Unusual Options Activity and Scalping Gamma - Finding and Managing a Trade

Unusual Options Activity and Scalping Gamma - Finding and Managing a Trade

Let’s find a trade using Wall Street Wiretapper (an AI driven unusual options activity scanner offered by Masters In Trading) and then review entering and managing the trade.

How to Find a Trade Using Wall Street Wiretapper

The new coronavirus variant, Omicron, is all over the news.  An opportunity is created by the uncertainty surrounding the potential impact of this new variant.  What sectors or industries could be impacted?  Gaming and hospitality immediately come to mind.  If we look at Wiretapper for names in this industry, we see that $CZR, Caesars Entertainment, has been appearing on Wiretapper scans for the last two weeks:

This indicates that actual volatility will outperform the implied volatility currently priced into the options – a great place to look for a trade.  This trade opportunity is confirmed by looking at Masters in Trading High Value Target Tool which shows that $CZR is extended below its lower price volatility bands, further evidence that the stock is ready to move (or keep moving):

$CZR is a more expensive stock so this trade may not be for everyone, but this example can be scaled up or down to any size trade and any size account.  Let’s go out to the January 21, 2022 expiration and look at a strangle – buying the 90 calls and the 80 puts for about $10.00 (with the stock trading around 85).

Entering The Trade

The first step in entering a trade is to determine how much capital to risk and how the trade fits into your overall portfolio risk.  We’re never going to get the exact, perfect entry (unless we get lucky!) so having enough risk capital for multiple entries is essential.  In this case, we want to be comfortable risking $3,000 or more on this trade so we can enter at least 3 times as the stock moves, and the opportunity presents itself.  This means that you’re comfortable losing the entire $3,000 on this trade!  Sizing of the trade in relation to the rest of your portfolio, multiple entry points and trade management are more important for a successful trade than your initial entry.

How To Manage the Trade

Let’s assume that we’re in the trade.  The stock moved around, and we were able to enter 3 strangles at an average price of $10 – we now control the equivalent of 300 long shares from $90 (the calls) and 300 short shares from $80 (the puts) for $3,000.  As we describe the three alternatives for managing the trade, pay close attention to the flexibility and profit potential of each.

Alternative 1:  Close the Trade

First, and the easiest, is to close the position at a profit. We purchased three strangles; if the overall trade is profitable, take the win and move on!  If the straddle moves to $12, we can close the position and take the $600 profit.  An alternative is to close one or two profitable strangles to cover the overall cost of the trade – we now have risk free trade – and let the open position(s)run.

Alternative 2: Sell an Option to Create a Spread

For the second approach, let’s assume that the Omicron issue is resolved quickly and $CZR rallies to $100. The call side is now $10 in the money and the increase in value of the calls will not only cover the overall cost of the trade, but the trade will be profitable.  We will be able to sell the $100 calls for more than $10 (the original cost of the trade).  We’ll own the $90 – $100 call spread, cover the overall cost of the trade (so our investment is $0) and most likely have a profit!  Now we have the opportunity to make $1,000 on each call spread ($3,000 in total based on 3 strangles) at expiration, and still own the $80 puts for downside protection…all with $0 at risk!

Alternative 3: Scalping Gamma (The Best Approach!)

Finally, the most flexible approach.  Let’s assume that Omicron is a really big deal and $CZR falls to $65, and our puts are now $15 in the money.  We could create a put spread much like we did with calls above but there’s an even better alternative using stock called Scalping Gamma.  As part of the strangle, we own 3 $80 puts which are in the money, so we are short the equivalent of 300 shares from $80.  We can now buy 300 shares at $65, lock in a gain of $5 or $1,500 in total (we lock in $15 by covering the puts through buying stock less the $10 we paid for the strangles) and have $0 at risk!  What’s the advantage of Scalping Gamma?  We’ve retained all optionality unlike the two examples above – we are still long puts and long calls – have locked in profit with the potential to make more.  If $CZR rallies to $90, we make $25 on the long 300 share position ($7,500), still own the strangles for $10 ($3,000 total cost), our calls increase in value, and we still own our puts with time left until expiration!!

Scalping Gamma is a Great Way to Manage Trades

Scalping Gamma is a great way to manage trades, but it will take some time to understand and incorporate into your trading.  Take your time and learn the trade – check out the Masters in Trading YouTube channel for educational videos on Scalping Gamma… and… paper trade, paper trade, paper trade!

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