Click here if you missed the first part of our interview. Najarian has a long history as an options trader, having worked as a pit trader and a market maker at the Chicago Board of Options Exchange. More recently, Najarian helped found One Chicago, an electronic exchange geared toward trading in futures on individual stocks, indexes and exchange-traded funds.
Here, in Part 2, we will look more closely at some of his more recent trades, some of his nuts and bolts ideas about entering and exiting options trades, as well as what it is that he loves most about being an options trader. We talked a lot about options trading in general in the first half of our conversation. Can you tell us about one of your best recent trades? We found it interesting and it made a lot of sense that if there were to be a pull back, the USO would be a great vehicle to use to be able to participate.
So they moved to the April options, instead, and they were buying both at-the-money and just out-of-the money puts in April at a pretty aggressive clip. Because of that the trade made sense. Now that was a pretty dramatic move, but it was a move that everybody sort of was waiting for and looking for. It sounds like a textbook trade. There had to be some patience. But it happened in a timeframe that allowed for the trade to come around. Trades like this make a lot of sense. We bought the same puts that the most aggressive buyers were purchasing.
We decided that the trade made a lot of sense for all the reasons I mentioned. It seemed like oil had made a substantial run, and maybe it could still keep going higher. And you just used naked puts in that USO trade? Do you consider yourself technically oriented, fundamentally oriented, a blend of the two in terms of coming with specific trade ideas? I would say an absolute blend. I go through the elimination process. But I try to look for every reason in the world not to do the trade.
I hear a lot of folks out there talking about how great this and that are. Without asking you to reveal too many secrets, could you give us an example of a sort of technical tool that you might use, and a certain fundamental tool just so people have some ideas of the sorts of things that you might look at? Oh, as far as the fundamental side? Maybe fundamental and technical. Maybe one from each?
Technically, I love the charts as much as anybody else does out there. There are plenty of patterns, in fact we are in one right now. So support and resistance is one example of a technical or chart-based tool that you rely on? But knowing that the infrastructure build-outs that are out there, knowing that the PE level presently for Cisco seems to be on the lower end… I look at all those things.
How much does the price of the option, whether the option is overpriced or not, play into your trading? Other than that, I think the other next step is having some form of system that can be the tool that you can lean on. There are systems out there that are offered through many of the various online brokers and so forth. But I would pick an online broker that has some of those kinds of tools available for me so that I can see the levels of volatility for a given stock and the volatility of the options.
You really have to have some knowledge going in. And you need those tools. When it comes time to exit a position, what are the ways that you want to get out of an options position?
That sounds easy to remember and stick with. But something that is working, they also tend to be a little bit giddy and then they seem to change their mode once things are working. And when that strength is there, say if an option doubles, you have to sell some of the position—at least half of it.
Because if you have sold half, then everything you own is free. This gives you an opportunity to say: Let the winners run. Do you subscribe to the fairly traditional ideas in terms of in-the-money, at- the-money and out-of-the-money options?
I think every situation is slightly different. But in general, I normally stay away from the in-the-money options and primarily stick with the at-the-money or just out-of-the-money options.
But the other option, the out-the-money option, if it accelerates, it really, truly accelerates. The options starts to move even faster with the stock.
I just generally like the less risk and less cost of the at-the-money and just out-of-the- money options. What is it, if you can say a thing or two about options trading that you enjoy compared to maybe if you were trading stocks or forex or something else?
I guess I really like the options because they do allow for leverage where you can be involved in many more positions for similar cost—and with potentially much more gain overall. Maybe one or two positions in a stock or pair of stocks. Whereas, the same amount of money deployed in options would allow me to say: It gives me the ability to spread around and be in more places at the same time. At Connors Research, we are using it as an overlay to many of our best strategies to make them even better -- now you can, too.
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