WDIS: Back to Cool


| Feb 21, 2015
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    WDIS: Back to Cool


    Feb 21, 2015

    The Market is extremely erratic today. As Katie is still a new trader, she wants to know whether this behavior and dramatic swings in price are what a more two-sided market should look like. Tony explains that that type of tape action is not all that common, and can provide some unique opportunities to trade.

    But before jumping in to new trades, the duo wants to recap two rolling trades that have finally worked in their favor. XLE originally began as a Put Ratio Spread. A Ratio spread is when you buy an ITM option and sell 2 or more OTM options for a credit, ultimately eliminating risk from one side of the spread.

    Eventually, Katie and Tony Turned this ratio into a strangle, and then Rolling tested side, extended duration, finally closed the trade for a profit, as demonstrated on dough’s Order Chain feature.

    Additionally, as a result of a deep ITM Put, Katie was assigned stock in UNG. The duo anticipated this, and prepared by selling two calls to cut the delta of the long stock. Ultimately, they closed the whole thing for a winner to free up the buying power.

    Tony and Katie have a net short delta portfolio. Looking to put on a play with some long delta, BAT suggests BABA. BABA recently had earnings, has sideways moving price action, and is beat up with a low IV Rank. These criteria have Tony wanting to add long delta while not using a lot of capital. Rather than trading a traditional Covered Call, they decide to do a Poor Man's Covered Call (PMCC), buying an ITM option at a longer duration than the short option they sell in the front month. Tony explains that you purchase the longer dated ITM option hoping volatility will expand, but want the price of the stock to go to your short strike. Selling 32 delta, buying 60 long deltas gives Katie a small long position.

    Then, as the market continues to climb, the duo makes another contrarian play in the form of getting long VIX. By selling a naked Put in VIX, they assume volatility will expand and that the market will sell off. While it may seem like they are shorting an ITM Put, based on /VX the team determines that the ATM Put is actually 17 (and not 14, which VIX indicates). Ultimately they sell the first OTM Put at 16 for a credit.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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