Earnings to Supplement Durational Trades

This is a really bad environment for options traders (most of my readers). The vix is sitting at 13.65, so it is not a great environment for strategic options traders due to the little cost basis reduction available (small options premiums). Therefore, a lot of traders like me are a little bummed, but there is some wonderful opportunity hundreds of times every quarter. EARNINGS SEASON. That is right earnings. Earnings possess a great opportunity for options traders due to earnings volatility crush (when implied volatility falls after the binary event risk goes away). Volatility gets pumped coming into earnings, but a options trader can take advantage of this by doing specific options trades. These trades despite risky can significantly make up for low volatility. The key is to stay small. Stocks are very unpredictable in nature especially going into earnings, but volatility is predictable and mean reverting in nature and therefore can be predicted. I will warn you from buying volatility into earnings. Statistically buying volatility into earnings loses money. Actually, buying a straddle into earnings in AAPL, GS, and IBM (picked at random) made money 30% of the time. However, selling wide strangles into earnings made money around 70% of the time. I recommend for sure selling volatility into earnings, but please make sure you have at least 6 months of trading experience before you dive in.

Weak Tape Action

From just watching the markets, I see several cracks in the surface. I am seeing lots of strength in stocks like NEM, BBRY, and JCP up. I mean BBRY and JCP are on the verge of bankruptcy. Then stocks like TSLA, GOOG, AMZN, and YHOO  are weak. Then we have Gold strong, oil weak, and bonds strong. This tells me that we do not have a whole lot of demand for risk markets like oil, and their is quite a bit of demand for something "safer" like gold or bonds. In the end they should all go down toegether. Along with this, you had the VIX up a bit. It seems it is ready to start mean reverting as it always does when it starts trading in the 13-11 zone. So, I am again positioned short premium, but I have on short delta in in bonds, gold stocks, stock indices, short BBY long oil (as hedge), long JCP, Long GRPN, Long JCP, and long BBRY. This amounts to about 17 positions.

Just Flipped Back Short

I just flipped my positions from long to short. I covered most of my longs on the way up in the last few, and I have added some short to replace. The reason for this is the Vix, so hopefully we can get a quick down move (vix pop), and I can roll over back to long. The largest short position (delta wise) is in IWM and I will close my iron condor. My major long is in DIA because it is part of my DIA-SPY long pairs trade. I also rolled over to short deltas in Gold (GLD), but I sold an iron condor in GDX because of the vol opportunities. However, there is not a lot of opportunity to be short volatility because VIX is low, so a lot of other stocks do not have high implied volatility. Again, there are a few stocks or indices for short premium, but there is not a lot of stuff worth getting aggressive in. For now, this is debit spread time, and directional stocks. The lower volatility gets the more directional plays are because there is not a lot of opportunity for volatility to get crushed. However, I am staying with my positions, avoiding earnings stocks (binary event risk), and I will not be getting overly aggressive. Staying small is key right now, and get as much theta as you can. However, do not go overboard. Remember volatility is still low.

A Few Trades Ideas

I got burned in the last week, but so what! Lets look for some oppurtunity.....

XRT:
The ETF fell a lot and the volatility in it popped to 91th percentile. This makes me interested in iron condors and short premium trades. So considering how over sold it is just because of goverment shut down fears (There sound economic reasons for that but I think it is over done) I think I will just sell a put spread, but I may just do a skewed iron condor. Other than that the stock is good for short puts, wide strangles, wide iron condors, broken wing butterfly's, and skewed iron condors. There is a lot of room to increase your probability of profit and return on capital.

IWM/SPY (Main indices)
The volatility popped in these very quickly, so I am interested in selling more volatility and premuim. The VIX has gotten way over extend so skewed condors look best. I prefer the bullish side (buying the dip). However, I do already have the position in, but I may sell a put spread in the same month or closer to expiry weekly option as long as I can get decent premium and duration.

JNJ
The volatility in this product again has reached all time highs. I am personally selling a put spread, and I may sell another because volatility has popped since then. Just remember it is statistically proven that is better to stay small so be careful with your size.

BBY
The trade in here looks to be a non directional calendar spread. Studies show that calendar spreads into stock market strength and low volatility are often the most profitable out of short call spreads and long put spreads. So, this is the stock that I watch with lowest volatility and should be a great stock for a options spread looking for a volatility pop considering volatility is the most mean reverting asset in the world.

Applying a Logic Chain to Trading

I was teaching a trading class today at a high school, and I did a intro on applying a logic chain to trading. A logic chain is essentially the steps and logic you use to make trades and manage your portfolio. A logic chain is not in any way a trading plan, but it should be applied in every trade written or not written. So question yourself? What is your logic chain? What logic do use from everywhere from the risk you are willing to take to your direction. If the trades doesn't fit the risk to your probability of success or risk to reward don't do the the trade. Does the trade fit your directional bias, does it give you an defined edge, does it fit your risk tolerance, and does it fit with your other positions. What criteria do you use to select trades (this is when it is more subjective)? Now this might start sounding like a trading plan, but it is not. Trading plans only fit a certain environment and markets and trading conditions change, so they are not valid. However, a logic chain is simply that. A chain of logic or a process you go through to select trades and manage your portfolio.

My logic chain is math based. The more subjective side is when I trade major markets and look at them. I will ask myself what is my opinions from the price action and news. Then I see if I can run studies that will give me any kind of edge in the current market situation. For example, volatility, the  SPX, and interest rates are all down one week and the next week they will do X 75% of the time? Then I will find the right way to implement the trade using impl vol, market conditions, options premiums, the way other markets are moving with the market I am looking at, and of course my current positions. Despite that, I may do trades that make more sense regardless of my directional bias. If the short iron condor trades makes the most sense I will do it, but if a pairs trade makes more sense I will do that. As for the rest of my positions it is all implied volatility based. What is volatility doing, where is it compared to the historical range, what our the options premiums, does the trade I want to do makes sense to implied volatility, and does the trade fit my portfolio. If the trade fits my portfolio, but it may not make sense compared to the stock I won't do it, but if they both make sense I will. Even if the paragraph might be a simplified version of everything I do it should serve as a good example. The trading rules I have is I never break my logic chain (my logic chain might change though), and I never take more risk than I feel comfortable with.