|
I have just spent the last 2 days at the February 2009 Optionetics 2-day seminar in Sydney. Most of the room were new students and I found it really special connecting again with people who are at the start of their trading careers. I found myself in conversation with a couple of students explaining what most of my trading comprises.
When I trade, I’m not so concerned whether the stock or index goes up or down a little, but just that the underlying stays in a particular range, or sometimes just doesn’t go into a certain price area. What kind of trades allow me to have this luxury?
Birds, Butterflies, even Insects! Is the Cockroach an insect or simply an outright pest? Technically an insect is a 6 legged creature but the Iron Cockroach strategy traditionally has 4 legs in its outset. Either way it’s a fantastic strategy.
So what do all these strategies have in common, other than their wings? Let’s go back to the animals for a second. What do each of these have in between each wing? Their body! In each of these strategies, there is a body and 2 wings. The bodies consist of selling options and the wings are protection. The bodies are therefore short options, and the wings long options.
The other common attribute each strategy has, is they can either encompass a wide price range, or have more than one direction of profit potential. What does that all mean? Let’s address the ‘wide price range’ first.
One of the great things Options trading can give you is the ability to make money non-directionally. Take a look at a chart of the S&P 500 as at February 11th, 2009.
Chart 1
click to enlarge
It could be said that the SPY (S&P500) is trading in a range at the moment, roughly between 75 and 95. The upper part of a range is known as ‘Resistance’ and the lower part ‘Support’. With Options trading, it is possible to apply strategies that make money if the underlying stays within a range. Naturally if the SPY went outside of the range in the chart above, i.e. higher than roughly 95 or lower than 75, the trade would be in its risk area and could be in significant loss.
Another way Option strategies can be constructed is that they make money in more than one direction. Out of the 3 directions (up, down and sideways), the strategy could make money sideways and up, or perhaps sideways and down. If the underlying went in the other direction the trade would be in its risk area.
Therefore the trader can choose where to put the risk. For example, if you think the market is NOT going above 95, but it could go sideways or down then you can choose to put the risk on the upside, and have profit potential open for the downside or the range in the middle.
The Masters ICT class (for graduates of the ICT) goes deeply into non-directional trading using Condors and Butterflies. It is my favourite class by a mile!
Manage your risk!
Matt Baker
|