Let's take a look at an options trade that the students in the Primary phase of
The trade is mapped out in our proprietary format that starts at the strategic level and takes a disciplined approach to surface an appropriate options tactic while managing risk in this volatile environment. Many novice retail options traders dive in and immediately head for the tactic without proper planning.
In this trade many of you will notice different terminology than you're used to seeing. For example, many traders don't understand the difference between "strategy" and "tactics."
A strategy is an overarching goal that supports a vision. Examples of financial strategies include: capital preservation, aggressive growth, consistent income generation, and risk management. After determining your investing strategy you can select the proper options tactics to execute that support your strategic objective.
Strategic Mindset: Bullish
An overdue profit-taking selloff of more that 3% in the broad market S&P index held support at the 1,070. This key level is the 50% retracement of the recent move from lows at 1,000 up to 1,130. The VIX fear index also reversed lower signaling the inability to make new relative highs above 28. The overall market has staged a 10% rally off the recent extreme lows with an attempt on the June high point for
the key upside resistance to overcome.
, which closed Thursday at $26.00.
Solid price support sits below at $25 is critical and the IV remains lower than June and July levels even with lower share prices. A pattern of higher lows for the last month sets up for a move to fill in the gap at 28 and move higher. The 29.50 level initial objective is the 50% retracement and a confirmation of a resumption of the December to May uptrend.
Tactic: Long Call
- Buy 1 WFC January 2011 21 call
- Net debit of $6.25 or better
- Risk = $625 .
- Reward = Unlimited
Profit exit: 50% profit, $9.35 profit level. Then reset profit exit to $780 (25%).
Loss exit: 50% of premium; $3.10
Threats to Success: Overall Market Breaks Down.
If the option increases in value from the entry price of $6.25 to a price of $9.35 that is the 50% profit level. At that point raise the stop loss protection to $7.80. If the option goes back down in value, the exit will then be at the 25% profit level to lock in profits.
Close the trade by selling WFC January 2011 21 call for a credit.
Happy hunting and make sure you hedge!
Matthew "Whiz" Buckley is a partner at
a provider of options education and practical applications for options traders of all levels. He is also the founder of Strike Fighter Financial LLC, a business-consulting firm specializing in leadership development, risk management and strategic planning for Fortune 500 companies and related organizations. Buckley flew the F/A-18 Hornet for the U.S. Navy. He's a graduate of TOPGUN, has close to 400 carrier landings and flew 44 combat sorties over southern Iraq. After leaving active duty, he served as a managing director at a Wall Street volatility arbitrage options firm and was a founder and the CEO of a financial media company. He is an internationally recognized speaker and combined his experiences in the military and corporate America in his book "From Sea Level to C Level."