As options traders, we’re in luck. Options volume is increasing every year, which means we have more underlying securities to choose from.
That brings me to this week’s event. Tomorrow, I’m revealing a brand-new options portfolio based on some of the biggest and most stable companies in the market: the FANG stocks (Facebook (FB), Amazon.com (AMZN), Netflix (NFLX) and Google (GOOG).
Click here to attend. Five years ago, trading options on these companies was almost impossible.
But now, there’s even enough liquidity to use one of my favorite options tools: weekly options.
The Basket: FANG Stocks Plus Apple
So how do I use weekly options?
I start out by defining my basket of stocks. Fortunately, the search doesn’t take too long, considering I am only going to trade the Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG) plus Apple (AAPL) in the portfolio. This allows me to focus and familiarize myself with the intricacies of a limited group of stocks and their associated options.
I will monitor on a daily basis the overbought/oversold reading of the FANG stocks using a simple indicator known as relative strength index (RSI). I use RSI over various time frames (2), (3) and (5). This gives me a more accurate picture as to just how overbought or oversold a stock is during the short term.
Simply stated, RSI measures how overbought or oversold a stock or ETF is on a daily basis. A reading above 80 means the asset is overbought; below 20 means the asset is oversold.
Again, I watch RSI on a daily basis and patiently wait for a stock to move into an extreme overbought/oversold state. Once an extreme reading hits, I make a trade.
Again, it must be pointed out that just because the options I use are called “weeklys” doesn’t mean I trade them on a weekly basis. Just like my other high-probability strategies, I will only make trades that make sense.
As always, I allow trades to come to me and never force a trade just for the sake of action. I know this may sound obvious, but other services offer trades because they promise a specific number of trades on a weekly or monthly basis. This doesn’t make sense, nor is it a sustainable – and more importantly, profitable – approach.
OK, so let’s say Google (GOOG) pushes into an overbought state.
Once I see a confirmation that an extreme reading has occurred, I want to fade the current short-term trend, because history tells us that when a short-term extreme hits, a short-term reprieve is right around the corner . . . it’s called mean-reversion.
In our case, we would use a bear call spread, also known as selling a vertical call spread. A bear call spread works best when the market moves lower, but it also works in a flat to slightly higher market.
And this is where the casino analogy really comes into play.
Remember, most of the traders using weeklys are speculators aiming for the fences. They want to take a small investment and make exponential returns. Not us. Why? Because we want the odds stacked on our side.
Take a look at the options chain below.
I want to focus on the percentages in the far left column.
Knowing that GOOG is currently trading for roughly $819.31, I can sell options with a probability of success in excess of 85% and bring in a return of roughly 16%. So if the underlying ETF, in this case, GOOG, stays our short strike of $870, we will make 16.2% return on the trade.
(By the way, if this seems a little advanced or technical, I urge you to attend my free event tomorrow. Some of these concepts are simpler to explain during a live event, so I can see your questions and answer them specifically. Click here to attend.)
Just look at the February 870 strike. If we sell the 870 strike and buy the February 880 we can bring in $1.40 for again, a 16.2% return.
If I lower my probability of success I can bring in even more premium, thereby increasing my return. It truly depends on how much risk you are willing to take. I prefer 80% or above.
Take the September 221.5 strike. It has a probability of success (Prob.OTM) of 75.84%. If we sell the 850 strike and buy the 860 we can bring in $2.60 for again, a 35.1% return. Those are still incredible odds when you consider that the speculator (the gambler) has less than an 25% chance of success.
It’s a simple concept that for some reason not many investors are aware of.
These are the types of scenarios and trades that I will be going over tomorrow in the webinar.
If you are interested in learning the intricacies of my step-by-step approach when trading weekly options, please sign up for my free webinar. You’ll not only learn how I trade weekly options, you will also learn a few other simple options strategies that use probabilities to your advantage.
This will likely be the last new portfolio I launch for a little while, and I’m excited to get into the details of how you can use FANG stocks to increase your income over the next year.