3 Ways to Trade Expiration
Stocks continue to trade through volatile ranges as we near the January expiration. DIS has been a bit more tame after the flush to $98 and I'd like to look at a few ways we can play it into expiration.
Good evening everyone, this is Henry Gambell with SimplerOptions.com, and in today's free video, I want to share a couple of ways that we can play Disney into the monthly expiration.
I felt that Disney was a good example of an expiration style trade for several reasons, so let's go ahead and discuss those. One of the first things that I think you want to point out with Disney--the thing that anybody who runs fib work probably would have told you--the first thing is this was coming down into this area of support mainly because it was such a large swing, so if you take the low that we put in here on August 24th, and run that up to the clear and obvious major high that was made several weeks after that, the six way retracement of this move came in at $101.71. It's the first area than most fib analysts would have told you. This is an important area to look to for support.
Well, since it's broken, obviously it's not an area that we can point to any longer. However, the bullish trend will still have one last area that I would give it for hope against this $96.56, on pointing out that there is a small level of support that you could vouch for, but it is definitely breaking down. Then you take that, and think about: how far are you from your 21 EMA? This is an area that you tend to see markets revert to, generally speaking, a good area to think about if you want to take a trade, be it bullish or bearish, making that decision at the 21 EMA is usually a good point to do it. So I'm thinking in the back of my mind, even though it is kind of breaking down, it could absolutely retrace back up to $105. Ultimately, you're left with very difficult technical decisions, and it all comes back to the idea that you do not have to have perfect technical setups to trade options that are on expiration. We go through the basic technicals that I like to look at. Ultimately point out, this is a very mixed chart. When it's mixed, technically, what can you come in and find valuable inside the option chain? In this case, if you drop into the January 16s, these are the contracts that will expire this Friday, and have four days of life left. The thing that stands out to me the most is that you have some very stand-out open interest here on $100 calls. So what this tells me is that whoever sold these has a vested interest in Disney staying below $100. If you flip that type of thought process and then look at $100 puts, notice you have 21,000 open, so, that is leaning maybe a little bit more towards the idea that whoever sold those puts has a vested interest in those expiring worthless.
So when you have these mixed forces coming into play, what does that ultimately end you with? It ends with the idea that the stock that trade very close to $100 to try and suck the premium out of both sides of these options. So once we get through that, how do we start setting up the trade? The three things that I would look at in most of these situations, now, these things won't apply perfect to it, but just give me a couple ideas how to play it.
The first one I will look to, is to sell a deep and wide one month. It will actually be a couple more strikes. I like to try to sell these $1 - $3 wide, and then take in a $1 credit if at all possible. Yes, this is selling this a bit In The Money, but if we're going to look for those $100 puts to expire worthless, and we get $1 for that, I think it's a fine way to play it.
Another way of looking at doing this: Buy a call side butterfly. I use very similar logic here. I'm going to start out pricing at $3 wide, and try to buy it somewhere near $1. If I can buy it in the lower third of the width of these strikes, that will cause me to try to sell it somewhere within the range that is 2/3, and that is the way I like to manage those butterflies. So that is one way to play it to the upside, as well.
One other strategy doesn't quite fit into what I would like to see here, but we're going to talk about some of the premium video with Amazon and a few others, but if you can take in a credit on an unbalanced butterfly, I think that is also a very interesting strategy to use at this time and point. Because you're faced with a situation--I'm gonna illustrate this real quick--of course, this right here priced going as a debit, which I'm not really as big of a fan of. But we're facing a situation where several of these markets have sold off hard. We're looking at the idea that they could bounce. However, we could also trade sideways, or flush. With this type of a strategy, the flush is what you have to be careful about. We'll talk about that more in the premium video. But if you can do a strategy like this on Amazon, or anything else that revolves around a key psychological strike, then what you're going to be able to do is to really do well. If the underlying trades sideways and pins, and if we do get the short covering rally and things burst to the upside, that initial credit you took in will still go into your account. I don't like those as much for a debit in this environment, but with expiration and the chance of a short covering rally, I think playing them for credit makes a lot of sense. So. Those are three of the strategies that I'll be using as we move into the monthly expiration. See you guys at the next free video!