Feb. 10, 2022 Option Trading

A very profitable day – and a new trick

Thursday (Feb. 10/22) was potentially a wildly profitable day for Nat’s option traders. Here’s what the daily chart looked like.(Click image to enlarge).

The market had been waiting for the inflation numbers, released this morning at 8:30 a.m. EST.

Overnight the price moved sideways in a narrow range, waiting for the number in the belief it would determine the Fed’s next move on interest rates.

The day before Nat left instructions on what to look for in the morning.

Right now option sets up the range from 4650 to 4500. depends on which direction to move first. if overnight pulls back near 4550 first, looking for 4600 call to buy after CPI report.

if ES goes up first before CPI report, looking for 4550 put or 4510 put to buy.

Overnight the market traded around 4560 before the inflation report was released. The 4550 Put was a bit expensive at $15-$20 overnight. The 4510 Put was an easier trade at around $6,

After the CPI report the market tanked 60 points in an hour, and the Puts that cost $6 overnight traded around $26.

Traders had lots of time to exit before the market roared back up to the overnight high, and the Puts dropped back to the low for the day around $5.50, which presented another opportunity to enter.

On the subsequent decline the Puts moved back up to $33. Purchase price $275; selling price $1650, which is pretty much the definition of “buy low, sell high.”

The futures continued to decline after the close and those Puts ended the day deep in the money. They still have a day before expiration.

A different way to trade high-volatility moves

During her members-only seminar on option trading Wednesday Nat mentioned a trading method that is standard for long-term option traders but a novelty for people trading short-term: an options straddle.

The inflation report was due to be released Thursday morning at 8:30 a.m. EST. Everyone expected it would drive a big move in the market; but no one (not even Nat) knew whether it would drive the market down or up.

The approach Nat proposed was a straddle. Buy an out-of-the-money Call above the market and an out-of-the-money Put below the market. One of the two would benefit regardless of which way the market moved.

In this case the market was trading around 4575. A 4625 Call — 50 points otm — cost about $3 overnight. A 4525 Put — also 50 points otm — cost about $10. A 50-point move is commonplace in the current market; one of the two should end up profitable.

As it happened the wild fluctuation today made them both profitable. The 4625 Call traded up to $11 during the day before falling back to pennies; the 4525 Put traded from $10 overnight to $44 during the day. It increased further after the close. Both options still have a day to run.

Option chain – ESH22 options exp. Fri Feb. 11

That’s not a situation that will be repeated often. But it suggests a low-risk way to trade high-volatility days. If the Put was the only leg that paid off, the total cost of the straddle was $650 and the total pay-out would have been $2200, for a net gain of $1550 before commission and slippage.

There are a lot of occasions when we know in advance the market will swing, without knowing which way, and given the increasing volatility, with 100-point intraday swings almost every day now, a short-term straddle could be a relatively safe and profitable trade.

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