Category Archives for Articles
Gold in Focus Ahead of Jobs Report
Last week, traders were squarely focused on the progress of the GOP tax bill. But this week, it feels like everyone’s watching Bitcoin so much that the world’s forgotten about the stock market! In fact, look at what’s #2 in the Apple App Store: It’s Coinbase — the app for the popular digital currency market place! Yes, a Bitcoin app is pulling more downloads than Instagram and Facebook! With the November jobs report on the way this morning, let’s dig in and see how how bullish traders are feeling about the forgotten stock market ahead of the weekend. (click here for a primer on the sentiment indicators below) 1) VIX Spread – Bullish On Friday morning ahead of the November nonfarm payrolls report, the VIX was at 9.97, the first sub-10 reading since November 29. This gives us a 3-month spread at 4.36, indicating that traders are very bullish. (click here for a primer on the VIX spread) 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is 60, dowm from 73 last week. This index operates on a 0-100 scale, so a reading of 60 is basically neutral. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 36.9% of individual investors are bullish. This is basically flat from last week’s 35.9+% reading, but it’s still way off the 45.1% level from 4 weeks ago, which itself was the highest since since January 5, 2017. The long-term average is 38.5%, so a reading of 36.9% is basically neutral. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio’s latest reading is 0.58. This is below the 0.655 long-term average. The 10-day moving average is 0.581, which is very low on a historical basis. And the 3-day moving average, which I use to measure very short-term bullishness, is 0.607. These numbers point to bullishness among options investors, who seem to expect a snap back to all-time highs in the SPX. ConclusionOut of 4 sentiment indicators, we have: 2 neutral (down from 3 last week) 1 neutral (up from 1 last week) 0 bearish (flat from last we) Here’s what I said last week: The permabears are still saying that everone’s all-in bullish and 100% complacent… and they’re right. If the bulls rush to the exits, they may face some trouble — there’s an awful lot of them, and only so many can fit through the door at once… Sentiment was very bullish last week, but it’s clearly cooled down this week. Judging by the VIX and the CBOE equity put-call, options traders see almost no volatility ahead — and a lot of upside potential. But when we mix in our data from the CNN Fear & Greed Index and the AAII sentiment survey, we a more nuanced picture. Market momentum has slowed, and individual investors are definitely in neutral territory. So clearly, traders are back in the “moderately bullish” camp. That’s not exciting to say, but it’s the truth. The big question now is what impact the jobs report will have on equities. I’m mostly interested in gold. Gold’s taken a big spanking, at least partially because Bitcoin has suddenly attracted a mountain of investor dollars. If we get a weak jobs report, gold could skyrocket, so keep an eye on it
Continue Reading -->99 of the Best Trading and Investing Quotes Ever Said
A good one-liner will never make you money in trading. But quotes can help you understand the mindsets of traders and investors that are more successful than you. That’s why we’ve put together 99 of the best trading and investing quotes ever said, from 99 different market experts. We kick it off with Warren Buffet… …and we’ll end it with a downright chilling remark from Bernie Madoff at #99. Can you make it all the way down that far?1) The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.-Warren Buffett 2) If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong.-Bernard Baruch 3) I learned early that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I’ve never forgotten that.-Jesse Livermore 4) Traders need a daily routine that they love. If you don’t love it, you’re not gonna do it.-Scott Redler, Chief Strategic Officer of T3 Live 5) Our main job is to know when to embrace risk, and when to hold back.-David Prince of T3’s Inner Circle 6) You don’t make money by trading, you make it by sitting. It takes patience to wait for the trade to develop, for the opportunity to present itself. Let the market come to you, instead of chasing the market. Chart patterns are very accurate. They have proven their accuracy and predictability time and time again, but you have to wait for them to develop.-Fred McAllen 7) Are you willing to lose money on a trade? If not, then don’t take it. You can only win if you’re not afraid to lose. And you can only do that if you truly accept the risks in front of you.-Sami Abusaad, Head of Strategic Day Trader and Strategic Swing trader 8) We don’t care about “why.” Real traders only have the time and interest to care about “what” and “when” and “if” and “then.” “Why” is for pretenders.-JC Parets, Founder of All Star Charts and Eagle Bay Capital 9) The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge.-Paul Tudor Jones 10) “The biggest risk of all is not taking one.” -Mellody Hobson 11) Trading is not for the dabblers, the dreamers, or the desperate. It requires, above all, one steadfast trait – dedication. So if you are going to trade, trade like you mean it!-Rod Casilli 12) Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.-Albert Einstein, Theoretical Physicist & Nobel Prize Winner 13) The most important 4 words to a trader are “IS IT F*CKING MOVING?”-JR Romero, T3 Live Momentum Express VTF® Leader 14) You learn in this business… if you want a friend, get a dog.-Carl Icahn 15) If most traders would learn to sit on their hands 50 percent of the time, they would make a lot more money.-Bill Lipschutz 16) The four most dangerous words in investing are: ‘this time it’s different.’-Sir John Templeton 17) The most important three words in investing is: “I don’t know.” If someone doesn’t say that to you then they are lying.-James Altucher 18) I always define my risk, and I don’t have to worry about it. I walk into the pit every day with a clean slate, so that I can take advantage of what is going on.-Tony Saliba 19) A risk-reward ratio is important, but so is an aggravation-satisfaction ratio.-Muriel Siebert 20) When you genuinely accept the risks, you will be at peace with any outcome.-Mark Douglas, Author of “Trading in the Zone” 21) Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.-George Soros 22) People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.-Peter Lynch 23) The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you’re wrong.-William J. O’Neil 24) I think to be in the upper echelon of successful traders requires an innate skill, a gift. It`s just like being a great violinist. But to be a competent trader and make money is a skill you can learn.-Michael Marcus 25) Michael Marcus taught me one other thing that is absolutely critical: You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.-Bruce Kovner 26) Price lies all the time. Facebook can be valued at $40 billion and then $20 billion and then $200 billion inside of a four-year period of time. Which of these prices is the truth? None of them. But all of them were momentarily true, until they were rendered a lie, and a new truth was forged in the fires of the marketplace. Sunrise, sunset. Prices change and, with them, the truth itself.-Josh Brown 27) Markets can remain irrational longer than you can remain solvent.-John Maynard Keynes 28) In trading you have to be defensive and aggressive at the same time. If you are not aggressive, you are not going to make money, and if you are not defensive, you are not going to keep money.-Ray Dalio 29) A peak performance trader is totally committed to being the best and doing whatever it takes to be the best. He feels totally responsible for whatever happens and thus can learn from mistakes. These people typically have a working business plan for trading because they treat trading as a business.-Van
Continue Reading -->Traders Don’t Have the Tax Bill Blues… Yet
Two weeks ago, I said “volatility is finally picking up!” Just like we’ve seen throughout 2017, like clockwork, the bulls came back in to push all indices up to fresh record highs. On Thursday, the S&P 500 set a new all-time high at 2657.54, with the Dow Jones Industrial Average crossing over 24,000 for the first time ever. Traders have been buying because they expect a tax reform bill. But on Thursday evening, the GOP push hit a wall as some lawmakers objected to the bill because of concerns over the Federal deficit. That sent futures down Friday morning, so let’s see how traders are feeling in the face of sudden uncertainty. (click here for a primer on the sentiment indicators below) 1) VIX Spread – Bullish Yesterday, I pointed out that the VIX was surprisingly strong despite an impressive stock rally. This morning, the VIX is up 2.1% at 11.52, giving us a 3-month spread at 3.33, indicating traders are bullish. But keep an eye on the VIX. It’s been up for 5 of the past 6 days, and if equity markets weaken, it could spike. This gives us a 3-month spread of about +3.95, which means traders are very bullish. (click here for a primer on the VIX spread) 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is 73, up substantially from 54 last week. This index operates on a 0-100 scale, so a reading of 73 qualifies as moderately greedy. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 35.9% of individual investors are bullish. This is flat from last week’s 35.5% reading, but it’s still way off the 45.1% level from three weeks ago, which itself was the highest since since January 5, 2017. The long-term average is 38.5%, so a reading of 35.9% is basically neutral. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio was at 0.55 on Thursday, which is well below the 0.655 long-term average. The 10-day moving average is 0.574, which is very, very low. In fact, it’s the lowest 10-day moving average since December 16, 2016. And the 3-day moving average, which I use to measure short-term bullishness, is 0.590. That’s the lowest since December 21, 2016. These numbers point to aggressive bullishness. Conclusion Out of 4 sentiment indicators, we have: 3 bullish (up from 2 last week) 1 neutral (down from 2 last week) 0 bearish (flat from last we) The permabears are still saying that everone’s all-in bullish and 100% complacent… and they’re right. However, keep in mind that sentiment was even more positive back on October 6 when I declared: Let’s not mince words: the bulls are clearly insane. They think they’re destined to ride into the sunset on a magic carpet made of cold hard cash. Of course, I hedged myself by adding that “the bulls may be insane… but they may also be right.” And they were right! All the indices have hit multiple record highs since then, while the bears are still on the floor crying. But maybe things are changing. Tax reform is now a mystery and the VIX may be on an upswing. If the bulls rush to the exits, they may face some trouble — there’s an awful lot of them, and only so many can fit through the door at once…
Continue Reading -->T3’s Top 10: Our Most Popular Articles for November 2017
What’s popular with the thousands of traders that make up the T3 Live community? You’re about to find out with our top 10 articles for November 2017, ranked by visits to our website. You can get a look at a top trader’s account statements showing $78K+ in profits from 4 weeks of trading, watch Scott Redler’s best-ever webinar, and even learn to game plan like a top trader. We’ll start with number 10 and work our way down to number 1: 10) $78,059.89 in 4 Weeks of Trading Earnings Sami’s no one hit wonder. Watch this video and you’ll see Sami’s actual account statements that show $78,059.89 in net profits since October 16. 9) You Just Lost $5,000 Trading. What Do You Do Next? How can you recover after a losing day? What do you do when you’re frustrated and angry because you know you could have done better? 8) How Implied Volatility Works In our introduction to options trading, we discussed some basics of options, like the differences between calls and puts, how options contracts work, and why options is a zero sum game. Now we’re going to dig into the single most important options pricing concept: implied volatility. 7) 6 Tips for Picking the Right Stocks for Day Trading You can spend years learning about moving averages, gaps, trendlines, and indicators. But if you’re day trading the wrong stocks, you’re setting yourself up for failure. 6) Black Room Game Planning with Sami Abusaad Ever want a look at a top pro trader’s watchlist? This is your chance to get the inside scoop on Sami’s top trades. 5) Video | Knowing Exactly When to Trade Rob explains how to get that feeling of conviction by knowing exactly when you should be in a trade, and WHY. Enjoy today’s 9 minute training video. 4) Sami Abusaad: $12K+ in Profit in 1 Day with Nautilus Nightly Game Plan Moderator Sami Abusaad takes you through an Earnings Play in fitness equipment company Nautilus (NLS). In total, Sami earned $12,115.50 in this one-day trade! 3) Trading Scans | The Foundation for Winning Trades In this special video, you’ll learn how using trading scans can unlock highly profitable opportunities. You’ll learn how to spot potential capitulations at the end of a momentum trade, plus explosions to new trends. 2) 6 Tips for Picking the Right Stocks for Day Trading If you ever find yourself asking yourself “what should I trade now,” then this article is for you. We’ve put together a list of 6 simple, effective tips for picking the right stocks for day trading. 1) Scott Redler Talks the Red Dog Reversal, H-Sell Setup, ROKU, and MORE! In this special live training webinar hosted by TradeStation, T3 Live Chief Strategic Officer Scott Redler breaks down his 2 favorite trading strategies: the Red Dog Reversal, and the H-Sell Setup.
Continue Reading -->Sentiment Report: Traders Still Happy with the Low Vol Grind
In last week’s sentiment report, I said “volatility is finally picking up!” And then it collapsed all over again as the post-election bull market raged on, with all major indices including the Russell 2000 breaking to new all-time highs. The VIX fell back under 10, and the bears are once again asking “is this low-volatility grind ever going to end? Traders were in a pretty decent mood before Thanksgiving, and they’re looking happier Friday morning with futures bid higher. So let’s take a fresh look at our sentiment indicators to see how traders are feeling on today’s Black Friday “holiday.” (click here for a primer on the sentiment indicators below) 1) VIX Spread – Bullish Last Wednesday, the VIX hit a 3-month high at 14.51. It’s around 9.85 Friday morning.. That’s extremely low by historical standards, but it’s become the new normal… at least since the summer. This gives us a 3-month spread of about +3.95, which means traders are very bullish. (click here for a primer on the VIX spread) 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is at 54, up slightly from 50 last week. This index operates on a 0-100 scale, so a reading of 54 is neutral. Before last Thursday’s big reversal higher, it was actually at 35. On October 6, it hit multi-year highs at 95, so it’s obviously come back down to earth. Funny — a lot of folks thought that 95 reading meant we were peaking. But markets kept pushing higher, showing how difficult it is to time tops and bottoms with sentiment indicators. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 35.5% of individual investors are bullish. This is up from last week’s 29.3% reading, but it’s still way off the 45.1% level from two weeks ago, which itself was the highest since since January 5, 2017. The long-term average is 38.5%, so a reading of 35.5% is basically neutral. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio was at 0.57 on Thursday, which is well below the 0.655 long-term average. The 10-day moving average is 0.629, which is below the long-term average. Both point to bullishness. Conclusion Out of 4 sentiment indicators, we have: 2 bullish (up from 1 last week) 2 neutral (flat) 0 bearish (down from 1 last week) The permabears are still saying that everone’s all-in bullish and 100% complacent… but the numbers point to moderate bullishness. If you want to see full-on 100% bullish insanity, go back to October 6 when I declared the following: Let’s not mince words: the bulls are clearly insane. They think they’re destined to ride into the sunset on a magic carpet made of cold hard cash. Of course, I hedged myself by adding that “the bulls may be insane… but they may also be right.” And they were right! The Russell 2000 shook off its cobwebs, tech picked up steam, and the bears got take to the woodshed. I suspect that with a few more days of upside, sentiment could go full on psycho bullish. And that’s not out of the question. Friday’s off to a great start already, and low trading volumes (due to the holiday) could exacerbate movement to the upside.
Continue Reading -->Chef Scott Redler Shares His Secret Turkey Recipe
Family + friends + food + football + fitness (say that 10 times quick!) makes Thanksgiving one of my favorite holidays. And believe it or not, I’m pretty handy in the kitchen. I cook like I trade, and I trade like I cook. I keep things simple, and I go with what works. I’ve been using this turkey recipe since my parents moved to Florida 14 years ago, and it’s what I’ll be serving my family on Thursday afternoon. Ingredients List Turkey 3-4 long celery sticks 2 sticks of butter 2 oranges 3-4 lemons 2 sticks of butter 4 whole onions 3 big hunks of garlic Salt Pepper Paprika Ms. Dash seasoning 1 can of pineapples 1 jar of orange or apricot jam The quantity of ingredients depends on the size of your turkey. Just scale up or down as you see fit. We usually get a frozen 20-pounder. And oh yeah — make sure you have a quality knife! It will make your life a lot easier. I’ll take the bird out of the freezer Monday morning so it will be defrosted by Wednesday evening, when I do my prep work. You know me. Whether I’m trading, running, or cooking, I never show up for battle unprepared. If you start getting things ready before Thanksgiving, you’ll get better results with less stress on Thanksgiving… just like in trading! I’ll dice up 4 whole onions and 3 big hunks of garlic, and toss them in a large bowl. I then add salt, pepper, paprika, some Mrs. Dash seasoning, and mix it all up. Then, I’ll stuff it into the turkey. I’ll also put half a can of pineapples in there, and jam a stick of butter right in the middle of all. Then, I pour some orange juice and lemon juice over the turkey skin — just enough to get it wet. In a separate bowl, I’ll mix up more salt, pepper, and paprika for the skin. I spread it all over, making sure to get in all the nooks and crevices. Don’t be cheap! Then, I’ll wrap the turkey in a big bag and leave it in the refrigerator overnight. On Thanksgiving morning, I’ll cut a few long celery sticks in half and put them on the bottom of the pan. Then, I take the turkey out of the bag and place it on the pan. There will be a lot of juice in the bag. Transfer it to the bottom of the pan, and be careful not to spill any. It’s a real pain to clean up! Then I’ll mix up more salt, pepper, and paprika, and sprinkle it on top of the turkey. Now it’s time to stick the bird in the oven. After an hour, start basting it every 15-20 minutes. Take juices from the cavity and squeeze it on top of the turkey. Also, rotate the pan every hour or so. It should take about 4 hours to cook. Just follow what your meat thermometer says. When there is about 20 minutes to go, pour a jar of orange or apricot jam in a bowl, and add a softened stick of butter to it. Mix it together, and brush the turkey with it. Stick the turkey back in, but keep a close eye on it. We want a nice crispy skin, but we don’t want to burn it. Once the turkey’s done, take it out and let it sit for an hour before you carve it. By the way, if you’re not experienced in the art of carving up a turkey, this video will help you get it right and impress your family: Delay your carving as long as you can — turkey tastes best just when it’s cut! If you give this recipe a shot, take a picture, post it on Twitter, and tag me (@reddogT3) so I can see it! Have a great week, and an even better Thanksgiving!
Continue Reading -->Volatility Returned. But Is There Any Fear Out There?
Volatility is finally picking up! The VIX hit 3-month highs on Wednesday, and we’ve had 4 down days in the last 6. And traders are finally starting to believe we’re on the verge of seeing the first real shakeup since the 2016 Presidential election. So let’s take a fresh look at our sentiment indicators to see how traders are feeling after the shakeup. (click here for a primer on the sentiment indicators below) 1) VIX Spread – Bullish As noted above, the VIX hit a 3-month high on Thursday. It’s since come back down towards 11 on Friday. This gives us a 3-month spread of about +3.60, which means traders are moderately bullish. As you can see in the chart below, the VIX may be breaking out above its depressed 50 day moving average the way it did in August: (click here for a primer on the VIX spread) 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is at 50. This index operates on a 0-100 scale, so a reading of 50 is perfectly neutral. Before Thursday’s big reversal, it was actually at 35. On October 6, it hit multi-year highs at 95, so it’s obviously come back down to earth. Funny — a lot of folks thought that 95 reading meant we were peaking. But markets kept pushing higher, showing how difficult it is to time market moves from sentiment indicators. 3) AAII Sentiment – Bearish. The latest AAII Sentiment Survey shows that 29.3% of individual investors are bullish. This is a major collapse from last week’s 45.1% level, which itself was the highest since since January 5, 2017. The long-term average is 38.5%. 4) CBOE Equity Put-Call – Neutral The CBOE Equity-Put Call ratio was at 0.64 on Thursday, slightly below the 0.655 long-term average. The 10-day moving average is 0.652, which is right in-line with the long-term average. So it doesn’t get more neutral than this. Conclusion Out of 4 sentiment indicators, we have: 1 bullish (down from 3 last week) 2 neutral (up from 1 last week) 1 bearish (up from 0 last week) The permabears are still saying that everone’s all-in bullish and 100% complacent… but the numbers tell another story. If you want to see full-on bullish insanity, go back to October 6 when I declared the following: “Let’s not mince words: the bulls are clearly insane. They think they’re destined to ride into the sunset on a magic carpet made of cold hard cash.” Of course, I hedged myself by adding that “the bulls may be insane… but they may also be right.” And the bulls were right, with the major indices continuing to march higher. Trader aren’t bearish. We all know that. But based on the numbers, it’s fair to call the crowd neutral. This is ultimately good for the bulls. The more doubt there is, the more potential upside firepower. In particular, if the Russell 2000 can stage a comeback, we could see a major spike in confidence… along with a major spike in price. Just remember, sentiment follows the action, which makes it awfully tricky to use to time trades. Plus, sentiment can stay at extreme levels for far longer than you think is reasonable. So always use this information as color — not as specific buy/sell signals.
Continue Reading -->Did Rolling Stone Jinx Tesla with the Magazine Cover Indicator?
So at 10:45 a.m. yesterday, I got an email with the subject line “The Most Important Person of Our Generation.” It came from Neil Strauss, author of the infamous pick-up artist memoir The Game: Penetrating the Secret Society of Pickup Artists: I know what you’re about to ask… And I can neither confirm nor deny that I read The Game. So, to whom was Neil referring as “The Most Important Person of Our Generation.”? Tesla (TSLA) CEO Elon Musk, whom Neil just profiled for a Rolling Stone cover story: Rolling Stone covers focus on entertainers, followed by politicians and athletes. I looked at hundreds of Rolling Stone covers going back to 1990 and I found exactly one CEO cover story… and it was about an even bigger tech icon. It was the October 27, 2011 issue commemorating Apple (AAPL) founder Steve Jobs, who had died 3 weeks earlier: Even in the late 1990’s dot-com boom, there wasn’t a single tech-focused Rolling Stone cover story, let alone a CEO story. And of course, this has me thinking about the magazine cover indicator. The magazine cover indicator says that a dramatic magazine cover story (typically a major business magazine like Fortune or BusinessWeek) can be a contrary indicator. The most famous example is BusinessWeek’s The Death of Equities cover in August 1979, which preceded the biggest bull market known to man. Chart from FinancialSense.com So did Rolling Stone ‘jinx’ Tesla? And the wider world of technology of stocks? Let’s see. In Neil Strauss email, he said he “spent the last nine months in and out of his world, working on this profile…” 9 months back from November 15 is February 15. Let’s assume that Rolling Stone spent a month before slating Musk for a cover story. In January, Tesla traded between $210.96 and $258.46. It hit $389.61 in September before pulling back to $312.49 when the story hit. Here’s what the stock chart looks like: Since Tesla’s at a bit of a crossroads now, only time will tell if Rolling Stone put in the ‘jinx.’ Or maybe I should put it another way. Only time will tell if Elon Musk marked a top in his ego — and by extension his Tesla/Solar City/Space X juggernaut — by agreeing to a Rolling Stone cover in the first place. So we’ll see. But what about technology overall? We know it’s been ripping since the election. But here’s a 20-year monthly chart of the S&P Technology ETF (XLK): Let me be clear: the magazine cover indicator should not be mixed up with actual science or rational analysis. It’s mostly valuable to permabears desperate for attention on Twitter. But I can’t help but ask: wouldn’t it be funny if tech topped out just as Rolling Stone broke tradition to put Elon Musk on the cover?
Continue Reading -->7 Things to Know Before Your First Options Trade
Welcome back to our Introduction to Options series! By now we’ve covered: 1) The ABC’s of Puts and Calls 2) How Implied Volatility Works 3) Theta: The Options Trader’s Kryponite 4) 3 Simple Options Strategies Beginners Should Know Today, we’re going to close out our series with 7 key things you need to know before you place your first options trade. These simple tips will help avoid common pitfalls that can destroy your profitability, so we hope you enjoy it! 1) Start with 1 Contract Yes, you want to swing for the fences and make a big fat pile of cold hard cash with your first options trade. But winning traders know that we’re not in a spring. We’re in a marathon. We recommend that you start slowly. So if you want to buy call options, just start with 1 contract, and carefully track your trade’s progress. Likewise, if you’re interested in multi-leg strategies like bull/bear call spreads or iron condors, just use one contract for each leg of your trades. A big part of your options trading education will come from actual trading — so make that education as inexpensive as possible! It’s very easy to make mistakes with options trading, particularly when it comes to order entry, and it’s best to start with small dollar amounts and work your way up. 2) Be Careful Getting in the Pool Naked Think twice before putting on naked short options positions. A naked short position is one in which you are short call or put options without an offsetting trade that limits your risk. The risk is astronomical and if the underlying stock makes a big move against you, your account will be damaged. So before putting on trades, consider the risk-reward, and makes sure the odds are in your favor. Shorting options can be very lucrative — especially in a volatile market when premiums are high — but you must be very careful. We recommend getting the guidance of a more experienced options trader before considering such a trade. Shorting options is especially risky ahead of earnings and other events. Case in point: take a look at this chart of online retail giant Amazon.com (AMZN). As you can see, it gapped up on 10/27/2017, the day after it reported a stellar third-quarter earnings report: Let’s say that when Amazon was trading around $980, you thought there was no way it could get above $1000. Ahead of earnings, you could have shorted the December $1,000 calls for around $28. So for each call you shorted, you would receive a credit of $2,800. Let’s look at what happened to this option’s price after earnings. The December $1,000 call closed at $25.15 on October 26 before the earnings report hit. And after Amazon beat expectations and skyrocketed, the option opened at $70.80. It then went over $100. It’s now trading at $131. Let’s assume you covered at $100 on the dot to keep things simple. This means you: Went short at $28 ($2,700 per contract) Covered the short at $100 ($10,000 per contract) That’s a net loss of $71, or $7,200 PER CONTRACT. A 3-contract trade would have put you out $21,600! So please, know what you are getting into when shorting options. And watch the calendar so you are aware of any stock-moving events. 3) Don’t Go Overboard with Out-of-the-Money Options In our last article on basic options strategies, we showed you this table explaining the differences between in-the-money options and out-of-the-money options: As you can see, out-of-the-money options have a higher chance of expiring worthless. But many new options traders love them because they have a lower up front cost. Beginners especially love far-out-of-the money options because they look so darn cheap. But there’s a reason they look so cheap… it’s because they’re lottery tickets. They don’t cost much, and there’s a low chance they’ll actually pay off. That’s not to say they’re inherently bad. Just be aware that with out-of-the-money options, especially those that are far-out-of-the-money, you’re rolling the dice. Plus, be aware that far out-of-the-money options can be very illiquid. It’s not unusual to get in a position (often at a bad price, because market makers often jack up the prices on out-of-the-money options), and be unable to get out because no one is interested in buying your particular options. It’s just like the roach motel: you check in but you don’t check out! 4) Be Careful with Your Entry Prices Like stocks, options have a bid and ask price. (the ‘ask’ is also called the ‘offer’) The bid is the price buyers are willing to pay. The ask is the price at which sellers are willing to sell. But if you are always buying at the ask and selling at the ask, you’re getting ripped off. Let’s look at red hot streaming media play Roku (ROKU). With the stock trading at $45.27, here are the prices of the December $44, $45, $46, and $47 calls. This is an extreme example so you can see just how easily you can get fooled by looking at the bid and ask. Let’s say we’re looking at the $44 calls. The market maker would LOVE to sell us those options at $6.80 (the ask). That’s like walking into a used car dealership and taking the first price the salesman offers up. Odds are we can actually get filled somewhere near the middle of the bid and ask. The midpoint of the $5.50 bid and $6.80 offer is $6.15. So if we bid $6.20-$6.30 or so, odds are we’d get filled. Heck, we may even get filled at the exact midpoint of $6.15. But let’s say we got filled at $6.30. That’s a savings of $0.50, or $50 per contract. On a 10-contract trade, that’s a difference of $500. This is an extreme example. Roku is a fast-moving new IPO. Options on tThese types of stocks typically have extremely wide-bid ask spreads. But we want you to understand the importance of not blindly placing orders at the bid
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Welcome back to our Introduction to Options series! By now we’ve covered: 1) The ABC’s of Puts and Calls 2) How Implied Volatility Works 3) Theta: The Options Trader’s Kryponite Now we’re going to dig into 3 basic options trading strategies that are perfect for beginners. We’re going to teach you 3 options trading strategies that allow you to speculate on 3 scenarios: A stock making a big move higher A stock making a small move higher A stock doing nothing But before you start, there’s one thing you must understand about options trading: for every stock scenario you can think of, there are 1 million ways to play it with options. Let’s say Amazon.com (AMZN) is trading at $1,000, and you think it’s going to $1,500 in one year. Here are 7 ways a trader could use options to speculate that move: Buy call options Buy bull call spreads Sell put options Sell bull put spreads Buy a butterfly spread Buy a risk reversal Buy a call back spread Every strategy has pros and cons, and no single one is best. Please note that all examples in this article are pure hypotheticals — they are not endorsements of these particular trades. Strategy #1: Buying Call Options to Speculate on a Big Rally At the time we’re writing this, Gilead (GILD) was trading at $75.00 Let’s assume we are very bullish on the stock, and believe it can hit $100 in the next 12 months. The simplest way to speculate on such a movement is to buy call options. You’re probably asking yourself yeah, but which ones? We can choose between in-the-money, at-the-money, and out-of-the-money calls. As a quick reminder, for call options, in-the-money options have strike prices below the current stock price. At-the-money options have strike prices that are about the same as the current stock price. And out-of-the-money options have strike prices above the current strike price. You can see relationship here: So which one is best? In the money, at the money, or out of the money calls? The answer is… none of them and all of them. Let’s look at the differences. Here’s a table detailing the major differences between in and out-of-the-money options: Let’s look at some numbers to illustrate these differences. Here are the prices of GILD call options with 24 days to expiration, with the stock trading at $75: The at-the-money $75 call is priced at $1.98. The in-the-money $70 call is $5.40. And the out-of-the-money $80 call is just $0.65. And as you can see, the in-the-money options cost more up front, and the out-of-the-money options cost less. This is because the in-the-money options have intrinsic value, and have a higher chance of being in the money at expiration. And that’s the tradeoff: you pay more for in-the-money options, but the option has a higher likelihood of being in the money. On the flipside, out-of-the-money options cost less up front, but give you a lower likelihood of success. And because they cost less, out-of-the-money options can give you a bigger percentage gain if the underlying stock makes a big move in your favor. Let’s take a look at possible payoffs of each option at expiration under a variety of price scenarios. On this table, here is what each option would be worth at expiration under different price scenarios: Let’s assume GILD goes flat, and is at $75 at expiration. Focus on the middle column of that table. As you can see, if GILD went to $75, the $65 calls would still be worth $10 ($75 – $65) — just a little less than the $10.77 cost. And the $75, $80, and $85 calls would be worth zero. Now let’s take a look at the P&L of these options: As you can see on the right column on the table, if GILD is at $85 at expiration, the $65, $70, $75, and $80 calls would have value: The $85 calls would expire out of the money and be worthless, giving a 100% loss of the $0.19 premium paid. The $65 calls would give you the largest dollar profit at $9.23. Here’s a third table showing the P&L on a on a percentage basis: As you can see, the $80 calls would give you the highest profit at $669% They cost just $0.65, and rose to $4.35. But remember the trade offs we discussed earlier: Out-of-the-money options cost less up front, but give you a lower chance of success. And because they cost less, out-of-the-money options can give you a bigger percentage gain if the underlying stock moves in your favor. We can also choose between shorter-dated and longer-dated options. If you recall from our article on time’s role in options pricing, longer-dated options cost more than shorter-dated options. As you can see on this chart, the more days there are to expiration, the higher the price of the option is: The call option expiring in 3 days costs just $0.88. And the one with 31 days to expiration costs $2.77. Through this options series, we’ve compared options to car insurance. A call option is an insurance contract that pays off when the stock rises. Ask yourself this: would it cost more to insure your car for 1 year? Or 2 years? Obviously, you pay more for 2 years of insurance coverage than 1. Why? Because over a 2-year period, there’s a much greater chance of something happening than over 1 year. So how should you choose which call options to trade? There is no simple answer. We recommend figuring out where you think the underlying stock could go within a certain time frame. Then, decide what’s more important: paying more money up front with a higher chance of success (in or at-the-money options), or paying less up front with a lower chance of success (out of the money options). Strategy #2: Buying a Bull Call Spread to Speculate on a Small Rally At the time of this writing on November 9, 2017, shares of
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