Triple Witching and Option Trading

Posted on by The INO.com Team

Today's guest blogger is Dan Passarelli the founder of Market Taker Mentoring and the author of the book Trading Option Greeks.

===================================================================

Like the ’60s icon Donovan once declared, “Must be the season of the witch.” In option trading, the season of the witch comes four times a year, and it is almost upon us. The term “triple witching” was originally used to describe the day that index options, equity options and index futures all commenced trading in their expiring contracts. Though some of the major index options now stop trading on the Thursday before expiration, the third Friday of the month ending each quarter is still a day of note for option traders.

The “witchiness” of this day stems from the fact that option volume and the volume of the underlying stocks tend to be higher on that day, which sometimes leads to unexpected, magnified price swings. This could mean more risk.

But this witch needn’t necessarily be feared, shunned or burned at the stake. While this anomaly makes many traders and investors a bit nervous, a solid understanding of the phenomenon can make you a better, more successful trader.

A lot of traders, especially professionals who have been in the game a long time, like to go into expiration “flat the strike.” That means they generally like to close out the at- and near-the-money options about to go off the board. If a trader is long near-the-money options, he’ll sell them to get to zero contracts. If a trader is short near-the-moneys, he’ll buy them. Getting rid of expiring long options avoids the higher risk of accelerated theta that comes with expiration. Closing out short options avoids pin risk, or the risk of not knowing whether or how many options will be assigned.

All this option trading can be accompanied by greater volume in the underlying stock as professional (i.e., delta neutral) traders also close out their hedges by buying or selling stock. Depending on which way the liquidity providers were positioned in the options (long or short, calls or puts), this spike in stock volume may cause upward or downward pressure.

Understanding triple witching and being prepared for its implications should be part of traders’ strategy going into the quarterly expiration. Simply appreciating the fact that the underlying security can have these moves and knowing why gives traders the opportunity to adjust their trading plan for that day to factor in a potential “surprise” move.

===================================================================

Passarelli started his trading career on the floor of the Chicago Board Options Exchange (CBOE) as an equity options market maker. He also traded agricultural options and futures on the floor of the Chicago Board of Trade (CBOT). In 2005, Passarelli joined CBOE Options Institute and began teaching both basic and advanced trading concepts. Be sure to visit Dan's Blog Trading Option Greeks and site Market Taker Mentoring

Free Video Seminar - “The Art of Morphing”

Posted on by lindsay

Have you ever had just one of those trade? You know, the kind of trade that looks like a dream come true, but then all of a sudden starts to shift, morph and turns into a nightmare? As Adam Hewison, (president of INO.com) likes to say, “A bad trade is like a dead fish: The longer you keep it the worse it stinks.” There is one INO TV author that explains what to do when you are caught in a “stinky” situation. Ron Ianieri would tell you that the answer is to morph. Morphing is the process in which the wrong position is quickly and efficiently changed into the right position by simply adding or subtracting from the current position based on an understanding of synthetic positions. Used by professional floor traders, this method helps manage positions in relation to movements in stock price, time and volatility.

Ron started his career on the floor of the Philadelphia Stock Exchange working on the Foreign Currency Options Floor just after the crash of ’87. After two years he moved to the Equity Options Floor and was trained in option theory by well known technical and analytical traders Cooper, Neff and Associates. Ron then joined TFM Investment Group where he served as the Option Specialist in Dell Computer during the early 1990’s at a time when DELL was one of the busiest option books in the US. During this period, Ron began to develop his highly respected Option Tradero Trainee Course. He later became a manager at a large, fast growing specialist unit, Gateway Partners, where he was an integral part of their expansion.

Currently, Ianieri is the chief options strategist and co-founder of The Options University.

We welcome you to watch Ianieri's 90-minute seminar, “The Art of Morphing” at no charge by visiting INO TV Free.

After you watch this seminar please tell us what you think by emailing

su*****@in*.com











.

Enjoy,

Lindsay Thompson
Director of New Business Development
INO.com

Can an egg timer improve your trading?

Posted on by The INO.com Team

True Story

When I started my career in this great business in the early seventies, I worked under a guy named Gary who  acted as a mentor to me.

Now Gary was definitely a character and his trading style was something else altogether.

Every time he made a trade he would flip an egg timer over and the sand would start running.

Now you have to remember, I was green to trading back then and had never seen someone with Gary's unique approach and trading style.  I just thought that having an egg timer on your desk and flipping it over every time you made a trade was a normal part of trading.

Have you figured out why Gary was using a egg timer?

Was it because ...

(A) He liked playing with egg timers
(B) He liked to time his poached eggs
(C) He used it for money management

If you chose (C) you are correct. Gary did use an egg timer for money management. It's not as crazy as you might think and it suited Gary's own style of trading perfectly.

You see Gary was using a TIME STOP.

How it worked is like this, Gary would see something on his intra-day charts that was a buy, and then buy it immediately. If it did not go up by the time the sand had finished running through his egg timer he would exit the market win, lose or draw. It was just that simple.

I never had the type of trading personality to trade like Gary, but I have to admit the egg timer worked.

You may want to give it a try only substitute the egg timer and use days or weeks as your time frame.

Adam Hewison
Co-founder, MarketClub.com

P.S. If you missed any of the "Traders Whiteboard" series watch them here.

Be Our Guest
We welcome syndication of our content in your blog or on your trading website. Please feel free to use our content with attribution - more details here to syndicate our content

Traders Toolbox: Candlestick Formations

Posted on by lindsay

Japanese candlesticks, which have been enjoying the spotlight in recent years, are difficult to explain in one broad brush. Candlesticks draw on the same open-high-low-close data as do bars. Here the length of the bar, or "candle," is determined by the high and low, but the area between the open and close is considered the most important.

This area, the "body" of the candle, is filled with blue (or white for most charting programs) for closes higher than open, and is filled with red (or black from most charting programs) for down days. The wicks above and below constitute the "shadow" of the candle, or high or low.

No pattern is 100% correct, but these formations are often time incorporated into many mechanical systems and can provide as great information source for the naked eye.

*Change to hammer and hanging man made on 12-10-08.

---

Doji - When the open and close price is almost the exact same value and the tails are not excessively long. This formation can alert investors of a possible indecision and during oversold or overbought conditions can possibly signal for reversal. The bulls and bears are equally pushing the price.

Long-Legged Doji - You can recognize this formation by one or two long tails (shadows). This formation will sometimes alert that we have reached the top of the market or warn that the trend has lost sense of direction.

Gravestone Doji - This formation occurs when the open and close price is the same or near the low of the bar (period). Although this can be found at the bottom of a trend, this formation can be used to pick out market tops.

Hanging Man - This formation looks like a body with feet dangling... or a hanging man. This occurs when there is profit taking near market open, then a rally with a close at or near the open price.  This formation can alert of a reversal and is typically found at the top of an up-trend. The longer the shadow, the greater the change is for a reversal.

Hammer - This formation is a short body with a tail that is twice the body's length. This occurs when there is a sell off near open, but then a rally supports a close at or near the open. This formation can alert of a reversal and is typically found at the bottom of a downtrend. The longer the shadow, the greater the changes are of reversal.

Spinning Top - This short body has sizable tables both on the top and bottom of the bar. This formation often times represents indecision and a standoff among the bears and bulls. There is little movement between the open and close, but both the bears and the bulls were active that trading day. After a long blue candlestick, a spinning top suggests weakness among the bulls. After a long red candlestick, a spinning top suggests weakness among the bears.

Bearish Engulfing Pattern - This formation is a major reversal pattern after the completion of an uptrend. After a blue candlestick, the next day will open above the previous day's positive close, throughout the trading day it will blow past the previous days open completely engulfing the previous day's movement.

Bullish Engulfing Pattern - This formation is a major reversal pattern after the completion of a downtrend. After a red candlestick, the next day will open below the previous day's negative close, throughout the trading day it will blow past the previous days open completely engulfing the previous day's movement.

Evening Star - This is a top reversal signal suggesting that prices will go lower. It is formed after an obvious uptrend. The 1st candlestick is a long blue box (usually when the confidence had peaked). This stick is followed by a small blue body, when the trading range for the day has remained small. The third bar (red) plows down at least 50% past the 1st day's bar signifying that the bears have taken control.

Morning Star - This is a bottom reversal signal suggesting that prices will go higher. It is formed after an obvious downtrend. The 1st candlestick is a long red box followed by a small blue box, when the trading range for the day has remained small. The third bar (blue) shoots up at least 50% over the 1st day's bar signifying that the bulls have taken control.

Dark Cloud Cover - This is a two bar formation that is found at the end of an upturn or at a congested trading area. The first bar is a blue (positive movement) bar followed by a red bar which reaches over the open of the previous days close and closes at least 50% down the previous days bar.

Piercing Pattern - This is a two bar formation that is found at the end of a declining market. The first bar is a red (declining movement) bar followed by a blue bar which opens (often gaps) below the previous days close and reaches at least 50% of the previous days bar.

---

You can learn more about Candlestick formations by visiting INO TV.

"Saturday Seminars" - Trading the Equity Curve

Posted on by lindsay

In this seminar, Bob focuses on using the trading equity curve to improve the performance of mechanical trading systems. He talks about the primary types of mechanical trading systems and what causes them to experience drawdown periods. He discusses the best types of trading systems to use for different kinds of tradable items. You will learn how the moving averages of equity curves, combined with the equity curves themselves, can serve as a money management technique to reduce drawdowns and even turn losing periods into winning periods.

Bob uses several examples of mechanical trading systems to show how this technique can quickly identify changes from congestion periods to trending periods and vice versa. He also discusses how to adjust the equity curve for any phenomenon that causes account drawdowns. Bob explains how applying his techniques in conjunction with several of the systems he discusses can signal when and how to place limit orders, thereby significantly reducing slippage.

PDF Workbook

Bob McCulloughBob McCullough writes the frequently quoted newsletter Investotalk and is president of Liberty Research Corporation, which produces and distributes Investograph Plus, a technical analysis and charting program. He has spoken at many meetings of computer-oriented investors, and recently published his book, A New Look at Technical Analysis. Bob graduated from the University of Texas with a degree in chemical engineering. He soon became interested in computers, and joined IBM to develop real-time process control and laboratory automation computer systems. He became interested in applying some of the pattern recognition techniques used in computerized laboratory analysis to the stock market when he read Hurst’s The Profit Magic of Stock Market Analysis. Bob combined his experience in trading, programming, and engineering in the development of Investograph Plus. In this work, he has developed several unique indicators and mechanical trading systems.

---

Saturday Seminars are just a taste of the power of INO TV. The web's only online video and audio library for trading education. So watch four videos in our free version of INO TV click here.

INO TV