Swing Trading with Options

Stock Candidates For directional strategies use single stocks Look for open interest and volume to make sure options are liquid Look for high beta names Initially scan S&P 500 for possible candidates Establish a watch list that you are familiar with –Movement –Length of moves –Option pricing –Volatility Examples: AAPL, GOOG, CME, RIMM, GS, WYNN, GS, AMZN, BIDU, POT

Time Frames HVMM users: 195 minute, 130 minute, daily UST users: 30 minute, daily UMT users 195 minute, daily Tick charts can also be used

Pick your play 2 types of strategies that I like to use for directional plays Single options Verticals Form an opinion on what the stock is going to do. Is it breaking out? How long are you anticipating the move to take? From there, you can move on to selecting your play.

Greeks Delta: The change in the price of an option that results from a one point change in the price of the stock. Gamma: The amount of change in the delta of an option with a one point move in the stock. Theta: A measure of time decay and tends to grow larger as an option approaches expiration.

Single Options Stock Replacement Strategy We are going to use the delta to pick the option. Use the ITM options to minimize the effects of gamma and theta. Look for a delta of depending on your outlook –If the stock is breaking out and you are expecting a quick move, look for a delta of –If you anticipate the move taking longer than a few weeks, look for a delta of to minimize the effects of gamma and theta. How much time? Get to know your stocks and how they move. Typically I look for at least 15 days before expiration.

Apple Example Long setup on HVMM 3/11 triggered on 3/18 Entry: Target: Stop:87.56 April Options (30 days to expiration) Apr 95 call with a delta of.69 $9.45 ($945/contract) Target Hit 3/26 Apr 95 call $15.60 Profit: $615 65% return in 6 days

Vertical Spreads Benefits: –Lower risk –Defined trade parameters –Can be used to play higher priced stocks Buying one call or put and selling another at a different strike further out of the money in the same expiration month. You are giving up potential upside for a limited downside. Verticals only reach max profit at expiration. Need to have a longer outlook to be the max benefit out of them. Max loss: amount you pay for the spread Stick to buying spreads initially

Long Call Spread Purchase of lower strike call and the sale of a higher strike call –XYZ 120 –+1 Dec 120 Call -1 Dec 130 call Max profit: difference between the spread’s two strike prices less the amount paid. Can only be realized at expiration. Max loss: amount you paid for the spread Break even: long call strike plus amount paid for the spread

Apple Vertical Long setup on HVMM 3/11 triggered on 3/18 Entry: Target: Stop:87.56 April Options (30 days to expiration) Apr 100/110 call spread bought for $4.15 Sold Apr 28 $6.75 Profit $260 63%

Long Put Spread Purchase of the higher strike put and the sale of the lower strike put in the same expiration month. –XYZ 120 –+1 Dec 120 put -1 Dec 110 put Max Profit: Difference between the spread’s two strike prices less the amount paid. Max loss: Amount paid for the spread