A New Idea For Trading Options Around Binary Events!

earnings presented an opportunity to take advantage of high P as we saw last night nice earnings plays in Google and my students plays in Amazon losing or any play in in Chipotle but I guess that's kind of way worse you know big stocks that's okay that's the way it works you know lose $2 make $5 you can do that all day long earnings present an opportunity again to take advantage of hi v-- in a one-day directional move based on the probabilities and our assumptions there are numerous strategies that we have at our disposal with to find an undefined risk so here was the challenge boys let's do something let's look for something that we haven't talked about before in the show let's mix it up a little bit let's find some let's find an approach attempt it's the same stuff it's a combination of all the same ingredients but let's make a gordita out of it out of it let's do something let's make something that's a little bit different than the stuff that we've made before so maybe this is like the super nacho instead of a regular nacho but or a fried whatever you want to call it guys we're just we're just mixing up the ingredients a little bit different coming up with something different and then testing it have some fun with it to see hey you know what let's mess with earnings a little bit as premium sellers we rarely will pay we rarely will pay to place a trade occasionally if we have a strong directional opinion we may like to put on a debit vertical spread generally buying one strike in the money and selling one strike out of the money now when we say we'll generally don't like to pay to do a spread I mean just think about yesterday I mean you know the expected move in Google with $60 and it comes up to be whatever 20 $20 the expected move in Apple the other day was $30 it comes up as 50 if no idea but I'm gonna tell you right now it's way worse buying the crap and having a not move then selling the crap and having a move outside of your range correct hey way worse and it works both ways you then happens more often than not median stays inside the expected range somebody sent me a great quote last night and I don't I wish I'd saved it from rounder so you saw rounders didn't you yeah so the email too I didn't save it I okay I didn't save it but one of the great movies of one of the really great movies of all time but talking about hey essentially we remember our losing paths we remember we remember when we when somebody pulls a certain card on the river we lose you know blah blah blah whatever right we just don't remember okay all the winners correct and so the losers stand out with us as traitors but the winners man those are hard sometimes we just you know we absolutely don't remember them by the way if you were on dough at all and you were following different traders on there one of the traders that we are teaching to trade and bring on is is somebody named frost jakka he is a professional poker player and if you like poker and whatever Feroz is actually a tournament right now where he's kind of a nomad II what goes around does whatever frozen determine out where he's down to the final he's down on the final table was he was I know he was tenth out of twenty five yesterday at one point I don't know okay well maybe you're right maybe it's just tenth but he's tenth in a tournament to win 800 grand yes cool that's first prize Evan yeah so he's down to yeah so he's right there so it's pretty interesting if you're if you're a poker player you watch tastytrade I mean you can check out for us I don't know what tournament is that's at the Bogata Bogata in Jersey yeah the regatta yeah have you been there I have not no no Tom really yeah I was built after I left that was it amazing hotel yeah I was built after out to I did a show there once as so as premium sellers were really pay the price we rarely pay to place a trade occasionally if we have a strong directional opinion we may look to put on a debit vertical spread but for the most for the most part we look to get paid if we're putting our debit spread we're generally buying one strike in the money and selling one strike out of the money when we do pay for a debit spread we may look to sell junk far out of the money options that will lower our cost of the trade and if possible generate some small profit you've seen me do this a million times buy at the money call spread sell multiple out of the money call spreads by an at the money call spread sell out of the money call whatever it is I want to do it because stocks can do three things they can go up down or stay unchanged and I like the fact that if you're going to sell something to finance something else you do it for credit because if they go the other way down or if they stay unchanged then you make money sure and since we don't know what's gonna happen I'll take the two out of three every single time correct so this is similar to breaking the wing of a butterfly in order to place the trade for a small credit based on viewer submissions we decided to test one such strategy that finances a debit call spread with an out of the money naked call for a credit this allows us to have a free directional play with no downside risk we have named this strategy sunny-side up I do not know which one of our geniuses did that but somebody had some fun last night we looked at three years back we don't do it once twice we do as much research as we can over the course of the day tastytrade has five researchers five full-time researchers and we look and eat and it tastes just multiplied they're here for about ten hours a day times five is fifty hours to create a 15-minute segment along with a few other things so it's not you know we're spending anywhere between 40 35 and 50 hours a day just creating content correct and they do 15-minute segments correct they do get 17 minutes to eat lunch 17 you gave me an extra minute a little bit okay so we looked at Apple Amazon CMG Google Netflix and Priceline we looked at six different underlines we bought a vertical call debit spread buying one strike in the money selling one strike out of the money the closest exploration cycle and then we looked to sell the first out of the money call that generated a credit greater than the debit paid we also looked at this in a very strong market because we've been a bull market for last couple of years so again we're putting ourselves in what we think would be the most dangerous of situations again we bought a debit a vertical debit spread one strike in the money one strike out of the money so yesterday for example if Google was trading 1140 we buy the 11:35 11:45 or the 11:35 1140 wherever it was to run by 5 point why he could buy 10 point buy buy one strike in the money selling one strike out of the money then sell the first out of the might call that generated a credit greater than the debit paid this is a very hard trade to do on inexpensive stocks it is a much easier traded to more expensive stocks hence Apple Amazon CMG Google Netflix and Priceline the trade was closed the following day so no holding on here we looked at the aggregate results aggregate results for all 72 occurrences how do we get to 72 occurrences for earning reports a year times three years times six underlyings is 72 four times three is twelve twelve times 6 is 72 correct and here are the results so you're gonna like this bet I'm with you I'm gonna change little bat life alright so the portfolio the portfolio net net P&L down seven thousand dollars did not work number of wins 61 out of 72 percent of wins 85 percent average credit 45 cents average out of the money call out of average out of the money for naked calls eighty two point six eight percent average return on capital in this case obviously negative because we lost money on the trade up one percent now there's we put this up even though the P&L was negative in this case we put this up because we wanted to a lot of times we'll make statements like you're gonna create a high number of winners right and in the process of creating a high number of winners we can't promise you that you're gonna create a positive P&L so we wanted to show research that kind of that has a that fits so you start to understand that hey how can you win eighty five percent of the time but not come out net net on top that you think you would now you're supposed to win in this case eighty two point six eight percent of the time it actually came out to 85 percent of times the whole idea that hey we did better then we were supposed to do as far as wins and losses but something got away from us but wait there's more he went too far then we isolated trades where the short naked call was greater than 84 percent out of the money while still creating an app and while still generated an overall credit thus establishing the parameters for the sunny-side-up trade now you ready we tricked you huh that's more so here the P&L was 80 it was 76% the number of wins was 35 out of 36 600 the number of wins was 35 out of 37 the total number of wins was 95% much better the return on capital was just over 4% we got something really interesting to talk about here there you go sorry about that that's the last slide so now I'm all bent out of shape because what did we do in this portfolio here bat can we go back one more slide in this portfolio oops one more slide we look to three years of earnings 72 occurrences Apple Amazon Google Netflix Priceline and CMG we bought a tote we bought a vertical call spread and then we sold the nearest out of the money call that generated a greater credit than the debit paid right so we didn't go to a certain level probability of being out of the money we just went to any call so if we paid $5 for a $10 wide spread we went to the call that we could sell for $5 do hold so why are we bringing this up we're bringing this up because we spend so much time talking about probabilities statistics certain numbers I even I talked to somebody yesterday and talked to it mentioned our businesses probabilistic alternative investing essentially suggesting that if you there's a reason for knowing these stats it's easy and what we would have done in a prior life is we would have gone to whatever strike generates and a credit for that position right and in the process in the process of doing so on all 72 occurrences we lost $8,000 so even though we had 85% winners and 61 of 72 we could not generate a profit because we just didn't use the statistics that our fingertips if you have contexts use it and one of the things that we haven't started we're just getting used to doing is putting that context you know around our trades so we go to the next one now we only sell calls we only sell call we only sell we look at the position on when the calls that we're selling have a greater than 84 percent chance of being out of the money correct it's sitting out on this strategy what we're doing here which worked out very very nicely you'll see on the next slide that that time already showed you is you're buying the ad the money spread and then you're selling something that has a 16% chance of being in the money and collecting the same you have to collect the same amount of credit that you paid for the debit of the call spreads if you paid five outs for that you have to sell the call to put that so this goes to the argument then that we're even going for higher on the implied volatility scale and when you start to think about that instead of 72 occurrences there was 37 occurrences so it was half the number of occurrences but these generated credits rather than debits we've never thought about that way never ever have we thought about this way so now I'm all I got all freaked out last night not freaked out but I got I got a little crazy when I started to read this because I'm thinking to myself hey with 95 percent winners and an 85 80 80 would we say 84 percent chance or higher of that short call being out of the money this is really interesting this is very interesting now I wish there was something do we have um we have a couple seconds left yeah let's go to a high foul on Delilah could we go to for example Tesla for a second mm-hmm I just what's the what's the implied volatility in there I didn't test this before I should have I just didn't have time this morning sure test was actually up right now no no I don't care about that but what's the what's the IV rank IV rank is sixty percent sixty percent so this may be borderline here so go to a Tesla page for a quick second now just to give you an example of what we're talking about so Tony's gonna go to the earnings are before February so you're gonna go to February open up this is gonna be a February earnings play just for now just to show you what we're doing okay now you're gonna see the stock is at 80 is 183 for us so you're gonna buy the 80-85 call spread just by the 80-85 call spread to this would be a bullish play for you yeah well in this case we're just using this sample now you're gonna scroll down and you're gonna look for probability being the money of around 16% there you go and you can see it's it's the 215 costs now sell sell the 215 calls put your you know first on the bid you're obviously collecting more than the 240 that this would be a perfect example of the criteria we just discussed if it was the day before because you'd be receiving a dollar seven credit correct now you're not doing this now you do another no using it as an example because people have said hey Tom please show an example when you do these market measures of what you're talking about here's a perfect example right buying the 80-85 call spread selling the 215 call there's a 16% chance exactly that we get to 215 you can probably in this case go up to the 220 call well that's because it's 21 days to go that I understand but you can probably even you can even go further in this case you could go just about to the 220 call that's correct and that would also qualify and be a much smaller credit have you changed the call down at the bottom to 220 which would even give you a higher probability of success here it would be about 87% you still have a 32 cent credit correct now that's cool because now we know there's a 95% chance that this works very good based on a lot of historical research 50 hours yesterday all of this stuff that this is awesome

Channel: tastytrade

Views: 22,663

Rating: 4.9285712 out of 5

Keywords: tastytrade, tastytrade.com, tasty trade, tastytrade network, tom sosnoff, tony battista, finance, options trading, how to trade options, trading options successfully, tastytrade options, financial investment, stock market, Get Tasted, market measures, binary events, trading options, sunnyside up, earnings

Id: G1k9nN0dSfE

Length: 14min 49sec (889 seconds)

Published: Fri Jan 31 2014