Options Trading Blog


Thursday, August 17, 2017

Is the Reward Worth the Risk?

When you read the title of this blog, you probably think that is the first thing you should consider before entering a trade. Smart traders should consider this when entering a trade and in my opinion and it should be documented in your trading plan. But for this particular discussion, I would like you to consider is the reward worth the risk after the trade has been implemented and time has passed.

In my Group Coaching class, I always like to tell my traders that you should consider multiple exits for profit and loss. I cannot tell you how much this has improved my option trading. You have to be a risk manager first and then a trader second to be successful on a consistent basis over the long haul. But why do I have and why should you consider multiple exits? The answer to me is simple and it all boils down to removing risk. I see too many traders that hold positions because they expect to earn the maximum profit or close to it. Now don’t get me wrong, there are some positions that exceed our expectations and the maximum profit is earned sooner than was expected. Those profitable trades are not as common as those that take their time becoming profitable or of course end up losing. Let’s go through an example below that may better illustrate my point.

In class this past Tuesday, we discussed buying an Apple Inc. (AAPL) August 157.5/162.5 bull call spread. At the time AAPL was trading in the $160.75 area. The spread at the time was going to cost about 3.00. This is the maximum risk on this position and it would be realized if the stock closed at $157.50 or lower at expiration which was at the end of the week. The maximum profit is the difference between the strikes (162.50 – 157.50) minus the cost of the spread which in this case was 2.00 (5 – 3). That would be earned if AAPL closed at $162.50 or higher at expiration. The spread had a greater risk than reward but it also had a lower break even than a spread that could have been purchased for less. As I always like to say there are many tradeoffs when it comes to option trading.

Later that same day, AAPL moved higher and the spread’s value moved up to 3.70 meaning a 0.70 ($70) profit could have been realized in less than a day. For some option traders, that might not have been a big enough profit to consider selling some of their position (me not being one of them). But now look at the current risk/reward scenario. There is an additional profit of 1.30 (2 – 0.70) that can be realized but the overall risk has not changed. It is still 3.00. Stop losses cannot guarantee anything but it might be a good idea to consider moving a mental or hard stop up to remove some risk.

What if the spread became even more profitable would your thoughts change then? If AAPL continued to move higher throughout the week, the spread’s value might increase to 4.50 which would be a nice profit of 1.50 (4.50 – 3). Now the potential profit left at this point would only be 0.50 but once again the risk remains at 3.00 (max risk). For at least a majority of your contracts, one should ask is it worth the additional gain when so much is still at risk?

I picked a vertical debit spread for this example but what if an out-of-the-money (OTM) vertical credit spread was chosen and the initial reward to risk would have been even worse based on the criteria. A profitable credit spread would make the new reward/risk even more skewed.

Option traders will sometimes only think about the initial reward/risk scenario when entering a trade. If you consider yourself a risk manager, which I believe you should, then the reward/risk should also be considered as the trade is active especially after a profit can be realized.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

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Thursday, August 10, 2017

Fundamental Correlation

The title sounds fancy but a good technician uses charts to appreciate the impact of economic or fundamental events. The immediate or knee jerk reaction to economic reports exposes sentiment. There are countless books and articles that preach the so called ‘proper way’ to react to economic reports. Fundamentals or supply and demand principles move markets, of that there is no doubt. It is diversity of expectations that move markets. And such moves reveal momentum and frequently start trends.

In just the week there were 2 incidents that surprised traders in the financial sector. The first was the job openings report, also known as JOLTS. It was reported that job openings had increased far more than expected.  Normally this report has little if any impact on interest rates and stock indexes. That was not the case this past week. Equity indexes spiked higher and treasury futures were hit hard, not because the report showed economic growth, but because the number exceeded expectations by a large margin.

The lesson here is that reports near consensus estimates are already priced in. The degree of difference between expectations and actual results is what makes markets move.

For example, let’s say a report is expected to show improvement in the economy. If the numbers are positive, but not as optimistic as expected, the market will likely fall. Even though the report was bullish, it was not bullish enough.

The S&P chart shows the spike higher early in Tuesday’s session last week. In just 60 minutes the rally spanned the length of an average day range. It was followed by a violent reversal later in the day following more threats and increased tension with North Korea. 

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Thursday, August 3, 2017

The Overall Market is Important

The market has been gliding along in a sideways yet volatile manner over the last couple of weeks. Many traders and investors seem to be still expecting a decline sooner than later. Taking that all into context, it is very vital to consider your outlook for the market when choosing certain option strategies. Making stock option picks with profit potentials, whether the market is up or down, depends on diligent market research and an understanding of stock option fundamentals. In my class, I always talk about how essential it is for traders to take into consideration the overall market sentiment when choosing strategies.

Finding profitable trading opportunities can be tough no matter what the market is doing. But you don't have to do all the work yourself. Some professional trader services, such as Market Taker’s Group Coaching, make stock option picks that they share with other like-minded traders, saving individual traders time and effort.

But whether you do your own research or rely on a seasoned professional for your option picks, its essential to understand some basic facts about options trading.

Making stock option picks based on individual stock assessment requires an understanding of specific fundamental parameters. Traders may learn how to read an annual report and 10K stockholders report for income statements, past earnings, sales, assets, new products, and overall industry trends.

Stock option picks based on technical analysis is essential for success and requires the investor to examine the historical price movement and sometimes volume in order to determine price patterns and forecast future price movements. The single most important technical analysis technique is the simplest: Support and resistance lines. I use them all the time and it is the most important component of my trading. Specifically, horizontal support and resistance lines at the same price level in two or more multiple time frames.

Option strategy picks based on broad market analysis examines overall activity based on performance indices. Is the overall market bullish (moving up), bearish (moving down) or neutral (moving sideways)? Ask yourself if you prefer to be on the side of the overall market? Without a doubt, the answer is probably a resounding yes! The broad market will affect individual equities and don't forget to take into account implied volatility and possible changes.

Stock option picks based on psychological market indicators attempts to interpret the facts and gauge whether a change from bullish to bearish (or vice versa) is on the horizon. Successful options traders are frequently contrarians who buy puts in a bullish market and purchase calls in a bearish market -- against convention.

The bottom line is that a lot goes into picking successful option strategies. Either doing it on your own or using the help of a professional with experience and “putting it all together” can make the process easier and can result in better trade ideas with greater profit potential.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

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Thursday, July 27, 2017

Trader Checklist

Spend time with a broker or pit trader from the era when all trades were executed at an exchange and you will learn a lot about the auction process and the information it provides. Trading pits are spheres of activity that appear chaotic to the untrained eye. But for a seasoned observer. a trading pit reveals vital information. Every trader or broker monitors order flow. After assessing any number of variables from the market generated information, they decide to buy, sell or not trade at all.

For about 20 years I watched price action in many of Chicago’s futures pits. One of my duties was to report the information to institutional traders, fund managers and retail clients. I frequently felt like a color commentator at a sporting event. For example, a trader from New York would call and ask who or what firm was buying or selling.  Meanwhile another trader from London might ask how much was on the bid or how much was offered. Another client might inquire if volume was light or heavy or where should they look to buy, sell or set risk. The questions varied but there was some consistency to the information all traders seek.

To create a discipline or strategy, it is wise to follow the same path professional traders take. The goal…Find the answers to the questions pros ask, day in and day out. I condensed these questions into an easy to remember acronym, V.E.R.T.E.X.

To become a successful trader, it is imperative that you learn to address and analyze the components that make up VERTEX.

The “V” stands for Value. Value is that price where buyers and sellers trade most often over a given time frame. It is considered the high volume or fair price. Momentum is defined as the movement away from a fair price.  Which brings us the next letter.

“E” is for Energy or momentum. To catch a trend higher, it is important to recognize when bulls have taken control of momentum. And sellers will show dominance in a declining trend by hitting bids. There are many technical indicators that are used to determine momentum, most notably moving averages. I prefer to track fair prices to determine when momentum becomes apparent.

The “R” represents Risk. Risk can be defined as a change in momentum. Many traders asked about where they should enter a stop loss order. If a trader has entered a bullish position, it is important to enter a stop loss at a level where momentum turns negative and vice versa.

“T” stands for Timing. Markets do 2 things, they trend and consolidate or run and rest. When a market is considered overbought or oversold it has moved too far too fast, thus favoring a rest period or consolidation phase. Therefore, the timing is not right to enter a trend type trade. On the other hand, when ranges and volume are below average during a period of consolidation, odds increase for a breakout or trend to begin. A trader should track ranges in various time frames (day, week, month). When these measurements are far below average, the timing is often right for a trend to commence.

The second “E and “X” are for Entry and Exit. They are also known as support levels which are below the current price. And resistance levels are above the current price. They can also be thought of as projections or prices where profits might be taken. Old high-volume prices and low volume pockets tend to provide support/resistance when retested.

When creating strategy, a trader must address these variables. If you want to trade like a pro you will have to learn to think like one.

John Seguin

Senior Futures Instructor

Market Taker Mentoring Inc.

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Thursday, July 20, 2017

Making Option Adjustments

I have stated my thoughts numerous times about option adjustments in Group Coaching and this past weekend in Portland where we hosted our 4th Annual Options Retreat. Although I personally do not like using the word "adjustments" with options trading (I prefer your new outlook or just a new trade), there are many times they need or maybe should to be done. Adjusting option positions is an essential skill for options traders. Adjusting options positions helps traders repair strategies that have gone wrong (or are beginning to go wrong) and often turn losers into winners. Given that, it's easy to see why it's important to learn to adjust options positions.

Adjusting 101

Adjusting options positions is a technique in which a trader simply alters an existing options position to create a fundamentally different position. Traders are motivated to adjust options positions when the market physiology changes and the original trade no longer reflects the trader's thesis. There is one golden rule of trading: ALWAYS make sure your position reflects your outlook.

This seems like a very obvious rule. And at the onset of any trade, it is. If I'm bullish, I am going to take a positive delta position. If I think a stock will be range-bound, I would take a close-to-zero delta trade that has positive theta to profit from sideways movement as time passes. But the problem is gamma. Gamma is the fly in the ointment of option trading.


Option gamma and particularly negative gamma, is usually the reason for, or at least the consideration for adjusting.

Gamma definition: Gamma is the rate of change of an option's (or option position's) delta relative to a change in the underling.

Oh, yeah. And, just in case you forgot...

Delta definition: Delta is the rate of change on an option's (or option position's) price relative to a change in the underlying.

In the case of negative gamma, trader's deltas always change the wrong way. When the underlying moves higher, the trader gets shorter delta (and loses money at an increasing rate). When the underlying moves lower, negative gamma makes deltas longer (again, causing the trader to lose money at an increasing rate).


Even though I am not a big fan of using the word "adjustments", it does not mean that you should not take a proactive stance and never adjust your option trades. Option traders must learn to adjust options positions, especially income trades in order to try and lessen the affect of adverse deltas created by the negative gamma that accompanies the trades. Once an option trader has a good grip on what changes need to be made based on his or her new outlook, potential profit can be an adjustment away!

John Kmiecik

Senior Options Instructor

Market Taker Mentoring Inc.

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Tuesday, July 11, 2017

Option Traders Need Watch Lists Too

If you are a NFL football fan, you probably know that we are getting ready to start training camp in about a week. Teams are gathering information about themselves and their opponents and trying to gain the upper hand over them which ultimately could lead to a victory. Just like in option trading, a well thought out and well-kept watch list can help a trader in a variety of ways including scoring profits.

First and foremost, it can help keep track of stocks and keep them all in one place so it is easy to reference them. Potential trade opportunities are often discovered by scanning and searching charts and options from stocks that are on a watch list. This is very similar to determining potential strengths and weaknesses of a football opponent. Here are a couple of ways a trader might go about building a watch list or creating a better one.

Familiar Ones

If a person is relatively new to trading there are probably a few stocks that he or she is familiar with. To gather more names to add to the list, a trader can scan through an index (like the S&P 500 for example) and find more stocks to potentially add to the list. Some of the stocks listed may not be conducive for a variety of reasons. It makes perfect sense to check out the symbols and see if the charts and the options are at acceptable levels for the trader’s personality and plan. Things a trader might want to consider when deciding whether to put a stock on his watch list are the stock price, the stock’s volatility, option prices, bid/ask spreads and option volume just to name a few. When this process is complete, a trader should have a decent watch list in which to work with. This list may grow and sometimes shrink over time depending on the trader.


There are numerous trading services (free and paid) out there that not only might introduce traders to stocks to add to the watch list which may lead to potential trade opportunities. The Market Taker Live Advantage Group Coaching is one such service that MTM offers. As mentioned above, the reason a watch list is created in the first place is to find potential trades. A service can not only introduce traders to new symbols but also provide trade ideas that can turnout to be profitable. But if the trade concept is unclear or deviates from a trader’s plan regardless of the source, it should be avoided until the concept is understood. In any case, if the trader thinks there may be an opportunity on the stock in the future it can be added the list.

List Categories

Once a trader has a watch list of stocks, it may be prudent to separate the list into different categories. There can be a list for stocks that are ready to trade now or very soon. Keeping this list the shortest might make sense for a couple of reasons. First a trader should probably not be trading more stocks than he or she can handle and secondly if there are too many on this list, some trade ideas might get lost in the mix. A short list makes it easier to monitor potential trade opportunities. There can also be a category for stocks that have trade potential in the near future (a day to a week for example). This list can be monitored maybe a little less frequently than the previous list. Another category to consider for the watch list are stocks that have no potential now but may in the future. For example, maybe a stock is trading in the middle of a channel and if it ever trades down to support a bullish opportunity may arise. Stocks should be moved up and down in these different categories as needed.

What’s Important

These were just a few ideas about how a trader can go about developing and monitoring a watch list and searching for potential trade opportunities. The most important part about having a watch list is not how it was acquired but that there is one. A well-refined and updated watch list can yield plenty of potential money-making opportunities in option trading. Go Broncos!

John Kmiecik

Senior Options Instructor

Market Taker Mentoring Inc.

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