This webinar was recorded on May 23, 2019
You can download the slides here
.
Jacob Mintz, Chief Analyst of Cabot Options Trader and Cabot Options Trader Pro talked about:
- How to choose which expiration and strike to buy when trading calls and puts
- How to make money trading options in up, down, and sideways markets
- Why buying calls is sometimes better than buying the stock
- Plus, 2 hot trades
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Webinar Transcript:
[00:00:05] Hello and welcome to today’s Cabot Wealth webinar -- 6 Tips for Making Money Trading Options plus 2 hot trades now.
[00:00:12] I’m your host Chris Preston chief analyst of the Cabot Wealth Daily. Advisory and managing editor here at Commonwealth network with me today is Jacob Mintz our options expert and chief analyst of Cabot Options Trader and Cabot Options Trader Pro investment advisoies.
[00:00:32] Today, Jacob will tell you how to choose which expiration and strike to buy when trading calls and puts. How to make money trading options in any market environment. Why buying calls can be better than buying an actual stock. And of course he’ll reveal two options trades he’s recommending right now.
[00:00:49] This is an interactive webinar which means we’ll be fielding your questions after Jacob’s presentation. So if you have a question feel free to ask it at any time. And we’ll try to get to as many of them as time allows. Once Jacob wraps up his presentation. Just keep in mind that we cannot offer advice in regards to your own personal investing situation or portfolio.
[00:01:10] First let me introduce Jacob. Jacob is a professional options trader. Using his proprietary option scans, Jacob creates and manages positions in equities based on risk/reward and volatility expectations. Jacob developed his proprietary risk management system while spending more than a decade as an options market maker at a top tier options trading company in Chicago, trading on the famed Chicago Board of Options Exchange. He joined cabin in 2013 and his subscribers have been quite happy ever since. In the last two months alone. Jacob has closed out trades that have earned returns of two hundred forty eight percent in Z-scaler. That’s 2 4 8. 48 percent and on semiconductor. Twenty seven percent in JD dot com and just four days and 20 percent in Microsoft in just three days. Mind you those trades have all come at a time when the market has been essentially flat. And. Maybe. Less than flat after today. Long story short Jacob knows what he’s talking about when it comes to options so I’ll step aside and let him do just that. Jacob, take it away.
[00:02:23] Thanks for that warm introduction Chris. This presentation webinar is six tips for making money trading options. Plus two hot trades now.
[00:02:36] Before I get started I do want to say if you have any questions please don’t hesitate to submit them. I really enjoy the education component of my role at Cabin Option Trader. So I really want you to walk away from this presentation with a better understanding about options and options trading.
[00:02:56] What we’re here to discuss today are six tips for making money trading options. Some of those topics will be, why you shouldn’t be afraid to trade options, how to find the best stocks and options, learn to choose the right strike price when buying Calls and Puts, how to choose which expiration when you’re buying Calls and Puts, how to Make Money in a sideways market, and, a recommendation to learn new advanced strategies.
[00:03:20] I’m gonna dive into each one of those one by one.
[00:03:24] Tip number one. Don’t be afraid to trade options. If you’re somebody who’s just been buying stocks for their whole life it’s time to trade options. With the help of myself, I can lead you in the right direction about how to learn about options. And to be a part of every investor’s portfolio. Some of the common myths about options which scare a lot of people away are -- options trading is too confusing. Offers trading is too risky. Flat out false. In fact options oftentimes reduce your risk. And you need a lot of money to trade options. Again that is flat out.
[00:03:56] I’m going to dive into each one of these to tell you why these are myths. That you should start to trade options.
[00:04:02] First things first. Options trading is too confusing. I think a lot of people agree with this: “Actually it is rocket science.” I’m telling you right now it is not rocket science. I’m a normal guy just like you. I’m pretty good at math but I didn’t go to a Harvard or M.I.T. I went to Miami of Ohio. I’m a normal guy but I spent the time learning about how to create options and now -- it can be very easy for a lot of people.
[00:04:26] I’ve taken a lot of beginner options traders to intermediate level traders and. Intermediate level traders to professionals. If you want to put in the time options trading is not too confusing.
[00:04:38] Myth number two -- options trading is too risky. Again flat out false. In my trading we don’t walk up to the craps table just roll the dice hoping and praying. Instead of just trading. If you put on the right risk/reward trades it actually reduces your risk. I’m gonna go into it into a little more detail on that in one of my training examples in a little bit.
[00:05:03] Next up -- you need a lot of money to trade options again. That’s flat out false. The power of options is that it gives you great leverage. You could have an account with five hundred to a thousand dollars in it and that is enough to get market leverage to stocks that you have interest in buying or in shorting. You don’t need hundreds of thousands of dollars to trade. And again I’m gonna go and do a little bit more detail about how that is the case.
[00:05:29] So my story and my system. When I graduated from Miami of Ohio I went down to the trading floor and stood next to trading floor legends. And they taught me about options. After a year of learning I was put on a trading badge and I became a market maker on the CBOE - the Chicago Board of Options Exchange. As a market maker it was my job, all day every day, to make markets in the stocks that were in my trading crowd. So if you want to buy a Facebook call, you call your broker Morgan Stanley let’s say, and you would come into my crowd and you would say where can I buy these calls and I would tell in the price and we would create the transaction.
[00:06:06] Not only was I trading against yourself but I was also trading against the top hedge funds and institutions in the world. Goldman Sachs would come running into my crowd and they would buy thousands and thousands of calls. As a market maker it was my job to sell those. Well, after I had been run over by them, buying Facebook calls ahead of an analyst upgrade or when they started buying 10000 calls of stock XYZ which never traded and then next thing you know that stock was taken over and I’m on the wrong side of that tree. I’m like why am I fighting the smartest traders in the world? These hedge funds and institutions, maybe they know what’s going on. So instead of selling those calls. I was like “Well now I should be buying the calls with them.” They’re not risking millions of millions of dollars buying these calls they don’t have some insider information or some clue as to what’s coming.
[00:07:00] So tip number two follow the smart money.
[00:07:04] If I’m at home and I’m just watching the option trades that go across the screen which is public knowledge. And I follow into a similar trade to get a similar exposure to a trade that a big hedge fund and institution is putting on. If I’m just filing public information that’s not insider trading. Now, they may be trading on insider information. They may know an upgrade is coming or a takeover is coming. That’s illegal. But Jacob at home, watching these trades go across the ticker. That is public information and there’s nothing wrong with me putting on similar trades as those hedge funds and institutions.
[00:07:41] It’s a bull market right now. Well, maybe not today in the last couple days. But, in general taking a step back, it’s been a bull market for many years. So we’re going to talk about how to buy call options. Assuming that it’s still a bull market we want to know how to buy call options to get upside exposure. So, we’re going to talk about call options and I’m going to give a couple of definitions and then once I give those definitions I’m going to break them down into greater detail. So, don’t be overwhelmed by the definition. We will go into specific examples.
[00:08:11] A call option gives its holder the right to buy 100 shares of stock at the strike price anytime prior to the options expiration date. Each one equity option contract represents one hundred shares of the underlying stock. So what does that mean? If we buy one call, that represents the right to buy 100 shares of the underlying stock. It’s a multiplier of one hundred. So if we buy two calls, that represents two hundred shares the underlying stock. So if we buy two Facebook calls for example, that gives us the right to buy two hundred shares of Facebook at a future date. And again we’re to go into detail about what that actually means.
[00:08:50] Stepping back to the unusual call activity and how I follow smart money in the trades. The last couple weeks there’s been a buyer of Zillow calls. On May 16th there was a buyer fourteen thousand Zillow June forty five calls for forty five cents. The stock at 39. That’s an intriguing trade. The buyer is buying fourteen thousand calls which is a pretty big order in Zillow. And they’re buying calls that are six dollars away from the current stock price.
[00:09:17] The next day they bought thirty five hundred Zillow June forty five calls for 40 cents. And then Tuesday of this week they bought twenty five hundred on Zillow August 40 calls for five 10 stock and forty one and so you could see the stock is already rising and they’re buying more calls. On Tuesday they also bought 3000 Zillow August forty five calls for two eight. Stock of 41. So this is the type of activity that I gets me kind of excited because a trader is buying calls repeatedly. And even as the stock is going higher. They’re buying even more and more calls. They clearly want to get into the into a position Zillow.
[00:09:50] With that information in mind, now we got to figure out which strike to buy and which expiration cycle to buy.
[00:09:57] TIP 3. When you’re evaluating options to buy you need to play the right odds. What do I mean by this? Zillow stock trades at forty one and a half. I ask myself. What are the odds that Zillow will go from forty one and a half to fifty five? I don’t think they’re that great. That’s a pretty big move for Zillow. So, my big picture takeaway if you’re playing the right odds, you don’t want to be buying calls. that are very far out of the money. What I mean by out of the money is strike prices that are 10 15 20 percent away from the current stock price.
[00:10:32] Stepping back really where the stock will go from forty one and a half to forty five. Well I think those odds are much better right because for Zillow to go up three and half dollars. That’s not that big of a move. However for it to go up dramatically more than that. That’s a bigger leap. .
[00:10:49] My takeaway is buy calls that are at the money, so right where the stock is trading or slightly out of the money.
[00:10:58] Tip 4. Time is critical. When you’re evaluating an option position that you might buy.
[00:11:07] Again I say what are the odds that Zillow will go from forty one and a half to forty five in a week or two. I don’t think those odds are great and it’s really hard to time the market as well as individual stocks especially in this current. market environment where there’s Chinese trade where the market could be up or down. 1 percent on any given day.
[00:11:26] So it’s really hard to predict price movement in the short term. And, the options world does have weekly options which are options that expire each week.
[00:11:37] My big takeaway is it’s hard to predict price so don’t buy weekly options more times than not. Weekly options will go to zero. Just because it’s hard to predict where the stock will go in a week. However, what are the odds Zillow will go from forty one and half to forty five or six months? Well. I think those odds are much better because that gives us six months. for the stock could go up three and a half dollars. That’s a more likely outcome that it going up three and a half dollars in a week or two. You got to play the right odds.
[00:12:06] My hot trade number one for the day. Now I’m not necessarily putting this trade on right now but it is something I definitely on my radar because the market is a little weak today but this is definitely on my radar. 5 to open the Zillow. November forty five Calls for five dollars or less.
[00:12:26] So as we’re talking about before I’m looking at an option that’s six months out. So. November. And at the forty five strike. That’s how I kind of walk my way through the thought process on how to evaluate a call position. I want to give myself some time for the position to work. I don’t want to go too far out of the money.
[00:12:42] So what are the risks in buying this call? The potential loss for the holder of an option is limited to the initial premium paid for the contract. In this case if you buy one call the most you can lose on the Zillow call is a premium paid for five hundred dollars per call purchase. The option was worth five dollars for buying. Now because it’s a multiplier of one hundred. That actually is five hundred dollars. The most we can possibly lose on this call position.
[00:13:08] You can see five hundred dollars is not, the risk is defined at that five hundred dollars so when people say options are so risky, well you can lose money, yes. But in this case the risk is defined to five hundred dollars. And that’s the case on any call buy or put buy. The most you can lose is the premium paid.
[00:13:29] So the power of options.Instead of paying four thousand one hundred and fifty dollars to buy one hundred shares of Zillow you can pay five hundred dollars for the opportunity to buy a hundred shares. That’s a pretty significant discount compared to four thousand one or fifty dollars.
[00:13:46] Tip number five. You need to know how to make money in any market.
[00:13:50] Well 2019 got off to a really hot start. The markets mostly chop around in the last month or so to be able to make money when the market is shopping around. I’m going to show you the short volatility trades called a covered call or buy right.
[00:14:06] So again, we give you a big definition and then I’ll break it down so don’t get overwhelmed with this definition.
[00:14:13] A coverd call rights coonsists of buying or owning a stock and selling a call option on that stock. You can write, or sell, one call on each hundred shares your stock you own. Your short often position is covered by the stock and thus is a very conservative strategy and requires no margin.
[00:14:31] So if you own one hundred shares of stock let’s just say Exxon Mobile. You can sell one call against that hundred shares of stock you. If you own two hundred shares you could sell to calls. I’m going to give you another definition and we’ll eventually break this down what some of the scenarios are of owning a covered call.
[00:14:49] A call option gives the owner the right but not the obligation to buy 100 shares of the underlying stock at a specified price. So that’s if you own a call. But because we’re selling a call we are selling the right to the buyer of the call the right to buy 100 shares of our stock from us. If a stock is trading at or below the strike price on the expiration date the owner of the call will exercise the right and buy the stock away from you.
[00:15:16] However if the stock is below the strike price they will not exercise the right to buy their stock. Like I said we’ll go into details on this.
[00:15:24] So why sell covered calls? Covered calls are a great way to create yield because you get paid to hang on stocks already owned. For example going back to Exxon. Exxon has gone nowhere for a long time. So if you own that stock you could sell covered calls against it to create a yield every single month. A way to get paid to hold on to a stock.
[00:15:45] It’s also a way to sell volatility as you bet on the stock not moving dramatically. If a stock is moving around moving around moving around the price of options will be very expensive. And you could sell that volatility, that expensive option, betting that the stock will stop moving. Its considered a very conservative strategy - Covered Calls.
[00:16:04] Selling these covered calls does not increase your risk. In fact it reduces your cost basis and we’re going to go Into that a little bit more.
[00:16:12] Why not take covered calls? Don’t sell a covered call if you think a stock will rise dramatically and want to participate in the stock’s rise. If you think a stock like Twilio is going to go much higher you don’t want necessarily sell covered calls. As if the stock runs significantly higher, you could lose that stock position so don’t sell covered calls if you think the stock is going to rise dramatically.
[00:16:37] So which stocks are best to sell covered calls on? Dividend stocks are very popular facts to sell covered calls on because you get to collect the dividend yield as well as the covered call yield. It’s a way of getting paid twice. Stocks that aren’t moving kind of like the Exxon Mobile example I’ve been using as well as the strongest stocks. Covered calls are a short volatility to mildly bullish positions. So oftentimes, we will sell covered calls on strong stocks.
[00:17:08] For example Cabot Growth Investor and Cabot Top Ten Trader editor Mike Cintolo sends out emails every week with the best charts and the best the strongest stocks in the market right now. Well oftentimes I will recommend covered calls based on those strong stocks.
[00:17:29] A recent recommendation of Mike’s was PayPal Holdings. So, trade number two. Now the prices moved on the on this trade. I had to submit this Powerpoint at some point and unfortunately the market’s moving quite dramatically so the stock and asset prices aren’t still at these levels but for this purpose this will work. Trade is Five PayPal stock at one twelve and a half and sell to open the July 1 15 call for three dollars and fifty cents. That would be the trade and we’re a breakdown of various scenarios in this trade.
[00:18:03] Here’s the break even. Price you paid per share is one twelve and a half. When you sell the call you’ve collected that three dollars and fifty cent premium. So that Three fifty is actually three hundred fifty dollars because. Each one call. Is a multiplier of one hundred. So you sell a call for three dollars 50 cents. That’s actually three hundred fifty dollars. This drops your break even on that trade 2 1 0 9. So as you can see PayPal can fall as low as 1 0 9 and you won’t lose any money.
[00:18:31] This is a very conservative strategy that lowers your cost basis. Once the trade is on what are the scenarios?
[00:18:38] The good scenario is that doesn’t move. If that stock doesn’t move for that month till July expiration you get to keep your stock position and the option will expire worthless. Why will it expire worthless? Because, if the stock’s trading at 1 Twelve and a half and somebody has bought the right to buy the stock from you at one time they want to exercise the right to buy from one team. Why? Because they could just buy the stock or one twelve and a half if they want. For that reason that call will expire worthless.
[00:19:07] If that’s the case you get to keep the 350 other option premium. And your profit is three point fifty dollars divided by your total risk in the position and you create a yield of three point to one percent even as the stock hasn’t moved.
[00:19:20] Best case scenario: some stock appreciation. So PayPal rises to 114 seventy five let’s say. Or just under the one fifteen strike price. You get to keep your stock. As a trader will not exercise his right to buy the stock from you at 115. As well as the stock gains because the stock went from one to 12 and a half to one fourteen twenty five. As well as the option premium. Is a great scenario.
[00:19:42] Collecting that to two hundred twenty five dollars. Because the stock went from one twelve and a half to one fourteen seventy five. Plus the option premium of three hundred fifty dollars. You divide that by the total dollars at risk and so now you have a yield of five point to seven percent in just one month time.
[00:20:01] Here’s the OK scenario. The stock explodes higher. If PayPal is above 115 on July expiration your PayPal stock is called away. Why. Because the trader will exercise his right to buy PayPal and 115 from you. But you get to keep the stock appreciation as well as the option premium. So you will make two hundred dollars on the stock rising. Plus, three hundred fifty dollers from the call premium that you collected again divided by the total dollars at risk. Now you have a yield of five point five percent.
[00:20:38] The downside is you will miss out if people lose a 120 125 130. You will no longer own the stock as the person who bought the call from you when you sold it will exercise his right to buy the stock from at 115.
[00:20:54] What’s the worst case scenario? Worst case scenario for a covered call strategy for the stock to drop dramatically. So in this situation the trader still collects the option premium. This is similar to just any stock purchase. You don’t want the stock to go down. Because you will lose money on the stock purchase. However, because you sold the covered call it lowered your break even on that stock purchas. And. Like I showed in that example, we lowered our break even to 1 0 9. The stocks falls to 109, we are at a breakeven. If you just outright bought the stock at 1 Twelve and a half. Then you would actually be down three and half dollars if you didn’t sell that call.
[00:21:33] Tip Number Six. Try new advanced strategies.
[00:21:38] Once you’ve learned how to buy calls. Execute covered calls buy right. Now it’s time to step up the game and one of those strategies that I really like in bull markets is a hedge fund favorite called a bull risk reversal.
[00:21:53] In a bull risk reversal you are buying a call which is bullish as well as selling a put which is bullish. These are two bullish positions combined. When you buy that call you are paying a premium as money is coming out of your account. But when you sell a put you actually collect a premium so there’s a way to lower your costs based on the trade. But does ramp up the risk and I’ll go into a little bit more detail on that in the example.
[00:22:24] So we look at Apple, which two days ago was trading at 185 -- again these prices moved a little bit but we had to put in the PowerPoint presentation and move forward. So Apple trading at one eighty five. One way you could do this full risk reversal is you would buy the Apple Aug. 1 90 call for eight dollars so you have eight hundred dollars coming out of your account. At the same time you could sell the Apple August 1 seventy put for 8 dollars. Net cost is zero dollars. So it’s a way to get. Upside exposure at no cost.
[00:22:57] Now I will say that is risk industry. Because when you sell a put. So. In this case the Apple August 175 put. You are giving the buyer of the put the right to exercise his right to sell you the stock. So if Apple goes below 175 you are on the hook to buy the stock at one seventy five. Now, you may have a lot of interest in doing that with the factory at one eighty five. You might say I’m willing to buy Apple 10 lower. I’ll buy it at one sevent five. Selling puts does put a little more risk into the trade, but if you’re willing to buy the stock at a certain level then selling that put. Isn’t such a bad thing.
[00:23:36] So here’s the chart on this bull risk reversal. If Apple closes between one seventy five and one 90 on expiration, net net you will made or lost no money. The call will expire worthless. And the put will expire worthless. To the downside if Apple goes below one seventy five you will be on the hook to buy a hundred shares at once only five. Again that’s not necessarily the worst situation because it’s. buying at a discount. But as you can see in the graph on the left side the graph at 170 you will be out five hundred dollars. At one sixty five you’ll be down a thousand dollars. But that’s similar to if you had just bought the stock at one eighty five.
[00:24:15] Now to the upside if Apple goes significantly higher back to its recent highs of one ninety five, two hundred, 205 you could see you have a lot of upside potential and you actually put this trade on at no cost.
[00:24:28] That’s the end of the presentation and I’m going to roll it back to Chris.
[00:24:37] Yeah we’re going into questions in just a minute. Thanks Jacob. I’m going to give. Jacob a minute to catch his breath before he starts answering your questions.
[00:24:47] Meantime let me tell you how you can sign up for his advisory. If you like whatl you’ve heard from Jacob so far today and are interested in giving options a try. If you’re if you’re relatively new to it or wanting to improve your profits or if you’re a veteran trader you can subscribe to Cabot Options Trader by going to Cabotwealth.com/COT.
[00:25:17] What you get are Jacob’s trade recommendations in real time. Weekly market updates that include includes analysis of market trends and the status of current trends. Regular options education. A guide to Jacob’s options trading strategies and direct e-mail access to Jacob for any questions you might have.
[00:25:35] And remember, you get access to the kinds of returns I mentioned at the top. Two hundred forty eight percent and Zscalar. 48 percent in ON Semiconductor. 27 percent JD.com in four days. 20 percent and Microsoft in three days. And again those are all just trades from the last couple of months.
[00:25:55] If those sound like the kind of returns you’re looking for I highly recommend you subscribe to Jacob’s advisory now, again by going to Cabotwealth.com/COT.
[00:26:06] Now let’s get to your questions and so you’ve been waiting patiently. See I’ll start with Elizabeth. Elizabeth asks: Jacob how can you tell if an institution is opening a new trade or just hedging an existing position.
[00:26:28] There isn’t a hundred percent, sure fire way of knowing but I can get it pretty darn close. I can get close to 98, 99 percent. If let’s say we’re looking at stock X Y Z. And they trade no options, like zero. If somebody starts buying five thousand calls let’s say the market’s two dollar bid at two dollars and fifty cents. And they buy 5000 calls for two dollars 50 cents. Well, that’s pretty obvious to me that they’re buying those calls because they’re paying the offer. If they buy them again then I can tell that they’re starting to build a position.
[00:27:01] Also there’s something called open interest which is again public knowledge that shows how, if a position is new or not. It’s a little bit tougher in a stock like Bank of America or General Electric which trades millions hundreds or thousands of options every single day. But, in most stocks, I could get a pretty good feel for if a position is opening based on the open interests or not.
[00:27:30] Thanks for the question.
[00:27:31] Let’s move to Russell. Russell asks: Do you have. A minimum free premium that you have in looking for your options picks?
[00:27:48] I don’t have a hard fast rule on that. Mostly my options picks tend to be a dollar and a half or more. Mostly because like I said I don’t buy weekly options or options that are expiring in the next week or two or three. I tend to buy options calls and books that are expiring three to 12 months out in time. And those options tend to be a little bit more expensive.
[00:28:11] I would say that the range of the price of options that we execute are probably in the dollar and a half to a dollar range with. Probably the average right in the middle probably about four or five dollars is the average trade. In terms of selling options, going the other way. I don’t sell an option that’s worth less than 25 or 30 cents. It’s just not worth it to give up the upside to a covered call if I’m selling it an upside call versus stock position.
[00:28:46] Here’s a question from Ken. Ken asks: What are your guidelines or rules for when to sell, or take partial profits?
[00:28:58] My general rule and it depends on the situation, if I have a position that works very well, very fast I tend to take off half the position at 20 to 25 percent profit. In a market like this one it really pays to take partial profit. In a wild bull market then I will have made a mistake if I take off half the trade for a 20 25 percent profit. But at the end of the day you can’t go broke taking profits at 20 25 percent or you would really have to screw up to do so. So, that’s my general. I do that basically because it’s hard to let winning options trades really really run. And what I found is that I’m able to trick myself into not selling the balance to the position if I have profits on half the position in the bank.
[00:29:52] If I have 20-25 percent profits in the bank on half a position I will let a position run for as long as I can. Recently that Zscalar position I can’t remember the exact details back that we bought the call for four dollars that ran as high as 20 dollars. And I just keep raising my mental stop on the second half of the position after I’ve already taken partial profit. I keep raising my mental stop and I don’t sell because I already have profits in the bank.
[00:30:20] Question from Amherst. Amherst asks: Do you have guidance on selling calls when they are falling?
[00:30:33] I’m not exactly sure what they’re asking but I guess maybe they’re talking about owning a call position and if the stock is falling and so are the calls. I guess it depends on the general strength of both the stock as well as the market.
[00:30:51] Right now because the market is weakening I’m more apt to sell a position that isn’t working. But it really depends on the size of the portfolio. I only have four right now and I’m more likely to give them each position a little more rope. If my portfolio is full of 10 stocks then yes I will be selling one or two every couple days to lower my overall portfolio at risk.
[00:31:29] Here’s another one. Do you tend to focus more on directional trades i.e. debit, or do you also do non directional trades, i.e. credit trades.
[00:31:42] I manage two portfolios at Cabot. There’s Cabot Options Trader, and in Cabot Options Trader we buy calls, buy puts and sell covered calls. Buying calls and buying points our debit type of positions.
[00:32:00] Cabot Options Trader Pro I can buy calls, buy puts and excute covered calls the same as Cabot Options Trader but at the Pro service I can also sell bull put spreads, debit call spreads, iron condors. At Cabot Options Trader Pro I’m able to trade any strategy that I think fits the portfolio. Last month we sold a bull put spread in Lululemon shortly after the company beat earnings and we collected a 15 percent yield on that bull puts spread in about five weeks. So yes in Cabot Options Trader Pro we can trade at anything in my trading repetoire.
[00:32:40] Here’s a question from a current subscriber: says great tread, a recent trade on SE Limited (SE). How do you plan on managing this winning trade from here.
[00:32:58] We bought calls an SE about a month ago. There had been day after day after day of bullish option positioning and I was like Well it’s time to get in. At the same time the stock was looking great even as the market was chopping around. So that’s kind of my ideal setup. Day after day after day of bullish option positioning as well as a stock that’s performing well.
[00:33:22] The stock actually jumped over 20 percent yesterday on earnings and we have a position that is up around 150 percent today. Right now, and subject to change depending on if the market gets really ugly I’m going to give this position as much rope as possible. We’re already up 150 percent but at some point I will set a mental stop below. The stock looks great and I firmly believe that if the market can regain its footing of sorts SE will be a big market leader and has the potential to be a monster home run for us.
[00:33:55] So for the time being I’m going to try give this as much rope as possible but at the same time I’m going to monitor how these hedge funds and institutions are managing their positions. Are they still buying calls or are they starting to bail on the position? If they’re still buying calls I will probably stay with it for quite some time.
[00:34:12] And by the way those are the SE long calls are up over 200 percent I believe as this subscriber just pointed out so that’s one I failed to mention it. Sorry.
[00:34:26] The question from Rahul: Where do you generally get the information about the option flow? In Zillow’s example where did you see someone was buying fourteen thousand calls.
[00:34:42] I have a trading tool called Livevol. I don’t have a relationshi. I’m not promoting them. That’s who I use. I’ve set up some proprietary scanning tools that allow me to look for the biggest option trades in the market you know. I’m not paying attention to sombody buys a thousand Bank of America calls because that’s not really that big of a deal. But I if I see a thousand or two thousand Zillow calls that’ll pop up on my screen and that’s how I can see that that information.
[00:35:16] Livevol cost, at the lowest level I think it costs three or four hundred dollars a month. I pay much more and I’ve set up some scans that that allow me to look for that stuff. But at Cabot Options Trader I do all that work for you. I’m literally staring at that screen all day long looking for those of trade. And if those trades start popping up and piling up in stocks I have interest in I will either send a stock on a watch or a trade alert to my readers. And every single day I send my readers at 8:30 in the morning Eastern they get the biggest hedge fund and institutional trades made each day. So basically I do the work for you. You get that full list every morning at eight thirty and you can evaluate if you want to put on similar positions if I’m not necessarily recommending the trades but oftentimes I do recommend rates based on that list.
[00:36:18] All right, here’s one. LVS is down quite a bit in the last month. What call would you recommend today?
[00:36:30] LVS is a position that we put on shortly before earnings last month. Luckily we took a quick profit in it which is exactly why we do take profits from time to time. Since then the stock has been hit unfortunately with this China stuff so it’s become a bit of a problem for our position. If I were to adjust the position or add a little bit more risk of the position -- the stock is trading at fifty six and a half approximately, I’d buy the fifty seven and a half calls. Those are just a dollar out of the money and again I’d probably buy a call with about six months until their expiration. But right now I’m not buying anything with China exposure. We’ll wait to see how this whole thing plays out. I’m not going to add more risk to the portfolio. Especially in that space.
[00:37:27] OK. Let’s see. When you buy long calls you mentioned buying OTM or slightly OTM -- out of the money -- what is the minimum delta you look for. Excuse me at the moment.
[00:37:51] Delta refers to how quickly the stock will move for every dollar that the stock moves so that the if I buy a call with a 50 Delta and the stock moves up a dollar that call will move up 50 cents. It’s also a great way of determining the odds that call a finish in the money. So I tend to look at calls that are 50 Delta to thirty-five at the low end. I don’t buy any 10 or 15 Delta option as those options are unlikely to work and they’re unlikely to move very much.
[00:38:24] So 50 to thirty five is the general range.
[00:38:29] A question from Haroon. Haroon asks: Why don’t you include SPX index options in your trading?
[00:38:43] Those options tend to cost a fortune. So I’m trying to keep the premium risk relatively minimal. So I recommend if we trade the indexes I tend to recommend options in the spider SPY or the QQQ because those options will cost anywhere between a dollar two to seven dollars like I was saying and you could choose then how many of those options you want to buy in it’s basically the exact same thing as trading the SPX just at a fraction of the cost.
[00:39:19] Let’s see. Question from Mark. Do you give advice on current holdings, example I own Ford which was up 35 percent but is taking a beating this month. Would this be a candidate for a covered call?
[00:39:32] Again I mentioned Jacob can’t get into your personal portfolio but just as a general question is that type of stock a candidate for a covered call.
[00:39:44] Yeah in general that’s the type of slow of slow and steady stock where you could just sell covered calls, every single month and collect premiums. If you sell a call that earns 2 percent this month. And 2 percent the next month and 2 percent and 2 percent as the stocks aren’t really going anywhere. Well at the end the year you have a yield of twenty four percent. I mean that’s just an example but Ford’s been chopping around and going nowhere for years and you would have really lowered your cost basis in a stock like Ford or General Motors or you know those slow and steady stocks. The premiums don’t look big but if you just keep selling calls every single month and accumulating that yield those numbers add up pretty quick and you can really lower your cost based on those trades.
[00:40:29] Here’s a question: Is there option order flow a lot of times you can tell from that which way the market might be headed, from reading the VIX and things like that, is there anything that is concerning within option order flow right now that makes you think you might be headed for a deeper correction?
[00:41:01] Right now. No. I tend to be pretty cautious but right now option order flow is very mixed. There’s certainly a lot of put buying but there’s tons of call buying and the Vix before this presentation started is only at 17 and a half. Which really isn’t like a panic level. Above 20, twenty five and really exploding higher is where I get really concerned. But right now the VIX is just hanging out.
[00:41:25] And optino order flow, while there is big put buying it’s not like big put buying in the leaders. They’re not buying ten thousand puts in Amazon, ten thousand points an Apple, ten thousand puts in the real market leaders. I’m not saying that activity. For the time being, and this can change very fast, I’m not terribly concerned about the market. Subject to change, subject to tweets, subject to trade headlines changing it really. So no. There are not the dark clouds on the horizon. As of now.
[00:41:59] Question from Jim. How many positions should the average investor manage at any point in time.
[00:42:08] That depends on your experience and how how you can mentally handle a lot of positions. My general rule for what I tell Cabot Options Traders and they can choose to listen this or not, is I tend to tell them to depending on market conditions put three to six percent of your options trading capital in each position. So in a wild bull market we’ll pop up to 10 to 15 options positions. If things get really hairy we’ll drop that to two or three options positions.
[00:42:40] It depends on the market. Depends on those individual stocks. As I’m raising stops on positions and I have partial profits in the bank I’m willing to add to the portfolio but you know if the markets falling apart we will de-risk quite quickly. So it’s really up to you based on your risk tolerance as well as your thoughts on the market.
[00:43:10] So here’s one. What is the range of time out in the future that you buy?
[00:43:17] So in general I like calls and puts three to nine months out in time. But at the same time there are leap options which are options that expire a year or two out in time. We rarely buy those calls but last year I saw a ton of Union Pacific symbol UNP call buying that were calls that were expiring a year and a half out in time I think it was and we bought a position that also expired a year and a half out in time I think we had like hundred percent profit on the position.
[00:43:51] Oftentimes I drive my stock recommendations my option picks based on the expiration cycle that the big traders -- the hedge funds and institutions are buying. If I see them buying calls that are expiring in three months I could go in three months. If they’re buying optionts that expiring in a year and a half and I like the risk/reward then I will go out to a year and a half as well. Just kinda depends on your time horizon.
[00:44:15] I wrote today to my subscribers about potential trade opportunities in the OIH, the oil services sector, as well as Freeport Mack brand not necessarily buying these trades but the calls expiring in seven months are just so cheap and these sectors have been so hit that I thought the risk reward and buying calls seven months out in time is becoming slightly intriguing if these stocks can find some support at these levels.
[00:44:43] Well thanks Jacob and thank you all for joining us today and for all the great questions and a lot of good ones today. First of all Jacob do you have any last words any final words of wisdom?
[00:44:58] Don’t hesitate to email me. Like I said I really enjoy the options education component of my role a Cabot Options Trader and I make the picks for you, I write the options education articles for you, and I help manage the positions so don’t hesitate to send me any of your questions.
[00:45:18] And, as I mentioned we’ll be back next month as you see on the screen here on June 19th at 2:00 p.m. again to be in eastern with another webinar next webinar this time featuring Cabot CEO and Chief Investment Strategist Tim Lutts. It’s on making money investing in the exloding marijuana industry. You can sign up by going to Cabot wealth dot com slash. Webinars.
[00:45:56] Also we’re holding our seventh annual Cabot Wealth Summit in Salem Massachusetts August 14th through the 16th this year. It’s a chance for you to meet other individual investors like yourself, meet all of our Cabot analysts, hear their latest investment advice and stock recommendations and enjoy summer in historic Salem Massachusetts. It’s a great event.
[00:46:27] If you’re interested you can register also by going to the cabotwealth.com website. That does it for us and for Jacob Mintz and the entire Cabot Wealth Network team, I’m Chris Preston. We’ll see you next time.