Are the big swings in this market this week causing doubt as to what trades you should be placing?
I have heard from numerous traders just over the last few days that are frustrated with the big volatility that seems to come out of nowhere these days. As options traders, we have the unique ability to handle this volatility better than any other market out there.
Using the flexibility that options offer us, we are able to react to any type of market condition that is thrown our way.
We don’t have to shoot for the home run trades all the time. There are cases where putting on a trade with a higher probability of success is worth sacrificing the big profit potential that can come with trading long calls and puts.
Netflix Put Spread
To give you an example of how we do this, we are going to take a look at selling a Put Spread on NFLX for this week’s Options Trade Of The Week.
NFLX is one of the most oversold stocks in the market right now. It hasn’t had any type of bounce higher in the last few months. As a result, we are looking at a chart of NFLX that is due for a move off the lows.
With that in mind, we want to take a look at a bullish options trade.
Instead of buying a long call on NFLX that would only make money if the stock moved higher quickly, we are going to take a look at selling a put spread which will give us 5 ways of making money.
- For this trade, we are going to use the October monthly options that have 14 days left to expiration.
- We will be selling the 257.5/255 put spread.
- In other words, we are selling the 257.5 put and buying the 255 put at the same time.
We can sell this spread and collect $.85 or $85 per spread which will be our maximum profit potential. We will be risking $165 per spread to put the trade on which is the most I can lose.
How Do We Make Money
We make money on this trade if the stock moves higher, lower, or sideways as long as the stock price stays above $256.65. The only move that hurts us is a big move lower which we are not expecting because the stock is already oversold.
We also make money from time decay adding up and from volatility decreasing. Having 5 ways of making money on the trade will leave us with a much higher probability of success when compared to buying the outright call option.
If you are looking for more consistency in your performance you will want to take advantage of these different options strategies. In doing so, you will be able to react to a wide range of markets. You don’t have to get frustrated from these volatile moves that we have been seeing lately.
For a complete break down of our Trade Of The Week make sure you review the video below.
You will learn the details of how we are placing trade trade including how we plan on managing it from start to finish.
If you are interested in learning how to find these trades, feel free to contact me directly with any questions you might have. Mike@netpicks.com.