Welcome back Swimmers.

Let's take a look at the Alcoa calendar trade we were following going into the company's earnings announcement on July 8th. I will be using thinkBack to look at a couple of key points we talked about before. Let's refresh our memories. First, we said we can expect implied volatility to rise going into the earnings date on both the front-month July and the back-month August. Second, we said that we could buy the calendar for .89 a couple of days in advance of the earnings date and looked at the Analyze tab to see how far the stock could move in either direction in order for us to keep our money on the trade. So, using the thinkBack tab, let's take a look at the implied volatilities at the close on July 8th prior to the earnings announcement.

As we can see the implied volatilities of both months are decidedly higher than where they were from the first post. In all fairness, the market has sold off pushing implied volatility levels higher in most stocks, but Alcoa is around the same level price-wise that it was from my first post. The rise in implied volatility is due to the uncertainty of the earnings and future revenue announcements. As we stated above, the calendar value prior to the earnings date was .89, meaning that for $89 you could buy the July/August 32.50 calendar. Also remember that a long calendar position is a short gamma, long vega position that maximizes in value if the stock is resting at your short July strike at expiration. However, you didn't need to hold the position till expiration to make money on this trade. Let's take a look at the value of that calendar on Friday July 11th. The value of that same calendar is now 1.15, with the stock trading $34, so we made about a 28% return in a matter of a week. That is not bad, and given the market sell-off recently, any gain is a good gain. Happy trading everyone!

Joe Mazzola

thinkorswim, Inc. and its registered employee, Joe Mazzola, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Writing on July 3rd. Happy Independence Day and welcome back to the Daily Swim. As I wrote about before, earnings season will soon be upon us with July 8th marking the beginning of the season and the announcement of Alcoa (AA) earnings. Hopefully, you have been tracking the front month implied volatility since my last post when July volatility was trading 52%. As I noted before, implied volatility tends to increase as the earnings date approaches. If we look at the July volatility as of July 3rd, AA front month volatility is now trading 64% with five days to go until earnings. So, what does this mean to you as traders and how can you make money off of the move in volatility?

One strategy that I like to implement when trading single stock volatility in products such as Alcoa (AA) is to buy the nearest back month options, in this case August, about one week before the earnings announcement. Even though this strategy will result in paying decay and add some delta risk, for that one week, the amount of decay is usually minimal as the implied volatility increases. Remember, volatility is uncertainty. Uncertainty about Alcoa's earnings will keep the implied volatility inflated, as we can see from the 12% increase over the past month. Once I now own the August options, I wait until the day before earnings to sell the corresponding strike in the front month, July, to take advantage of the difference in implied volatilities between the two months. In essence, I have legged myself into a calendar spread while working for better execution by waiting until the July premium is fully inflated. This usually occurs the day before or the day of earnings. You can make this a directional play by choosing the call or put calendar. For instance, if you believe Alcoa stock will sell off after the earnings announcement, then the put calendar would be a better play. In our case, for Alcoa, the July/August 30 put calendar would represent a bearish bias. I prefer to place my earnings calendars at the at-the-money strike if I do not have a bearish or bullish bias. Just remember that calendars are short gamma positions, so large moves in the underlying are detrimental to the value of the calendar.

In order to see how far Alcoa can move in our at-the-money calendar example to capture a profit, I have created a simulated trade using the thinkorswim Analyze Tab. As you can see, the calendar, as of July 3rd, would cost about $88 per one lot. In my example, I have chosen to buy five calendars for a total debit of $440. Now as we move closer to the earnings date, we could leg into the calendar to reduce that cost. Our maximum profit occurs if the stock settles at $32.50, however, we continue to make money as long as Alcoa stays between our Break Even points of $30.20 and $35.22. If you believe that this will be the case, then this might be a strategy to consider.

Let's keep an eye on Alcoa to see how it performs over the next week. Until then, best of luck trading.

Joe Mazzola

thinkorswim, Inc. and its registered employee, Joe Mazzola, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Option traders rely on the VIX for a number of reasons. One of those reasons is to help them spot tops and bottoms in the market. When the market hits a bottom, the VIX is usually trading at an extreme. For example, on March 17th the VIX blew through 33 while the SPX found a bottom at 1275. On January 22nd the VIX blew through 33 again while the SPX again found a bottom at 1275. In both examples the market began to rally afterward.

So what is missing now? The market continues to head downward while the VIX trades around 23. Don't get me wrong, a 23 VIX does allow you to sell some pretty good premium which is what we like to do, but if you're trying to time the bottom, a blow off in the VIX sure would help in doing just that.
Successful Trading!
thinkorswim, Inc. does not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.

I get asked numerous questions when on the road about strike selection. For the most part, most swimmers understand the criteria of putting on a trade, but they don't understand which strikes to choose. Thus, I have come up with some of my own rules that I implement when I trade. You have to understand that we are premium sellers. That is the basis of how we make our money and how we put probability on our side. Once you understand that and truly believe it, the rest becomes easier.

First, I go to the Trade Tab on the TOS platform to set my information layouts to Probability of Expiring and Delta to determine which strike I want to sell. Personally, I look to sell the 35 delta, or namely 35% Probability of Expiring, and I buy the 25% Probability of Expiring, or 25 delta options against them for protection. In this instance, I have chosen the XLE 92/94 call vertical to sell. This usually involves me selling a two-strike wide call or put vertical, depending upon my directional bias. Yes, even though I am an anti-chartite, I do have directional biases. Why do I choose two-strike wide intervals as opposed to one-strike wide? For me, it comes down to the amount of credit, or premium, that I am selling. Usually, if I am comfortable selling 10 one-strike wide verticals, then I will sell 5 two-strike wide verticals to collect approximately the same premium while saving on commissions. Don't tell anybody I told you that.

I must, however, be aware that I will feel some "heat" on this position before it expires. This is known as Probability of Touching, and is usually twice the value of the Probability of Expiring. In my example up above, if my short strike has a Probability of Expiring of 35%, then the stock has approximately a 70% chance of touching my short strike before expiration. But remember, stocks move throughout the life of your positions. The only guarantee I will make you is this: If you always have a stop price set at your short strike, you will lose money! If this isn't clear, then go back to the Probability of Touching to see that 70% of the time your stop will be activated.

With that in mind, we have eliminated an adjustment many people make, Stop Orders. I don't like them, and I don't use them. Remember, your vertical acts as a defined risk order with a natural stop in it, your long strike. So, why add another stop on top of that especially when you now know how to read the Probability of Touching number.

Best of luck trading Swimmers. Next week I will return to my Alcoa example to show you a trade I like to make going into earnings season.

thinkorswim, Inc. and its registered employee, Joe Mazzola, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Just My Opinion 6.29.08

The overall market looks bad and all the news is so bearish. It seems every morning we wake up to something else that some company has been hiding or is coming clean on. CEO's say one thing, two weeks later do another, then two weeks after that, most are gone. There is no trust in most of the financial stocks management. That is with good reason considering what has happened in the last year and until they prove otherwise, that will probably continue. It doesn't matter what most of them say. The public, or financial analyst for that matter, doesn't know what to believe from them.

We are coming up to the end of the quarter and conventional thinking always says that the market gets marked up for the end of the quarter. However, I have seen many large down moves on the last day of a quarter. I don't know what is going to happen this time, but I do believe we are getting close to a tradable bottom, and a washout on the last day of this quarter would be a good opportunity to buy for a trade for the short term. The rallies in this down market could be very large and fast, but I don't believe that they will hold. I am more inclined to be patient and sell large up moves, not on the first day, but a couple days into a rally. There isn't any reason right now for the market to head higher in a meaningful way. So in my opinion, I think we will get a chance to buy a washout some time this week and sell sometime in the next two weeks for a trade. I can see possibly leaning to the short side if the rally is big enough. I am not a short seller at the current levels. Of course, this is all dependent upon no major news events.

Also, the OPEC president said he can see oil at $170 by year's end and blames the FED for that because of the weak dollar. Most thought oil was a sale at $100 and now most think that oil can't go down. I think we are getting close to a large down move in oil, but ideally I would like to see a large up move and reversal in one day. I also believe the Dollar will rally against the Euro. This is more of a longer-term call. The European bank is only concerned with fighting inflation and will probably raise rates at their next meeting. However, they have bigger financial problems that raising rates will ultimately fuel, negating any benefits in their fight against inflation. When this all starts to play out, I believe the Dollar will rally against the Euro. I have no opinion about other currencies.

Stay nimble in this market, admit when you are wrong and take your losses like you take your gains because the market really doesn't care what we think. We want to always have capital to trade the next trade, or day depending upon what we want to do. Make sure that you are allocating funds that you feel comfortable risking. You never want to be forced out of a position before it has time to do what you had thought it would do for you simply because you are uncomfortable with the amount you have at risk at any given time.

One more thing. Barron's had an article about GM and a couple of convertable bonds this weekend. They look very interesting to me. I just wanted to give you a heads up on these and you should do your own homework and investigate these on your own. I am not an expert on convertable bonds and I will be asking questions before I decide if I am going to buy any. SNY

Neither thinkorswim, Inc. nor Scott Snyder, (employee of thinkorswim Advisors dba RED Option) solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Every three months I get excited and ready for the commencement of earnings season, the highly anticipated time of the year when company fortunes rise and fall according to a little number we call EPS. Actually, if we take a deeper look into stock price fluctuations following earnings releases, the pivotal data has not been current EPS, but rather future revenue guidance.

Recent market volatility (the S&P 500 sold off 45 points on Fri. June 6th, accompanied with poorer jobs data and higher energy prices) could signal another volatile earnings season to come. Does anybody remember January through early April when the VIX traded in the 30's? Much of that volatility can be attributed to a disappointing earnings season. Alcoa symbol (AA) typically signals the beginning of the next earnings season, as it is the first Dow symbol to report. Look for the company to release results on July 7th. Currently, the implied volatility in AA July options is around 52%. I would imagine that volatility will rise as we get closer to the earnings date.

As we get closer to that date, I will offer up to you some basic earnings trading strategies. I will show you what traders look for in terms of gauging implied volatility, calendar spreads, straddles, and strangles. So, stay tuned...

Happy Trading

thinkorswim, Inc. and its registered employee, Joe Mazzola, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

I have to come clean and admit that I occasionally like a little excitement in my trading. Sure I love to make money and be profitable with high probability spreads that have defined risk, but that can be dull. And I don't mind dull to make money. Understand I use these strategies (Verticals, Iron Condors) continually as my revenue generator so that I can take very small pieces of capital and get kooky with them. When I say kooky I mean that I still monitor and define my risks, but I may implements strategies I know have a relatively low probability of success. Often times for me this can mean BUYING options or straddles in products I know are unpredictable. I am not a very frequent option buyer as you can tell. Fans of Seinfeld can relate in this way: Remember when George decided he was going to do the opposite of whatever he thought he should do and the results were terrific? He promptly told a woman he was bald, unemployed and lived at home and she fell for him. My point is that we all get rules and probabilities and guidelines for success and understand we need to put the probabilities in our favor, but once in a while it is fun to just let loose. Again, very small amounts of capital and limited risk with this!

The instruments one can use to fulfill those needs of excitement are often easy to find. Watch the news or read the paper and it becomes evident fairly quickly where the real flyers in the market are. Finding them is easy, but now what do we do with them? You are wise enough to realize if something has the potential to really take off and be profitable, generally it also has some inherently large risks. That is the reason we play in limited risk and limited capital in these areas.

Let's talk about some recent volatile instruments, commodities, oil, financials, currencies, solars and a smattering of some sector ETF's. I am not going to prescribe anything in particular so don't hold your breath. I will tell you I have played with Google, FSLR, LEH, and BSC (ouch) C, YHOO and some Oil and Currency ETF's. What have I done? I have bought small amounts of stock, options, sold naked puts, sold verticals and calendars all in products I would normally avoid. Notice everything above has limited risk and I watch it diligently.

The problem with trading in this manner? First, it may not be successful. Second, these are products you may fully understand but don't often trade. Experience in a product is huge and that is why many successful traders use the same products consistently. Finally, what frequently happens is that folks dabble small in a flyer and if they are profitable they start over allocating to that product. You can guess how that turns out.

Remember the most important aspect of this article. This is your SMALL play money and not meant to be a staple of your trading strategy. Scratch those itches and play, but be smart!

thinkorswim, Inc. and its registered employee, Steve Quirk, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

On May 19 two things occurred. First, the SPX hit its head on one of the oldest technical indicators the market has, the 200 day moving average. Many traders and institutional investors consider an underlying bullish when it is trading above its 200 day and not until then. Secondly, that same day the VIX hit a support level at 16 and didn't break it. Any time you have the SPX smacking a resistance level and the VIX hitting a support level, roll out the yellow "proceed with caution" tape.

Now Memorial Day has come and gone and summer is upon us. What does this mean for the market? Lighter volume and unpredictable movement. News tends to be the main driver which is very hard to trade. So exactly how would you trade it? Look for high-probability, delta-neutral strategies that an investor to make money on positive theta decay. Until the market does rally with conviction above that 200 day moving average, maintain a neutral posture and sit back and let theta decay make money. Be warned . . . it's like watching paint dry . . . but at least its green paint!

Successful Trading!

thinkorswim, Inc. does not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.

Have you ever looked at a stock or ETF and thought to yourself, "I think that's going higher"? The follow up question is then "How do I play the move"? There is no perfect answer to that last question, but this post offers a possibility.

Many option traders, especially those who are new to the profession, have an inclination to simply buy calls if they are bullish. In theory this can be a very profitable way to trade. However professionals are aware of a couple of things that give them an advantage over the amateurs.

1. Often what one think will happen simply does not
2. Even if correct, buyers bleed from the negative effects of time erosion

The flexibility of the options market allows an investor to combine strategies that reflect a directional bias while reducing directional risk and offering profits through time decay. One of the many combinations one might consider is a diagonal spread.

Let's take a look at an example of a bull call diagonal using the Chinese ETF, FXI as the underlying product. See the chart below.

After a five-month period of price decline, the stock begins showing signs of life. In the past month the stock has seen the formation of new higher highs and higher lows. One could easily expect prices to go higher from here as this trend continues.

To create a bull diagonal spread, start with the purchase of a longer dated in-the-money option. Look at calls within a delta range of .60 - .70 that are 3-6 months out. These options carry a lot of leverage. That's good if the stock goes up, bad if the stock goes down. They also carry the negative expense of time decay.

To off set some of the directional risk and actually turn the time decay into a money maker, one might sell front-month calls with a delta in the .30 - .40 range. By doing this all the profit potential of a long vertical is created. The trade can become worth the difference between the strikes. This trade also has the availability of "rolling out" by selling calendar spreads at the short strikes every month. This provides income and lowers the cost basis. In short the diagonal makes money if the stock goes up and pays money through time decay. Sounds like a good combination on a bullish stock, doesn't it?

thinkorswim, Inc. does not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.

I believe we may have finally found the tipping point for oil and the economy. I must admit I expected both consumer and business demand for petroleum products to decrease long before the $135 barrel of oil. But the Consumers just shrugged it off and pushed on until this week. It seems the upward pressure at the pump finally caught up with the market and it is apparent this market is too fragile to withstand a rapidly increasing surcharge on most transactions. The market reacted by shedding a good chunk of its two month recovery this week as is displayed in the chart of the S&P below. Move over financials, oil is the new villain.

I think the most important aspect of the market to be cognizant of is what the overall market is watching. As I just described above and we discovered last week, the market is watching oil. Sure we all have been feeling the pinch but it seems we only recently let it change our behavior. Why is this important? Because it will dictate the success of your strategies so you need to be aware of the price of oil and understand at what points it dictates market gyrations. On Tuesday oil plunged $3 a barrel and the market had a moderate rally. The more relationships between asset classes you understand the better the chance of profitability. Market goes down, VIX goes up.........Learn to understand these and become aware of what is front and center on the market radar and you are much less likely to be shocked by moves. Remember this though, the market is dynamic and its obsessions can change quickly. I cannot count how many things have been the focal point for the past twenty years I have actively traded: Trade Deficits, Employment Data, Currency, Iraq War (twice), Elections, Terrorism....Just keep your sights on the most important market catalyst and be ready when it dictates changes in your trades.

How can we apply this to our trading? As I have stated in previous articles here I still believe we are stuck in a range-bound market at least through the summer. Barring a significant collapse in the price of oil I think we will not see anything above 1440 in the S&P and a decent level of support around 1360. An effective risk-defined method of profiting from this movement is selling vertical call spreads as we approach the higher end of the scale, and selling vertical put spreads as we retrace toward support. Warning, patience is required for this strategy and you cannot beat yourself up for not selling the top or bottom of the range.

I typically have the best results when I sell them over time and add positions as we continue rallying and repeat the process as we sell off. Good luck and keep your eye on the Pump!

thinkorswim, Inc. and its registered employee, Steve Quirk, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.