Many TradeStops members use tracking options to increase their income, enter stocks at a lower price, or just to speculate with limited risk. How can TradeStops help?
As option trading becomes more popular, the TradeStops team wants to help you understand what you can expect from TradeStops to help you manage your options trades.
It’s important to understand that options (and tracking options) are completely different than stocks. Options are derivatives of an underlying stock or ETF. The price of an option is at least partly based on the price of the underlying stock. Also, every option will expire on a pre-determined date and will then cease trading.
The majority of options traded have a life-span of less than one year. Because of this, it’s impossible to determine a Volatility Quotient (VQ) for the options. Even if we could determine a VQ for options, this number would be meaningless as the option will ultimately expire.
Because it’s impossible to determine a VQ for options, it’s also impossible to determine a Stock State Indicator (SSI).
However, we can use the VQ and the SSI of the underlying stock to help manage the trade and to understand how the stock is trending.
For our first example, let’s look at how to track an out-of-the-money call on Netflix (NFLX). NFLX traded recently at $190 per share. The 52-week high on NFLX was set about two months ago at the $202 level. Someone bullish on NFLX might think that the stock could continue to rise back up to its all-time high – or even as high as $205 per share in the next six months or so.
As with many investment strategies, we recommend you set up a separate portfolio to track the options. You’ll notice that we’ve included the underlying stock in the portfolio in addition to the option itself.
We have an alert set up for the underlying stock NFLX (the dark bell indicates an active alert). This is an SSI Alert. An option trader might want to know if NFLX drops by ½ of its normal VQ.
We can set up a customized trailing stop for NFLX by clicking on the “Alert” tab above or by clicking on the position itself and then opening the “Alerts” tab from the new window.
NFLX has a current VQ of 28.74%. We’ll set up a trailing stop alert to trigger if NFLX drops 14.37% from this point in time.
Because there is no VQ alert available for the option itself, we have to enter a customized trailing stop for this position. To do that, we need to create an alert for this position. When we click on the position itself and go to the “Alerts” page, it opens to a trailing stop alert. Let’s use a 50% trailing stop for this position.
Trading options requires more oversight than just buying and holding stocks. The price of the option is not only based on the underlying stock, but other factors as well. We recommend that you follow these closely and adjust your option alerts as necessary based on your personal trading strategy.
We’ll be hosting a webinar next week to show you additional examples of using TradeStops to monitor your option trades. This will include the steps necessary to follow covered calls and naked puts. To register for the webinar, click here.
Education Director, TradeStops