Options Education: What to do with Xilinx? Plus: Order Flow, Explained

OPtions terminology

In my advisories, Cabot Options Trader and Cabot Options Trader Pro, my primary focus is making money for my subscribers. But my secondary goal (and a goal that I love) is options education – to take beginner options traders to intermediate level options traders, and intermediate level traders to pros.

How do I do this? I write options education pieces and my readers regularly email me their questions.

Here are some of the most frequently asked as well as the most recent questions:

Three Options Education Questions, Answered

Options Education Question #1 – “What do you mean by Option Order Flow?”

Following bullish and bearish option trades is one of the key components of my trading success. It goes back to my days on the trading floor as a market maker. Whenever Goldman Sachs or Morgan Stanley came running into my trading crowd buying millions of dollars of calls inevitably news would break of an upgrade or takeover in the coming days.

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Think of it this way: Hedge funds and institutions don’t put millions of dollars at risk if they don’t believe in a position.

And while they may or may not be trading on insider information, Jacob at home watching public trades is not trading on insider information.

Options Education Question #2 – “Is there a way you can quickly determine if high-volume activity represents that an option has been bought or sold?”

Yes, the best way to determine if an option is bought or sold is to see the market on that option at the time of the trade. So if the market on a call is $1.00 – $1.50, and the trader pays $1.45 or $1.50, then it is safe to assume the trader bought the call. Conversely, if the trade is made at $1.00 or $1.05 it is safe to assume it was sold.

Also, going a bit deeper, I can determine if options prices/volatility go higher after the trade was made, which is a second clue that I use.

And it can be hard to determine if an option is bought or sold on a very tight option market. For example, on a Bank of America (BAC) option, whose market is $1.00 – $1.02, it is very challenging to determine if an option was bought or sold.

In my daily email list that I send to my subscribers every morning, which highlights the biggest options trades made the previous day, I only include the trades that I have high confidence in being able to determine if the option was bought or sold.

Options Education Question #3 – “I kept my shares of Xilinx (XLNX) options (I was on vacation at the time you advised selling). Obviously, I’m glad I still own the options. What would you recommend I do now?  Should I sell them between now and March? Or do you think I should exercise the option come March? What would be your suggestion based on different market scenarios?”

First off, I’m thrilled you were on vacation and didn’t sell! That sale haunts me, but I had to stick to my stop, and at the time of my sale the market was totally unwinding. So I live with the mistake and a 75% profit ;).

Now, how I would manage this position going forward?

I really like XLNX, and if the market can stay in gear, I continue to think XLNX will work well. However, should the market lose steam I would expect XLNX will fall as well.

So, I would manage this position like I do with all of our big winners. I would set a mental stop below. So with the calls trading at $30 today, perhaps I would set a mental stop at $23. That way I wouldn’t get shaken out should the stock fall a couple dollars. At the same time this would stop me should the stock really fall apart. This strategy will also prevent me from selling should the stock continue to run. And as the stock runs higher, I would raise my stop along the way.

Also of note, you can sell the option up until the close of trade on expiration—so, in this case, March 15.

Or you can let the option expire in-the-money on March 15, and if you have the capital in your account, and are set up to take delivery of the stock, you will buy the stock at 80 that following Monday.

Or at any point you can sell the option out, and if you want to remain with a bullish position, you could buy a new XLNX option. This is called rolling—taking some money off the table, but still holding a bullish position.

So that would be:

Sell to Close March 80 Calls

Buy to Open September 115 Calls

Now it’s Your Turn

As you can see by my long answers to my subscribers’ emails above I truly enjoy the back-and-forth and questions. And I invite you to post any questions you may have about options in the comments section below this story. Don’t be scared. Like your third-grade teacher told you, “There are no stupid questions.”

Or, if you’re ready to take the next step in your options trading, you can subscribe to either my Cabot Options Trader advisory if you’re relatively new to options, or to my Cabot Options Trader Pro advisory if you’re an experienced options trader looking to take things to the next level. Click here to learn more.

Jacob Mintz

Quick Profits, Controlled Risk

Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader. He uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.

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