Tuesday, July 28, 2009

Profiting from Implied Volatility

The most common view of those that are unfamiliar with options trading is that it is “RISKY.” One of the main reasons for this is the changes in Implied Volatility can alter the option’s price in a way that is too often misunderstood. Anyone that has entered a straddle the day before earnings only to have no significant move up or down in the stock price, more than likely has witnessed a drop in their options value the next day…It would be safe to say that the finger of blame could be pointing in the direction of implied volatility and how rapidly it can decrease.

Understanding and controlling implied volatility is critical to any option trader’s success. One way to manage it is to buy options between earnings periods when implied volatility is often closer to the low of its range than the high. Since part of an options price will increase/decrease due to changes in the implied volatility as represented by its VEGA amount. The relationship is for every 1% increase/decrease in implied volatility the options value will increase/decrease by the VEGA amount. Therefore the result from a 10% increase/decrease in implied volatility could mean a great return or an outstanding loss of invested capital.

How am I profiting? By buying my options when implied volatility is low, usually about 6 weeks before an earnings event… If the stock moves, that is just a bonus! On the other hand I will never make money with the use of options if I don’t know how and when to exit. Having a primary and secondary exit plan is essential to consistent profits when trading.

When should I exit in this type of situation? The day before earnings when IV is at a peak!

Here are some stocks between earnings with low Implied Volatility:

  • Research in Motion (RIMM), maker of the Blackberry is a good candidate at present. The company is not scheduled to releases earnings again until September.
  • Apple Computers (AAPL) who is now a competitor of RIMM doesn’t have an earnings announcement again until October.
  • Pharmaceutical company Merck (MRK) is in between earnings and doesn’t have another announcement until October.

Thursday, July 2, 2009

It is all about the J O B S

They say the unemployment report is a lagging indicator...Try telling that to the one who is unemployed...I would guess that they would tell you that is the leading indicator for their financial problems right now.

Don't get me wrong, I understand what they mean by "lagging indicator" but this latest
report tells me a lot, it confirms a lot too. One thing I cant help but think about is the unemployment benefits extension plan as part of the American Recovery and Reinvestment Act (ARRA) that was signed by President Obama back in February. Are our unemployment issues, as bad as they seem to be right now, really a whole lot worse? There are a lot of people that are struggling right now, family, friends and close acquaintances. Some have made bad decisions, some have put too much faith in others (people they thought they could trust.) Most are struggling right now as a result of bad decisions made by a very small percentage of our population, very small group of individuals.

What will spark the turn around? (comment here)

In my opinion...You have to make money in order to spend it. And the only way you can make money is buy working, using your talents to create something of value that people will want to use and share. Unless your the Federal Reserve, why then you can really just "make" money.

My 2 cents for what it is worth...Stay protected, use common sense, ask a lot of questions and most of all be honest with each other and yourself.

Thanks for reading, Coach Nuge

As for my current positions due to the short trading week, I am holding and will be looking for adjustment opportunities next week.

Stay tuned.

Demand Talib Kweli in University of Utah!
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