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Stocks & Commodities V. 25:5 (70-72): Product Review: Options Spreads: Generating Exceptional Returns... by David Penn
PRODUCT REVIEW
double calendar and double diagonal be sorted on the basis of their expected sary to help option traders is widely
credit spreads are among the most com- outcomes. available, relatively easy to use, and
mon trade structures he uses. One major point Ciccone introduces often affordable. Its a lot easier, ad-
near the presentation is the importance mits Ciccone, while adding that just
STRESS TEST AND of understanding risk and stress testing. because these trades have extremely
EQUIPMENT CHECK To all of the strategies Ciccone has high probabilities does not mean they
Earlier in his presentation, Ciccone discussed, the biggest danger is extreme are guarantees.
made the point that you cant really price movements or drops in implied Ciccone recommends that traders start
trade options well without instru- volatility. In dealing with these risks, small and always trade within their
ments. As regional director and an Ciccone recommends stress testing means. One advantage with spread trad-
investment advisor with OptionVue, it trades by seeing what worst-case sce- ing of this sort is that since the short
is little surprise that many of those narios with regard to volatility. positions are covered, traders with
instruments he advocates include soft- Stress test all trades across different smaller accounts can trade them with-
ware available through OptionVue changes in implied volatility, Ciccone out the sizable capital often required
though Ciccone acknowledges that other warns, saying that an uncomfortable when writing options naked.
software on the market can do the sort number of up-and-coming traders have That, plus the historically modest
of work to analyze volatility. come up to him with trading problems commissions charged to retail traders in
That said, one of the features Ciccone only to reveal in conversation that they recent years, makes it more possible
is especially appreciative of is never stress tested their positions. I than it has ever been for the average
OptionVues OpScan, which he uses to stress test every trade, says Ciccone. option trader to spread em like a pro.
scan for horizontal volatility skew. As Stress testing has revealed, for ex-
part of his presentation, Ciccone shows ample, that while double calendar David Penn is a Technical Writer for
one of his favorite formulas or screens, spreads do not react well to extreme STOCKS & COMMODITIES.
which looks for instances where im- decreases in implied volatility, double
plied volatility is 15% or more in the diagonal credit spreads seem to be rela-
third month of expiration compared to tively less affected. Another helpful tool
the first. He also looks for high volume is the historical volatility chart. These
(for liquidity) and a generally low charts may give insight as to what
longer-term implied volatility, which changes in implied volatility may be
he determines by way of a 400-day likely, Ciccone says.
exponential moving average. Another The good thing about trading volatil-
tool Ciccone uses is OptionVues Trade ity, says Ciccone by way of conclusion,
Finder, which can identify potential is that anyone can do it. While trading
trade structures that will be effective in volatility does require trading instru-
various situations. The results can also ments, the fact that the software neces- See Traders Glossary for definition S&C
Futures trading is speculative and is not suitable for all investors. Futures accounts are not protected by SIPC. Futures
trading services provided by TD Ameritrade Futures & Forex LLC. Trading privileges subject to review and approval.
Not all clients will qualify. This is not an offer or solicitation in any jurisdiction where we are not authorized to do business.
TD Ameritrade, Inc., member FINRA/SIPC. 2016 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.
Economics 101
Interactive Brokers
Member - NYSE, FINRA, SIPC Supporting documentation for any claims and statistical information will be provided upon request.
*According to Barrons best online broker review on March 9, 2015, How Secure Is Your Securities Portfolio. Lowest cost of any broker and
Best Trading Experience & Technology in Barrons survey. For more info see ibkr.com/awards. Barrons is a registered trademark of Dow
Jones & Company, Inc. Based on DARTs of US ebrokers in Q4 2015. 05-IB16-981CH963
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