Options Trading Blog posts page 2

Thursday, April 25, 2019

Option Traders Need a Plan

When I became a retail option trader, I was told by many that I needed to write and follow a plan. Although many of you know this as well, you may have either not written or finished your plan. As I always like to say, if you were opening a restaurant, would you do it without a plan? The answer is, of course not. So why do most option traders not have a solid trading plan? You need to answer that for yourself.

Before you start writing a trading plan, ask yourself if you are truly motivated to succeed. It may sound insulting to ask that, but traders really need to find out. Will you put in the time to make it as a trader? There are going to be highs and lows along the way. Will you be able to handle those? And will you be disciplined enough to write and follow a trading plan?

To make it as easy as possible, I tell traders a good place to start is to write down their strengths and weaknesses. Who is going to know you better than yourself? This can formulate, based on your personality, what type of trade plan would best suit you. Are you patient or impatient? If you are impatient, maybe longer-term trades are not for you. Are you a risk taker? If you are, selling premium on options where losses can be substantial may be an option for you.

Now you have something to work with, and that can give you the motivation you need to continue on and finish your plan. Next you will have to complete sections such as goals, strategies, management and post-mortem, just to name a few. In later blogs, we will talk about them too.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

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Wednesday, April 17, 2019

How to Catch Directional Moves

One of my chores is to write a weekly piece that enlightens traders. At times my interpretations are spot on, almost prophetic. And sometimes I am clueless. My 30 years of experience in the futures markets has taught me to accept, almost embrace, being wrong. Traders must embrace risk. No one likes being wrong, but accepting the possibility of a bad trade is a huge step for a trader. This industry requires us to accept that market movement is uncontrollable and unpredictable. It is a trader’s job to find the moments when probability favors a bullish or bearish wager.

Trading is a battle and a sport. Both require discipline. If you prefer to make directional or trend-type trades, make a list of conditions to increase the odds of catching directional moves.

Here are some of my favorites:

  • A series of five days with below average day ranges

  • Two weeks where the range is below the weekly norm

  • The closes are about midrange over a three-day period

When all these conditions are met, odds favor a breakout or vertical type trade.

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.

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Thursday, April 11, 2019

A Bullish Trade Setup to Consider

The market remains predominantly bullish, and there are several potential bullish trades we have considered in our Group Coaching class. One setup I continue to love is the 2-bar bullish break from a bullish base.

A bullish base is created when a stock moves considerably higher usually over a short period of time and then begins to trade sideways. If the stock does not pull back more than two-thirds of the move higher, it is considered a bullish base. The 2-bar close is two consecutive bullish closes in a row, with the first bar closing above the resistance level of the base and the second closing above the first candle’s high. This works on all time frames. Of course, the bigger the time frame the bigger the expected move higher.

Take a look at this recent example of Dominion Energy Inc. (D).

The stock has moved higher since the beginning of February and has maintained a fairly bullish base after testing the $77 level. That area acted as resistance in the past and is doing so currently. Although the stock has been on a bullish watchlist, it has never had the 2-bar close (2 consecutive bullish closes) trigger. So in this case, it is still a waiting game.

Determining what a bullish base is can be fairly easy if you know what to look for and consider. Just because it is a bullish base does not mean it will eventually move higher. Being patient and waiting for the 2-bar trigger can immensely improve your odds. As traders we always want to put the odds on our side, and for me that would be a break above the resistance level of the base.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

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Thursday, April 4, 2019

What Makes a Well-Rounded Trader?

I was fortunate to spend most of my career at the Chicago Board of Trade as a broker in the 30-year bond pit. The ’80s and ’90s were the heyday for interest trading pits. Most days were filled with big swings and lots of volume. The pits were packed and often became chaotic and even violent after vital economic reports. I focused mainly on charting techniques early in my career and learned fundamentals by watching price action immediately after economic data were reported. I soon learned that sharp rallies in treasury futures followed weak economic data, and steep declines occurred after strong employment or retail sales and high inflation reports. I was learning fundamentals through order flow.

Late in my time at the exchange, I worked at a firm with an outstanding economist. We traveled to many firms sharing my knowledge of technicals and her fundamental views. We were a great team and customers responded well. Having a technical background was a great asset, but I did not become a well-rounded trader/analyst until I incorporated the lessons from my colleague. Fundamental data are what make markets move, while technicals are used to navigate trades while waiting on the next vital statistic.

I highly recommend viewing the economic calendar before each week begins. Stock market traders track earnings, but there are reports that affect not only the equity indexes, but also individual stocks and ETFs. Interest rates drive economies, so that should be first on your list of commodities to watch daily. A move in interest rates often impacts currencies, a currency is often connected to precious metals or energies, and energies may impact equities or grain prices.

To become a well-rounded trader, pay special attention to the major sectors because they are frequently interrelated. A good trader knows that a move in a currency could affect energy, which could have impact on a stock or ETF or another sector. The major sectors are interest rates, equities, forex, precious metals and energies.

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.

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Wednesday, March 27, 2019

How Do Option Collars Work?

The market has been on some run since the holidays. After investors were worried that stocks would continue to sink into 2019, many stocks have recovered quite nicely. If you are a smart investor and know what an option collar is, the threat of another decline is not as scary. If you don’t know what a collar is and you own stock, now may be the time to learn.

A collar is having a stock position and buying a put option and selling a call option on the stock. Usually both the call and the put are out-of-the money (OTM) when establishing this option combination. One collar represents one long put and one short call along with 100 shares of the underlying stock. The main objective of a collar is to protect profits that have accrued from the shares of stock rather than increasing returns.

An investor will usually implement a collar after accruing unrealized profits from shares of stock. Just like everything in option trading, there are pros and cons to collars too. Selling a call option limits gains to the upside like a covered call if the stock moves past the call strike by using the premium received from the sold (short) call to partially or fully fund the long put. The position does not profit exactly like just a covered call would.
   
Let’s take a look at a quick example. Say you bought this stock when it traded above its 200-day moving average. You purchased 100 shares for $170. The stock currently closed at $182.14 as seen below.

A profit of $12.14 (182.14 – 170) is currently realized. What if you are nervous that either the stock will gap down again as it did recently or that the overall market may decline? This is where an options collar may help. Take a look at the option chain below.

You could sell the 187.5 call for a credit of 2.64 and buy a 177.5 put for 2.99 with about 30 days to go until expiration. The net result of the collar is a debit of 0.35 (2.99 – 2.64) or $35 in real terms. Now the position is protected if it falls past $177.50 (because the 177.5 put strike) until expiration for a small debit. The long put allows the shares to be sold at $177.50.

The position is now limited to gains of up to $187.50 (short call strike) until expiration because of the short call. If the stock closes between the two strikes (177.50 and 187.50), shares are retained and the loss of $35 for the collar is realized. It was the price of protection.

The one thing about an option collar is that an investor knows the potential losses and gains right from the start. There simply is no guessing. If the stock climbs higher, the profits may be cut off because of the short. If the stock moves lower, the investor has protection due to the long put.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

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Thursday, March 21, 2019

How to Avoid Technical Overload

My search for the ideal trading tool ended about 30 years ago after attending the Market Logic School conducted by Pete Steidlmayer, the creator of Market Profile. These days I do not think it is necessary to use Market Profile. But applying the logic behind the tool allowed me to create charting techniques that incorporate the best parts of many technical disciplines.

Prior to that class I had researched and used many of the most popular technical tools and indicators. Most beginning technicians start with bar charts and moving averages. There are seemingly endless byproducts derived from just those two devices. Once computers were small enough to bring on the trading floor, the list of indicators grew exponentially. Traders began to experiment in search of the holy grail of price predictors. Candlesticks became more popular than bar charts. Initially stochastics and RSIs were the most popular indicators used to determine if a market was overbought or oversold. Simple moving averages were often replaced by exponential MAs. MACD (moving average convergence divergence) and Bollinger bans were derived from tracking average prices. These can be used to express when a market is ripe to trend or due for a consolidation phase. ADX is another popular indicator that is meant to reveal the strength of a trend. The list of indicators is vast and seems to grow every year.

As an educator I have seen many traders’ screens, and some are so packed with indicators it is difficult to distinguish between the signals one should act on or ignore. I have had clients who cluttered their screens with so many signals that conflicts often arose. Thus, they froze and could not pull the trigger on a trade because one signal said sell and another said buy.

The point of all this is to help you design your charts to give the answers all traders seek on a relatively clean slate. The list of indicators should include three types. One, use an indicator that reveals when a trend is likely to commence. This gauge should illustrate when a market has spent too much time around a moving average, thus making it ripe to go vertical. Two, find an indicator that reveals when a change in trend in likely. This gauge is used to signal when a market has gone too far, too fast (a.k.a. overbought/oversold). It is often used to identify when to take profit. The third must-have gauge is one that allows you to stay with a trade and ride the trend until exhaustion.

Markets move and coil or trend and consolidate. Quick decisions can make or break a trader. It is easier to execute strategy if your mind and screens are not cluttered with conflict. Keep it simple for clarity.

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.

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