A Swing Trading & Stock Index Futures kind of Day

Okay gang, welcome back! I hope you are having a great start to the weekend here. Listen, what can we say? Let’s start off with the basics here as we look at the $VIX.

When the $VIX is poppin Rob & Ryan are rockin. Friday of course we fired off five different trades between Ryan and I which kept the room really engaged in the process there and seeing how and why we do what we do. Just really great stuff here as the $VIX continued to pop out of that congestion band here. Let’s see if we can get some more of that action going into next week. Every tick the $VIX goes up so do my number of trades. I always love to go ahead and see situations like that. The $VIX is rising.

Taking a look at APPLE real quick, what can I say about APPLE. All sorts of articles coming out here, I’ve kind of pointed that out a little bit in some of the recent videos. Particularly in Swing Trading Videos. Everybody’s highly negative on APPLE, talking about how APPLE is going to be obsolete in three years for instance and so on and so forth. Since this split was even announced telling people that they’re going to buy the rumor sell the fact well the rumor came out, the split came out and this thing is still continuing to be higher there. Will it go straight up forever? No, of course not but if you’ve been listening in to all that you know ‘muckidy muck’ in the news you missed some really great opportunities.

You recall my Swing Trading Videos, I was sharing with you guys where I was selling puts way down below here with really quick results obviously coming out of that. I’ve been kind of APPLE-ble for a little while here since they announced they were going to do that split. Again my logic being, if you liked it at $600 you’ll love it in the 90s. Makes it a lot easier to afford with those fundamentals. Just beware, it’s another one of those pieces of evidence. Watch out about what you hear in the news. We do have a negative divergence here, we certainly would like to see it pull back, I’d like to see it pull back. Let some of that divergence be absorbed and then have it take off to new levels here again. Nonetheless, if you bought into all the negativity it’s been out since down here, you really missed some great opportunities.

The Euro is most of the way… Thursday and Friday I stayed out of the Euro here. There’s a lot of news that came out for it and the Stock Index Futures just offered up too many opportunities such as the five trades this morning. There’s a little bit of room left until the next major round of support at 1.34. Beyond that my next opportunity to look for this would be below 1.33 80.
As far as Gold is concerned, looking at this both ways you recall the other day I was looking to get a break down below the 12 87 level, that just could not happen. It held that 12 87 I told you about, went right back up here to some falling resistance. We’ve got some more work to do on Gold. I’m actually looking at Gold kind of from both sides of the fence now. I’m looking to short down below the 12 87 look for longs back above that magic 13 20 level you’ve heard me talk about many times over the last month and a half or so.

Crude Oil was a great example of our work in progress here this morning. Crude Oil is one of the trades I actually took here as well. This market came right down to my round number support which is also S2 – Normal Statistical Maximum Daily Range and then shot right back up like a rocket. It was great for people to watch that whole thing in action.

Stock Index Futures Talk

Let’s look at the Stock Index Futures as a unit here. With the Stock Index Futures what I would like to see going into Monday here… we’ve got room to grow to the down side if we can get below this inventory retracement bar here. We’ve got room to grow if we can get down below the low and I’d really like to get below the low set here earlier this week. I would really like to get down below that 11 35 level on the Russell, that would make me a much happier camper. That opens up another hundred tick plus move to the downside immediately and of course below that opens up a whole nother can of worms which I’m looking forward to when that happens. In the meantime we’ve got room to grow to the down side on the NASDAQ on the DOW and we’ve got it to go on the Russell. The Russell as you can see has been the weakest of the bunch since the get go here. the S&P certainly has room to go to the down side but it’s going to be a little bit of a harder journey on the way down here. Some of these other ones, particularly things like the Russell could much easier fall out of bed, a little bit quicker there. Could be a bit of a rocky ride for the S&P traders on the way down for that. A lot of these retail traders have 6-12 tick stops there and 10 to get themselves stopped out very early.

Let’s take a look at the Bonds. We talked about this area right now not looking for the longs until back above this area over here, that’s the earliest otherwise there’s too much stress on the system too much resistance up in this immediate area here to make me real excited about looking for the long side trade. Did have a nice stochastic spike trade here which is all well and good. But looking for the continuations on to my next market at the 140 area I would like to see it get above this area over here set at the end of May.

A lot of great stuff taking place there. Stock Index Futures is definitely one of the primary places. The action was also in my personal trading this morning, in the Crude Oil. As a rule these Stock Index Futures are just opening up a lot of opportunity and while it’s giving a lot of Swing Traders and Options Traders a lot of headaches its opening up a lot of trades for the futures traders. We’re looking at this from a multi-faceted approach of course, Stock trading, Options trading and Futures trading but that’s why the Swing trading video that I do is so important in my Options program. Nonetheless, firing off all the different trades this morning. Great stuff! Looking forward to another big week of it.

Of course we have some milestones that I’m looking for because with the Russell here we’ve gone ahead and had this negative divergence that I’ve been telling you about for a while. That’s lead to various types of selling here. Initially we started that conversation way back over here where I showed you the negative divergences that kicked in and now we’ve seen that even more so as we came back up to those levels, those negative divergences were reinforced and we continue to drive to the down side. As you can imagine, what I would really like to do in the sweet spot here is get down below the 11 12 area on the weekly and then watch this thing deteriorate much further. That’s just because I like to ride the elevator down vs. walk the steps up for no other reason than that. I’m certainly not impermeable by any stretch of the imagination. I just like to ride those nice quick moves to the down side as you can imagine. That’s the beauty of being a trader!

Great stuff! Great week! Great way to end the week with five more trades this morning to really teach traders and have them watch exactly how we do it and why we do it. You guys have a great weekend, I’m looking forward to seeing each and every one of you in the Live Trading Room. If you didn’t already join us this week when we made that special offer consider doing that. There’s a little link to the video down below in your email. You can read more about it if you want at becomeabettertrader.com/ltr. But no matter who you are and why you’re here you guys have a great weekend and we’ll hopefully see you Monday morning to see what we do and why we do it. Otherwise we’ll see you Monday night in the videos here and keep helping you from afar. Take care everyone, have a great weekend!

Options Trades, Swing Trades, and Day Trades | The $VIX Effects

Well, hey everyone, welcome back here. Hope everyone is getting ready for an exciting summer weekend! As we talk today, the markets not quite closed yet, I have to leave a little bit early as I’m getting ready to head down to St. Louise for a speaking engagement this weekend. Hope to see a lot of you there, it’s going to be a lot of fun. I was trying to reflect on what I want to share with you tonight. I think we’re going to hit two key concepts because they tie to last week’s videos in part and concepts we’ve shared with you many times and once again we put into action this morning.

As we start out, for all of you that are longer term swing traders, investors that are watching this market kind of looking for guidance on what’s next, even in short term turning points or longer ones. One of the things we want to watch is the $VIX. We mentioned last weekend the title was something to the effect of “It’s all about the $VIX, whether you’re a swing trader, day trader, or investor” and sure enough, last week we ended the $VIX with it right here at a seven year low. Pretty much most of the week here we spent going up, up, up the ladder from that point. Of course, what that did to the Stock Index Futures was some of them particular really put the hurt on most of this week. It’s really great for you to go ahead and see how the $VIX went ahead then and influenced the market for the entire week’s trading basically and what you can learn from that.

Make sure you’re paying attention to these videos when we talk about the $VIX and how we’re expecting it to effect short term trading because that’s going to affect your options trades, swing trades and of course your regular old and fun day trades. Ryan and I were cranking them out left and right here again this morning focusing on short side trades and that was the right decision to make this morning. Then we backed off as we had a little bit of a retracement back up. Let’s talk about that, because we identified where that retracement was coming up. Now how did we do that? Let’s focus on that, it’s a great learning opportunity for everyone here as well.

What was happening here in the overall market was the NASDAQ has been strong throughout this process today. Where as you can see the other ones are under pressure and under their speed lines today whereas the NASDAQ has been at and/or above the speed lines throughout the morning. What happened was we were looking at possibly getting another short side trade here in the Russell again after the great trading we had already done and the issue here was that I was starting to see positive divergences going ahead and forming here across multiple time spans. So I pointed a couple of those out and said, “Listen, here’s the issue, we have to watch that more positive market” because there’s the 3 to the 1 strategy that I share with you all the time. So what happened was the 1 a lot of times brings the other 3 with it. It’s counter-intuitive to what most people think about. Most people, the average retail trader says to me, “Rob, three of those indices are down surely the NASDAQ is going to come with it” but in actuality as I told you many times over the years here, it’s actually quite the opposite.

Generally and statistically speaking the three come back to the one. So I said look, I know this would be great to give it another short, we all want to make even more money and close out our week even stronger, you know that fear and greed thing starts to kick in. Fear missing a move then greed of wanting to go ahead and get another great one off. The thing was that what I said was listen, because of the positive divergence and that NASDAQ we need to mark the NASDAQ where it’s at right now and if it starts to go down then we can look for another short opportunity. If it holds or starts to go up this market could actually have quite a reversal to the upside. Sure enough, no sooner did I say that within the next 4-5 minutes in the NASDAQ not only held but started to pull back up. The moment that did that the Russell just went BOOM to the upside here to the tune of 40 plus ticks, four hundred dollars contract and of course more than twice the normal maximum stop out loss for the average retail trader.

It was a great way for people to see the 3 to the 1 strategy being used live in real time there once again. As well as some of our core strategies used in our work with positive divergences and everything else. Those were just two things I wanted to share with you guys. The $VIX because that was the theme all week since last weekend’s video and then you always hear me talk about the 3 to the 1 strategy and I wanted to give you a live example of how we stopped shorting this morning right before the nice reversal.

Great stuff, we’ll have a lot going on for you guys next week, stay tuned for a bunch of big updates. We have a lot going on next week that you guys are going to be invited to and so you’re not going to miss a lick of it whether you’re a swing trader or investor. You guys have a great weekend and we’ll forward to seeing you Monday with all sorts of great information for you. Take care everyone have a wonderful weekend.

Focus is on $VIX, Stock Index Futures And Gold

Welcome back, here, everyone! What an exciting day! As we take a look, of course, the story continues since this weekend, the title, the theme, was about the $VIX. We followed through with that, yesterday being all about the $VIX and then once again today it was a story about the $VIX. So, great stuff here, nice pop-ups leading to really good trading in the Trading Room, although, I must admit Ryan beat me out this morning in the Trading Room, so we’re going to have to come in there tomorrow morning and see if I can show him who’s the boss right? That’ll be a lot of fun, just have our fun, little, friendly competition and see who makes more money each day. So we’ll see how that works out tomorrow morning.
As we take a look, in addition to the $VIX, coming off these lows, having the nice pop-up, here, which, of course, leads in general, more trading, also effects the way we handle things , such as stochastic spike trades. Certain trades tend to work a lot better as this $VIX continues to pop-up. People are getting to watch that, live in the Trading Room, which is awesome.

The Bonds

As we’re focusing now, there are certainly lots of different Markets I can focus on tonight, but let’s talk about two of them. First is going to be the Bond. We focus on the 30 year, here. The reason I am bringing you back to this is because over the last 6 months, I spent a lot of time on the Bonds, here with you. Looking through this whole process, we were looking for a breakout, pullback to support, and then a rally. For month after month, from January to February to March, into April, we kept looking and finally in April that’s when it happened. We kept looking for a breakout, a pullback to this key support line of mine, and then a resurgence back above, closing above the speedlines, here. It’s a fantastic setup, here, and it is one we were hunting there for months. I kept saying, “Gang, I know everyone wants to go long here, but not a good idea”, “I know everyone wants to go long here, not a good idea”, over and over, you remember, month after month after month. And then, finally, we pushed through, it pulled back, closed back above the speedlines and Voila! We got to the next target. So what ended up happening, here? We got through that resistance, we pulled back to it, and then we closed back above the speedlines and the BAM, over the next day and a half we ended up having some real nice spiking, there. We got 75% of the way to the next target. So, then, we went into “no traders land”, you recall, not a lot of interest here, we got up to that resistance, got killed right back off of it, got right up to it again today. We still have not broken through it, pullback and start to take back off. And the reason that’s so important, well, we can see that in Gold, because, I told you, the same thing I’ve been watching in the Bonds, historically, is the same thing I’m looking at here in Gold.

Gold Shows

Gold is just incredible. I know you are going to think I am just showing the same cart from a week or two ago, but gang, I’m certainly not here! If you’re following Gold, this is fantastic! Here we are, just sitting here, right at that 13200 level AGAIN, day after day. Opens, highs, lows, closes right at that 13200 level. I warned you about that level before, and we continue to see this. The thing is, what I want you to watch out for now with this, is what happened today, we went in pushing above the speedlines, here, like, “Well, that’s great gang, but we have not closed back above there”. So, we may have pushed up, pulled back, but we have not closed back above there, and that’s a real issue, here. The reason why that’s a real issue is because we don’t, necessarily, then have the full setup in place to have the continuation. Well, sure as can be, no sooner did I say that this morning, then shortly thereafter I talked with the room about that, right here on this pop-up bar, because, as you can imagine, some of our newer students to us getting excited in those kind of moves. Those are the kind of moves that retail traders get excited about, and as we’re correcting bad behaviors out of new students and such, getting them to think about the Markets in a different way, I was explaining that to people. Well, no sooner did I do that, then, within a few moments, when the Market already started rolling over, and then it died a horrible death, dropping over 80 ticks, there, in the next 10 minutes there. It was a great reminder of, and you can see that, then, right over here, how important it is to wait for that strategy to come to completion for follow-through, otherwise, you’re asking to get your head handed to you, okay?

So, great stuff today. It was a lot of fun, and I’m looking forward to another great day. I mean, just look at this. You got the Euro looking to breakdown below the $1.3580. We got Gold, here, looking to breakout, preferably to the upside, above the 1320, that’d be a favored trade, as you can imagine. We got these great Stock Index Futures, that’ve already had these really nice pullbacks these last couple days, because of the $VIX and all that that entails. Going into the coming days, we are going to continue to watch that looking for additional short opportunities, and we’re going to start out with that, of course, when we’re below the speedlines, here. That is going to be our natural inclination here. But, a lot of that is coming to a head. You can see those negative divergences that were resulting in this Market, pushing down. Everything is working the way it’s supposed to. It’s fantastic. So, let’s have another great day trading tomorrow, let’s see who wins the Rob/Ryan battle in the Trade Room tomorrow morning. That should be a lot of fun. You guys have a great night! We’ll look forward to seeing you tomorrow in the Live Trading Room, or we’ll see you in tomorrow night’s videos, here. Have a great evening!

Rob Hoffman Reviews Key Thoughts To Remember From Today’s Trading Day

Ok gang, fantastic stuff today. Let’s just run through it by the numbers. First of all, as we’re looking at the EURO, the two main points that I’ve been watching on the EURO is above $1.36 or below $1.34. AT this point what I’m going to be doing, we had this massive key reversal that took place today (on my charts at 0:35) and what I’m going to look to see is if we can continue down now below the $1.36 level and push even lower here. So, that would be the favored. We have had a very long move in a one day basis so it might have to pop up for a day or two. No matter what happens I’m going to see if we can’t get back down below here. That would be the favorite trade until such time as we get back up above the $1.36 and I’ll be very gung-ho about the $1.36. In the meantime, $1.34 is very much on my watch list this evening and going forward the next several days.
As we look at crude oil next, it once again tested that key accumulation area that I have been talking about the last few days. You’ll notice going from last week (on my charts at 1:20) we had this big accumulation bar and we keep testing it over and over again. We have no broken through it but if we can break through that area I will be looking for a move do to around the 90 level. So I’m watching this minute by minute looking for trading opportunities where we can push down.
Gold as you know I’ve been very bearish on. On gold we went ahead and started piercing through this key accumulation bar that was set over here (on my charts at 1:44). This long term band of support and resistance has been key not just from that accumulation but even into the backdrop as you can see on my charts (at 1:51). I’m really excited about this and what I want to see now is if we can hold at or below this blue band here (at 1:59). It can travel back into the blue band but I want to see it stay in that area or below. If that happens and we start to push back down it could lead to some fantastic sell-side activity. We traded short in gold in the Live Trading Room the other day and this is just kind of an extension of that process from the other day.

The DOW As A Key Index To Watch

Now, let’s look at the stock index futures. In the stock index futures it was all about the DOW just like we told you. That was the focus in the Live Trading Room, the focus beyond the Live Trading Room and right here in these videos. What we knew we had happening was the S&P, the RUSSELL and the NASDAQ were all at or below their daily speed lines but that DOW was just resisting travelling down this morning. So, we went ahead and shared with people what we’re looking for which is to get back down in the afternoon session after the FOMC statement. If we could do that, any sign of weakness and pushing through the slow speed lines on the DOW would lead to short-side opportunities in the RUSSELL and that. That is exactly what ended up happening and those are exactly the trades that I ended up taking this afternoon. Once we had that news announcement come out it lead to great retracement trading which is what I was focusing on and then nice shorts to the downside. Absolutely perfect, we just had to be patient; we had to wait for it. We were waiting, waiting, waiting. We knew exactly what we were looking for. We broadcasted that to you here even in the previous videos and certainly of course in the Live Trading Room.

Reviewing The DDD Opportunity

Now, as we go into tomorrow. I’m going to be watching the DOW once again to see if we can get sell-side activity and maybe get a speed line to 20EMA trade. That would be fantastic. That really dovetails into what we talked about here in the previous Swing Trading Video and then in last night’s video regarding DDD. It continued to go right on through today. The other day at $83 I was talking to the students in the Live Trading Room who were asking about it and who were looking at preserving profit. We talked about all the reasons why I felt that it was time to go ahead and get out of this trade. The absolute cut off point that I’d be looking for. Sure enough, as soon as it broke through that cut off point the thing nose-dived yesterday. In last night’s video I shared my concerns with you about this going right back here (on my charts at 4:36) for completing a speed line to 20 trade (one of those favorite options trades that have made our options trading so successful). We went ahead and closed out another options trade today. Fantastic stuff. So the methodologies were great and we came all the way down to that target in just two days after going ahead and mentioning that to you here. It dropped about 17% in two days. This was really great stuff for everybody to learn from.
To that point, as a reminder, if you guys want to be part of the nightly Swing Trading and Day Trading newsletters you can do so by going to www.becomeabettertrader.com/now. We’ve got a great offer going on for you if you want to get those videos nightly with some great content, some extra goodies, and also the Starter Package of Indicators so you can see some of those things happening. Just think about how much money you could have saved or made on just by doing something with this particular trade on DDD.
Keep learning from us each and every day. We look forward to seeing you in the Live Trading Room, in the videos tomorrow, or as you know, we are in Vegas at the Traders Expo and will be here all day tomorrow. Have a great night everyone.

The Importance of Option Volatility in Our Trading

It’s always interesting to see how the “experts” refer to volatility as generally a bad thing in the markets. For us option traders, especially us option sellers, it’s our life blood. As option sellers we are typically selling option volatility and therefore the higher the better. Increased option volatility raises option premiums allowing us to collect more for the option sale and more easily sell high and buy back low, which is the goal of sellers. Let’s look at an example of how higher option volatility impacts pricing and the advantages of higher option volatility when selling options.

Example of Option Volatility in Action

Effect of Option Volatility

The figure above shows a one standard deviation range for a hypothetical stock that is priced at $400 with options expiring in 40 days (DTE) with three different volatilities (A one standard range says that the stock is expected to be within that range at expiration approximately 68% of the time). As we can see the width of the one standard deviation ranges increase as volatility increases thus allowing one to sell options farther away from the current stock price. Additionally because of the high volatility the options are typically more expensive than the comparable options with lower volatility which increases our profitability and probability of success. Thus when picking stocks for option volatility trades, as option sellers we want to focus on stocks with volatility . So from the example above, if there were three $400 stocks with the different volatilities shown we would want to sell options on the stock with the 40 volatility versus the 20 volatility. This will give us the most premium and thus highest probability of success.

Naked Puts vs. Covered Calls

I’m always surprised when people tell me they are afraid of selling naked puts but are comfortable selling covered calls. It probably doesn’t help that there is no shortage of trading educational firms that promote covered call strategies as a low-risk way to “enhance your returns” or, as some put it, “make a consistent 3 to 5% per month.” Now this is not intended to diminish the covered call —  it’s a good trading strategy that has its place, and Rob Hoffman trader personally uses it. The key is to understand when to use the strategy, how it can be part of a larger overall strategy and the difference between naked puts and the covered call.

What is a covered call?

As many know, a covered call (also called a covered write) involves buying stock and then selling an out of the money (OTM) call option against the stock. This trading strategy allows one to profit if the stock goes up while reducing the cost basis on the purchased stock in the case where price does not rise enough to be called away or falls. For example, say one purchases 100 shares of XYZ for $43 per share and then sells the $50 call option for $1 for the next expiration cycle. If the price of XYZ is above $50 at expiration, the stock would be called away and they would have a profit of $8 per share: $7 on the stock ($50 strike price – $43 cost) plus the $1 received for selling the call.

Now if the stock were not above $50 at expiration, one would keep the $1 from the sale of the call option, thus effectively reducing the cost basis on the stock to $42 ($43 for the purchase of the stock less the $1 received for the call option). You can graphically see the profit profile on this position below.

 

With the covered call strategy, you are looking for the stock to rise. This is a bullish trading strategy, however, you have given yourself some downside protection by selling the call which lowered your cost basis and thus your break-even point. If the stock had instead dropped to $40, the person that only purchased stock would have a $3 loss while the covered call investor would only have a $2 loss as we can see on the graph.

Naked put vs. covered call example

Now there is another way to make this bullish play, and that involves selling a naked put. Now many people start off the trading conversation of selling a naked put with, “But if I do that, I will have unlimited risk!” Well, the reality is, you do not. A stock can only go to $0, so the most you could lose on the naked put is the strike price less what you received for selling the put, which is no different than if you owned the stock outright and it went to $0.

As an example, let’s take XYZ stock again and in this instance, instead of buying the stock for $43, you sold a $40 put for $1.50. Now if XYZ went to over $50, the put would expire worthless and you would keep the full $1.50. This is not as great a profit as with the covered call, but by reducing the profit potential, the probability of trading success was greatly increased. We can see this increase in that for the put, the stock needed to only stay above $40 for us to make our $1.50. But for the covered call, the stock must rise to $43.50 for us to make the same $1.50, and we know that the probability of staying above $40 is greater than the stock rising to $43.50.  We can also see this effect by looking at the case where the stock dropped to $40. In the covered call example, there was a loss of $2 (remember the outright stock purchase had a $3 loss). But in the case of selling the naked put, it again expires worthless, and we keep the entire $1.50 (the price needs to be below $40). We can see this in the profitability graph below.

Now one thing that stands out right away with this is that the shape of the profit profile for the naked put and covered call are identical. In fact, they are synthetics of each other (a “synthetic” is when you have a trading strategy that has the same profit profile as another strategy that uses different components). This makes sense as in both instances we are capping our upside gains to increase our probability of success while they both have similar downside risks. The main difference is that the probability of success is greater for the naked put versus the covered call (note that the break even for the covered call is $42 while it is $38.50 for the naked put).

Combine naked puts with covered call writing for maximum results

So now you may be saying, “Well I should just sell puts and not bother with covered calls.” There are some merits to this, as in margin accounts naked puts can offer a more effective use of capital (puts must be cash secured in IRA accounts). But this doesn’t tell the whole story. One very powerful trading strategy is to combine these two individual strategies creating a more encompassing strategy. In this combined strategy, you start by selling naked puts. You continue to sell puts on the stock until you get assigned the stock. Once assigned, you switch to the covered call and continue selling calls until the stock is called away. You then start all over again with selling puts.  Combining these gives you the best of both and allows you to either profit immediately (at expiration) or continually reduce your cost basis on the stock.

Now one thing to note about this trading strategy, it is a bullish strategy. And as such it is most effective when the market and stock are moving sideways to up and is less effective in down markets. This also applies to the individual components of the strategy, covered calls and naked puts, by themselves as well. Remember it’s always important to match your strategy to the market conditions. If you don’t have the correct strategy for the market conditions, you can be right and end up losing.