It’s shaping up to be another slow day for traders, as it seems like the market is almost on pause now…
…waiting to see what comes out of this weekend’s G20 Summit, where it’s expected that President Trump and President XI are set to meet and discuss trade.
A couple of other things:
- It’s summer and the end of the quarter: Seasonally it’s a slow period for stocks in terms of volume and volatility
- We’re coming off one of the strongest first-half rallies in the S&P 500 in over two decades: Stocks need to breathe a little
- Earnings season around the corner: Some traders are waiting for earnings before putting on new positions
However, whatever this market decides to do, whether its push an extend the all-time highs, sell-off hard, or trade sideways…
I’ll be ready to profit…
That’s because I all I have to do is go into my bag of options tricks and pull out a strategy that fits the present market condition.
You see, some traders need “their type of market” to make money… However, I chose to exploit them all.
Now, that’s all I’m going to say about that, if you’d like to know EVERYTHING I’m doing with options and HOW… then you’ll want to watch Total Alpha tomorrow (one-night-only, don’t miss it).
That said, before you can run, you must learn how to walk. And when it comes to learning how to trade options, it isn’t any different.
And it all starts with the options chain. Understand how to read it, and it can improve your odds for finding the right trades. Read on to learn more.
How to Find the Right Options to Trade
If you don’t know… when you’re trading options there are a lot of variables.
If you’re bullish on a stock, which call options do you buy?
If you’re bearish on a stock, which put options do you buy?
Should you go far out of the money (OTM) or are at the money (ATM) options a better trade?
Well, when you’re trying to find which options to trade, there’s one tool that simplifies this – the options chain. Basically, this tool lets you see expiration dates and strike prices and quotes for those options.
Some options traders refer to the options chain as the options matrix, because it resembles a mathematical matrix (don’t worry, you don’t need to have a Ph.D in Mathematics to understand the options chain).
I don’t care what you call it… as long as it’s able to show where to find winners like this:
(For the first time ever, I’m going to be revealing all my money making options strategies… register for this live event tomorrow at 8:30 PM EST – and no, I don’t plan on recording it)
Options chains tell us what’s available for optionable stocks and exchange-traded funds (ETFs).
Here’s a look at an options chain of the iShares 20+ Treasury Bond ETF (TLT) from Yahoo Finance (using the Straddle view).
Now, when you look at the options chain below, you’ll see the calls on the left-hand side, the strike price in the middle, and the puts on the right-hand side.
Some stocks and ETFs have options expiration periods that are near term (like one expiring a week from today) and all the way up to a year or two. For example, the options chain below is for the TLT calls and puts expiring this week.
However, you can select different expiration dates depending on your outlook.
For example, if you think TLT could run higher within the next two weeks, you can look to the weekly contracts expiring July 26 to buy yourself some time.
A Look into the Options Chain
When you look at each row (from left to right), you’ll see last price, change, % change, volume, open interest for both calls and puts… and in the middle you have the strike price.
Now, there are a few things to focus on when you’re trying to find the right options contracts to trade… two of them being volume and open interest.
Volume tells you how many contracts have been traded that day. While open interest lets you know the total number of outstanding contracts that have not been settled. In other words, these options positions haven’t been closed out yet.
Basically, these two bits of information tell traders how “liquid” a particular option is… and allows them to the right options trade.
You see, if there’s no open interest in a specific options contract… and there’s low volume… that means no one is really trading that specific strike price. As a rule of thumb, you want to trade options that have at least a few hundred contracts traded, but I prefer when thousands of contracts trade.
That’s why I love trading ETFs like SPY, QQQ, and TLT.
Basically, the more traders in a specific options strike, the easier the execution will be.
Now, let’s take a look at an options chain in SPY (using the thinkorswim platform).
The options in focus are the weekly options expiring on July 1, 2019 (top left corner).
On the left-hand side you’ll see the volume, open interest, bid and ask for the calls.
On the right-hand side, you’ll see the bid and ask, the volume, and open interest for the puts.
In the middle, you’ll see the expiration period and the strike price.
If you look at the 297 calls you’ll see that over 5K contracts traded, and the open interest is over 9,000 contracts. This is a prime example of an options contract that has healthy volume and open interest.
However, for confirmation, you should look at the spread between the bid and ask price. In this case, it’s $0.62 by $0.64, a two-penny difference. I would consider this a competitive spread, and options worth trading if you had an opinion on the SPY.
On the other hand:
Take a look at the options chain for Booking Holdings, formerly known as Priceline, a stock that trades north of $1875 a share.
Now, if you take a look at these options, not too many trades, and the bid/ask spreads are extremely wide.
For example, if you look at the $1880 calls, they are more than $3 wide. Now, you might not think that it’s too bad, given how expensive the stock is.
However, what if there was some news in the stock do you have any idea what would happen to the options?
Given the lack of volume and open interest, you’ll be at the mercy of the market makers. The spreads could get as wide as 10-20 points, making getting out very difficult.
That’s why you want to focus so much on liquidity, and understanding how to read the options chain.
Of course, there is more the options chain has to offer and show you… but like I mentioned earlier, before you can run … you must learn how to walk when it comes to options trading.
Can’t get enough of the discussion?
… then tune in for my event tomorrow… it’s where I reveal ALL my money making options strategies…but don’t get it confused, it’s a one-night-only event and I don’t have any plans to record this.
Source: WeeklyMoneyMultiplier.com | Original Link