The Difference Between a Trade and a Position

I will lay all talk of the Greek Tragedy aside, for the most part, today. We churned on Friday, but there seems a bit of a build up in the air. This blog has talked about the bid up juice in the volatility products enough (although a bit of a decline today) over the last couple of weeks, and it made for some nice trade. It is time for a new topic now.

What I would like to discuss are the timelines on trades. What makes a trade, and what makes a position?

I was watching the action in some of the homebuilders, and I think it was HOV who reported a bit better than expected, and there was short burst of activity for the group. BZH was up the most, when I was doing a quick afternoon scan. I know the homebuilders are just scrapping off the bottom, so a trade that looked interesting was selling the BZH APR 3 Straddle for .70. I was hoping for about 74% or so volatility on it. BZH is pretty range bound, and I thought that level was not too bad, as long as it was short term enough. To me, that is a trade. Relatively short term and I am looking for a very quick strike of maybe .20 or so, if I can get my entry level. As far as current market conditions, BZH has not traded $2.3 for months, so the real risk, I think, is the upside. I am not thinking this short straddle is a long term play. Most likely, today was the only day for the April cycle where the pricing got remotely interesting.

For a position, my time horizon is a bit different.  On the flip side, I also am looking at FIO.  I actually heard of it on the Option Insider Radio last week and looked up the name.  The volatility numbers looked very interesting.  I don’t really care about the fundamental story, but the company sells stuff to Facebook and Apple. That is probably enough of a story for most.  The 30 Day HV in FIO has not spent one moment since its IPO below 70% on a 30 day basis.  I see June IV trading for 60%.  When I look to take a position, I am thinking this is a long term trade in order to make it work out.  April might work, but the Jun cycle will catch the earnings for sure, which puts a bit of a floor under the options.  Here I am thinking a month or two hold if necessary.  Then I trade around my Backspread come what may.

The Concept

Most traders new to options would be well served if they thought of the trading timeline prior to entry.  That way, a plan can take shape, and with the various bail outs and adjustments set well ahead of time, some of the hard thinking on exit strategy is pre-determined.  As we move through this week and possible big news on Thursday evening, are your positions ready for it?

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Mark Sebastian and Andrew Giovinazzi