Dear readers and friends,
This coming Monday, Feb 22, at 3:15 PM I will be speaking at the
Traders Expo New York.
Below are links for the Traders Expo.
I’d like to thank Options City for coordinating the opportunity to give this talk.
I would also like to announce the launch of our new website, OptionsHedger.com. Scheduled to be up next week, OptionsHedger will feature consultancy and commentary across multiple
options markets. All commentary on the site will come from people who
professionally trade the markets they comment on.
The vision for the site is to become the place individual
traders and small-mid sized businesses come to get their options questions
answered. Understanding options is becoming more important with the recent onset of global volatility. We are creating the site to become the resource that sophisticated traders
and businesses come to when they are considering putting on options trades. In world
markets that feature progressively less real liquidity, slippage in options trades, or undisciplined execution of a concept can become costly. OptionsHedger
will be the one stop shop for those who want to avoid those costs.
Please visit us next week at OptionsHedger.com
Topic for
the discussion Monday Feb 22, New York Marriott Marquis Times Square
The goal of this talk is to discuss how directional traders
can use options to create trades with better risk profiles than simply buying
or selling futures, ETFs or Stocks.
Why this topic?
Recently a number of traders I consider to be market savvy have asked me whether options make sense for them to trade when they are bullish or bearish in a given
market. That is an impossible question to answer without knowing more details
about how the options in that market are priced. That being said, there are
ways that directional players can learn to find opportunities within these
markets using options. A friend of mine who has market experience but limited options experience
recently asked me about whether he should be using options to carry out his
directional bias on the S&P. After about 45 minutes of asking questions about where things
were priced, I still had no simple answer for him. I spent about an hour talking
about all the risks that he probably hadn’t considered. Don't worry, I promise this talk won't be that long.
“Why Directional Traders Need to Understand Options”
continues my conversation with Brian to explore the ways that options can be used to generate better returns. I will spend a portion of the talk going
through historical examples in gold, where opportunity was clear for those who
were paying attention. This will not be a long complex rant on options pricing.
The goal of the talk is to help traders and hedgers consider ways to more intelligently approach the options markets they are trading in.
Gold Update:
Gold has been extremely exciting since I last wrote. A near
70 dollar rally on Feb 11 was the crescendo of a near 200+ dollar rally low to
high.
In my last post,(Feb 6) I showed the below 3 year gold chart
and said the following::
I think
the chart above tells gold’s story. The upper line of the down-channel, which
has held as solid resistance for nearly 3 years comes in near the October high
around 1190-1210 depending on how you draw the line. This however, is not the
1200 of old. Consolidation around this area would be to my eyes bullish and
would expect a retest of the 1325-1350 area should it break above. The length
and strength of the down-channel we have seen for the last 3 years in gold must
be respected. The extremes have brought buying in on the lows and selling at
the nearby tops. I am not one to question history, so I will be watching these
levels and the ensuing price action very closely. If gold is able to regain
this area for a period of time, buyers may be emboldened if the resistance
appears to weaken around 1190-1210.
This same chart 12 days later looks like this.
You can see that gold pierced through that upward resistance. It has quickly sold off and sits hovering right above the line. In keeping with last weeks theme, I think the concept that consolidation around this area could be quite bullish. The push through 1200 led to an onslaught of buying. Once that resistance gave way, new highs were established over 60 dollars higher. It is back here again, but those who hate 1200 in gold because of the monotony of last time should not lose sight of opportunity if we sit here for a bit. The longer gold is capable of hanging around up here even if it is doing nothing, the more bullish it becomes. Spending time above this clearly defined trend line would signal that the conviction of sellers had weakened. The longer term and bigger a price a channel is, the more likely you are to see a strong move when it breaks away from it. We shall see if this was a blip and a fail, but this type of situation might create opportunity for options traders with a directional opinion on gold.
Gold Options are historically expensive right now. Volatility, while off the highs, is at the far upper end of its multi-year range. While that does not mean they are overvalued, they are not at the point that a directional trader considering using options should look to be getting involved. But the opportunity might arise.
This is a perfect example of how a trader with a directional opinion can monitor options prices and find real opportunity with some basic homework. Let's say looking at this chart that you are bullish gold. You believe that gold will chop around this area for a while and then rally to new heights. Whether or not gold is to rally, someone who is bullish could reasonably look for an extend move higher because it would appear that it has broken out of its downchannel. This might be a reason to own options.
But the problem is if gold sits, and you buy options, especially at prices well above the 3 year historical average, you will painfully lose your premium. Time becomes your enemy. However, if you are of the mind that consolidation here is bullish, then you should be monitoring the options market carefully and waiting to look for entry points where the risk reward gets good.
Understanding the risks of owning options can be complex but in a scenario like this it can be simple. If gold consolidates into a tighter range, options almost inevitably get sold. As the movement becomes and less more and more options selling ensues as the cost of owning in a dead market is too high based on the movement. This creates the opportunity to put on an options trade based on the concept of a breakout out of consolidation.
The key is not to be in a rush. You do not have to do any trade. But if gold consolidates, and you view that as bullish, you will be able to buy options at lower and lower prices, giving you a lower cost basis on your investment/trade. In its simplest form, I am advocating that anyone who is bullish gold, unless they see it spiking back up, start monitoring the implied volatility in the options. If you view consolidation as bullish, and watch closely, you can find opportune times to get options at prices that give you a better risk adjusted return than you can get by trading futures alone.
I hope to see you all on Monday Feb 22nd.
Ben
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