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When I think "Earnings Season" I think Straddles & Strangles. They go together like lamb and tuna fish... (perhaps you prefer spaghetti & meatball?~ Big Daddy 1999 all rights reserved). Anyway, let's talk about the strategy. After all, we haven't done so since last earnings season, and we need a refresher!!!

Starting with the premise of this strategy, their are two useful ways to utilize this trade.

First: Taking this trade in anticipation of a substantial price movement. A movement big enough to override the loss on one side of this trade.

Second: Options are at historically cheap levels and you take this trade in anticipation that option premiums will eventually rise. You buy both calls and puts expecting both to gradually increase with a rise in implied volatility, but not expecting large price movements yet.

As some may know, a straddle or strangle consists of buying calls and buying puts (Straddles = same strikes / Strangles = different strikes). That's right, you are an option buyer times two! We all know the issues with buying options... lower probabilities of success mixed with double the time decay. However, as the educated optionaddicts you are, many of you know how to override these problems.

Problem #1- As you get closer to earnings, option premiums rise in value.

Solution: Stop buying options right before the announcement! Look at a chart of avg. implied volatility for your stocks options. You'll see that with most, volatility tends to get very high every three months, and low in between. Yes, there is a cycle that takes place there. Some stocks will have a large range, others will not. Every stock is different so analyze them on a relative basis. As you get closer to an earnings release prices tend to rise, so trade in anticipation of this. In October I did a strangle with MSTR including the public and walking them through the process. It worked extremely well, and mostly because we got in three weeks before the announcement. We bought the options at the bottom of the pricing barrel before the became expensive.

Problem #2- Time Decay

Solution: In reality, if implied is increasing at a good amount, this totally takes care of time decay and then some.

Solution 2: Stop buying options that are so sensitive to time decay. Instead of buying 1 month options, buy 2 or 3 months out. This means your theta will be smaller and vega will be larger!

Problem #3- Stock Selection

Solution: If you are going to place this trade, it is not appropriate on just any random stock. Do some research! Watch the news! Whether it is a company announcing FDA results, clinical trials, court verdicts, product news, earnings, etc....pick the stock that should blow everyone out of the water! The more likely the stock is to move in large amounts, the more probable a successful outcome is using this strategy.

I think I covered everything, but I gotta run and go record the Marketcast anyway. If I missed a point, leave your comments here. I will clean them up when I get back.

You guys rock!

Jeff,

Could you please comment on what is an advised, recommended or an acceptable number of positions to have open at any one time for the novice vs. the experienced trader? I find that if I have alot of positions open at once, I don't do as good a job managing them. How many do you tend to have open at one time?

Thank You,

Sean M.

Jeff,

Could you please comment on what is an advised, recommended or an acceptable number of positions to have open at any one time for the novice vs. the experienced trader? I find that if I have alot of positions open at once, I don't do as good a job managing them. How many do you tend to have open at one time?

Thank You,

Sean M.

Happy weekend, everyone.
Well, sometimes "stupid" pays. I've been running with MER for a while and didn't even notice is was announcing earnings yesterday. Got hit bad yesterday but it was up today and we're still sitting on a tidy profit. Think I'll ride it out a bit longer as it's continuing in it's upward channel.
Meanwhile BXP is the only thing that's saving my bacon right now. Bought it at $1.86 and it closed today at $5.70 It may be reaching a peak, though. Keep an eye on it to retrace and continue it's merry road upwards.
Everything else I have is sucking wind. ADM has a very narrow channel downwards, but I'm not convinced it's going to continue. It's right at support (or is support really resistance when it's going down... I'M SO CONFUSED!!!) so if it heads up... I'm out.
I must go and rest my weary brain. Have a good weekend everyone. We're really looking forward to meeting everyone in Orlando.
Chris and Catherine.

Sean,

I am not experienced trader, only have 19 months since I started my education on Investools ( PHD, 3 DL class by the way Jeff was one of my instructors, and 4 DL class in UTAH, trading rooms and Active investor talk for a year)but maybe can share what I have done.
I think is important to know if you are able to watch your computer very frequently or not and what type of strategies you are playing.
If you are doing short term trades then maybe could be good to keep 5 to 7 positions but if your are doing more intermediate trades then you probably can monitor 10 to 15.
I started with 4 to 6 position but I was also able to be watching my positions all the time. Then with time you might do more and depending wath type of trades you are doing.
Also depends on the amount of money you have for trading, you only use certain percentage of your total account to trade options maybe start with 10% to 20%.
I have not check all the articles that Jeff has published but if he did not write about money management rules that will be a good topic to write about. That for sure will give you a better idea how many trades after all you are able to do based on money management rules.
Alessandra

Sean,

As my rules get more developed I am able to take more positions. I don't think there is a magic # that you can or can not watch. The key is if you are missing sell signals you have too many positions. Missing buy siganls is frustrating, but you are still in the game. Missing sell signals is deadly. Missing sell signals is more deadly if you are an option trader.
As my rules get more developed I am able to get in and more importantly out of trades mechanically. I have the abiliy to log into my accounts at the end of the trading day. One of my accounts will send me updates on all of my positions on all of my accounts every 1/2 hour over e-mail. I have a cheat sheet list of all of my positions at my desk. It has where my exits will be, and what avg volume is for each stock, it also has earnings dates posted if they are within 2 weeks. The list gets updated on Saturdays. As long as I am not close to any exit spots, all is good. If I get close to an exit spot, I need to look at what is going on with volume, check news, check overall market ect. to see if there is anything driving the price action. If there is no bad news and volume is reasonable then I wait until the end of the day to see where the price goes. On very heavy volume and bad news I will cut and run ASAP.

Even with that said usin my money management. I never put more than 10% in an stock position and try not to have move than 20% in options at any one time so that limits my positions.

The other thing I have found myself doing, but it is too soon to write a well thought out rule is; If I jump into too many new positions at any one time I find it harder to handle emotionally. If you are a trend trader the hardest thing for me is the first big pull back to support. You see your account balance on down, thin you have picked wrong..... After you get the first good bounce off of support you then have unrealized $$ in the trade. Then as the stock price starts coming down to bounce off of support I am more relaxed nowing that if support doesn't hold I am still up on the trade and can walk away with a profit.

sorry for the typo's

Hi Jeff,
How about a straddle or strangle on BIDU ? It seems to make a nice, farely large, move at earnings and the next earnings release is Feb 14th. That gives us 3 1/2 weeks to get in before earnings. Is that enough time ?? I have never done a straddle/ strangle. Could you walk me/us through the process. Thanks as always. ~Tonya/DAYTONA BEACH~

Tom D. and Alessandra,

Thank you for your help. One of the best things about trading for me is that you learn new things every day and I can learn from everyone I talk to that is trading. This blog is certainly a good forum for exchanging ideas. Again, thank you.

Sean M.

You are welcome Sean. Let's see if maybe Jeff will write something on the money management rules or other guideline on this topic.

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...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT... ...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT...

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  • I'm Option Addict
  • From Saratoga Springs, Utah, United States
  • I am a professional trader and an instructor for Investools. I've had relations with the markets for 9 years. Born in Concord, CA, but reside in Saratoga Springs, Utah. Father of THREE, Husband of one.
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