Members Only: Trading Front Month Options. Front Month Options What is the difference between front month options and LEAPS? When is it best to trade.

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Presentation transcript:

Members Only: Trading Front Month Options

Front Month Options What is the difference between front month options and LEAPS? When is it best to trade front month options? What can they be used for? How does risk change in the front month?

Front Month Options What is the difference between front month options and LEAPS? Extrinsic Value vs. Intrinsic value AAPL is trading at $590 What is the difference between the May 590 Calls and the Jan 590 Calls?

Front Month Options What is the difference between front month options and LEAPS? Gamma: All GAMMAS are going to be higher in the weekly options than standard options with the ATM gamma representing the highest gamma. Gamma will also move higher as time until expiration decreases. Gamma is HIGHEST ATM and closest to expiration

Front Month Options What is the difference between front month options and LEAPS? Theta: All THETA is going to be higher in the weekly options than the standard options. Remember that time decay is not linear and as the time to expiration decreases time decay increases at an exponential rate. The fact that weeklys are always close to expiration this effect is especially noticeable. This also means weeklys can be very risky.

Front Month Options When is it best to trade front month options? We look at weekly options or front month options to trade ANY catalyst event We use weekly options to day trade using the cloud Front month and weekly options can also be traded against LEAPS in diagonal or horizontal spreads

Front Month Options What can they be used for? Front month and weekly options are hands down the best way to calculate measured move targets. They give the “cleanest” targets. While a trader could use longer dated options to calculate targets but they don’t work as well. Why is this?

Front Month Options Calculating Measured Move Targets: Example: TSLA was trading around $200 ahead of their earnings report on 5/7/2015 The May 9 th Weekly 200 Straddle was trading around $21.00 Using this straddle price I calculated an upside target of $ and a downside target of $ After my analysis I decided TSLA had a better chance of selling off than rallying

Front Month Options Calculating Measured Move Targets: My trade: I bought the TSLA May 9 th Put Flys for $1.40 Risk: $140 per 1 lot Reward: $860 per 1 lot Breakeven: $ and $ How did this play out?

Front Month Options TSLA as Example of Time Decay: The stock stayed in a tight range on Friday, the stock opened at $ and the spread was worth around $5.00. The stock hovered around $180 for most of the day and the spread continued to increase in value into the close. Time decay is not linear!

Front Month Options Questions?