How Long Can We Teeter on the Edge
January 31, 2012
January’s rally was admirable.
It’s perseverance frustrated bears.
The infrequent single day declines maxed out at -0.6%.
And the last nine days of the month were more than mind-numbing for most traders as the market traded in a very tight range.
There’s no doubt the bears are ready. Almost every technical and sentiment measure I follow has pushed into a bearish state. Typically, I am ecstatic by the weight of the bearish measures, but it seems everyone is aware of the measures and have joined my camp. And when what seems like the herd is anticipating something it has a hard time coming to fruition.
We must remember that January is one of the strongest month of the year for the market. February not so strong with a historical return of 0.0%.
February swoon?
After three months of gains a decline seems the likely scenario. Again, almost all technical and sentiment measures have reached short to intermediate-term extremes, but will they win out for the bears or will the mighty power of the bulls push through the consolidation that has lasted nine long trading days?
If you haven’t already, don’t forget to sign-up for my :
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Also, for those of you who live on Facebook. You can access my info there as well. Just click on LIKE.
The Ongoing Frustrations of the Options Industry
January 30, 2012
*Just a short rant tonight. Hopefully, if time permits, I will be back later with some additional reading.
Hacks, hacks and more hacks?
I hate to say this about some of my fellow options traders, but I can’t tell you how much I abhor those in the industry (you know who you are) that absolutely ruin the true benefits of options for the self-directed investor. Claims of outlandish 300%, 400%, 500% in just a few days. Encouraging the use of low-probability out-of-the-money puts as a predominant strategy without the mention of selling premium.
It’s frustrating.
It’s frustrating to see so many so-called gurus with no real-world experience act as options traders when their services fail time and time again. Again frustrating.
Why don’t people want what’s important, realistic gains with realistic strategies. Transparency. Knowing that trading isn’t easy and is a life-long endeavor and that while the journey may be bumpy at times over the long haul it is worth all of the effort. A long-term approach to short-intermediate-term trading with high-probability trades as its foundation. Selling credit at every extreme and occasionally taking some greater risk with a few directional plays. Always talking about the importance of position-sizing. Always considering risk-management.
Why would people rather join services that tout such outlandish claims? It is beyond me. Are self-directed investors really that gullible?
It is my hope that I have carved and will continue to carve a slice of decency and transparency into the options world. I am certainly not perfect, but I know that options are a valuable tool for every investor and it is my goal to teach as many people as I can about the benefits they offer.
If you haven’t already, don’t forget to sign-up for my :
High-Probability, Mean-Reversion Options Strategy : Free 30-day trial
Theta Driver Options Strategy (limited room available): Free 30-day trial
Also, for those of you who live on Facebook. You can access my info there as well. Just click on LIKE.
Bold Enough to Call A Top?
January 27, 2012
Well, I already made that mistake. 1.9% lower. Check out my post from last Tuesday.
But, 1.9% lower really isn’t that far. Especially if you consider all of the bearish indicators that currently reside on a sentiment and technical basis.
I use very few indicators. I am a strong believer in the linear regression of time and price. You know, mean-reversion, bell curves, simple overbought/oversold indicators. Simple, logical, intellectual and more importantly mathematically sound indicators that are the first step towards long-term trading success. Emotions are nonexistent. Time and price determine my parameters.
Basically, I apply statistical principles first and foremost. And the credit spreads I apply all have the probability of success edge. Combine the two, well, it is in my opinion, THE foundation for long-term trading success.
But I also believe in sentiment, especially on a short-term basis. While I never trade based solely on sentiment, it is certainly I filter or screen that I apply.
And now both are overwhelmingly bearish on a short to intermediate-term basis.
Short-term look no further than the High-Probability, Mean-Reversion Indicator below. All of the major indices remain in a short-term overbought to very overbought state. Couple that with almost every sentiment measure in a bearish state and yes, I remain bearish for the moment.
I think this chart by highly-acclaimed Sentiment analyst Jason Goepfert of Sentimentrader.com says it all.
Certainly, food for thought.
Remember, keep it simple, remain patient and allow opportunities to come to you. Once they do, apply statistically proven strategies like credit spreads. Use option theoreticals, like probability of success to make your final decisions. And of course, the final and most important piece, use position-sizing to effectively and other risk-management techniques to maintain order within your portfolio.
Apply all of these principles, like I do in my Theta Driver strategy and you will be well on your way to long-term success. It’s not easy, it shouldn’t be, but I can tell you that it is worth the effort. Allow yourself the independence of successfully managing a portion of your own wealth. Make your own decisions and make them with conviction.
If you haven’t already, don’t forget to sign-up for my :
High-Probability, Mean-Reversion Options Strategy : Free 30-day trial
Theta Driver Options Strategy (limited room available): Free 30-day trial
Also, for those of you who live on Facebook. You can access my info there as well. Just click on LIKE.
All it Takes is One Bad Trade
January 25, 2012
I came across a great article on the one bad trade syndrome. Several months ago, Slopers (Tim Knight’s Band of Followers), were privy to a real-life blow-up in which a trader essentially risked all of his trading capital on essentially one trade(disregarded the importance of position-sizing). I want to make sure that I never make the same mistake. Currently, my positions are teetering on max pain (stop-loss). My outlook remains with the pullback scenario that I have mentioned repeatedly the past few weeks – short-term bearish.
Check out the article - All it Takes is One Bad Trade
For those of you who have not been reading my posts the past several weeks, I have been reminding my loyal readers of the following:
For several weeks I have warned of the following: The Rally That Never Stops, Up, Up and Away, Not if History Has a Say and How to Recognize a Bear Market Rally
Don’t Be a Hero When Trading Options
Options trading seems to create a “get rick quick mentality” that attracts the “speculative gamblers” out there. To me this approach seems short-sighted, unless that is your goal and you are willing to take the risk. I prefer to take the “long-term” approach that attempts to beat the market over an extended period of time. Admittingly, I “go for the gold” sometimes and place a highly speculative trade. But those are few and far between and I would never allocate a large portion of my portfolio to a trade like this. It is just too risky for my blood after what I have experienced as a trader. Take the loss and move on. Think in terms of probablities. Use a scientific approach. Losses are a cost of doing business. It is how your account compares to the benchmarks after a long-period of time that defines your success. Any Joe options trader can make a bundle on a trade. It is how Joe performs over the long-term that defines his success.
If you haven’t already, don’t forget to sign-up for my :
High-Probability, Mean-Reversion Options Strategy : Free 30-day trial
Theta Driver Options Strategy (limited room available): Free 30-day trial
Also, for those of you who live on Facebook. You can access my info there as well. Just click on LIKE.
The Rally That Never Stops
January 23, 2012
What is there to say that I haven’t said already?
If you were not privy to the stats that I provided last week by the wonderful sentiment analyst Jason Goepfert of Sentimentrader.com here you go:
Starting around the 2nd week in January, stocks have had a consistent tendency to weaken. Or at least not show much strength. Especially technology.
I don’t want to hammer on this too much. Seasonality is a tertiary indicator at best, and can easily be overwhelmed by fundamental developments, technical breakouts and changes in sentiment.
The performance of various sectors since the day honoring Martin Luther King, Jr. became an exchange holiday in 1998. The performance of QQQ was positive only 1 out of 11 years into the end of the month.
He goes onto to provide a wonderful chart that shows sector performance after the MLK holiday and the Nasdaq 100 only has a 9%, yes 9% chance of closing higher than its price level before the holiday.
Furthermore, 24 of the indicators he follows are reading bearish, not a single one is bullish. Some of the indicators include Rydex Bull/Bear RSI Spread, Put/Call Ratio – OEX Open Interest Ratio, every Put/Call RAtio including Equity Only, Total of All Options, Equity Moving Averages, Liquidity Premium QQQ and SPY, AAII Sentiment Survey and the list goes on and on. So, I think you get the picture.
1/3 gap here we come?
Okay, so if the post-MLK meltdown is to occur we would need to see a move down below $58.18 or 2.7% in the Nasdaq 100 (QQQ) over the next six days.
We are still in the weakest period of January, but even that is coming to a close over the next few days.
Courtesy of Sentimentrader.com
And there are a few catalysts that could certainly help to bring this market lower over the next few days.
- Apple earnings due out tomorrow after close (1/24)
- For the first time ever, the Fed on Wednesday will release forecasts for the path of interest rates.
- GDP release Friday
It just feels as though the market is teetering. I get the sense that the bears are just waiting for the bulls to pile on in drives before we see what will be a fairly decent decline that closes the 1/3 gap. One thing is certain, we are in the most short-term overbought state that I have seen in years, so something has to give. Grinds higher typically lead to collapses lower. The problem is knowing when the grind ends. I think the time is near.
If you haven’t already, don’t forget to sign-up for my :
High-Probability, Mean-Reversion Options Strategy : Free 30-day trial
Theta Driver Options Strategy (limited room available): Free 30-day trial
Also, for those of you who live on Facebook. You can access my info there as well. Just click on LIKE.
On the Eve of Options Expiration…..
January 20, 2012
I am always amazed how large the opportunity to “make it big” factors into the great magnetism of the market. The belief that anyone, from any background can be successful and make tons of money has quite the allure. But, in all of this euphoria people neglect to think about all of those that failed before them. And believe me the failure rate is high. Yet, investors/traders continue to choose the most difficult of investments to trade – stocks. Stock-only traders are at a complete disadvantage because they have no way to trade the randomness of the market. They have a 50/50 chance of success for each and every trade.
Bottom line – stock investors/traders are truly at a disadvantage.
Again, stock investors only have two ways to make a profit: buy a stock or short a stock. And most retail investors are not willing to short a stock, so basically they are only able to profit in one direction – up.
Another characteristic that stocks have is that they don’t have an expiration date like options. I know some of you are probably rolling your eyes right now. How could something that expires be more attractive than something that can be held to perpetuity?
Well, we all know about the marriage that many of us have for our beloved stock positions. A plan to end the investment/trade often doesn’t exist because the stock goes up and you hold it and then it goes down and you hold it even longer and if it continues to go down you hold it for that much longer hoping that your position will eventually come back to break-even and even then most decide to exit the position.
Just think of all the missed opportunities. It drives me absolutely insane to think about it. Your capital could have been used for so many other opportunities. Also, an expiration date forces options traders to truly think about the risk/reward of each and every investment /trade. Furthermore, it forces the options trader to think about the future in greater detail.
Remember, when you buy a stock, you have the entire amount of your capital at risk and more importantly you have dedicated a large portion of capital to the trade. With certain option strategies you could have a tenth of the capital tied up with the same risk.
Of course, there will always be the foolish guy who has dedicated as much on one options position as they would in a stock position., They don’t understand the importance of position-sizing. And position-sizing is THE key to being successful trading – PERIOD.
A basic rule that I like to use is that if I become too emotional about a losing trade then I have too big of a position on.
If you haven’t already, don’t forget to sign-up for my :
High-Probability, Mean-Reversion Options Strategy : Free 30-day trial
Theta Driver Options Strategy (limited room available): Free 30-day trial
Also, for those of you who live on Facebook. You can access my info there as well. Just click on LIKE.
Up, Up and Away? Not If History Has a Say.
January 18, 2012
The market rallied hard making it the 9 out of 11 tradings days with positive gains. SPY has made since 4.2% during that time, but over the past month SPY has made a staggering 8.7%. And as expected, now we are seeing sentiment change.
But, I am not completely sold on the rally yet.
Why? Well, other than the overbought to very overbought readings in most of the ETFs I follow and all of the reasons mentioned in my post yesterday, we are also entering into the weakest period of the month of January. Just look at the DIA chart below for percentage of times positive over the next five trading days.
courtesy of Sentimentrader.com (click to enlarge)
If you look at the ETFs I follow in the High-Probability, Mean-Reversion Indicator you can see that almost every ETF I follow is in a short-term extreme. Extremes that have not been seen in quite some time. I can’t remember the last time I saw all four major market benchmarks in a very overbought state. The decline is coming and soon. The question is how long will it last? Will it be long enough to close the gap from 1/3 or will it be a another one hit wonder. We shall all see soon enough.
I also came across an interesting article written by James Kostohryz wrote on Seeking Alpha which mentions three handy tools for investors to identify the characteristics of a bear market rally so as not to be lured into one. Interesting reading indeed.
How to Recognize a Bear Market Rally
1. Fundamentals: The first challenge in determining if a rally is legitimate or not is to address the fundamentals of the bear market. Are they still in play? “Stocks will often rally on relatively insignificant news during a bear market rally – news that in no way negate causes of the original decline. However, in a bear market rally, fundamental deterioration continues beneath the surface despite rising stock prices.”
Given that troubles in Europe helped spark the market decline, we can say these fears still hold. In fact, the likelihood of an economic collapse in Europe seems more likely today than it did on October 4th. The same can be said of America’s political and budget-cutting issues.
2. Low Volume Advances: “Bear market rallies are characterized by extremely sharp advances on relatively low volume. Such advances are driven by price-indifferent purchases by short sellers, put buyers and call sellers that are aggressively executing stop-loss orders,” writes Kostohryz. “Furthermore, in bear market rallies the sharpness of the price increases indicate price indifference on the part of long investors.”
With regard to this element, market actions since October 4th have been sharp and on low volume.
3. Sentiment: Rallies are fueled by a reversal of pessimism and skepticism, explains Kostohryz. “Extremely bullish sentiment suggests a high probability that reasonably foreseeable positive factors are already almost entirely discounted in the price of stocks.”
If you haven’t already, don’t forget to sign-up for my :
High-Probability, Mean-Reversion Options Strategy : Free 30-day trial
Theta Driver Options Strategy (limited room available): Free 30-day trial
Also, for those of you who live on Facebook. You can access my info there as well. Just click on LIKE.
Was Tuesday the Top?
January 17, 2012
Numerous downgrades, more European woes, news of inevitable Greek default, financial sector struggles among other bearish news led to a lower, oops, higher open today? Yes, higher.
It has indeed been rather frustrating as a short-term bear since the gap open on 1/3. But, oftentimes when you are a contrarian and you make your livelihood on fading short to intermediate-term market extremes you often get into positions early. Any professional with any cred will tell you the same. It is to be expected. However, we are now nearing the area of max pain. While I thought we would see an immediate push lower after the first week of the year, I was willing to accept a push up to 1300 on the S&P or roughly $130.00 in SPY. We hit that level today and after the bulls pushed and pushed they failed miserably by the end of the day.
I mentioned in earlier posts about the weakness that the end of January brings and I am still under the assumption that the market will indeed move lower to close the 1/3 gap unless SPY breaks the 1300 level and holds.
If you were not privy to the stats provided by the wonderful sentiment analyst Jason Goepfert of Sentimentrader.com he recently stated the following:
Starting around the 2nd week in January, stocks have had a consistent tendency to weaken. Or at least not show much strength. Especially technology.
I don’t want to hammer on this too much. Seasonality is a tertiary indicator at best, and can easily be overwhelmed by fundamental developments, technical breakouts and changes in sentiment.
The performance of various sectors since the day honoring Martin Luther King, Jr. became an exchange holiday in 1998. The performance of QQQ was positive only 1 out of 11 years into the end of the month.
He goes onto to provide a wonderful chart that shows sector performance after the MLK holiday and the Nasdaq 100 only has a 9%, yes 9% chance of closing higher than its price level before the holiday.
Furthermore, 24 of the indicators he follows are reading bearish, not a single one is bullish. Some of the indicators include Rydex Bull/Bear RSI Spread, Put/Call Ratio – OEX Open Interest Ratio, every Put/Call RAtio including Equity Only, Total of All Options, Equity Moving Averages, Liquidity Premium QQQ and SPY, AAII Sentiment Survey and the list goes on and on. So, I think you get the picture.
1/3 gap here we come.
If you haven’t already, don’t forget to sign-up for my :
High-Probability, Mean-Reversion Options Strategy : Free 30-day trial
Theta Driver Options Strategy (limited room available): Free 30-day trial
Also, for those of you who live on Facebook. You can access my info there as well. Just click on LIKE.
Ignore the Noise. Trade Strategies Based off Probabilities
January 13, 2012
“What do you think about the latest economic report, data coming out of Europe, etc?”
That’s a question I often receive. My typical response, I don’t care. Okay, that may be a bit harsh, but it is true. For the most part I really don’t care about the daily news that flows in and out of the market. I am an options trader. I trade strategies based off probabilities. I create statistical advantages based on my current market assumptions.
We must realize that knowing what is going on in the news and knowing how to make money consistently are two separate things. For successful options investors it’s about your strategy, your logic, your process, it doesn’t matter what you think the market the latest economic report is going to say. I realize it’s a difficult concept for the options newbie to understand.
You see, it doesn’t pay for me to try and absorb every financial story out there. All I care about is when my indicators hit extremes. I allow probabilities, not the talking heads, to define my options strategies.
And this means that the strategy enters periods of stagnation. Trades should never be forced. A forced trade is not a statistically sound trade. Again, this market apathy is a long-term approach to options trading and should be expected if you wish to bring in profits over the long-term.
Boring? Maybe to the aggressive crowd out there. But, I am more interested in the profitable trades – not trying to be the short-term hero who trades every scenario out there. I am confident in trades that consist of short-term extremes that have entered the stock market – high-probability trades.
What is a high probability trade?
The High-Probability strategy is a short-term directional strategy that utilizes single calls and puts based on overbought/oversold extremes in the market. The strategy requires patience coupled with a disciplined approach. The strategy consists of approximately 2 to 5 trades a month with holding periods of 1 to 10 days, however; there will be some months when I make no trades..
Again, the key to this strategy is patience. Waiting for the appropriate scenario to trade with a high probability of success is what makes this strategy a success. As I always say, opportunities are made up easier than losses. So if you let a few pass you by don’t dwell on what could have been. There will always be more opportunities around the corner. Remember, trading is a marathon not a sprint.
What About The Markets Right Now?
Just look at how many overbought to very overbought ETFs are in the market and you can quickly see why I expect to see a short-term reprieve over the next week. Typically, when we see a reading like the one we have now in most of the ETFs I follow a short-term pullback is to be expected. I already have a few positions on in both of my options strategies, but I am not hesitating to add more if the market tells me to do so. All I can do is trade probabilities as it is all we have as traders. If we gap up again tomorrow, I will most likely fade, fade fade. Remember, position-sizing is the key to long-term trading success so keep your size small and never trade too big. Trading too big will ultimately lead to failure.
If you haven’t already, don’t forget to sign-up for my :
High-Probability, Mean-Reversion Options Strategy : Free 30-day trial
Theta Driver Options Strategy (limited room available): Free 30-day trial
Also, for those of you who live on Facebook. You can access my info there as well. Just click on LIKE.
The Right and Wrong Way to Approach Options Trading Strategies
January 12, 2012
A while back I had the pleasure to speak with a gentleman from a prominent newsletter service. It was interesting to see just how he traded options and how his newsletter service and others that he was affiliated with used options in their services.
As I suspected – he uses options irresponsibly in his service - as most people do. And I told him so.
His response – “You sound like an idealist.”
An idealist? Why? Because I do not allow marketing efforts to control my options strategies? Because I do not gamble with options by attempting to guess which way an earnings call will go? Because I do not buy out-of-the-money options in hopes that an option will move towards my chosen strike price?
I could go on and on.
I was amazed how little he knew about how to effectively trade options. He actually asked me about how I used statistics to gain an advantage in my trading. This man has been in the industry as an editor for several major newsletter publications for nearly 15 years. 15 YEARS!
And yet, he doesn’t know how to create a trade with a probability of success of your choice – be it 70%, 80% or 90% chance of success.
He stated that using credit spreads does not work for the retail public. It doesn’t sell. It’s too complicated.
I could not believe what I was hearing. This man, who had no clue about the true advantages of credit spreads (like in our Theta Driver Options Strategy).
The general consensus in this business is that the the public is too stupid to place a credit spread. He told me that his marketing department told him not to use credit spreads in their options services.
Why? Because according to him, lots of lottery-ticket gambles are more attractive to readers – and they help create a portfolio of huge winners. He didn’t mention that it also creates lots of big losses. And it might be that it’s easier to sell a newsletter when you can promise lots of chances for big gains.
But that is not my goal as the editor of an options service. I want to educate anyone willing to listen how to effectively trade options like the professionals do. And that does not mean creating more complicated strategies – it means keeping them as simple as possible.
I do not tout outlandish gains. I only try to bring to you the best strategies that I know.
The strategies that floor traders use.
The strategies that create real statistical advantages.
And then I try to incorporate risk-management techniques as well. He actually scoffed at that as well.
If you want an options strategy with a gambling mentality then you certainly have your pick. There are probably dozens of them in your email inbox right now. But I am not a gambler and therefore I do not offer daily trades with no statistical advantages.
I am a realist. I realize there is no holy grail in trading. However, one thing I do know for certain is that I have found several unique and concrete strategies that make a world of sense to me and I trade them to make serious money over the long-term. Furthermore, I realize that the less I trade, the better my strategies will perform over the long run: And the long run is what matters. This is what makes my strategies unique and so far, successful.
If you haven’t already, don’t forget to sign-up for my :
High-Probability, Mean-Reversion Options Strategy : Free 30-day trial
Theta Driver Options Strategy (limited room available): Free 30-day trial
Also, for those of you who live on Facebook. You can access my info there as well. Just click on LIKE.
