Category: Trading Strategies

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Trading Strategies

Stressing Out as an Option Trader?

stressing

Have you ever heard that stressing out is not good? Of course, you have! There are numerous emotional and physical disorders that have been linked to stress, including depression, strokes and heart attacks to name a few. While stress can be a motivator, it can obviously also be very harmful. It’s important to recognize the stressful nature of trading and consider things you can do to avoid unnecessary stress. Let’s take a look at a few stress-relieving measures you can use as a trader.

Do Not Trade

The first is the easiest of them all. When there is extra stress in your life, you should consider taking a break from trading. Extracting money from the market is difficult enough with a clear mind, but adding stress to the mix makes it almost impossible. I like to make the association of trading during a stressful time in your life and trading with money you cannot afford to lose. Both are ridiculously tough to do.

The pressure traders put on themselves to make money or even to have a “winning” trade can cloud their judgment and management of the trade. This allows the “emotional” trader to make the decisions, which usually does not end well. The good news is there are a few things you can do as a trader to combat being stressed.

Write a Trading Plan

It should come as no surprise that it’s crucial to have a well-written trading plan. I’m sure you did not expect me to say anything else, since we’ve talked so many times about this in the past. You need a plan so decisions can be made easily and with, we hope, limited stress. Trust me, nothing can ease stress as much as having a well-thought-out trading plan that you actually follow. Know exactly what you will do no matter what happens. That is what following a trading plan will do for you.

Take Time Off

Something simple you can do to relief stress as a trader is to take some time off. I see traders all the time who feel there is always a need to trade, especially those who trade full time. The market will always be there. Yes, it’s true you cannot make money if you are not trading. But if you are stressed about losing or even winning, what is the likelihood you will be successful?

Time to Meditate

Have you ever meditated? A simple meditation routine that you can get for free almost anywhere can relieve stress and not just for trading. It may be difficult to do, or to find the right time to do, at first. But if you make some time to do it, I guarantee it will help.

These are just a few things a trader can do to relieve stress. Trading is difficult and stressful enough, so you need to make it easier if you can. By doing the few things above, you will help yourself physically and mentally, I promise.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

Categories
Trading Strategies

Know Your Option Delta Basics

option

Over the past several weeks, I have been working on writing my PowerPoint presentations for our annual option training retreat. Of course, I am reminded of several topics I need to focus on during the retreat but also in my daily lessons with traders. Management has always been priority number one for me, but I also put a great deal of focus on option delta. Let’s take a quick look.

Option Delta

There are several definitions of delta, and they are all very good. The one I’ll focus on here is that delta is the rate of change of an option based on the underlying. To keep it simple, for every $1 the underlying moves, the option premium should change by the amount of delta. Essentially there are only four things you can do with options: buy a call, sell a call, buy a put and sell a put. Long calls and short puts have positive deltas and can benefit from a move higher in the underlying. Short calls and long puts have negative deltas and can benefit from a move lower in the underlying. Think of delta as more of a bullish trade for positive and more of a bearish trade for negative.

Deltas Multiply

If you have on more than one position at a time for the same strategy, then you need to total up the deltas. For example, if you bought 2 long calls each with a positive 40 delta, the position would have a positive 80 (40 X 2) delta overall. For a spread position, if your positive delta total is bigger than your negative delta, a move higher will benefit the position whether it is a debit or credit spread. If your negative delta total is bigger than your positive delta, a move lower will benefit the position. Simple and easy to remember.

Delta Made Easy

One more thing. I always teach this lesson to my one-on-one coaching students in our very first session. I like to say calls and puts will react the same way depending on the underlying. What I mean is that call option premiums and the deltas will always increase (keeping everything else constant) if the underlying rises and vice versa. Put option premiums and the deltas will always increase if the underlying falls and vice versa. Many option traders get confused on what is positive and what is negative, so to me this is an easy way to remember how the premium and delta will change. Obviously, whether you benefit from the move depends on if you are positive or negative.

Lastly

There is a lot more to delta, of course, but these key points can help you understand delta and the significance of it on every position you take.

An option trader notices AAPL is holding a bullish base and it looks like it wants to break higher. He decides to buy a June call with 36 days to go till expiration to profit from the expected move higher. He buys the 175 call and pays 4.60 (as seen below).

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

Categories
Trading Strategies

Make This Your Option Trading Mantra

mantra

You have seen posts from me like this before, but the lesson cannot be taught enough. I have a mantra I like to use in my Group Coaching class and with one-on-one coaching students, and I repeat it frequently: “Know exactly what you will do no matter what happens.” Simple enough, right? What I mean by this is that you should have a trade management plan in place before you enter a position. Do not let the emotional trader come in during the trade and convince you otherwise.

Trading Plan

As we have talked about here so many times, having a trading plan is imperative to your success as a trader because it is mandatory to remove the emotional part of trading. This is why knowing what you will do, and actually doing it, can improve your success and profits.

Let’s look at an example using Apple Inc. (AAPL) with the chart and option chain below.mantra

mantra

An option trader notices AAPL is holding a bullish base and it looks like it wants to break higher. He decides to buy a June call with 36 days to go till expiration to profit from the expected move higher. He buys the 175 call and pays 4.60 (as seen below).

mantra
Potential Stops

Based on the chart, the stock has potential support around the $172 area or approximately $2 below where it is currently trading. The trader’s management plan if the stock moves lower (against the position) would be to consider closing out some or all of the position if the stock closes below that potential support level. He could also choose to manage some of the position by risking 25% of the cost. In this case, 25% of the cost is equal to $1.15 (4.60 X 0.25). If the position declines to about $3.45 (4.60 – 1.15), he could close out some or all of the position.

Profit Taking

On the profit side, there is no imminent potential resistance overhead. Many times, it is good to consider removing risk at support levels for bearish trades and resistance levels for bullish trades like this. Support and resistance have a better chance to hold than break. In addition, since 25% was risked on the stop loss, 25% (or $1.15) may be used as a potential profit too. In this case, if the call’s value increases to about $5.75 (4.60 + 1.15), the trader could consider taking a profit.

Mentally Strong

This was just one example of how having a plan in place can greatly improve your trading outcome. Just make sure you know how you will handle every conceivable situation before it happens, and I promise you will be better off and less anxious about your trades.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

Categories
Trading Strategies

Volatility and Vertical Debit Spreads

spread

Let’s start with something simple that most option traders know. Long options, such as long calls, have limited risk. The purchase price is the risk on the position. One of the many reasons traders love options so much is that they are usually far cheaper than buying 100 or fewer shares of stock. But sometimes even options can be quite expensive, so a trader may consider a spread, such as a bull call or bear put spread. Besides a potentially cheaper trade with less overall risk, there can be other benefits as well.

Bull Call Spread

For option traders, a bull call spread (debit call spread) may help control risk even better than a long call. What if the options are very expensive or the trader is worried the stock might fall, especially in the volatile environment we are currently experiencing? One or both scenarios may cross an option trader’s mind. If that is the case, implementing a bull call debit spread might just make sense. Although the spread is still a debit, an option is bought and sold, which can possibly lower the cost and risk of the trade. But what else could benefit an option trader by doing a spread versus just buying a call or put? Do you already know? Let’s do a quick review.

Negating Volatility Risk

There is more than one answer, but today we will be talking about offsetting your volatility risk. Vega changes the option premium for every 1% change in implied volatility. If implied volatility (IV) rises, so does option premium. Generally, IV rises when stocks move lower and vice versa. For long puts, this could be good because if the stock falls and the IV level increases, premium may increase from the negative delta and increase in IV.

The same could not be said for an expected move higher especially if IV is elevated, as it has been recently. Long calls can still profit from a move higher, but IV may drop and that could offset some positive delta gains. If a spread trade like a bull call is implemented, vega could be neutralized.

Offset Vega

Take a look at the option chain below. The long 195 call has an IV of 34.56% and a positive vega of 0.11, and the short 200 call has an IV of 33.02% and a negative vega of 0.11. The positive and negative vegas virtually offset each other, so changes in IV either higher or lower will not affect the premium if the IV basically changes the same for each strike.

spread
Finally

As with everything in option trading, there are risk/reward trade-offs. Just knowing what they are can greatly benefit you as an option trader. At times spreads can be beneficial, as in the example above when a decrease in IV is expected with a move higher and a positive vega position is not wanted. And, of course, sometimes negating one or more of the option greeks can be detrimental.

IV is at about 22%. If it were to move up 1 percentage point to about 23%, the option would increase in value by 0.11 because of vega (see chart below). The new value would be about 2.98 (2.87 + 0.11). That would be beneficial for the position. But what if IV levels dropped to historical levels if the underlying rallied? If IV decreased by 6% (22% – 16%) to about 16%, the new option value would be about 2.21 (2.87 – (6 X 0.11)).

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

Categories
Trading Strategies

Use a Spread to Offset Positive Vega

vega

The market has been a volatile machine as of late. Option prices and implied volatility levels have moved higher in response. That said, implied volatility and option prices are destined to come back down again if and when the market rallies. Generally, IV levels move higher when the market drops, and IV levels drop when the market rallies. If you have an option position with positive vega (long options), this might be a bit concerning for you. If it is, and it probably should be to some degree, one way you can offset that risk for a directional trade is by using a spread.

Short Options

Let’s keep this lesson short, simple and to the point. Option prices are affected by implied volatility. If IV is higher than normal, option prices tend to be high. If IV is in the lower part of its range, option prices tend to fall. Option vega changes the price of an option for every 1% change in IV.

Take a look at the example below. The red line represents implied volatility, and the turquoise line represents historical volatility. Without getting deep into the woods, option prices are above historical levels currently: 16% historically and about 22% currently.

spread

IV is at about 22%. If it were to move up 1 percentage point to about 23%, the option would increase in value by 0.11 because of vega (see chart below). The new value would be about 2.98 (2.87 + 0.11). That would be beneficial for the position. But what if IV levels dropped to historical levels if the underlying rallied? If IV decreased by 6% (22% – 16%) to about 16%, the new option value would be about 2.21 (2.87 – (6 X 0.11)).

spread

Clearly if you bought the option, you would prefer the option to increase in value, and it would (based solely on vega) if IV did increase. If IV is high because the market has fallen and you expect stock prices to rise and IV to drop again, you need to be cognizant to this. Don’t get me wrong. Positive delta and a move higher would offset some if not all the vega loss in this instance. But if you can do something about it, why wouldn’t you?

Use a Spread to Neutralize Risk

This is a situation where you would not want to have a positive vega position like a long call. If IV decreases as the market and stock move higher, vega would decrease the premium. So what should an option trader consider?

A spread like a bull call could neutralize that positive vega risk. A bull call involves buying a call and selling a higher strike call with the same expiration. The position can benefit from a move higher in the underlying, and it is considered bullish. Take a look at the example below.

spread

The 180 call is bought and the 182 call is sold. But take a look at the vega on the position. Before selling the 182 call, the position had a positive vega of 0.11. Now by selling the 182 call, the vega position is essentially neutral (0.11 – 0.11). So if IV drops, the position will not be as affected as it was before when the position had positive vega and would have lost premium.

Finally

This is just one way to offset vega risk. It can be rather effective, however, particularly in down markets when a move higher is expected.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

Categories
Trading Strategies

Successful Option Trading Is Not Easy

option

As a young retail option trader, one of the first things I did was buy an options program called “Options Made Easy.” Some of you may remember it from back in the day. It had three sets of red, yellow and green lights to guide you as an option trader. On the surface, it seemed easy. But in reality, option trading is far from easy.

It Takes Work

It takes a lot of work and patience to be a profitable option trader. Getting started by putting some cash into a trading account is the easy part. But that is where the easy stuff ends. Not only do you have to learn about calls and puts, different strategies and technical analysis, you also need to know the option greeks. That is already a lot to throw at a human being. Then comes management and all the psychological and emotional aspects of trading. You think learning the option greeks was hard? The psychological element is the killer for most.

Out of Our Element

As human beings, we are not particularly designed to be traders. I don’t know too many people who love to be wrong. As a trader, you will be wrong countless times. The emotional aspect of trading is huge, many traders and investors are not prepared for it, and most do not overcome it. I hired a trading psychologist myself, and it was the best money I ever spent hands down. That is why as a mentor, I focus on that aspect a lot. So aside from what options can and can’t give you, you need to ask yourself, “Can I handle trading?” That said, options can lower an investor’s or trader’s risk and produce profits that increase his or her P&L.

Hedge

Options cannot perform miracles. You definitely can lose money trading them, and many option traders do. But options allow you the chance to hedge, use leverage and generate income. Hedging essentially reduces risk. Is that not one of your main goals as an investor or trader? They can protect individual trades or your whole portfolio if need be. To me, that is invaluable.

Leverage

Options also provide leverage. You can use less money to have more exposure to a stock’s piece movement especially expensive stocks like Costco Wholesale Corp. (COST) and Home Depot Inc. (HD), for example. This in turn gives you more flexibility to trade underlyings that may be too expensive for your portfolio.

Income

Even though a trader’s or investor’s No. 1 goal is to preserve his or her capital, options can generate income. Reducing risk is the most important attribute to options, but being able to increase your profits is not such a bad thing. The best part about options is there is a strategy for whatever your outlook may be. With stocks, you simply can’t make money from a sideways position solely on the underlying.

Profit and Protection Potential

Yes, option trading and other types of trading are very difficult. Option trading in particular may be considered the hardest to master because there are more moving parts than, say, buying and selling stock. But if you are disciplined, option trading opens so many potential profitable and protection scenarios that are well worth it in my opinion.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

Categories
Trading Strategies

Don’t Forget About Long Calls and Puts

One thing that annoys me a bit is when option traders refuse to consider buying a call or put, no matter what. Granted, I only use long calls and puts in certain situations, but I will still buy them. Here is a brief reminder to all option traders who have abandoned buying calls: Please don’t forget to consider them as an option, so to speak.

Got Me Started

The first thing I learned as a brand-new option trader was a long call. I viewed it as a great strategy when I expected to profit from a move higher in the stock for significantly less money than buying shares. However, once an option trader has a firm grasp on spreads, like verticals, long calls and puts are a thing of the past. Let’s not forget that a long call and puts to some degree have unlimited profit potential, and there is always a chance the stock might rise or fall more than you envisioned. There is no better risk/reward in options than a long call or put.

MCD Example

Take a look at a recent daily chart of McDonalds Corp. (MCD). After breaking out of a downward sloping channel, the stock moved from around $270 to over $282 in about 2 weeks. That is a rise of almost 4.5% over that period.

Certainly, a bull put spread would have profited with the move higher, and a bull call spread would have done even better from a risk/reward perspective. But an at-the-money (ATM) or even an out-of-the-money (OTM) long call most likely would have produced the best monetary return.

A long call with positive delta and positive gamma would have been a great way to profit from this extended move higher. In addition, a long call has positive vega, which could have increased the call’s premium if implied volatility also increased. IV level are currently on the lower side too. Of course, if IV decreased, vega would have decreased the premium.

Lastly

Please do not forget about long calls and puts. They are extremely viable options. The bottom line is, when expecting a move higher or lower buying a call or put should always be considered. It might just produce a grand slam trade too.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

Categories
Trading Strategies

Your Trading Business

trading

I was asked last week what a trader should look for in selecting an options broker. That really got me thinking about what a trader needs to trade. Here I’ll share my thoughts.

Running Your Trading Business

Think of your trading as a business. Then think of the different functions that business requires to perform profitably. In a business different functions are performed by different departments. You have:

  • Administration
  • Information Technology
  • Operations
  • Marketing
  • Human Resources
  • Finance

Now, I’m not going to B.S. you and tell you these translate exactly to what a trader does, but… They kinda do.

Administration for Traders

To trade, one must be organized. We need the reports we need delivered to us in an easy-to-read, simple way. What are my Greeks? Breakevens? What is my portfolio risk? This is the stuff any good options platform must have tight.

Information Technology

Trading is an information business. We rely on data. And those data must be correct. “garbage in” leads to “garbage out” when it comes to processing data. Whatever platform you’re using, whether it’s through your broker or another analysis platform, it’s very common for the first blush of data they get to have some glitches. You may have seen on a platform a chart hit zero one day and the next candle is back up to what looks like a normal price. These bad bits of data are caused by computer glitches or sometimes human error. It happens all the time behind the scenes. But the best-run platform providers clean the data to make sure they’re right so you never even notice these glitches.

Trading Business Operations

How do we make any business run and crank out quality products? We need a factory to assemble the parts. Here the parts are data. This needs to be streamlined and efficient. We can’t be in the garage wondering where the screwdriver is every time someone orders a product, right? Well, we can’t be trying to reinvent the wheel every time we look at a trade. We need to get the prescreened trade idea, run it down the assembly line through the screening process and get it out on the dock for delivery to the market.

Marketing for Traders

What’s marketing? It’s literally bringing the product to the market. A business communicates what the product is, so buyers can see it’s available and make the decision to buy it or not. This is trade execution. And just like marketing in any other business, this must be streamlined and well communicated.

Back in the day, I remember being on a trading platform trying to create an OCO order and just not being able to figure out how to do it—how to communicate that information to the market. It’s gotta be easy (and fast) for you to find and click the right buttons and send the order type you need to send. This is both an issue of finding a broker who makes it easy to do by creating intuitive execution screens, as well as you working it out in advance so you know where it is and how to do it for the types of orders you’re likely to use. 

Human Resources

I don’t know why this is so far down the list. This is probably the most important of all of these to any business, but especially trading. People make businesses run. We need good people around us to help us reach our goals. I’m talking Community.

Traders absolutely need to be surrounded by a Community of traders for many reasons. Humans learn from one another. Being in a Community with other traders will hasten your learning curve. Other people can also be a great resource for trade ideas. And most importantly, trading can come with emotional swings. We all need people to share our victories and defeats with, who will cheer for us when we’re up and be there for us when we’re down.

Finance

This one is last for a reason. There are some important things to consider here, and some that often get too much emphasis. First is watching the money. Trading is a very bottom-line business. We need to keep tabs on our P&L and watch it closely. And we need good tools for that. A problem is that sometimes it’s hard to know what number you’re looking at on your brokerage platform. I can attest it’s worth your time to learn how to read your statements. Know how much money you have, what your risk is and how much margin you have left.

Part of finance is also taxes. My advice: Hire someone. Some active traders may be able to write things off that help their trading business. You work too hard at trading to pay more in taxes than is legally required by the tax code. Experts can help you with this. A good accountant can save you multiples on your taxes of what you pay him or her.

And then, last and least, there are transaction costs. Commissions (or fees as they are curiously called now) are important. But they are probably the least important of all of these. If you don’t have all these other business verticals dialed in, you shouldn’t be trading big enough for your extra couple of cents in commissions to matter. Try to save what you can on commissions, but don’t sweat it too much.

I hope that helps!

Trade smart,

Dan

Dan Passarelli
Founder and President
Market Taker Mentoring

Categories
Trading Strategies

Should You Adjust the Trade or Move On?

trade

Here is another short post on something I feel strongly about. The reason I bring it up now is because I have had back-to-back discussions about the topic with one-on-one coaching students recently. Both of them asked, “If you have a losing trade but it looks like a good setup again, should you take it?”

Of course, when you word it this way, a good or even a great setup should always be considered. But I like to tell traders to think of the adjustment as a brand-new trade…because it is. You are most likely closing out a losing position and looking to enter another one. Fair enough. But if you look at the possible psychological aspect of closing out a losing position, there is a tendency to think of it as a “revenge” scenario. As in, “I am going to show that stock who is boss!” Clearly, not everyone will feel that way, but a pretty big majority do in my experience.

So, to avoid that drama, I like to say there are plenty of other fish in the sea, meaning other trade ideas are just waiting to be found. I also like to say that your P&L does not care how you try to make up the loss on that last position. Only you might. Just because Apple Inc. (AAPL) took your money does not mean Boeing Co. (BA) can’t make you enough to compensate for some if not all of that previous loss.

I like to tell traders, when in doubt, look elsewhere. There will not be as much of a psychological element involved with the trade, and I can almost guarantee the results will be better too.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

Categories
Trading Strategies

Have You Written Your Trading Plan?

plan

On a recent Saturday morning, I did a webinar on the psychological aspects of trading. Without a doubt, trading psychology is my favorite topic to discuss, and in my opinion it’s the most important by a mile. It is a topic most traders realize needs to be addressed but usually do not want to think about. That’s because during the conversation the importance of a trading plan will be stressed.

I know when I bring up the subject, many of you groan and most likely it is for one of two reasons. The first is you have heard before that you need to have a plan and follow it but have not created one yet. The second is you already have a plan or have started one but are not following it. In either case, this will serve as another little reminder.

So Hard to Just Get Started

Before starting to write a trading plan, traders need to ask themselves if they are truly motivated to succeed. It may sound insulting to ask, but traders really need to find out the truthful answer to the question. Will you put in the time to be successful (whatever that means to you) as a trader? The trading plan is a huge component. There are going to be highs and lows along the way. Will you be able to handle them? Will you be disciplined enough to write and follow a trading plan?

Motivations

Trading has both internal and external motivations. External motivations cannot be controlled, such as making money and being right about the outcome of a trade. Internal motivation is the drive that traders need to get through the many challenges trading can bring, like being wrong about a trade and wanting to quit altogether. Mentally, it is a battle!

Before creating a trading plan, I tell traders to write down their strengths and weaknesses outside option trading. Who is going to know you better than yourself, right? This can determine, 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 or those type of trades are just what you need. Are you a risk taker? If you are, selling premium on options where losses can be substantial may be an option for you, so to speak.

Finally

I know it may sound like I’m beating a dead horse here, but I do it for a reason. Writing and having a well-thought-out trading plan is essential to your potential success. And like it or not, I will keep reminding you to write yours.

 

John Kmiecik

Senior Options Instructor

Market Taker Mentoring, Inc.

Categories
Trading Strategies

No IV Skew? Try an Iron Condor

condor

I love to find opportunities where I can buy calendar spreads for a neutral bias. In fact, we have feasted on them in MTM’s Group Coaching class for a long, long time now. The most important part about a calendar, whether it be neutral or directional, is that the underlying is trading as close to the short expiration as possible. There is no debating that point, but an option trader can get an edge from a proper implied volatility (IV) skew. What if there is no IV skew? A short iron condor may be a good choice in that case. Let’s take a look.

IV Skew Edge

An IV skew edge for a long calendar is when the IV level for the short option (shorter expiration) is larger than the long option (longer expiration). The bottom line is to sell more expensive premium than you are buying. There is less risk overall, and the max profit and breakevens grow. But without an IV skew, a short iron condor could be a valid choice. A short iron condor can work better when IV levels are elevated, but if there is no IV skew or a reverse IV skew (larger on the long option) it may be your second and best choice.

SPY Example

Recently in Group Coaching, we had been looking for a neutral opportunity in the S&P 500 ETF (SPY). But as we looked at the IV levels, we found there really was no advantage based on an IV skew. IV levels were a bit elevated because there were several expected volatility events taking place that week. In the hourly chart below of the SPY, you can see the ETF was trading between some potential support around $395 and resistance around $404.

condor

But as you can see below, there was not much of an IV skew between Wednesday’s expiration and Thursday’s expiration.

condor

Instead, we considered a short iron condor by selling the 392/394 put spread and the 404/406 call spread for Wednesday’s expiration as seen below.

condor

Both trades would have benefitted from neutral action from the ETF. But without an IV skew a long calendar seems a bit less attractive, especially since IV skews have been abundant over the past several months.

Finally

As noted above, it is not mandatory to have an IV skew to trade a long calendar, but I would rather wait until there is one to consider a long calendar. A short iron condor will be there for you as a good backup if there isn’t.

John Kmiecik

Senior Options Instructor Market Taker Mentoring, Inc.

Categories
Trading Strategies

Mind the Gaps When Trading Options

gaps

gaps

This market remains a volatile beast, gapping higher or lower practically every session. We are also almost through another round of quarterly earnings, which always seem to create potential for large gaps. I think many of us can agree that the first 30 minutes of the market can be very volatile because of a volatility event or from an earnings report. If you have been watching the market over the past couple of months, you might say the entire sessions have been volatile. But by being patient, and many times sitting out early market action, you can improve your chances for success later in the session.

There is an old technical analysis saying that says gaps tend to fill. Of course, that is true sometimes but not true other times. That said, the market and stocks tend to be more volatile at the open than later in the session. Although technical analysis like support and resistance levels still tend to work, erratic movements are present more so than later in the session. I like to tell traders to let the market settle and simmer and then look for an edge.

So, remember: Be patient and wait to see how early trading develops. Give some previous support and resistance levels a chance to respond to try and get a better feel of which way (if any) the market will move after the initial open. Then if you get a 2-bar close, for example, on whatever time frame you are using below support or above resistance or a reversal off those levels, you have put the odds are your side. And that is a very good thing!

John Kmiecik

Senior Options Instructor Market Taker Mentoring, Inc.

Categories
Trading Strategies

Take Nothing for Granted When Trading Options

options

As market volatility continues, here is a quick reminder to be cognizant about removing risk. If you know me, you have probably heard me say (at least a thousand times) to think of yourself as a risk manager first. But many times we take that for granted, especially when it comes to options. Let me explain.

What’s the Use?

The way the market has been behaving lately, there are many positions that can move quickly in our favor and of course those that can move quickly against us. The latter are what I am talking about here. Removing risk from your portfolio is not just about taking profits. It is also about reducing risk and protecting the position from further losses. Often, we are frustrated when a position goes against us, and we just give up. Trust me, we all have felt this way, especially early in our option trading careers. But you need to refocus and manage the trade as initially intended despite your frustration. Protecting the position from additional losses is the key to getting ahead and not letting big losses take you down.

Expiring Worthless

Another option position that is often taken for granted is credit positions. Selling covered calls, cash-secured puts and vertical credit spreads. Many option traders will not close out the position and let the position expire worthless. Let’s be honest: More times than not they do, especially if 80% or more of the premium is gone. But why not remove risk totally? Although the odds are small, the additional gains when at 80% or more of the max profit pale in comparison to the risk that remains. In this market anything can happen, so be smart and get rid of the risk.

Be the Risk Manager

options

Once again this has been a friendly reminder to be proactive and manage your positions actively. This can make all the difference in the world and give you a fighting chance to keep extracting money from the market for a long, long time.

John Kmiecik

Senior Options Instructor Market Taker Mentoring, Inc.

Categories
Trading Strategies

Directional Butterflies, French Physiologists and Bending Spoons with Your Mind

spoons

I can read minds. OK. Not really. But, hey, wouldn’t some of that sixth sense stuff be great as a trader?

I actually traded with a guy on the CBOE trading floor who said he could bend spoons with his mind. True story. I never saw him do it, and let’s just say I had my doubts. But he swore he could.

Anyway, I feel like I can almost read minds in one regard: reconstructing the rationale for why someone may have made a trade.

Wing Spreads

You’re probably already familiar with our Credit Spread Genius and Time Spread Genius trade trigger systems. Well, those work so well that I’m expanding the family with Wing Spread Genius (soon).

I’ve got the prototype ready and have been testing it by looking at the trades the model sends out.

Just like the credit spread and time spread versions of the Genius namesake, it’s built to scour the market for the best candidates of a very specific type of trade—direction-neutral income trades. And it spit out those trades but also some other types I did not expect.

It was French physiologist Claude Bernard who said, “It is what we know already that often prevents us from learning.”

I know butterflies, iron butterflies, condors and iron condors like I know my birthday. I’ve traded them for years. But I underappreciated the directional prowess these trade setups have.

Johnnycat from Group Coaching is a pro with directional butterflies. But it wasn’t until I saw some of these hit the scanner that I really started to appreciate them for all they are worth—and learned that a LOT of professional traders use them all the time.

NVDA Directional Butterfly

On Thursday, midday, this trade hit the Wing Spread Genius test account:

spoons

And here’s the chart of NVDA over the past 6 months:

spoons

It’s been climbing straight up for over two months. At that point, what was the likelihood of it heading higher to close out the week positive? Probably pretty good, BUT…

Unemployment was the following day. And there’s been a smattering of voices expressing concern or even downright bearishness lately. This was a case for a reasonable bet to the upside but necessitating very low risk in the case of being wrong.

Here on this trade, the trader risked $440 max loss. But if he or she was right and NVDA rallied along its recent trajection, the trader could stand to make massively more. Perfect case scenario, the max profit could be $9,560.

To be fair, with butterflies—directional or not—traders aren’t looking for the max profit. But just close. It had a roughly 2% range in which it would be profitable between $245.11 and $249.89.

This trader made a bet that maybe placed the odds somewhat against him or her, but the risk reward more than balanced out the likelihood of success. Win, lose or draw, this was a very smart trade right out of the gate.

And this is why I’ve come to join the likes of other super smart traders like John who love directional butterflies.

Dan Passarelli
Founder and President
Market Taker Mentoring, Inc.

Categories
Trading Strategies

Make Some Option Moves at the Close

moves

Bullish vs bearish tradesThis market has been a volatile beast with almost every day filled with decent to large moves. Let’s be honest: It is hard for a swing trader to get an advantage with those moves. Obviously, when the market closes, there is never a guarantee it will open higher or lower the next session. If we knew that, trading would be a whole lot easier and we probably wouldn’t be having this chat. But there is a method I use on a constant basis that I have found helps me tremendously. It is to monitor how the stock closes on the day.

Bullish Close

This is even more essential if I am looking for a bullish or bearish directional trade. For example, I like to enter a bullish trade closer to the end of the session if the stock looks like it will close toward the high of the day. Naturally, I want the stock to close in positive territory. But if there is some resistance or if the stock is extended, odds tell us there is a better chance the stock will pull back. If there is a strong bullish close at or above resistance or if the stock does not retreat much, that shows buyers have not moved on. This gives us better odds the stock will move higher, at least at the open. Many times, you will see the stock continue to move higher, particularly if it is breaking resistance or triggering a bullish reversal.

Bearish Close

For a bearish potential trade, look for a bearish close with the stock closing near the low or at or below a support level. If it does, I look for a bearish entry toward the close again.

Many times, the stock will continue to move lower, especially if support has been broken or that bearish close has triggered a bearish reversal.

No Guarantees

Of course, there is no guarantee whether a stock closes bullish or bearish that it will continue in that direction the next session. Market risk can move stocks too, like a gap that is the opposite of your expected move. But being patient and waiting to enter a position when there are more odds on your side can improve your results tremendously, and that is a guarantee.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

Categories
Trading Strategies

Profit Taking Orders Are Mandatory

profit
profit

There is a lot of subjectivity in life and in options trading. In both, there are lots of choices with many potential scenarios. As any trader knows, there are also lots of judgment calls and not a lot of certainty when it comes to options. There is, however, one move that can 100% improve your trading results.

Risk Removal

What I am talking about is implementing profit taking orders as soon as you have your position on even if profits are not quite realistic in a day or two. Good-til-canceled (GTC) sell limits for debit positions and GTC buy limits for credit positions can be true game changers. It is not just about taking profit; it is about removing risk at the same time. With the position gone, risk for that position is also eliminated. Think about that for a minute or two.

Not So Easy to Do

How easy is it to put a profit taking order on? Not very, right? If you have the order in place, there is a chance it could be filled. If you do not, obviously there is no chance. Here’s the thing I like to tell option traders. There might be one instant in the day whether at the open or later in the session that the order could get filled. If the order is there already it will fill. Saying you will keep an eye on it is not the same because you may miss out on the moment.

Finally

If you haven’t learned by now, there are many decisions to be made as an option trader. This is a no-brainer and can absolutely improve your option trading results. There are not many other things you can do as an option trader with such absolute certainty. No ifs, ands or buts, have your profit taking order out there.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

Categories
Trading Strategies

Get Technical Edge on Your Trades

technical edge

Here is a really short blog about putting the odds on your side as a trader. You have heard me talk about this many times but it needs to be repeated often. What has a better chance of happening? Do you ask yourself that enough when looking at charts? If you don’t, then why not?

QQQ Chart

Below is a recent hourly chart of the Invesco QQQ. Take a look at the downward sloping trendline that has acted as resistance since almost the beginning of February. Based on where QQQ closed recently and considering potential resistance, you would probably say it has a better chance to move lower than higher. Resistance like support has a better chance of not letting the underlying through that level.

technical edge
Break of Resistance

That said, the market has been gapping practically every single session so a gap lower or higher might occur. A gap higher over that potential resistance level from the trendline would be a bullish sign, so a trader might consider potential bullish opportunities like a long call, bull call or bull put spread. If potential resistance holds, long puts, bear puts or bear calls could be explored.

The Bottom Line

As a trader who uses technical analysis, you have to respect the fact that support and resistance have a better chance to keep the underlying from moving through that level. Again, what has a better chance of happening? But a gap or move through that level is a strong sign in the continued direction with the odds on your side too.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

Categories
Trading Strategies

Waiting Out Your Theta

waiting

waiting“Please remain on the line and the next available representative will be with you shortly [elevator music resumes].”

WAITING! Yeah. It’s annoying. But we have to do it. And when the wait is over, we finally get what we want…just like theta.

How Does Theta Work in Options?

The first thing we need to talk about is: How does theta work in options? This is not a big mystery. The option Greek “theta” measures how much an option loses per day from time passing—a phenomenon called time decay, or option erosion.

If you think about it—and this is not necessarily intuitive UNTIL you think about it—options lose value as time passes because they have less time to gain value as each day passes. And THAT is how option sellers make money: by waiting for time to pass.

But what if we can wait less time and make more money? Is this even possible?

Yes!

We left-brained option traders LOVE to measure things. As I like to say, “What is measured is optimized.” When we can put a number on it, we can make better decisions. We can literally select the option that gives us the greatest advantage for our trade each and every time when we use the option Greek theta.

When Does Theta Decay Most?

That begs the question: When does theta decay most? If we can answer that question, we can gain an advantage over other option traders who are not quite as savvy. When we sell options, we want to get the biggest positive theta possible. (Note: There are other factors to consider and balance this ideal against. But all else held constant, when it comes to theta, size matters. Bigger positive theta is better.)

There are two factors that are useful rules of thumb when it comes to theta: moneyness and term structure.

Moneyness

There’s a word we don’t get to throw around in everyday use. An option’s moneyness is the proximity of the strike price from the stock price. Simply put, it’s how in or out of the money it is. With theta, the closer to being at the money, the higher it is. Both in-the-money and out-of-the-money options will have lower theta than at-the-money options. So, when we sell options, selling closer to the money can give us an advantage (again, all else held constant).

Term Structure

I know. I’m just full of fancy words today, aren’t I? When we look at options with the same strike price but different expirations, they will have different thetas. (And that’s all term structure means: same strike, different expirations.)

Near-the-money options with less time till expiration have higher theta than options with more time till expiration, given they are the same strike price. This is another way traders can get an edge and trade more profitably in the long run. (Yeah. The more you learn, the more you earn, when it comes to option trading.)

Options Rules of Thumb Limitations

Options rules of thumb are super useful. But remember the old Russian proverb Ronald Reagan used to throw around, “Trust but verify.” Any options-friendly broker will have option theta as an available column in the option chain. Use it! The rules of thumb provided above are just that: loose rules to quickly gauge the situation BEFORE looking at the actual situation. Go and look at the actual theta value on every trade. It’ll ensure you’re maximizing every opportunity and making that wait as short as possible to get to your profit target.

Dan Passarelli
Founder and President
Market Taker Mentoring

Categories
Trading Strategies

Double Calendars Still the Ticket

If you have been in MTM’s Group Coaching class over the past several months, you have seen me model out several long double calendars…mostly on the SPY but on various other stocks and ETFs too. Some have done better than others, but overall double calendars have been profitable more often than not. The times they have worked best have been during volatile events.

FOMC’s Expected Rate Hike

Just recently, there was another rate hike expected to be announced on Wednesday afternoon. In class on Tuesday, we looked at a potential long double calendar on the Russell 2000 ETF (IWM). In the 6-month daily chart below, you can see there was a support and resistance level around the $188 to $189 level and the ETF was trading a little above it.

We also noticed that the Friday expiring options had implied volatility (IV) levels much higher than the Monday expiring options courtesy of the expected announcement on Wednesday as seen below.

The Double Calendar Plan

With the underlying trading around the $190 level, we decided to go about 44 higher and lower with the strikes. We did the 194 call calendar and the 186 put calendar. We sold the Feb-3 expiration, which was Friday, and bought the Feb-6 expiration, which was Monday as seen below. The cost was 0.34 ($34 in real terms).

The P&L diagram is an estimate at the short expiration because of the two different expirations. As you can see below, it sure looked good on paper!

It showed max profit at either $186 or $194 to be over $150, which is really good based on the cost of $34. The guesstimate break-evens were from about $182 up to just over $199 to the upside. Not too bad overall at least on paper. There will be changes in IV levels, time passing and naturally the ETF will be moving as well.

Wrapping It Up

Let me start by saying if you have not been in MTM’s Group Coaching class, why not? You are missing out. If you are familiar with double calendars, you know how effective they have been lately. If you are not, it is time to learn.

 

John Kmiecik
Senior Options Instructor
Market Taker Mentoring

Categories
Trading Strategies

3 Things Traders Who Know Everything Don’t Know

3 Things Traders Who Know Everything Don’t Know

Have you ever met a trader who “knows everything”? Of course you have. Every now and then, you come across them on TikTok or YouTube. If you can’t already tell just from looking at them that they know everything there is about trading, don’t worry: They’ll tell you.

Well, I’d like to share three things they (apparently) don’t know (and I bet there’s a good chance you know some of them already).

  1. No one knows everything

    I mean, come on. Really?! Humans have been trading options for literally millennia. Arguably the first recorded example was when Thales (620 B.C. to c. 546 B.C.) contracted the local olive presses to potentially capitalize on a bumper olive crop. (Sounds like a future blog post to me.) Let’s not forget the Dutch Tulip Mania of 1636 when seemingly everyone was trading options on these bulbs (sounds like another future blog). But it wasn’t until 50 years ago when humans actually came to understand how option pricing worked. (Thanks Fischer and Myron!)

    In my first trading gig, I worked for a legend in the options world, the late Steve Fossett. (Sheesh, is this yet another future post? I got me some inspiration today!) He was massively successful. The one thing he was known for saying is, “I’m still learning.” I love that attitude, and it shaped the way I think about trading and about life.

  2. The best traders are humble (and have losing trades)

    The best way to identify a losing trader is when you hear someone who only talks about their winners. These braggadocios are really annoying. I mean really. Who are they kidding? There’s actually an answer to that question: Only themselves.

    For many professional traders (who trade big enough to move the market) this is a prerequisite—you never brag about how much you’re making on a trade so other pros don’t come in and do the same thing, crowd the trade, and squeeze out your profit. Back when I stood down in the CBOE trading pits, when we were making a killing and another market maker asked, “How’s trading going in your pit?”, the answer was always something to the tune of: “Ugh. Oh man. Yeah. It sucks. No paper. I’m going to have to get a second mortgage. How about you?”

    As retail traders, that’s less important. In fact, our community benefits from our student traders sharing both their wins and their losses. That’s how we learn.

    John and I try to set the tone for that too. We are actually much more likely to share stories about our past notable losers than our winners. And it’s not just to be humble. It’s because I believe that while you can surely learn a lot from hearing about how someone made money, you can learn a lot more hearing about the mistakes they made. This is how we shorten your learning curve. I like to say, “I’ve made the mistakes so you don’t have to.”

  3. Knowledge only benefits you if you have the right psychology

    Imagine if you were a boxer who is afraid to get hit. You train for months and then in the ring you cower or run away when the first punch is thrown. Or you don’t want to hurt the other guy, so you don’t punch too hard.

    Sort of a ridiculous analogy. Or is it? I’ve met a handful of traders who I could quiz on factoids and theory who can get ’em all right but just can’t find a way to make money.

    Let me be really clear: Psychology is the most important thing in trading.

    I’d almost go as far as saying it’s MORE important than knowledge. If you’re too scared to make the trade; if you get too nervous when you’ve made a little profit and get out too quick; if you’re too nervous when you lose and your head’s on fire and you freeze; if you get too greedy when you have a profit and watch it retrace and wind up a loser; if you’re too greedy when you have a loser and wait for it to come back, trading is not going to work.

    This is not a phenomenon known only to traders. This applies to anything you can do in life. Sure, some athletes are born with good genes. But they and all the other greats will tell you that it’s the mental game that got them where they are.

    Entrepreneurs. How many stories have you heard about great entrepreneurs who didn’t graduate college? How about Sir Richard Branson, Steve Jobs, Steve Wozniak, Mark Zuckerberg, Larry Ellison, Michael Dell, Walt Disney or Bill Gates? Henry Ford didn’t even go to high school!

    What made them successful? Attitude. Sheer will. Determination. Mastering their own minds.

    Psychology.

    This is what matters. You can always learn more (and should always try to and need to). But psychology is what really makes or breaks a trader.

    And if you haven’t already registered for our 7 Keys to Making This Your Most Profitable Year online training (which, you guessed it, is all about trader psychology) we have a special encore presentation of it coming up in a few days. There’s still time to grab a spot here. I hope to see you there!

    Trade Smart,

    Dan

Dan Passarelli
Founder and President
Market Taker Mentoring

Categories
Trading Strategies

IV for Options Is Dropping

options

I started out my Group Coaching class recently by talking about how it may be a bit more difficult to find option trades than it was a couple of weeks ago. As you know, everything in options trading is a trade-off. If the probability to make money is good, the risk/reward is not so good. If the risk/reward is fairly good, most likely the probability is lower. The market may be a bit more difficult right now, so let me explain my thoughts.

IV Levels Have Fallen

Implied volatility levels have dropped drastically over the past couple of months. Take a look at this daily chart of the VIX (S&P 500 Volatility Index).

options

When the VIX drops with IV levels, option prices do as well. Credit spreads that were awfully tempting just a few weeks ago seem less of a bargain now. In class, we modeled out a few recently that really made no sense from a risk/reward standpoint. To me, the market is still quite volatile with gaps and intraday moves sometimes being very dramatic. I feel option prices do not match the level of overall volatility.

IV Skews Are Less Abundant

When IV levels are high, there are typically more IV skews available. For long calendars, an option trader prefers higher IV levels on the short option expiration and lower IV levels on the long option expiration. When IV levels are elevated, IV skews are more abundant. With IV levels dropping, it has been harder to find that IV edge. Now granted, there will be some IV skews with pending volatility events like the upcoming FOMC announcements.

Quarterly Earnings

Lastly, we are just getting under way with the latest quarterly earnings. If you are a TED (Total Earning Domination) trader, you are excited. If not, it can sometimes be a nuisance trying to avoid those landmines otherwise known as earnings announcements. Just be cognizant and check and double-check for any expected earnings before placing your trade. No one wants a nasty trading surprise.

Finally

That said, there are still plenty of opportunities out there to extract money from the market. But in the current conditions, you may have to consider different strategies from what have worked in the recent past. Happy trading!

John Kmiecik
Senior Options Instructor
Market Taker Mentoring