Equity Options – Option Trading Strategies Video 33 part 5



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Let’s go back and take a look at that again. They’re predicting a fairly small range in which this stock is going to be moving, based on its current volatility. That’s assuming, of course, that the volatility remains the same. It could change. Right now, with the volatility extremely low, it looks like this stock moves around quite a bit.

This may not be a bad choice. All things being equal, we want those with a profit index as high as possible, with lowest historical volatility. Right now, Netflix looks like it’s probably going to be the best choice, because the profit index is relatively high. The range index is the highest of all of the issues that we’ve looked at. The cost index is at the lowest end of the range of all the ones that we’ve looked at. And it’s currently at a historical low probability.

That is a very good candidate. Our second candidate would probably be AVP, Avon Products. Historical low volatility, relatively high range index, relatively low cost. It gives us a nice profit index.

We would eliminate some of these other candidates. Usually, I use this last column here to cross out the ones that I am not interested in. I would cross that [QQQs] out immediately, because of the high volatility. I would cross out that [JNPR], because of the high volatility. That is out, that is out, and that is out.

Then, I would go back again and look at this one, which has a relatively small profit range, and profit index. I would eliminate that issue. Just by the process of elimination, go down through each one of these, to determine which one we should probably be doing.

Disney is in the middle of its range, so it could come down a little bit, but the range index is fairly low, at 0.24. The cost index is a little bit high, so I would eliminate that.

Now, we have three potential issues here. Netflix, Avon Products, and Clear Channel Communications. As I noticed on this chart, Clear Channel Communications actually seems to move around quite a bit. Let’s take a look at the last 60 days and 60 minutes of this chart.

You can see, over a 60-day period, this has not moved at all. That’s why the profit index has dropped down to 0.51. Over a 60-day period… Remember, we only have 20 days to expiration. The reason that we’re using the front-month option again is because we want the highest Gamma we can possibly get, to affect our Delta. The more our Delta changes, the more opportunities we’re going to have to scalp this stock.

If we take a look at this, for the past 60 days, you can see that the stock has hardly moved at all. I believe that’s because they received some sort of bid-out offer, some sort of takeover offer. That’s why the stock has not moved.

We’re going to immediately eliminate that option. Let’s take a look at AVP again. We need to look at it over the last 60 days, on a 60-minute chart. This has moved relatively well. It’s been up and down. It looks like it’s moved within a channel, and we may have had a number of opportunities over the last 60 days, in order to actually scalp this stock.

That is a fairly decent option here. That is a fairly good candidate.

We’ll take a look at Netflix. You can also see that it has had a fairly good number of opportunities, both up and down, over the past 60 days, on a 60-minute chart, for opportunities for scalping this stock, based on the movement of the stock itself.

I would say our number one candidate is Netflix. Actually, it also has the highest profit index. The profit index really does work. Once you plug in your numbers, I would look at the profit index first. Then I would go over the historical volatility, to make sure that it’s relatively low, compared to the stock over the past few years.

If we do look at the chart again… Let’s go back to our 5-year chart, on a daily basis. You can see that the volatility is at a relatively low spot. That means that, if volatility does increase, that we will have additional opportunities to profit, from this particular issue.

If you were going to do more than one stock for Gamma Scalping, you might want to pick both Avon Products, as well as Netflix. The reason for that is, like I mentioned – we’ve been in a bear market for several months now. It’s extremely hard to find issues that have low historical volatility, along with a good range at which it’s moving around. In order to increase profits, you may actually want to do both of these issues.

There’s nothing to say that you can’t do both, and you can’t do more than one Gamma Scalping issue at a time. The thing that you have to keep in mind is whether or not you have sufficient capital.

If you’re purchasing 10 contracts on a straddle, that means that you’re buying 10 calls, and 10 puts. The maximum number of issues that you could be holding while Gamma Scalping these issues is 1000 shares of the stock that you’re going to be doing. If you take Netflix, for example, at $27.51, you could end up holding approximately $27,000 worth of the stock, not including margin.

On margin, it would be about $13,000 or so. With Avon Products, you’re talking $36.37 a share, multiplied by 1000 shares. That’s $36,000. If you were to do both of these, that’s about $18,000 in margin, and $13,000 in margin. You would need close to $31,000, if you had to, at any one time, hold each of these stocks.

Both of those look like very good candidates. We’ll do further analysis, just prior to entering into any type of Gamma Scalping position. This will be the subject of the very next video.

This is how we use the Gamma Scalping analysis tool. I’ve also included a sheet, which we will talk about next time, which will help us determine exactly what our profit and loss is, as we go into this trading session.

You can see that this Gamma Scalping analysis tool really does help you quantify and judge exactly which issues you should be Gamma Scalping, and which you shouldn’t be. It’s more than helpful, if you do have this sheet. It’s proprietary, remember. It’s for Tradeology customers and members only. Please do not share it with anyone.

Alright, guys. That’s it for today. Trade with confidence.

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