Carley Garner's Blog: What's new on DeCarleyTrading.com, page 46
December 17, 2014
Nominated for Best Futures Brokerage Service
We are honored to have DeCarley Trading nominated for a Trader Planet 2014 STAR Broker award!DeCarley Trading works tirelessly to provide superior futures and options brokerage services for traders of all types and sizes at competitive rates. We are humbled, and ecstatic, to be recognized for our efforts in the 2014 Trader Planet STAR awards.
Please take a second to vote for us in the "Brokerage Service" category of the Trader Planet STAR awards. It only takes a second to cast a ballot (you can vote once each day in December).
Simply click on the link below, locate the category "Brokerage Service", choose "DeCarley Trading", and then "Submit".
We appreciate your business and your support!
Please click here to vote DeCarley Trading as best "Brokerage Service"!
Click here to open a trading account with DeCarley to find out for yourself why we were nominated for best broker!
DeCarley Trading (a division of Zaner Group)
www.DeCarleyTrading.com
1-866-790-(TRADE) 8723
info@decarleytrading.com
*THERE IS SUBSTANTIAL RISK OF LOSS IN TRADING FUTURES AND OPTIONS.
December 11, 2014
Trade Like a Girl with DeCarley and TraderPlanet
Click here to see the archive video recording of this class
Trading is a game of odds, if you are not doing everything you can to put the odds in your favor, then you are putting the odds in the favor of your competition. We believe that humility is the secret to increasing a trader's probability of success in that it encourages traders to accept the potential of mis-speculation.
Covered Topics
Simple Trading Rules to Live (or Die) by
Deleveraging Speculation with Common Sense
Using the Versatility of Options to Reduce Position Volatility
Constructing Synthetic Calls and Puts
Adjusting Synthetic Positions in Favorable and Adverse Market Conditions
The Only Magic in Trading: Humility
Click here to see the archive video recording of this class
DeCarley Trading
1-866-790-TRADE (8723)
info@decarleytrading.com
**There is substantial risk of loss in trading futures and options
Free Futures and Options webinar
Click here to register for this complimentary class
Trading is a game of odds, if you are not doing everything you can to put the odds in your favor, then you are putting the odds in the favor of your competition. We believe that humility is the secret to increasing a trader's probability of success in that it encourages traders to accept the potential of mis-speculation.
Covered Topics
Simple Trading Rules to Live (or Die) by
Deleveraging Speculation with Common Sense
Using the Versatility of Options to Reduce Position Volatility
Constructing Synthetic Calls and Puts
Adjusting Synthetic Positions in Favorable and Adverse Market Conditions
The Only Magic in Trading: Humility
Click here to register for this complimentary class
DeCarley Trading
1-866-790-TRADE (8723)
info@decarleytrading.com
**There is substantial risk of loss in trading futures and options
November 25, 2014
Vertical Option Spread Trading Pros and Cons
By Carley Garner
One of the new buzz words in the option industry is the vertical spread. Although they’ve been around for as long as option trading, popularity of the strategy has been on the rise due to historically challenging market volatility and a more sophisticated trading community.
Option buyers look to vertical spreads as a means of lowering their cost and risk of a particular trade. Similarly, option sellers seeking to collect premium as an income strategy might choose to implement vertical spreads to limit risk and lower margin. Nonetheless, we believe that in many cases trading vertical spreads might come with more baggage than benefits. Like any other strategy, there is a time and place for vertical spreads, but in my opinion they should not be the staple of a trading portfolio.
Vertical Spread Overview
By definition, a vertical spread is an option strategy in which a trader makes the simultaneous purchase and sale of two options of the same type and expiration dates, but different strike prices. A buyer of the spread would be purchasing the more expensive leg of the spread, which is the option with the strike price closest to the market, and then selling an option with a distant strike price. The seller of the spread would be selling the option with the most value (the one with a strike price in closest proximity to the current futures price), and then purchasing the cheaper option.
The term vertical describes the relationship between the option strike prices while inferring the components to the spread share the same underlying contract. A horizontal option spread, on the other hand, would consist of options in the same market and strike prices, but different expiration dates.
An example of a long vertical spread (often referred to as a bull-call-spread) in the e-mini S&P 500 futures is the purchase of March 2015 2075 call and the sale of an 2125 call. At the end of November 2014, this particular vertical spread could have been bought for 25.00 points in premium, or $1,250 (25 x $50). Simply put, the buyer of the spread is willing to wager $1,250 on the prospects of the S&P 500 being above 2075 at expiration. However, the trader doubts prices will surpass 2125 and, therefore, is willing to reduce the cost of entry and risk by selling a call with a strike price at the noted level for $1,250 (or $25.00 in premium). Had the trader bought the 2075 call outright, the cost would have been about $2,500.
The sale of the 2125 call eliminates the profit potential above 2125. At the noted price, the spread is maxed out. Thus, selling a call to pay for a closer-to-the-money-call comes with the opportunity cost of limited profit potential. This is because at expiration, if prices are above 2125 the buyer of the vertical spread is making money on the 2075 call but losing the same amount on the 2125 call to create a “wash”.
Charts courtesy of Trade Navigator by Genesis.
The seller of the spread is operating under the opposite premise. He believes the price of the S&P will be below 2075 at expiration luring him to sell the 2075 call; he is then willing to purchase insurance to limit the loss should prices exceed 2125. This strategy is known as a bear-call-spread. In contrast to the previous trader who sold the 2125 call to finance the cost of the long 2075 call, the seller of the vertical spread purchases the 2125 call to the detriment of his profit potential in exchange for having peace of mind. Should the price exceed 2125, the vertical spread seller will not suffer additional losses because at expiration, for every point he loses on the short 2075 call, he is making back on the 2125 call.
Calculating the P&L of a Vertical Spread AT Expiration
Calculating the profit of a vertical spread at expiration is relatively straight forward. The buyer of the spread has the potential to make the difference between the strike prices of the long and short options, minus the cost of entering the trade. For this to occur, the price of the underlying futures contract would have to be beyond the strike price of the sold option. Using the example above, the trader would be profitable by 25.00 before considering transaction costs, or $1,250 (25 x $50) points if the price of the S&P was above 2125 at expiration. This is figured by subtracting 2075 from 2125, and then factoring in the 25.00 points to purchase the vertical spread.
The seller of the spread faces the exact opposite payout profile; he stands to lose 25.00 points should the price be above 2125 at expiration. If the vertical spread expires worthless, he keeps the $1,250 originally collected (of course, this is the premium paid by the buyer). In summary, the maximum potential risk to the spread buyer, $1,250 in this example, is the maximum profit potential to the seller. Not surprisingly, the maximum possible payout to the buyer of the spread, $1,250 in this case, is the maximum loss to the seller. In other words, this is a zero sum game. For every trade there is a sinner and a loser with the exact opposite experience in regard to profit and loss. This example ignores transaction costs which must be added to the buyer’s cost, and subtracted from the seller’s premium collected.
Calculating Vertical Spread P&Ls BEFORE Expiration
Predicting the profit and loss of a vertical spread at any point before expiration is much more complicated; in fact, it is impossible. Before expiration, the spread profit or loss is determined by the widening or narrowing of the difference between the option values on the two legs of the spread. Because the premium of each of the options involved in the spreads are based on factors that cannot be quantified, such as demand, expectations of future volatility, emotion, and timing; the value of a vertical spread before expiration cannot be forecast. Any attempt at such is nothing more than an educated guess.
In addition, monitoring profit and loss of a vertical spread in real time can be frustrating. When trading vertical spread strategies, being right on market price is only half the battle. We’ll discuss this further in the following sections.
What are the benefits of trading long vertical spreads (buying the spread)?
The primary advantage to going long a vertical spread, as opposed to buying an outright option, is the luxury of positioning the trade closer to the current market price with reduced out of pocket expense. Going back to the aforementioned example, the trader saved about $1,250 in cost and risk by selling the 2125 call to pay for his long 2075 call. Simply put, the trader was able to purchase the 2075 call for $1,250, rather than the $2,500 price tag. Of course, there is an opportunity cost to getting a discount.
Rather than purchasing the 2075/2125 vertical spread, the trader could have opted to simply buy a call outright. We’ve already determined that the 2075 call would have come with a total cost and risk of $2,500 but it would have also been possible to purchase a call with a distant strike price to cut the cost to the desired $1,250. In this instance, the March 2125 call could have been purchased for about 25.00 or $1,250. Thus, the trader faces the same risk and cost of the original vertical spread by simply purchasing the 2125 outright. As you can see, the trader would have sacrificed about 25 in strike price to achieve the same cost as the vertical spread. Naturally, the odds of the futures price being above 2075 at expiration are much greater than it being above 2125. Nevertheless, a buyer of a 2125 call would have potentially unlimited profit potential.
What are the pros of trading short vertical spreads (selling the spread)?
The most notable advantage to trading short vertical spreads is peace of mind. Unlike outright option sellers who face theoretically unlimited risk, vertical spread traders cap their risk at a predetermined level through the purchase of an option with a distant strike price. Accordingly, a short vertical spread provides traders with the assurance that regardless of a catastrophic event the total loss on the trade won’t exceed a certain level. In essence, the purchased option acts as insurance to the option seller, but as with most insurance policies, it is often more of a burden to a buyer than a benefit.
Trading naked options outright might make more sense
On the surface, vertical spreads appear to offer traders the best of all worlds. They are limited risk, directional positions, with a built in hedge. Yet, there are two relatively unobvious draw-backs that sometimes make vertical spread trading a frustrating venture; delta and time.
If you aren’t familiar with delta, it is simply the pace at which the value of a particular option fluctuates relative to the underlying futures contract. For instance, if an option has a delta of .30 it will gain or lose 30% of a corresponding move in the futures market. To illustrate, an option with a delta of .40 and the S&P goes up 10.00 points, a call option should have increased in value by about 4.00. Of course, market pricing is based on emotion just as much as it is mathematics, so the relationship between option value and futures value isn’t always according to theory. In fact, there are times in which software identifies an option as having a low delta but market participants wildly bid prices up to unbelievably high prices that far exceed expectations based on the estimated option delta. Nonetheless, it is important to realize as a vertical spread trader at any point before expiration, volatility and time value can interfere with profitability of the trade. It is sometimes necessary to hold the position until expiration to achieve a worthwhile profit. This is particularly true during times of high volatility which has a tendency to neutralize the delta of the trade.
Beginner traders often learn the hard way that in highly volatile market conditions it is possible for a trader long a vertical call spread to fail to make gains, or even sustain a loss, despite the market moving in the desired direction. Using the previous example, this can happen if the value of the short 2125 call rises nearly as much as the value of the long 2075; some refer to this as a vertical spread handcuff. Such an occurrence is more common than most would think. This is because speculators often bid up the price of the “cheaper” options with distant strike prices due to affordability. The increased demand for these more affordable strikes often lead to higher percentage gains than options with strike prices closer to the market. Plainly, unless you are planning on holding the trade for a substantial amount of time, vertical spreads might not be the optimal strategy because you can be “trapped” into an unprofitable trade even if your original speculation was accurate.
Similarly, if time value erosion outpaces the benefits of the underlying market moving in the desired direction, a long vertical trader can find himself in a position in which he is losing money despite being “right” in price prediction.
The implications of vertical spreads for option sellers (as opposed to buyers) is even worse, the purchase of the “insurance” option typically encourages traders to execute trades in higher quantities due to lower margin requirements for vertical spreads relative to naked option selling. Many don’t notice it until it is too late, but they are often taking on more risk than would be the case selling naked options in lower quantities. Further, premium collectors typically sell options with strike prices closer to the market in order to make up for the premium paid for the protective option. Thus, the strategy of selling vertical spreads can sometimes become more dangerous that selling naked options!
The Bottom Line on Vertical Option Spreads
Those trading outright calls and puts, will typically see much quicker profits and losses. They will also have the ability to trade in and out of positions more proactively than a vertical spread trader would. In summary, vertical spreads are a better “buy and hold” strategy for option traders while outright options are better suited for swing traders. Don’t fall into the fallacy that any type of strategy can be applied in all circumstances; there is a time and place for everything.
*There is substantial risk of loss in trading futures and options; it is not suitable for everyone.
Carley Garner is the Senior Strategist for DeCarley Trading, a division of Zaner, where she also works as a broker. She authors widely distributed e-newsletters; for your free subscription visit www.DeCarleyTrading.com. Her books, "A Trader's First Book on Commodities," "Currency Trading in the FOREX and Futures Markets," and "Commodity Options," were published by FT Press.
November 19, 2014
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Register for a free trial of TnT Live at the bottom of this article!
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October 28, 2014
Read our latest piece in the Fall issue of TraderPlanet Journal
See our "Trade Like a Girl" quiz in the Fall TraderPlanet Journal!“Girls” believe in pressing their luck in the markets, even if they are enjoying relatively easy gains now?
Answer: FALSE
Beginning traders sometimes confuse skill with luck. There are times in which you will be in the right place at the right time to make extraordinary profits possible. If this happens to you, take the money and risk off of the table.
Regardless of what we think that we know, or even what others think that we know, trading boils down to making an educated guess. If you happen to be the lucky beneficiary of a windfall profit, don't get greedy or expect that the gravy train will continue. Letting your ego fog your logic may lead to a situation in which a big winner becomes a loser.
“Girls” attempt to keep past trades where they belong; in the past?
Answer: TRUE
Whether it is a positive or negative, the past is the past and it should stay there. Allowing previous decisions to guide future actions in the markets is one of the quickest ways to end a trading career. The most common form of this is the torture a trader sometimes puts himself through by playing out different scenarios of what could, or should, have happened.
Dwelling can be a drag on performance or in extreme cases devastating to a trading account. The fact is: we will never be able to sell the exact top and buy the exact bottom. This is something that mature traders learn to accept. The ability to fully appreciate this concept should prevent you from carrying the emotional baggage that comes with the "could have, should have" mental anguish.
Continue reading in the Fall issue of TraderPlanet Journal
Click here to open a trading account to utilize our state-of-the-art platforms, or work with an experienced broker.
Click here to browse Carley Garner's trading education books
DeCarley Trading
1-866-790-TRADE(8723)
info@decarleytrading.com
www.DeCarleyTrading.com
***There is substantial risk of loss in trading futures and options.**
October 8, 2014
E-mini Futures Day Trading
Continue reading this article on TraderPlanet!
There are plenty of compelling reasons to prefer day trading in the ES (e-mini S&P futures). For starters, it is a highly liquid and leveraged product and the ease of exiting by the close of trade eliminates overnight risk. Further, profits (ideally) and losses are supercharged and fast. As great as this might sound to the inexperienced, the difficultly of the practice is largely underestimated.
Day trading the ES is most likely one of the most challenging endeavors a trader could embark upon. This is because there is little room for error; traders must be right about the direction of the market and the limited time window in which the move might occur. However, for those that have the perseverance to dedicate themselves to the practice, contain the natural ability to eliminate emotions and have enough experience under their belt, day trading might also be one of the most potentially lucrative forms of market speculation.
There are an unlimited number of strategies day traders might opt to apply, so discussing that aspect in a single article is impossible. Nevertheless, over the years I’ve noticed a few factors that play a big part in determining day trading success, and failure, that are worth sharing. Hopefully, you will walk away from this with a better understanding of risks, rewards, and reality.
Day Trading Is Mental
I believe that becoming a successful day trader comes down to instinct and the ability to control emotion. If you have ever been involved in athletics, you have probably heard the adage that performance is 95% mental and only 5% physical. I have found this to be true in trading as well, although instead of being physical, trading is technical. Quite simply, it isn't which oscillators or indicators you use, it is how you use them; perhaps more importantly how you deal with fear and greed as you are charting your trades.
Although we cannot control the market, we can control the environment and circumstances we choose to put ourselves in. The best way to keep your mental demons in check is to avoid compromising situations. As a trader, this achievement is certainly impossible but if you can merely minimize the exposure to stressful endeavors, it will go a long way toward trading success....
Continue reading this article on TraderPlanet!
DeCarley Trading
1-866-790-TRADE(8723)
*There is substantial risk of loss in trading futures and options.
September 24, 2014
DeCarley Natural Gas Analysis on Mad Money
CNBC's Jim Cramer featured DeCarley Trading's natural gas analysis on the September 23rd episode of Mad Money
If you missed the original airing, click here to view a clip of the show
Natural gas prices aren’t quite as cheap as they were at this time last year heading into the winter season, but they are close. Further, there are some glaring similarities between the current environment, and that of a year ago that could compel the bulls to step in.
You might recall that natural gas prices essentially doubled from August 2013 through February 2014; we may not get a repeat to the magnitude, but we believe there is potential for a move toward the $5.00 mmBtu (10,000 million British thermal units). Watch the video for details on the bullish factors we are looking at.
Click here to check out the video archive Carley's segment on Mad Money!
DeCarley Trading works hard to provide clients with quality insight into the markets. One of our recent issues of the DeCarley Perspective focusing on natural gas analysis was featured in the "Off the Charts" segment of the Mad Money TV show (the segment aired on September 23rd).
The DeCarley Perspective is a publication distributed exclusively to DeCarley's brokerage clients. If you are interested in being part of the loop, open a trading account today!
You will find the original DeCarley Trading newsletter text here:
DeCarley Perspective emailed to our brokerage clients: https://madmimi.com/p/75f155
If you haven't already enjoyed a trial of DeCarley Trading newsletters, you can register here.
If you would like to open an account to trade via one of our state-of-the-art trading platforms, or with an experienced broker, click here.
DeCarley Trading
info@decarleytrading.com
1-866-790-TRADE(8723)
www.ATradersFirstBookonCommodities.com
*There is substantial risk of loss in trading futures and options
September 11, 2014
FREE Commodity Option Trading Webinar
Join us for a free webinar hosted Trade Navigator!When: Tuesday September 16th, 5 pm Central
Where: ONLINE
Traders tend to flock to the simplicity of futures trading, but overlooking the opportunities offered by the commodity option markets could be a detriment to your trading experience.
Options are flexible tools that can complement a more traditional futures trading approach, and if used correctly will likely work against volatility in your trading account.
Join us to explore the following ideas:
• Key differences between trading options on futures and those on stocks
• Commodity option tips and tricks
• Long option trading vs. short option trading
• Calculating break even points
• Short strangles and outright option selling
• Which markets to avoid as a short option trader
• The realities of trading commodity options
Click here to register for this FREE class
DeCarley Trading
1-866-790-8723(TRADE)
www.decarleytrading.com
info@decarleytrading.com
* THERE IS SUBSTANTIAL RISK IN TRADING FUTURES, OPTIONS, AND FOREX.
August 8, 2014
Carley Garner was in studio for an episode of Mad Money!
CNBC's Jim Cramer talks to one of his favorite 'chartists,' Carley Garner of DeCarley Trading, about two commodities that could feel the impact of events in Ukraine -- oil and gold.If you missed the original airing, click here to view a clip of the show.
DeCarley Trading works hard to provide clients with quality insight into the markets. Carley Garner visited the set of Mad Money this week to discuss one of our recent issues of the DeCarley Perspective focused on gold and crude oil analysis (he segment aired on CNBC's Mad Money on August 6th).
The DeCarley Perspective is a publication distributed exclusively to DeCarley's brokerage clients. If you are interested in being part of the loop, open a trading account today!
Click here to check out the video archive Carley's segment on Mad Money!
You will find the original DeCarley Trading newsletter text here:
DeCarley Perspective emailed to our brokerage clients: https://madmimi.com/p/76a625
If you haven't already enjoyed a trial of DeCarley Trading newsletters, you can register here.
If you would like to open an account to trade via one of our state-of-the-art trading platforms, or with an experienced broker, click here.
DeCarley Trading
info@decarleytrading.com
1-866-790-TRADE(8723)
www.ATradersFirstBookonCommodities.com
*There is substantial risk of loss in trading futures and options!
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