Wednesday, April 1, 2015
Seifert, Profiting from Weekly Options
At the book’s core are four basic weekly trades—long call or put, credit spread, risk reversal, and backspread (1 x 2). Seifert explains when to initiate them and how to manage them. For instance, higher-priced stocks don’t lend themselves to the outright purchase of a call or put or to a backspread. “Once you move to the higher-priced stocks, you must go to the synthetic in order to overcome the premium. Although the option model works the same for higher-priced and lower-priced stocks, the dollar risk comes into play, and since our goal is to minimize the dollar risk and maximize our leverage, you must use the risk reversal on high-priced stocks.” (p. 113)
He analyzes how the trader should deal with these four types of option positions in varying market conditions—in a congestion phase, a trending phase, and a blowoff phase. To take but a single example, you could sell a bullish credit spread in a congested market, especially at a double bottom. You’re looking for a reward/risk ratio of approximately 2/3. “If you are more aggressive, you could consider the 60/40 [delta] spread and see if you can do it ‘Vega neutral.’” (p. 140) If the market rallies after you put your trade on, you can do nothing and allow it to expire worthless or you can roll it up. To play defense, you can sell another credit spread on the other side of the market, turning your initial position into an iron condor.
Seifert’s vocabulary is sometimes idiosyncratic, so the reader has to pay close attention early on or risk having to go back for remedial education.
Profiting from Weekly Options is not the most obvious place to begin an options education even though it assumes no previous knowledge. But those seeking to capitalize on the growing weekly options market will find it a worthwhile addition to their trading library.