Options trading strategies Buying options before big events Fed, earnings reports Options 101, buying puts and calls, buying puts, buying calls, buying put options, buying call options, options trading tips, options trading for beginners, options trading basics, options trading explained, stock options explained, stock options for beginners, stock options for dummies, options strategies explained, options straddle, options strangle welcome to looking at the markets with David Moadel just a quick video today
because today is September 21st 2016 today was a big fed decision day Janet
Yellen came out at two o'clock pm and announced that she right now is not
planning on raising interest rates so it was a big day and as you can imagine and
now that it's past i'm sure you know by now that the market when you know the
the stock market went up today a lot because you know the fed announced that
it's not going to raise interest rates and so the market was very happy with
that but before two o'clock p.m. today
a lot of people bought puts or calls or both maybe they bought a straddle or a
strangle they were hoping for a big move in the market if they bought a call
option they wanted the market to go up a lot they were they were hoping and they
were right they were hoping that Janet Yellen would not announced a Fed or in
an interest rate hike and she did not people who bought puts we're hoping that
she would announce an interest rate hike and they were hoping that the market
would go down a lot today which did not happen
so the question is today is it a good idea to purchase options puts calls
straddle strangles whatever right before a big decision or a big event such as an
earnings report or such as today's example such as a big fed announcement
or decision
well let's examine this because today is a perfect example
alright i took a screen capture right before the big fed announcement today
before Janet Yellen Janet yellen's big announcement as to whether she was going
to raise or hike interest rates today
alright so that was at two o'clock and and i took the screen capture at 152
p.m. 8 minutes before and as you can see the the the price of SP why and that's
the spiders which tracks the S&P 500 index the price at that moment was 213
and 82 cents
alright so this isn't at the money call a 2-14 call expiring today at four
o'clock pm
and at 152 p.m. right before the fed announcement you can see how expensive
the call option is it's it's usually not this much especially if it's going to
expire in a couple of hours at four o'clock p.m. today it's a about let's
say eighty eight dollars per contract right 88 cents 88 cents per share or
eighty eight dollars per contract that's a lot and why is it why does it cost so
much because the IV the implied volatility is so high
there's a lot of anxiety uncertainty everybody's everybody was talking about
is she going to is is Janet Yellen going to announce a rate hike or not
alright so the implied volatility component of the the call option premium
is very high and so really the the call option is too expensive
but in any case what what happened to the price of SP why afterward
well it went up because Janet Yellen in fact did not announce an interest rate
hike today and the markets were very investors were very happy about that
they were for very pleased and so since SP why went up you think that the call
option price would go up with it right
nope we can see that the price of SP why went up it went from two 1382 at 152
p.m. about half an hour later at $TIME to 28 p.m. SP why went up to two 1391
but look at the price of the call option it went down from 88 cents a share
here it is 52 cents a share
eighty-eight dollars a contract to $52 a contract
why because the well some time had passed yes that's true but i believe
mainly it's because the implied volatility component of the the option
price the option premium had been removed because it now the the
uncertainty was uncertainty was gone the anxiety and wondering and hoping and
thinking about what's going to happen it's gone now and so look at what
happened even though you might have been right on the direction if you purchased
a call option have about half an hour later after the fed decision
announcement your call option suffered quite substantially went down a lot and
as you can imagine the put options did even worse
here's a screen capture at 152 p.m. right before the fed announcement of an
at the money put option
really expensive here put options tend to be expensive because the implied
volatility again is so high right now and people are buying protection for
their investments and so here it is a dollar seventy share that's way too much
i think for a an option that's going to expire in a couple of hours
that's a hundred and seven dollars for contract and we can all pretty much
guess what happened about half an hour later at $TIME to 28 p.m. from a hundred
and seven dollars for contract to $59 a contract
yeah pretty pretty devastating so whether you bought a call or put at this
moment you're here
you lost money even if you got the direction right you lost money and if
you bought a straddle which is an at the money call and at the money put you
definitely would have lost money and if you bought a strangle you wouldn't have
done too well with a strangle isn't out-of-the-money call and an out of the
money put you would have lost either way so what's the takeaway well instead of
buying options right before a in earnings report or a fed decision day or
some other big event you might want to consider selling options instead now you
have to be careful with it if you're going to sell options you really need to
know what you're doing don't just start doing it if you don't know what you're
doing but I believe that selling options before a big event is often times more
profitable then buying options at a very inflated price right before a big event
and so if you'd like to talk to me about this if you'd like some help with this
or you want help just putting together a trading plan involving stocks options
whatever you like to invest in our trade you can send me an email anytime my
email address is David Modell @ gmail.com
and if you like this video please give it a thumbs up on YouTube leave a
comment I like to read your comments and subscribe to my channel so you can get
the latest updates on my educational financial content
thank you so much for listening and watching and i hope to talk to you soon