All Entries in the "Option Trading" Category
Trading the VIX
The market recovered almost all the losses of yesterday on the further weakening of the dollar. As the dollar goes down, the market goes up. Its an inverse relationship that is having its effect. The dollar is down 2.63% vs the Euro year to date and down .88% vs the pound just today.
As Geithner said recently, “We can’t devalue our way to prosperity”, but isn’t that exactly what the government is doing? We continue to spend, spend, which puts downward pressure on the dollar. Interest rates are akin to zero and now we are hearing about the upcoming QE2, which will send the dollar even lower. So is this really a good thing for the stock market long term.? Clearly NO! If we don’t get spending under control we should expect to see a near collapse of the dollar.
Net net, not a good thing for the US economy and were on shaky ground as it is.
I anxiously await what’s next. I’m still expecting a significant downturn and I’m even more convinced of the inevitability of it now. So how do I intend to protect myself and make money on the downturn? I’m trading debit spread puts and I’m trading deep out of the money calls on the VIX. More on the specifics on my VIX strategy tomorrow.
Correction On the Horizon?
After today’s big stock slide, does this indicate a much anticipated correction? My personal thoughts are that we are headed for a correction, although I thought the market would hold high or continue higher until the November election. After today, perhaps we will see the market continue downward. Only time will tell. It’s earnings season, and although some of the reports have showed increased revenue growth and stronger than expected results, at the end of the day, gross margins and guidance has disappointed. I wouldn’t be surprised to see a continued downward trend. Tomorrow I will post some thought on how to make money if and I believe when a correction occurs. Stay tuned!
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A New World Order
What really is going on here? The market is on a tear, although volume continues to be low and as far as I can tell most Americans are not any better off than they were 6 months ago, in fact, I can make a case that most Americans are worse off. They fear for their jobs, or most likely fear they won’t find another job after losing the the one they had over the course of the last year. Many still fear losing their homes and if the news reports are accurate, we haven’t stemmed that bleeding yet. So what’s up? I have come to the conclusion that the market aka investors are inherently bullish and that any crumb of good news takes the market higher… Until the day that one piece of bad news comes along, and Wham! correction.
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 Debit Spread
The market continues upward, breaking through what were perceived threshold limits, 10,700 on the Dow, 1130 on the S & P. Volume is low, off a full 30% from September last year. While the market moves northward and there is little talk anymore of a double dip, I still believe we are headed for a correction, downturn, whatever you want to call it. I don’t believe and never did believe we were headed for a double dip, but I still go back to my old soap box reiterating that the economic news is not good and won’t be good until jobs return. So given what I believe, how do I trade? First I’ll admit that I’m becoming quite the fan of the vertical roll. With the NDX on a holy tear, I have vertical rolled my position twice, both times to the next month and at least one strike price away. I am vertical rolling myself out of danger, and I’m very comfortable with that strategy. Most of the time I make money with the roll, one time I had to pay, but I’m very much okay with giving back some of my gain to remain safely out of the money. I’ll wait for the market to turn down and lose volatility.
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.
Vertical Roll Limitations
The market is moving up, up 6 of the last 7 sessions. I have a call vertical spread position on the NDX and the strike price is moving uncomfortably close to my position so this morning I vertical rolled up and out, meaning I rolled my position further away from the current strike price and moved my position to next months options. I trade primarily the iron condor, which consists of vertical put spreads and vertical call spreads on the same index. So after executing my vertical roll to the next month, I wonder whether I would be able to complete my iron condor by getting puts in the current month. Of course the answer is no, not without additional buying power. So be aware that when you vertical roll, you will need additional buying power to complete the iron condor in current month, or if you already have puts and you want to vertical roll your calls, you are going to have to close your put position prior to vertical rolling if you don’t have additional buying power. The vertical roll is a very valuable strategy, but it has its limitations.
Happy Trading!
Back in the Game
Okay, I could say I told you so, but I’m not going to do that. The market finally had that correction we’ve been talking about. Now it’s moving up again. What a wild couple of months it’s been.
I’ve been silent over the last month, for a number of reasons. I, like many I’ve talked to in recent weeks got caught in the unexpected (and as I’ve blogged, unsubstantiated) market rally and lost some money, but more importantly have found myself questioning my strategy in this volatile market. I’m back in the game with a different attitude and a more conservative strategy. I’m still trading the iron condor but I’ve diversified my strategy and have moved to a more conservative ROI expectation. I have found that in the current market, you can’t count on what has worked historically to continue to work now. The market is changing. Once upon a time the market reflected the performance of American based corporations and reacted accordingly. More and more the US stock market reflects global economic conditions and even more concerning is the market movements that are a result of electronic trading. Now I am not against electronic trading, I like other investors depend on it. But after the “flash crash”, you have to wonder, can that happen again. Going forward it one thing you can take to the bank, the market has changed and it would behoove you to recognize that and trade accordingly.
Happy Trading!
Beware of a Bull Market
Wow, its been quite an interesting and volatile last couple of weeks. The “Flash Crash” notwithstanding, it seems that the correction we saw last week has disappeared in a wisp of smoke fueled by what I feel is false confidence. I get that people are relieved that Greece has been bailed out for now and that the European nations have bonded together to support the Euro, but the bailout is a band aid at best. As worst it has served to delay the inevitable and the inevitable is BAD. So as the market regains all it lost last week, we are back to where we were, totally ignoring basic fundamentals and basking is the belief the economy is in a V shaped recovery. Who are they kidding???? We just got through Q1 earnings announcements and they were for the most part positive. So the market screamed up, up, up. Don’t investor realize that earnings were up based on managed inventories and cost cutting and not revenue growth? The job market has not gotten significantly better, jobs are not being created, so why the optimism? I just don’t think things are getting that much better that fast. Call me a pessimist, but I just don’t get it. And let’s talk about the deficit. The IMF bailed out Greece to the tune of trillions of dollars. Okay, good to stem a catastrophic slide, we did it with TARP to keep our economy from crisis, but at the end of the day, who funds the IMF? Guess who? WE DO. the US makes up 20% of the IMF so in essence, we the US taxpayer is bailing out Greece. Where’s that money coming from? And the market screams up. I’m not an economist, and these are just my thoughts. So are we teeing up a big correction? Bigger than the flash crash of last week? A market slide based on fundamentals that makes last week look like a bump? No one knows and I do believe we are in a slow economic recovery and that the markets will be up 10% or more by the end of the year. Just beware, rocky roads are ahead.
Futures – Can They Predict the Market?
Anything that can help us figure out which way the market is going to head is a good thing right? YES. And I use as many indicators as possible to give me helpful information, avoiding deep analytics as often as I can. I’m sure you all know or have observed, the market seems to make some of it’s most significant moves at the open and the close of the trading day. It has been said that the open of the market is determined by the amateurs and the close of the market is determined by the professional traders, and whether you subscribe to either of those ideas, the truth is, the market does move more at the open and at the close, for whatever reason.
Option Trading Strategies – Tips for Profitable Trading Part I
Option Trading Strategies – Tips For Profitable Trading
Most folks I talk to know about the stock market and have purchased a stock or two, many have a large portfolio of stocks, but confess they know little about stock options and why one would invest in them. Stock Option trading is a great way to invest in the stock market without having to invest in the underlying stock. Stock option trading comes with its own vocabulary and you would be wise to learn as much as you can before jumping in. A good reference for the basics is Understanding Options by Michael Sincere. My advice is to read as many books on option trading as you can get your hands on.
See my recommended Resource List located at the end of the article.
This article is going to assume you know the basics of stock option trading and talk specifically about tips that will help the novice to experienced trader make a profit from option trading.
TIP 1 – Educate your self. Read as much as you can, both on line and hard copy publications/books. See the resource list at the bottom of this article for some of my personal favorites. Take a class, online or real time. Get coaching. Some instructors also provide one on one or group coaching with their educational offerings. Prepare yourself, arm yourself with every thing you can to be ready to trade for profit. All new traders make mistakes, but you can greatly minimize errors with knowledge.
Tip 2 – Have a strategy. One of the biggest mistakes new traders make is to start trading without following a tried and true strategy.
Spend the time, energy and money to learn a good strategy that works for you. Implement a strategy that takes into account your risk tolerance, your time available to trade and your long term interest in trading. If you don’t think it’s fun, or can’t take the pressure, find another line of work.
The strategy I use has been tested for a number of years and works. It works in up markets and down markets. It works through a market crash. More importantly it works for me. The strategy I use guides me to know when to enter the market, when to exit, when to use profit lock and stop loss strategies. Learn more about my strategy.
Tip 3 - Have discipline. Now that you have chosen the strategy that works best for you and have invested the time and money to learn everything you can about the strategy, you have to stick to it. Most new traders get into trouble because they deviate from their strategy. I don’t know what it is about human nature that we find ourselves doing things we know we shouldn’t. Option Trading is not for everyone, psychology plays a huge roll in trader success. I have a good friend who also trades options using the strategy that I use. Early on in our trading he placed a trade that almost got him into trouble. He knew the strategy, but ignored it, just that one time because he felt as if he had done the analysis he needed to eliminate the risk and make just a tad bit more money. Fortunately for him, he is also very lucky, but one day his luck will run out if he doesn’t go back to basics and follow his strategy. Without fail. Which leads to my next tip.
Tip 4 – Don’t get greedy. The strategy I use nets me about 8 – 12% a month. Yes, that’s a month. Now let’s face it, I’ve got tons of other investments that I’d be happy making 8% a YEAR, much less a month. So if I can consistently get that rate of return, each and every month, do I really need to get greedy, take more risk and make more? There have been some months when I’ve made upward of 15%, but honestly, I can make 5% a month and be perfectly happy with that result. The point is, when the strategy is working, month after month, and you see that you could have made more money, taking a little more risk, month after month, resist the temptation to take that extra risk. Cause if you do, it will come back to bite you, hard. Just don’t do it… Want to learn more about my strategy? Click Here
Tip 5 – The abundance of really good option trading software link to option trading software post makes the process of placing trades easy and fast, without the need for human intervention. With the ease of use of on-line option trading software comes the frequency of errors when making trades. To ensure you understand how to use the software, read the users guide, Paper Trade (link to Papertrade post) first and create a checklist that you follow for each and every trade you make. I’ve been trading for a while now, and I still occasionally forget the very basics and miss something, placing an incorrect trade. I use ThinkorSwim as my trading software. www.thinkorswim.com. My checklist looks something like this and is posted in my office above my computer screen so I always reference it.
Items to Double Check For Every Trade
- Strike Prices
- Number of Contracts
- Net Profit From Trade
- Commissions Paid
- Percentage Profit From Trade
- Limit or Stop?
- Day or GTC Trade
Please send me your favorite reference sources and I’ll include them in my Resource List.
Resource List:
Understanding Options by Michael Sincere
Options Made Easy by Guy Cohen
The Bible of Options Strategies by Guy Cohen
The Rookies Guide to Options by Mark Wolfinger
Option Spread Strategies by Anthony Saliba
Trading for a Living by Alexander Elder
Want to learn more tips? Check out OPTION TRADING STRATEGIES – TIPS FOR PROFITABLE TRADING – PART II Click Here
