I’m a pretty conservative investor  – with the exception of my last post – The Debit Spread – and I look to basic fundamentals when it comes to the market. Well over the course of the last year and a half, I’ve had to release my mental hold on the belief that the market moves based on economic fundamentals.    I think the market has changed, and I think it has changed for the long haul.  I totally get that although the US stock market is made up of US companies, most of the companies making up the DOW are global companies with an increasing percentage of their profit coming from overseas.      I’m not referring to that, I’m referring to a market that now moves with much greater volatility on emotion.  Emotion often times a result of NEWS!     We seem to have gotten away from the fundamentals of how our American companies are prospering and seem to trade with what gets reported by CNBC.  Now don’t get me wrong, I love CNBC, it just seems to me that the market is overly bullish without the basic fundamentals to back it up.

We are in a new era of the US stock market – low volume, electronic trading, flash crashes, and emotional trading.  I’m trying to get used to the new world, adjusting my strategies along the way.  Having said all that, there is one thing I’m sure of, even though the rules may have changed, there’s still money to be made!

Happy trading!

The one trade that I’m experimenting with (read, it’s a gamble so don’t necessarily follow my lead!)  is the debit spread.  I believe the market will go down sometime in the near future – (clearly a directional trade, which I usually avoid, but in this market I’m willing to take my chances) – so I BUY a debit spread – I’m trading the S&P, a 10 point spread expecting the market to take a down turn and when it does, I sell the position for a profit.  Warning!!!  This only works when you are predicting the direction of the market and you are correct!!  What I specifically like about this strategy, which by the way is a 360 degree turn from the iron condors I usually trade, is the cost to get into the trade is small, your losses are finite, limited to only the amount it cost you to buy into the position and your profit is huge if you call it correctly.    Okay, I’m becoming a glorified gambler – and I like it.

Happy Trading!

What is a Mastermind Group?
The concept of the Mastermind Group was formally introduced by Napoleon Hill in the early 1900′s.  In his timeless classic, “Think And Grow Rich” he wrote about the Mastermind principle as:
“The coordination of knowledge and effort of two or more people, who work toward a definite purpose, in the spirit of harmony.”
He continues …
“No two minds ever come together without thereby creating a third, invisible intangible force, which may be likened to a third mind.”
In a Mastermind group, the agenda belongs to the group, and each person’s participation is key. Your peers give you feedback, help you brainstorm new possibilities, and set up accountability structures that keep you focused and on track. You will create a community of supportive colleagues who will brainstorm together to move the group to new heights.

I initially thought the benefits of our mastermind group was to share information as we were all pretty new to trading.   Ha! what a misconception, while our group started off sharing the basics, I find my mastermind group more helpful to me today then when I first started trading. We have all advanced to a new level of strategy trading. We have graduated from the basics to more sophisticated strategies.  We all have very busy lives and often need the support of others to stay on track.  Or to find the time to stay committed.  I often fall on my Mastermind group to give me support and sometimes even confidence to keep doing what I’m doing.

In total I actually have 3 mastermind groups, each with a specific focus.  I am a member of one group that focuses on growing our businesses online.  I have another that goes back over  5 years, and while we no longer talk every week, we still hold each other accountable to being the best entrepreneurs we can be and sharing our gifts with others.  The third is my trading mastermind.

So regardless of what you want to be, have or do in your life, I’m guessing participation in a mastermind group will help you get there faster.  So google masterminding and learn more about it, then go out and start inviting folks to join you on your path to success.  To learn how to start a mastermind group click here.  One word of advice, a mastermind group made up of all like individuals will be less effective than mixing it up with different personality types.  Find a group of 5 -6 individuals who are similarly motivated, but somewhat diverse. Good luck and check back and let me know how its going.

Many traders, myself included look at the market and determine trades after the market has closed for the day and place trades before the market opens, hoping to catch that dip or rise that ofter happens at the opening bell.  What if there were an indicator that could tell you what direction the market might open on any given day?  What if that indicator were readily available?  Guess what, it exists and is readily available and its called futures.

I primarily trade the Nasdaq 100 Index (NDX) and the S&p 500 Index (SPX).  There are futures indexes for both the NDX and SPX, and I’m sure many more.  I watch the overnight futures almost everyday to give me some clues as to where the market is headed.  Specifically I monitor the following:

/NQ is the symbol for the E-mini Nasdaq 100 Index Future ETH

/ES is the symbol for the E-mini S&P 500 Index Future ETH

So what are these futures and where are they traded?  As you probably know, there are financial markets open all over the world at any given time, so when our US markets close, there are markets overseas the continue to trade.  With our global economy, what happens in other financial markets effects our economy and our markets.  In addition, people place orders when the markets are closed that get queued up for execution at the opening bell.  All these things and I’m sure a number of other factors effect the value of these futures.  So I monitor these mini futures as another small indicator of market performance.  One more tool to add to the tool belt.

Your money rules not withstanding, how much should you hold back and why? Hopefully these are lessons better learned while paper trading, but a few of us have learned the valuable lesson of holding some percentage of buying power in reserve. There will at some point I suspect be the need to vertical roll as I have personally learned this month. Luckily I knew enough to know when to vertical roll (click here if you missed that post) and I made money on my vertical roll, but others waited too long and had to pay money to roll.   There may come a time when you just decide to take your losses and move on and it could cost you money to close out a position.  There is nothing wrong or bad about this, we use stop losses all the time, they are a very smart part of any option trading strategy.  Better to take some losses and live to trade another day than to wait until you are under the bus.   You may want to really take some risk and implement a two stage butterfly up like strategy, if you’ve got the guts for it.   That will cost buying power.

So how much is enough?  I’ve heard the suggestion of 10% as a good number.  I, being the conservative one keep 20% buying power in reserve.  Once again this plays into your money rules and your risk tolerance.  At the very least the amount of buying power you hold in reserve needs to be a conscience decision, not a random one.

Happy trading!!

I did hear of an interesting strategy from my mentor Scott Chaney, but it is only for experienced and bold traders.  I have in-the- money calls on the NDX.  If I expect the market to sell off on a given day or couple of days and if I have sufficient buying power, I can go and sell an additional vertical call spread one strike price higher than what I currently have, in essence doubling the number of NDX call contracts I have.    For instance, if I have 5 NDX Apr10 1925/1950 calls, I would sell and additional 5 contracts of NDX APR10 1950/1975 calls.  I will make a lot of money selling these calls as they are in-the-money.  This strategy is depended on the market going down, like it did today, on the dip I would go and buy the 1925/1950 calls for less than or equal to what I sold the 1950/1970 calls for, in essence, moving my strike price up from 1925/1950 to 1950/1975.  That still doesn’t get me out of danger if the market moves up above 1950, but it gets me further away from trouble, and doesn’t cost me money, in fact could make me money.  You gotta have guts for this one!

You want to vertical roll before your position gets into the money and certainly before it gets seriously into the money.  Many of us are trading with an iron condor or collar strategy in which we buy and sell a put or a call position to manage and limit the risk of our trades.  When vertical rolling your position, you will make money if the strike price is out of the money, or if the strike price is in the money, but has not blown through your short and your long legs.  Once that occurs you are paying to vertical roll which will buy you time, but I’d rather make money on a vertical roll than have to pay.  So my advice is to watch the market very carefully and if you think a vertical roll is the right strategy to get you out of danger, make your move before you’re in the money.  When deciding to vertical roll, I look at a number of factors, not the least of which are:  How many days left till expiration?  Do you think the market is headed up or down?  Where is the RSI?  What’s in the news and how could that effect the market?  Don’t forget to take a look at your exit strategy and your money rules.  Stay calm!  Option trading is a long term strategy to make very good cash flow, so be patient, use the tools you’ve learned to deal with fluxuations in the market, be okay with making less some months than others.  Don’t get greedy and don’t run scared.  Stick with your strategy and you will prevail!

Cool stuff!!!

Jack, question for you, if you have a limited amount you are trading on lets say the SPX, should you trade 5 point increments and more than 19 contracts or
trade in 10 point increments and less than 20 contracts.  Which trade will go through faster?
Thanks!!!!
Janet