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Podcast: Jon Najarian & Invest Like A Monster Conference in Newport Beach CA

I spoke with Jon Najarian about the markets today, as well as his upcoming education event in Newport Beach, CA in late March. What you can read below is a more in depth analysis of what we spoke about, plus it’s admittedly hard to envision the mechanics of option spreads, hence the pictures and graphs.

Register now for the Invest Like a Monster™ option education conference.

SP500 Short Put Trade
(click for larger image)

In the podcast, Jon mentioned right off the top that he’d shorted a Put around 1355, the Strike Price of which is indicated by the red line. His thought process was that the market opened weak and had had a tendency to rally at the Open. Selling puts is a bullish strategy and Jon used the weekly put contract as his vehicle of choice for this Day Trade.

As the rally extended Monday, the value of having the ability to sell the S&P 500 at 1355 would decrease. That value is expressed in the option’s premium, which Jon purchased back at a lower price much later in the day keeping the difference.

One trade that I taught to some of my students last week is the Credit Put Spread on AAPL (see below). It’s technically called a “Net Credit Vertical Bull Put Spread.”

AAPL Net Credit Vertical Bull Put Spread
(click for larger image)

Here, we sold the March 500 Strike Price for a $9.80 credit (the top red line) and against that we bought the March 490 Strike Price for a $6.70 debit (the lower red line). The Net Credit of $3.10 is our Max Gain on the trade and we make that if/when AAPL remains at $500 or higher (which is what we expect).

Break-even is $496.90 [$500 – $3.10]
Max loss is $6.90 which traders will incur at $490 or below

Spreads are hedged. That’s why you trade them. Sure you can sell the March 500 for $9.80 and you might get away with keep the whole thing…once in a while. However, I think Victor Niederhoffer demonstrated the brutality of being short naked Gamma overnight.

Here is the margin calculation, courtesy of CBOE:

put spread margin
(click for larger image)

Jon and his brother Pete, Guy Adami, as well as Anthony Scaramucci and Jeff Macke will be in Newport Beach, CA for their next education conference. These guy are solid citizens and they’re great to hang with besides being great instructors.

You can register now for the Invest Like a Monster™ option education conference.

As he mentioned in this interview, Jon and I spoke at the Milken Global Conference in Beverly Hills in May 2011. We also talked about being short options overnight. “Seller beware…”

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  • Manuelbravochico

    Spread traders are the only long term profitable option traders. With low commission rates and penny pricing trading spreads is a viable strategy that has maximum risk defined on each trade. There’s not many other strategies that have maximum risk defined with no uncertainty.