Options and Candlestick Coaching â Level 2
Options and Candlestick Coaching – Level 2 Session 3 – Bear Puts
Presented by Dave Forster – Nison Certified Options Trainer ™
Bear Puts (Long Put Verticals)
• • • • • • • • • • • •
Bear put Definition Opening and Closing the Bear put Spread Differences of using ATM, ITM, OTM Choosing a Spread Width 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
Bear put Defined A Bear put is a vertical spread. The long put and short put are in the same expiration with the long put strike closer to ATM There are a number of considerations when choosing a Bear put: • Bear puts should only be used for bearish setups • Bear puts are placed for a debit since buying the long put will cost more than the premium taken in from selling the short put • Maximum risk is the amount of debit paid • Maximum reward is the width of the spread minus the debit • Bear puts are one of the four vertical spreads so both the long and short puts have the same expiration • The long put is used to make the trade profitable • The short put is used to reduce the risk of the trade and define an exit • Can benefit from implied volatility increases and most underlyings have IV that increases as the underlying drops so this can make the short put more expensive to buy back. It’s possible to leg in by buying long puts first • Close the trade once the underlying hits the short strike, a pre-determined ROI % gain (or loss) is achieved, after a time stop or other criteria www.nisonoptionsacademy.com
Opening/Closing Bear puts To open a bear put buy a put and sell a put in the same trade. Do the opposite to close the trade With the SPY at 147 for example, to open a bear put:
With the SPY at 147 for example, to close a bear put:
Limit orders are recommended as well as only trading the most liquid i.e. tightest bid/ask underlyings since it’s likely that two commissions will have to be paid to implement this strategy. Try to not buy at the ask and sell at the bid www.nisonoptionsacademy.com
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 and moves sideways, the greatest impact from time decay •The highest Gamma offers the fastest potential profit
• The longer you might hold, the least impact from time decay • Depending on the strike, offers the lowest returns due to highest debit
•The longer you might hold, the greater possibility of achieving profitability •Offer the greatest percentage return gains • Low probability
How fast do you expect the underlying to move?
• Most responsive to changes in price since Gamma is highest • Most expensive due to highest extrinsic
•If the time frame isn’t clear, the least time decay impact • Typically offers the lowest returns
•Offer the best returns if the underlying can move quickly • Typically allows fastest profitability to move stop
How strongly directional do you want to bias the trade?
•Is the most neutral directionally due to Delta •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
How Wide to Make the Spread? The width of the spread between the long and short strikes is a critical decision There are a number of considerations when choosing how wide the spread should be : • Technicals such as support/resistance – The closer the underlying is to resistance and the farther away from support, the wider the spread could be i.e. buy the long put with a strike around resistance and sell the short put at support. A wider spread allows for greater potential gains • Risk management concepts like risk to reward apply to both the spread and the technical setup • The wider the spread is the more it costs, therefore the higher the risk is • Some like to pick a short strike that they believe will go ATM before expiration which would be max profit for the trade • Some like to pick an expiration that allows for enough time for the underlying to move towards the short strike • There are guidelines for which strike to pick but it’s up to YOU to decide how wide to make the spread 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 highest Gamma offers the fastest potential profit •The longer you might hold onto a spread, the greatest impact from time decay
• A week or two maximum • The longer you might hold onto a spread, the greater impact from time decay
•The longer you might hold onto a spread, has the least impact from time decay •The longer you might hold onto a spread, the greater possibility of achieving profitability
How fast do you expect the underlying to move?
•The most responsive to changes in price since Gamma is highest • Box ranges are the most detrimental
•If the time frame isn’t clear, balances cost with responsiveness •Available on all underlyings
• Offer the 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 due to Delta and Gamma •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 gains since has time to move down
How high is implied volatility?
• Is the least impacted by implied volatility changes as long as earnings aren’t involved
• 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 a bear put, even when the stock moves down, is not profitable There are numerous considerations about how IV may impact a bear put: • Compare historical volatility with implied volatility • Compare the implied volatility of the long and short strikes • Longer term bear puts are the most subject to implied volatility decreases since they have the most time value • Shorter term bear puts are the least subject to implied volatility changes since implied volatility tends to decrease closer to expiration • Can benefit from implied volatility increases based on events like earnings or FDA announcements as those events get closer • Most underlyings have IV that increases as the underlying drops which helps the trade along with Delta and Gamma to create profits • It might be helpful to note the IV when entering a bear 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: • There should be a stronger candle signal than most i.e. falling window bearish engulfing so 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 resistance 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 down to breakeven as the underlying moves down to a resistance 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% • 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 bar 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 • If assigned on the short put, exercise the long put to close 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 breakouts or the trend is often ideal for bear puts so the technical analysis used should support these types of setups • Support and Resistance should be a key consideration for bear 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 to determine what strike to sell the short put • If trading the trend, try to ensure the move isn’t already extended 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 bear puts. Less bearish candle signals such as a bear sash or bear harami should either not be used a signals for bear put trades or should have more confirmation along with Western technical setups to be considered for bear put trades • The candle signals need to be in concert with risk management principles and Western technicals for ideal bear 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? This could slow down any potential move down
www.nisonoptionsacademy.com
Time Stops If the stock isn’t moving down, the bear put is likely losing value Since the bear put only becomes profitable due to down moves or implied volatility increases, keep the following in mind : • Time decay is the only certainty with options when there is a lack of movement so it works against bear puts • Box ranges are the worst case scenario for a bear put and since box ranges can occur after strong down moves, a time stop can help • 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 • 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 ™
Bear Puts (Long Put Verticals)
• • • • • • • • • • • •
Bear put Definition Opening and Closing the Bear put Spread Differences of using ATM, ITM, OTM Choosing a Spread Width 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
Bear put Defined A Bear put is a vertical spread. The long put and short put are in the same expiration with the long put strike closer to ATM There are a number of considerations when choosing a Bear put: • Bear puts should only be used for bearish setups • Bear puts are placed for a debit since buying the long put will cost more than the premium taken in from selling the short put • Maximum risk is the amount of debit paid • Maximum reward is the width of the spread minus the debit • Bear puts are one of the four vertical spreads so both the long and short puts have the same expiration • The long put is used to make the trade profitable • The short put is used to reduce the risk of the trade and define an exit • Can benefit from implied volatility increases and most underlyings have IV that increases as the underlying drops so this can make the short put more expensive to buy back. It’s possible to leg in by buying long puts first • Close the trade once the underlying hits the short strike, a pre-determined ROI % gain (or loss) is achieved, after a time stop or other criteria www.nisonoptionsacademy.com
Opening/Closing Bear puts To open a bear put buy a put and sell a put in the same trade. Do the opposite to close the trade With the SPY at 147 for example, to open a bear put:
With the SPY at 147 for example, to close a bear put:
Limit orders are recommended as well as only trading the most liquid i.e. tightest bid/ask underlyings since it’s likely that two commissions will have to be paid to implement this strategy. Try to not buy at the ask and sell at the bid www.nisonoptionsacademy.com
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 and moves sideways, the greatest impact from time decay •The highest Gamma offers the fastest potential profit
• The longer you might hold, the least impact from time decay • Depending on the strike, offers the lowest returns due to highest debit
•The longer you might hold, the greater possibility of achieving profitability •Offer the greatest percentage return gains • Low probability
How fast do you expect the underlying to move?
• Most responsive to changes in price since Gamma is highest • Most expensive due to highest extrinsic
•If the time frame isn’t clear, the least time decay impact • Typically offers the lowest returns
•Offer the best returns if the underlying can move quickly • Typically allows fastest profitability to move stop
How strongly directional do you want to bias the trade?
•Is the most neutral directionally due to Delta •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
How Wide to Make the Spread? The width of the spread between the long and short strikes is a critical decision There are a number of considerations when choosing how wide the spread should be : • Technicals such as support/resistance – The closer the underlying is to resistance and the farther away from support, the wider the spread could be i.e. buy the long put with a strike around resistance and sell the short put at support. A wider spread allows for greater potential gains • Risk management concepts like risk to reward apply to both the spread and the technical setup • The wider the spread is the more it costs, therefore the higher the risk is • Some like to pick a short strike that they believe will go ATM before expiration which would be max profit for the trade • Some like to pick an expiration that allows for enough time for the underlying to move towards the short strike • There are guidelines for which strike to pick but it’s up to YOU to decide how wide to make the spread 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 highest Gamma offers the fastest potential profit •The longer you might hold onto a spread, the greatest impact from time decay
• A week or two maximum • The longer you might hold onto a spread, the greater impact from time decay
•The longer you might hold onto a spread, has the least impact from time decay •The longer you might hold onto a spread, the greater possibility of achieving profitability
How fast do you expect the underlying to move?
•The most responsive to changes in price since Gamma is highest • Box ranges are the most detrimental
•If the time frame isn’t clear, balances cost with responsiveness •Available on all underlyings
• Offer the 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 due to Delta and Gamma •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 gains since has time to move down
How high is implied volatility?
• Is the least impacted by implied volatility changes as long as earnings aren’t involved
• 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 a bear put, even when the stock moves down, is not profitable There are numerous considerations about how IV may impact a bear put: • Compare historical volatility with implied volatility • Compare the implied volatility of the long and short strikes • Longer term bear puts are the most subject to implied volatility decreases since they have the most time value • Shorter term bear puts are the least subject to implied volatility changes since implied volatility tends to decrease closer to expiration • Can benefit from implied volatility increases based on events like earnings or FDA announcements as those events get closer • Most underlyings have IV that increases as the underlying drops which helps the trade along with Delta and Gamma to create profits • It might be helpful to note the IV when entering a bear 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: • There should be a stronger candle signal than most i.e. falling window bearish engulfing so 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 resistance 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 down to breakeven as the underlying moves down to a resistance 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% • 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 bar 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 • If assigned on the short put, exercise the long put to close 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 breakouts or the trend is often ideal for bear puts so the technical analysis used should support these types of setups • Support and Resistance should be a key consideration for bear 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 to determine what strike to sell the short put • If trading the trend, try to ensure the move isn’t already extended 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 bear puts. Less bearish candle signals such as a bear sash or bear harami should either not be used a signals for bear put trades or should have more confirmation along with Western technical setups to be considered for bear put trades • The candle signals need to be in concert with risk management principles and Western technicals for ideal bear 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? This could slow down any potential move down
www.nisonoptionsacademy.com
Time Stops If the stock isn’t moving down, the bear put is likely losing value Since the bear put only becomes profitable due to down moves or implied volatility increases, keep the following in mind : • Time decay is the only certainty with options when there is a lack of movement so it works against bear puts • Box ranges are the worst case scenario for a bear put and since box ranges can occur after strong down moves, a time stop can help • 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 • 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
