Options Trading Blog


Thursday, May 25, 2017

Considering ITM Put Options?

There is always potential for the market or individual stocks to move lower despite this incredible bullish run over the last several months. In fact, many traders never even think about bearish strategies because they are always looking for bullish options. Option traders know that stocks and markets do not always go up, but many will wait until they think the decline is over to once again look for a bullish strategy instead of taking advantage of bearish opportunity at hand. Understanding put options is a must for option traders but I am often asked how to choose strike prices. There are several different options to consider and here are a few things to consider specifically based on an expected small move in the underlying. But first let us take break down the anatomy of a put option.

A buyer of a put option has the right, but not the obligation to sell shares of underlying stock at a certain price on or before an expiration day. The price at which the buyer can sell the shares is called the strike price. There are many strike prices and expirations to choose from which can be overwhelming for a trader. When expecting a stock to make a small move especially if the stock is lower in price, it may be advantageous for the trader to select an in-the-money (ITM) put option. An ITM put option is a put with a strike price that is higher than the stock’s current price. Before going further, here’s a look at a possible scenario where buying an ITM put might be warranted.

An ITM put option can be used to capture a relatively small move lower. Suppose an option trader is watching a $10 stock in a downtrend. The stock then rallies higher and now he thinks it is a good time to enter a bearish position with a put option. He surmises the stock might be able to drop about $0.50.

A critical point about capturing this potential $0.50 move down revolves around option delta. Option delta is the rate of change in the option’s value relative to the change in the stock price. Puts have a negative option delta because if the stock rises, puts will lose some of their value. Since puts give the owner the right to sell stock, puts gain value as the stock falls. In this example, the trader is expecting only a $0.50 move lower. Buying an ITM put that has a higher option delta will profit more than a put with a smaller option delta if the anticipated move comes to fruition.

With the stock trading just under $10, the option trader looks at the 10 and 12 strike puts. The 10 strike puts have an option delta of about -0.55 and the 12 strike puts have an option delta of about -0.90. This means that for every $1.00 the stock moves down, the 10 strike put’s premium should increase by $0.55 and the 12 strike put’s premium should increase by $0.90 all other factors held constant. The reverse is also true. If the stock moves higher by $1.00, each put would lose value in the amount of their deltas. Since the expected move is only $0.50, half the deltas would be gained or loss depending on the direction of the stock.

Final Thoughts…

Buying an ITM put option is not always the best way to capture a stock’s move lower, but when it comes to profiting on a perceived small move, an option trader should consider a put option position with a higher option delta and do so with the satisfaction of knowing their loss potential is limited to the cost of the put option.

Happy Memorial Day!

John Kmiecik

Senior Options Instructor

Market Taker Mentoring Inc.

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Thursday, May 18, 2017

An Options Watch List is a Must

If you are a NBA or NHL fan, you probably know that we are getting closer and closer to the finals. With only four teams left, the finals are near. The remaining teams are gathering information about themselves and their opponents and trying to gain the upper hand over them which ultimately could lead to a victory and a championship. Just like in option trading, a well though out and well kept watch list can help a trader in a variety of ways including scoring profits. First and foremost it can help keep track of the underlyings and keep them all in one place so it is easy to reference them. Potential trade opportunities are often discovered by scanning and searching charts and options from stocks that are on a watch list just like determining potential strengths and weaknesses of a hockey or basketball opponent. Here are a couple of ways a trader might go about building a watch list or creating a better one.

Familiar Ones

If a person is relatively new to trading there are probably a few stocks that he or she is familiar with. To gather more names to add to the list, a trader can scan through an index (like the S&P 500 for example) and find more stocks to potentially add to the list. Some of the stocks listed may not be conducive for a variety of reasons. It makes perfect sense to check out the symbols and see if the charts and the options are at acceptable levels for the trader’s personality and plan. Things a trader might want to consider when deciding whether to put a stock on his watch list are the stock price, the stock’s volatility, option prices, bid/ask spreads and option volume just to name a few. When this process is complete, a trader should have a decent watch list in which to work with. This list may grow and sometimes shrink over time depending on the trader.


There are numerous trading services (free and paid) out there that not only might introduce traders to stocks to add to the watch list which may lead to potential trade opportunities. The Market Taker Live Advantage Group Coaching is one such service that MTM offers. As mentioned above, the reason a watch list is created in the first place is to find potential trades. A service can not only introduce traders to new symbols but also provide trade ideas that can turnout to be profitable. But if the trade concept is unclear or deviates from a trader’s plan regardless of the source, it should be avoided until the concept is understood. In any case, if the trader thinks there may be an opportunity on the stock in the future it can be added the list.

List Categories

Once a trader has a watch list of stocks, it may be prudent to separate the list into different categories. There can be a list for stocks that are ready to trade now or very soon. Keeping this list the shortest might make sense for a couple of reasons. First a trader should probably not be trading more stocks than he or she can handle and secondly if there are too many on this list, some trade ideas might get lost in the mix. A short list makes it easier to monitor potential trade opportunities. There can also be a category for stocks that have trade potential in the near future (a day to a week for example). This list can be monitored maybe a little less frequently than the previous list. Another category to consider for the watch list are stocks that have no potential now but may in the future. For example, maybe a stock is trading in the middle of a channel and if it ever trades down to support a bullish opportunity may arise. Stocks should be moved up and down in these different categories as needed.

What’s Important

These were just a few ideas about how a trader can go about developing and monitoring a watch list and searching for potential trade opportunities. The most important part about having a watch list is not how it was acquired but that there is one. A well-refined and updated watch list can yield plenty of potential money making opportunities in option trading.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

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Thursday, May 11, 2017

Overbought and Oversold

The goal for most traders is to catch a trend early and ride it to the end. To accomplish that requires incredible timing on both entry and exit. This article will focus on recognizing when a market has moved too far too fast and is therefore likely to stall out or reverse direction.

Markets often telegraph an end of a trend by simply going through a period consolidation. Markets were created to facilitate trade. When a market moves in a direction and the day ranges and volume decrease, it is not facilitating trade. Subsequently, a reversal often occurs.

Another type of reversal comes when a market is over extended. This is commonly known as overbought or oversold. Many analysts use technical indicators to track the speed of a move, the most popular are RSI and Stochastics. When either of these indicators get above 80, a market is thought to be overbought.  On the other hand, a reading below 20 signals an oversold situation. One problem with these indicators is that a market may hang around that 20 or 80 level for weeks. This makes timing a reversal difficult.

A trader can become more skilled at picking tops and bottoms by becoming familiar with market dimensions, mainly average ranges over a few time frames. If we track benchmarks regarding range we can define when odds have shifted to favor an end or reversal of trend.

For example, if a day range spans more than 150% of the average in a 24-hour period, it is considered overdone, thus odds favor a rest period or reversal. Currently, an average day range for S&P futures is 16 points. If the range during a day session extends 24 points, probability favors a reversal. Such large ranges during a trend are often called exhaustion moves.

In the crude oil chart below there is a bracket that spans the length of an average week. For a longer-term barometer refer to the average week range. In this example, oil surpassed an average week range in a 48-hour period.  Generally, if a market moves the length of an average week in just 2 days, it is considered overdone and due for a reversal or period of consolidation.

 When riding a trade, it is difficult to time when and where to take profit. A severely overbought/oversold signal can help with picking off extreme high and lows for both entry and exit trades.

John Seguin 

Senior Futures Instructor

Market Taker Mentoring

Wednesday, May 3, 2017

Calendars Held Over Earnings

Continuing on from a couple of weeks ago when we talked about an option strategy that pertains to earnings, here is another strategy option traders can consider. In this blog, we will talk about a trade that can profit when held over the announcement. Although many option traders will naturally steer away from earnings because of the volatile nature which is usually not a bad thing, the risk/reward of this option spread can be very tempting. The strategy is a long calendar and it is pretty simple to implement. First let’s take a look at what a calendar is below.

A long calendar is selling an option and buying a longer-term option with the same strike. Generally, all calls or all puts are used. A calendar is a time spread because it benefits from the passing of time. The short option will have a bigger positive theta than the long option which will have a smaller negative theta. The maximum profit is realized if the stock closes right at the strike price of the short expiration. That option expires worthless and the long at-the-money (ATM) option will have time premium left. The max profit and the break evens are all hypothetical because there are two different expirations. Using the P&L (profit and loss) diagrams that your broker probably provides, is the best way to estimate them.

The key component that can enhance potential profits is an implied volatility skew. An option trader prefers to sell higher IV and buy lower IV. For the long calendar, a higher IV is naturally preferred on the short option with a lower IV compared to the short strike on the long farther out expiring option. Many times, this can be difficult to find and we talk about this scenario all the time in Group Coaching. But when there is an earnings report that is scheduled to be released, the IV for the options that expire closest to the report will have a higher IV than expirations that take place even further out. In essence, it is a perfect opportunity for an IV skew!

Let’s take a look at a recent example. Advanced Micro Devices (AMD) that was scheduled to release its earnings on a recent Monday after the close. Calendars can be used for neutral and directional outlooks. Remember an option trader wants to set-up the calendar where he thinks the stock will be trading at the short expiration. Let’s assume a neutral forecast was expected after the announcement. Taking a look at the chart below, A trader can sell the 13.5 strike for Friday’s expiration and buy the same strike for the following expiration. Note that the short expiration has an IV over 107% and the long expiration is just below 77%. That means he or she would be selling more expensive premium than he or she would be buying.

Of course, the stock needs to cooperate and in this case, not move much after the announcement. The IV for the short and long options should drop after the announcement and that is where the option trader realizes his or her potential profit. The short option should decrease more than the long option percentage-wise which should increase the value of the spread if the underlying trades relatively close to the short strikes the next day. Although maximum profit is potentially earned at the short expiration, with an earnings calendar, it may be worth exiting some if not all of the position the morning after the announcement.

Long calendars held over earnings can be relatively low risk high reward trades. Like most trading, there is always an element of luck involved. You want the stock to move or stay near your strikes and you just don’t know exactly what will happen despite having a P&L diagram. As I like to say about earnings calendars, sometimes I am surprised I made money and sometimes I am surprised I lost money. Good luck!

John Kmiecik

Senior Options Instructor

MarketTaker Mentoring Inc.

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Wednesday, April 26, 2017

Different Risk/Reward Scenarios

If you have heard me before, you have often heard me say that options have so many moving parts. There are so many more areas to learn and understand than there is for say just trading stocks. As an option trader, you have so many different strategies and risk/reward scenarios to think about before initializing a trade. Many of my students in my Group Coaching class as well as my one-on-one students ask me all the time how do you decide between buying a debit spread and selling a credit spread as one example. Let's take a look at a scenario below and some things for an option trader to think about.

Risk and Reward

A debit spread such as a bull call spread or a bear put spread is considered to have a better risk/reward ratio then a credit spread such as a bull put spread or a bear call spread depending on how it is initiated. Usually the reason is because the debit spread is implemented close to where the stock is currently trading with an expected move higher or lower. A credit spread is usually initiated out-of-the-money (OTM) in anticipation the spread will expire worthless or close to worthless with the underlying barely moving. Let's look at a theoretical example using ABC Corp. (ABC). Let's say the stock is currently trading at $187.50. The stock looked like it could drop lower. The trader could consider buying a bear put or selling a bear call spread.

If the option trader expected a move lower into the close of Friday, he or she could have considered buying a 185/187.5 debit spread for December expiration (let's say 4 days from now). If the 187.5 put cost the trader 2.25 and 1.15 was received for selling the 185 put, the bear put (debit) spread would cost the trader $1.10 (also the maximum loss if the stock is at $187.50 or higher at expiration) and have a maximum profit of $1.40 (2.50 (strike difference) – 1.10 (cost)) if the stock was trading at or below $185 at expiration. Thus the risk/reward ratio would be 1/1.27.

If the option trader was unsure if the $187.50 stock was going to move lower but felt the stock would at least stay below a resistance area around $190 by December (4 days from now) expiration, the trader could sell a 190/192.5 credit spread with December expiration. If a credit of 1.00 was received for selling the 190 call and it cost the trader 0.50 to buy the 192.5, a net credit would be received of $0.50 for selling the bear call (credit) spread. The maximum gain for the spread is $0.50 if the stock is trading at $190 or lower at expiration and the maximum loss is $2 (2.50 (strike difference) – 0.50 (premium received)) if the stock is trading at or above $192.50 at expiration. Thus the risk reward ratio would be 4/1.


The risk/reward ratio on the credit spread (4/1) does not sound like something an option trader would strive for does it? Think of it this way though, the probability of the credit spread profiting are substantially better than the debit spread. The debit spread most certainly needs the stock to move lower at some point to profit. If the stock stays around $187.50 or moves higher, the puts will expire worthless and a loss is incurred from the initial debit ($1.10).

With the credit spread, the stock can effectively do three things and it would still be able to profit. The stock can move below $187.50, trade sideways and even rise to just below breakeven at $190.50 (190 (sold call) + 0.50 (initial credit)) at expiration and the credit spread would profit. Of course if it closes at $190 or lower, the maximum profit of $0.50 is achieved because the spread expires worthless. A loss is only realized if the stock closes above the breakeven level of $190.50. I like to say OTM credit spreads have three out of four ways of making money and debit spreads usually have one way of profiting especially if the underlying is basically around the long option when the spread is initialized.


There are several more factors to consider when choosing between a debit spread and a credit spread like time until expiration, implied volatility and bid/ask spreads just to mention a few. We will talk about these other factors in future blogs. The risk/reward of the spread and the probability of the trade profiting are just a few to consider mentioned above. A trader always wants to put the odds on his or her side to increase the chances of extracting money from the market. The credit spread can put the odds substantially on the trader's side but it comes at a cost of a higher risk/reward ratio.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

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Thursday, April 20, 2017

Market Reversals

Fundamentals trump technicals. Economic and supply and demand reports often alter sentiment and are frequently responsible for changing trends or extending them. When there is no data to affect a market, many traders rely on technical signals to interpret momentum, pinpoint entry /exits levels and define risk.

In this issue, we will focus on market turns and how to spot when reversals are likely. During rallies, markets tend to make lows very early in the day and highs are often seen late in the session. During declining trends, highs tend to be made early and lows late in the day. So, when this type of price action ceases, anticipate a pause in trend or possibly the end of one.

Markets tend to consolidate before reversals and there are subtle changes that often telegraph change. The most liquid times of the trading day are during the first hour and last hour. It is during these times that big ticket orders are often executed, in order to be discrete.

In the Japanese Yen chart below the first hour of regular trading hours is highlighted in a yellow rectangle.  Note that during the rally, lows were made very early in the day session.  Also, note when the market turned down highs were made in the first hour of the session.  

When markets are ready to turn they frequently leave clues.  A high or low made during the most volatile time of the day is often a subtle change, a change nonetheless.


John Seguin

Senior Options Instructor

Market Taker Mentoring


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