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Mailing address: Sheridan Options Mentoring, 1539 Della Drive, Hoffman Estates, IL 60169 USA
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Mailing address: Sheridan Options Mentoring, 1539 Della Drive, Hoffman Estates, IL 60169 USA
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Sheridan Options Mentoring Blog |  |
| A Few Things You Should Know Before You Trade Options Posted: 06 Feb 2012 10:06 AM PST  Mark Answers Commons Questions He's Asked One of the questions that frequently comes up with option traders who have only done the equity side of options is how do I get into trading futures options and what do I need to know before I start? There are several basic things you should know and understand about futures and their option before you get started with live trading of them. What month should I trade? One of the first characteristics to consider is that futures do not always have a new contract every month. Many futures, U. S. Treasury bonds for instance, have only a few contract months per year. Treasuries have March, June, September and December only. All the months in between have options only that are traded derivative of the next futures month. Strategies, such as time spreads must be placed carefully to insure that you are trading off the same underlying contract month. Get to know your futures and options expiration periods before you start. Not only the contract months differ from the equity world, trading hours do also so be sure to know when your underlying is being traded during the day and night. What is the tick size? Tick size for the different futures and options is different than many equities also. And the tick size of the options and the future itself can be different. Using the bond example again, the future tick size is $31.25 per tick and the options are $15.625 per tick. Futures trading can be larger and highly leveraged, it is important to understand how each tick movement is effecting your position. What type of strategy should I trade? Once you have a basic understanding of the future and its options you wish to trade you can begin to look at what strategies to employ. Non-directional or directional strategies such as iron condors and calendars can be used but be careful with the time spreads that you are using the same underlying contract month as I mentioned earlier. From my own experience it seems iron condors either even on each side or sometimes weighted heavier on one side or the other can be a solid month-to-month trade. Sometimes short or long straddles can be appropriate also. Don't trade without a PLAN! Having a PLAN is the most important part of trading any underlying, whether you trade futures or equities. Before you enter any trade you should know and have a plan for how and when you will exit the trade at a profit or a loss and at what point you would adjust or reduce risk a trade that is going against you. In my experience mentoring new traders that is the most common mistake I see being made. You must also stick with your plan and try to control the emotions that would have you staying too long or not long enough in a trade. Your trading PLAN is fundamental. Don't trade anything without one. If you follow these steps, you should have a good start to learning how to trade futures and futures options. Trading always involves risk; learn to control it as best you can. |
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| Posted: 01 Feb 2012 08:17 AM PST It seems like Apple (NASDAQ:AAPL) has replaced the Dallas Cowboys as "America's team." And yes, I know it is a great stock – one that might actually be undervalued. But at the risk of sounding almost un-American, I think it's time to start getting short AAPL. Sure, the company just announced record – heck, downright mindblowing – earnings thanks to iPhone 4S, iPad 2 and international sales. Even Wall Street analysts were impressed with the final numbers. Unprecedented sales figures for the company aside, I'm a trader and, therefore, looking ahead to what the stock's going to do next. With all the good news for the company, the stock has been climbing … but it can't possibly go straight up without any down days. In other words, even AAPL has to have a few days or weeks to act "human" … and you should get positioned to profit from the pullback when it comes. As a trader, I am not concerned about AAPL long term. But here in the short- to intermediate-term, it's quite reasonable and even wise to look for a little healthy downside trading action. Here's a trade idea for the speculative part of my options portfolio. Trade Idea: With AAPL trading here around $447, you can "buy to open" 1 April 430 Put (which would cost you about $12) and, at the same time, "sell to open" 1 April 410 Put (for which you would collect $7). To enter this trade, which is a put debit spread (or a bear-put spread), your total cash outlay would be $5 per share, or $500 per option contract ($12 – $7 x 100). You could simply buy the April 430 Put on its own, but by selling the $410 put against it, you instantly reduce the amount of money you would otherwise have at risk in the trade. The spread is costing me $500 and the most I can make is $15 (the difference between the option strikes, or $430 – $410) if the stock is trading at $410 or lower at April expiration. My total risk in a put debit (or bear-put) spread is the same as being long an option. Whatever I pay, which is $500 in this example, that's the total risk. The cost of the spread at current prices is closer to $5.30, but I am going to be patient and let it come to me a bit. If the stock goes up a couple bucks from here, I should get filled. Last week when I told you that it's time to get a bit short, I also mentioned that you should enter your options trades by "nibbling," or scaling in by buying your position in thirds. Here, too, I am initiating this spread with 1/3 of my total intended position size. I am starting with one contract here and will work up to my total of three contracts as the stock increases. Will I wait till April options expiration to get out of this? No way! Once we get a little pullback and the put spread gains some profits, I'll head for the exits. I'd like to make a minimum of $2 on this spread. By getting in at a good price, by scaling into the spread at less than my maximum size, and by using options with an April expiration date, I have lots of time to wait for a small pullback. That's my plan and I'm sticking to it! If, after I get up to three contracts and there is no pullback, I plan to show you in a future article how you can cut your total risk in half. (Hopefully, I won't have to show you this adjustment as anything other than a strategy that's good to know for future trades.) Whatever happens, I will follow this trade to completion with you. Stay tuned to see if AAPL is really human. I'm betting it is! |
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