Tony B: Tom is back, my friend, Best Practices: Expiration, Before and After.
Tom S: Somebody pointed this out to me, and they are 100% right, I missed this morning..confirm with Sandra, we talked about scalping, because I should put this up, I forgot to mention this. Remember tasty bite accounts size accounts.
Tony B: Three.
Tom S: There is day trading rules, if you try to scalp options just like scalping stock. The reason that you can do with futures which I wasn’t thinking about because futures are not subject to day trading rules.
Tony B: Right.
Tom S: There is no pattern day trading rules around the futures; it’s just stocks and options.
Tony B: It’s a great point.
Tom S: So be careful there. Thank you for pointing that out too.
Tony B: It’s a great point.
Tom S: All right. Are you ready Mr. Bats?
Tony B: I am.
Tom S: Man, we’ve got a ton of stuff today, we are going to cover everything, we’ve got strategies for IRA, we’ve got Best Practices, we’ve got a great market measure coming up, and just tons of other stuff. Also this week we’ll show, thanks for all the response on the …tape it from, from we put up on Friday.
Tony B: Friday.
Tom S: Also thanks for all the feedback …. is high-frequency trading thing. Both of those were …
Tony B: Nailed it.
Tom S: Both of those…

Tom S: We are going to play another, we feel… one of they are doing Ratigan piece last week and we are going to play it for you probably tomorrow, maybe Wednesday, whenever we finish production. We’ll try to have one a week, and hopefully we’ve got more than that. But the next one is a lot lot better. The one we played last week, I wasn’t even sure we are going to actually produce it, but we started to put it out there anyway just because the more information the better and everything else.
Tony B: …know you.
Tom S: The next one is.
Tony B: The next one is your first day.
Tom S: We are also all getting to know each other, but the next one is much more direct, much more specific and you get a much better feel about what we are trying to accomplish with that segment: truth or skepticism. We’ll give you some details on that. So far we’ve been really quite say to done almost nothing so far. We still, we sold a bunch of puts in.
Tony B: Forward slash CL, which would have no day pattern day trading rules….. grand.
Tom S: We sold a bunch of …
Tony B: About a dime which is $100 on every contract because CL is a ten times.
Tom S: We sold a bunch of the Feb 45 puts. We could scalp it right now for about a dime, but we are not going to. We’d like to make $0.20, $0.30 whatever it is. The game plan here Tony is just, let’s put ourselves, we’ve got to give opening trade, winning trade on the books. We sold some in 97, we sold some at 98, and maybe we’ll buy some if they get into the 70s or 60s, but just to start …if they get there. I’ve no idea. But we’ll keep a close eye on those.
We’ve no working orders right now. The rest of market, we are just kind of, we got very flat. When I say very flat, we’ve got flat trading wise last week. We traded not bad for the first week of the year. Our positions are short trading piece.
Tony B: Scalping was great.
Tom S: We scalped great, but our positions are short S&Ps, short bonds, the way they’ve been almost all along, short NASDAQ futures and short notes. To be fair that has not worked. The S&Ps have gone down, the NASDAQ futures have gone down, but the notes and bonds have gone up. We are going to keep that position on, but need some help, I’m looking up to the gods, I’m looking at you. We need some help for sure.
Tony B: I’m talking to you.
Tom S: I’m talking to you. That’s exactly right, but we definitely some help.
Tony B: All right. We’ll keep an eye, as we keep an eye on those, on those, on that crude oil trade, let me just open on my screen too, just because I … I never want to be, we have this crazy, Bat and I have this kind of, you always keep this eyes wide open.
Tom S: Sure approach.
Tony B: Attempt to.
Tom S: Strategies, I’m sorry, this is not strategy, Best Practices. We are going to do, we are starting the day off with Best Practices and the segment today because it’s expiration week is, what to check for going into expiration. This is expiration before and after, so lots of really good information here today. I think you’ll …
Tony B: Timely too with….
Tom S: I think we covered this like once or twice a year, and I think it’s important. No one the product you are trading is going to expire. Now this is not about, this is not a function of saying; hey there is this incredible opportunity on expiration week. This is not about any of that stuff saying, hey, here is something you could do in the weeklies, here blah, blah, blah. This is about, you have options coming up for expiration.
There is not much you can do, you are actually disadvantaged towards when it comes to you versus the professional, or you versus the machine. The longer the time is between the day you put a position on and the actual expiration of that position. It’s not, there is supposed to be some giant long-term, but if you have a normal duration, which we consider to be maybe 30 to 50 days with 45 days, around that being the sweet spot. That’s when it’s most difficult to define where the real edge is.
Tony B: Agreed.
Tom S: Which means that it’s a very level playing field. As you get into expiration week, the playing field becomes a lot less level, which means other people with more capital don’t know more than you, but they can be more nimble than you. What we want to talk about here is just, hey, know what’s going to expire. Now with options it’s easy because all the option expire in the same day, basically either on Thursday or Friday of this week, but with futures …
Tony B: …. some of the indexes, I guess, SPI.
Tom S: It’s at Thursday or Friday of this week, but with different futures and different other things, that there is just a lot of stuff going on. Why wait? Why torture yourself? Look for opportunity. If we are always looking for opportunity, then let’s not torture ourselves trying to worry about expiration stuff. Know when your product is going to expire. That’s all, third Friday of the month.
Tony B: It sounds like common sense. You’d be surprised how many times you get an email from people saying, hey, I didn’t know the VIX’s futures expired on a Wednesday, when did that happen? That kind of thing.
Tom S: I still get like dozens of emails every week that talk about, hey, what do I do this week on expiration. I will not have one thing to do this Friday with respect to expiration. I will not have one thing to do this Thursday with respect to expiration. Everything I have on will be long gone, way before all that stuff.
Tony B: Sure.
Tom S: Comes into play.
Tony B: What we did here was we talked about kind of just, we put this out here so that you guys would have a, a really clean picture, kind of where everything expires and went, because people ask me this all the time. We just, we gave you a chichi. And this is really good, just stick it somewhere, or at least know you’ve always got archives to get it, but like VIX options and futures settle to cash, and they settle, it’s an AM settlement, and there is the settlement value. Now VIX is a …
Tom S: You can go to VRO to fund the price.
Tony B: Now unfortunately for this one, VIX will settle on Wednesdays, not Thursday or Friday, but SPX monthlies, what they should have put here was the actual date to make it simpler, but SPX monthlies, weeklies; monthlies, weeklies, these are all Friday, Friday a.m. or p.m. The VIX and VIX options is Wednesday, so we should set that differently. Stocks, futures and futures options, all, so you get everything, all of the physical close, closing price, physical cash, what it turns into, blah, blah, blah, everything.
Tom S: No, it’s good, really very helpful.
Tony B: It helps out because just if you had any questions, there you go.
Tom S: They can answer yourself, yes.
Tony B: This is for expiration week. What actions do we take to on open positions going to expiration? First of all, we identified that in the money positions, we decide to close a role take assignment. One of the neat things about the toss platform is on your monitor tab, on your monitor tab you can choose, like the number of days before expiration you want to see it, if you have in the money options or whatever, but there will be a little, there will be different icons for if you have in the money options. And just be aware of that because, because …
Tom S: It says ITM in the money.
Tony B: I understand. But some people don’t know why that icon is there. You can set your screen up, it’s all based on, there is in the set-top box there are default settings for allowing you to choose when you want to see those icons. I strongly recommend that you just get comfortable so you can just quickly look and see, oh, I have stuff expiring this week, just makes it easier. We look to check for manageable positions, positions that are nearly in the money or …
In other words, if it’s something that’s close to being near the money or at the money, we roll. If they are winning positions, we roll or close. If they’re losing positions, we may hold as long as we can, but again in maybe a roller coaster [inaudible 00:08:57] position is winning but it just says too much delta, we may roll or close.
Tom S: Sure.
Tony B: Right. I did that this week in Twitter and a bunch of other things. For example, what’s [inaudible 00:09:07]. For at the money options, such as a long butterfly, you can consider just closing. Now if you have a cash settled, that’s different. If you’ve cash settle positions, you might just let them go.
Tom S: Right.
Tony B: You might. That’s up to you, but …
Tom S: Define risks versus undefined risks, out of the money versus in the money, there is a lot of variables to it.
Tony B: A butterfly is a perfect example, which is why I’m glad they put this in here. If you have a cash settled butterfly, like in the SPX or the VIX, whatever it is, you might say, hey, you know what, its cash settled, and I don't have to do anything, so who cares.
Tom S: You could.
Tony B: If you have an equity …
Tom S: You still have risk there, right. There is still going to be market risk.
Tony B: There is risk. You can make or lose moneys, there is always risk.
Tom S: Right, I’m just saying. But there is, if you have a cash settled product, you might decide, I’m going to hold this position. If you have an equity settled, you can’t really do that, you have to close it out. Equity settled, you have to close it out. Cash settled, you can just let it go, if you want.
Tony B: Sure, yep.
Tom S: For in the money spreads, the long and short options cancel each other out. However, it’s a case-by-case situation as to whether the assignment fees per striker is cheaper than the commission’s close to position. We are all about just letting everything go. I don’t look at this business as a 10, 15, $20 decision of when to do something. Almost always we’ll let everything go, unless your positions are one or two lots or three lots, we just let everything go.
If only one strike is in the money, it will not be canceled out, so therefore you have to be careful. It’s always about, but there is no reason to be in that position anyway.
Tony B: There really is no reason to be in that position. There is really no reason, nine times out of 10 not taking a position into expiration.
Tom S: I have hundreds of positions on, it’s never an issue for me. Somebody with a lot less positions on, it should never be an issue for you, never, never. It’s just, it should not come into play. An easy way to determine what your in-the-money positions will settle to is to consider the directional aspect of that position, just so we understand everything. If you are long at call, its bullish, and your resulting position is long of 100 shares; if you are short of call, the opposite, just so.
Again, if you are long on put, its bearish to become short of 100 shares. If you are short of put, it’s bullish to become long of 100 shares. Just so you want to know what the worst case is, if you don’t do anything, that’s how it works out. If you we have 10 calls that you are long, the resulting position in the money is your long of thousand shares of stock, unhedged. If you’re short puts and they are in-the-money, you are long a thousand shares of stock unhedged, just sort of all make sense.
Dow also indicates positions that are in-the-money. Toss says ITM, Dow says ITM. Now what about the Monday after expiration? What should we check after the expiration cycle? We do a quick overview. Now here is something that most people don’t do. Everybody looks at their monitor tab, but they don’t really look to see if, hey, maybe this got us, just I go through everything. The Monday after expiration, not the weekend of. Wait till the market opens and then go through everything.
Tony B: Agreed.
Tom S: To make sure that, hey, maybe I missed this, maybe I didn’t. I can tell you …
Tony B: Sometimes over the weekend the short options will get exercise or signed before the long options, so you’ll be left with the …
Tom S: Just wait till Monday morning. I can tell you some horror stories of people that didn’t look and didn’t make another trade for a month, and then just, it works both ways.
Tony B: Sure.
Tom S: But it usually comes out to be a horror story.
Tony B: Open each position and check to see for assignment, for correct prices. It also helps you just memorize everything that you have on. Just after every expiration because sometimes you don’t even realize its cash settled, and you don’t have a position. I promise you everybody does this. Everybody. I don't care how many years you’ve been doing this, everybody messes up when it comes to the Monday morning after expiration occasionally. You end up with stock…..have you end up with cash, you [inaudible 00:13:07] you had meeting that something just settled. It’s just, it’s not that easy. Or something that you thought was out of the money turned out to be in the money, just …
Tom S: It’s a lot easier to do and see on the smaller account because your buying power reduction will be that much greater.
Tony B: Check everything, just check everything the Monday before. Confirm what you have on is what you want for the next cycle. Close any leftovers, incomplete hedges or unwanted positions, just like you would kind of a losing trade that you didn’t intend to have, and spread off any uncomfortable delta or premium. In a perfect world and I mean this because it’s so important to the mechanics of continued success, to take care of everything early.
Tom S: I got a question.
Tony B: You’ll never regret it.
Tom S: I got a question for you. You go through your position, you have one of these …. things that you didn’t anticipate, whatever the case maybe and you are down $0.25, $0.30, what do you do?
Tony B: Do you look to make it a position?
Tom S: Sometimes.
Tony B: Do you look to get out of it?
Tom S: Sometimes I look to make it a position because I only trade, the underlyings I like to trade anyway.
Tony B: So you are saying that you are inclined to trade it again anyway.
Tom S: It’s one of the reasons I never trade stuff that I don’t really want to be involve with later on, because I’m always comfortable being involved with this stuff that I’m always involved with. I may have 40 underlyings on right now, the same 40 underlyings that I trade mostly. 80% of them are the same 40 underlyings that we are going to trade all year long.
Tony B: That’s a fair answer, so let’s play the other side for a quick second. Let’s just say it’s something that like an earnings play that you are playing really, really small and whatever. It got away from you, looking at you down $0.25, $0.30, do you stay with that and try to make it a play or do you look to get out of it?
Tom S: Sometimes I just get out. I don’t want it.
Tony B: I tend to just got out myself, especially the markets are wide and we just had earnings play and, I take it as like, it cost me $0.25 and $0.30 and now I’m not going to let that ever happen again.
Tom S: I think one of the best changes to being a retail investor was that I didn’t feel compelled to have to carry all these positions on expiration week. I know it was a big part of, my own personal trading through expiration was a big part of my life.
Tony B: My own personal, when I came off the floor I thought expiration week was going to be like my star week where I was going to carry a lot of things. I carried nothing now.
Tom S: It’s no longer relevant to me anymore. Now I just roll early, move onto the next. That 45 days, the 45 days to expiration has changed all my trading, because now I’m just always moving out, 40. I rolled mostly everything, like Apple being a perfect example. I rolled mostly all my Apple positions to February, like a week ago.
Tony B: No, no, I know.
Tom S: It helps.
Tony B: Sure. Apple does have earnings January 27th…..
Tom S: If I’m assigned on a position that is notionally larger than my account value, the position we are required to be liquidated immediately, especially it’s important to be aware of in-the-money positions on higher price stock to expiration as you will be liable for any losses incurred after being assigned the stock. That goes without saying, hey, if you don’t pay … Where in life do you get a free pass for anything? Nobody gets a free pass. In fact not only do you get free pass, but when you mess up it’s always a 100 times worse than when you do something right.
Tony B: You don’t remember the ones to do right anyways.
Tom S: Right. You never remember anything you do right. When you mess up, it just sucks.
Tony B: Sure.
Tom S: This business is no different. Every time you mess up, you pay for, but it’s not one-to-one. You don’t pay for, it one screw-up.
Tony B: You pay for….
Tom S: One screw-up. One five wins is like one screw-up. That’s just the way, it’s almost it works everywhere, like at life, just think about business. It happens all the time, so roll early, just be careful, roll early.
Tony B: Early roll often.
Tom S: Just roll early, just get done with. I’ve got… my positions right now. I’ve rolled my Apple position and I’ve rolled my CMG position. I haven’t rolled my Cosco position, and I’m going through, like I’ve rolled my Disney position, I’ve rolled all my emerging markets position, I’ve rolled my Facebook position. You probably have about 40% of my positions that I have rolled so far, but we’ll get to them.
Tony B: I’d say 50 or 60% I’ve already rolled and the rest I do share it tomorrow. Just the purpose of this discussion today was just, you know what, because … and we didn’t think about this for a long time. But because the risk of screwing up is so much greater than the simplicity of rolling or just moving on to the next month, it’s long next month. We need to deal with it.
Tom S: It really does cut out so many …
Tony B: We just need to deal with it, we just. We used to think that there were so much opportunity this week that we squeeze as much that we can out of it. You know what, no, it’s not the answer. I’ve been talking to a lot of customers that that trade like weekly options, they trade futures, they do all this other kind of stuff. Ultimately everything always comes back to the people that do the best consistently are going, are taking, are rolling sooner, managing winners sooner, and focusing on that 45-day window. You can scalp around the position.
Tom S: Got to trading on their size.
Tony B: I’ll even go down to football this weekend. I called, I sent you an email saying, “I want to bet a nice chunk of money on Green Bay given six.” And you said, “I like the same side.” I called up Jewels and we make a small $20 bet, which I happen to lose. He text me back later and says, “Hey, how do you like Indiana minus nine?” which was the line. I’m like, “Okay, fine, I’ll take Indiana.” If I had bet the … because I didn’t really care about the Indiana game.
If I had bet a large amount of money on the Green Bay game with you, Jewels or anybody else, and then you said, hey, how about taking Indiana [inaudible 00:18:46] you know what? No, I’m not interested in it, because I don't want to like, I don't have a feeling for that game, even though I know it’s basically a 50-50 shot on either one. Because I traded small, they’d say, “Sure, I do that.” Then you are even. It’s all comes down to size.
Tom S: I didn’t want to bet with you because you are too good. I just, I knew that in the end. I thought your Jewels helping you with your picks.
Tony B: And you say how immature.
Tom S: I was too scared of …
Tony B: Then Jules helping with my…
Tom S: The two of you.
Tony B: The two of you.
Tom S: He took the other side.
Tony B: The brain power of the two of you just actually …
Tom S: It’s mind-boggling at times, isn’t it?
Tony B: It’s scary. It’s scary.
Tom S: All right, you are done.
Tony B: Anyway that’s roll early, that’s all.
Tom S: Roll early, roll often.
Tony B: Roll early, close early, move onto the next and focus on the stuff you’re good at.
Tom S: Bonds catching a bid up 12, market catch a small bid [inaudible 00:19:35] the S&P’s up 4, oil is up couple of pennies after where we just bought it. Gold is up seven. We are going to take a quick break, when we come back we got the opening bell in about four and a half minutes with tastylive Live.