Date Published: 2017-03-22
Written by Ophir Gottlieb
What we're going to look at could feel uncomfortable, not in that it's difficult, but rather that it's a glaring example of how the top 0.1% have been dissecting retail traders for decades. But its objective data - this is how option professionals find the edge they require to keep going.
Arista Networks Inc (NYSE:ANET) is the young technology company that has burst onto the seen as the first legitimate competitor for Cisco Systems Inc (NASDAQ:CSCO) and it is rapidly gaining market share in various areas, in particular the high-speed data center switching market:
It's these switches and routers that power every computer in every cloud.
Arista Networks Inc (NYSE:ANET)
When trading options we need to answer three critical questions:
* What to trade
* When to trade
* When to close the trade
Arriving at an answer to these questions has had staggering implications. It's also been a disaster for those that have not been prepared.
What to trade: Let's examine selling out of the money puts spread in Arista Networks Inc.
When to trade: Let's now compare examine selling the weekly options versus the monthly options.
Look, while trading partners, pundits or just general social media gurus may belly-ache and proclaim that the difference between trading a weekly option 4 times a month or a monthly option once a month is no different -- they are wrong and they will cost you money.
It might have felt like a trivial difference -- to trade weekly or monthly options -- but it isn't trivial at all. Selling a weekly out of the money put spread in ANET over the last two-years has returned -44.7% while simply switching to the monthly option has returned 102%. It really does matter -- and it's different for each stock.
Now that we know the what to trade and the when to trade, we must objectively answer when to close.
A short put spread has downside protection but it's one of the most common questions traders have with selling option premium -- "when do you close the trade?"
It turns out that if a put spread was sold for, say $2.00, closing that put spread out once it drops in value to $0.30 has had a large impact on results for Arista Networks Inc. Here's how we account for our limit gain:
And now, the results:
We told you it might feel uncomfortable -- the fact that some people have access to this information and others don't.
Skepticism is natural -- trading isn't a game and that means we have to prove to ourselves that this isn't luck or happen stance.
What we need to do now is look at this short put over various time periods. We see that it has worked over the last two-years, now let's look at the last year:
A -29.7% return, when we switched to monthly options and followed a rule of when to close turned into a 81.2% gain.
It's not a magic bullet -- it's just easy access to objective data.
Finally, we look at this short put spread over the last six-months, these are the results:
WHAT JUST HAPPENED
We don't mean to make you feel uncomfortable, but this is it -- the difference between the professionals and the amateurs. This is how people profit from the option market - it's preparation, not luck.
To see how to do this for any stock or ETF and for any strategy, with just the click of a few buttons, we welcome you to watch this 4-minute demonstration video:
Tap Here to See the Tools at Work
Thanks for reading.
You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.