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?

Read more on our option mentoring and trading blog

Mark Sebastian and Andrew Giovinazzi

http://www.optionpit.com