Kineo Capital Managing Partner Jim Strugger joins Yahoo Finance Live to discuss options trading amid earnings season and volatility, Tesla, and the outlook for markets.
Video Transcript
BRAD SMITH: Let's turn now to more about options trading as part of our month-long series on the topic. We've covered what they are and the different types that are available. So now let's dive into strategies to make options work for your portfolio. So here's how to trade options during volatility.
Joining us now with more, we've got Jim Strugger, who is the Kineo Capital Managing Partner here. This segment is sponsored by Tasty Trade. Great to have you here with us on set.
JIM STRUGGER: Thank you very much.
BRAD SMITH: So there's actually a different place that you believe a lot of options traders should be starting. Where is that and why?
JIM STRUGGER: Well, I think a lot of people, when they're new to options, think that what you're supposed to do is just buy options. We're going to talk about Tesla. They report earnings after the close Wednesday.
An individual investor, even institutional investors think it was up 23% post-earnings in January. That's going to happen again. Let me run out and buy some calls. Or alternatively, I think Tesla is going to take a dive. Let me buy a bunch of puts.
If you want to build a sustainable option strategy, the reality is, is that the edge is on the side of selling those options, rather than buying them. And that's an important distinction for many investors. I appreciate that you guys are doing this.
I think sort of a few shows for the first time and hopefully educating people. But it's really, really critical for people to understand that. That if you can, especially against, for example, long stock, sell calls, right? In a trade like this, put on a structure that suggests that Tesla isn't going to move in either direction quite as much as the market is pricing in right now. That's what an "iron condor" can do for you.
BRIAN SOZZI: Further break down what an "iron condor" is? And then what are the options-- what is the options market saying about Tesla and earnings?
JIM STRUGGER: Sure. So right now, the options market is pricing about 9% move on earnings. The last eight quarters have been about 7.6%. As I mentioned, in January, it was 23%. So an enormous move. But that was really after Tesla had bottomed out, began to almost double, right?
So that was in that context. What is an "iron condor"? In an "iron condor" what you're doing is you're selling two credit spreads. So I priced this up on Friday, but Tesla is around $186. So what would a structure potentially look like?
We're going to go out to April 28 expiration. That's a week out even though they report this week. So with Tesla around $186, you're going to sell a call spread. And the way we size this up on Friday, we're going to sell a 205, 215 call spread. We sell the 205 call spread. We buy the 215 call spread. Call. Excuse me.
On the other side, we sell the 167.5 strike put and we buy 157.5 strike put. So if you create a payoff, it looks like this. You're basically like this boom, boom, boom, boom, saying that I think Tesla is going to move less than-- in this case, it's about 11% on the upside and 13% on the downside. Anywhere in here, you win.
Now, on the tails, you do lose. But the critical element to this structure is its defined risk. So in the structure as I priced it up, you're paying about $3.10 for this, right? The most you can lose is $6.90. So we're not doing something that creates tails of risk on the extremities.
Where if you ever hear people say, I got my face ripped off in options, the retort should really be I'm sorry to hear that, but unfortunately you don't know what you're doing. Because you've created these tails of risk that can rip your face off in options markets. Here, we're saying number one, for all you people that want to come in and make bets in terms of Tesla exploding one way or the other, have at it. I'm going to sell you those options, right?
And I'm going to structure this so that the price is more contained, number one. And then even if I'm wrong, when I put the trade on, I know exactly how much I can lose. So I don't have this tail exposure, where you result in potentially significant losses.
BRAD SMITH: Even as I was looking at the projected charting of the trade and how it would be effective, what's the difference then even if I was looking at that versus the "iron condor" versus something like a butterfly option that has kind of a similar general move to it. It might be a little bit more long in strategy, I guess. I'm not sure.
JIM STRUGGER: No, it's really the same. The only difference is that instead of selling these put spread call spread out here, you're selling two of the middle strike.
BRAD SMITH: Got it.
JIM STRUGGER: So instead of creating a payoff where I win in here, you're creating a slightly different payoff. My personal preference in a case like this where it's earnings, I'd rather be in an "iron condor" than a butterfly. But in terms of structure, it's defined risk. Butterfly has a defined risk trade and really a short volatility trade as well. Just like the "condor", a slightly different structure.
In the options market, there are innumerable strategies to use. At all times, you're choosing what strategy you want. Some people like a certain strategy for a particular situation. If we're talking about earnings, I want to create a payoff where I'm representing the view that Tesla earnings are going to be-- I don't know. I have no idea what they're going to be. Really, though, that the emotion of the market is going to push implied volatility high enough that I sell these wings in terms of where Tesla will be post earnings, right? And the "iron condor" does that for you.
BRIAN SOZZI: More broadly, as we hear a lot of folks concerned about a second half recession, are you seeing certain trades being put on in the options market that would really pay off big if there is a recession?
JIM STRUGGER: The answer is yes, but you always see those. So we saw those last fall. We saw them late last year. Frankly, we can talk a little bit about spot VIX. Spot VIX is its lowest level since January of last year.
So there are plenty of people staring at VIX, number one, saying it's broken.
BRIAN SOZZI: Volatility index.
JIM STRUGGER: I'm sorry, the volatility index, right? Number one, saying this thing is broken. It's not broken. It's a mathematical construct. It's based on S&P options. There's nothing broken about the S&P 500-- I'm sorry, about the VIX calculation. But plenty of people look at VIX here as sort of almost 16 handle and say new bull market, right?
We would actually take the other side of that. And really, I think, important point about VIX is if you scan out, VIX came into existence, at least the data, in the early 1990s. We have gone through periods of structurally high and structurally low volatility. We are since the beginning-- since January 2020, COVID shock, in a period of structurally high volatility. That means the floor for VIX has been 15, 16 and nothing below that.
For some of us that have been around a while, we remember when VIX touched eight back in the day, right? Those are boring times. I would argue that what VIX is signaling now is it's simply at a trough. The duration of these historical cycles usually 5.5, six years, we're just over three years into this, where a market has sustained this underlying bid to volatility, which is just saying that we see structural risk in the market. And so I would argue that we're more around a trough now, not about to see VIX move materially lower.
And then so as markets move, as you said, to increasingly price in the likelihood of a recession, you would expect to see volatility begin to move up. And when you see that volatility begin to move up is when you'll see some big players come in and put in these outsize, whether S&P put structures or whether it's long volatility structures. That's when, I think, you'll begin to see much more outsized positioning for volatility to be higher and equity markets to be lower.
BRIAN SOZZI: Real interesting. And I really appreciate. Jim Strugger, Kineo Capital Managing Partner, good to see you. Appreciate it.
JIM STRUGGER: Thank you very much.
"strategy" - Google News
April 17, 2023 at 09:16PM
https://ift.tt/OVI6xZn
Options trading: What is an ‘iron condor’ strategy? - Yahoo Finance
"strategy" - Google News
https://ift.tt/yI2Ae5B
https://ift.tt/RC9AXvr
Bagikan Berita Ini
0 Response to "Options trading: What is an ‘iron condor’ strategy? - Yahoo Finance"
Post a Comment