Category Archives for free trading education
How Sami Abusaad Trades Stocks for Cash Flow Over a 3-5 Day Window
Looking for the ultimate swing trading solution? Sami Abusaad’s Strategic Swing Trader newsletter is your solution. Here’s What You Get:Actionable swing trade ideas with specific entry and exit levels, based on Sami’s proven strategyLive, interactive strategy sessions every Monday after the close (video replays available)Morning update with 3-6 new trade ideas and updates every day before the open, plus intraday alertsRenews every 30 days at $95 per month unless you cancel first (no contracts, no commitments)Get Sami’s ‘Earnings Plays’ ideas so you can make big profits during earnings seasonWatch Sami’s webinar replay to learn more about what you’ll get with your membership. While the offer presented in the webinar has now expired, you can still sign up for just $95. Click to Learn About Sami’s Strategic Swing Trader Program!
Continue Reading -->Scott Redler’s Reality Check: How to Take Control of Your Trading, and Finally Turn Things Around
Every day is a new day. And that’s the beauty of trading. You can always start over. But if you want to make a fresh start, you need a reality check. Put your ego aside, and take a serious look at what you’re doing right, and what you’re doing wrong. Most traders, especially when they’re losing money, can’t do that. But if you’re ready to take control of your trading, you can start now. Here’s how: 1) Break Down the Last Year This is where the rubber meets the road. Your first step to getting on track and stemming the bleeding is to know where you stand. Take your last 12 months of trade data, and put it in a spreadsheet. What was your P&L for each month? What about each week? And each day? What was your average gain or loss per trade? What were your 5 best and worst 5 days? 2) Connect the Dots Start working your numbers and look for the common threads. Did you let losers run too far? Did you sell your winners too early? Are you having trouble shorting stocks? If you look deep enough, you’re going to see some really interesting things… especially if you think about your life outside of trading. I’ve seen many traders post their worst results when they’re having family, career, or health problems. Something big like a divorce or surgery can really set you back. A lot of traders think they can fight their way through anything. And you do need a little bit of that attitude to get ahead in life. But if a major life event throws you off your mental game, take a break, regroup, and come back fresher. 3) Set New Goals Your #1 goal for the second half should be to break bad habits. Did you hit your daily loss limits too often? Did you keep doubling down on bad trades? Make a list of habits that cost you money, and print it out. Then, post it at your desk and read it every day. Breaking bad habits gives you instant results. For example, let’s say you keep breaking your daily loss limit, which drags down your average daily P&L by $500. If you can eliminate that bad habit and take back that $500, you’re going to have an extra $10,000 a month. That takes care of a lot of mortgage and tuition payments. How do you do this? Start by following the list you just made. 4) Create a Trading Daily Routine Successful people don’t come in to work wondering what they’re going to do. They have a routine. Elite performers like Steve Jobs, Winston Churchill and Benjamin Franklin all used daily routines to stay productive and on track. Trading is no different. So I’m challenging you to make a checklist of 10 things you’re going to do when you get to your trading desk in the morning. This can be stuff you’re already doing. But I want you to systemize it so you flow from one task to the next without getting sidetracked by the news, social media, or TV. It could be checking news, scanning charts, tracking futures, previewing the economic numbers, whatever. Just have a routine and stick to it. 5) Get Some Balance I love trading. But I’d hate it if I never got away to blow off steam. I highly recommend picking up a sport or hobby that forces you to be 100% in the moment. So start running, swimming, playing chess, or even video games to give your trading brain a rest. You’ll work out your stress and come back fresh. Plus, you’ll be taking better care of your body. Your P&L is tied to your health. If you eat well, and get to sleep at a decent hour, you’re going to be a better performer day in and day out. But if you’re coming in on 4 hours of sleep and chugging coffee to stay awake, you’re doing this all wrong! The Bottom Line You’ll never get where you want to go in trading if you can’t see the truth about yourself. Hopefully, you now have some ideas that can help you take that first step towards turning your P&L around. Positions Disclosure: As of 5/10/2019 at 10:56 a.m. ET, Scott J. Redler is long TWTR, TWTR calls, AMRN calls, BRKB calls
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?Get a FREE PDF of This Article!The best 99 quotes about trading ever said… and it ends with a WHOPPER from Bernie Madoff!Yes, I Want This FREE Download1) 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) Patterns don’t work 100% of the time. But they are still critical because they help you define your risk. If you ignore patterns and focus on hunches, feelings, and hot tips, just forget about achieving consistency.-Ifan Wei, T3 Live Strategic Day Trader Room Moderator 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) Never confuse your position with your best interest. Many traders take a position in a stock and form an emotional attachment to it. They’ll start losing money, and instead of stopping themselves out, they’ll find brand new reasons to stay in. When in doubt, get out!-Jeff Cooper, Author of the Daily Market Report 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
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
Continue Reading -->3 Options Strategies for New Traders
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
Continue Reading -->Theta: The Options Trader’s Kryponite
Welcome back to our Introduction to Options series! By now we’ve covered: 1) The ABC’s of Puts and Calls And 2) How Implied Volatility Works Now, we’re going to explore another critical factor in options pricing: time You’re about to learn: How the passage of time impacts the value of an option The differences between short-dated and long-dated options How you can buy a call option, have the stock go up, and still lose money! This article is somewhat technical in nature. You don’t need to understand all the math. You certainly don’t need to know this formula: So just focus on learning the basic principles, and you’ll be a step ahead of options traders that fail to grasp the role of time in options. The Basics of Time’s Effect on Options Prices In our recent article on implied volatility, we identified the 7 basic factors that determine an option’s price: The price of the stock The strike price Type of option Time to expiration Risk-free interest rate Dividend policy Implied Volatility While implied volatility is the most important factor in an option’s price, time is a close second. Remember what we said about options — they’re a form of insurance. A call option is an insurance contract that pays off when the stock rises. And a put option is an insurance contract that pays off when the stock falls. And like a car, the faster a stock moves, the higher it costs to insure it with options. But what else affects the price of insurance? Time. 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. And so it goes with options: the longer the time to expiration, the higher the price of the option (insurance). A Time Example with Facebook Options Let’s take a look at Facebook (FB) $175 call options across a wide range of expirations. As of the time of publication, the stock was trading at $176.46. Here are the prices for all FB $175 call options that are currently trading. They have expirations ranging from 2 to 793 days from today: As you can see, the $175 call option expiring in 2 days is priced at just $2. The option expiring in 93 days costs $9.61. And the call option expiring in 793 days costs $32.10! Why? Because again, options are a form of insurance. And it’s only logical 793 days of coverage costs more than 2 days of coverage. Theta Is Kryptonite to an Option Remember what I just said about our Facebook example. 793 days of coverage costs more than 2 days of coverage. And you know what? 793 days of coverage also costs more than 791 days of coverage… and 790 days of coverage, and 789 days of coverage… and so on. So all things being equal, options lose value as time passes. And theta is a measure of how fast that loss of value happens. Is Inherently Bad? No. Theta is simply a reality of the world of options trading. And it’s a concept you have to understand if you want to make money with options. Plus, there are strategies that actually take advantage of theta, though they are beyond the scope of this article. An Example of Theta, and How It Eats an Option’s Price At publication, the Facebook $175 call option expiring in 9 days is currently priced at $3.18. The stock is trading at $176.46. This means there is a premium of $1.72 built into the option. This is calculated as the strike price + the options price – current stock price, or $175 + $3.18 – $176.46 = $1.72. The amount of premium built into the option is affected by implied volatility and other factors. The higher the implied volatility, the higher the premium. Theta, or time decay, is the dollar amount by which this premium declines each day. You can find the theta of an option on virtually any trading platform. Theta is displayed as a negative number, typically without a dollar sign. So if you see a theta of -0.10, that means the option will decline by $0.10 per day, all things being equal. (we use dollar signs in this article to reinforce the fact that it is indeed a dollar amount) The theta for our Facebook $175 call expiring in 9 days is -$0.12. This means that if Facebook’s stock doesn’t move at all, it will be worth $0.12 less tomorrow, or $3.06. And that’s why time is an option’s kryptonite. If the underlying stock or ETF doesn’t move, the passage of time will reduce the value of your option. How Theta Varies Over Time Theta continually changes. And the closer an option is to expiration, the faster it loses value. Here is the theta for our Facebook $175 call options by each expiration: As you can see, the option expiring in 2 days has a theta of -$0.16. And the one expiring in 793 days has a theta of just -$0.02. This is a simple illustration of one of the most important concepts in options: the closer an option gets to expiration, the bigger the theta is. Why? Think of of it this way: if an option expires in 9 days, each day accounts for 11.1% of the time left to expiration. And if an option is expiring in 793 days, each accounts for just 0.13% of the time left to expiration. So it’s not going to change much. Now, let’s look at the theta table one more time, because there is an exception to the rule that the closer an options gets to expiration, the bigger the theta is. As you can see, the option expiring in 16 days has a theta of -$0.15, which is bigger than the -$0.12 theta of the option expiring in 9
Continue Reading -->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. If you don’t understand implied volatility, you don’t understand options. Period. What Is Implied Volatility? Implied volatility is exactly what it sounds like: it is the amount of volatility implied by the price of an option. Put another way, by paying a certain price for an option, we are implying that the stock will have a certain level of volatility. There are 7 basic factors that determine an option’s price: The price of the stock The strike price Type of option Time to expiration Risk-free interest rate Dividend policy Implied Volatility Factors 1-6 have something in common: they are pre-determined. Implied volatility is different because it is determined by how much we pay for the option in question. Options are effectively insurance. A call option is an insurance contract that pays off when the stock rises. And a put option is an insurance contract that pays off when the stock falls. And like a car, the faster a stock moves, the higher it costs to insure it with options. It costs more to insure a Dodge Viper than a Honda Odyssey minivan. Why? Because there’s more potential for trouble (volatility) with a 645-horsepower sports car than a minivan. (WARNING: This video may Not be Safe for Work…) An Implied Volatility Example with Tesla As we’re writing this on October 17, 2017, Tesla (TSLA) is trading at $354.72. The implied volatility on the TSLA $355 December calls expiring in 59 days is 40%. What exactly does that 40% number mean? To successfully trade options, you don’t need to understand all the nitty gritty of options math. But you do need to understand the basic fundamentals of options prices. So let’s jump back to Statistics 101 so you understand what that 40% implied volatility number means. We use implied volatility to lay out the implied 1-standard deviation move in the underlying stock. This is the movement that is expected 68% of the time. Here is the formula to determine a 1 standard deviation move using implied volatility: Stock Price * Implied Volatility * Square Root of Calendar Days/365 = 1 Standard Deviation For our Tesla example, this becomes: $354.72 * 40% * .40205 = $57.05 This implies a 68% chance Tesla will move $57.05 or less by expiration in December. Put another way, it implies a 68% chance that Tesla will stay between $297.67 and $411.77. (calculated as $354.72 minus and plus $57.05) If implied volatility was just 30% instead of 40%, there would be less implied movement. And if it was 50%, there would be more implied movement Take a look at this table of implied stock movements at different implied volatility readings: As you can see, if implied volatility on our option is 30%, the implied movement (up or down) is just $42.78. And if it was 50%, it would imply movement of $71.31! You don’t need to do this math every time you look an option. Just remember this: the higher the implied volatility, the more movement in the underlying stock you need to make money on the option. Why? Because the higher the implied volatility, the more you’re paying for the option. Implied Volatility Levels on Different Kinds of Stocks Remember our car insurance comparison. The insurance company will charge a lot of money to insure a 645 horsepower Dodge Viper because there’s a lot of potential for trouble. Sellers of options are no different: if a stock can move a lot, the options seller (who is in effect selling insurance) will require a high premium for the related options. Here is a table showing implied volatility readings for at-the-money call options expiring in 59 days on 5 popular stocks: Applied Optoelectronics (AAOI), a very volatile semiconductor stock with a $860 million market cap, has 60% implied volatility. Snap (SNAP), a volatile tech name, is at 54%. And Pfizer (PFE), a slow moving pharma giant, has implied volatility of just 14%. Why the difference? AAOI and SNAP are much more volatile, so options seller demands higher options prices — which means higher implied volatility. Since Pfizer doesn’t move much, the seller must charge a lower price to draw in options buyers. Our TSLA Option Under Different Implied Volatility Scenarios Let’s take a look at our December TSLA $355 call one more time. Using the CBOE’s options calculator, we can calculate the price of the option under various scenarios. With a stock price of $354.72 and implied volatility of 40%, the December 355 call has a value of $22.95. But if we assume implied volatility of 30%, the value of the option drops to just $17.28. Here’s a table showing the value of the option at different implied volatility levels: As you can see, at 50% implied volatility, the option would be worth $28.61. Implied vs. Future Volatility As we’ll discuss in our next article on time decay (or theta), options are decaying assets. All things being equal, an option loses value every single day. You need movement — or volatility — in your favor to offset the impact of that time decay. So when you buy an option, you are essentially going long volatility on the underlying stock, ETF, index, or commodity. You are saying that the actual volatility in the future will be greater than the implied volatility that is currently priced in. And all things being equal, if you are long options, you want implied volatility to rise. However, there are some differences between calls and puts. When stocks fall, implied volatility typically rises. That’s great for owners of put options. But it’s not so good for calls, because a falling stock price will hurt the options price, and offset the impact of higher implied volatility. Implied Volatility
Continue Reading -->3 Keys to a Great Trading Journey
The view of the Swiss countryside is breathtaking as it whips past my panoramic window. As I gaze outside, I catch snippets of conversations in at least 3 different languages With this as a backdrop, I begin to think of journeys. Today’s journey is a train trip through the “Golden Pass” from Lucerne to Lake Geneva. It’s one of the most amazing landscapes on the planet. It’s a small trip inside a 5-week “workcation” to Europe, which is just a small part of my larger trading journey. Every day, people from all walks of life become traders for all different reasons. I found my way to trading while searching for a better way to live. I spent most of my life working 50-60+ hours week. I read about places I wanted to see but never actually went anywhere. I decided I needed to define “a better way to live.” The next step was to find a vehicle, get in, and step on the gas pedal. A few years ago, either someone started making building materials heavier, or I started getting older. I also wanted more time with family and the resources to see the world. So I needed a job I could do from anywhere. Like many people, a search for flexibility and opportunity led me to trading. My trading journey started out like the mountains I’m looking at: rocky. I had the misfortune of doing really well for the first couple months of trading, and I got enough information to really hurt myself. I paid for my trading education in multiple ways. I didn’t know as much as I thought I did, and I quickly lost money that took me years to earn. I had to admit to my wife and family that I had lost so much of what we had worked for. And then I decided to invest in myself with a T3 education. Ironically, the free seminars and books I consumed only cost me money. With a proper education, a plan for success, and most importantly, membership in a supportive trading community, I was able to achieve my goals. Mentioning a 5-week work-cation in Europe sounds like bragging — we can all agree on that. But to me, it is the realization of two goals I wrote in my first trading plan: to spend more time with my family, and to see the world. Don’t get me wrong. This didn’t happen overnight. Like anything worth doing, success in trading requires hard work. Learning technical chart patterns is incredibly easy. The real work is staying disciplined and grinding it out trade after trade. And then tracking those trades to learn from your mistakes and successes, and understanding the nuances and psychology of the market participants. And even that pales in comparison to learning about yourself, and figuring out what it takes to make yourself a success. But if a former custodian, fence builder, and construction worker like me can succeed in trading, then anyone can! The keys to any good journey are simple: 1. Do your Research Before You Start There are a million ways to make money in the market, there are a million and one ways to lose it. So find the education, methodology, and a mentor that makes sense to you. T3 Live has some of the best traders, educators, and mentors available. We have different rooms and moderators, each with their own unique trading personality. 2. Have a Road Map for Success In trading, a strong trading plan is the map to success. Trading without a plan is like baking without a recipe. You can do it, but you’ll find it awfully hard to repeat any successes. 3. Find Companions That make the Trip better Find companions that make the trip better. My companions are the moderators and members of the T3 Live Black Room. We are a community of traders who work together each day to improve ourselves and each other. If you want to achieve your trading goals, come to the Black Room and start your journey. Attend an open house, take a course, find a mentor; because you can’t ask a book questions in real time. Click here to learn about the T3 Live Black Room, where Mark Harila serves as a trading mentor.
Continue Reading -->4 Names to Watch: Update
Two weeks ago we highlighted 4 names to watch for the upcoming weeks. In the video below, we break down the recent action in the market and revisit those 4 names to see how they have done. The 4 names are: Tesla (TSLA), Caterpillar (CAT), Michael Kors (KORS), and Target (TGT).
Continue Reading -->7 Ways to Be Just Another Failed Trader
Do you want to fail as a trader? Do you want to miss your next mortgage payment? Or pull your daughter out of private school because you can’t make tuition next month? Well you’re in luck! Because we’ve got 7 surefire tips for failing as a trader! Just kidding… sort of. We’ve worked with thousands of traders over the years. The best of them ended up with 6 or even 7-figure incomes. But many flamed out. They end up holding bad trades too long or doubling down on losers. Even worse — we’ve seen traders that spent more time on Twitter and Instagram than on their trading platforms! 9 times out of 10, it’s easy to spot a failing trader. So we’re laying out 7 habits of unsuccessful traders so you can avoid them. How many of these apply to you? 7. Don’t Develop a Daily Routine Successful people don’t have time to figure out what to do next. That’s why they use routines and checklists. Why? Because if you’re asking yourself “what should I do now?,” you are wasting time and energy. If you have a daily trading routine, you’ll accomplish all your key tasks in less time, which will actually frees you up to be more flexible and creative. 6. Don’t Learn New Things Dinosaurs go extinct. And so do traders that refuse to learn and adapt. Chasing novelties can be very dangerous. But if you want to succeed, you must keep yourself up to date. Always strive to understand what’s working in the market right now. And explore new tactics that may work with your current strategy. You don’t want to wake up one day and discover that everything you know is useless. 5. Don’t Analyze Your Results A wise man once said “you can’t manage what you don’t measure.” Traders have bad memories. So it’s important to carefully go through examine your trading results to see exactly what you’re doing right, and what you’re doing wrong. Maybe you think you’re great at trading Tesla (TSLA)… but does a detailed P&L back you up? And who knows? You may find out that you have some strengths you didn’t know about. You may just be a dynamite gold trader, or a genius on the short side. Just let the numbers do the talking. 4. Don’t Talk to Other Traders The biggest myth on Wall Street is that great traders are lone wolves, getting rich on instinct and talent alone. In reality, most profitable traders join a pack. Because there is power in numbers. You may have 3 good trading ideas. But if you’ve got a buddy with 3 more ideas, you’re up to 6. Add a 3rd friend and you’ve got 9. And it’s not just trade ideas. We’re talking trading techniques, news flow, and support when things get tough. 3. Don’t Do Your Own Homework Newsletter, trading rooms, and trade idea generation services can be tremendously valuable. But you must also do your own homework. For example, if you see a stock make a big move, study it and create your own case study. Or, go back to a major historical event like the 1987 market crash or the 2008-2009 financial crisis and study the price action. You can obviously learn a lot from other people’s summaries and explanations. But if you want to build a truly valuable knowledge base, roll up your sleeves, and do the work yourself. You’ll be shocked at how much you learn. 2. Don’t Learn an Actual Strategy Individual tactics are great. And you can learn thousands of them for free. But if you want to actually create wealth through trading, you need a complete strategy. There are 2 major problems problem with just learning random tactics. First, it’s hard to know who to trust. And second, it’s hard to know which tactics work together. So instead of focusing on bright shiny objects, learn a real trading strategy that includes technical analysis, entry/exit parameters, and risk management. And THEN start exploring additional tactics that may work with your evolving trading style. 1. Don’t Pay the Price for Success You may lose money and waste time in learning to trade. That’s the price of success, and you have to pay it. If you start your trading adventure with a legitimate strategy with specific risk-reward parameters, you can keep a lid on your losses. However, you must be willing to put in the time. If you haven’t paid that particular price yet… it’s time to ask yourself why. Ready to take your trading seriously? Check out: Trading the Pristine Method Home Study Program Sami Abusaad’s 5-Day Elite Private Mentorship Program
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