My Option Trader: September 2011

Friday, September 30, 2011

REPLAY is ready for "How to Trade in the Current Market"

The video replay for today's class "How to Trade in the Current Market" is ready for you! Please visit:

http://www.sheridanmentoring.com/index/method/c.how-to-trade-in-the-current-market.html

The next class will be on Wednesday, Oct 5 for paid students.

Join the class today!

Please let me know if you have any questions about the class!

Regards,

Dan Sheridan

Sheridan Options Mentoring

dan@sheridanmentoring.com

Tel: +1 630-835-4691

Mailing address: Sheridan Options Mentoring, 1539 Della Drive, Hoffman Estates, IL 60169 USA

To unsubscribe please visit:
http://www.sheridanmentoring.com/index/method/c.unsubscribe/emailaddr/markrschultze.tset@blogger.com.html

CLASSROOM IS NOW OPEN! Join us for "How to Trade in the Current Markets"

Hi everyone,

Today's classroom is now OPEN and ready for you to join! I'll start at 1:00 PM Central...

Here's how to join the class:
------------------------------------------------

How to Trade in the Current Markets

https://sheridan500.webex.com/sheridan500/onstage/g.php?t=a&d=660574595

TODAY - Friday, September 30, 2011 1:00 pm Central Daylight Time (Chicago, GMT-05:00)

Event number: 660 574 595

If the link above does not work, you can manually join this class
by following these instructions:

1. Visit http://sheridan500.webex.com/
2. Find the meeting "How to Trade in the Current Markets"
3. Click the "Join" button
4. Fill in your name, email address
5. Submit the form
------------------------------------------------

I hope you can attend this event with me!

Regards,

Dan Sheridan
Sheridan Options Mentoring
www.sheridanmentoring.com
Tel: +1 630-835-4691

Mailing address: Sheridan Options Mentoring, 1539 Della Drive, Hoffman Estates, IL 60169 USA

To unsubscribe please visit:
http://www.sheridanmentoring.com/index/method/c.unsubscribe/emailaddr/markrschultze.tset@blogger.com.html

Sheridan Options Mentoring Blog

Anatomy Lesson

Posted: 30 Sep 2011 06:09 AM PDT

Options can be confusing. The world with which an options trader deals is described by a host of confusing and often redundant terms. The extremely dynamic nature of options and option based trades produces additional confusion as, for example, a particular individual option moves from out-of-the-money to at-the-money to in-the-money within the course of a few hours or even minutes.

I think it is helpful to have a thorough understanding of the anatomy of an option premium in order to help provide an organizational framework. Once the trader understands the basic anatomy with which he is dealing, the behavior of the options begins to make more sense.

The price of an option premium is quoted as a bid and ask price. The magnitude of the difference between these two prices can be quite variable. As a general rule, the more active the option series, the tighter the bid-ask spread. The actual price at which the option trades is usually somewhere between these two quotes.

However another important variable is the recognition that this negotiated price at which an option trades is actually the sum of two components which have very different behaviors. This price is composed of the sum of the intrinsic and extrinsic (also known as time premium) values of the option.

Given the particular option strike price and expiration month, the embedded intrinsic value can range from $0 to almost the entirety of the value of the option. Similarly, the extrinsic value can range from the entirety of the premium to only a small portion of the entire premium.

Consider the recent AAPL October monthly series option quote montage displayed below. This table represents a snapshot of option prices at an instant in time when AAPL traded at $396.92.

AAPL Option Chain

The market price of the option at this particular point in time is displayed in the boxed column headed "Mid" and the extrinsic (time) component is highlight in the column indicated by the ovoid. The intrinsic value represents the embedded value directly attributable to the current market price of the underlying. This value can easily be calculated by subtracting the extrinsic value from the total market price of the option. The intrinsic value of the option will reliably track penny for penny with the price of the underlying.

One potential point of confusion deals with the at-the-money strike option. Rarely is the price of an underlying at precisely the strike price of an available option. There is always an at-the-money strike, and it is defined as the option with the strike price closest to the current market price. In our example of AAPL, this would be the $395 strike; note that this strike price is highlighted in red in the quote box.

A few minutes study of this quote board reveals several important and consistent functional characteristics of options pricing. These include:

Out-of-the-money options consist entirely of extrinsic (time) premium; they contain no intrinsic value.
At-the-money options contain the maximum dollar amount of extrinsic premium.
In-the-money options contain a variable amount of extrinsic (time) premium which decreases as the strike price under consideration lies deeper in-the-money.

It is important to consider the amount of time premium contained within the option price because this represents value that is reliably and constantly eroded by the passage of time. In addition, it is only this extrinsic component that is impacted by the variation in implied volatility. In contrast, the intrinsic premium rises and falls as a result of only changes in the market price of the underlying.

While this discussion may seem a bit theoretical, understanding of these concepts is critically important to structuring option positions as well as understanding their response to market conditions and the impact of the passage of time on positions.

Familiarity with these concepts allows trades to be constructed with a higher probability of success. For example, a basic vertical call debit spread can often be constructed by buying an in-the-money option, and selling an out-of-the-money option containing more time premium than you have bought. In such cases, you are able to "sell sizzle and buy steak".

Thursday, September 29, 2011

How to Trade in the Current Markets - Class Two - TOMORROW - 1:00 PM Central

Hi everyone,

Tomorrow's class is at 1:00 PM Central and it is free. I hope to see everyone there!

I made a mistake yesterday and forgot to record yesterday's seminar. I'm so sorry! I will include the material I covered Wednesday in a condensed presentation on Friday.

Tomorrows presentation will be approximately 1-1/2 hours(1/2 hour condensed version of Wednesday and 1 hour of new material including analysis of Wednesday's live class trade and putting on another live class trade).

These are the details for joining the live class tomorrow:
------------------------------------------------

How to Trade in the Current Markets

https://sheridan500.webex.com/sheridan500/onstage/g.php?t=a&d=660574595

Friday, September 30, 2011 1:00 pm Central Daylight Time (Chicago, GMT-05:00)

Event number: 660 574 595

If the link above does not work, you can manually join this class
by following these instructions:

1. Visit http://sheridan500.webex.com/
2. Find the meeting "How to Trade in the Current Markets"
3. Click the "Join" button
4. Fill in your name, email address
5. Submit the form
------------------------------------------------

I hope you can attend this event with me!

Regards,

Dan Sheridan
Sheridan Options Mentoring
www.sheridanmentoring.com
Tel: +1 630-835-4691

Mailing address: Sheridan Options Mentoring, 1539 Della Drive, Hoffman Estates, IL 60169 USA

To unsubscribe please visit:
http://www.sheridanmentoring.com/index/method/c.unsubscribe/emailaddr/markrschultze.tset@blogger.com.html

Wednesday, September 28, 2011

"How to Trade in the Current Markets" - Starting TODAY at 1:00 PM Central

You are invited to Dan Sheridan's new Free Class starting TODAY at 1:00 pm Central:

How to Trade in the Current Markets

The meeting room already open!!!!

Here's how to join the live class:
------------------------------------------------

Event: How to Trade in the Current Markets

Event address: https://sheridan500.webex.com/sheridan500/onstage/g.php?t=a&d=668817323

Date and time: Wednesday, September 28, 2011 1:00 pm Central Daylight Time (Chicago, GMT-05:00)

Event number: 668 817 323

If the link above does not work, you can manually join this class with these instructions:
1. Visit https://sheridan500.webex.com/
2. Find the meeting "How to Trade in the Current Markets"
3. Click the "Join" button
4. Fill in your name, email address
------------------------------------------------

We hope you can attend this event.

Regards,

Sheridan Options Mentoring
www.sheridanmentoring.com
800-288-9341

Mailing address: Sheridan Options Mentoring, 1539 Della Drive, Hoffman Estates, IL 60169 USA

To unsubscribe please visit:
http://www.sheridanmentoring.com/index/method/c.unsubscribe/emailaddr/markrschultze.tset@blogger.com.html

Sheridan Options Mentoring Blog

Options Safari: GLD Bull Call Spread and RUT Bear Put Spread

Posted: 28 Sep 2011 05:06 AM PDT

Dan’s two shows for CBOE TV Options Safari this week are:

GLD Bull Call Spread

RUT Bear Put Spread

Download the Presentation Slides here

Join our free public forums at http://forums.sheridanmentoring.com.

Tuesday, September 27, 2011

CORRECTED LINK: You are invited to attend "How to Trade in the Current Markets" - TOMORROW, Wed Sep 28th at 1:00 PM Central

You are invited to Dan Sheridan's new Free Class starting TOMORROW at 1:00 pm Central:

How to Trade in the Current Markets

We will open the meeting room at least 1 hour before the class starts.

Here's how to join the live class:
------------------------------------------------

Event: How to Trade in the Current Markets

Event address: https://sheridan500.webex.com/sheridan500/onstage/g.php?t=a&d=668817323

Date and time: Wednesday, September 28, 2011 1:00 pm Central Daylight Time (Chicago, GMT-05:00)

Event number: 668 817 323

We hope you can attend this event.

Regards,

Sheridan Options Mentoring
www.sheridanmentoring.com
800-288-9341

Mailing address: Sheridan Options Mentoring, 1539 Della Drive, Hoffman Estates, IL 60169 USA

To unsubscribe please visit:
http://www.sheridanmentoring.com/index/method/c.unsubscribe/emailaddr/markrschultze.tset@blogger.com.html

How to Trade in the Current Markets - TOMORROW - 1:00 PM Central

You are invited to Dan Sheridan's new Free Class starting TOMORROW at 1:00 pm Central:

How to Trade in the Current Markets

We will open the meeting room at least 1 hour before the class starts.

Here's how to join the live class:

------------------------------------------------

Event: How to Trade in the Current Markets

Event address: https://sheridan500.webex.com/sheridan500/onstage/g.php?t=a&d=662929031

Date and time: Tuesday, September 27, 2011 1:00 pm Central Daylight Time (Chicago, GMT-05:00)

Event number: 662 929 031

If the link above does not work, you can manually join this class

with these instructions:

1. Visit https://sheridan500.webex.com/

2. Find the meeting "How to Trade in the Current Markets"

3. Click the "Join" button

4. Fill in your name, email address

------------------------------------------------

We hope you can attend this event.

Regards,

Sheridan Options Mentoring

www.sheridanmentoring.com

800-288-9341

Mailing address: Sheridan Options Mentoring, 1539 Della Drive, Hoffman Estates, IL 60169 USA

To unsubscribe please visit:
http://www.sheridanmentoring.com/index/method/c.unsubscribe/emailaddr/markrschultze.tset@blogger.com.html

Monday, September 26, 2011

Free class on Wed: How to Trade in the Current Markets

Please join me Wednesday at 1:00 PM Central this week for a FREE live classes:

How to Trade in the Current Markets

This FREE class is on Wed, Sep 28th at 1:00 PM Central (Chicago) Time.
Sign up for this class now at:

http://www.sheridanmentoring.com/index/method/c.eventSignup.html

I hope to see you on Wed at 1:00 PM Central!

Regards,

Dan Sheridan
Sheridan Options Mentoring
www.sheridanmentoring.com
800-288-9341

Mailing address: Sheridan Options Mentoring, 1539 Della Drive, Hoffman Estates, IL 60169 USA

To unsubscribe please visit:
http://www.sheridanmentoring.com/index/method/c.unsubscribe/emailaddr/markrschultze.tset@blogger.com.html

Saturday, September 24, 2011

Sheridan Options Mentoring Blog

NETFLIX: A few trade ideas

Posted: 23 Sep 2011 08:10 AM PDT

Netflix has surely paid for their price increases and especially how they communicated those price increases to the public. The public and investors responded by trashing the stock price. From around the middle of July to today, the stock has fallen from around $300 to the current level of $129. Buyers haven't jumped in much yet, but it's worth considering potential bullish trades if you feel the beating is almost over.

Here are a few trades that look interesting to me. There was a saying in the pits, “Don't try to catch falling knives.” Picking bottoms isn't easy! If I was to jump in on one of these trade ideas, I would probably scale in, starting at about 1/3 of my intended size.

#1. Sell 1 November 85 put for around $3.00 ( stock around $129.70 as I'm writing this). Trade is neutral to bullish.

I would only do this trade if I was comfortable owning NFLX stock if I got assigned. In other words, I have to have a neutral to bullish outlook on NFLX over the next 6 months if I am going to do this trade. The implied Volatility levels are jacked at over the 100 level. By selling the puts at $3.00, I am committing to buying the stock at $82.00! ( strike price of 85 minus the put premium of $3.00). If I'm not comfortable owning NFLX at $82.00 if I get assigned, I wouldn't do this trade.

What would I do if I get assigned?

I would start selling at-the-money or out-of-the –money calls against my long stock. What if I don't get assigned? I would collect the premium of $3.00 and if my outlook on NFLX was still neutral to bullish, I would go 30-60 days from expiration and do it again.

#2. Buy 1 November 125 call and sell 1 November 30 call for a net debit of around $2.40 ( stock around $129.70 when looking at this trade). Trade is neutral to bullish.

Why would I consider this trade? Because I can do well if the stock is neutral ( doesn't go up). At expiration, if stock is 130 or over, the potential yields are very high because of the pumped up implied volatilities. The risk / reward is a little better than 2:1 and I do well in 2 of 3 scenarios, neutral and bullish.

What would I do if NFLX went down?

If NFLX went down under 123 or 124 over the next 25 days I would probably considering exiting. At that point , my losses would be far less than they would be if NFLX was at the 123-124 area at expiration. At expiration you would lose entire debit, in 25 days at the 123-124 area I would approximate my losses to be around 10-15% on the cost of my spread.

That's my 2 cents for the day ( my Irish mother used to say this), have a wonderful weekend!

Join our free public forums at http://forums.sheridanmentoring.com.

Friday, September 23, 2011

Sheridan Options Mentoring Blog

Survival Mode

Posted: 23 Sep 2011 07:01 AM PDT

Bunker

As I sit to type this blog, my aluminum foil hat is getting really uncomfortable. The NASA satellite is re-entering the atmosphere somewhere this afternoon, Europe is approaching financial meltdown, Ben Bernanke is out of ammunition, and gold prices have retreated from their recent multi-year high. Even the VIX has awakened from its slumber and is hovering around multi month highs.
Assuming the satellite doesn't take me out this afternoon, what can I do to deal with the increased risk of the current environment? Remember that capital preservation is paramount in times like these. Here are a few suggestions to keep in mind:

Take a break. You don't have to be in the market at all times. Recognize, as farmers have always known, that sometimes it is just too wet to plow. It will get easier.
Trade small. Valuable skills can be learned in fast markets such as these, but they only benefit those who survive with their capital intact. Cut your trade size in half or to one-quarter of your usual size.
Trade only the most liquid issues. Liquidity traps are subtle- they draw you in with a reasonable negotiated price but they don't let you go without inflicting pain. I find the list of underlyings that trade weekly options to be a great screen for finding the most liquid candidates.
Recognize and deal with elevated implied volatility. When planning trades, allow for the probability that current inflated volatility will revert toward its mean. Neutralize this effect or turn it to your advantage. In optionspeak, use vega neutral or vega negative trade structures.
Use limit orders. The two cardinal changes in markets adapting to uncertain market conditions are increases in implied volatility and widening of bid-ask spreads. Never ever use market orders to enter positions. As a corollary, remember that you may have to use these type orders to exit in emergency conditions.
Reduce the number of positions you have open. It is easy to overlook positions that need attention in the heat of battle. This is not the time to baby sit the neighborhood.
Use defined risk positions. Some option positions, for example naked short puts, have substantial potential risk. This is not the time to depend on the Black Swans remaining in the nest.
Plan your trade and follow your plan. Deer in the headlights have a very short life expectancy. So do traders in current market conditions who lack a plan or ignore the plan.
Remember that option position risk is defined in terms of time and implied volatility as well as price. Certain positions, for example call ratio back spreads, have risk defined in terms of time as well as price. Don't miss the forest for the trees.
Remember to breathe. This too shall pass. It does get easier.

Life will return to normal. The foil hats can come off soon. We'll need the time to get ready for whatever the Mayans were trying to tell us about in 2012.

Join our free public forums at http://forums.sheridanmentoring.com.

Thursday, September 22, 2011

CORRECTED LINK for next week's class

I apologize for the link in the previous email not working. The code on the server incorrectly processed the emails before sending them out. This is the correct link to sign up for the class

How to Trade in the Current Markets

that starts on Wed, Sep 28th at 1:00 PM Central (Chicago) Time:

http://www.sheridanmentoring.com/index/method/c.eventSignup.html

Sorry for error in the first email.

Regards,

Tom Nunamaker

Sheridan Options Mentoring

www.sheridanmentoring.com

Mailing address: Sheridan Options Mentoring, 1539 Della Drive, Hoffman Estates, IL 60169 USA

To unsubscribe please visit:
http://www.sheridanmentoring.com/index/method/c.unsubscribe/emailaddr/markrschultze.tset@blogger.com.html

Join Dan next Wed for a Free Class...

Dan Sheridan invites you to a new class he's teaching next Wednesday

How to Trade in the Current Markets

The first two classes next week are FREE!

Dan will discuss trading opportunities that work in this market and give you some ideas of how to modify your income trades to cope with increased volatility.

The class starts on Wednesday, Sep 28th at 1:00 PM Central (Chicago) Time. To receive updates and the login to the class, please register here:

http://www.sheridanmentoring.com/index/method/c.eventSignup.html

We look forward to seeing you next Wed!

Sheridan Options Mentoring
www.sheridanmentoring.com
800-288-9341

PS: Don't forget to complete your free registration at http://www.sheridanmentoring.com/index/method/c.eventSignup.html

Mailing address: Sheridan Options Mentoring, 1539 Della Drive, Hoffman Estates, IL 60169 USA

To unsubscribe please visit:
http://www.sheridanmentoring.com/index/method/c.unsubscribe/emailaddr/markrschultze.tset@blogger.com.html