This whitepaper was brought up last night during my subscriber’s Happy Hour, where we discussed risk management and disposition effects when trading options. The title of the paper is “Investor Trading Behavior and Performances: Evidence from Taiwan Stock Index Options.”

Essentially, what they looked at was all trade data in Taiwan Index Options and looked for asymetric (they exist) returns and their causes. They wanted to analyze this because there are different behaviors that occur in the options market due to the “decaying” nature of options. They used Taiwan because it was traded by mainly nationals and the data they used contained unique investor IDs, so they could track investor performance.

The whole paper is a really nice read (surprisingly) and may help you to be a better options trader. I find this particular quote a great guideline:

We find that the following individual investors tend to have superior trading performance: those that trade more often; those that make larger-sized trades and those that usually hold multiple option positions at the same time. In addition, individual investors who trade both index futures and index options significantly outperform those that trade only index options. Finally, individual investors who made combination trades (e.g., straddles) significantly outperform those that do not. We interpret these findings as evidence that individual investors’ trading performance improves with experience and sophistication. [emphasis mine]

Fortunately, most of those characteristics are incorporated into IWO Premium Trading strats!

You can download the whitepaper here.

You had all your shorts lined up, waiting for a breakdown of SPX 1040, when all of a sudden, you catch an elbow to the sternum.

But the measure used may not be indicative of the entire market. The original source (MKM Partners) uses JCJ as a measure of correlation. This is known as an implied correlation index, and it’s very helpful for firms who are tryinig to run dispersion trading/vol arb books. However to Johnny Retail it might be a little more misleading.

JCJ (and KCJ) are derived from looking at the top 50 components on the S&P and their options– you can see the actual whitepaper here – if you have insomnia, this will cure it!

Here’s the thing– we already know that a lot of the large companies are going to have high correlations. Unless there’s fresh news in a sector or a company, they generally run on the same track– the futures arb firms make sure of that.

So the death of stock picking? Probably not. The high beta small caps aren’t really included in this reading, and so I’m more inclined to think that correlations really aren’t running that hot– especially when you see ARST or FIRE from the past week. Besides, stock picking is much more sexy when you buy DDRX instead of XOM.

Randy was one of the first customers to buy EarningsTrades, and he just sent me his thoughts about the product. You can follow Randy on twitter here.

His full review can be seen below:

Hi Steve,

As I finished your EarningsTrades Course I wanted to send you an overall thank you. In this course you covered everything that I could think of when it comes to earnings. I started trading options in July 2007. I consider myself mostly an income trader using option spreads but also occasionally trade speculative plays using single puts and calls. With experience in trading income and speculative, there was still 4 times a month in a security’s life I wanted to stay away from, and that was earnings.

I’ve tried in the past to play earnings off of direction and it just never worked out. I had little understanding of the nuances that go into the markets pricing of options during the earnings cycle. I found out quickly through time that there is a lot more to it than just trading straddles or strangles or the occasional “lottery ticket”. Believing there was no real way to gain an edge as a retail trader, I just avoided earnings season.

When I recently saw that you have compiled a course on strictly earnings, I wasn’t hesitating on the purchase. This was going to be another tool that I could use and help my development into becoming a trader during these times. I wanted to take advantage of earnings and the option intricacies instead of sitting out on earnings.

All I can say is that your course is complete. It is nicely laid out in the three modules of theory, strategies, and examples and it follows a good chronological order.

1) Theory

In the theory module you started from the straight basics of options and technical analysis you use and then quickly accelerated into the volatility crush and other deciding factors. I  liked the 4 step process of you use in your trades for earnings. I learned a lot from how you showed to use past quarters and volatilities to analyze the expected range of what the option market is pricing in for the earnings move.

It is also a plus in how you showed to use the thinkorswim analyze tab with respect to volatility crush and expectancy.

In other deciding factors two things that stand out is how you show to use competitor earnings and the options tape. In particular with the options tape, I really learned a lot in not to just look for big blocks of options trades but how to really use that and how to tell if these trades are tied to stock. This was particularly helpful in how you showed this in your SYMC example.

2) Strategies

Your strategies module was very complete and you were able to show how and when to use specific spreads. The pre and post earnings video was helpful as well as you showed that these strategies just don’t end after the earnings came out but how to take advantage of moves and how to hedge yourself as well. I particularly liked how you highlighted how the option squeeze can occur and how to take advantage of it on the way up and the way down.

3) Examples

You provided good examples and were even able to show some that didn’t work and how you can adjust to create less pain when the play doesn’t go your way. It was also beneficial to show your thought process before the earnings and after the earnings came out (ie. AA) . These examples were helpful as you went through he whole process you talked about throughout the course.

Conclusion

Overall I am very pleased with the course and do not regret the purchase at all as I believe this will be a great return on investment, after all ROI is what it is about. Starting out I will use papermoney and thinkOnDemand in testing what earnings trades work for me.

This course was very complete and you really helped define the edge in the earnings trades that a trader can make and what to really look for before putting them on and what strategy to use. Just showing how to measure the implied volatility crush and expected range is worth the price of the course itself because there is a lot more to it than just looking at the at-the-money straddle (as I previously believed).
Earnings make for a difficult time as option volatilities and price action can be frustrating, but you were able to teach how to take advantage of these times. In your course you were very detailed and showed every nuance that I could think of. I really appreciated how you show more strategies than just buying/selling straddles or strangles. As you showed, these are not always the best trade. Also with selling straddles, there that higher margin requirement but you were able to point out other spread strategies that reduce that margin requirement. Overall, I cannot say enough how glad I am to have purchased your course as earnings season was a missing link in my trading strategies and you were able to fill that space. Every piece of content you provided was informational and full and never too repetitive or boring. I can honestly say that the information you provided has not been put in a book or blog that I have read. Thanks for putting this course together and I would recommend this to any trader I come across.

-Randy Redman

**I know this may have been a little lengthy and feel free to cut/edit/rearrange/leave out any piece of this testimony. I wanted to be able to give you a review as well as in the conclusion give a basic synopsis and opinion of the course. Also I just wanted to get across to others that come across your site that this course and purchase is worth it. This is definitely going to help me in my trading and the price you are charging is unbelievable for the content provided. This is definitely a no-brainer. Thanks Steve and from one trader to another, great job as I am very thankful for what you have put together.

EarningsTrades is an online video course that will teach you how to profitably trade options around an earnings event. You can learn more about it here.