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Welcome To Epsilon Options

Posted by on 8:22 pm in Blog | 0 comments

Welcome To Epsilon Options

Welcome to Epsilon Options. We aim to help you, the retail investor, in the art of options trading. What is Epsilon Options? Epsilon Options is an options trading blog and education service provider, started in July 2012. We’ve recently revamped the service, offering more affordable options to those wanting to master the world of options trading. Who runs Epsilon Options? The service is owned and edited by me, Chris Young. I’m British by background but have worked in the US and lately in Australia. My interest in options was first...

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Use The ‘Metal Bar’ Options Pricing Model

Posted by on 7:43 pm in Blog | 0 comments

Use The ‘Metal Bar’ Options Pricing Model

Many options trading beginners struggle with the heavy math jargon involved. All the talk of Deltas, Gamma, implied volatility etc is enough to persuade many who were glad to leave algebra aside at school that options trading is not for them. Well, here’s a simple way of working out where an option will go given a certain change in conditions, without the need for any of this knowledge. It’s actually a throwback to the origins of options pricing models, in the 1970s. So before I get into how this works, a bit of a history lesson…...

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Could Retirees Use Covered Calls To Generate Yield?

Posted by on 6:03 pm in Blog | 0 comments

Could Retirees Use Covered Calls To Generate Yield?

With interest rates still at record lows, could income seekers use covered calls to generate yield? Investment for income used to be a relatively simple affair. You bought a bond, put money into a high interest savings account or bought a share and collected income. For those with significant capital, retirees for example, investment income could supplement or replace a wage or pension. The last few years have changed this. Record low interest rates and the lowering of dividend yields to around the 2% level have meant that many retirement...

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Think Money: Calendar Spreads

Posted by on 12:06 am in Blog | 0 comments

Think Money: Calendar Spreads

As you know Calendar Spreads are a favourite strategy of ours in the sort of low volatility market we’re in now. Think Money magazine’s Spring 2013 has an excellent article on the Calendar Spread. Here’s the link. Have you been reading Think Money? It’s the quarterly magazine of thinkorswim, the options specialist broker now owned by TDAmeritrade. It’s always full of really good stuff – with, of course, a bias towards leading traders around the thinkorswim platform. Best of all it’s free, even to non-ToS...

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Exploit Gold Collapse Using a Directional Calendar Spread

Posted by on 2:06 am in Blog | 2 comments

Exploit Gold Collapse Using a Directional Calendar Spread

Gold Directional Calendar We have used the relative calmness of the gold price in the last 18 months to successful sell LEAP ‘covered calls’ This has been a good strategy for us, but we need to rethink in the short term: Gold (GLD) has been falling dramatically over the past few days. Let’s see if we can exploit any further weakness over the next week with a directional calendar spread explained in our courses. Background Gold was until about 12-18 months ago the darling of the markets, rising to over $1800 in Sep 2011: Gold Price...

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Using an EBAY Backspread To Bet On Economic Strength

Posted by on 10:08 pm in Blog | 0 comments

Using an EBAY Backspread To Bet On Economic Strength

The New Year has seen stock markets around the world rise on the back of encouraging signs for the US economy and a resultant switch from cash into equities by the large market players. Although we are mainly non-directional traders – we like to trade on non movement of stocks and/or volatility – we don’t want to be too left out of any action over the next 3-6 months. But we want to do this in a risk managed and capital efficient way. Let’s look at the options: Vehicle: What stock should we construct our trade around?...

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Use A Broken Wing Butterfly To Capture VXX’s Down Drift

Posted by on 3:51 am in Blog | 2 comments

Use A Broken Wing Butterfly To Capture VXX’s Down Drift

In September I outlined a strategy for hedging against market volatility for little cost; even being paid to do so. This involved buying a longish term VXX call backspread and taking off if VXX hadn’t spiked within 3-4 weeks of expiration. (NB the VXX underwent a 1:4 split in October and so the prices quoted in the article should be multiplied by 4 for a direct comparison with today). Anyone employing this strategy before the recent volatility should have done well. And indeed the following months, with the fiscal cliff looming, may provide...

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Weeklies vs Monthlies

Posted by on 7:23 pm in Blog | 0 comments

Weeklies vs Monthlies

I’ve been asked by a couple of members, by email and through our comments, about whether they should use weekly options rather than monthlies for our hedged put IBM trade. The short answer is that this is a valid strategy but I chose monthly cycles as they are easier to manage and I plan to do several of them (and don’t want everybody having to roll 8 positions, say, every week). But weeklies are potentially more profitable – up to double the amount of premium per month. The issue with them is when the short put goes into...

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Hedged puts vs LEAPs

Posted by on 2:38 am in Blog | 2 comments

Hedged puts vs LEAPs

I’ve been asked a couple of times by members why we have used two different methods, hedged puts on our IBM trade but LEAPs on our recent UNP trade. Both rationales seemed the same: exploit a boring but rising stock over the long term. But we used one method from IBM (selling puts against a long term OTM put) and a different one for UNP (long a LEAP call and then sell monthly OTM calls against it). Why the different approaches? The short answer is to show the two ways of trading these set ups. I use both as I like having short calls and...

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Get on track with a Union Pacific LEAP ‘covered call’

Posted by on 12:09 am in Blog | 6 comments

Get on track with a Union Pacific LEAP ‘covered call’

Many people’s first experience of options trading is the covered call. It’s a relatively easy to understand extension to normal stock investing: buy stock and sell out of the money calls to boost ‘income’. There are a few problems with the strategy though. As I’ve noted elsewhere its actually more risky than it seems; it has the same risk profile of a naked put sale. A significant fall in stock price hurts each equally. The second issue is its cash requirement. Even on margin this strategy requires 50% of the stock price upfront. Monthly OTM...

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