members only: trading front month options. front month options what is the difference between front...

Members Only: Trading Front Month Options

Front Month Options

• What is the difference between front month options and LEAPS?

• When is it best to trade front month options?

• What can they be used for?

• How does risk change in the front month?

Front Month Options

What is the difference between front month options and LEAPS?

Extrinsic Value vs. Intrinsic value

AAPL is trading at $590

What is the difference between the May 590 Calls and the Jan 590 Calls?

Front Month Options

What is the difference between front month options and LEAPS?

Gamma:

All GAMMAS are going to be higher in the weekly options than standard options with the

ATM gamma representing the highest gamma. Gamma will also move higher as time until

expiration decreases.

Gamma is HIGHEST ATM and closest to expiration

Front Month Options

What is the difference between front month options and LEAPS?

Theta:

All THETA is going to be higher in the weekly options than the standard options.

Remember that time decay is not linear and as the time to expiration decreases time

decay increases at an exponential rate. The fact that weeklys are always close to

expiration this effect is especially noticeable. This also means weeklys can be very risky.

Front Month Options

When is it best to trade front month options?

• We look at weekly options or front month options to trade ANY catalyst event

• We use weekly options to day trade using the cloud

• Front month and weekly options can also be traded against LEAPS in diagonal or

horizontal spreads

Front Month Options

What can they be used for?

Front month and weekly options are hands down the best way to calculate measured

move targets. They give the “cleanest” targets. While a trader could use longer dated

options to calculate targets but they don’t work as well.

Why is this?

Front Month Options

Calculating Measured Move Targets:

Example: TSLA was trading around $200 ahead of their earnings report on 5/7/2015

• The May 9th Weekly 200 Straddle was trading around $21.00

• Using this straddle price I calculated an upside target of $221.00 and a downside

target of $179.00

After my analysis I decided TSLA had a better chance of selling off than rallying

Front Month Options

Calculating Measured Move Targets:

My trade: I bought the TSLA May 9th 190-180-170 Put Flys for $1.40

Risk: $140 per 1 lot

Reward: $860 per 1 lot

Breakeven: $171.40 and $188.60

How did this play out?

Front Month Options

TSLA as Example of Time Decay:

The stock stayed in a tight range on Friday, the stock opened at $183.76 and the spread

was worth around $5.00. The stock hovered around $180 for most of the day and the

spread continued to increase in value into the close.

Time decay is not linear!

Front Month Options

Questions?