Profiting from Weekly Options

How to Earn Consistent Income Trading Weekly Option Serials

Robert J. Seifert

• Publisher: Wiley
• Year: 2015
• Print ISBN: 9781118980583
• eBook ISBN: 9781118980941
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

Generate consistent income with a smart weekly options strategy

Profiting From Weekly Options is a clear, practical guide to earning consistent income from trading options. Rather than confuse readers with complex math formulas, this book concentrates on the process of consistently profiting from weekly option serials by utilizing a series of simple trades. Backed by the author's thirty years of experience as a professional option trader and market maker, these ideas and techniques allow active individual traders and investors to generate regular income while mitigating risk. Readers will learn the fundamental mechanisms that drive weekly options, the market forces that affect them, and the analysis techniques that help them manage trades.

Weekly options are structured like conventional monthly options, but they expire each week. Interest has surged since their inception three years ago, and currently accounts for up to thirty percent of total option volume, traded on all major indices as well as high volume stocks and ETFs. This book is a guide to using weekly options efficiently and effectively as income-generating investments, with practical guidance and expert advice on strategy and implementation.

• Discover the cycles and market dynamics at work
• Learn essential fundamental and technical analysis techniques
• Understand the option trading lexicon and lifecycle
• Gain confidence in managing trades and mitigating risk

Weekly options can be integrated with any existing options strategy, but they are particularly conducive to credit spread strategies and short-term trades based on technical patterns. For investors looking for an easy-in/easy-out method of generating consistent income, Profiting From Weekly Options provides the wisdom of experience with practical, actionable advice.

Chapter 1
Market Psychology: The Mind-Set of a Trader

“90 percent of the game is 5 inches wide, the length of the space between your ears.”

—Bobby Jones, Golfer 1932

“Anyone who has never made a mistake has never tried anything new.”

—Albert Einstein, Scientist 1937

“You can observe a lot by just watching.”

—Yogi Berra, baseball player, New York Yankees 1956

“Greed is good.”

—Gordon Gekko, Wall Street 1987

“Bulls and bears make money; pigs get slaughtered.”

—Anonymous

“Coulda, woulda, shoulda.”

—Every Investor 5000 BC to Present

The Herd Mentality: Bubbles

History is our great teacher. As Yogi Berra, the Yankees great, once said, “You can observe a lot just by watching.” The past is the key to the present; if we do not learn from observing past events, we are doomed to repeat them.

In the spring of 2014, we still have a vivid memory of the financial meltdown in the summer and fall six years ago. TV commentators pleaded with investors to “get in there and sell, Wilson sell.” Irate investors looked to hang their broker. Pictures of hysterical homeowners seeing years of hard work going out the window in a matter of months were gut-wrenching. Fingers pointed and tongues wagged. Crooked politicians, dishonest mortgage brokers, greedy Wall Street traders, shady rating agencies—there was enough blame to spread around.

Who could have possibly seen this one coming?

Comedians had a field day. Internet cartoons of stick figures explained to other stick figures where their money went. Hitler learning that his generals had tied up all of his cash in AIG and Lehman Brothers stock. Surely, this was the first time such a financial disaster had affected so many so quickly.

Or was it?

Because of its impact, it is crucial to recognize that the Great Recession was not an isolated incident. The market psychology that triggered this disaster goes back at least as long as history has been recorded. The panics will come in all forms and will start with many different patterns. Usually, the common thread is that some commodity or new technical revolution has no upper end. Demand for the product will be so great that it can only get bigger. There will be no upper limit to price, and any naysayers will regret their doubt. The thought process is:

“This time will be different.”

Let's review a few of these “bubbles” that have occurred in the past 300 years and see what they have in common.

The South Sea Bubble 1711–1721: Trade, War, and Government Collusion

The South Sea Company was established in 1711 as a partnership between the British Treasury and the merchant class. England had been in a battle with Spain since the early 1700s in what is referred to as the “War of Spanish Succession.” The war had been very costly; the Crown need to finance its debt, and the Lord Treasurer Robert Harley came up with a good idea: Sell a franchise!

He granted exclusive trading rights to a group of merchants in the “South Seas.” It is a common misconception that the “South Seas” were in the Pacific, but in eighteenth-century Europe, the term referred to South America and the Caribbean Sea, not the Pacific.

The first round of financing granted the company “exclusive” trading rights for the sum of £10 million (approximately £500,000 million in 2014 £). In effect, the merchants convinced investors to take stock in the company and replace the bonds issued by the English Treasury. In exchange, the government granted the company a permanent annuity paying a little more than 5 percent. The merchants quickly resold the notes and guaranteed a profit to investors from the Treasury “in perpetuity.” Today, we would call this arbitrage, and it is the way many investment banks generate billions in profit: Buy debt for one price, sell it for a discounted amount to investors, and take the difference and put it in their pocket.

The British government viewed the transaction as a layup. It would charge tariffs on trade from the “South Seas” to fund the interest and pocket the difference.

When the war with Spain was finally settled in 1713 by the treaty of Utrecht, the terms were not as favorable as the Crown or the merchants had hoped. Although there is no evidence the company had ever made dollar one, the Treasury was able to float another round of financing in 1717 for £2 million. The original notes were converted to the new debt and the government continued to pay the interest. Nowadays, financiers call this type of sovereign debt replacement Brady bonds in honor of the US Secretary of the Treasury whose ingenuity bailed out US banks and Latin America in the 1990s.

The new debt funded the original loans from 1711. Nevertheless, as time passed and the company still did not flourish, the Crown needed to raise more capital. In 1719, the company conceived of a new idea.

Exchange the existing debt for equity in the Crown!

The company proposed to buy the majority of the Treasuries debt for £30 million. In exchange, the government guaranteed to pay interest on the shares at a preferred rate of 5 percent for a period of eight years, and then 4 percent “in perpetuity.” To sweeten the deal, the shares were allowed to be traded, and any “appreciation” could be used to buy more shares.

Needless to say, this arrangement benefited the company and the Crown. Rumors circulated that the trading rights granted the South Sea Company in the “New World” were far in excess of what was being revealed (can you say “new economy stocks”?), which caused frenzied speculation. Trading in the winter and spring of 1720 drove the price of the stock up almost 400 percent. Greed pulled in even more investors anxious to be in on the big payoff. Insiders and the Crown were rumored to have made a killing.

In June 1720, after scores of joint-stock companies joined in the feast, Parliament—fearing a revolt by the general population—passed the “Bubble Act,” which forbad joint-stock companies from participating in unregistered issuance of stock. Unfortunately, this did not curb the bubble, but triggered even more aggressive buying of the South Sea Company stock. In a perverted way, the South Sea Company was viewed as a flight to quality!

Shares prices exploded, peaking at 1,000 percent of their issuance price from the final conversion of debt to stock in 1719. Finally, in August 1720, “No greater fool could be found,” and the prices started to tumble. In six weeks, it was all over. The price was back to £150.

What became of the South Sea Company?

It continued to exist until 1763, when it was disbanded. In between wars, it continued to serve as a front for the Crown's debt. In times of war, it virtually disappeared.

The hangover lasted for decades. Scores of ordinary citizens were broken. Bitterness was unbridled and knew no class. One of the biggest losers in the scam was Sir Isaac Newton, one of the most brilliant minds of all time. He never recovered financially and died in virtual poverty March 31, 1727, in an apartment with his niece and her husband.

The Cotton Panic of 1837: Land, Commodities, and Government

The first bubble addressed took place in Europe. Let's turn our attention to the original panic in the United States. This bubble is not nearly as celebrated as its European counterpart, but it was equally as deadly. It occurred during the presidency of Andrew Jackson, 1829–1837. When the bubble burst on May 10, 1837, Martin Van Buren was the president, but make no mistake—the stage was set in the prior 10 years.

The war of 1812 was really America's second Revolutionary War. The British invasion was almost successful, and the United States came very close to being “the colonies” again. As with most wars, there is a positive effect on the economy, as manufacturing and commerce in general have a tendency to grow. Capital goods must be replaced at a far greater rate than during times of peace. Usually, the prosperity lasts a few years; however, once the “war effect” ends, a general slowdown is almost sure to occur. In the United States, it manifested itself with the downturn of 1819–1821.

By the middle of 1821, the country was on its way to a recovery. The United States was expanding it western borders; new agriculture opportunities and trade brought in an era of exceptional wealth. The population went up by almost 60 percent, primarily shifting to the West, where commerce flourished North and South along the Mississippi River valley.

When the Jacksonian Era began in 1829, the United States had expanded its borders, and had also built an infrastructure of roads and canals that allowed for a flow of goods not only North and South on the Mississippi but also from the East Coast ports to the western colonies as far as Ohio.

Jackson was a very tough and vengeful man. He had been a war hero, a US senator, a landowner—and his nickname “Old Hickory” said it all. It was the merciless streak that helped to set the wheels in motion for the disaster that was to follow.

As with any time of prosperity, the demand for commodities and the land to produce them continued to increase. By law, public land in the West and Mississippi Valley could be purchased for $1.25 per acre. Sales of land increased steadily in the 1830s, and landowners started to feel the first wealth effect. Land in some prime growing areas of the Mississippi more than quadrupled in value in five years (Iowa farmland in 2014?).

In government, a nasty personal feud betw...

Table of contents

• Cover
• Title Page
• Copyright
• Dedication
• Foreword
• Preface
• Acknowledgments
• Chapter 1: Market Psychology: The Mind-Set of a Trader
• Chapter 2: Modern Markets
• Chapter 3: Technical versus Fundamental Price Analysis
• Chapter 4: Phases of the Market
• Chapter 5: The Relationship of Time and Price
• Chapter 6: Introduction to Options
• Chapter 7: The Option Model
• Chapter 8: The Option Chain
• Chapter 9: Option Trading Strategies
• Chapter 10: Why Trade Weekly Options?
• Chapter 11: Midterm Review
• Chapter 12: Standard Deviation—The Mathematics of the Price Cycle
• Chapter 13: Trading in a Congestion Phase of the Market
• Chapter 14: Trading in a Trending Phase of the Market
• Chapter 15: Trading in the Blowoff Phase of the Market
• Chapter 16: Selecting a Portfolio to Trade
• Chapter 17: Managing Your Equity
• Chapter 18: Organizing Trades and FAQs
• Appendix I: Answers to the Chapter Quizzes
• Appendix II: Days until Expiration Straddle Values
• Glossary of Option Terms
• About the Author
• Index
• End User License Agreement