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Trader Talk on Options and Futures

Site Administrator | November 4, 2011

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Trader Talk – 11/3/2011

Jared Levy –jaredalevy.com

Michael Thomsett –michaelthomsett.com

Bill Costarides –dtitrader.com

How long did it take you to find a trading method that worked consistently for you?

Jared – Being a market maker is a whole different ordeal, when I left the floor in the early 2000s, it became a different fight.  I had to change my thinking into more directional thinking.  A good year and a half later, I found a philosophy that was consistent.  But nothing is really consistent , you have to change and adapt constantly.  One strategy isn’t going to work forever.  You need to adapt with the market.

Michael – It constantly has to change, I’ve been trading options for close to 35 years and am constantly reproaching the market.  I don’t think that its safe to settle down into one strategy that works.  Your one strategy may serve as a base for other things that you do.

Bill – I’m another 35 year veteran.  Started at Merrill in the 70s.  Started as a portfolio manager with no particular strategy.  Some years made money, some years lost money.  Then I discovered the afterhours market and became fascinated with that market.  And realized that as the global economies grew, the afterhours would become more and more important. Now my hours are from 3:30 CT until 6:00 or 6:30 am/CT.  Not only do I focus on after hours, I trade just the e-minis at night.

What strategies do you feel are best to hedge a portfolio in a bear market?

Bill – To me the best and most pure way is with the S&P futures.  You know they’re going to move with the market. I’m a little partial to the S&P futures and its one of the best and purest ways to hedge your portfolio.  As the market changes its profile, you have an opportunity to trade accordingly in the afterhours market.

Michael – Lately I’ve been looking at the leveraged ETFs.  Not only for what they do in bear or bull markets or both, but the kind of options trades you can do in those.  Those kind of things have to be kind of folded into your strategy so you can take advantage of what the market is doing right now.

Jared – In my book, I spend a lot of time talking about hedging.  One of the biggest advantages of hedging is taking it a step further is portfolio beta waiting.  You can use the amount of shares you hold and also the beta of the amount of shares you hold and that will give you the amount you need to hedge on the S&P.  The best hedge is to learning options, use a collar.  If you’re along stock person, and you own stock, buy a down side put and finance that with the sell of an upside call for a net credit.

If you had to pick one trade idea, long or short term, what would it be?

Jared – There are two of them I’ll give.  CNQR – Congra Technologies.  Its way over-priced, and I am looking to sell the Nov. 50/55 Call Spread.  Target is around 41 to 42 dollars.  LinkedIn is my other idea.  Getting in short again, ahead of earnings.  It could be a great opportunity for a short.  I remain cautious to the upside.

Bill – We’re out of the market by 5 or 6 in the morning, but I would look at shorting the Euro between 141 and 142, and then the Bonds, maybe in February, the 30 year or 10 year bond looks great on the short side.

Michael – Short term strategy I would like to share, the dividend collar, open a collar by buying 100 shares, sell a call, buy a put, do this so you’ll be the stock holder of record when the dividend hits.  What happens here is that the short call will be exercised.  If you do this you can earn 1% every month, which is 12% per year on the dividend gain.  The main thing here is that the dividend collar will get you a monthly yield and limits the market risk of owning the shares.

Michael – What is a scenario where you would use in the money covered calls vs. out of the money covered calls?

As a general rule, you want to write out of the money covered calls.  You want to have time decay to work for you.  When you have a large carry over loss, you don’t care whether you have long term or short term gains.  Writing a deep in the money call, you own a lot of premium.  If the stock remains high, that stock becomes a profit.

Jared – What advice would you give a struggling options trader?

The biggest problem is that people try to take on more than they understand.  If you can really get the gest of calls and puts and their behavior.  Paper trade!  Test out your theories, test out your strategies.  What you might want to do is start with strategies that will have higher probability.  Maybe buy at the money or in the money that is already statistically probable.  You may not make as much money as you would with other strategies, but you will have more consistent wins.  Don’t rush anything is my best advice.

Bill – Were you able to trade last night with all the volatility in the night market?

The night market for years had a reputation for being boring and quiet, its anything but that now.  We generally use a 2 point stop, and we’ve had to widen our stops a little bit.  Volatility presents opportunity.  During the Asian session (5 pm ct to midnight) we’ll see the Asian market rally initially which leads the S&P higher as well.  If we see weakness in Asia, we will see weakness in the ES futures.  We tend to use that as well as support and resistance levels to enter trades with a fairly tight stop given the volatility.

Recording:  Trading Education

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