Andrew Giovinazzi is the COO of Option Pit. He previously served as a member of both the Pacific Exchange and the Chicago Board Options Exchange where he acted as a market maker in both equity and index options.
Giovinazzi has a wealth of knowledge to share and was a guest on Benzinga #Premarket Prep on May 19.
“First you have to know what you are doing with options,” said Giovinazzi. “They provide a tremendous amount of leverage for the dollar.”
Giovinazzi does admit that options are not perfect. Many traders will use options in a way to increase a speculative position (and risk) and doesn't leave them with an “out.” As such, investors need to fully understand the risks involved and how to control risks.
Traders need to master terms such as “delta” and especially “time decay” to gain as much control in a position to avoid large losses, said Giovinazzi.
Traders should understand that multiple strategies exist in which a profit is earned if a stock trades within a range, as opposed to the stock required to move in one specific direction. By doing so, the position stands a better chance of earning a profit, as the pressure for the stock to move in a direction is alleviated.
Technical analysis could be used to create reference points to be used to determine a stock's range, but that doesn't tell the whole story. Volatility-based data makes up the bulk of the research Giovinazzi conducts before entering a new options position.
Volatility data is important for highly-speculative stocks.
“If you are trading a highly-speculative stock, it can only handle certain types of option positions,” Giovinazzi explained. “You can't sell naked contracts unless you bring yourself really unreasonable risk. What we try to do is focus on where there might be an opportunity given whatever is happening with volatility on any given day.”
Volatility strategies are dependent on daily unique events; as such, Giovinazzi tracks around 250 specific stocks, in addition to multiple indices. Chances are likely, Giovinazzi said, that on any given day a trade can be made under ideal volatility conditions.
Moving on to weekly options, Giovinazzi believes that these instruments work great when volatility is set to move on the back of a Federal Reserve announcement. This is a focal point of Giovinazzi's instructions, as a unique set of characteristics and prices need to be in place to justify a position that expires quickly.
Giovinazzi thinks that the Volatility Index will stay range bound between the 12 and 14 levels in the short-term. Longer term, if bonds stay steady, the economics news is “ok, but not great” and the Volatility Index could dip below the 12 mark.
Bottom line, “I own a lot of stocks, but I own some protection,” which according to Giovinazzi is a good trade to simply be long but it's important to hedge “in case things blow-up.”
- Coal: A 'Million Dollar Mile' Getting Longer In the U.S.
- Gold Standard Ventures Consolidates Southern Carlin Trend District
- Pierre Lassonde: Mining Cycles Are Good For Royalty Companies And Investors
© 2014 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
- Personal Investing Ideas & Strategies
- Personal Finance - Career & Education