Each morning I look for new option trading ideas. I prefer selling premium; however, in such a low volatility environment, often the premium received is not worth the perceived risk assumed. In such cases, I either pass on the trade or buy in-the-money (ITM) credit spreads. Today I will review a few trades which I actually entered plus review some I was interested in but the option pricing and volatility was not interesting enough to enter.
This morning Greg Capra showed charts of the broader indices and suggested the markets may retrace and break the recent support range because of mixed signals and the extremely low $VIX. Within the first 30-minutes of trading today, most indices were weak.
Option Trading: Legging Into Weekly Bear Call Spread on DIA
I decided to enter a short trade on DIA since it appeared the weakest on the daily. The above daily chart shows the breakdown with “loose demand” to the left. Ideally, I would have shorted the DIA 186 calls (either naked or a bear call spread). However, with the low $VIX and implied volatility of DIA options, there was insufficient premium to sell. The weekly DIA 185.5 calls were only .11 x .13. Therefore, I decided to buy the ITM weekly DIA 185.5 puts instead because of the low time value. I then legged into a bear call spread by selling the weekly DIA 182.5 puts after a multi-bar decline into the 10:30 ET reversal period.
Option Trading: Bear Call Spread on COST
See the above daily chart of COST. Although it is very strong, it also broke down today with the broader markets and is at major weekly resistance. Despite its low Implied Volatility Rank (21%), I sold the August 170/175 bear call spread for a net credit of $.54 (representing $540 premium received on a 10-lot). I could have purchased a bear put spread (or other bearish strategy), but was happy with the $.54/share received for the 5-point wide spread with significant overhead resistance. This is a potential 10.8% ROI over the 17-day period to expiry. I will put a GTC “buy-to-close” order in for .27 representing 50% of maximum profit to see if I can get filled in the next few days as the stock hopefully continues to drop. My stop is over $169.50.
Option Trading: Potential Put Selling Candidate on MOS
I check all pre-market gaps and movers for possible new option trading ideas – particularly on earnings gaps since the IV will still be elevated. I had MOS on my radar this morning since it reported earnings today and was acting well during the first 30 minutes of trading on minor support. I was considering selling the August 25 puts around $.30 but never got an ideal entry nor did it retrace in confident manner on the hourly chart. Thus, I passed on the trade.
Option Trading: Earnings Put Selling Candidate on SQ
Although this daily chart of SQ is not a compelling bullish pattern that I would take a directional trade on, it has built a bullish multi-month base of support above $9.00. Tomorrow after the bell are earnings so volatility is high. I sold the Aug 9 puts (IV of 75%) for $.30/share. This would give me a cost basis of $8.70 if assigned ($9.00 less $.30 credit received, which is 13.8% cheaper than its current $10.12 price).
Option Trading: Core Trade on MNK
The following is a weekly chart on MNK.
Today MNK had what we call an Igniting Gap from a bullish consolidation on positive earnings. The weekly chart has an incredible bullish multi-month consolidation which provides a base of major support. Although not shown, the monthly chart is also very bullish and breaking out. I wanted to short puts on this today but the spreads were too wide, making it un-tradable to the active option seller like me (note, however, that I did try to sell some puts at the low offer price but never got filled). However, because of its long-term potential as a core trade, I will be keeping an eye on it to leg into a bear call diagonal (i.e., buying a deep ITM longer term call and/or stock and then selling monthly OTM calls against it to lower cost basis).
Option Trading: Bear Put Spread on PFE
PFE had a bearish open this morning after releasing earnings pre-market. The above daily chart shows it gapping under yesterday’s bullish breakout bar (creating a bearish Shakeout or failed breakout). This morning it sliced through daily support. It was an ideal candidate to short the weekly or monthly 37.5 OTM calls (either naked or a bear call spread); however, when I looked around 10 ET, the weekly 37.5 calls were only bid 3 cents and , the Aug 37.5 calls were only bid 11 cents. That is insufficient premium to sell.
As such, when PFE was trading around 36.39, I decided to buy an ITM bear put spread (I bought the Aug 37 puts and sold the Aug 36 puts for a net debit of $.58) because of the low time value. The cost was less than the intrinsic value of $.61. My max loss is $.58/share; max gain is $.42/share ($1 difference in strikes less debit); and a break even at expiry of $36.42.
I hope the above was helpful. We will be diving into these and many other option trading topics in the future, as well as giving suggested option trading ideas with the underlying rationale.
Happy trading! If you have any questions or comments, please e-mail Dan Gibby at gibbyglobal@gmail.com
