Chapter 7 - Find trades I

Transcription

1 Chapter 7 - Find trades I Find Trades I Help Help Guide Click PDF to get a PDF printable version of this help file. Find Trades I is a simple way to find option trades for a single stock. Enter the stock symbol in the symbol text box on the Site Map. Make any web site date changes in the upper right on the Site Map. Click Find Trades I. Find Trades I uses the same search engine that is used by Find Trades II and III. You can observe the Find Trades I search settings by clicking Create A New Search on the Site Map page. A new search is loaded into Find Trades III. Look below the Find Trades III strategy table and select "Find Trades I" in the search Wizard selections. Find Trades III will reload with the Find Trade I settings. Return to the Find Trades I web page. Select your sentiment under Step 1. Choosing bullish means you think the stock will go up. Choosing bearish means you think the stock will go down. Choosing neutral means you think the stock will go sideways. Next select what you think the stock option's IV value represents. Select high if you think the IV is high and will probably go lower. Select low if you think the IV is currently low and will probably go higher. Select neutral if you think the IV is likely to go sideways. Each of the above combinations shows option strategies that can profit from the sentiments selected. A table listing of option strategies is shown below:

2 When you see the option strategies desired, checkmark the ones you wish to search. The fewer you check, the faster the search. Each checked strategy appears below Step 4. You can checkmark strategies from different sentiments. Limited space in the option strategy selections caused us to put Condors, Iron Butterflies, Synthetic Straddles, 2x3 BackSpreads and 2x3 Ratio Spreads in the Neutral Neutral selections. Step 2 shows the initial sorting options. This is the way the searcher will arrange the found trades. Only a maximum of 100 trades is sent back to the browser from the searcher. So the initial sort selection is important. You will be able to resort the 100 trades, however. You will sometimes notice in Find Trades I that not all 100 trades are displayed. The ranked numbers on the left of the search output under Rk sometimes contain skipped numbers. Find Trades I uses a wide open search. It allows trades with zero volume and zero open interest to be considered as a trade. If the output has less then 10 found trades, the display will show these zero open interest trades. Be aware that these trades have liquidity problems and the bid/ask can be stale and inaccurate. Nobody was trading these options. You will have to find someone who will take your trade. If more than 10 trades are found in the search, these zero open interest trades are not displayed. It is as if you used Find Trades II for a single stock and used 1 in the min open interest filter option. We highly recommend that you switch to either Find Trades II or III and set the min open interest to a number greater than 0. The Rk numbers will start to be sequential. Find Trades I is for novice traders who are just checking out the Platinum site for the first time and who do not want a lot of explanation about what to do. Since you are now reading the help manual, you can read Chapter 3 > Find Trades II and III and progress to the better search tools. Another filter being used in all the Find Trades is based on the trade odds. On the Site Map, click

3 "Search Settings". Look at the bottom of that page, and you will see where you can set the max odds to display in the search output. It defaults to 50:1. Any trade with odds greater than those odds are not displayed. You can open this up to 10000:1. Be aware that once the Find Trades I trade odds exceed somewhere near 20:1, you very likely have a trade where one or more legs has stale or bad option data. It is unlikely that you will be able to fill those legs and get those odds. But it could be that the odds are correct. It is up to you to decide what your tolerance is for viewing potentially bad quote trades. There are 32 initial sorting selections. They are computed at the expiration of the earliest option leg in the strategy. The selections are explained in detail below. Read the explanations and graphics in Chapter 2 and the Glossary for the definitions of some of the selections, like Odds. The selections are: Maximum Profit/(-Risk) The maximum possible trade profit is divided by the maximum possible trade loss. Both assume the IV model is constant to trade expiration. The ratio is used to rank the trades. This ranker is best used with option combos that have limited reward and limited risk. It is the default option. Smallest Max Risk is for trades with finite risks. The trade with the smallest risk is put at the top of the trade display. Note that this means that trades far out of the money are usually ranked higher than at the money trades. Trades with poor odds and expected looses could also be highly ranked. However, if you keep primary strike variability near 0.0, this can be a very useful ranker. Largest Max Profit is an interesting ranking option that searches for trades with the biggest potential payoff. If you keep the primary strike variability low and search just a few strategies at a time, the rankings can be good quality. Maximum Profit/ Cost - The maximum possible trade profit is divided by the absolute value of the trade cost. Both assume the IV model is constant to trade expiration. The ratio is used to rank the trades. Cost - The absolute value of the trade cost. Trades are ranker from lowest absolute cost to highest. This is the ranker to use to find no initial cost backspreads and ratio spreads. Probability of Profit will rank the trades from highest probability of making a profit to lowest probability of making a profit. Odds will rank the trades from highest odds to lowest odds. Kelly Bet Fraction - This is ranker is discussed in the Glossary. This is the fraction of your holdings you should invest in the trade to maximize profits give the probabilities and odds of the trade. High Delta Option prices moves with underlying at Delta %. This ranks the trades with high delta at the top. Option price and underlying are moving together. Low Delta Option moves with underlying at Delta %. This ranks the trades with low delta at the top. Option price and underlying are moving opposite each other. Delta can be negative. Delta/ Cost - The Delta is divided by the absolute value of the trade cost. You desire that the trade move rapidly when the stock price changes but you want to pay a cheap price to get those trades. The ratio is used to rank the trades. Delta Neutral Option moves with underlying at Delta %. This ranks the trades with neutral delta, i.e. closest to 0.0, at the top. A delta neutral option is barely changing when underlying moves in either direction. Gamma Neutral - The Greek Gamma for the trades are ranked from lowest to 0 to highest. Theta Neutral - The Greek Theta for the trades are ranked from lowest to 0 to highest. Vega Neutral - The Greek Vega for the trades are ranked from lowest to lowest. Maximum Theta will rank trades that have the most time value at the top. Useful in searching for trades that will rapidly gain value simply due to time passing. Rate of Return - The rate of return of the option trade assuming nothing changes to the expiration of the earliest option leg. If the trade is a credit, like a sell call or covered call, the rate of return is positive. Largest Upper Breakeven % - Breakeven is the stock price where the option just switches from losing money to making money or vice versa as the stock price changes. Breakeven can be converted to percent of latest stock price close as follows: Breakeven % = 100*(Breakeven - Stock Close)/(Stock Close) The upper Breakeven is the Breakeven percent that is positive. If there is no upper Breakeven it is assigned a value of 100%. In the search output click the Breakeven view. If you use this initial sorter, the column labeled "Percent Stock Change to Upside Break Even" will be sorted from highest percent on down. If you are selling a call option, you could use this sorter to find the Sell Call options that require the most stock price change before you start to lose the credit. Smallest Upper Breakeven % - (see Largest Upper Breakeven %). In the search output click the Breakeven view. If you use this initial sorter, the column labeled "Percent Stock Change to Upside Break Even" will be sorted from lowest percent on up. If you are buying a call option, you could use this sorter to find the Buy Call options that require the least upward stock price change to where you start to make money. Largest Bottom Breakeven % - (see Largest Upper Breakeven %). The bottom Breakeven is the Breakeven percent that is negative, ie below the stock close. If there is no bottom Breakeven it is assigned a value of -100%. In the search output click the Breakeven view. If you use this initial sorter, the column labeled "Percent Stock Change to Downside Break Even" will be sorted from highest percent on down (the negative sign is not shown). If you are selling a put option, you could use this sorter to find the Sell Put options that require the most downward stock price change before you start to lose the credit. Smallest Bottom Breakeven % - (see Largest Bottom Breakeven %). In the search output click the Breakeven view. If you use this initial sorter, the column labeled "Percent Stock Change to Downside Break Even" will be sorted from lowest percent on up (the negative sign is not shown). If you are buying a put option, you could use this sorter to find the Buy Put options that require the least downward stock price change to where you start to make money.

4 Largest Breakeven Width % - The Breakeven width is computed as follows: Breakeven Width = Upper Breakeven % - Bottom Breakeven % There is a Breakeven Width even if there is only one breakeven. If the upper breakeven is not there then the Upper Breakeven % is assigned to be 100%. If the bottom breakeven is not there then the Bottom Breakeven % is assigned to be -100%. In the search output click the Breakeven view. If you use this initial sorter, the difference between the columns labeled "Percent Stock Change to Upside Break Even" and "Percent Stock Change to Downside Break Even" will be sorted from highest to lowest. If you are trading any option in the Neutral High IV column that have upper and lower breakevens, this initial sorter finds the trades requiring the most stock price change before you lose money. This sorter also finds the best Diagonal Calendar Spreads. Smallest Breakeven Width % - The Breakeven width is computed as follows: Breakeven Width = Upper Breakeven % - Bottom Breakeven % There is a Breakeven Width even if there is only one breakeven. If the upper breakeven is not there then the Upper Breakeven % is assigned to be 100%. If the bottom breakeven is not there then the Bottom Breakeven % is assigned to be -100%. In the search output click the Breakeven view. If you use this initial sorter, the difference between the columns labeled "Percent Stock Change to Upside Break Even" and "Percent Stock Change to Downside Break Even" will be sorted from smallest to up. If you are trading any option in the Neutral Low IV column that have upper and lower breakevens, this initial sorter finds the trades requiring the least stock price change before you start making money. Days Left will rank the trades from most days left to least days left. Volume will rank the trades from highest option volume to lowest option volume. The option volume used is for the leg with the least volume. Open Interest will rank the trades from highest open interest to lowest open interest. The open interest used is for the leg with the least open interest. Low IV will rank the trades from lowest ATM Implied Volatility to highest ATM Implied Volatility. The ATM Implied Volatility used is for the leg with the lowest ATM Implied Volatility. High IV will rank the trades from highest ATM Implied Volatility to lowest ATM Implied Volatility. The ATM Implied Volatility used is for the leg with the lowest ATM Implied Volatility. Expected Profit will rank the trades from highest Expected Profit to lowest Expected Profit. Expected Profit/(-Risk) is an interesting ranking option that searches for inexpensive trades with probabilities that indicate a profit is likely. This ranking option can be used on all strategies that have limited or unlimited profits and a limited loss. Bullish (Bearish) Percent to Double - The stock percent change required for the purchase price to double. If we buy the option at $1 then we want to sell it at $2. What stock percent change will allow us to reach the option price target profit goal. The smaller the percent to double change needed by the stock movement, the better the trade. Selecting this initial sorter and searching debit strategies that can double in price will yield a ranking of the best percent to double option trades. If you search bullish strategies like a Buy Call then use Bullish Percent to Double. If you search bearish strategies like a Buy Put then use Bearish Percent to Double. Step 3 allows you to narrow your search to options that expire within a desired future time period. The selections are: All days - the search looks at almost all option expiration time periods. Options that expire within 5 days are not considered. <= 90 days - the search only looks at options that expire between 5 and 90 days from the web site date. > 90 days - the search only looks at options that expire 91 days or more from the web site date. "All option legs must have real quotes" (below Step 4 in the Find Trades I web page) means that if an option exists but nobody is trading it, the searcher will not consider it. We recommended that you turn this on. It can be set as default in General Settings on the Site Map page. If you leave it off, the searcher will search all options and use the option model to create quotes when none exist. The right side charts are the stock price chart and the IV chart. See Create Charts for more details. More selections are shown below:

5 You can select a folder to store any trades found you want to save. You can change the "Days Before Expiration" used to compute the search output and Risk Graph. The search will compute and rank all output, like Max Profit etc..., this selected number of days before expiration. The Risk Graph black expiration line will turn purple and will end this many days before expiration. If trades expire inside this many days to expiration then they will not show up in the search output. You can change the stock symbol. Once you have made your selections, click the Search button. The search has limits. The searcher max limits which cause it to stop searching are 150 real time secs go by or trades searched. Your settings in Settings > General Settings may be different. If the maximum is reached, you should consider using Find Trades II or III to fine tune your search. You can change the time limit and the trade limit in General Settings. Your objective is to pick a trade from the search output, and click the trade link under the trade components column. You can left mouse click the trade components to go to the risk graph in the current window. You can also right mouse click the trade components, select a new browser window and continue using Platinum in the new window without losing the search in the first window. Close the second window when you are done. You can run Platinum in multiple windows at once. DO NOT click in a window and then click in a different window before the first window's click command has finished processing. The first trade shown is not necessarily the best trade. There are several factors to consider, including your own personal view of the market's future direction, before the trade expires. Before making a trade with your broker it is also advisable to read the latest news about the stock in such web sites as Yahoo Stocks. You might not be aware of factors such as poor earnings warnings that could affect the trade's behavior. The search output shows six different view options. Clicking each view option link causes the table of searched trades to show different columns of data. Each column of data has a link in the column heading. If you click this heading link, the table gets resorted high with that column as the sorter. If you click the link again the table gets resorted low. These resorts and views are being done on your PC. If you have a slower PC the resort may take awhile (<30 secs). Be patient. The view called My Views is a set of column headings that you can choose yourself by clicking Search Display on the Site Map. The other search table views are as follows: Risk Rk - This is the original searched ranking. It is a number from 1 to 100. A maximum of 100 trades can be displayed. Checkboxes appear in the search output "Rk" column. The boxes are all unchecked. Two links appear below the View options: "Show All" and "Show Checked". Check these trade boxes and then click "Show Checked" and only those checked trades are displayed and sorted. Restore the search trade display to the original displayed trades by clicking "Show All". Stock - This is the stock symbol. Click trade below for Options Analysis. - These are the trade components. Below is a trade component example:

6 Buy 1 JAN02 50 Call@ 1.10 Sell 1 JAN02 60 Call@ 0.25 The trade is buying one Call that expires in Jan of 2002 and selling a call that expires in Jan of The Buy Call strike price is 50 and the option price is The Sell Call strike price is 60 and the option price is You must multiply option prices by 100 to get their dollar value. Stock Price - This is the End Of Day stock close price. Cost - This is the combined trade cost in dollars. Negative means a credit to your account. Max Profit - This is the maximum profit of the trade. Some trades have unlimited maximum profit. Max Risk - This is the maximum risk of the trade. Some trades have unlimited risk. The risk is evaluated at 200 different underlying price points. The underlying values are varied plus or minus 4 standard deviations around the current stock price. (This is a huge range, but finite.) Of the 200 points, the highest is the Max Profit, and the lowest is the Max Risk. Of course, you can construct a trade far out of the money (beyond the 4 standard deviations point) where this logic will fail. Since only 200 points are evaluated, the absolute Max Risk and Max Profit may be off by a few dollars. Prob of Profit - This is the probability of profit (0-1.0). See Chapter 2. The probability of profit calculator finds the future stock prices where a profit of any size greater than 0.0 occurs. It sums up all these profitable stock price regions and divides this by all possible stock price regions. The ratio is the probability of profit. Odds - This is the trade odds expressed as xx to 1. See Chapter 2. Strive for option trades with odds better than 1:1. Days - This is the number of days remaining in the trade. For calendar spreads the near month leg is used for days. Vol - This is the prior days volume. Volume is the number of trades made for an option leg that day. On multi-leg option trades the number displayed is the highest volume of the legs in the trade. Open Interest - This is the prior days open interest. (OI). OI is the yet to be closed trades involving the options. On multi-leg option trades the number displayed is the highest OI of the legs in the trade. Kelly Bet Fraction - The Kelly Bet Fraction is what fraction of your trading dollars you should invest in the trade. It is widely optimistic and a very aggressive trading indicator. The flaw is that it assumes the Probability of Profit and the Odds used will be constant to trade expiration. They are typically not constant. But the Kelly Bet Fraction is an amazing trade ranker and should be tried in Trade Adjuster and Strategy Maker. Here is the Kelly Bet Fraction equation: KBF = 100* ( [ Probability of Profit*(Odds+1)-1]/Odds ) Probability of Profit and Odds are discussed elsewhere in this Glossary. Here is a more detailed discussion of the Kelly Bet Fraction: Kelly. Ratios Rk (see Risk) Stock (see Risk) Click trade below for Options Analysis. (see Risk) Stock Price (see Risk) Cost (see Risk) Max Profit (see Risk) Max Risk (see Risk) Expected Profit - This is the most likely outcome of the trade profits. See Chapter 2 and the Glossary. Max Profit/Risk - This is the ratio of these two dollar values. Max Profit/Cost - This is the ratio of these two dollar values. Expected Profit/Risk - This is the ratio of these two dollar values. ATM IV/SV - This is the ratio of these two standard deviations. Odds/Prob Odds - (see Risk) Greeks Rk (see Risk) Stock (see Risk) Click trade below for Options Analysis. (see Risk) Stock Price (see Risk) Prob of Profit (see Risk) Odds (see Risk) Vega - This is the Greek Vega of the trade. It is the amount your option will gain in dollars with a 1 percentage point rise in implied volatility. Theta - This is the Greek Theta of the trade. It is the loss per day in dollars of the leg due to time decay and no other changes. Gamma - This is the Greek Gamma of the trade. It is the amount delta will change as the price of the stock/index/futures contract moves from its current price. Delta - This is the Greek Delta of the equivalent number of stocks shares represented by the option/stock trade combination. Odds/Prob Odds - (see Risk) SV&IV Rk (see Risk) Stock (see Risk) Click trade below for Options Analysis. (see Risk) Stock Price (see Risk) ATM IV - This is the latest At-The-Money Implied Volatility using the time frame

7 specified in General Settings. High ATM IV - This is the highest ATM implied volatility of the option using the historical data time length specified in General Settings. Low ATM IV - This is the lowest ATM implied volatility of the option using the historical data time length specified in General Settings. SV- This is the latest statistical volatility using the time frame specified in General Settings. Buy IV Sell IV - These are the IV values of the option prices of those legs if a trade has a buy and a sell component. If you click this column to sort the following is sorted: Sort = 100*(Sell IV - Buy IV)/Buy IV The UP sort shows the largest percentage difference between the Sell IV and the Buy IV. The DOWN sort shows the smallest percentage difference between the Sell IV and the Buy IV. Model Profit - The Optionetics Platinum software uses an option mathematical model ( the Bjerksund Stensland American option model) to fairly price the option. The Optionetics Platinum software computes what the profit of the option strategy would be using the math model option prices. If this "model profit" is close to the profit of 0.0 when the trade is formed ( a new trade should start with no profit ), we are confident the data are good. You can specify in Find Trades III how much "Model Profit" you are willing to allow in the search engine. Breakeven Rk (see Risk) Stock (see Risk) Click trade below for Options Analysis.. (see Risk) Stock Price (see Risk) Downside Breakeven -This is the lowest stock price where the trade breakevens. Upside Breakeven -This is the highest stock price where the trade breakevens. Percent stock Change to Upside Breakeven -This is how much the stock price needs to change using percentages to get to the upside breakeven point. Percent Stock Change to Downside Breakeven -This is how much the stock price needs to change using percentages to get to the downside breakeven point. Number of SVs to Upside Breakeven - Let E be the upside breakeven stock price. Let P be the current stock close. Let v be the annual statistical (historical) volatility of the stock price expressed as a fraction (i.e., v in percent is dividing by 100). Let t be the time to expiration of the earliest expiring leg expressed in years. Then the number of SVs the stock must move to reach the upside breakeven is given by (Natenberg) number of standard deviations = ln(e/p)/(v*sqrt(t)) where ln - natural log sqrt - square root The algorithm looks at both the upside and downside breakevens to find the closest breakeven above the stock close. If neither are above the stock close then n/a is reported, i.e. not applicable. Number of SVs to Downside Breakeven - Let E be the downside breakeven stock price. Let P be the current stock close. Let v be the annual statistical (historical) volatility of the stock price expressed as a fraction (i.e., v in percent is dividing by 100). Let t be the time to expiration of the earliest expiring leg expressed in years. Then the number of SVs the stock must move to reach the downside breakeven is given by (Natenberg) number of standard deviations = abs( ln(e/p)/(v*sqrt(t)) ) where abs - take the absolute value ln - natural log sqrt - square root The algorithm looks at both the upside and downside breakevens to find the closest breakeven below the stock close. If neither are below the stock close then n/a is reported, i.e. not applicable. Return Rate to Expiration (%) - This algorithm assumes the stock price remains at the current close to expiration of the earlist option leg. The gain or loss is computed at expiration. This gain or loss is the intersection of the current stock close with the black expiration line in the Risk Graph. The gain or loss is expressed as a fraction of the current stock price close and then is converted to its annual rate of return based on days remaining to the earliest expiration leg. The result is the rate of return of the option if nothing changes. Options which are short usually have a positive rate of return while options that are long usually have a negative rate of return. This ranker is excellent at evaluating near term covered calls. It can also be used for sell calls, sell puts, short straddles, short butterflies etc... Below is the rate of return equation behind this ranker: Rate Of Return = 100*( ExpirationProfit(Loss)@StockClose / StockClose ) * (365/(DaysToExpiration));

8 My Views -This has all the above view options plus these selections: Strategies -This is a description of the option trade such as "Buy Call". Projected Price - If you turn on the projected stock price option in Find Trades III, the resulting price movement used by the searcher is shown in this column. If the projection is not turned on, the projected price will match the Stock Price column price.