Options and Candlestick Coaching â Level 1
Options and Candlestick Coaching – Level 1 Session 2 - Long Puts
Presented by Dave Forster – Nison Certified Options Trainer ™
Long Puts
• • • • • • • • • •
Differences of using ATM, ITM, OTM Choosing a strike Choosing an Expiration Implied Volatility considerations Setting a Profit Target Setting a Stop Loss Ideal Western Technical Setups Ideal Candle Signals Using a Time Stop Live Demonstration
Differences of using ATM, ITM, OTM Questions to ask Yourself
At The Money
In The Money
Out of The Money
How long do you expect the move to last?
•The longer you might hold onto puts has greater impact from time decay • Offers the fastest potential profit
•The longer you might hold onto puts, the least impact from time decay •Offers the most similarity with how the stock trades
•The longer you might hold onto puts, the greater possibility of achieving profitability •Offer the greatest percentage return gains
How fast do you expect the underlying to move?
•The most responsive to changes in price • Box ranges are the most detrimental
•If the time frame isn’t clear, the least time decay impact •Can offer the greatest dollar gains
•Offer the best returns if the underlying can move quickly •Allows fastest profitability to move stop
How strongly directional do you want to bias the trade?
•Is the most neutral directionally •Will gain intrinsic value the fastest
•Will respond the most similar to the underlying •Costs the most •Can make the greatest dollar profits
•Is the most strongly directional •Offers the greatest potential percentage returns
How high is implied volatility?
•Higher implied volatility makes this have the most extrinsic value and the most time decay
•In high IV, offers the least impact due to changes in IV therefore the least time decay
•Makes these options more expensive and therefore more reliant on a move down
www.nisonoptionsacademy.com
Which Strike to Choose ? The strike chosen is a critical decision as to the profitability of long puts There are a number of considerations when choosing the strike: • Technicals such as support/resistance – The closer the underlying is to resistance and the farther away from support, the better • Risk management concepts like risk to reward • Probability calculations such as probability of touching • Can benefit from implied volatility increases and most underlyings have IV that increases as the underlying drops. Upcoming Events like earnings or FDA announcements can also increase implied volatility • Some like to pick an OTM strike that they believe will go ATM before expiration • Some like to pick a strike that they believe will go ITM ASAP so the trade is profitable quickly • There are guidelines for which strike to pick but it’s up to YOU to decide how strongly directional to make the trade based on the trade setup. www.nisonoptionsacademy.com
Differences of using Expirations Questions to ask Yourself
Weeklies
Front Month
2 Months +
How long do you expect the move to last?
•2 to 3 days maximum •The fastest moving offers the fastest potential profit •The longer you might hold onto puts, the greatest impact from time decay
• A week or two maximum • The longer you might hold onto puts, the greater impact from time decay
•The longer you might hold onto puts, has the least impact from time decay •The longer you might hold onto puts, the greater possibility of achieving profitability
How fast do you expect the underlying to move?
•The most responsive to changes in price • Box ranges are the most detrimental
•If the time frame isn’t clear, balances cost with responsiveness •Available on all underlyings
• Offer the best least time decay if the underlying moves down slowly • Allows flexibility if move may take time
How strongly directional do you want to bias the trade?
•Is the most strongly directionally •Will gain value the fastest
• If the strength isn’t clear, balances cost with responsiveness •Available on all underlyings
•Is the most expensive •Offers the most potential (dollar, not percentage) gains since has time to move down
How high is implied volatility?
• Is the least impacted by implied volatility changes
• IV can change due to fixed events but typically increases on down moves
•Higher implied volatility gives this the most extrinsic value
www.nisonoptionsacademy.com
Implied Volatility considerations Implied Volatility is often why people buy long puts, the stock moves down but is not profitable There are a number of considerations about how IV may impact a put: • Compare historical volatility with implied volatility • Compare the implied volatility of nearby strikes • Longer term puts are the most subject to implied volatility decreases since they have the most time value • Shorter term puts are the least subject to implied volatility changes since implied volatility tends to decrease as expiration approaches • Can benefit from implied volatility increases as events like earnings or FDA announcements approach • Most stocks have IV that increases as the underlying drops but other asset classes like commodities do not • It might be helpful to note the IV when entering a long put and see how it changes over time. www.nisonoptionsacademy.com
Setting Profit Targets It’s what you keep that matters There are a number of ways to set profit targets: • If this is a stronger candle signal than most, you can consider using a higher target if the risk/reward is still favorable • Use a fixed percentage gain such as 25% • It’s helpful to structure the trade so that it can be profitable sooner if it moves down so that you keep the trade profitable • Technical support levels such as Fibonacci retracements, pivot points or trend lines can be used for profit targets • Consider how close by any potential support levels are. If there are multiple support levels close to each other, consider scaling out of the trade by selling some contracts and moving the stop up to breakeven as the underlying moves down to a support level • If part of reason for the trade is relying on implied volatility increases from events, once those events are over consider closing the trade www.nisonoptionsacademy.com
Setting Stop Losses Risk Management Is The Key There are a number of ways to determine stop losses: • Pay attention to any bullish candle signal or any neutral signal such as a doji or high wave candle that could indicate a shift in momentum • Pay attention to the size of the recent candle bodies – if the bodies are getting smaller, it can indicate a loss of momentum • Use a fixed percentage loss such as 20% to scale out or close • If the trade becomes profitable focus on keeping the trade profitable • There’s a price on the chart that isn’t bearish, know that price • Technical support levels such as Fibonacci retracements, pivot points or trend lines can be used to find levels that shouldn’t break • Consider using a technical stop like a 1, 2, or 3 candle trailing stop • Consider using a time stop – i.e. if the stock isn’t moving down in the time frame you thought it would, consider closing the trade
www.nisonoptionsacademy.com
Ideal Western Technical Setups Technical Indicators or Technical Patterns or Both? The more varied technicals that point in the same direction, the better: • Your choices are often to trade the trend, breakout, or retracement • Trading break downs or the trend is often ideal for long puts so the technical analysis used should support these types of setups • Support and Resistance should be a key consideration for long puts • If using technical indicators, use different types of indicators such as volatility indicators like Bollinger Bands along with a trending indicator such as ADX • Technical indicators offer overbought/oversold areas • Many Technical patterns have measured moves associated with them which allow for setting price targets
www.nisonoptionsacademy.com
Ideal Candle Signals The more bearish the candle signal, the better There are candle signals that are more bearish in their potential signals for trend change than others : • The more bearish candle signals are falling windows or bearish engulfing candles. These are ideal for trading long puts. Less bearish candle signals such as a bear sash or bear harami should either not be used a signals for long put trades or should have more confirmation along with Western technical setups to be considered for long put trades • The candle signals need to be in concert with risk management principles and Western technicals for ideal long put trades. • Past candle signals should be considered as to their potential effect on the current signal(s). For example, is there a falling window that is now close to a previous rising window that could act as support?
www.nisonoptionsacademy.com
Time Stops If the stock isn’t moving down, the long put is likely losing value Since the long put only becomes profitable due to down moves or implied volatility increases, keep the following in mind : • A time stop is a period of time (days for daily charts or hours for intraday charts) that you expect the stock to move down within and if it doesn’t meet that expectation during that period of time, you should consider either closing out the trade or closing out part of the trade • Time decay is the only certainty with options when there is a lack of movement so it works against long puts • Box ranges are the worst case scenario for a long put and since box ranges can occur after strong down moves, a time stop can help • You should have a time frame in mind as to what price and a range of time frames that the stock should move down by so this can guide as to what time stop you can use. www.nisonoptionsacademy.com
Presented by Dave Forster – Nison Certified Options Trainer ™
Long Puts
• • • • • • • • • •
Differences of using ATM, ITM, OTM Choosing a strike Choosing an Expiration Implied Volatility considerations Setting a Profit Target Setting a Stop Loss Ideal Western Technical Setups Ideal Candle Signals Using a Time Stop Live Demonstration
Differences of using ATM, ITM, OTM Questions to ask Yourself
At The Money
In The Money
Out of The Money
How long do you expect the move to last?
•The longer you might hold onto puts has greater impact from time decay • Offers the fastest potential profit
•The longer you might hold onto puts, the least impact from time decay •Offers the most similarity with how the stock trades
•The longer you might hold onto puts, the greater possibility of achieving profitability •Offer the greatest percentage return gains
How fast do you expect the underlying to move?
•The most responsive to changes in price • Box ranges are the most detrimental
•If the time frame isn’t clear, the least time decay impact •Can offer the greatest dollar gains
•Offer the best returns if the underlying can move quickly •Allows fastest profitability to move stop
How strongly directional do you want to bias the trade?
•Is the most neutral directionally •Will gain intrinsic value the fastest
•Will respond the most similar to the underlying •Costs the most •Can make the greatest dollar profits
•Is the most strongly directional •Offers the greatest potential percentage returns
How high is implied volatility?
•Higher implied volatility makes this have the most extrinsic value and the most time decay
•In high IV, offers the least impact due to changes in IV therefore the least time decay
•Makes these options more expensive and therefore more reliant on a move down
www.nisonoptionsacademy.com
Which Strike to Choose ? The strike chosen is a critical decision as to the profitability of long puts There are a number of considerations when choosing the strike: • Technicals such as support/resistance – The closer the underlying is to resistance and the farther away from support, the better • Risk management concepts like risk to reward • Probability calculations such as probability of touching • Can benefit from implied volatility increases and most underlyings have IV that increases as the underlying drops. Upcoming Events like earnings or FDA announcements can also increase implied volatility • Some like to pick an OTM strike that they believe will go ATM before expiration • Some like to pick a strike that they believe will go ITM ASAP so the trade is profitable quickly • There are guidelines for which strike to pick but it’s up to YOU to decide how strongly directional to make the trade based on the trade setup. www.nisonoptionsacademy.com
Differences of using Expirations Questions to ask Yourself
Weeklies
Front Month
2 Months +
How long do you expect the move to last?
•2 to 3 days maximum •The fastest moving offers the fastest potential profit •The longer you might hold onto puts, the greatest impact from time decay
• A week or two maximum • The longer you might hold onto puts, the greater impact from time decay
•The longer you might hold onto puts, has the least impact from time decay •The longer you might hold onto puts, the greater possibility of achieving profitability
How fast do you expect the underlying to move?
•The most responsive to changes in price • Box ranges are the most detrimental
•If the time frame isn’t clear, balances cost with responsiveness •Available on all underlyings
• Offer the best least time decay if the underlying moves down slowly • Allows flexibility if move may take time
How strongly directional do you want to bias the trade?
•Is the most strongly directionally •Will gain value the fastest
• If the strength isn’t clear, balances cost with responsiveness •Available on all underlyings
•Is the most expensive •Offers the most potential (dollar, not percentage) gains since has time to move down
How high is implied volatility?
• Is the least impacted by implied volatility changes
• IV can change due to fixed events but typically increases on down moves
•Higher implied volatility gives this the most extrinsic value
www.nisonoptionsacademy.com
Implied Volatility considerations Implied Volatility is often why people buy long puts, the stock moves down but is not profitable There are a number of considerations about how IV may impact a put: • Compare historical volatility with implied volatility • Compare the implied volatility of nearby strikes • Longer term puts are the most subject to implied volatility decreases since they have the most time value • Shorter term puts are the least subject to implied volatility changes since implied volatility tends to decrease as expiration approaches • Can benefit from implied volatility increases as events like earnings or FDA announcements approach • Most stocks have IV that increases as the underlying drops but other asset classes like commodities do not • It might be helpful to note the IV when entering a long put and see how it changes over time. www.nisonoptionsacademy.com
Setting Profit Targets It’s what you keep that matters There are a number of ways to set profit targets: • If this is a stronger candle signal than most, you can consider using a higher target if the risk/reward is still favorable • Use a fixed percentage gain such as 25% • It’s helpful to structure the trade so that it can be profitable sooner if it moves down so that you keep the trade profitable • Technical support levels such as Fibonacci retracements, pivot points or trend lines can be used for profit targets • Consider how close by any potential support levels are. If there are multiple support levels close to each other, consider scaling out of the trade by selling some contracts and moving the stop up to breakeven as the underlying moves down to a support level • If part of reason for the trade is relying on implied volatility increases from events, once those events are over consider closing the trade www.nisonoptionsacademy.com
Setting Stop Losses Risk Management Is The Key There are a number of ways to determine stop losses: • Pay attention to any bullish candle signal or any neutral signal such as a doji or high wave candle that could indicate a shift in momentum • Pay attention to the size of the recent candle bodies – if the bodies are getting smaller, it can indicate a loss of momentum • Use a fixed percentage loss such as 20% to scale out or close • If the trade becomes profitable focus on keeping the trade profitable • There’s a price on the chart that isn’t bearish, know that price • Technical support levels such as Fibonacci retracements, pivot points or trend lines can be used to find levels that shouldn’t break • Consider using a technical stop like a 1, 2, or 3 candle trailing stop • Consider using a time stop – i.e. if the stock isn’t moving down in the time frame you thought it would, consider closing the trade
www.nisonoptionsacademy.com
Ideal Western Technical Setups Technical Indicators or Technical Patterns or Both? The more varied technicals that point in the same direction, the better: • Your choices are often to trade the trend, breakout, or retracement • Trading break downs or the trend is often ideal for long puts so the technical analysis used should support these types of setups • Support and Resistance should be a key consideration for long puts • If using technical indicators, use different types of indicators such as volatility indicators like Bollinger Bands along with a trending indicator such as ADX • Technical indicators offer overbought/oversold areas • Many Technical patterns have measured moves associated with them which allow for setting price targets
www.nisonoptionsacademy.com
Ideal Candle Signals The more bearish the candle signal, the better There are candle signals that are more bearish in their potential signals for trend change than others : • The more bearish candle signals are falling windows or bearish engulfing candles. These are ideal for trading long puts. Less bearish candle signals such as a bear sash or bear harami should either not be used a signals for long put trades or should have more confirmation along with Western technical setups to be considered for long put trades • The candle signals need to be in concert with risk management principles and Western technicals for ideal long put trades. • Past candle signals should be considered as to their potential effect on the current signal(s). For example, is there a falling window that is now close to a previous rising window that could act as support?
www.nisonoptionsacademy.com
Time Stops If the stock isn’t moving down, the long put is likely losing value Since the long put only becomes profitable due to down moves or implied volatility increases, keep the following in mind : • A time stop is a period of time (days for daily charts or hours for intraday charts) that you expect the stock to move down within and if it doesn’t meet that expectation during that period of time, you should consider either closing out the trade or closing out part of the trade • Time decay is the only certainty with options when there is a lack of movement so it works against long puts • Box ranges are the worst case scenario for a long put and since box ranges can occur after strong down moves, a time stop can help • You should have a time frame in mind as to what price and a range of time frames that the stock should move down by so this can guide as to what time stop you can use. www.nisonoptionsacademy.com
