WDIS: Back to Cool

Using Extrinsic Value in Extending Duration

| Feb 4, 2015
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    WDIS: Back to Cool

    Using Extrinsic Value in Extending Duration

    Feb 4, 2015

    Tony Battista and Katie start by looking at FXE, the Euro Trust ETF, which they first traded this year by doing a tastylive original strategy: The Super Bull.

    The Super Bull strategy entails making a very bullish trade by purchasing a call spread, usually aiming for the at-the-money call spread (ATM), and financing it with the sale of an out-of-the-money (OTM) put.

    Tony highlights that FXE stock dropped from $126 to $112, but despite their strong bullish directional trade, the loss they incurred is significantly less than their max potential loss because they stayed mechanical as well as proactive in managing their trade.

    Tony switches gears to discuss the tastylive Research Team’s Market Measures segment that he and Tom Sosnoff covered earlier in the day called "A Reason To Manage." In brief, this particular Market Measures segment is about managing winners at 50% of max profit instead of holding the trade through expiration. The reason being that we want to avoid increased gamma risk around expiration, which Tony reiterates to Katie is best done by exiting or rolling trades with sufficient duration remaining.

    Tony wants Katie to apply that strategy and research covered in "A Reason To Manage" to her own trade in XLE (Energy Select Sector SPDR Fund). The duo starts by looking at the regular March Options to roll their Strangle out to. Tony helps Katie find the extrinsic value of her existing position and suggests that they use that extrinsic value to widen their strikes. This is all part of their strategic decision to extend duration by establishing a new position to have a pure premium play on again.

    This trade is a scratch in the front month, therefore there’s no loss in the front month, therefore net - net it is the same idea as putting on a brand new trade. (Remember, they selected the strikes of their “new” or rolled position based on the prices of those options being equal to the remaining extrinsic value of their original trade from the front month.)

    Tony and Katie wrap up the segment by looking at USO (United States Oil ETF). Since USO has high implied volatility rank at 100%, they look to get long some deltas by selling a Covered Call.

    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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