Go to http://ExpertOptionTrading.com/videos for more free options straddle videos.
Okay, we want to diversify our portfolio a little bit, and when we do that - I mean, we can do strictly ETF, and index options, and so forth, to build our portfolios. But sometimes, it really does pay to have a stock or two in the portfolio, because not all stocks move exactly the same as the market. Some stocks are going to go up, when the market is going down, and some stocks are going to go down when the market is going up.
That really helps diversify the price risk that you have in your portfolio. You want to take a look at stocks that have good and liquid options in them. IBM is one of those stocks. You also want stocks that have a good chart. What I mean by "a good chart," is that it looks like it's either trending, or it looks like it's channeling, in some way.
Let's take a look at IBM here, just for a minute. If you go to your profit charts and click on profit, and then type in IBM and click "Enter," you'll see a chart of IBM, here. Let's take a quick look at that, and draw a little channel around it. We can see where the price has been, and where we think it's going.
If we draw a quick channel line on this, it looks like IBM, right now, is up around 126. It looks like it's had a pretty good run. It's run up from around 96, back in the beginning of January, all the way up to 127. For IBM, that's a pretty good move. It's been moving inside of this little channel, going up all the way up to - I think the high looks like it's around 129. It's 128.68.
Let's say we wanted to do something with IBM, because IBM looks like it's tapping out, here, and we might get some sideways action. Or it might move down a little bit, who knows? But it looks like it would be a good candidate for us.
Let's go to our "Trade" tab, in our Think or Swim platform. We'll go to the "Trade" tab, pull up IBM, and pull up the June options. Now, there's one thing that we want to look at, before we really start to take a look at these options. That is close up - you want to close up your option months. So, the arrow for June of 08, should be pointing toward June, and not down, so you don't have the options open.
The same with July, and for all the months. What we want to do, is we want to go over to the right side, and take a look at what's called the implied volatility of these options. If we follow June all the way across, we can see that the implied volatility is 21.1. July is 23.4. October is 25.6.
If we were going to do a calendar spread on any one of these, what we want, ideally, is something called a positive skew. A positive skew means that the front month, which would be June, in this case, has a higher implied volatility than the second month that we're going to be buying.
The reason for that is that volatility increases the price of the option. We want to sell the option for as much as we can possibly get. If the implied volatility is higher in the front month, that means the options are actually more expensive, than the ones in the second month. Those are the ones we're selling. That actually works in our favor, because we want to sell them for as much as we possibly can.
If we take a look at June, we see that it's 21.1% implied volatility. The July is 23.4%. If we subtract those two from each other, we have a negative number. We have a -2.3, approximately. That's a negative skew. We don't like negative skews, normally, over 2 points.
We're not going to do IBM, at this point. What we would like to have, ideally, is an option in the front month, that has a higher implied volatility than one in the second month.
Let's take a look at another stock. In this case, let's pull up MNST. MNST is Monster Worldwide. They run a website for people who are looking for a job. In this case, you can see that the June options - the front month options... We're still in our "Trade," tab, here. We want to take a look at MNST, which is the option symbol.
For more options straddle videos be sure to check out our channel:
To learn more about the Expert Option Trading course go to:
vertical spreads, options greeks, what is options trading, option volatility, option spreads, options volatility, how to trade in options, option strategies, index options, equity options, virtual trading, options spreads, virtual options trading, options trading tutorial, option trading strategy, options trading course, how to trade stock options, options trading systems, options training, learning options, learn to trade options, option trading tutorial, options trading strategy, option trading course, option trading systems, options trading basics, option trading basics, option trading system, options trading courses, options trading training, trade options, what is a stock option, options strategies