From iron condors to bull put spreads, Jacob Mintz, editor of Cabot Options Trader, highlights a variety of options strategies, and discusses some trading positions on his buy list.
Steve Halpern: We’re here today with Jacob Mintz, editor of Cabot Options Trader. How are you doing, Jacob?
Jacob Mintz: I’m doing well. Thank you, very much.
Steve Halpern: How do you find your trading ideas for your Options newsletter?
Jacob Mintz: Well, when I’m looking for trading opportunities, I’m all about looking for probabilities and risk versus reward. For example, I say to myself, what is the probability of this stock moving 3% or 5% in a predetermined amount of time? Then I judge my risk/reward in buying or selling this option to determine if I like a trade.
Another way that I find my trades is through a strategy that I have found tremendous success with, which I call, order flow reading. This is, basically, following the largest and smartest traders in the world into the same trades that they’re putting on.
To find these trades, I have a scan that I’ve set up to alert me when an option is trading way outside its normal daily volume. For example, if a stock, such as stock symbol ABC, normally trades only a 1000 calls a day, and I notice that someone has bought 5000 or 10,000 calls, then I’m alerted to this.
Then I can judge for myself if I like the trade.
I know it’s hard to believe, but sometimes hedge funds, or other larger traders, get insider information, and they trade on this information. When they do this, it’s illegal; however, if I follow them and do a trade, and I have no insider information, there is nothing wrong with this.
Steve Halpern: You’re actually making the bet based on the increase in volume in the trade without having any specific information as to why the person buying that excess volume is doing so.
Jacob Mintz: That’s correct. These hedge funds-if they’re betting $5 million, $10 million, and $20 million on a call, for instance, they’re not doing it to lose money. They probably have a good feeling that the stock is going to go this way, be it their opinion on the market, or if they have insider information.
Steve Halpern: Do you typically buy options or sell them?
Jacob Mintz: Most traders identify themselves as either buyers of options or sellers of options. I think these traders are making a mistake when they pigeon-hole themselves like this. There are times to be sellers of options, and there’s times to be buyers of options.
If volatility, which is one of the key components in pricing options, is high and the opportunity is right, then I’ll sell options. If volatility is low, and the opportunity is right, I will buy options.
It’s my feeling that to be allergic-to use an expression-to buying or selling options is-it’s a mistake. You need to find the best trades, no matter what your style is.
Steve Halpern: You’ve mentioned one strategy you use as following where large options purchases are made.
Could you highlight some of the other strategies that you follow?
Jacob Mintz: Sure, I try to have as many trading strategies as possible at my disposal. Now that trading is electronic and we are easily able to access any stock and any option with a click of a button, there are limitless opportunities. I try to keep an open mind about my strategies.
In general, I like to spread my risk. Not all of my trades are going to be winners. Of that, I’m absolutely certain. If someone tells you that they are, I would recommend running in the other direction. When I’m wrong, I want to limit my risk.
One risk-defined strategy that I use is called an iron condor. It’s a slightly complex option strategy in that it involves trading four options at once; however, once understood, it’s a great way to create yield.
For example, Tesla (TSLA) had earnings just a month ago, and volatility and fear were extremely high. I want to take advantage of this fear by selling some volatility. With the stock trading around $135 the day before earnings, I put on an iron condor that made money if the stock stayed above $95 and below $180. This meant that I had $40 of room to the downside and $45 to the upside.
This trade worked great, as a stock that’s currently trading at around $160; however, there was a chance that I could have been wrong, but with an iron condor, I defined my risk. I knew my worst possible scenario if the stock moved outside of my ranges.
Steve Halpern: A lot of investors are scared of options if they think it’s too complex.
Could you explain how the average investor might comfortably use options in their investment strategy?
Jacob Mintz: Many investors feel that options might seem like an exotic financial instrument that they could never understand. What I can tell you is, I didn’t graduate from MIT or Harvard with an advanced degree in mathematics or physics.
I was a communications major from Miami of Ohio, but I put in the time learning the basics of what a call and a put is, and slowly built up to more advanced strategies.
I think options should be part of every investor’s trading playbook. A great way to hedge your portfolio to create yield in this zero interest rate environment, and gain significant market exposure and leverage with little capital at risk.
Steve Halpern: Could you give us a few examples of some current trades that you recommend, so that listeners could understand the types of opportunities they could get with the Cabot Options Trader.
Jacob Mintz: Sure, I’ll first talk about the type of trades I recommend through Cabot Options Trader. When I took over this role as options editor, I made it my objective to share with my readers my experience and knowledge of trading for the past 15 years. I hope everyday to enrich my readers’ options knowledge and brokerage accounts.
At Cabot Options Trader, we have a wide range of investors and traders, with varying levels of experience and options. Therefore, I send out many educational pieces every month explaining the nuts and bolts of trades and the risks and rewards.
Many of my readers just want simple call and put recommendations and I offer these when the risk and reward is right; however, when I feel a more complex strategy is needed, I offer my advanced strategies, such as call and put verticals and iron condors.
Many of my novice option readers were initially scared of these more advanced strategies.
However, I showed them what our best and worst scenarios were in these strategies and how to initiate the trades. They became more and more comfortable and now they’re moving from novice option traders to advanced options traders.
A couple of examples would be, we certainly have recommended the purchase of some SandRidge (SD) calls. Several large investors felt that the company was mismanaged for the last couple of years and the CEO was essentially forced out.
In the last year, some of the largest hedge funds in the world have initiated positions in SandRidge, including famed investor Leon Cooperman of Omega Advisors.
At the Delivering Alpha conference in July, Cooperman said that SandRidge has the potential to double, and the stock has the best risk/reward of his top ten stock ideas.
Also, recently I’ve been noticing a large call volume in the stock, which leads me to believe that other big investors also like the risk/reward in buying calls.
Another trade we put on recently was a bull put spread in Cree (CREE). The stock had dropped from $74 to $57.5 after a disappointing earnings release. I didn’t anticipate the stock would rally hard, but I wanted to put on a trade that would profit if the stock went up, didn’t move, or didn’t go down another 10%.
We sold the September $52.5 put and bought the September $50 put and received a credit of $0.44. If the stock stays about $52.5 by September 21 of this year, we collect our $0.44.
If the stock goes to $50 or below, we lose $2.06.
There certainly was risk in this trade, but I liked our odds and the stock not falling another approximate 10%.
Steve Halpern: Now, is this a trade that somebody could put on today?
Jacob Mintz: At this point, the spread has actually worked really well, so, you could still put it on, but you would not get the $0.44 still. I think it’s currently around $0.20. Now, with less than two weeks until the spread expiration, the fact that it’s trading near $60, and our spread is looking like it is a winner.
Steve Halpern: Is there something going out a little longer that could be of interest to our readers that they could act on now?
Jacob Mintz: In terms of another trade idea perhaps?
Steve Halpern: Yes.
Jacob Mintz: Yes, recently I recommended buying Dendreon, a January 3.5 call. This call expires January 17, 2015. Dendreon’s symbol is (DNDN). Also, recently got hit pretty hard with an earning miss, the stock fell from approximately $5.50 to-it is currently trading around $3.
I use long-term options when I think there’s a chance for a turnaround in a company. This January option doesn’t expire until January of 2015. I’ve given us approximately a year and a half for the stock to have a potential bounce.
Steve Halpern: Jacob, thank you very much for joining us today. We appreciate your insights.
Jacob Mintz: Thank you very much for having me. I appreciate it.