Friday, July 31, 2015

Earnings Plays and Data Services

From Our July 2015 E-mail Archives: At the time of this post, the markets are in the thick of Q2 2015 earnings announcements. Last week, we received a question from one of our traders about earnings and data services. Our Head Trader, Robb, answered the question.*

-----Original Message-----

From: Jay P.
Subject: Earnings Plays - Data Services?

Good evening,

I wonder if there are any recommended data services (,,, etc.) to support playing earning trades (ratio backspreads, straddles/strangles, verticals, etc.).

Any insights appreciated.


-----Reply Message-----

Hi Jay,

I used to be a news hound and would search all over for news, reports and commentary. I actually used to listen to conference calls as well after earnings reports. In the end, I realized that no matter what research I did or commentary I studied, the stock ended up doing exactly what it would have if I hadn't done any of that research.

In fact, I finally realized that all of the research that I did actually "convinced" me that it was going to go up or down. This caused me to stay in losing trades too long since I was "convinced" from my research. So, now I don't do any research other than plan out my entry point, risk parameters and exit points.

The options premiums will tell you the expected movement up or down. You can do this by looking at the front month at-the-money (ATM) straddle and make your decision to play a short volatility or long volatility play. Or, you can choose to lean bullish or bearish with a ratio backspread. All of this will be based on risk/reward analysis and not on the "news" of the stock or what the analysts think is going to happen.

In this way, you are no longer playing your hunch, guess or "well researched opinion." Rather, you are now playing odds and placing yourself in positions where the losses are minimal when you are wrong and the wins are big when you are right.

Over 1,000 times that you make an earnings trade, the move of the stock will be random in the end. So, it really comes down to putting yourself in positions where the risk is less than the reward.

Hope this helps.


* NOTE: Some original wording has been modified for legibility.

Thursday, July 30, 2015

End Of Day Post

The markets opened lower today, but reclaimed their losses, closing flat on the session. The markets have been experiencing a bounce off of support over the last couple of days. Today’s session could have gone either way after yesterday's FOMC statement, but it appears the bulls had an answer to this morning’s weakness.

Technically, today's action doesn't change much in the overall market patterns, however the bulls did show up, leaving us with a nice hammer candle in the S&P. Tomorrow, we will be looking to see how this week finishes, although either direction should give us opportunity for new trades based on earnings results.

Mid-Week Outlook

  • Bullish: 34%
  • Sideways: 43%
  • Bearish: 23%

Have a great weekend,

The Maverick Trading Team

MAT: Highlighted Trade From One Of Our Traders

Here is a great trade made in Mattel (MAT), which designs, manufactures, and markets a range of toy products worldwide. There are a few indicators in this chart – not just the support level breakdown – which helped to confirm this move lower. Using multiple indicators is just one of many topics covered in Maverick's curriculum.

There are many different trading strategies available to take advantage of this type of setup in the options world. In this case, our trader's personal Trading Plan directed the trader to buy a diagonal put spread, giving the position added time for continued weakness in the stock and further gains.

Typically, for the strategy chosen, the risk is the premium paid and our traders aim for a 50%+ return. At Maverick Trading, we pride ourselves on our community of traders. Every week in our live Trading Room, our traders share their favorite new trade setups (like the one above from last week) with all of their fellow Maverick traders.

NOTE: Chart(s) courtesy of

Tuesday, July 28, 2015

End Of Day Post

The bulls finally made an appearance today following five straight days of selling. All three majors made decent moves to the upside, with the S&P posting the largest gain of just under 1.25%. We would expect a counter move after five straight days in either we just need to see how far this move will go.

We are once again seeing different levels in the three majors. The Nasdaq is still the strongest of the three, pulling back to its rising 20-day simple moving average (SMA) and posting a nice hammer candle. The S&P has given up more, moving below its 50-day SMA, but bouncing off of its rising 200-day SMA – still an overall bullish sign. The INDU looks to be struggling here – below its 200-day SMA and setting a lower low.

Earnings season is still the main driver to these markets. We should now look to the sectors with the strongest results. It is still early, but today's move could create opportunities to the upside...or at least trigger some bullish setups. Feel free to start adding to your portfolio if desired. Make sure to implement both longer- and shorter-term trades, thus making it easier to adjust your exposure based on any changes in market sentiment.

Have a great night,

The Maverick Trading Team

Friday, July 24, 2015

Repurchase Programs and Stock Price

From Our November 2014 E-mail Archives: One of our traders wondered if there was a trading strategy that could be used on companies that had significant share repurchase programs. Our Head Trader, Robb Reinhold, answered the question.*

-----Original Message-----

From: David B.
Subject: Buyback Question

Hi Robb and Joe,

I was just wondering if either of you have ever done any research on companies that have announced or have large stock repurchase authorizations in place and the impact on their stock price?

Obviously, companies have blackout periods (e.g., before earnings) when they cannot buy back stock. However, I would imagine that these authorizations could provide some support for the stock price. Therefore, after earnings, these companies are likely to trade sideways or have an upward bias.

If the stock trades in this manner, then it would appear to me that they could be good candidates for slightly out of the money credit spreads or diagonals. I hear you guys talk a lot about finding stocks that are not going to go down and, to me, these could fit.

Am I wrong in my rationale? Do you have any thoughts or experiences?


-----Reply Message-----

Hi David,

Thanks for the question – this is an interesting one. The big problem about buybacks is that even though the company can announce a 1 billion dollar buyback, they don’t actually have to do anything. So, there is no way to know in real-time how much the company is trying to buy back at the moment. Most companies do report their buyback amount per quarter with earnings, but that is not required.

Overall, companies that are actively buying back stock after buyback announcements tend to move higher. I don’t have any hard data (it might be out there on Google), but I did pull up a quick story from The Economist – click here to read the story.

I skimmed through the article and didn’t see any hard data over a long period of time that would support our hypothesis that companies that are actively buying back their stock will increase/beat the market. However, in my 18 years in this business, I would say that there is a small benefit to a stock price from share buybacks. However, your question regarding repurchase programs and stock price is "cause and effect" and my favorite saying in statistics is, "Correlation does not equal causation!"

You could say that only companies that are generating a lot of free cash flow (FCF) from operations can afford to buy back their stock. It is PROVEN that companies that generate higher rates of FCF have stock prices that rise over time. As you can see, the buyback is likely just one piece of an overall bullish scenario. I think that you are looking in the right place, but the buyback is probably only a small part of the overall positive story.


* NOTE: Some original wording has been modified for legibility.

Thursday, July 23, 2015

End Of Day Post

Earnings results are still rolling in, as the markets continues lower this week. We are seeing mixed results so far; however, the companies who come up light are weighing heavy on the markets. There are still a lot more announcements to come, and with a very light economic calendar this week, we should continue to see market reaction to the results.

Technically, we are still in a bull pull back here. Volume has been increasing with this move lower, so keep any eye on the VIX for confirmation of something more than just a pull back. Keep an eye on support as well. We could see the bulls step in at these levels, as we haven’t heard from them yet this week.

Consider keeping a balanced portfolio as we move through earnings season. We could see a directional bias reveal itself over the next couple of weeks.

Mid-Week Outlook

  • Bullish: 13%
  • Sideways: 46%
  • Bearish: 41%

Have a great night,

The Maverick Trading Team

Wednesday, July 22, 2015

KITE: Highlighted Trade From One Of Our Traders

Here is a great trade made in Kite Pharma (KITE), a clinical-stage biopharmaceutical company. The Ascending Triangle chart pattern shown below can prove to be very strong and bullish. This pattern is just one of many covered in Maverick's curriculum.

There are many different trading strategies available to take advantage of this type of setup in the options world. In this case our trader’s personal Trading Plan directed her to buy a diagonal call spread, taking advantage of possible gains even after reaching a $75 dollar stock price target.

Typically, for the strategy chosen, the risk is the premium paid and our traders aim for a 50%+ return. At Maverick Trading, we pride ourselves on our community of traders. Every week in our live Trading Room, our traders share their favorite new trade setups (like the one above from last week) with all of their fellow Maverick traders.

NOTE: Chart(s) courtesy of

Tuesday, July 21, 2015

End of Day Post

The markets took a step back today with help from some disappointing earnings results. After last week's bullish surge, consolidation and/or even a bull pull back was to be expected. All three majors gave up ground today, but currently aren't testing any major support levels.

We discussed the probability of earnings driving the markets and, so far, that seems to be the case. Earnings results will vary from day to day, so stick with the overall market trend and not the individual results. It can be hard to enter new positions during earnings season, so take note of the earnings results of any stocks in your watch lists for opportunities down the road.

The VIX didn't show much reaction in today's move lower, indicating that this is more of a reaction to specific stocks, rather than something bigger. Keep a sharp eye on your watch lists and don't be afraid to take positions after earnings results have passed.

Make sure to limit the amount of earnings plays that you take. If you are going to play an earnings event, then make sure that you take the trade with the biggest reward-to-risk advantage.

Trader trades triggered:

  • Bull: 0
  • Bear: 0

Have a great night,

The Maverick Trading Team

Friday, July 17, 2015

Trade Adjustments

From Our May 2014 E-mail Archives: If you have ever had a max loss in an options trade before expiration (okay, who hasn't?), then you need to hear why making an adjustment can often lead to larger losses. Our Head Trader a, Robb Reinhold, answered the question, plus described the concept of merger arbitrage.*

-----Original Message-----

From: Travis J.
Subject: Question

Hi Robb,

I am in a Bull Put spread on Valero Energy (Ticker: VLO). I have the May(4) weekly 56/58. I am currently at max loss right now. Tell me why it is not a good idea to buy back the short leg and let the long put run since the stock is dropping.

Thanks for your time,

-----Reply Message-----

Hi Travis,

Thanks for the email – this is a good question. What you are talking about is an adjustment of a strategy. In theory, adjustments are great since you can take any position that is a loser and, technically, turn it into a winner. If done correctly, you will never need to take a loss at all!

In reality, though, it doesn’t work as well. The reason: Every time that you click the button to submit an adjustment, you will get results based on your long term win/loss ratio. So, let’s say a trader has a 50/50 win/loss ratio. So, on average over time, the adjustment will improve the position 50% of the time, but it will also be the wrong decision 50% of the time. This would be fine if the Risk/Reward (R/R) didn’t change. However, the R/R changes on all adjustments and most adjustments will open up a bigger max loss potential.

Let’s take your VLO as a great example. You are short the 58/56 put spread and VLO is currently [in May 2014] below $56/share, creating a losing position. Let’s say that you are at a max loss of 1.00 (having collected a 1.00 credit originally).

Once you make an adjustment by buying back the short leg, you will effectively lock in the max loss on that contract. Your remaining long put will be considered a new position at its current price. The May 23rd long put is currently trading at 2.12 per contract. So, after the adjustment, your max risk increases from 1.00 to 3.12 overall. If VLO stock drops in price and you could sell that long put (currently worth 2.12) for 3.12 before expiration, then you would erase the 1.00 loss in the original spread and effectively break even. If you can sell the long put for anything above 3.12, then the original spread plus adjustment would be in an overall profitable position.

If the adjustment works out, then it was a great trade. However, we also have to look at the other side since VLO stock could jump higher before expiry. Without any stops, you have effectively added $2.12 to the original 1.00 max loss. In the worst case scenario, you could take 3X the size of loss you had originally planned for.

So, here’s Maverick Trading’s (and my) position on adjustments. Using your VLO trade as an example, if that long put after adjustment is the absolute best new short position that you can find in all of the stocks in the ENTIRE market, then make the adjustment. Simply treat the remaining long put as a “new trade” and either have a $1.00 stop or reduce your position size in half to maintain proper position sizing.

With that said, I would make a huge bet that your particular stock (VLO) is NOT the best short that I could find in all of the stocks in the ENTIRE market. That is, I’d bet big that you could find a better “new trade” out there.

Knowing that I could most likely find a better new trade idea, I would leave VLO as a max loss and enter a new short position in a better trade/different stock, then follow correct position sizing and management on that new trade.

In summary, I consider a trade adjustment a new trade. If it follows everything that I am looking for in a new trade, then I am okay with it. Just be aware that 99% of the time that traders make adjustments in a losing trade, it is because they are emotionally invested in their position and they want to get their money back in that trade. This is a common pitfall of trading. Don’t fall for it!

Hope this helps,

* NOTE: Some original wording has been modified for legibility.

Thursday, July 16, 2015

End Of Day Post

The markets continued to move higher this week, now fueled from favorable earnings results. We did see a strong bounce off of support, as the U.S. markets shook off the overseas move rather quickly. The continuation of this move, though, should be driven by earnings results moving forward.

Earnings season is still in the early stages, but we have seen some decent numbers in a few of the larger companies up to this point. So good, although we still have a way to go before this round of earnings is complete and the overall results impact sentiment.

We have been talking a lot about sector rotation. With the passing of each earnings season, will need to identify any changes in sector trend. Pay attention to earnings results, especially with each sector, when adding new positions at these levels.

Technically, the markets are moving right back up to high resistance levels and are now showing signs of increasing volume. The VIX is dropping as fast as the markets are moving to the upside, as it currently revisits yearly lows.

Adding longer-term, bullish positions (preferably diagonals) at these levels would make sense; however, earnings season can pose a problem. If you are planning on taking longer-term positions, then make sure to trade outside of the earnings event, either before or after the results are posted. It is okay to wait until after the event to enter the trade, thus giving you a better idea of the stock's next move and increasing your probability in direction.

July monthly option expiration is tomorrow, so make sure to address your portfolios. Keep in mind your exposure moving into August and make note of any moves that need to be made going into next week. The markets appear to be strong here, so take your time and follow earnings results.

Mid-Week Outlook

  • Bullish: 9%
  • Sideways: 61%
  • Bearish: 30%

Have a great night,

The Maverick Trading Team

Tuesday, July 14, 2015

End Of Day Post

Lower support levels held as the markets continued higher from last week. The S&P broke below its 2,080 support level last week, but bounced off of 2,050, and is still moving higher. Although the last few days have been bullish, we are now retesting minor resistance levels set back on June 11th. Volume is still on the lighter side, but the movement is definitely bullish, as we have seen a decent drop in the VIX over the last couple of trading days.

We need to stay cautious as this could still be a very large bear rally to this point. We haven’t seen an answer from the bears yet, but expect one later this week. Entering new trades here will be difficult with July monthly expiration coming up, along with the amount of volatility that we have seen in the markets the last few days. Consider staying balanced if you are going to enter longer-term positions here. Trying to gauge shorter-term direction will prove difficult until the week progresses.

Another earnings season is upon us, so make sure to keep track of earnings dates and/or earnings results of any stocks on your watch lists. Earnings results can create sector rotation, so keep an eye on sector performance over the next few weeks.

Have a great night,

The Maverick Trading Team

Friday, July 10, 2015

LEAPS and Mergers

From Our E-mail Archives: We received a question about the effect of mergers on LEAPS options. Our Head Trader, Robb Reinhold, answered the question, plus described the concept of merger arbitrage.*

-----Original Message-----

From: Colin M.
Subject: LEAPS and Take-Over Price Target

Hi Robb,

Say you own 2016 LEAPS (Long-term Equity AnticiPation Securities) in Heinz (Ticker: KHC) at $60 and Warren Buffet decides to come in and acquire Heinz privately at $62.50 tomorrow.

Would your LEAPS immediately lose all of their extrinsic value and drop to $2.50 in value? Do LEAPS still retain some of their extrinsic value when the underlying stock is taken private?

Thank you,

-----Reply Message-----

Hi Colin,

Technically speaking, if that scenario happened, then the Implied Vol (Volatility) and Time Value would go to almost zero immediately. However, in real life, that never happens. Even after the announcement of a merger, the prices don't change automatically since the actual merger or buyout is typically months away and each company has to go through a process of possible regulatory approval, shareholder approval, integration questions, etc.

So, there will still be at least a month or two before the actual merger happens. During this time, there is an entire trading strategy called merger arbitrage, where traders will take positions based on the likelihood of the deal closing or not.

For example, let's say the Heinz buyout is announced at $62.50. The first thing to determine is if the offer is all cash, half cash/half stock or an all stock deal. If there is stock involved, then there is now the underlying risk of the acquiring company's stock going down, so this will be built into the market price and Heinz might only trade at $61.50 on the day of the announcement.

If traders think that there may be big regulatory or shareholder hurdles, then the price of Heinz might only be $58 due to the risk of the deal not closing. On the other end of the spectrum, I have even seen stocks trade above their buyout price if traders think that a competing, higher bid might come in for the stock.

Due to all this uncertainty, there will still be extrinsic value built into the options. The less likely that the deal will get done will equal a greater extrinsic value. However, as the stock gets closer to the actual buyout date and hurdles are removed, the risk premium comes out of the stock where it will move up to 61.40 or higher and the risk premium will leave the options as well.

Hope this helps and have a great weekend,

* NOTE: Some original wording has been slightly modified for legibility. Also, stop using ketchup on your hot dogs. You're too old for that. Use a spicy mustard instead.

Thursday, July 9, 2015

End of Day Post

The markets closed slightly higher after the third day in a row of wide-range trading. The S&P and Dow closed below their respective 200-day simple moving averages for the second day in a row. The Nasdaq gapped higher on its open, then steadily gave back nearly all of its gains, though it still ended up for the day.

The markets are still waiting to see what is going to happen with Greece and China. On some positive news (though it may be short-lived), China introduced new market support measures, leading the Shanghai Composite to have its best day (up nearly 6%) in the last six years.

As we near the weekend, we will continue to closely watch how the U.S. markets continue to deal with the uncertainty surrounding Greece and China. So far, we just have not seen the bullish catalyst that we need to have the markets head higher with conviction.

Trade cautiously and think about letting trades come to you.

Have a great night,

The Maverick Trading Team

Tuesday, July 7, 2015

End of Day Post

The markets made a remarkable recovery today after being down over 1% mid-session. The S&P temporarily broke its 200-day simple moving average for the first time since October 2014. The Dow and Nasdaq hit their lowest intra-day prices since February and May, respectively.

Eurozone officials are saying that Greece "might" submit a new aid proposal to European creditors tomorrow (Wednesday). However, any new proposal is not likely to differ significantly from prior proposals, which could add more hesitation in the markets. As price action is often an indicator of "yet to be released news," we believe that Greece and the eurozone took a major step toward a resolution today.

We will watch closely how the U.S. markets continue to deal with the uncertainty surrounding Greece. Expanded range bullish candle reversal patterns have been found at many of the important bottoming points in the broad markets over the past few years. So, today's reversal should be respected at a minimum, if not acted upon!

When a big expanded range candle forms, the next day is usually a harami (inside day). So, tomorrow may give an opportunity to buy on a very minor intra-day dip if you didn't already pounce on the bullish reversal in today's session.

Have a great night,

The Maverick Trading Team

Monday, July 6, 2015

Getting Exercised

Today, our Head of Trader Development, Joe Jensen, answers a question from one of Maverick's traders about getting exercised in a position.*

-----Original Message-----

From: Chris T.
Subject: Getting exercised

Hi Joe,

I have a really quick question for you. I'm in a really nice bull call spread with Goldman Sachs right now and it got me thinking. I've always had it as part of my plan that if the price per share hits my short, then I would exit the position – which is fine if it is the week of expiration. However, in this case it is a June spread. So, if it hits the short this week or next, then (by following my plan) the profit will be about 1/3 of what the max gain would be.

I thought about why I have that in my plan and I realized it's due to a fear of getting exercised. I now have a couple questions about it:
  1. Do options get exercised often prior to the expiration date or does that never happen?
  2. Also, if I'm in a spread and they exercise, will Interactive Brokers (IB) just exercise my long and the trade is over? If that's the case, then I really shouldn't have any fear of it and can change that part of the plan instead of exiting immediately because I feel like I might be leaving money on the table.
Thanks in advance for any advice.


-----Reply Message-----

Hey Chris,

This is a great question and one that I get often. Getting exercised (i.e., assigned stock) in an option position can be extremely unnerving, especially when you see the amount of margin used and the unrealized profit/loss. There is no real way to tell if you will get exercised. However if you find yourself deep in-the-money (ITM), then the odds do increase.

Remember, options are priced based on two things:
  1. The amount of intrinsic value (how much an option is in-the-money)
  2. Plus, the amount of extrinsic value (time and volatility remaining in the option).
If the holder of an option was to exercise his option and convert it into stock, then he has wasted the time value. People don’t like to throw money down the drain, though, so that's why options aren't usually exercised early.

For example: ABC is trading at $52/share and a trader owns the 50-strike calls worth 3.00 each. Each option has 2.00 of intrinsic value and 1.00 of extrinsic value. If the trader exercises the option early, then he is actually throwing 1.00 away per option since they will own stock at $50 that is worth $52. They have only 2.00 of value by exercising instead of the total 3.00 of value that the option was worth. Thus, if a trader really wants to own a stock instead of an option, he will dump the calls and simply buy the stock in its place 99% of the time.

Usually, options are exercised near their expiration and only if a dividend is involved. The reason is simply that if the dividend is worth more than the extrinsic value, then it makes sense to exercise the calls early.

If you ever get exercised, it is important to remember to trust in your combo. Vertical spreads are hedged, so take a look at the risk graph and you will see a max gain and max loss point. Even with a stock assignment, you are still hedged due to your other leg in the combo. Essentially, you are still in the same is just that the stock was substituted for one of the option legs.

If you are ever assigned stock, take a look at the stock chart to see if the combo is still favorable. You can always close this position manually by getting rid of the stock first and then selling the other option. If the combo is ITM (which it probably would be due to the assignment), then you can let the whole thing expire (same day substitution), which would equate to a max gain if you bought the debit spread.

This isn't exactly true for all combos, but if you are in any "combo," then you will be hedged up to a point. Always refer to your risk graphs for help and make sure to add a plan of attack for assignment in your trading plan.

I hope this helps,

* NOTE: Some original wording has been slightly modified for legibility. Also, the original response was modified to add additional content, including an example.

Thursday, July 2, 2015

End Of Day Post

The markets finished flat on today’s session as we enter into the July 4th holiday. Since Monday’s sell-off, the markets have been floating higher, but with decreasing volume. This was to be expected going into the long holiday weekend. Even though the markets managed to move off of Monday's close, this still feels like a bear rally here.

With the U.S. markets closed tomorrow, the focus will move to Sunday’s Greek bailout vote. No matter the outcome, it will definitely have an impact on Monday’s U.S. session. Make sure to allow the volatility to settle down a bit before entering new positions.

The results of this vote could create a longer-term market sentiment change; however, Monday’s reaction alone won’t be enough to determine that. We will need to look more towards Tuesday and Wednesday for follow through.

Stay patient on Monday. Entering later in the week can give us a better perspective on market direction, along with better pricing in our options with lower volatility. We will see if the Greek vote moves us out of this range or right back into it.

Mid-Week Outlook

  • Bullish: 15%
  • Sideways: 55%
  • Bearish: 30%

Have a great weekend,

The Maverick Trading Team