upperman, Contributor

The recent FOMC meeting and subsequent announcement came as a surprise to me. I expected a more hawkish tone, at least some hint of an exit plan (at least some plan to taper the 85B a month in Fed purchases of bonds and mortgage back securities). But not even a whisper on that! And now everyone is focused on the Debt ceiling, and the annual tradition of "raising the debt ceiling". What a farce! If this whole fiasco... [more]

Advanced Trading: Going Long and Short on the Same Instrument in the Same Account

 Raymond Stein, NinjaTrader, LLC

Savvy investors must have an arsenal of tools and strategies available to employ as the market continually changes, adapts and corrects to news and events from around the world. I would like toshare a powerful technique any trader can use to either hedge their position and/or trade in multiple time frames and multiple directions (long or short) at the same time.

Why would I want to trade long and short on the same instrument, in the same account at the same time? This is a great question and the key... [more]

Butterfly Spreads: Part C

 Ross Barnett Terry, Contributor

As previously discussed, the butterfly and condor spreads are a composition of vertical spreads combined in various ways. All offer the trader various ways to profit with inherent defined risk. The long butterflies can be designed to profit as a stock moves up or down or trades sideways. The key to success is for the stock to stay in the range between the long strikes and optimally being at the common short strike nearest to expiration; which is when the spread is at its most profitable point.

Another form of the butterfly is called a double diagonal, which is a similar position to the iron condor, but is created by the long strikes being purchased in the next... [more]

Understanding Butterfly Spreads: Part B Variations

Ross Barnett Terry, Contributor

Now that we have discussed the basics regarding the butterfly spreads, it is time to look at variations common to many floor traders regarding positioning. As we initially saw in part A, the Butterfly Spreads are comprised of a long vertical call spread and a short vertical call spread in the same expiration on the same underlying with a common short strike. The spread is most profitable at the common short strike. The goal again is to have the stock closest to the short strike but more importantly; between the two long strikes. The same is true for put butterfly spreads. That said let us look at a variation known as the iron butterfly.

The iron butterfly is a variation comprised of a short call vertical and a short put vertical on the same underlying and done in the same expiration... [more]

How to Get Your Wife to Support Your Trading

Laurie Itkin, The Options Lady

Before I began my formal presentation at the Traders Expo last year, I asked the 90% male audience three questions:

1) How many of you have wives/partners who trade?
2) How many of you wish your wife/partner would trade?
3) How many of you wish your ex-wife would trade so you can reduce your alimony?

As you guessed, very few hands went up in response to the first question, lots of hands went up in response to the second question, and laughter was the response ...[more]
 

 

Butterfly Spreads - Part I

Ross Barnett Terry, Contributor

In this discussion, butterfly spreads and variations will be addressed in an attempt to build on a concept that will be further explained in additional soon-to-be released articles. The trader should then have a fundamental grasp on the different ways to properly position themselves for a wide array of scenarios in regards to the underlying security in question.

Butterfly spreads are an options position created by buying one vertical spread and selling another with the short strike of the verticals being ...[more]

 

"Mixing Signals" - Gold: Corrective strength continues; options trading uncovers persistent bearishness.

Larry Shover, SFG Alternatives

Gold continues its comeback from its April 15th lows ($1,322oz.) with June (COMEX) futures contracts up $28.00 at $1453.70/oz. punching through the very strong technical resistance area of $1450/$1460oz. While fundamental technical readings have declined substantially, as a result of the past twelve month’s consolidation pattern, most recent dramatic falls are presently being digested with formidable strength. Many market technicians are wary of gold’s most recent snap-back strength and will remain so unless it can build a reassuring base above the $1450/$1460oz. area. Bullish confidence will grow even stronger...[more]

 

“Presuming a Perfect World”

Larry Shover, SFG Alternatives

Uninterested in last week’s dampening growth data, (i.e. U.S. Import Prices, Producer Price Index, and University of Michigan Sentiment Index, etc.); the S&P 500 resumed its ascent – shattering all-time (nominal) record highs (set October, 2007) in the process. The S&P 500 closed the week +2.29% and presently stands   ...[more]

“The Markets March Madness”

Larry Shover, SFG Alternatives

We look back at a confusing March 2013, a month where the S&P 500 posted a 3.5% gain (Dow Jones Industrials +3.70%, Nasdaq +3.40%) going against the grain of most – if not all – global stock markets. Europe was flattish overall however peripheral markets suffered steep declines – Spain and Italy both weakened more than -3.5% while Greece tumbled almost- 14.0%. March also witnessed  ...[more]

When Should You Take Advantage of the Early Exercise Right?

Dave Rodgers, Contributor

The early exercise feature for equity options contain fundamental changes in risk that need to be evaluated prior to making a decision. The most common reason to exercise a call early is to capture a dividend. By exercising a call option the day before a stock goes ex-dividend the option holder take delivery of the stock and captures said dividend. This is can be an easy decision if options are deep in the money but how do you evaluate  ...[more]

 

Understanding Front Month Gamma

Ross Barnett Terry, Contributor

Gamma is a greek term that identifies the rate of change in a delta. In essence, it is the delta of the delta. Why is this important? It is significantly important because gamma is a dynamic animal and is most sensitive as an option nears the end of its “life”.

Think of it as a dying entity, a warrior lying in the battlefield gasping for his last breath, lashing out, striking at anything that comes close. This is the very essence of the term gamma. The life of an option is limited. It either ends up ...[more] 

Earnings Volatility: Friend or Foe?

Ross Barnett Terry, Contributor

When a company has an earning’s conference scheduled, many times there is speculation not only in regards to the accuracy of the projected earnings per share (EPS), but to several other factors as well. These include but are not limited to sales and revenue streams, products in the pipeline, cash on hand, management changes, possible future stock or bond offerings, etc. The uncertainty may cause volatility in the shares themselves, but the diamond in the rough is actually the temporary parabolic increase in the exchange listed options on the underlying shares. Traders tend to stay on the sidelines going into the days leading up to the earnings...[more] 

Delta is the King of Option Greeks

Dan Passarelli, Market Taker Mentoring

We all know option contracts are derivatives, and option prices are derived from the underlying stock, index, ETF or futures contract. But with other factors at work – implied volatility, time decay, etc. – how can you know how much an option is going to move with respect to said underlying? Very simple – check out the option’s delta.

Delta is arguably the most heavily watched of the option greeks, as it offers a quick-and-dirty way of telling us what to expect from our option positions ...[more]

Is Time Decay Kicking Your Butt?

Dan Passarelli, Market Taker Mentoring

There are still a few weeks to go until options expiration, but it is never too early to start thinking about time decay. Time decay is a premium buyer’s worst enemy and a premium seller’s trusted friend.

An option’s pricing consists of two main elements –intrinsic value (the difference between the strike price and the stock price; out-of-the-money options have no intrinsic value) and time value, measured by the length of time until expiration. While intrinsic value is ... [more]
 

Finer Points of Expiration

Dan Passarelli, Market Taker Mentoring

Once a month, options expiration rolls around. But options expiration requires some study to understand. Let’s take a look at some options expiration finer points.

1. While we always refer to “expiration Friday,” options don’t actually expire until Saturday. Technically, expiration occurs ...[more]

The Power of Leverage: Purchasing Options Verses Owning Shares of Stock

Ross Barnett Terry, Contributor

Why would anyone want to risk capital trading derivatives in lieu of the actual physical underlying vehicle they are based on? The advantages are based on the potential to leverage available capital and better position one’s self for greater profit with greatly reduced risk.

Buying one standardized option affords the owner a veritable safety net on the price of the underlying. The strike price coupled with the cost of the options...[more]

 

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