A New Endangered Species: Cheap Options
Thursday, December 13, 2007 at 11:21AM I just can't seem to find good momentum stocks with cheap options anymore. They are officially extinct. Any stock that fits my "Momentum Mold" has expensive options now days. True, it has been this way for a few months. However, I went out scanning for stocks this morning looking for relatively low levels of implied volatility, and when I looked at the charts of these companies, I laughed out loud.
Expensive option premiums makes it that much tougher for option buyers to survive these market conditions. You need to be an unbelievable stock picker, to get price movements that will pay for the expensive premiums you are buying. Not only that, but you need to be wise in the options you select. OTM options fail left and right during these times, and if you are on the wrong side of a trade, a high delta option will subtract big portions of your option premiums.
Speaking of big movers, I am going to show-off my trade on MA. Why? Because the stock is up 17% since my reco over 2 weeks ago.
Take a look at volatility here. Notice how IV is well off it's highs, and substantially below 30 day historical volatility. All this while the stock price is approaching all time highs. I'm thinking there will be some convergence over the life of my Jan 195's (which were purchased at 6.90). I think 58% is reasonable, and very much welcomed.
Right now I'm working with a mental stop at $210, but hoping to choke up on that a little if I can get some more price movement to the upside.
If you are still on the sidelines watching MA cruise higher into the New Year...you ought to at least consider a December diagonal or vertical spread.
By the way...if anyone finds cheap options on a good momo stock, leave your ideas in the comments section. In the meantime, I'll keep looking.
UPDATE!!!
It appears that there is still confusion surrounding the BGC trade. If you wanted to see the pattern drawn, scroll down to my initial entry on the trade idea! If you can't make that happen, here is the link to the post, and to make everything convenient, here is an updated chart.
BGC- Symmetrical Triangle. Lower highs negates this as an ascending triangle, higher lows negates this as a descending triangle. The apex of the triangle commonly acts as the re-test point and should be considered as the worst case scenario. Alternatively, use the breakout point of the triangle ($73) as a re-test point.
NOTE: Both of which have held up nicely.
OTHER NOTE: This is why I encourage taking profits quickly. If the stock originally broke out at $73, traded up to $83...why let it retrace to $73?
Take profits...Take profits...Take profits...Take profits...Take profits...
View Printer Friendly Version
Email Article to Friend
Reader Comments (119)
I know this has nothing to do with your blog topic... but it perplexes me...
Why is it, of masterful one, that this post just showed up on my RSS feed at just after 2pm Eastern.... I've been refreshing about every 5 minutes since 1:30pm EASTERN time in anticipation of todays enlightenment...
I realize that you are in UTAH, but isn't that only 2 hours difference from the Eastern Timezone?
So if the post was at 11:30 (local time) to you... then by 1:30 EASTERN it should have showed up... but yet is like 35 minutes later when I see it.
Is the "Post Time" the "create new entry in blog" time?
anyway... yeah.... i've seen the same problem... its too damn expensive for me to play... and over the last 2 days, I've just been getting slaughtered across the board, and I am diversified... PUTS & CALLS! ;)
Jeff:
When you go vertical, do you normally use a 1 strike spread or do you trade verticals based on delta? Thanks!
Jeff,
Not only cheap options are rare, but ones that have smallish spreads -- these spreads are insane lately.
Raimo - on BGC I had a symmetrical triangle drawn, in which the retest was beautiful today.....chart drawing is such an art. Maybe your lines are flawed ;)
Jorge,
In efforts of managing risk, I only spread my legs (ewww) one strike apart.
Popeious,
The date on the RSS is when I start compiling a post. Depending on how much trading I do in between...or perhaps get up and go to lunch...take a nap...etc will determine the difference in time.
That wasn't the way I wanted that answered... but thanks for the image... sigh...
Thanks Jeff!
And did I listen to you on MA,sure did in at 200 out at 223 gigaddy-gigaddy ooooh yeah!
Jeff,
So you don't have to jump to the old thread, the answer is yes, time and sales data... it happened at 11:49:43 eastern time...also the trade before it appears to be included with that "trade"...
(for those not following, this is an answer to COF interesting option trade from previous blog subject)
What do you define as "cheap" options? FSLR has IV of 75% for December calls. The Dec 270's, 280's, or 290's will either go to zero next week or could explode in a big way if this stock pops. Of course with only 1 week until expiration it is not a "safe" play, it's pretty much an all or nothing trade. But these were trading with an IV of 90% just about a week ago, so they seem "cheap" to me now. Would you agree?
Is there a certain standard you apply when deciding if an option is "cheap" or not?
this is about syna...
if this looks to close above the 30 and 50 day moving average, is it still a broken trend? i know a lot of people were going to hop out of this trade... maybe a hammer forming as we get closer to the close?
Thanks! you all are very helpful!
Jeff,
When you are talking about momentum stocks do you have a rough idea of how much it must move in a given time frame to say it has the momentum you like to trade the option? I guess I am asking how are you defining momentum stocks so that I can start looking at stocks keeping this definition mind.
Jeff,
First off thanks for all you do for us little guys. I wanted to ask you how do you feel about selling at the money or out of the money puts and collecting huge premiums on these fast movers such as MA, AAPL, ISRG, CME etc...
SYNA - It has not closed below it's 50 MA in over a year. It is very close to doing that now. If it doesn't get over that by the close today, I am out of it. That is what I am doing. Not saying it's what YOU should do.
Doji, shmikey (and anyone else),
I'm also in SYNA...would you please meet me in the Trader Chat for a discussion on SYNA?
:)
Would you consider CME a momentum play? It has cheap options.
msft
Jeff,
please what do you think about DRYS, OTEX, MSFT
call options
Thanks
Jodi,
I simply answered a question RE: BGC if it was a broken down Ascending tirangle... which in my view, is.
That being said my darling Jodi...it is not my lines that are flawed, but perhaps your eyes that are, because I don't think I mentioned BGC as a sym triangle breakdown at all.....but only an ascending one!. If you look at the chart I posted, I show it as both an ascending and a symm angle..intentionally, without mentioning it, to see if anyone picked up on that little nugget....so touche, you got it!
So what if I've got a wandering eye? Keeps things interesting watching people try to look me in the eyes ;-)
ESRX IV is on par for the year. Not bad considering it has doubled and is trending exponentially since October. It is approaching a support bounce probably not much past the EMA(13).
JODI!!!!!!!!
I thought all this time you were mine only!!!! now I find out you have a wandering eye!!!
Jeeeesh!!!
This is worse than a bad trade!!
MAR is dying! falling knife
also ener will drop below 30 by monday. Looks like rapid bear flag
JH,
CME- cheap options, yes. Momentum...hmmm. Great question. As a percentage of the stock price, I'd say there are better momo's out there.
Disclaimer: I own calls on CME. Momentum or not, it performs.
COF is retesting its breakout from yesterday
SELL, SELL, SELL
Question, what wrong with selling PUT’s (Naked)? Tomorrow, I start placing PUTs on selected stocks (30-35 days out). Some of my favorites AAPL, BIDU, CME, MON,NILE, TSL and X, with GS & RIMM after earnings.
Theta (the decay of premiums). Tomorrow to expiration Friday (Jan 18), there are 35 days. By my calculations that’s just less than half of the trading days. Now, Theta really accelerates the last two weeks prior to expiration (a bonus).
Example: a stock like Monsanto (MON) with a JAN 100 strike is paying a PUT bid around $3.75 or 3.75% for 35 days of work. As Jeff explained with synthetics, you can buy a Call. For me, I will play Calls in and out of that particular stock with front month plus one month options (provided I see the entry). As mentioned before, I don’t do spreads, “they bore me.” But that’s my trading style.
FYI, you call the trade desk at TOS which are x-floor traders and they will tell you – the smart traders are collecting premiums with Theta and high Volatility.
MSFT...momentum?
Read my post "30 stocks not to buy options on."
My original question about BGC was is the pattern still valid after such a large retest or is the pattern deemed broken after making what was according to my charts about 75% of the expected move. Would that necessitate redrawing the chart or is it just considered a retest and the original symmetrical triangle is still valid?
(I know I repeated myself but ..)
Axman,
Not a big fan of that strategy. You can outperform those big premiums by buying options in front of big moves.
Anu,
I define momentum as stocks that move :)
It's important to define that one based on your own experience.
Alpha!
Jeff.
What software program do you use to chart...?
Jeff...What do you think about X? IV doesn't look to high historically speaking.
Jeff,
BMRN, break on Asc Triangle today......cheap options...crappy spreads.
Haha, I just checked CBOE, not cheap options.....just kidding!
I lurk on the sidelines hoping to learn the nuggets from the pros like OA, Doji, Raimo, and other positive regulars. But now I'm at a loss what to do. My account is small (didn't learn the nuggets all that well) but growing thanks to Jeff's suggestions. Single contract options are getting impossible and still maintain my portfolio management. Suggestions?
Jeff,
Take a look at MTW - COBE IV shows IV low compared to historic and stock close to resistance break at 49 after two up days in a down market. How would you play it if at all?
Thanks
Tom in SC
Jeff,
Are doing the marketcast tonight?
NJRich
Something we've done in the past, which we all seemed to enjoy, was have someone post their trading rules, and we all come in and offer our suggestions based on that. If that is something that interests you, why don't you post them in the trader chat.....see if it helps
NJRich,
I'm flattered that you put me between Jeff and Raimo (hmmm...could be an interesting ...um, .nevermind). HOWEVER I am not (yet) a pro and am still learning. And if my account for the past couple of weeks is any indication, I have a long way to go before I quit my day job. But thanks.
Jym,
I am doing it tomorrow. However, I am toying with the notion of a "Greatest Hits" segment.
Stay tuned...
Jeff,
"I am doing it tomorrow." Is Eric gone for good? I certainly hope not. :(
So.....did anyone grab BMRN at the end of the day there? Up 14% on AH data..let's hope it sticks till morning!
ESRX is giving us a gift tonight. I'm toasting my glass to it carrying through tomorrow. Kim
ESLR not ESRX. Stupid glass is impairing me.
Kim, I've been giggling about your post (stoopid glass) for a few minutes -- just couldn't leave it, without saying something. Cheers to you and ESLR!
Clara,
Yes, he's done.
What do you mean "done"??? With the cast or with IT?
BMRN - I didn't even have that one on my radar. What was the news on it?
DG
They got approval on a new drug, shipments commence tommorrow. I threw it out there, but not till about 5 minutes left in the day......sorry for the late notice
What a disappointment.... His macroeconomic insights, imo, were very relevant and very important to trading. I'm not a happy camper...
jeff
please tell eric i will miss his macro-minute...that really bites...
sorry to start controversy w BGC, but i see/saw it as a sym triangle retest today and i'm HAPPY with my entry...if it fails my risk is virtually zero...
I will let him know.