Long Collar – Free Trade Idea

OPPORTUNITY

There is an attractive long collar trade in Twitter (TWTR). Currently it is trading for $18.48.

CHARACTERISTICS

There is a 61.3% chance the stock will close above 17.50 on 03-24-2017, and you will earn your target return of $237.95. There is a 68.0% chance the stock will close above 16.89 on 03-24-2017, and you will earn a profit. There is a 15.4% chance the stock will close below 15.00 on 03-24-2017, and you will have a total loss of $767.05.

SPECIAL CHARACTERISTICS

For a Long Collar, the amount you risk is different than the amount of capital required. This is because you cannot lose all the capital invested in the position (this is a good thing). This long collar will require $6,757.10 and returns 3.5% on the capital invested.

ENTRY PLAN

This is a three legged strategy. To enter this position you will sell 4 call options expiring on 03-24-2017 with a 17.50 strike price, buy 4 put options expiring on 03-24-2017 with a 15.00 strike price and buy 400 shares of stock for 18.48. This will require a net debit of $16.86. The commission for this trade will be $15.10.

DISCLAIMER

All information presented here is current as of February 8, 2017 12:58 pm (EST). All trading involves risk. Free trades ideas are presented for illustrative purposes only and are not to be construed as financial advice.


How Did We Do? The Results…

This trade employed a Long Collar strategy that needed TWTR to close above $16.89 on March 24, 2017 to earn a profit. The stock closed at $15.14. This trade had a net debit of $16.86 on 400 shares. Each share had a negative value of $1.72 resulting in a loss of $688.

Don’t Forget About Put Options When Getting Long

The stock market is often compared to the casino. All too many times, some traders have found themselves wildly speculating about a potential stock or move in the broader market. This speculation essentially boils down to a bet on whether stocks will go up or go down.

When it comes to the options market, there can be a far more choices as opposed to simply, long or short. But when it comes to the casino, “the house” metaphor still holds up.

Many refer to the casino as the one selling option trades and the traders are considered the buyers. While the actual number varies, it is said that about three-quarters of option positions expire worthless.

Of course, this data varies and one could argue that a large chunk of positions are closed before expiration, leaving a smaller sample size largely containing worthless positions. But we’re not here to debate the merits of these studies. Instead, we’re here to look at credit spreads using options.

I bring up the casino reference because many investors have a hard time shifting from buying options to selling options. Because buying an option has unlimited reward and limited risk and selling an option has limited reward and unlimited risk, many traders are inclined to perform the former: buying options.

But selling options, while seemingly less rewarding, can really add up over time when executed correctly and done with an aversion to risk. Of course, picking out those rewarding, low-risk trades is the tricky park.

So What Is a Credit Spread?

Simply put, a credit spread still involves a trader taking a market position – either long or short. But instead of buying a call spread when we’re bullish, we’re going to sell a put spread.

That also means that instead of buying a put spread when we’re bearish, we’re going to sell a call spread. But to keep things simple for now, we’re just going to focus on the first one: Bull put spreads.

Additionally, when the underlying security doesn’t move at all or moves very little, our trade will often times end up profitable as well. This is a distinct advantage over buying option spreads as opposed to selling them.

A bull put spread involves a combination of selling a higher priced put option and simultaneously buying a lower priced put option. An example would look like this:

Shares of ABC are trading at $100 and we’re bullish on the stock. To perform the trade, we sell 1 February $95 put for $1.00 and buy 1 February $90 put for $0.25.

By only selling the $95 put, we would collect a $1.00 credit for assuming the risk of the stock’s decline. Unfortunately, we open ourselves up to a big risk (a maximum of $9,400 technically) should the stock suffer a massive pullback.

We are at risk once the stock falls below our breakeven price of $94, which is the strike price minus the collected credit, ($95 strike – $1.00 credit = $94 breakeven).

But because we purchased the $90 put option for $0.25, our maximum loss is now capped at that level. So even if the stock falls below $90, our maximum loss is only $425, ($95 – $90 = $5.00; $5.00 – $0.75 credit = $4.25 per share as our maximum loss).

So what exactly is our goal with this trade? The theory is that shares of ABC will close above $95 per share on February expiration and as a result, we will get to keep the $0.75 credit we collected by selling the spread.

If the stock rallies, stays flat, or even pulls back slightly, the value of our spread will dwindle, which in turn actually shows a profit for us, as we’re looking for both options to be worthless at the time of expiration.

To picture it visually, look at it from the flip side. Imagine you are looking to buy protection for shares of ABC. For the $95/$90 put spread, it costs $0.75. We pay that price to insure that our stock has some protection. But for the seller, their goal is see the stock continue to trade higher, or at least flat, so that insurance plan ends up worthless and he gets to keep his $0.75 credit.

So What’s a Real World Credit Trade Look Like?

Conveniently, instead of pouring through countless options chains of various stocks, we can simply scan for our strategy using OptionParty.

For this particular scan, I wanted to skew my results to the more conservative side, as the market has been a bit complacent and I’d rather avoid a big loss rather than go for a big gain. Using the Party Rank feature allows for this type of discrepancy.

As you may remember, there’s three very important probabilities to understand when it comes to options. Below are my criteria for this trade:

  • Minimum Probability of Target Return: 65%
  • Minimum Probability of Profit: 75%
  • Maximum Probability of Total Loss: 5%
  • Minimum Return: 4%
  • Expiration: Within 10 Weeks

In total, 150 entries were returned from this criteria. Thankfully though, it’s ranked. Below are the top 10 results.

Don't Forget About Put Options When Getting Long

While typically the individual stock trade – in this case, GOOGL – is more appealing to me than an ETF or index, the sub-1% total loss probability and 4.1% return on risk from the third-ranked SPY trade is too enticing.

It involves selling the March 3rd $212.50 put option and buying the $202.50 put option for a net credit of $0.41.

Don't Forget About Put Options When Getting Long

According to the results, there is a 93.7% chance the SPY will close above $212.50 on expiration, leaving us to collect the entire net credit. Likewise, there is a 94.2% chance the stock closes in profitable territory, which means the SPY would close above $212.10 on expiration.

Finally, there is only a 0.4% chance of total loss, which would mean the SPY closes below our long put strike price of $202.50.

While a trader could surely up the stakes here – that is, take on higher risk in order to collect a higher credit – it seemed that a more prudent, conservative approach was warranted given the market conditions.

As the markets change though and volatility rises and falls, it will continually change the landscape for those looking at credit spreads in the options market. There will be times to be aggressive, times to be conservative and times where no trading at all is warranted.

Just remember, the return may seem small. But when accumulated over several months or an entire year, the gains can be impressive.

Long Straddle – Free Trade Idea

OPPORTUNITY

There is an attractive long straddle trade in Cisco Systems (CSCO). Currently it is trading for $30.51.

CHARACTERISTICS

There is a 61.8% chance the stock will close above 31.30 or below 29.71 on 02-10-2017, and you will earn your target return of $3,851.10. There is a 73.5% chance the stock will close above 31.04 or below 29.96 on 02-10-2017, and you will earn a profit. Since this strategy has an uncapped reward potential, you can earn more than the target return should the stock move strongly either up or down. There is a 1.5% chance the stock will close between 30.47 and 30.53 on 02-10-2017, and you will have a total loss of $8,964.45.

Note that in actuality you cannot have a total loss unless the stock closes exactly at 30.50 on 02-10-2017, but we count the stock ending within 0.1% of 30.50 as a total loss.

ENTRY PLAN

To enter this position you will buy 165 call option(s) and 165 put option(s) with a 30.50 strike price. Both the calls and the puts will have an expiration date of 02-10-2017. This trade will require a net debit of $0.53, and the commission for this trade will be $219.45.

DISCLAIMER

All information presented here is current as of February 1, 2017 1:26 pm (EST). All trading involves risk. Free trades ideas are presented for illustrative purposes only and are not to be construed as financial advice.


How Did We Do? The Results…

This trade employed a Long Straddle strategy that needed CSCO to close above $31.30 or below $29.96 on February 10, 2017 to earn the targeted return. CSCO closed at $31.51 which resulted in a return of $3,851.10.

Protect and Profit: How a Collar Trade Can Do Both

Like the long straddle trade – which involves traders purchasing both a call and a put on the same security, at the same strike price on the same expiration date anticipating a high-volatility event – the collar trade is often overlooked.

The long collar trade – which involves owning a chunk of stock, selling calls against that stock, and buying downside put protection for it – has a place in every investors’ playbook, even if it’s rarely called upon during the game.

In fact, the collar trade has sort of a “legendary play” if we dare call it that. Back in 1999, the dot-com boom was well on its way to becoming the dot-com bust.

One person who didn’t want to risk their winnings? Mark Cuban. In 1995, Cuban and his partner set out to build an internet content-streaming company. By 1999, Broadcast.com had successfully completed its IPO and despite being valued at 57 times sales in the deal – remember, this is the dot-com era – it was acquired by Yahoo! (YHOO) for $5.7 billion.

Cuban of course, didn’t own the company outright. But the deal had given him paper profits of more than $1 billion. In fact, the 14.6 million shares he received in the deal were trading at $95, valuing his stake at roughly $1.4 billion. Because Cuban faced a lock-up period – something us retail investors aren’t usually bound by – he needed to find a way to protect his fortunes.

The answer? A collar trade. By selling an upside call, reportedly the $205 strike, and buying the $85 downside put, the now-owner of the NBA’s Dallas Mavericks basketball team essentially limited his downside to $85 per share, while capping his upside at $205.

These options expired in three years and thanks to the hysteria surrounding tech companies in the early 2000s, the premium he collected from the calls actually offset the premium he paid for the puts.

The rest is pretty much history. In 2000, shares of Yahoo! soared to almost $240, making Cuban’s collar trade initially look short-sighted (although still very profitable). By 2002, the stock and the rest of the market had plunged, with Yahoo! dropping to $13.

Instead of Cuban’s fortune shrinking to “just” $190 million, his 14.6 million shares were protected by the $85 put options, leaving the stake valued at a whopping $1.24 billion.

A pessimist will point out that his trade actually lost him $150 million. But a rationale investor will argue that it saved him over $1 billion and that managing his downside was a prudent move given the animal spirit environment the market was in at the time.

Are there things that Cuban could have done differently to maximize his position? Hindsight is 20/20 and when reflecting back, he could have lowered the strike price of his short calls and raised the strike price of his protective put, so that he wouldn’t have lost anything on the trade.

In fact, there are a few different things he could have done. One thing he couldn’t do however, is use OptionParty’s screening and ranking products.

So Where Does That Leave Us?

Why use a collar trade? Perhaps investors want to own the stock for its dividend or other upcoming catalysts. They could also already own the stock and are simply looking to protect their stake without having to sell it.

While deploying a collar may be less common than something like a bull call spread, it certainly has its applications. Because investors are selling an upside call and buying a downside put, the trade can be put on for little or no premium at all (on the options front, anyhow). In some cases, investors can even collect a net credit, depending on the chosen strike prices.

While many investors would initially think of a collar trade as selling out-of-the-money calls, and buying out-of-the-money puts as the ideal collar trade scenario, there are other ways too. Let’s look:

First we cast as wide a net as possible, then we tighten up our criteria and quickly whittle down the very best possible trades. This task could take days or even weeks, depending on how seasoned of a trader one is. But with OptionParty’s scanning and ranking method, it only takes a few minutes.

In our trade, we looked for something a bit more on the aggressive side, (you can actually alter the ranking of the final results by adjusting how conservative or aggressive you want the trades to be).

Ultimately, the top-ranked result was our choice. In it, for every 100 shares of Netflix (NFLX) that we purchase around $129, we will sell the February $110 call and buy the February $95 put.

Protect and Profit: How a Collar Trade Can Do Both

In this case, we are selling a deep in-the-money call, and a simultaneously buying a deep out-of-the-money put. The goal here is that we will get our stock “called” away by shorting the $110 call options, given that the stock is trading nearly $20 per share higher than the short call strike price.

Protect and Profit: How a Collar Trade Can Do Both

By doing this, we collect about $20.75 in total credit. That essentially locks in our final selling price a few dollars per share above our cost basis near $129. When it comes to total return on our capital, the gains are not very high: Just about 1.6%.

However, the return on risk is much more attractive, at 10%. The capital at risk vs. the capital needed for the trade are much different, thanks to the long put.

Think of this trade like an in-the-money covered call. While there is a high-percentage chance the long call will finish in-the-money and the stock will be called away from the investor, there is nothing substantial protecting investors in the event of a big pullback.

This collar trade does have protection though. By purchasing the $95 put options, the investor’s losses are capped at that point. In fact, because of the credit collected, the cushion is even higher. On this trade, the maximum loss is $1,325 per unit (one unit consisting of 100 shares of stock, 1 short call at $110 and 1 long put at $90). This occurs if the stock closes below $90.

Our maximum profit is achieved so long as the underlying stock closes anywhere north of $110. According to the probabilities, there’s an 82.4% chance of that happening.

A 10% return-on-risk is pretty good, especially if one can duplicate this strategy several times throughout the year. In fact, even the 1.6% return on total capital, if replicated throughout an entire year, can quickly add up to market-beating returns.

Is a collar trade the perfect trade for all environments? No. But it certainly has its place, whether it comes in the form of in-the-money collar trades being opened, or an out-of-the-money collar trade being put on an existing stock position.

Cash Secured Put – Free Trade Idea

OPPORTUNITY

There is an attractive cash secured put trade in Go Pro (GRPO). Currently it is trading for $9.18.

CHARACTERISTICS

There is a 72.7% chance the stock will close above 8.00 on 02-10-2017, and you will earn your target return of $171.15. There is a 77.3% chance the stock will close above 7.71 on 02-10-2017, and you will earn a profit. There is a 0.1% chance the stock will close at or below 0.00 on 02-10-2017, and you will have a total loss of $4,628.85.

ENTRY PLAN

To enter this position you will sell 6 put options expiring on 02-10-2017 with a 8.00 strike price. This will produce a net credit of $0.30. The commission for this trade will be $8.85.

DISCLAIMER

All information presented here is current as of January 18, 2017 1:01 pm (EST). All trading involves risk. Free trades ideas are presented for illustrative purposes only and are not to be construed as financial advice.


How Did We Do? The Results…

This trade employed a Cash Secured Put strategy that needed GRPO to close above $8.00 on February 10, 2017 to earn the targeted return. GRPO closed at $8.90 which resulted in a return of $171.15.

Can’t Decide, Long or Short? Saddle Up for a Straddle Trade

We’ve all been there. We have a feeling the market or a particular stock is going to make a big move, but we can make a viable case for each direction.

The stock market is overbought, so a pullback seems reasonable. That said, what catalyst will stop the indices from powering higher? How about when a company is set to report earnings or a medium-sized drug company has FDA results due up for a make-or-break treatment? In all these cases, we can justify the expectations for a big move higher and a big move lower.

Unfortunately though, we can’t short Company ABC while simultaneously buying ABC, right?

Conventional wisdom is a resounding “no.” But sometimes – particularly in the options world – conventional wisdom isn’t always at play. At least, when it comes to having choices.

That’s where the long straddle strategy comes into play. Simply put, a straddle play is defined as buying both a call and a put option with the same strike price and expiration date on the same underlying security. For instance, buying a straddle on the S&P 500 ETF (SPY) would look like this:

Buy to Open 1 January $225 call option for $2.00

Buy to Open 1 January $225 put option for $2.00

What’s the point of doing this? The trader in this case is basically betting on a high volatility event taking place in the underlying security, be it a continued rally or a quick pullback. In a stock-specific case, it could be a strong or horrendous earnings report that generates the move.

Since the buyer is purchasing both options, they have unlimited reward potential if the underlying security posts a massive move, as well as limited downside in that the most they can lose is the premium paid for the two options. In the scenario above, the most the trader can lose is $4.00, which is the total paid for both options.

Keep in mind though, this would include the SPY from our example closing at exactly $225, which would render both options worthless. That said, the ETF needs to close either above $229 or below $221 in order for it to be profitable.

You may be asking yourself why one would deploy a straddle strategy. There are certainly drawbacks to using a straddle, particularly the high premiums generally paid. That said, if a big move does materialize, the long straddle can be a low-risk, high-reward strategy.

Let’s look at an example using the Option Party screening tool.

We used a somewhat broad screening method for the straddle. While traders can certainly bore down on the specifics of a trade or strategy, it is paramount for them to first cast as wide of a net as possible. This ensures that no matter what the bias – bullish, bearish or neutral – the best possible trades that exist will be accounted for.

Here was some of the criteria for our long straddle trade:

  • Minimum target return: 6%
  • Minimum probability of target return: 60%
  • Minimum probability of profit: 60%
  • Maximum probability of total loss: 10%
  • Range: Options within 12 weeks of expiration

To learn more about the three most important probabilities used in options trading (listed above), read about them here. (They really are a difference-maker and learning about them never hurts!)

In any regard, our screen returned 17 potential trades. Thankfully, each has been ranked via the Party Rank system, thanks to other criteria we have entered.

The trade that stood out to me the most – perhaps with little surprise – is the number one ranked trade, which involves the iShares High Yield Bond ETF (HYG).

Can't Decide, Long or Short? Saddle Up for a Straddle Trade

While other trades that rank in the top 10 of our results do have lower total-loss probabilities, the HYG trade is still relatively low at just 1.7%. However, keep in mind that with long straddle trades, a maximum loss is relatively unlikely because the underlying security would need to close exactly on the strike price.

Given that, other readings are important to consider as well. For instance, the HYG trade presents traders with a return on risk potential of 126%, with a probability of profit of almost 83%.

Those are pretty good figures and give the trader a solid statistical snapshot at how to advance when it comes to playing the odds.

In this case, the ETF is trading near $86.50, and the strategy calls for the trader to buy both the $86.50 call and put options expiring January 6th, for a total net debit of about 67 cents.

In order for the trade to show a profit, the stock needs to close either above $87.17 or below $85.83. It should be noted that by “showing a profit,”” we are talking about technicalities here. A profit would be with the stock closing by 1 penny or more over the breakeven price. Since we are long both calls and puts in this case, the higher the ETF goes or the farther it falls works out better in our situation

The hope is that the ETF rallies considerably or falls precipitously, driving up the value of our position. The risk lies in the stock ending somewhere in between our two breakeven points of $85.83 and $87.17. Depending on where the ETF closes within that range will determine our loss on the trade.

When volatility is low, the cost for a long straddle is cheaper. Conversely, when volatility is high, options pricing is higher, and thus a straddle is more expensive.

It’s clear that long straddles have their downsides, but the strategy also has upsides too. It’s in traders’ best interest to at least be aware of the strategy and its usefulness in order to determine whether it may be appropriate to deploy depending on market conditions. If it is, OptionParty’s screening and ranking platform can make finding and picking a straddle trade that much easier – and more profitable.

Covered Call – Free Trade Idea

OPPORTUNITY

There is an attractive covered call trade in Advanced Micro Devices (AMD). Currently it is trading for $10.61.

CHARACTERISTICS

There is a 70.4% chance the stock will close above 9.50 on 02-03-2017, and you will earn your target return of $141.90. There is a 75.0% chance the stock will close above 9.21 on 02-03-2017, and you will earn a profit. There is a 0.1% chance the stock will close at or below 0.00 on 02-03-2017, and you will have a total loss of $4,603.15.

ENTRY PLAN

To enter this position you will sell 5 call options expiring on 02-03-2017 with a 9.50 strike price and buy 500 shares of stock for 10.61. This will require a net debit of $9.18. The commission for this trade will be $13.15.

DISCLAIMER

All information presented here is current as of January 13, 2017 12:57 pm (EST). All trading involves risk. Free trades ideas are presented for illustrative purposes only and are not to be construed as financial advice.


How Did We Do? The Results…

This trade employed a Covered Call strategy that needed AMD to close above $9.50 on February 3, 2017 to earn the targeted return. AMD closed at $12.24 which resulted in a return of $141.90.

Picking Your Perfect Trade Is Easier Than You Think

Picking Your Perfect Trade Is Easier Than You Think

Earlier this month, we looked at how important it is for an investor to zoom out, in order to zoom in when it comes to trading. Meaning that in order to find the best trade for a given bias, it would be most prudent to first consider all of the options on the table – every strike price, strategy and expiration month.

Doing so by hand is exhausting labor and you may not even find your perfect trade until it’s too late! Thankfully, OptionParty makes screening a multi-minute affair, not a multi-day ordeal.

Although narrowing down by opening up is an important task, that’s only half the battle. Once a trader lands on the correct strategy and tailors a trade to their preference – based on three very important probabilities: probability of profit, probability of target return and probability of total loss – they still have to choose the best trade for them.

This task isn’t as difficult when only 10 or 12 trades meet the investor’s criteria. But what if there are 20, 30, 50 or 100 different choices? Investors would have to manually sort through each one – a task that can be as demanding as screening them by hand, assuming the proper analysis is applied to each.

Picking Your Perfect Trade Is Easier Than You Think

Thankfully though, that again doesn’t have to be the case. Thanks to OptionParty’s ranking system – Party Rank – users are saved a tremendous amount of time when it comes to screening and ranking trades. The only thing they have to do is make a decision.

Great products are born from solving problems and that’s exactly what OptionParty has done. Screening was an issue, but so was ranking, which is difficult because ranking each trade depends on a number of different things, such as expiration, strategy, risk, etc.

Once a ranking algorithm was devised for this deeply complex issue, individual users’ tastes were factored into the mix. Because you and I, or you and any other trader likely have different risk/reward appetites, that had to be taken into the mix as well.

That was achieved with the two “sliding bar” inputs that OptionParty devised. As you can see below, users can skew more towards being aggressive and achieving their target return, or they can be more conservative and focus on avoiding total loss. It’s not an all-or-none situation either. The sliding scale can rest at any point in between, so it’s very custom-tailored towards each investor.

Between the risk/reward scale and various other inputs, OptionParty is then able to calculate what the best trade for an investor really is. From there, investors can choose which suits them best. Let’s have a look:

In the first scan, we enter our desired target return and the minimum or maximum probability amounts for each respective category. We adjust our slider to the more aggressive approach, input our preferred strategies – in this case, credit trades like cash-secured puts and bull put spreads – and other criteria like length of trade and maximum position amounts. then we scan for the results.

Pre-scan Inputs:

Picking Your Perfect Trade Is Easier Than You Think

Scan results:

Picking Your Perfect Trade Is Easier Than You Think

As you can see from the results above, the system’s goal is tilt towards achieving our desired target return. As a result, the “Return on Risk” tends to be higher, alongside a higher “Total Loss Probability.” Higher reward of course, equals higher risk.

The “Party Rank” results are found in the far right column and this is where the algorithms go to work shaping the best trades based on the investor’s input. Of course, just because the choices are ranked, doesn’t mean the #1 result is necessarily the best choice in all cases.

For instance, perhaps the investor doesn’t like trading ETFs and has an accurate history with Occidental Petroleum, #5 in this case. In this scan, there were 332 results. So #5 is still a pretty darn good choice.

These results were derived with the more aggressive investor in mind. But what happens when we tip the scales to the more conservative side? Let’s see:

Pre-scan Inputs:

Picking Your Perfect Trade Is Easier Than You Think

Scan Inputs:

Picking Your Perfect Trade Is Easier Than You Think

A few things jump out right away following the second scan. First, notice how the “Total Loss Probability” and “Return on Risk” results are much lower than in the first scan, while the “Target Return Probabilities” and “Profit Probability” are generally higher

It’s quite obvious that although both scans involve most of the same securities, that the trades are certainly less risky in the second scan. You may also notice that the pre-scan components are all the same. The only thing we changed in this instance is on the sliding bar, which impacts how aggressive or conservative we want to be.

The Devil Is In The Details

Screening is an important and helpful component when looking for a trade. There’s no question in that. But what good is a trade screen that returns hundreds, or heck, even dozens of results that investors again have to dig through to find the best results.

Furthermore, how good is a ranking system that can’t be adjusted toward certain investors? Too risky and it mitigates the conservative investors; too conservative and it leaves out the aggressive investors. Smack dab in the middle may leave both types of traders in the dark.

By having the control of a broad or specific screener, combined with a powerful, customizable ranking system, OptionParty has formulated an ideal way for investors to find trades in a quick and easy way, while maximizing their ability to profit and sharpening their trading edge.

Down the Rabbit Hole With Options: Searching for Profits

Imagine this: You’re either long or looking to get long equities and in order to lower your cost basis, collect some income and limit your downside risk to a certain extent, you plan to sell calls against your stock position.

But instead of pulling up the nearest options chain and picking a random strike price, it would be far more beneficial for investors to consider a wider range of choices.

First, when considering selling call options, what most investors are really considering is income. They are looking for a neutral to slightly bullish options strategy that will net them a return in the form of a collected credit.

Another neutral to slightly bullish credit-collecting strategy? Selling cash-secured puts. It’s similar to selling calls and opens up more options for investors to find the best trade, rather than eliminating half of their choices from the get-go, (in the form of looking at both sides of the options chain).

This may sound counterintuitive, but in order to narrow down your options, traders first have to expand their options to be the most inclusive.

Narrowing down by opening up? It makes no sense, it seems.

Down the Rabbit Hole With Options: Searching for Profits

But in order for a trader to narrow down the best options, they first have to be willing to consider every option. Luckily, OptionParty makes it so that investors don’t have to do this by hand or by each individual stock.

So instead of just covered calls or cash-secured puts, let’s consider both. And instead of just options that expire this month, let’s look at those that expire next month too. I don’t want our trade ideas to revolve around volatility- or commodity-based ETFs, so I will black-list a few of the more well-known ones such as GDX, GLD, VIX and VXX.

If you wanted to only include those securities, or any security for that matter, it’s referred to as white-listing, and both options can be used on the OptionParty platform.

As opposed to saying we only want to sell covered calls on a few stocks, we now know what offers us the best risk/reward on a number of different stocks over a number of weeks. In our specific trade inquiry, the top trade that came back is a cash-secured put option in SolarCity (SCTY).

It involves selling the $16 put option expiring December 16th for a $0.71 credit

SolarCity may not be the first name that comes to mind when looking for bullish to neutral trades. But that is precisely the point! Without this screening technique, many investors may not have found SolarCity as a viable option. Yet it offers a great risk/reward for our capital.

The position offers an 84.2% probability that we will hit our target return of 4.6% and an 88% chance of turning a profit of some kind. The 0.1% total loss probability is incredibly low as well.

What Else to Consider?

The point here is clear – and somewhat ironic: Open up your options in order to narrow down the best trade.

To narrow, one must open.

The example above is a good representation of that, but it can be applied more broadly as well. Instead of looking for just a call option for a long position, investors can search for bull call spreads and bull put spreads, in addition to neutral-to-bullish plays like the covered call and cash-secured put strategies we just looked at.

Investors can also consider options that expire in 10 or 12 weeks (or longer), not just 4-8 weeks. Here, look at this:

We are bullish on the market, but only want to consider a long call or a bull call spread to take advantage. Additionally, we’re looking for a play that expires within the month and only includes the top ten holdings of the PowerShares QQQ ETF (QQQ). At the moment, this includes Apple, Microsoft, Amazon, Facebook, Alphabet, Intel, Cisco, Comcast, Amgen and Kraft Heinz.

We will white-list these stocks and see what we come up with. Here are the top 5 results:

Down the Rabbit Hole With Options: Searching for Profits

There are certainly a couple attractive options in there. But a wider scan among the same stocks might reveal some better trades. Instead of just bull call spreads and long calls, this scan also includes covered calls, cash-secured puts and bear put spreads. We also extended the scan to 12 weeks instead of 4. Here’s the top 5 results:

Down the Rabbit Hole With Options: Searching for Profits

Both time frames offer returns of about 5% to 6%, and both can be done with a total loss probability of ~1% to 3%. So on that front, it doesn’t seem to matter if we use a scaled down and shorter time frame approach vs. a longer time frame and more broad scope of strategies.

But, one will likely notice the tremendous difference in target return probability and the probability of profit.

To read more about the three key probabilities, you can do so right here.

In the second table, one can quite clearly see the odds of success are tilted much further in their direction than in the first table. Again, these are the same stocks with the same directional bias. But in the second situation, both probabilities are above 90%, offering much better odds of success than the sub-80% probabilities for the first results.

Final Thoughts

Far too often we become too close-minded. Not just on strategies but on stocks as well. Naturally we want to go to our “lucky” plays and the ones we know best. There’s nothing wrong with favoring stocks we know better than others, just like there’s nothing wrong with avoiding the ones we don’t want to touch, (such as what we did with volatility-based securities earlier).

However, even when white-listing our favorite stocks, it is simply too cumbersome to work out the odds for each security against a number of different strike prices, expiration months and strategies.

Using the OptionParty platform vastly aids investors and traders in not only saving time, but also finding the best trades available.

Fighting for Protection: Why Options Give Investors a Leg-Up in This Market

Often times, investors find themselves in precarious situations when it comes to the stock market. It impacts all kinds of investors too. Short-term, long-term, those searching for income, those screening for day trades and the ones looking for multi-week or multi-month swing trades.

It’s the beauty of the markets; investors of all shapes, sizes and strategies are welcome to play. While all these strategies differ, they have one thing in common: downside.

The one drawback to any investment is the risk. Too much risk and investors eventually get punished. Too little risk and the returns may not even beat inflation, however paltry it is. And while there is no fool-proof way to evaporate that risk, there are ways to minimize it.

By isolating risk and minimizing its impact on one’s portfolio, they can concentrate on maximizing their reward. In investing, it’s all about minimizing downside and maximizing upside.

Using options is not only practical, but flexible too. While it may be hard to apply options in every scenario, they most certainly can be applied to a number of different investing techniques, helping out both traders and investors.

Let’s look at a few options (no pun intended) for hedging your portfolio.

Fighting for Protection: Why Options Give Investors a Leg-Up in This Markets

Dan is a short-term trader. He buys individual stocks and looks for them to rally over the next few weeks. However, Dan is growing less confident in the overall market

While he could simply exit his position and wait for a more favorable environment, he could also consider using options to limit his downside. For instance, Dan could sell upside calls on his long position. While the short calls limit his upside after a modest rally in the stock, it also protects him if it trades flat or even slightly lower.

Take this trade for example:

With shares of Twitter (TWTR) trading at $18, Dan could sell the $19 call option for $1.40 that expires in the first week of December. Given that it’s late-October, that gives Dan about 6 weeks until expiration.

Dan collects the credit of $1.40 per share, which immediately lowers his cost basis by the same amount, $1.40. Assuming he bought the stock around $18, he now has an effective cost basis of $16.60. Of course, Dan’s upside is limited at $19 per share. But in a situation where his confidence is waning a bit, it may be worth trading some of the potential upside in order to minimize the downside.

Of course, the covered call strategy only provides so much protection. While, the stock could fall almost 8% from current levels and Dan wouldn’t experience a loss, a drop below $16.60 would be a different a story. His position would decline step-for-step with the stock price.

In order to protect against such an event, Dan could consider an enhancement to that strategy. For instance, using the $1.40 credit he received by selling the $19 call, Dan could also purchase the $17/$16 put spread for $0.45, and he would be left with a $0.95 credit.

It would look like this:

Buy 100 shares of Twitter at $18.

Sell the Dec. 2nd $19 call option for a $1.40 credit.

Buy the Dec. 2nd $17/$16 put spread for a $0.45 debit.

The $1.40 credit received minus the $0.45 debit paid, leaves Dan with a net credit of $0.95. This lowers his cost basis to $17.05.

Fighting for Protection: Why Options Give Investors a Leg-Up in This Markets

Technically speaking, Dan’s maximum loss is $17.05 per share. Should the stock not fall below $16 before expiration, his maximum loss is just $0.05 per share, while his maximum upside is $1.95 per share, with his gains capped when the stock climbs above $19.

While the strategy is clearly more complicated, Dan has effectively reduced his risk-reward to a far more favorable position. So long as the stock does not endure an 11% decline, Dan’s worst-case scenario is a 5 cent-per-share loss, with a best-case scenario locking in almost $2 per share in gains.

What About the All-Around Portfolio?

Sometimes, investors aren’t looking for a swing trade. Instead, they may be looking for protection on their entire portfolio. This is a trickier situation, but one that can still be navigated.

In this scenario, Cheryl has a $100,000 portfolio, comprised of a simple 60-40 stock-bond mix. She could consider selling some of her equity positions and holding cash to reduce her risk.

However, she could also consider using options. For simplicity, let’s say Cheryl has a portfolio beta of 1.0, meaning it moves in lockstep with the S&P 500.

Cheryl could always consider buying put options or bear put spreads on market-based ETFs, such as the S&P 500 ETF (SPY) or the Russell 2000 (IWM). Her put positions would appreciate should the market decline and she could likely exit her position with a gain.

Cheryl could also sell upside calls a few percentage points above the current market price to help finance the purchase of the put strategy – sort of like what Dan did. The risk of selling upside calls is that technically, the seller’s risk is unlimited. But since the trade is short-term in nature, it seems unlikely the S&P 500 will rally by an enormous amount in that period.

For instance, if it’s late-October and Cheryl is worried about a potential market pullback around the time of the 2016 election and in the heart of earnings season, she could consider a strategy such as this:

Sell the November $218 call for an $0.85 credit.

Buy the November $212/$208 put spread for a $0.94 debit.

Fighting for Protection: Why Options Give Investors a Leg-Up in This Markets

In this strategy, Cheryl could simply buy the $212/$208 bear put spread on the SPY for a $0.94 debit. This would protect her in the event of a pullback, but it also costs more premium.

In order to help lower that premium, Cheryl could consider selling the 218 call for $0.85. This would bring her net cost down to just $0.09 before commissions. Should the SPY close between $211.91 and $218, Cheryl’s trade won’t produce a profit – but her loss will be quite small, just the $0.09 debit.

However, should the SPY fall by just 2.8% from current prices – to $208 – Cheryl will see a gain of $3.91. This also happens to be Cheryl’s maximum gain in this scenario, which is the $4.00 spread minus the $0.09 debit.

Conversely, should the SPY rally just 2.8%, to $220, Cheryl will have a loss of $2 per share, plus the 9 cent debit she paid on the trade, for a total loss of $2.09. However, Cheryl must also consider that since she is long stock in her portfolio, she will have gains to offset this loss.

In our example, Cheryl could also consider scanning for bearish trades using the Option Party screener. Specifically, she could look for attractive bearish trades in companies with weak fundamentals, as they will likely be the first to fall if the overall market takes a turn for the worst.

Additionally, Cheryl could look for the trades that are more conservative by nature and run less risk of her experiencing a loss.

It takes practice to navigate the market, no matter what kind of participant you are. By managing risk, investors can help turn the odds in their favor that they will outperform the market and one way to manage risk is to consider hedging. In any regard, at least knowing how to hedge is an important craft in any investor’s toolbox.