Friday, January 31, 2014

Day trading non-directionals using weeklys

I've been meaning to post this up as a rudimentary guide on what I look for when considering non-directional option plays using the weeklys for a day trade. There are primarily three things that I look for: 1. Relatively large extended hours (ETH) swings; 2. Weird/conflicting news, and 3. Where IV comes in at off the open. I also check a two year chart of the stock as well to see if there are any key support levels, but I don't focus on that as much as I do the ETH range.


On Friday, January 31, 2014 I was looking at AMZN for a non-directional play. What got my attention was the large ETH swings. Any unusual algo ticks are immediately disregarded. The stock basically swung from a range of 360 to 390, traded around 385 then dropped to around 367 before bouncing to 377ish before the open. I love that stuff. It tells me nobody can figure out how the hell to price the thing, and odds are it will probably take more than 1hr to effectively price it when the market opens.

Secondly, AMZN had weird news. I don't try to dissect anything nor do I try to peg some type of valuation to it. I just look for some news like AMZN had i.e. "growth is slowing, but we're looking to improve margins". Again, I'll let other people grapple with how AMZN should be priced and it will probably take them >1hr to do it. Another example was FB earnings in the fall of 2013 when it came out "We're making money, but losing teens". That was another solid setup for a straddle/strangle.

Lastly, I look at the implied volatility off the open. I don't use any hard and fast percentage rules, but I  just look at the IV of the back months as a reference. I use Thinkorswim which is pretty shitty, but at least it displays the IV rather nicely, and it also will list the IV at each line you're looking at. This allows me to have a good idea of what I am buying:

AMZN opened with weekly IV at 65%, ticking as high as 69% in 5 minutes. It then dropped down to about 57% within 20 minutes off the open. I entered a 375/370 strangle w/IV around 54% knowing that my enemies were vega and theta burn. However, given the peak-to-trough ETH range of 30 points, I felt that when the IV cooled and the stock remained in a semi-homeostatic range at the 373 level that there was a >51% chance of the stock exiting that range at some point within the next five hours. The trade cost me $5.00, giving me a range from 380 to 365, a 15pt range. This is half of the 30pt swing it had made and 75% of the 20 point swing it made closer to the open in the ETH.

AMZN bounced between 370 and 375 for about 45 minutes, but then finally broke below 370 to 365. This break was when I looked to exit. Anytime I can get >25% for a day swing, I'm happy. For anyone who cares, I entered it for $5.00 and exited at $6.50, though it ticked as high as $8.10 after I exited.

On another vol note, a week prior I had entered an EBAY strangle off the open with IV around 40 which then popped to around 50, despite the lack of movement in the underlying. This resulted in a realized gain of about 10% just from the pop in IV. Obviously 10% is nothing to write home about in the options world, but it's better than being negative. Point is, sometimes the IV can be under priced off the open.

Obviously this isn't going to work out every time. However, when the conditions are right I feel they can be high probability setups to turn a profit if given the time to work. For these non-directionals using weeklys, especially on OpEx days, I generally don't use percentage stops but time stops. If the trade is not working, I will usually leave it on until the end of the day to see if funds come in and either buy the stock or dump the stock.

I hope my stupid post helps. If you end up losing your shirt on a trade, don't come looking for this guy. Caveat emptor!


  1. This was good and helpful. Can you tell us how long you've been trading like this and what your results have been overall?

  2. Just saw your comment now. I have had a high degree of success trading the non-directional strategy when the setup is there. In fact, my 1st priority in the morning is checking to see if I can play anything non-directionally via long straddle/strangle.