All posts by T3 Live
Do You Need a Trading Intervention?
There are a million courses and instructional videos on chart reading, economics, fundamentals, and quantitative analysis. Most traders come up through the ranks by taking information from various sources and mixing it together to create an individual path. You don’t need to be original or overly creative to be a great trader. You must simply be able to curate strategies that work for your personality and trading style. But the ugly truth is that a lot of trades desperately need a wake-up call. Sometimes, we think we’re putting things together in a very rational and controlled fashion, but we’re still not getting the result we should. That’s often a failure of mindset rather than of intelligence or natural trading acumen. So we put together a list of 9 clear signs that you need a trading intervention. If you suffer from 1 or more of these symptoms, then it’s time for a gut check! 1) You Suffer from Brain Freeze (and we don’t mean the ice cream kind) You do your best to learn a strategy or methodology, but when it comes time to implement it, you freeze up and do nothing. Quite often, traders are more comfortable with the idea of risk than risk itself. When traders find themselves freezing up, it often makes sense to dramatically cut position sizes to get acclimated to executing real trades. 2) You Make Conscious Errors You realize that you are doing something that does not fit into a logical strategy, and yet you do it anyway. This is a bizarre mix of anxiety and arrogance, as it’s based on two illogical beliefs: that doing something is always better than doing nothing, and that things will miraculously work out in your favor. Both are wrong on all counts. 3) You Are Underconfident You exit winning trades too early, stunting the potential of your winners. As unusual as it seems, traders often have difficulty letting winners run. Many traders want the security of having locked in a gain, which means they miss the bulk of a move. The best traders look for clear signs of exhaustion in trends before exiting winners, because trends often last longer than may seem logical. 4) You Have Too Much Patience You exit trades too late, allowing your winners to turn to losers, and losers to turn into bigger losers. This comes back to the belief that things will somehow just work out. Many traders have a problem with wanting more! more! more! out of a winning trade, even after it’s showing signs of of change in trend. So they’ll let emotion take over, and they’ll watch a position decline in the hope that it will magically turn around and restore prior gains. Traders also sometimes have a hard time dealing with losses, so they’ll sit and wait for them to turn around, even when they have no rational reason for doing so. 5) Not Enough Patience You chase trades aggressively, giving yourself bad entries, which eventually causes you to get stopped out. The fear of missing out is pervasive among traders. We see a stock go up $10 and we start to wonder if it’s going up another $5. A smart trader accepts that sometimes, trades just pass you buy. You’re never going to catch them all, and trying to do so means acting out of emotion instead of logic and analysis. 6) You Don’t Take Responsibility for Your Results You blame others for your problems trading problems instead of taking responsibility. We can’t control anything in the markets beyond our own strategies and risk management techniques. But since we all consenting adults engaging in an uncertain business, we must accept responsibility for our own results. We’ve all stepped into this arena by choice. So we must own the consequences — both good and bad. 7) Your Stop Get Hit Constantly You are dying of a thousand paper cuts, getting stopped out constantly, which adds up to huge losses. Many traders set extremely tight stops, which is death in today’s volatile, algorithm-driven markets. There is a misplaced belief that hard stops ensure limited losses, but that’s not always the case. A stop strategy must be adapted to current market conditions, and if you are getting consistently stopped out, you must reassess your thresholds. Quite often, traders that suffer from an overload of stop losses find that they’d actually have profited if they’d held on a little bit longer, or set their stops a little looser. 8) You’ve Forgotten That Trading Is Work It’s easy to view trading as an unstructured entrepreneurial adventure rather than a job. It takes a big streak of independence to become a trader. But beware of too much of a good thing. Traders often find themselves living an unhealthy lifestyle, including bad sleep habits, heavy hunk food intake, and zero exercise. If you want a healthy trading mind, you must take care of our body of first so you can show up ready to work effectively every day, just like any other job. When you’re tired, unfocused, and unprepared, you are throwing money away. 9) You Are Not Compartmentalizing We all have life problems. But when we trade, they must be put away to be dealt with later. You must be focused on the task at hand. You can’t be thinking about the fight you had with your spouse the night before or how you’re going to make the next mortgage payment. So when it’s time to trade, stay focused on the task at hand.
Continue Reading -->Our 10 Top Articles of April 2017
With April 2017 coming to a close, let’s take a quick look back to our 10 most popular articles of the month, as judged by our internal website statistics. We’ve got everything from education on the VIX to technical analysis tips to Scott Redler’s latest appearance on CNBC’s Fast Money. Enjoy them! 10) What is the VIX? And How Can I Trade It? – April 20 Learn the basics of the VIX, and how you can trade instruments based on the VIX. 9) How the 3-Bar Rule Can Help You Deal with Failed Setups – April 10 Learn to avoid setups that look like they are triggering, but actually fail. 8) Oh Snap! A Unique Options Opportunity Presents Itself – April 18 Snap options looked unusually priced ahead of the May earnings report, presenting an opportunity to place an interesting options trade. 7) Jeff Cooper: Gold $1262 Is the Level to Watch – April 10 Jeff Cooper breaks down the levels you need to be watching in gold. 6) 9 Tips for Picking the Right Stocks for Swing Trading – April 4 As a swing trader, one of the most important decisions you’ll every make is choosing which stocks to trade in the first place. 5) How to Use the VIX Curve to Judge the Market’s Mood – April 17 The VIX isn’t very useful as a market indicator. But looking at the curve can tell you a lot about the market’s mood. 4) 7 Interviews with 7 Top Traders – April 1 Get to know 7 of our top traders, including Sami Abusaad, Kurt Capra, and Mark Harila in this exclusive interview series. 3) Jeff Cooper: Why a Big League Market Reversal Could Happen – April 6 Technical analysis maestro Jeff Cooper identifies market levels that could signal a major change in trend. 2) 17 Killer Tips Every Momentum Trader Should Know – April 3 Most successful traders are highly disciplined. So to help you get better momentum trading results, we’ve put together a list of 17 handy rules that will keep you out of trouble. 1) Scott Redler: 4 Charts You Need to See – April 10 Scott Redler laid out his case for the banks on CNBC’s Fast Money. Here are the 4 charts he used to break down the action.
Continue Reading -->Which ETF’s Should You Be Trading?
The ETF industry is HUGE. According to the Investment Company Institute, as of February 2017, we have 1,736 ETF’s to choose from, with total assets of $2.7 trillion. There’s an ETF for everything. Yes, we all know about SPY and QQQ and IWM, but did you know that there’s an ETF for lithium? That’s right, you can ride the lithium market with the Global X Lithium (LIT) fund. Into livestock? Then check out the iPath Dow Jones-UBS Livestock Subindex Total Return (COW). (h/t to RothIRA.com) Heck, there’s even an ETF that invest in ETF companies… albeit not very well. To help you make sense of the endless array of ETF’s available to you, we’re going to give you 5 basic ground rules to keep you away from the worst of the ETF lot. 1) If It’s New, Tiny, or Illiquid, Stay Away New ETF’s tend to be expensive and illiquid, with plenty of alternatives that are already on the market. Plus, a hot new fund may not actually ever garner enough assets to stay in business. So why bother with them? According to ETF.com, once a fund surpasses $50 million in assets, it’s far likely to close, so that’s a decent benchmark to keep in mind. However, we’d suggest upping your minimum requirement to $250 million to reduce the likelihood of a fund closure during times of extreme market stress. And if you’re an active trader, look for funds that trade over 1 million shares per day. This will ensure you can get in and out of them without too much trouble. 2) Forget Those Highly Specialized Sector Funds As with many new ETF’s, highly specialized sector funds are usually not worth trading. Specialty funds are typically more expensive and less liquid than generalized funds with similar performance characteristics For example, the Bioshares Biotechnology Clinical Trials Fund (BBC) sounds exciting, but it trades less than 13,000 shares a day. It also has an expense ratio of 0.85%. The iShares Nasdaq Biotechnology ETF (IBB) trades over 1 million shares per day with an expense ratio of 0.47%. Here, you can see a chart comparing IBB (bars) to BBC (purple line): They look pretty much the same, though BBC has been more volatile and a weaker performer over this 2-year time frame. 3) Know What You Own Before trading an ETF, you should actually make sure it fits your trading and investment objectives. Always look at a prospective fund’s underlying holdings, because you can’t always rely on a fund’s name to determine what it owns. For example, the SPDR Homebuilders ETF (XHB) is more of a retail/building supply ETF than a homebuilders ETF. Only 1 of its top 10 holdings is a homebuilder, and the biggest position is Williams-Sonoma (WSM)! And if you’re playing with anything fancy like leveraged ETF’s or VIX-derived products like VXX and TVIX, run, don’t walk, to the prospectus. Quite often, these complex products have significant tracking errors and other risks of which you should be aware. 4) Check Your Free Options Many large brokerage firms allow you to trade certain ETF’s for free. Every dollar you save on commissions is another dollar that stays in your pocket, so why not look into your free options? For example, Fidelity offers commission-free trading of the popular iShares ETF’s. TD Ameritrade also offers free trading of select ETF’s from iShares and Vanguard. However, there are two caveats to keep in mind: there are usually some restrictions with free ETF trading, like a minimum 30-day holding period. And secondly, some ETF’s offered in commission-free trading programs aren’t exactly top-shelf offerings. Occasionally, you’ll come across a fund that has very little liquidity and a high expense ratio, which you’ll want to avoid. 5) Stick With the Establishment Most of the time, it makes sense to stick with the industry giants like Vanguard, iShares, State Street SPDR, and PowerShares. In all likelihood, these companies will stay in business and remain very profitable for a very long time. And because of rampant competition, fees just keep going lower and lower. Plus, funds from major ETF companies, allowing you to get in and out of the market at will. It’s just one of those cases where bigger is almost always better.
Continue Reading -->What Is the VIX? And How Can I Trade It?
How can I make money trading the VIX? That’s one of the most popular questions we get from aspiring traders. And they usually don’t like the answer — because you can’t trade the VIX. The VIX — better known as the Chicago Board Options Exchange Volatility Index — is not a security, and thus the number you see on your screen is not a price. It’s actually a trading indicator. The VIX uses prices of various S&P 500 options with expirations between 23 and 37 days to measure traders’ expectations of volatility. The VIX helps us measure sentiment by telling us how much traders are willing to pay for these options. Typically, the VIX rises when traders are worried about downside risk. Why? Because when traders are worried about downside risk, they’ll pay higher prices for downside protection through options. Let’s take a look at a 10-year monthly chart of the S&P 500 (bar chart) against the VIX (purple line): The chart shows that the VIX had major spikes during the: A) Financial Crisis B) Flash Crash C) Euro Sovereign Debt Crisis D) August 2015 Minicrash This illustrates how the VIX rises when traders are scared and markets are coming under pressure. Why? Again, because traders were willing to pay up big for downside protection through S&P 500 options. The same dynamic plays out on shorter time frames. As you can see in this 20-day hourly chart, when the S&P 500 (bars) rises, the VIX (purple line) falls: And vice versa. What You Can Trade We told you before that you can’t trade the VIX directly, since it is an indicator. However, there are many derivatives of the VIX that can be traded. But before we proceed further, you must understand that virtually all VIX-related instruments can be tricky to deal with. And we urge you to read the prospectus and understand the pricing mechanics of any VIX-related instrument you trade. VIX Options and Futures The CBOE has created VIX futures and options. VIX futures trade nearly 24 hours, 5 days a week. And VIX options can be traded just as easily as a standard equity option. However, keep in mind that VIX options typically expire on Wednesday, and VIX options contracts are based on the price of VIX futures, not the VIX itself. VIX ETN’s There are many VIX-derived exchange traded products, the most popular of which is the iPath S&P 500 VIX ST Futures ETN (VXX). The VXX aims to deliver the return of the S&P 500 VIX Short-Term Futures Index. Many traders also follow the Credit VelocityShares Daily 2x VIX ST ETN (TVIX), which aims to deliver twice the daily return of the S&P 500 VIX Short-Term Futures Index. VIX ETN’s can be bought and sold like stocks. However, they only appropriate for short-term trading since they don’t track the VIX — they track VIX futures, which tend to naturally fall over time. Here’s a direct excerpt from the VXX prospectus: The index underlying your ETNs is based upon holding a rolling long position in futures on the VIX Index. These futures will not necessarily track the performance of the VIX Index. And for technical reasons related to the VIX futures term structure, they tend to decline over time: On the flip side, shorting these instruments over the long run is not easy because of margin requirements and other issues. Plain Old SPY Options The easiest way to trade changes in the VIX may be to just trade SPY options. They’re very liquid and easy to trade with none of the complex mechanics involved with VIX futures, options, and ETN’s. For example, if you think the VIX is set to increase sharply, rather than messing with VIX products, you could simply buy SPY put options. Why? Because a higher VIX means higher put options prices. Remember, the VIX is a measure of implied volatility on S&P 500 options. And all things being equal, when implied volatility goes up, options prices go up. (click here for a primer on implied volatility) And on the flip side, to speculate on a falling VIX, one could simply buy SPY call options, since a falling VIX is typically associated with rising stock prices. Sure, the VIX products are sexier and more exciting, but for newcomers to trading, simpler is often better.
Continue Reading -->How to Use the VIX Curve to Judge the Market’s Mood
Many traders view the VIX — formally known as the Chicago Board Options Exchange Volatility Index –as a stress gauge for the market. (click here for an introduction to the VIX) But knowing the level VIX alone isn’t very helpful, and it has little value as a predictor of price. One way of getting real value out of the VIX is comparing it to the prices of VIX futures. The VIX uses implied volatility levels on a variety of S&P 500 options expiring in 30 days to estimate traders’ expectations of volatility. So if we compare the VIX with prices of VIX futures expiring later in time, we can get an idea of the market’s mood. We do this by looking at the VIX curve, which is a plot of VIX future prices by expiration. Typically, the VIX curve slants up and to the right because the prices of later-dated futures are higher. Here’s an example from VIXCentral.com: This is called a state of contango. If you think about VIX futures as insurance, this makes perfect sense. Why? Because when there’s more time to expiration, there’s more of a chance that insurance will pay off. If you want to buy VIX futures because you think the VIX will spike 25%, you have a far greater chance of having your bet pay off if you have 6 months to expiration rather than 3. Therefore, the seller of VIX futures will charge higher prices for later-dated futures. On the flip side, occasionally, the VIX curve will invert — or enter what is called backwardation. Here is an extreme example from August 24, 2015, when the market had a mini-crash: As you can see, the near-term VIX futures prices are higher than the later-dated ones. This means that traders expect so much near-term volatility that they’ll pay tremendous amounts of money for VIX futures that are close to expiration. So how can you make sense of all this? One good rule of thumb is to use the 3-month VIX curve as a proxy for fear in the market. This is calculated by taking the VIX future expiring in 90 days, and subtracting the VIX spot price from it. So if the VIX future expiring in 90 days is priced at 15 and the VIX spot price is 11, the 3-month curve is calculated as +4. And if the VIX future expiring in 90 day is priced at 14 and the VIX spot price is 15, then the 3-month curve is priced at -1. Generally speaking, here are some 3-month VIX curve levels you can use to determine how optimistic or fearful traders are. +5: Traders are extremely bullish and in danger of being complacent +4: Traders are very bullish +3: Traders are optimistic +2: Traders are neutral +1: Traders are moderately bearish 0 or below: Traders are very fearful Just keep in mind that as with all sentiment indicators, the VIX curve should not be used a buying or selling indicator on its own. Rather, it should be considered as another potentially helpful tool in your decision making process.
Continue Reading -->Scott Redler Discusses the Market Complexion with CNBC
In yesterday’s Market Insider Column with Patti Domm on CNBC.com, T3 Live Chief Strategic Officer Scott Redler broke down yesterday’s weak market action in the aftermath of the release of the Fed’s March Meeting Minutes: The real test is whether the market will fall below and close below the 50-day moving average, which it hasn’t done since Election Day. That would be a signal the complexion has changed, and that would breed more caution,” said Scott Redler, partner with T3Live.com. Redler, who follows the market’s short-term technicals, said the dramatic reversal in the S&P 500 Wednesday may be a forewarning of more turbulence to come. “When you break key levels and hold them, it’s a constructive signal for the bulls. If you push above levels and it fails, it could give you some clues that there’s more weakness to come. The banks and small caps were giving clues even before the Fed said the market is quite high,” said Redler. Click here to read the full article on CNBC.com, which also includes commentary from market legend Art Cashin, who serves as director of floor operations at UBS.
Continue Reading -->17 Killer Tips Every Momentum Trader Should Know
When people hear the word “momentum,” they think excitement. Volatility. Big wins, and big losses. But the reality is that the most successful momentum traders are highly disciplined. To help you get better momentum trading results, we’ve put together a list of 17 handy rules that will keep you out of trouble: 1. Create a Game Plan and Stick To It You should have a reason for entering each trade and always have a stop-loss price and a level to take profits before you enter a position. In the long-run, discipline is the key to consistent success. 2. Adapt to Changes Quickly If a short-term trade isn’t working, don’t hesitate to switch sides. The market action can change very quickly, and you must be able to change with it. Don’t be stubborn! 3. Don’t get Married to Stocks If you are losing money in a stock, you don’t have to make it back in that particularly stock. Likewise, don’t force a trade in a stock only because it has made you money before. Always trade the best set-ups only. 4. Don’t Try to Pick Tops and Bottoms Trying to identify tops and bottoms will lose you money over the long run. The trend is your friend, so focus on that. And when you find it, follow it. Don’t trade with a bias because you think something should or shouldn’t happen. Let the stock tell you what its next move will be. 5. Accept Losses As Part of the Game Prepare yourself mentally and emotionally, because you will lose money at times. It’s part of the game, so there’s no use in fighting it. Just try to keep your losses small, and don’t be afraid to take a break if they’re getting bigger. 6. Stay Confident and Positive If you’re not feeling confident about your strategies and execution, don’t hesitate to step back from he market until your head is together. 7. Be consistent with Your Game Plan, Size and Execution. Keep your tier and trade sizes consistent and stick to your game-planned trades. You don’t want to end up with $1,000 gains and $5,000 losses! 8. The First Stop Is the Cheapest Stop Do not give into the temptation to let a losing stock run. Most of the time, you will end up getting destroyed because your small loss will turn into a huge loss. 9. When You are Wrong, Admit It and Move On Don’t waste time with a trade that is no longer compelling. Just move on to the next one. 10. Give Your Trade Time If you believe in a trade, but you’re just not getting movement, wait for it to play out. 11. Never Let a Winning Trade Turn Into a Losing One If you see profits in a trade disappearing, don’t be afraid to cash out. You can always get back in later. 12. Try to Capture the Full Move of a Trade While it is important not to let winners turn to losers, you will make your largest profits from capturing larger moves. So you can give a little back if you’re up big — but not too much. 13. Know Your Trade Type Always be aware of the type of trade you are in and act accordingly. Don’t mix up your time frames and don’t mix up your stock types. If you are in a swing trade, don’t get out impulsively on the first tick against you. If you’re in a fast scalping situation, don’t get tempted to hang on too long. And if you’re in a slower-moving stock, be patient. 14. It’s Okay to Take the Money and Run If you have a highly profitable morning session, it’s okay to take the afternoon off and relax, especially if you start giving some back. Don’t turn a great morning into a losing day. And if you have a bad morning and make it back to flat or a little green, call it a day and declare victory! If you push it, you risk suffering the emotional roller coaster of going from red to green back to red. 15. Trade the Same Way Whether You Are Up or Down Traders tend to press hard when they are down, and they get careless when they are up. You should have the same disciplined approach in either situation. 16. Trade Stocks That Are in Play Don’t trade something just to trade it. Make sure the stock you’re eyeing have regular movement, or have catalysts for movement coming. 17. Learn a Proven Method There are many ways to learn to trade, but too many traders take random pieces of information from different sources, and put them together without a plan for success. The best way to learn to make money trading is to study a proven strategy, and then carefully apply it in real-world market conditions.
Continue Reading -->How to Define an Uptrend on a Stock Chart
In technical analysis, one of the biggest mistakes you can make is to not have clear criteria for the patterns you’re looking at. What do we mean by that? Quite often, you’ll hear traders use terms like head & shoulders and support and resistance. But you never hear But you never hear about the criteria they use to actually define these terms. In our T3 Technical Strategies and Trading the Pristine Method Programs, we pride ourselves on giving traders, particularly beginners, clearly defined criteria for the patterns we use. Let’s start with one of the most important — the good old uptrend. What is an uptrend? A trendline that points up… right? Well yes, but that’s not enough. Why? Because without clear criteria to define our uptrend, we’ll never know when the trend breaks! Here are our 5 criteria for an uptrend on a daily chart: 1) Higher Highs: stock is making new highs (see letters on chart below) 2) Higher Lows: stock is not breaking below prior lows (see numbers on chart below) 3) Rising 20 Day Moving Average: indicates an improved short-term trend 4) A Rising 40 Day Moving Average: indicates an improved intermediate-term trend 5) Even Space Between the 20 and 40 DMA (a.k.a. railroad tracks) Here’s a chart showing what an uptrend looks like: Next Steps We recommend that you pick out 10 stocks, and see how each of them fits our uptrend criteria. By completing this exercise, you’ll learn to quickly spot the REAL uptrends.
Continue Reading -->Throwback Thursday: Two of Our Most Popular Articles
Meet the Traders! 8 Questions With Sami Abusaad 5 Reasons Forex Trading Might Be for YOU! Bonus Article: Trading: Trend Following vs. Counter-Trend
Continue Reading -->9 Ways to Destroy Your Account with Options
Options trading is fun. Options trading is sexy. And options trading can destroy your account if you don’t know what you’re doing. Profitable options traders understand the principles of options pricing, order entry, and market mechanics. If you fail to understand these 3 critical elements of options trading, you are not actually investing. You are gambling! So before you hit the buy button on your first options trade, carefully read through this list to make sure you are avoiding these deadly mistakes. There’s a reason I know they’re deadly. I’ve made them all myself. Multiple times. So please, be smarter than I was! Mistake 1: Thinking the Guy on the Other Side of the Trade Is a Guy There is no such thing as easy money in options trading. Let me repeat: there is no such thing as easy money in options trading. As you start exploring options, you’re going to be be tempted by options that are low in price. Well, if the options are so cheap… why is somebody willing to sell them? Remember, the guy on the other side of an options trade isn’t even a guy. Or a woman. It’s a computerized algorithm developed by math and physics PhD’s that are way smarter than you or me. Those algorithms generate millions of dollars a day by selling overpriced options to overeager traders. If you think you see easy money, it’s usually a trap. Mistake 2: Trading Far Out of the Money Options An option is far out of the money when its strike prices is far away from the current stock price. Beginning options traders are often attracted to these options because they look cheap. We’ll Tesla Motors (TSLA) as an example. Let’s assume the stock is trading at $250. An at-the-money call option expiring in 3 months is priced at $19 (or $1900). But the $300 call is trading at just $4. Many beginning traders will be more attracted to the $300 call simply because it has a lower nominal price. However, far out of the money options require huge moves in short time frames to pay off. So you’re paying less money out of pocket, but your trade is much less likely to make money. Mistake 3: Trading Illiquid Options Options on major stocks like Amazon.com (AMZN) and Apple (AAPL) tend to trade with fairly tight bid-ask spreads, and it’s fairly easy to trade in and out of them at reasonable prices. However, you should be very careful with options on small and mid-cap stocks. They tend to have very wide spreads and do not have much trading volume. So odds are you’re going to have to overpay just to get into the trade, and get underpaid on the way out. And in some rare cases — particularly with very far out-of-the-money options, you may have an awful lot of trouble getting trades completed at all. Last year, I bought way, way out of the money put options on Ambarella (AMBA) puts and doubled my money. However, there was no market for the options, and I couldn’t get out at any price. I went from making over 100% on the trade to losing 100%! Mistake 4: Blindly Buying at the Bid and Selling at the Offer As I said earlier, algorithms generate millions of dollars a day by selling overpriced options to overeager beginners. How do they do this? They buy low and sell high. For example, right now I’m looking at April $17.50 calls on UnderArmour (UA). The bid is $1.30 and the offer is $1.65. That means the market maker will buy the option at $1.30 and sell it at $1.65. That gives them a tremendous profit margin. However, you don’t have to accept those prices. Try bidding and offering in the middle. For example, you could bid $1.48 (basically the midpoint) and still get filled. That would save you 17 cents, or $17 a contract. On a 10-contract trade, that’s $170! Mistake 5: Not Double-Checking Your Orders Before you hit send on your options order, double-check it. When dealing with options, you’re often looking at dozens or even hundreds of small numbers on a single computer screen, and it’s easy to make mistakes. Make sure you selected the right the expirations and strike prices. This is especially important if you’re entering an order with multiple legs. You may fool yourself into thinking you’ve found an especially attractive calendar or butterfly spread when in fact, you just got ripped off. Mistake 6: Selling Options While Naked Get your mind out the gutter! Selling naked options entails shorting calls or puts without any kind of hedge. This is what we call “picking up pennies in front of a steamroller.” Let’s talk about naked shorting of call options. This is a bearish trade because you will make money if the stock falls. But if the stock rises substantially, you’ll get destroyed. Let’s say we want to sell nVidia (NVDA) June $100 calls for $6.30. If NVDA is below $100 at expiration in June, I’ll have made a pure profit of $6.30, or $630, per lot sold. But if the stock was at $120 at expiration, the options would be worth $20 each, and I’d be out $13.70, or $1370, per lot. These are the types of trades where 1 bad trade can wipe out your last 10 good trades, so just don’t do them. Mistake 7: Ignoring the Calendar Events like earnings reports, FDA decisions, product announcements, dividend payments, conference appearances, and economic data releases can have a tremendous impact on options prices So before you place a trade, be aware of what’s on the calendar for the stock or ETF in question. For example, if Alphabet (GOOGL) is about to report earnings, its options will tend to be very expensive in the days before the report. Mistake 8: Not Understanding Options Pricing Basics Most options beginners think a $0.01 option is cheap and a $10.00 one is expensive. The reality is not that simple. An option’s
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