As the volatility dropped a fair bit this week and the market rallied over 5% in a bit more than a week, I had to be extra careful with my trade selections.
When the volatility is low then the best way to make money trading options is to place directional trades but the challenge with directional trades is that you have a 50/50 chance of being right.
Obviously we can do chart analysis or dive deeper into the fundamentals but it's still a 50/50 game.
The good news is that with options even if we are wrong directionally time works in our favour.
For example, you see a stock dropping from $60 to $50 and you assume that it will bounce back so you sell a $45 put option. It is fine if the stock continues falling as long as it doesn't go below your break even point by expiration, which would be $45 less the premium you collected. And if it does then you can easily roll (buy back your option and sell another expiring a month later) your position, collect additional premium, lower your break even point and give yourself more time to be right.
Options trading offers tremendous flexibility unlike stock trading, which is a 50/50 game.
For those, who are new to my daily market comments, I place and document one trade a day with the objective of helping everyone learn how to trade options.
What's my trade for today?
#W (#Wayfair) wide strangle expiring in Feb before the earnings. I was tempted to sell the $35 put for additional credit given how much the price jumped in the past week and a bit I decided to be a bit more conservative on the put side. Unfortunately the volatility is relatively low but that's across the board now. However, the potential return is still great.
Trade Type: Short Strangle
Strike: $30 / 55
Expiry: 17 Feb
IV Rank: 37.8
Cap Req: $858
Annualised Prof at Expiration: 247%
IMPORTANT: Studying previous trades provide the opportunity to everyone to learn a great deal so I encourage you to click on the links below and digest the info.
Watch more detail here:
Let me know what you think.
Closed at $1.40 for an annualised profit of 447%.