Should short term trading be a part of your portfolio? In this podcast we discuss the advantages of short term trading and how you can use short term trading to add an active trading component to your portfolio.
The US markets have had almost a week of volatility with the DOW moving more than 1000 points a few days in a row. In this podcast we discuss if this is a good time to buy the market, is the extreme volatility over or is there more to come? We also discuss some options strategies that work well in this extreme volatility.
Even trader's make New Year's resolutions! What are some of the things you will change about your trading this year? In this episode of the SCT Podcast Sarah and TJ will discuss the changes they are each making in their trading this year. Tune in to see how they are going to make 2018 a great trading year.
December is almost over and 2018 is right around the corner. In this episode Sarah shares what she does at year end and how she prepares for the new year.
She also discusses how to evaluate your trading strategies and make sure that you have your best strategies working for you in 2018.
Traders always want to make the most profit possible with every trade. Traders feel bad when they leave money on the table. In this episode of the SCT Podcast, we discuss strategies to maximize the profit you have in a trade. We discuss the pros and cons of a few different strategies and why they might be a good fit for your trading.
What if making money was just like riding a bike? Where you get better the more you practise the skill. While you may be familiar with money preserving skills like ‘save more’ or ‘spend less’, Sarah Potter explores the myths and realities of what it is really like to build the skills to make more money, grow wealth and investing in the markets for average people. Find out why financial literacy is failing you, and how to change the financial narrative for the next generation. Sarah Potter is the author of How You Can Trade Like A Pro: Breaking into Options, Futures, Stocks and ETFs (Published by McGraw Hill) and founder of www.shecantrade.com
Sarah is well regarded as a trading and market expert and is well known for her trading consistency and straightforward options strategies. Her unique skill set, including her Masters of Education allows her clients to learn about trading markets and market analysis in a clear and understandable way.
Sarah Potter has both written for, and been featured in: Forbes.com, Tradestation, All Stars of Options, Traders Expo, Scotia iTrade, TheStreet.com, Yahoo Finance, AOL Daily Finance, Active Trader Magazine and more.
Traders who have been trading options for a long time will accumulate starategies, indicators, charts and watch lists. Some items will be used and some will be forgotten about. Traders can make sure they are focusing on the important items by decluttering and removing items that they are not using or that are not working any longer.
I always find that this helps me focus on what's working and removes the distractions from my trading.
In this podcast we discuss what TJ and I do to declutter our trading and some tips that you can use to make your trading more efficient.
In this episode of the SCT Podcast we discuss taking a vacation or break from trading to reset and make sure we stay fresh all year. Trading is a mentally tough activity, you are always managing trades and looking for the next options trade to place. This means that at some point you will feel warn out and exhausted from what you are doing. Taking a break is essential to staying sharp all year.
In this episode of the SCT podcast we discuss three of our top tips to improving your trading. These tips are simple and straight forward, yet very powerful. These are tips based on how we trade each and every day, just some simple steps that you can use to make improvements in your trading right away.
When buying calls is it better to buy at the money or out of the money. There is not a one size fits all answer to this question. There are many considerations on both sides, and each strategy has it's benefits and drawbacks. In this podcast we discuss the pros and cons of trading calls out of the money vs in the money.
How long should you hold a losing trade? This is a question with as many answers as there are traders. In this podcast we discuss some of the common answers and what we think are the best ways to handle a losing trade.
What do you do when you have a few back to back winning trades? Most traders will increase their contract size and the riskyness of the trades they take? What is the best strategy, Sarah Potter of Shecantrade will review how she adjusts her options trading to make sure she doesn't give all of her profits back to the market.
The best strategy is sometimes the hardest, and that is to not get greedy as you have a few trades that end in your favor. Staying consistent with your probabilities and position sizing is a good way to be trading options for years to come.
In this episode of the SCT Podcast Sarah Potter and TJ discuss the differences between fundamental analysis and technical analysis. Fundamental analysis is typically discussed in the media about trading options and stocks. Fundamental analysis attempts to assess the financial health of a company and determine if the current market price of the stock is under or over valued.
Technical analysis on the other hand looks at charts and chart patterns and looks at the supply and demand for the stocks and whether current price trends will continue or reverse.
Both technical and fundamental analysis have their place in investing, for the short term weekly options trades that we place in the shecantrade trading room, a combination of technical analysis and probability trading from the options chain are what we use to select our trades.
Fundamental analysis is best used for longer term trading when the financial growth prospects of the company can be fully realized over a few years.
Sarah: Hi everybody, it's Sarah Potter from shecantrade.com and this is the SCT podcast. We are on episode 38. I have TJ here.
TJ: Good afternoon.
Sarah: And today's discussion we're going to talk a little bit about technical analysis versus fundamental analysis and basically why we choose to look at what we do to gather evidence to place the best trades. What we're really proud of in the live trading room she can trade is that we are very consistent in our approach to trading and as a result that really comes from finding good evidence from the beginning, we really focus on getting it right from the beginning as opposed to just placing trades and then adjusting or rolling trades as we proceed in them. So kind of front-running the evidence I suppose and trying to gather pieces from all sorts of different areas to make sure we have a good perspective when we're placing trades. Now the basis of what we both trade both TJ and I is technical analysis, but you know I think even within the umbrella of technical analysis there's a lot of different areas, a lot of different systems that people use to place trades and I'm not really sure we do everything in technical analysis. So I don't know, what do you think you would you call yourself a technical trader or a Chartist like, how would you define yourself?
TJ: Well definitely for the weekly trades, the day trades, the swing it's definitely not fundamentals, so yeah, I consider myself a technical analyst.
Sarah: But I think when someone thinks about technical analyst I think sometimes you're thinking about somebody who spends a lot of time, very detailed amount of patterns in charts and when I've seen you trade, you do use how price moves but you're not getting that detail in terms of the patterns you're look for.
TJ: Yeah, that's true. I don't think what we do is we would I do anyways I think kind of the broad concept from technical analysis, you know in terms of support resistance, trend, reversals and really applied at a pretty high level kind of the 10,000 foot level instead of getting into it right you know right down to the nitty-gritty and counting the number of bars in a triangle and you know the exact shape of the triangle and you know going back and looking at every time it happened for the last ten years and will it happen again, I think definitely, I don't delve into it that deeply and there are a lot of people that that really do it and use it to quite a bit of success. I think anything that you use, you need to, whether it's technical or fundamental you can't use it in isolation on its own, you need to combine it with what you're seeing and the options chain, what you're seeing on the charts, what you're seeing on short-term, what you're seeing on some long-term charts, what you've seen that stock do in the past and put that all together and take a little bit from every piece of that and then and then evaluate your trade. So yeah, definitely I use definitely use all the principles and it's a mosaic you know you grab a little bit of a little nugget from here, a little something from there you know something that you've learned here over there that works and you kind of put it all together and wrap it all up and apply it and I think that's why every trader has a slightly different style and I think that's the same thing with the trading room as well is that you know none of our members, are going to trade exactly like us or are going to look at the market exactly like us, but as long as we can give them some nuggets and some good trades and you know discuss the pros and cons good and bad of each trade before we place it then everyone is educated and everyone can make that decision to trade on their own and I think that's the important thing is building the story yourself and just being confident in the trades.
Sarah: Yeah, I mean so I think when you're talking about it, it really does ring true to what I'm saying is that yes we're technical traders. I am as well, I do want to pay attention to how price is moving but I want to look at things like how it’s moved in the past as opposed to, oh today we've seen this many Bars in a consolidation so it must mean it's going to break out. I actually think that a lot of times we spend a lot of time there too much time in charts it's very good at looking back in history and identifying areas to enter our exit rates but because we're trading live and we're actually looking to get filled on our trades to make money on our trades then we need to be able to see things in the moment, recognize patterns certainly that have happened in the past, we can rely on those pieces of evidence but if you're only doing the charts I think you're missing another part of the picture and in options trading because we do have an options chain there's a lot of information there and that tells a story too. So what we both do in the trading room very successfully is take pieces of technical analysis and layer it in with the options chain but what I find interesting is that I've tried just looking for trades only through the auctions chain and I can't really find trades that way. So I definitely rely on technical analysis to find my trades, to choose the stocks that I'm going to spend more time and to decide whether or not a trade is actually setting up. So for me when I'm starting to look for trades I'm going to focus on the daily chart that's really where I'm filtering through all the different stocks, it comes from the daily and if something from the daily piques my interest then I'm going to go out to different timeframes and look to see how it's moving. So I want to look historically, looking on a weekly chart to see what is it done in the past are there any key areas of support and resistance, what does the trend look like, is it consolidating, those kinds of things and then from the weekly chart if things still look good and I'm still excited in the trade then that's where I'm going to move to the shorter term pieces like the 60 minute and the 5 minute to then get more precise about my entries. And then from there we're going to take all the evidence we've already gathered and then layer that into the options chain. Actually today in the trading room, I was looking at one stock at Walmart and the Walmart chart, so from a technical analysis point of view looked fantastic, it pretty well had everything, steep trend, no resistance, multiple timeframes everything looked like it was going to pop up it looked like an idea a great trade to place led to buy a call but when we moved into the options chain and started looking out to next week in terms of expiry which is where I was going to purchase the option, it didn't look as good anymore. The probability of success to me didn't look as as great as I would like it to and so I didn't place the trade so there's times where I'm going to gather all sorts of different evidence from the charts but if I can't get it to line up with what it looks like in the options chain, it's not worth placing the trade, it's probably worth putting it on a short list perhaps trading it next week once that expiry is moved on but it actually stopped me from getting into a trade. So layering what you see in charts with what you see in the options chain and what we know what's happening in the media too can also be helpful when we're actually putting together that trade. Now you use probability as well when you're placing trades especially sometimes with some day trading, how do you layer in different pieces of evidence? You're really well known TJ for your day trades, what kind of evidence to use there is it any different than when your swing trading?
TJ: I think so. I think if it's if we're day trading I'm looking for something is going to happen either the next day or later that day. So I think the evidence that we that shows up on the options chain is more timely because it's you know there's less time before that option expires so what I'm seeing is you know is probably going to be the most accurate information that I'm seeing. For example, you know let's talk about Delta. Delta changes very rapidly it can and it can go from you know you can go from a delta 20 to a Delta 80 on an option on a strike pretty quickly if the stock really gets you know really gets moving, you know if we you know let's take an example again with a delta and we go to expiry and we look at expiry that delta number is going to be the most accurate right before 4 o'clock on that Friday and that's just the nature of the market so if I'm taking a day trade you know I'm relying more on what I'm seeing on the options chain I'm trusting it a little bit more because there's less time between now and expiry for the market to move, for traders to change their mind, for new big positions to be initiated. So definitely for the day trading I'm looking at the options chain, I'm looking at the details from the options chain and I'm taking that at a more of face value, I'm looking for things like you know where's the volume today, you know where is volume coming in, is it close to the strikes I'm trading, is it far away, is there a skew to the put side or the call side, is there a lot more credit on the put side than on the call side? You know there's the market and we look at the credit is the market pricing and a bigger move to the put side or the call side and these are all things that I look at in that that I use from the options chain to form my day trading decision and then I'll go to the chart and I'll look at those support and resistance levels from the options chain, you know based on like I said on credit, on volume, on open interest and I'll compare those to the moving averages, you know more traditional support and resistance on the chart and I'll see if any of those levels line up. And again you know the more the more things that line up at a certain point you know typically this areas as more traders will be looking at that point as well. So it will you know if you know if there's a lot of traders looking at say 2400 to hold on the S&P, there's a good chance that it probably will. So yes I use a lot of evidence and I think a lot of it is just looking at subtleties and seeing if there's you know a little bit something different than last week or you know something's changed between the morning in the afternoon, you know nothing will really kind of showed out at you but by the time you put it put together 3, 4, 6, 8 pieces of information and you build your case you know at least you've got at least the evidence that you know is supporting the trade.
Sarah: Okay, so what we haven't talked about is fundamental analysis. And that is also very traditional, there's a lot of people in that group in camp that would say that that is an important piece to trading, but it's something that you and I both don't use and that might just be because of our outlook and how we setup our trades, because we are generally trading and looking to get out of the trade within a week or two. So do you think there's a role to play with fundamental analysis in the approach or the system of which we trade the market?
TJ: I honestly don't think so for short-term trades. I don't think the fundamental analysis, I don't think any of that has enough time to play out during the week. I think fundamental analysis takes a longer time to work its way into the system, to work its way you know we see that you know companies release they've got good, good fundamentals you look ok it's a growing company you know price should go up over the next six months to a year that's great but we're typically in well I'm typically in a trade two or three days. So the market knows that yes, fundamentals might be good or fundamentals might be changing but you know there's no real time for that to take hold in the market. No obviously, earnings which is a fundamental event obviously if you want to consider that do have a big impact and we obviously you know we've talked about that in previous podcast with earnings, but generally yeah you know it doesn't I don't really pay attention to it at all.
Sarah: Do you think what we have both been paying attention to though and what is relevant from very much for our style of trading though is what's happening in terms of in media and whatever you want to call that in terms of its analysis being very aware of what's happening on a global stage will impact the broad market especially which then will roll into the trades that we're in? So it is important to be paying attention to what's going on in the world because that will influence how price will move and so whether you're a technical or fundamental trader I do think that that's very important. We have geopolitical news that is influencing the market these days and I think as we move forward that will definitely be something we'll need to be very considerate of. The beautiful thing which is we're talking about the trading room today actually, the wonderful thing about the style of which we do trade is that it doesn't really matter what happens in the market two or three weeks down the road because we're probably out of those trades and we can easily-easily readjust to how the markets moving at the time. So whereas somebody who's maybe more long term is thinking, oh is this a dip this is my opportunity to buy and then we're going to see things move up and they're thinking about longer-term stances in the market, we don't have to be as concerned about that, we can be fluid and flexible with the market depending on how things are portraying themselves and we can take advantage of the trades that we're seeing and I think marrying the combination between some technical analysis linked with what we're seeing in the options chain and keeping in mind what's going on in the world is kind of the three core pieces to have really great trades. All right let's leave it there, that was a great discussion, certainly there's a lot of camps and a lot of points of view on technical and fundamental trading. As always we really do appreciate your review so anytime you can review she can trade or our podcast I would really appreciate it, those are very important and honest review is very helpful and come and check us out the live trading room at Shecantrade.com Happy trading everybody.
In this episode of the SCT Podcast, listen to Shecantrade review your options for selecting the best expiry date for your options trades. Options traders have lots of choices when it comes to picking an expiration date for their trades. Many traders simply pick the date that looks best to them, but there are better ways. Listen to find out how to pick the optimal expiration for your long and short options trades.
Sarah: Hi, everybody, this is Sarah Potter. This is the SCT podcast. Happy to have you all here today. I have TJ with me.
TJ: Good afternoon.
Sarah: And this is episode 37. And today we’re going to talk about how you pick expiries. I mean, in options, we have the lovely ability to pick how long we want to be involved in a trade. And so often, this is a question that we get asked a lot is how you make a decision about what week to trade when you can basically trade any week in a stock or any other trading instrument in options. So, how do you make that choice. I think this is a good discussion because TJ and I sometimes have a different points of view on this is to how many weeks to really hold trades. So, I think the first thing you want to think about is how much money are you actually interested in risking because the further you go out, the longer the time you’re giving the trade, the more expensive generally it’s going to be to be involved in that trade. And so, there has to be a balance with how much money you’re willing to put up versus actually figuring out, you know, I think this time frame is actually going to be quite soon so I think the stock is going to move, let’s say in a couple of weeks, so I only want to have a couple of week expiry versus you know, I think it’s going to go up and I don’t really know when so I’m going to go out a month or two and hope that it goes up in that time. So, TJ, what do you think, when are sometimes, or how do you make choices about expiry?
TJ: Well, I guess first I have to, I want to look at the type of trade that I’m trading, whether it’s a spread or if it’s a directional buying long puts or long calls. I typically look for, I look first, I guess, let’s kind of talk about this maybe as a checklist. So, first, I look at the market. Is the market really trending? Is it moving sideways? Are we getting lots of different news? Political, economic. It’s just a lot coming out all the time. It’s maybe that causing the market to move back and forth. And then, I’ll look and I’ll say, okay, “These are the market conditions.” Is this a time that I want to spend a lot of time in the market with my trades? Or is it a time where things are happening so quickly that maybe I only want to be in the trade two or three days. And I don’t want to sit for weeks on ending a trade because we don’t know what’s going to happen if there’s going to be another government announcement or economic announcement. So that’s kind of the next step. And then I’ll tell her to, “Am I buying a put or call or am I selling a credit spread?” Generally, credit, I will only do week of so it’s a decision, “Do I get it on Monday, Tuesday? Or do I get it on Wednesday, Thursday for the Friday expiry?” But then for long puts and calls, I like to give the trade enough time to work but I also don’t want to get into a situation where the expiry is so far out on the put or call. That price is moving, may move over the next two or three days but the option doesn’t really respond because there’s so much time to expiry. So, I like to weigh those. So, I think for me, usually two or three days for credits, for spreads and I’m probably three weeks out for long puts and calls?
Sarah: Okay, but that three weeks out on a market that’s moving, would you suggest that once a market is sideways, are you still picking that same three-week window or are you adjusting if the market is consolidating?
TJ: I think the market is really slowly consolidating. I’m probably not trading the long puts and calls anyway, so it wouldn’t really be, it wouldn’t be something that I’d really look at.
Sarah: So, I will basically make my choice about what week to trade especially for directional trades for buying calls and puts. Also, based on volume and where there are other people. So, sometimes, I might want to give it three weeks or four weeks to place the trade, to have the time. And I generally like to have a few extra week, so if I think that a stock is going to move let’s say this week, I will not trade with this week’s expiry. And that’s just because your faded decay is going to be too influential in the same week of expiry. So, if the option is going to expire in the same week, even if I think the move is going to happen, because you’ve got so much time decay value coming out of that option because it’s an option that’s going to expire that week, generally, those trades won’t be as favorable as if you went out at least one more week. So, I kind of think about it like, “Okay, do I think the move is happening this week?” Then I want to give myself an extra week just in case I’m wrong. And then I want to give a week for time value so that generally, I’m not in trades in the last week of expiry. So, that’s kind of my rule of thumb, so, I would suggest that I would meet a three-week window is the first place I’m going to look. So, if I want to buy a call, I’m always going to start at three weeks out. But there are also times when three weeks out, there’s no volume so it doesn’t make sense with the trade that week either. And that’s what I’m going to go out further or go in a week and start to consider whether or not it’s worth taking those trades instead. So, I’ll stick with the same strike but I’m going to start looking at various weeks just to see if there’s a nice place where there’s other people that are already trading so, looking at open interest in volume and looking for other positions to already be there. I don’t want to be the only person trading at a strike. I find that that’s just, those trades don’t work out as well versus when I’m in trades where there’s other people as well. I mean, that’s a whole other podcast too we could do down the road. So, there will be times that I will go out. But yeah, I mean, we’re both very similar in terms of our style for calls and puts, but there are times do you ever take trades that are out further? Like going out more than three or four weeks?
TJ: Not typically an option, no. If I’m going to trade a moderately expensive stock and I’m buying an option that say three or four, six months out in the future and I want to buy that in the money with a high delta. I mean, at some point, the benefits of buying the option are kind of reduced ‘coz I might as well go buy the stock ‘coz that option is going to be a big chunk of the cost of the stock price if I’m going that far. And it expires so I’d rather spend, instead of spending 30 or 40 dollars on an option that expires, I’d rather spend maybe a hundred dollars share on a stock. At least I know that stock will still be around typically. I may be able to hold it out a little bit longer if something happens whereas the option it’s, you’re committing a lot of capital and it could just expire worthless.
Sarah: Yeah, and you know, from coaching a lot of people to, when we talk about trading options, sometimes, people get really focused on the expiry like what week should I pick for their trade to end. And I also suggest, a really good tip, is to think about the trade from the beginning. So, if you identify that you think a stock is going to move, let’s say this week, but you look at it, and let’s say in a shorter term time frame like a 60-minute chart, there’s a bit of resistance. So, what sometimes traders will say is, “Well, there’s resistance here so, I have to go out a week.” Where I would say, “There’s resistance here so, I’m not going to trade it this week.” And so, you and I, that person and myself, we might end up with the same expiry but I’m going to get into the trade a week later. So, I’m not going to pay for that risk to be in that first week while there still is resistance where somebody else would. Perhaps, their perspective, what I can hear sometimes is, well, it’s cheaper then so I’d rather get into that option where it’s cheaper when there’s still resistance. And I guess, from my point of view, yeah, it could be less but if there’s resistance there, the market hasn’t proven that it’s actually going to move in a direction you want yet, so it would be better to sit and wait to see how that moves first rather than going out and spending more on an extra week. Just because we have the flexibility of trading options with more weeks, it doesn’t always necessarily mean that that’s something you should do. And I think, when we’re trading, I mean that’s the downfall of options because you have so many choices. Sometimes, instead of making a good trading decision from the beginning people say, “Well, I have a choice so I’m just going to mitigate some of these by these other choices that I have and that’s why I’m going to place a trade.” I don’t know, have you ever encountered something like that?
TJ: Yeah, I think that’s I would agree, I think that’s pretty common. I’d also suggest to that if we think that the market is pretty accurate and fairly priced on the options chain, the market has a pretty good idea where price will go, and the options, if you look where the market thinks it’s going, those options will end up expiring worthless. It’s just the reason why a lot of times, straddles don’t work because the market is priced in that move and the market is generally right which is why we like to do spreads, credit spreads. We want to take the other side of that market. So, if we think that we want to trade high probability trades, we want to look at the options chain for evidence, I would tend to suggest that the market is more accurate the closer you are to now. The market expiry this week is probably pretty well-priced if I go out a year or eight months or nine months, that accuracy I think diminishes so there’s a lesser probability. So, I think if you go out and you want to rely on the probabilities from the options chain from the market, and you want to go out eight or nine months and you want to buy these long date options, I think the market isn’t as accurate out there. So, you’re relying on information, you’re paying for example, a premium maybe, for an option that the market isn’t really accurately priced. There may be a lot of discrepancy where prices are at that point which is where a lot of these longer term trades, they’re pretty binary. I mean, they either work or they don’t. And I think we also have to think too that if you do believe that in the distance that the options chain that it is fairly priced, then you have think about how is that options chain becoming fairly priced? Well, the market makers, the market in general, not just the market makers, each trader, the supply and demand is out there is there is going to be a lot of will room priced into those options, they are going to be expensive to cover that unpredictability. And, you can look at it and direct something that’s very easily noticeable implied volatility, that’s one input of market volatility. And if we look at that and we put all that together, then we really have to say why are we trying to outguess the market, if we think we can, that’s great, so say we do outguess the market, but we’ve potentially paid so much for that put or call, that by the time we get to where we need to go, we really haven’t made all that much profit because we’ve spent so much on it from the get go. And I hope that makes sense but what I’m trying to say is that it goes back to the whole no free launch. We think that’s there’s potential for a lot of profit eight or nine months and we see it but how many times does that really come, does that really play out? And I think we have to remember that that we need to look at that in the future as well.
Sarah: Yeah, I think that’s actually really good advice. Don’t get caught up in thinking that we can outsmart the market. You might as well work with the market because there’s a lot of trades to be had that are there right in front of you. So, I just want to thank everybody, we’ve had a lot of really great feedback lately on the podcast, everyone’s really liking this new format, and I do, too. I think somebody kind of summed it up as it sounds like the two of us are just kind of having a coffee and a chat about options and I don’t know, I think that’s a really nice way to think about it. We do appreciate your reviews, though. The reviews are very important especially in iTunes, so if you could take a couple of minutes and post an honest review of the podcast up there in iTunes, we’d really appreciate it. And of course, we’d always love to see you guys at shecantrade.com. Happy trading, everybody.
Thanks for listening to a Shecantrade Review of the Markets
Two very popular options to trade are in the SPX S&P500 cash settled index and the SPY S&P500 ETF. Each offers unique benefits for options traders. Listen to this week's podcast to hear about the key differences between the SPX and SPY and some strategies for trading each.
Sarah: Hi everybody, this is Sarah Potter welcome to the SCT podcast. We are in episode 36 and while I completely understand that when we do podcasts everybody is listening to podcasts at different times. TJ and I definitely wanted to highlight and have a discussion about something that's very relevant for this week. Now certainly our topic is going to be good for any of the weeks that are trading but it's especially important this week. So this week if you look at the market there's a lot going on. We have a lot of news, a lot of earnings, we have FOMC does a lot. So if you are even if you're not even an options trader, if you just trade stock, if you're just investing in the market this is a big week and we want to expect or anticipate that we will have relative moves to that. So what that means then is we're going to have many perhaps many of the stocks or trading instruments that you look at might look a little different. So what we decided to do is talk about some different opportunities to trade or different instruments to look at. So we're going to talk today about the differences between a cash-settled index versus ETFs. Now you guys know that we both like to trade those and certainly those are different instruments and they have different characteristics so we thought let's get into that so that people understand what they are like to trade and perhaps those are things you might want to go look at when you have a week on deck that has a lot of different news. So hi TJ.
TJ: Good afternoon.
Sarah: You like to trade the SPX a lot and I know that that's something that you do in the trading room and I would definitely say that you're really good at that. So could you start us off by explaining a little bit about what is a cash settle index and its characteristics?
TJ: Okay, sure. I guess let's compare how to trade indexes. So the two basic ways our cash settle index like the SPX and any TF like the SPY so the major difference between the two is the SPX is cash settled. So that means you will never be assigned shares of the SPX, there are no shares to be assign. The SPX you can only trade options on the index. So at settlement if you are in the money, you either have money put in your cash, put in your account or cash taken out of your trading account instead of a typical option where you would have shares assigned to you. The SPY is an ETF so you can buy shares in the SPY so if an expiration day you are assigned you actually get the shares so that is the main difference between the two. The other differences is just the size of the contract the SPX is about ten times the value of the SPY so that comes into position sizing as well and we can talk a little bit more about that maybe later in the podcast. And the other major difference is how they expire and we'll about that a little bit I guess later or we can get into that right now, what do you think Sarah?
Sarah: Sure, I mean I think expiry is a really important piece because that's something that when we get questions about when we're trading these instruments people don't sometimes realize that things can expire at different times especially in the SPX. So let's get to that. So this is a week that has a lot of earnings and new so especially Wednesday's FOMC and then SPX has expired on Wednesday. So in particular you like to trade SPX. Would you ever trade an SPX trade and have it expire on the same day that you have an FOMC announcement?
TJ: You could, that would be a lot like an earnings trade you know the market has expectations and obviously you're expecting a big move so you can definitely set it up. Is that my strategy? No, that's typically not my strategy. The two strategies I really like are overnight trade in the SPX so basically holding it, buying at the day before expiration, setting up the trade holding it overnight and letting it expire the next day. The other trade that I really like is also today trade. So to look for you know potential credit spreads on a Friday. However we do have to look at and we can talk about this as well that those two trades primarily work best when there's higher implied volatility in the market and right now if anyone's paying attention to the SPX, I mean we know that I mean IV was you know a couple weeks ago even if the last week was 8, 9 which is extremely-extremely low. So the credit is just not necessarily there for those types of trades but definitely those are the two setups that I prefer when I do trade it.
Sarah: But when the implied volatility be going up this week like perhaps this is a week that you want to pay attention to SPX because of all the news?
TJ: Yeah, you would you would think that that FOMC would actually you know really make a difference in it, but it's actually it's not, it's not changing implied volatility, we're just even if we look at the VIX it's just pegged it right at the lows I mean we were talking about it in the trading room a couple weeks ago how you know we were down in the low 9s on the VIX and you know we had to look back 11 years, we had to look back you know almost 11 years back to 2007 before we really saw levels below 9 and I think it was a VIX with eight and a half, 8.5 I think was approximately the number that we saw and that was back in 2007 and we know what happened. You know I have you know six months to a year later we had the big crash of 2008 and no I'm not saying that what we're seeing now is it all the same, I'm just trying to say that you know we're at really-really low levels and you know the VIX doesn't really want to go lower but it doesn't want to go higher either because the market does keep going up. So you know it's kind of stuck in a range and Daphne you know events that we would typically see an increase in volatility a little bit but not enough to really make a difference in trading.
Sarah: Okay. So those kind of change gears and start talking about ETF. So I know that in the trading room I get asked about SPY a lot it seems to be very popular instrument to trade and I want to specifically talk about it, obviously you guys all know that we both look at the ES which is the futures contract but they all represent the same thing, right? So this is the SNP and SPY in particular it is ETF so it's cheaper. So I think a lot of people really like to trade it because it doesn't cost as much to trade but I don't know about you but sometimes I find if I place trades or if I even look for trades and SPY it can be actually difficult to be able to actually get filled on a tray that you really like the charts can look really nice but when we move into the options chain sometimes to just things don't really line up. So a lot of times I'm not actually going to follow through on that trade because we can't see stuff except for weeks like this when you now have more news, more events that might potentially move the market if you are fearful of placing a trade, a futures trade in the ES or the SPX business setting up SPY can actually be a really good instrument right now.
TJ: Yeah, I mean absolutely. I think that we have to keep in mind too what you brought up is absolutely right. So I mean we think about if we're getting say we're doing a credit spread in SPX and we're getting 30 cents you know we're potentially looking at 3 cents of credit in the SPY so it really doesn't make sense to almost trade for that 3 cents. So I think you know we may differ in that opinion is, I really rarely look at the SPY and I don't I don't really see the advantage to it.
Sarah: Really? I can buy a call and SPY and have so much less risk because I don't have to put up as much in the trade and still be able to take advantage of the moves that can happen in the broader markets obviously the ETF is a representation of that. So I don't know, I like that, so to me looking out it this week and seeing, oh yeah, I expect the market to move quite a bit I think SPY is actually a really great trading instrument that I do want to be involved in because I don't have to put the risk up. Now you're probably talking about spreads, right? And trying to place a spread trade in SPYs almost impossible sometimes.
TJ: Exactly and I think too that. Yeah, I guess if you're looking to buy puts and calls I do agree that we’re, yeah so it's a little bit cost prohibitive in the SPX. I mean you can be 20 points out on a put or a call you know risking two thousand dollars on per contract whereas you could do that risk two hundred dollars per contract in the SPX which is probably more in alignment. So I guess if you think about it that way, yeah I guess they're useful for different reasons.
Sarah: Yeah, so a piece about SPY that I definitely want to mention is that, just because those are cheaper calls and puts to buy again they don't necessarily mean that they're going to turn into crazy profits, right? So if you're buying something and you see risked a dollar and you make thirty to fifty dollars on that trade that is a huge return on investment and so I think where people get wrong, go down the wrong way there with SPY is they start saying well I'm not risking that much but I still want to make a huge amount so I'm just going to let that run, run and run and you need to keep that all relative to how that instrument likes to move. So remember that SPY is cheaper than the other ones for a reason and that also is going to mean at that range that you're looking for needs to all be aligned with what is realistic. So realistic set realistic profit targets in SPY and I think that can be a really great trading instrument especially for just buying straight calls and puts. But you don't ever do SPY you do SPX so if we were to ask you like of the ES the SPX and SPY, which one is your favorite and why?
TJ: That’s a really good question. I think I'm tied between the S&P, the ES contract, the options on futures, and the SPX depending on how I feel in terms of position sizing on that day, the ES contract is about half the size of the SPX give or take. So you can kind of fine-tune position sizing that way as well. So I'm kind of tied between the kind of between the two of them. One thing I do want to mention as well is that the cash settle index is like the SPX you have to remember that on monthly expiration, you have to trade a different contract. So every third week is a month if you want the contract that expires on Friday, you do need to trade the SPX p.m. contract because the SPX contract expires Thursday at the close but the pricing is based on Friday's open. So there's been quite a few traders who have been locked in, stuck in positions on you know overnight Thursday as the market gaps up Friday morning and a max profit goes into a loss and because the option stops trading on Thursday at the close but is still pricing Friday so you still see it in your account, the price is changing but you can't trade it. So it's really an odd situation if anyone's ever traded the SPX the third week and not realized that it expired the Thursday. Well that it stops trading the Thursday but again it's still pricing based on Friday's open and it's not even the open, it's the open of all 500 stocks in the S&P 500. So that doesn't even give you satisfaction when the market opens, it could be 5 or 10 minutes before they or 15 minutes before they figure out an actual settlement price. So just a little wrinkle there.
Sarah: A little wrinkle. I think that's why a lot of people are afraid to trade SPX because of the expire reason and all the rules and trying to keep that in mind. So I mean if it was what you just heard TJ described was too stressful for you just to keep that in mind I mean remember you can still trade SPY or you can do the ES and sometimes even though with the size of the ES if you're doing a futures contract you might think, oh gosh, remember it's still an auction too, right? You're still doing an option on the futures contract, it does the same thing as the options and everything else it's just a different underlying a different trading instrument. So you know if SPX and understanding all of its different expiries is not something you're interested in then don't forget that you can also do options on futures on the ES. However I also want to mention with the SPX because it does have the different expiry, there's times during the week where the Friday expiry doesn't look good on the options chain but the Wednesdays do. So it really just depends of that week, what actually looks to be setting up and don't forget that I went like, it’s almost like double the trade opportunities there so you can be pickier about the ones that you really want and when they do setup definitely pick the one that's tailored for you.
TJ: Exactly and one other thing too is I think that you know if we draw a line and we've got premium on one end and no premium on the other, you've got a stock like PCLN where there's ton of premium, there's a ton of people with different ideas, the index is like the SPX used by a lot of institutions for various reasons and they're priced pretty fairly in the market, there's not a lot of arbitrage, there's not a lot of you know a lot of profits, you know the sneaky profits if you want to call that to be had, it's pretty well traded, there's a lot of volume, a lot of institutions, a lot of big trading in the SPX, so if you see a lot of premium at a strike that you think is way out of the money and it'll never ever get there by Friday you know chances are there may be a good chance that it does, you know you don't get a lot of those opportunities to get that bonus premium like you might in a in a PCLN
Sarah: Yeah, I mean I think that's good. Remember, they all have different characteristics but there's always going to be times when each of those are good to trade. So if you're afraid of the market swinging too much then adjust to the contract size that you like but make sure you remember that within each of those contracts that your profit targets need to be relative to how those individual stocks move. I think that's a good discussion this week. Don't be afraid this week if the market don't be afraid of news just make sure you're tailoring your trades to make to remember that we do have news and that volatility will change things. So happy trading everybody.
Sarah: Hi everybody, this is Sarah Potter from “She Can Trade” and this is the SCT podcast, we are at episode 35, I have TJ here
TJ: Good Morning
Sarah: And today we are going to talk a little bit about how the market shapes in the summer and what to do through the summer months particularly in the market, so we are really in the middle of the summer now, we are moving into mid end of July and then especially as we roll into August, sometimes we can get questions about whether it’s worthwhile to actually trade in the summer or whether we should just avoid it and move back in the fall. And obviously since TJ and I are both trading, we would obviously suggest that yes, there are still great trades to be had in the market, it’s just about being aware of what’s happening in the market and adjusting your trade strategies according to what you are seeing as opposed to may be being too determined and focused in only looking for the same set up over and over again in the summer, so I will suggest the biggest thing that you need to think about summer is you need to be flexible, flexible with your mindset of what you see in the market and then what strategies can work accordingly as opposed to saying, I don’t have a trade calls, I do really well in calls, so you only look for is calls. So I don’t know how is your summer been so far TJ?
TJ: So far it’s been great, trading has been still really great, I don’t know when to really step away from trading in this summer, I think there’s still lots of opportunity obviously, I think I agree with what you say, you do have to match your strategies and market conditions but I think that’s any time of the year, we really have to pay attention to what the markets are doing. I think it was two years ago, memory service we woke up two or three mornings in a row in August and I remember distinctly one morning, the S&P was down over a hundred points premarket and that was in August, that was supposed to be a slow summer time to trade and we were still seeing lots of volatility. Governments don’t shut down, countries don’t stop bickering over the summer, you know there is definitely presidential issues that will continue in September, they are not taking a back seat or a vacation, so I think there’s tons of events that can move the market and that we can trade, we are in earning season right now and it’s the summer that’s creating the volatility for a lot of stocks, so you know, I do agree that, we do need to pick some time to kind of step away and recharge and if that’s the slow week in the summer to recharge your batteries and come back and focus, then absolutely, but I think just a step away from the market because it’s summer, I don’t know, I think things have changed lately, I think with the retail trading and more and more online trading, the more retail traders that are out there trading the market, trading all it around, there is no real season now to it, what do you think?
Sarah: yeah, especially, It’s to know that retail trading and we should mention that, right, we are professional retail traders, you are all retail traders by being involved in the market with someone who is not managing other people’s millions of dollars, you are basically trading for yourself, so that makes you retail trader. Remember, you are basically most likely trading with other retail traders as well and in fact, lot of people might be on vacation so they actually might be bumping up their trading more than ever because a lot of retail traders might have more time through December to actually focus on this, perhaps things are lighter for you at work and so you have more time to really focus on finding stocks or getting better at trading, finding more trades, all of those things can happen in the summer. They can actually be a really great time to test strategies too and I don’t know if it’s just about, depending on where you guys live, just having more sunshine, generally more people are happy through summer, may be if they are getting more because they are on vacation, I don’t know. But I think that means that, there’s lot more people interested in looking at the market and paying attention to it and sometimes when you are not as busy, you can still find trading opportunities as well. So certainly there’s a lots that we have in summer and just because the weather is warm outside, it doesn’t mean you can’t take your laptop outside and trading too right.
TJ: Yeah, that’s absolutely right, I think you make a good point there, how many people have taken some vacation in the summer up at their cottage or the way they pull up their laptop at the dark right on the deck and actually spend time trading or in the markets where, they normally have that 9 to 5 job where they don’t have that time. So, definitely some advantages there, I do think that we need to discuss kind of few pointers and a few things that we kind of should look for in summer trading because, yes, we will have those weeks where, it is just, the volume is just so low and the markets really don’t move. So I think that’s the key point, it’s we need to look for volume, look for those low days, look for those sideways weeks and when we get into those weeks or those days of trading then absolutely those are days to maybe go and improve your golf game. I think we do need to pick and choose when we trade but there is still with 3000 stocks in the NYSE, there is still ample opportunity every week to find your four, five, six trades.
Sarah: so on top of that, my tip would also be in terms of summer is, if you normally trade, let’s say six or eight trades every week, don’t go out to the market and say, I need to find my six or eight trades this week, it has to be six or eight and that’s what I mean by flexibility, this week you might find three because things are slow but next week you might have 14 on, so just be flexible with the numbers, don’t get too caught up in looking for a certain amounts of trades every week, you want to look for good quality trades. Another tip I think I would suggest is being flexible with the industries you are trading as well. Just because, say, you can’t find something in one industry and you love to let’s say only trade technology stocks but things are a little slow in that or they are just not as accountable as they usually are, then look through different industries. Summer can be a great time to try different areas and to try different stocks as well. Certainly the evidence you are looking for still looks the same, so I am still going to look for stocks that have a history to them, I am going to look for something that has a long term trend that I could take advantage of and I am going to mirror that with some other shorter terms charts to find nice entries and exits, I am going to look for a mixture of trades that have momentum as well as the mixture of trades that are pretty well standing still but I might do that in some new stocks that may be I don’t normally look at other times of the year.
TJ: Yeah, absolutely, that makes sense and I think that’s the way I look at it as well, maybe I have been trading Amazon every week through the spring, may be Amazon is a stock that starts to slow down in the summer and July or August, may be it doesn’t, but if it does, I will just move to something else. I think it’s more about, we need to pay attention to and I think be aware of when, which stocks are slowing down and when they are slowing down and just having that flexibility to trade and not be stuck in one strategy or one stock and just keep doing the same trade over and over again for six weeks and when or why it stop working or why price isn’t moving as much as it did three weeks ago.
Sarah: One thing though, I definitely want to mention in the summertime is, for people that look for trade set ups where you are looking for the whole of the market to change directions completely, sometimes because the volume is lower, those kinds of trades at the time is going to eat out a little bit, so what I mean by that is over the last few weeks, we have had a lot of stocks that have started to trend lower, so there’s a lot of people out there who I think are looking for everything to reverse and to start moving up higher again and what they are spending time is buying calls on dips and suggesting, ok, well this has to go up, this has to go up and I would just throw it out there in the summer because we are going to have some weeks that are going to move sideways, if that stock price has a lot of resistance specially on a weekly chart as a result of the last couple of weeks that are sold off, I would suggest it’s actually better to wait for those positions to get through that resistance first and then by the calls, so that traditional philosophy of buying on dips, it still good but I would suggest you really need to look at something like a weekly chart and just make sure that when the stock did sell off that there isn’t some established resistance there, because there is nothing worse than sitting in something like a call, so the assumption that’s going to move higher, but price just moves sideways through the summer because there is not enough volume to get that through that resistance. So may be waiting an extra week before you place trades like that, you could put them down on your short list but don’t buy, don’t get into calls and expect things to pop up right away when it’s moving into resistance through the summer especially.
TJ: Right and I would like to ask you questions well, and we can discuss, this is about expiration and I think that we do, that’s another point that we have to, that trader should look for in the summer is expiration Fridays because it is a Friday, people are leaving work early, they are stopping trading, they have got other things to do on Fridays, that we will see, there is a tendency for a little bit of kind of a slow Friday where we are not getting the moves on Friday that we would see on a normal expiration day, but we can also see what happens is, we get a move and then it kind of just drifts sideways on low volume and then we will see at the end of the day where there is a counter trend move to that, so I think we do have to pay attention to on low volume Fridays to expiration and just keeping an eye on how things are moving and with low volume may be support and resistance that would have held, had there been a lot of traders trading at that levels, you may not hold as well, so depending that we see on a high volume day during the year might not happen in that low volume just because there is nobody trading, not enough people trading those levels to keep price above or below those key areas of support or resistance.
Sarah: Yeah, that’s a good point, expiration can act a little differently in the summer, especially with long weekends too, that’s something to be aware of, but I think most people know that anyways those Fridays can be tricky days in particular, so if you are looking at trades and was thinking about now, we move into August and even into the end of August, and September, when you are setting up your trades also keep in mind of when that long weekend is, may be you want to take the week before or the week after as well and not even deal with that Friday because those don’t characteristically work as well as they would any other Friday throughout the year just because of volume things will now, that can be good or bad but if you want to increase the probability of what generally happens, then I would suggest taking the trade out to expire not on the long weekend, the Friday of the long weekend but take it out another week.
TJ: yeah, that makes sense, absolutely that makes sense, so I guess leave that with one or two trade take aways that our listeners can use over the next few months, so for me, I think it would be watch volume, watch the ATR as well, how much is the stock per moving, is it in a quiet period, is it not in a quiet period and just make that you are trading according to what the stock’s dealing, not what the stock has done three or four months ago, what it’s actually doing right now this week, today.
Sarah: Well, on that and I might may be just agree a little bit, is that I want to definitely be trading only stocks that have lots of history, so that is also very helpful because I do want to know what it has done in the past, I do want to use the but I also need to be setting up my trades to be realistic about what’s going on and you are right, like if it hasn’t happened, may be things to happen the fall, you see things move more than you do in the summer, you don’t expect that the price is going to move like it does in the fall, but we can still expect that it will move as it normally does through the summer time, so you can go back in history and see that stocks do still move in the summer and we still can trade those ones, but I would definitely stay away from newer stocks, I want to take stocks that are trending nicely and then I think my biggest step is looking for trades that are already moving in that direction as opposed to looking for trades that are going to switch directions, you are going to have much more probability of success in the summer because we don’t really know which week or day is going to be slow, we can’t anticipate but that will happen though because it is summer time, so generally trading in the same direction that it’s already moving in is helpful without having to do with any resistance, save the trades for pops and momentums into the fall and into the winter. Alright, another great podcast, I look forward to see you all, remember you can see us trading live in the live trading room at Shecantrade.com and all of your reviews are really helpful up on iTunes and anywhere you can post them. Happy trading everybody.
Sarah: Hi everybody this is Sarah Potter from she can trade. And this is SCT podcast. We are at episode 34. Today's discussion is going to be focused around earnings and specifically how do you adjust and trade sorry how do you adjust and focus on your trades through that earning season. Obviously we'll talk a little bit about actually placing trades for earnings as a result of those. But also what do you do with all your other trades what to expect in the market when we have to go through an earnings season. So I have T.J. here.
Sarah: And we're going to discuss this together. I think it'll be interesting also to hear our various perspectives on these kinds of things. So let's start off with a little kind of a definition of a basically an idea of what is earnings and how do you basically think the market moves through earnings season versus when we're not in earnings.
T.J: All right. So earnings we're talking about corporate earnings so every quarter financials companies release their financials and there's a lot of anticipation and a lot of excitement around the numbers or are sales up or sales down. Our earnings up earnings down how’s the company doing and obviously how does that link the stock price. Well, if you're a fundamental investor obviously the more the company's earnings and the better their financial ratios the higher the stock price. So people look for those numbers they look. They read through them they look for a lot of details to see whether the stock price is accurate. If it's a fair representation of where the stock should be trading and if not obviously do they think the stock price should be higher or lower? And the reason we need to watch for earnings is because it's a high volatility event. It's a pretty binary event. So the day before the earnings are announced or the day of there's excitement earnings are announced and as soon as the numbers come out you generally see a decent a big move in the in the stock's price either up or down. So what we need to do is options traders are we need to look for two things coming into earnings. One is we need to look for increased volatility. So we will see on our options chain that the week of earnings and especially coming into the day of earnings the implied volatility of that stock will increase. The other thing we need to watch out for is obviously if we're holding options positions through earnings so if we have put or a call or a spread or any trade that expires after the earnings date that that earnings date can significantly influence the price of the stock. And we just need to be aware of of those potential kind of potential influences when we go through earnings. So Sarah are there any websites or how do you find out, what do you look for where do you look to see when companies are going to have earnings.
Sarah: Yes, so I'm going to SCT up my trades differently through the earnings season than I will other times. And I do think that it's very important to always be paying attention to looking for when those earnings announcements are going to be because it's really going to change the flavor of how that stock is moving. So you guys know when we're trading in the trading room you'll often see us looking at the history of price how it's moving in relation to the broad market and those are really ways that we can identify opportunities to trade. But when we have earnings and earnings season that that announcement is going to change things. It's gonna do it also leading up to it. So you'll notice that I will still trade stocks a couple weeks before their earnings but we're gonna have to deal with higher implied volatility and if I'm buying a collar put I'm gonna have to deal with paying more than what I usually would in anticipation of that. And now a lot of times I can trade really well earnings actually before their earnings announcements so there's some good trades there when we look at how that stock has been behaving moving up to his announcement. We might have an expiry after the earnings but we can definitely take an opportunity to take advantage of a move prior to earnings. So generally stocks especially the more and more there in the media will have a nice move prior to its earnings announcement so we could definitely capitalize on that. So I mean it's tough to find them though right it's not about just okay well it's the next quarter. So all the stocks are gonna be moving because they have earnings announcements, there's going to be times when those stocks actually don't move they're gonna have less of a reaction than what market makers had anticipated would be in that option. And so that's also something to be paying attention to but when we're first looking for trades you can look at something like Yahoo Finance or a market watch or I think actually even some trading brokerage platforms have earnings announcements in them if I am correct on that. Did that do they have earnings announcements right in the platform?
T.J: A lot of platforms do. Definitely they do have the earnings dates. Obviously the other one too is nasdaq.com. They list the earnings dates you do have to generally current earnings date. If I'm going to be trading the earnings and I really need to make sure that it is that exact date whether it's before the market or after the close. I generally check two different sources because you'll find out as well if you look comb through earnings dates that different websites list may have a day earlier a couple days later. It may not always be that accurate. So I do like to double check there the one thing I do like about earnings I guess we can real really get into some strategies is what happens at earnings? There's two things there's the actual result of what happens and there's a move based on the result of what happens but there's also a move based on the expectations and that's how most stocks move. So if Nike moves up say they've got 75 cents per share of earnings and Nike so if the expectation was only 50 then that look great stocks gonna move up. If expectations were say 85 or 90 cents then the stock could move down as well so we can't look at just the absolute number. It has to be we have to look at expectations we have to look at was it sales was it revenue how do those compare?
And I think that's really what makes kind of earnings such an exciting time because there's so many variables involved. So with so many variables, so many inputs, so many unknowns what are some strategies that we can look at to give us kind of a shot at the best outcome because obviously saying hey I think let me guess I think the stocks gonna go up after earnings that's really a 50-50 trade at best guessing in the direction and we'll probably most likely guess in the wrong direction. So what can we do obviously out of the money credit spreads those are that's a great way to trade earnings you can limit your downside on that by keeping this spread nice and tight so maybe you don't want to do a five or ten dollar spread maybe you want to do a dollar or 250 wide spread. Keep your risk reasonable look for something out of the money as standard and a hat 1.5 standard deviation away staying wait far away from where the expected move is on that earnings announcement. Same thing with iron condors those work really well as well you can also just I mean you can also sell straddles. You can sell a strangle they work out really well again you're playing to the fact that the market thinks there's gonna be a bigger move and then really what's priced in and that's usually what happens. The trouble is they're unlimited loss. So we do have to be careful with that and if we are trading strategies where there is no stop-loss on them or where there is no limitation on what you can lose, we do need to be very careful because nine times out of 10 you're fine but those one or two trades where the earnings is two or three times the expected move. You might see yourself in a loss situation but I do think that there is a lot of opportunity out there to trade earnings. We just have to come at it with kind of a from a standpoint of this is these are some fun extra trades that we're doing. This isn't bread and butter meat and potatoes this isn't how I generate my reliable weekly income.
Sarah: Yeah, I wanted to mention that so when you're trading earnings I think the biggest tip is that you don't want to expect that all of your earnings trades are going to work and I think you need to kind of account for that. So when you're SCTting up trade strategies through earnings let's say you're placing one earnings trade a week through the earnings season that if you look at the collective of all of those at the end you can't have a goal of making eighty percent of those work. Because they won't because those trades at the end of the day are really more 50-50 trades. So as long as you're realistic about that and if you test the strategy over different quarters through the year and let's say you're coming out ahead sixty-five percent of your trades are right through earnings then that is a time that that you want to be adding all more contracts but you certainly want to test that through more than one quarter. So trading earnings is fun because yes it's pretty hyped up everyone talks about it. There's all this great opportunity, absolutely but remember many people don't talk they're losing trades. They only talk about their winning trades and it's with earnings you're gonna have winners and losers to betting regardless of what strategy you pick. But you can still make it work as long as you're very aware of what your percentage is as you move through each earning season. And so perhaps a goal closer to about 65% so you're getting more winners than losers so that overall you're still coming out with profit is important you don't want to just put trades on. And just pay commissions or come out at zero no your opportunity cost is important as well you've spent time looking for those trades and that's really relevant as well.
T.J: Yeah, exactly and I think that is I think that's the key to trading is everybody tries to do the same thing. And I think if you have to find something that works for how you feel comfortable trading and if earnings is a strategy that you can make money at that's fantastic I mean that that's great that's what you need to be focusing on. For somebody else doing the exact same trades they might not look at it the same way or be able to enter or exit at the same time and they may not, they may do the same trades but not but end up losing money on that series of trades. So it's really something that's very personalized and if you can make it work fantastic you just need to realize that with earnings there is a ton of anticipated and unanticipated things that are happening. And it makes it really exciting and there's that potential to make to make some really quick money. As you make that money you place the trade five minutes before earnings are released at five minutes after four and it's usually either max loss or max profit. There's usually not a lot of difference in between and if that's how you like to trade. Then yeah, what earnings is something that you can dip your toe into.
Sarah: Yeah, I think that's a good point let's end on that so we're moving into earnings season now so there's lots of opportunity and I think TJ's got some good examples here on how to kind of keep that risk a little tighter and I do like the idea of still trading but trading out of the money. And keeping that spread a little tighter so that if you some of those trades work great, if they don't that's fine. You're not blowing up any accounts. So look forward to you guys remember we do have our live trading room which is the opportunity for you to see both of us trade live all the time showing our real accounts real, trades, real money. Look forward to seeing you there and happy trading everybody.
Sarah: Hi Everybody and welcome to the SCT podcast, this is episode 33 and we are going to have a nice little conversation today about what to do with the stocks that are trading around $1000 and TJ and I are each going to explain a little bit about how, what are approaches and how to get the most out of these very expensive stocks, so I have TJ here.
TJ: Good afternoon.
Sarah: Now TJ, as we all know especially if you follow in the trading room he is very good at a particular stock and that name is PCLN and he has been doing day trade in this PCLN stock for years, so I think we should kick it off there with your perspective and this stock has actually been sitting around $1,000 for a long time too. Can you tell us a little bit about why you like to trade PCLN which is so expensive and why you like to trade it as a day trade?
TJ: Yeah absolutely, you are absolutely right, I mean PCLN is almost $2,000 now and we have been day trading it since it was under $1000, it was $800 or $900. The reason I really like PCLN as a day trade and that's I guess we should be needing backup and talk about a little bit of how we do it. So, the setup is a Friday trade looking to cash in on the tremendous amount of premium that is still left in NPCLN because it's a really expensive stock on Friday. So the day of expiration placing the trade either in the morning or early afternoon and holding the trade a couple of hours into the close. Primarily, what I will do it either a call credit spread or a put credit spread. Just looking to capitalize on the available premium on Fridays and the reason it works is because the stock is so expensive
Sarah: You have really been trading PCLN since it was below $1,000 and now it is up to $2,000, my gosh time flies.
TJ: It's been a long time. Well the PCLN over the last little bit, it’s really, really ramped out it's been on fire lately.
Sarah: Ok so just curious then, if you think back when you just started day trading the PCLN and today, do you do it any differently like is something changed now that it's almost $2,000?
TJ: No, not at all spreads very expensive anything over $1,000, it just needs to get expensive enough that the time value of that remains on Friday is 20 to 40 cents. Obviously a stock that’s trading at $100 like IBM or Apple. On Friday, we will not have 30 cents or 40 cents of time value in a credit spread, that’s way out of the money, so obviously you need that high price and the higher it goes actually the easier it is to get more and more premium in it.
Sarah: Ok, so I think this is, to me it’s an obvious question but I want to articulate it anyways, is there reason why you are only day trading this as opposed to doing this further out, because it is so expensive and there is a bit of a sweet spot in that day trade.
TJ: There is, the reason we don’t tend to trade PCLN early in the week is that, it doesn’t trend necessarily all that well during the week, it will trend on expiration nicely but what we found is that, you kind of get website in and out of trades during the week, it will be up one day, down the next, up the next, down the next. It’s not a very consistent stock and with it being so expensive, it has really large dollar moves, so we have just found that for efficiency and profitability sake, it’s better to focus on it as a day trade.
Sarah: so, I find that quite interesting because I think what’s also relevant in the market today is we have Google and Amazon that have also crept up close to this $1000 mark and let’s just kind of focus on Amazon here for a second, what’s interesting about it is, it’s characteristics about how price moves in this stock, I think is changed as it has moved up to a $1000 and I find it interesting that you are mentioning that in PCLN, it can rip around quite a bit during the week, it doesn’t trend as much. If we look at how Amazon has been moving and we think about it really over the last, at least couple of months it hasn’t been trending as well either. And do you think, that’s a result of it getting up to about $1000?
TJ: I do think so, I think that $1000 mark is a big number. I think it does have some, I don’t want to necessarily use the word psychological but I think it does weigh on investor’s minds when it gets that expensive and I think that most investors buy stocks are foolishly concerned about the price of the stock, obviously investing you need to be concerned about the relative price of the stock compared to its financials obviously with, looking at it to be a value, compared to itself. Most traders will look at those $1000 stocks and say that they are too expensive and that they are way overpriced, when based on fundamental ratios, at $1000, it may not be overpriced, so I think there is a policy that we can kind of explore but I do think the $1000 mark does keep price, does keep traders and investors away from it and I think because of that, prices have hard time getting through it and stocks have a hard time through that hurdle.
Sarah: Yeah, Looking at Amazon for Call credit spreads now is a great idea and it will be interesting to start up applying your trades that I have seen PCLN to Amazon and Google, now that they are moving into that, that category and I would want to mention something here, I think you brought up something which is important to highlight and that is just because price in Amazon has come up to $1000, I don’t think you want to assume that, that’s just going to go and continue to move higher without any kind of resistance, that is a big marker and not a lot of stocks get up here in terms of price, so absolutely, I think to expect some resistance there is important. Now, the other piece I think also changes for the average traders is when the stock price is getting up to about $1000, that is certainly changing their risk profile for that trade, which means that because it’s going to move back and forth, you obviously have opportunities for gains and record, but there is going to be risk involved there too, because you can get really whipped out of that trade quite quickly. Do you think there is still a case for Calls and Puts in stocks like Amazon, Google or PCLN?
TJ: For me not as much, I would like to trade in the money, Puts and Calls and if I am looking at any in the money Put or Call in Amazon, I mean we could be looking at it being worth $20, $30, $40 per contract, so per contract you are looking dollar risk, anywhere between $2000-$4000, so it becomes a big trade and it does become one of those kind of limiting factors where you really have to think about, is your capital best used for that risk reward profile or is it better utilized in may be trading in two or three moderately priced stocks.
Sarah: Ok, so I kind of have to disagree a little bit because I do think that there is some opportunities in these larger stocks to still trade directionally but yeah, I agree just buying the Call and Put, it becomes too expensive and I would rather be able to spread some of that risk out, but what I can do is do a debit spread, so we can basically look at those stocks, have the assumption that it’s going to move, trade with the same strategy but have far less risk and of course the reward is cap 2 in debit spreads and certainly there is an argument there for debit spreads but it’s a great way for me to be able to take advantage of some of that volatility and still wait for those opportunities to pop, so I can buy debit spreads may be with a little bit larger or longer term expiry date and still have some nice money in debit spreads.
TJ: yeah absolutely, I think debit spreads are a great way of looking at the higher price stock and as well, you have got to think about that too is people look at debit spreads and don’t want to trade them because their profits are limited but honestly, if you look at the last protocol that you bought, did you make $2 or $3 or $4 or $5 on that per contract? Probably not, so if you limit yourself to say $2 $2.50 max profit in a debit spread, you are not even really looking for that anyway but people just tend to seem, oh I can only make $2, so they decide not to do the debit spread, hoping to buy the Put or a Call and making two or three times of that, but how often do they actually make that money, I don’t know, what do you think about that?
Sarah: Well, that’s why, like I said, I like debit spread, it’s because you still have the opportunity. I don’t understand why people will give away the idea of saying well $2 isn’t enough in this trade but if you traded at smaller or cheaper stock or call, you would be ecstatic with that amount of money, so debit spreads provide you a lot of risk and they do think that it gives you also the opportunity to hold a trade a little bit longer as well, right. So, I can still take a debit spread out a few months or weeks, whichever time line you want and still be able to make money, so I actually prefer these days, I have been doing more debit spreads in these larger stocks as opposed to anything else because I just think it has a really nice risk free profile.
TJ: Yeah, opposite there, I don’t do very many debit spreads, I am more of a quick in and out credit spread, overnight Thursday and a Friday or day trade Friday, and we were talking about Amazon and actually Amazon, we have done the last couple of weeks in the trading room on Friday and those trades have actually worked out really well for us, we managed to get 25, 30 cents of credit day of and that expiring for max profit being able to keep that for trade that last in may be 5 or 6 hours at the most. I do still like the credit spreads, credit spreads out of the money definitely, if you look at the chart of the Amazon right now, do you want to be in that stock for a long time, do you want to hold that for 2 weeks in a credit spread, probably not. I mean, it makes highs, it makes drops down, it makes comes back up all-time highs, drops right back down again, one day it’s an uptrend, one day it’s a down trend. So again really changed my focus in shorter time frame with the expensive stocks, so that’s how I trade them, it seems like we kind of approach it in a different way.
Sarah: yeah and I would say that, yeah, with the debit spread because you have protected yourself with the amount of risk, you can hold it through a day that it is moving down because the next day can pop right back again and ask me to take tradeoff for profit and we can end up with the same results, so I mean that’s interesting that we both are approaching these $1000 stock a little differently, both have good success rates in them and I think that’s also a really great reminder to everybody when we are trading, is there isn’t just one way to do it, there’s a lot of different ways to look at the market and it’s all about collecting the evidence and the reasons as to why you want to trade one versus another. Every trade is going to be a little different and it should be tailored based on what you like and so, you and I can look at these stocks and think, ok, yeah, it’s going up, it’s going down. But our approach, our strategy to be involved in the market is different.
TJ: Absolutely and I think that there’s many strategies, whether it’s debit spreads or credit spreads, day trades, long term trades, there is ways, definitely ways to effect the trade that mark expensive stocks with options and that’s the beauty of trading options is, you have choice and you are able to trade a $1000 stock and limit your risk and really make it still a stock that can stay on your watch list.
Sarah: Awesome, great stuff everybody, this was a great talk today about how to be involved in these more expensive stocks and remember that is, the best thing about auctions is we can still trade these regardless of how expensive the underlying gets, there’s still lots of ways to really take advantage of the trade, the movement in auctions even if you do it differently. So I appreciate all of your time coming to the podcast today. I would really appreciate it if you can post a review and honest reviews are the best reviews and it really does help the podcast moving forward and also please share it with your friends. This is something that TJ and I, both enjoy doing and spreading the word about trading. So we will see you in Amazon, Google and PCLN this week, right TJ?
Sarah: Happy trading.
Sarah: “Hi everybody, this is Sarah Potter, from She Can Trade. This is the SCT Podcast, and this is episode 32. Very excited to have you all here, the markets have been moving quite a bit lately, so we’ve had a number of really nice trades in the trading room at She Can Trade. So I have TJ here :
Sarah: “And today’s topic, we’re going to talk about the differences, the advantages/disadvantages of weekly options versus monthly options. Now, you guys all know, (who’ve been following me and TJ in the trading room) that we do a lot of weekly options. We do that because they produce really great results. But we’re going to get into it in a little bit more detail today, why we do that, and what is [sic] the main differences between weeklies and monthlies. So, I think we should kind of start it all off with just kind of giving a bit of context about weekly options, and, for those of you who’ve been trading a while, weekly options is a relatively new feature for trade. I think it’s really only been around, what, three, four years? Since they really introduced weekly options. And really, it’s only been the last couple of years that it’s really gaining in popularity. What I've found is when I go and talk to different people, whether they’re from the COE, or I’m doing different talks, is a lot of professionals, a lot of them out there who will trade weekly options with their own money. I think that’s a really glaring great advantage right there, if you talk to a lot of professional people who are always making money from the market, and where they choose to put their money is in weekly options, to me is just a first advantage that’s’ very obvious as well. If they can make money, we can make money, we can all do well using weekly options. So, that’s something that I think is a pretty good advantage. And then, obviously, thinking about the fact that there’s [sic]lots of people trading it, so weekly options are quite liquid. That can sometimes be a good advantage for everybody when you’re trading; because you want to always have somebody to go back and forth with. So TJ, have you ever had that occasion where you’ve been trading in an option and the stock or the underlying might have moved in the direction you want, but the option doesn’t necessarily produce the financial results that you want?”
Sarah: “Ok, well this has happened to me, which is why I was kind of bringing it up, so sometimes when you’re getting involved in trading options that don’t have the same volume, sometimes the stocks can look so enticing on a chart, it looks really good to trade. So, I’ll go and trade the option, but sometimes I get caught in being involved in something that I’ve made a little bit of money in, but had I done something like Apple, or Facebook, or something in a weekly option, then generally I would have made more money in that stock as opposed to something that doesn’t get traded back and forth. There’s nothing more frustrating about being involved in a chart, when you see, and you look at it, and it’s taking off, but that option strike that you traded isn’t trading as much as you want. So I kind of find that weekly options, because there are lots of people trading them, make it easier to get in and out of trades.
TJ: Yeah, I think you’ve brought up a good point in that, with the popularity of weekly options, there is a ton of volume in the weeklies. You’ll almost see that in a lot of stocks, there’s as much volume in the weeklies as there is the traditional monthly expiration, in the third week of the month. Some stocks you do see a difference in open interests in volume in the monthlies, but, for a lot of the big stocks, the Amazons, the Googles, people are trading the weeklies and there is a ton of volume, there’s a ton of liquidity, you’re getting great fills in the weeklies, you’re getting all the advantages of a traditional option, but you’re able to trade those options four times a month. So, I think the discrepancy, the disparity between a weekly and a monthly expiration is that gap is narrowing, and really, we should be thinking of monthlies as just another expiration, as just another weekly expiration. Whether it’s the first week of the month or the third week of the month, that expiration for options is really all the same. Sometimes on the monthlies you’ll see a little bit of difference in terms of hitting or in terms of volatility on expiration day, just because it is traditionally the monthly expiration. You also get (on the monthlies) you’ll get contract rollover, you’ll get other types of options, not just equity options expiring as well on some of those dates. So, sometimes there is a little bit of difference but I would argue that right now, the gap between the weeklies and the monthlies is really closing and we just need to realize that yeah, you know what, we’re trading an option. Also, you know, I don’t have the stats with me, but most of the stocks on the S&P 500 right now have weekly options as well, and even now I mean if you look, we’ve started to (on the options on futures, on the cash settle indexes like the SPX) we’re now having three expiration dates per week. There’s sometimes with the SPX a Monday and a Wednesday expiration as well, so, the Exchanges have really looked to add product, and to give people really a lot of, you know, advantages of variety. What do you think the advantages of trading the weeklies are? Trading a short term? I mean, I think one of the biggest advantages for me is just how much the market is moving. I’m able to pick a smaller market trend and and trade that micro-trend that week and not have to, you know, sit through a weekend, or two weekends until the option expires.”
Sarah: “Yeah, I mean, the market likes to move, right? I’ll make money because everything goes up and down. So I think when you have more choices of when something expires, you’re able to tailor your trade a little bit more, like almost refine it more, because you can make more money in that, by getting in and out of those trades more often and looking for opportunities to really pop. Of course it depends on the strategy you’re using but rather than sitting in something, like let’s say doing a credit spread on a monthly option, which really doesn’t have the premium decay acceleration that we’re looking for, that you can really take advantage of in a weekly option, it just, to me, seems like you have far less risk. You just analyze and create the reasons for why you want to enter something like the credit spread in the first place, and then you get to place your trade and have an accelerated amount of premium decay in the weekly, as opposed to the monthly where, sure you might say ‘oh yeah, you can get more credit’, but you’re just sitting in it, like you’re just sitting there, a week, or two, and nothing’s really happening. I also think there’s a little bit more ‘give’ in a weekly option versus the monthly. So, with monthlies, let’s just talk credit spreads first : With monthlies, the credit spread has to, um, I think you have to be better at the direction, almost. You have to be pretty sure that, if you think a stock is going down, and you’re selling the call credit spread, you really need that stock to go down, because that’s where you’re going to see the premium come out and where you’re going to make some money off that trade. Versus, in the weekly option, because you already have an accelerated amount of premium decay, you can kind of be a little wrong. The stock can just stay still, and you can still make money in a short amount of time, which I think is so key. You don’t really have that advantage with monthlies. What are some advantages, you think? Let’s talk specifically in terms of strategies like credit spreads or premium time trades.”
TJ: “Yeah, as we mentioned before I think the advantage to the weeklies is just – I can get in a trade Wednesday or Thursday that expires Friday, and I can get in that trade and I can pick up, say, 30 cents a contract on a credit spread. If I go out a month, I may be able to get 50 or 60 cents, so it almost, to me, makes more sense to be in the trade a day or two, or three days, rather than three or four weeks, and do that same trade week in and week out, and even generate a little bit more in terms of, you know, if the strategy is working out and more credit – 30 cents a week times 3 or 4 weeks versus trying to get 50 or 60 cents out on the next monthly expiration. I think the advantage is that over those three weeks or four weeks that you’re trading, the market isn’t necessarily doing the same thing every week and you can tailor your trades. If I’m trading Wednesday and Friday there’s less of a chance of the market having a big move or abruptly changing direction than if I’m trading this week for three weeks out. I think we’ve seen it in the S&P, I mean everything looks great, we’re above the 21, we’re above the 8, we’re pushing higher Monday Tuesday Wednesday. Thursday we drop and Friday we drop and it’s completely changed how the market looks that week and by trading a shorter term I think we’re able to stay on the right side of the trend more often than not.”
Sarah: “Yeah, and that’s a good point too: the market has been moving around quite a bit, and you don’t want to be stuck in trades in the wrong direction. There’s not much you can do with those other than lose money. Whereas, if you’re getting in and out and actually cashing out of your trades, profiting on them and putting that money in your pocket, and then the following week you look to do it again, you can work with whatever direction the market’s moving in that week, as opposed to trying to hope that over the next few weeks or the next few months it continues to move in that direction. I think there’s far less times when you’ll open your account and you’ve seen that the trade has actually swung down into a losing position, because you’re not holding the trades as long, you don’t need to. You really get to capitalize on the moves. Now, I mean, that’s being said too: Do weekly options work when a stock underlying is moving quite a bit? So, you’re going to have, obviously more premium something as the implied volatility is higher, so things are moving around. Would there be an argument for buying calls and puts in monthlies, then, giving it a bit more time, versus the weeklies?”
TJ: “Yeah, I think there is, I think yeah absolutely. So for long puts and calls, yeah, I think you do need to give the stock time to move so I absolutely will buy it, typically buying it three to four trading weeks out, but I’m not going to be looking solely, saying, ‘okay well I can only buy an expiration of the third week of the month, the traditional monthly.’ No, I’ll be buying it, you know, maybe 3 or 4 weeks out, but the expiration will still be in a weekly option a lot of the time. I’m not focused solely on that third week of the month expiration. I’m just going to go out 3 or 4 weeks no matter where that falls. But yeah, I think definitely you do need to give trades a little bit of room when you’re trying to buy a call or a put.”
Sarah: “Yeah, I mean you do need some time, but you can still pick your weeks. And, I think the more choice you have, the better. And don’t get overwhelmed by choice, I think a lot of traders, because you do have, in options there are so many different things you can choose, make that a way to really focus on your own strategy, to make it really your own, and test the different ideas so that you’re really maximizing what you’re getting out of the market. There’s no sense in being in one stock when you can make more money in another. I would say that with weekly options, whether you want to trade it within that week or you want to go out a couple of weeks and still use the weekly option as your choice for expiry, there’s way more opportunities to tailor trades based on how you like to personalize things, how you like carry a risk, what rewards you like to work with. Regardless of whether the implied volatility is up or down, regardless of whether the market is moving or not, all of those advantages are still very relevant in weekly options. So, why not get into those and cash out of your trades more often? To me, it just makes way more sense. There’s far less risk than sitting in something and letting it go day after day, after day in the wrong direction when the market’s moving all over the place. So, I think this was a good talk and honestly, I actually believe that moving forward, we’re really not going to see new trading instruments come on, with only monthlies – I just think that weeklies is just the future. Or, it is the way that people trade now and it’s important to be able to adapt to those strategies in a modern market that we’re seeing today, because of all the advantages that we’ve outlined. So I did want to make sure that I’m mentioning in this podcast that reviews are really important and I would really appreciate if you guys enjoy the podcast, then post a review up on iTunes or any place that you like to post reviews about not only our podcast, but of course our trading room for many of you who are also members. Feedback is really important and an honest review is very helpful for everybody so I would appreciate that, if you guys could do that. Do you have any last minute words?”
TJ: “No, I think we’ve covered it! I think weeklies… the one thing that I’ll leave with is that I don’t think we should be thinking of them as weeklies and monthlies – they’re just options. Pick the expiration date that you want to trade!”
Sarah: “Good point. Alright everybody, have a great week in the market. We look forward to talking with you again. Take care!
Sarah: Hi everybody, this is Sarah Potter here for the SCT podcast, we are at episode 31 and I have TJ here.
TJ: Good morning
Sarah: And today we are going to talk about Theta, all about time and the option and how that influences it, how do we use that to our advantage and what are some things we can look for when we are trading. So, to start us off here TJ, do you want to explain to everybody just couple of sentences what is Theta.
TJ: Theta is the time value in the price of an option, so when you look at the price of an option there are two components, the intrinsic value based on the price of the stock and time value which is based on the time to expiration, so the longer an option has to expiry, the greater the percentage of time value in the price of the option, obviously the shorter the expiry, the less time value there is. So as you are holding an option, if the price of the stock doesn’t change, the price of the option will go down every day till expiry and theta is the reason the price is going down because that time value that chunk of money in the option that is based on the amount of time to expiry is decreasing. So if you have an option and price doesn’t move, that option price will go down.
Sarah: Right, yeah, remember when you are trading options, we have to deal with time as an options trader or somebody who, let’s say is buying a stock, doesn’t really have to pay as much attention to it. So certainly time is going to influence the value of that option. So there is also different ways that you can deal with it and to take advantage of it depending on what strategy you are trading. When you look at Theta, obviously you can put that on your options chain, you want to use it, at least I want to use it not necessarily to pick the strategy that I am going to use because I am generally going to make that decision based on the direction of where I think the underlying is going, but it can be very helpful with how long you want to hold an option for, so do you have any specific rules about Theta in terms of how it influences the expiries that you are trading?
TJ: Yes, absolutely. I think that we want to make a distinction about it, I really found this interesting when I first started trading options is that when you look at a textbook or when you look at an options payoff diagram, it shows that Theta expires in a nice consistent way all the way to expiry, but what I found is that the through implied volatility, the price of the options still remains high into expiration a lot of times and that will affect the premium, the time value that’s elapsed, so it’s not necessarily a linear line or a straight line of expiration, I find that, let’s talk about weekly options, that generally in time value comes out fastest usually in the last three or four days of the options life and the same thing with, if you look at monthly option, that time value is going to decrease most rapidly in really the last week or last week and a half of that option’s life. So I really like to trade weeklies, weekly options in the same week that they expire. If I am going out maybe two or three weeks, I usually like to keep it within a month, I find that if you keep it within the last month of expiry, usually the last three weeks, three or four weeks, you get the biggest bank for your buck in terms of time value expiration. If you trade an option that expires in six months, you are really not going to see a lot of time value come out of that option for the first really long time. I think that’s important to know because a lot of people try and sell options or credits spreads that are 4,5,6 months old hoping that they are going to hold this for the first three weeks and they are going to see all this time value come out, but it really doesn’t work like that.
Sarah: Yeah, I know, tell me about it, I feel like that’s pretty common that people, and sure that can work sometimes but I think the influence there if you sold a spread or you done where you have collected credit and you are just sitting on because the expiry is way far out month or two out, you have either traded something and you got the direction right but it really isn’t the difference in the option value that is changed in those periods of time when you are so far away from expiry. So I actually think that sometimes you really just become a pile on out there in the market, you really are just saying, hey guys, hey everybody, hey market makers, I am just going to stay at this stagger right here and take whatever premium and I really hope that, I hope you guys don’t know this because I am here because you just become a sitting tuck. With credit spreads once you place the trade there is isn’t any more value to that trade, so you are not making any more for holding it any longer, so sometimes they can look to really great, the whole idea of I have just taken more credit and go further out in terms of expiry but then you are just sitting there, so your money essentially isn’t working for you, you have just kind of tied it up and it’s sitting there, hoping that price doesn’t come to you. I think also, when you think about Theta decay in terms of time, its different for weekly options but then also even in terms of buying, how far out is too far out, I guess, what do you think?
TJ: It really depends, that’s a difficult question to answer, how far out is too far out, I think it really depends on your philosophy, I think it’s same as the saying, how far in the money is too far in the money, I think there is a sweet spot there as well, so for me personally I think three to four weeks what I am buying an option. I know people will buy 3,4,6 months out, I mean they offer leaps, I mean people will buy options two years out, three years out in a longer holding strategy and I have never really come to a good conclusion as to whether that is profitable on long run, what works for me is keeping it short, keeping it tight, staying within the bounds of what the market is doing right now, because as we know, in three or six months from now it could be a whole different market.
Sarah: Yeah, I think that’s a really good point. So when we are looking at multiple time frames which we both do when we are trading, it’s easier to get a kind of feel for what cycle of the market is in now, so if you think about the market moving within a year, there is going to be time where it’s going to trending really nicely, there will be other times where things are transitioning and there will be other times when the market is just not moving at all and throughout, let’s say one calendar year, you are going to have different periods of time in the market moving that way, so the further out you go in terms of the expiry or not having to deal with Theta case, let’s say you buy a call or a put, you have to keep in mind that the history that you are looking at to decide for how the market is moving now, we can gather that information, we can use the weekly charts but once you start getting out in two months out, it becomes a lot more difficult to get a feel for what cycle that market is in at that time and so, actually, I think really what you are doing is using less information with higher risk, the further out you are going because you don’t have anything, you don’t have as reliable tools to get a sense of how the market is moving.
TJ: Yeah, exactly. We spoke about that in the previous podcast as well, the illusion of credits of few months out and you get a lot more credit, but really if you look at the probability of success, it’s no more than, it could even be less than trading the current week or the next week, so it was a lot of illusion out there and you really need to understand the data or the options chain and look into, what the numbers are really, what the data is really saying, I think deltas are really quick and easy way to do that or a lot of platforms have probability of success programed in and I think those are couple of measures that people can look at to give themselves a good benchmark of yes, I am getting all those credits or yeah, the trade looks really good, I can make $20 on this option but the chances of probability of it actually working might be very low.
Sarah: And so that’s even more true, especially the closure we guess, so we both like to trade weekly options granted but let’s talk about options in terms of day trading and how Theta then becomes very important because that’s really going to influence the success of your trade and a lot of times why you might buy something and think well, this is really cheap, I am just going to buy something in the morning, I am going to try to get out of it by the end of the day and sometimes the direction might be correct but you don’t really end up with a lot of money and that really has to do with how much data is influencing the value of that option because at that time, it’s going to be much more influential. So in that respect, if you think about just Theta in terms of day trading, do you think the data hurts it too much, is there still possibilities of day trading options?
TJ: Absolutely, I think you need to look at Theta when you day trading option, you will be trading the Theta trade, so you need to be selling on a day trade, you need to be taking advantage of that rapid time decay, there is a lot of the time on Fridays the higher price stocks, virtually the entire premium that you are getting at a certain strike is time value, it’s an order the money protocol that you can sell and it’s all time value which means that, within that day the price doesn’t really move all that much, you got to collect the entire credit. I think we also have to look too is we have to look at a lot of cheaper stocks too and we have to be careful at our trading less expensive stocks and that, if you are looking at say, you may have to actually buy a put or buy a call, if you are looking at something right at the money or just slightly out of the money, that entire premium can be time decay on a lot of inexpensive options. And that can disappear very quickly with a slight change in price that’s not favorable, so we have to remember that too that if your option has a lot of time premium in it, the price moves slightly against your trade, that time value will come out very quickly.
Sarah: Yeah and so in that respect as well, theta can actually be very helpful than when you are managing trades because if you have done something like sole deed and let’s say it’s pretty close to your strike, theta can be more influential because you want to see how much time is actually embedded in the option, we are looking for that to decrease quickly, so that can be helpful tool if you are day trading, use your theta to help remembering that premium decay will go away like premium is going to happen and disappear a lot faster obviously as we get closer and closer to expiry, so that can also be very helpful with management. Are there specific numbers and levels for theta, like I don’t think I have a number that I am looking specifically for those strikes, what about you?
TJ: No, not at all, I am not looking at specific number, it’s not like delta where for example, I want to buy a put or call, you are doing to 60s or 70s, I am really not looking at theta in terms of percentage, I am just looking at it in terms of what is the price of the stock, what’s the strike price of the option and how much of the option’s price is time value, so I am looking at it kind of in a general sense and not for any specific levels.
Sarah: yeah, me too, I think it’s a good guide and remember it’s just like a slide, sliding wheel, almost like it’s going to go back and forth, then we are just looking to see how influential is it at that time, is it moving, is it changing all the time or is it pretty steady and consistent, so those numbers can be helpful when you are trying to figure out whether you are in enter trades, stay and trades or look to exit trades as well. But it is a really important thing, I think it’s kind of an underdog element to trading options it’s not always discussed but it is at the root of all of your trades because the value of what you are paying or looking for to sell is ultimately what we are doing with trading, so theta is a very important element in trading options.
TJ: That’s true, absolutely. Another thing too, that I think we can leave on this note and may be this is a great feature of podcast is option pricing models and I think we have to keep in mind too that option’s theoretical price based on model such as like black shelves or binomial pricing or any of the calculations can be different than what we are actually paying for in the market, what it’s trading for and I think a lot of times we have to understand that the price that the option is trading for in the market is based on supply demand, it’s based on market makers and traders who are going to take the other side of the trade, so sometimes the price can be different than what we think it should be.
Sarah: That is a very good point, remember, to everybody. Whatever is text book and theoretical isn’t necessarily what’s actually going on in the market. And when you are actually trading, your expertise is very valuable because actually having your money there, actually getting filled, actually exiting, actually profiting , those are the things that are really important when you trade, it doesn’t matter what it says in the textbook, it matters what you can do in the market every single day. That is an excellent theme and let’s talks about that next time. Have a great week of trading everybody and take care.
Sarah: Hi everybody this is Sarah Potter. Welcome to the SCT podcast. We are on episode 30 and I have TJ here and this is episode 30 I mean when you turn 30 years old it's kind of a big deal and I feel like you're in a new age bracket, a new category, a new box when you have to check off. I don't know, does that mean you're in a new level here for podcasts?
TJ: Yeah absolutely. I think we should have a big party for the SCT podcast, what do you think?
Sarah: Yeah way to go. Okay, so today's theme is going to be something that we kind of thought was related to being 30 and really what that has to do with is a watch list. So we're going to talk all about how to build a watch list and how to make sure you are modifying your watch list to make sure you're getting the best rates possible out there from the market. So this is kind of something that I think that maybe some people overlook. You talk about treat entries you're all people are always asking about the best strategy, what are the best stocks to trade, how do I find trades from the market but really the root of a lot of the trading and good trading comes from having a good watch list and having a watch list that you can actually find trades from and that's a big key there. You want to have a good watch list but that watch list I have to be able to produce trades for you. So it doesn't really matter how long your watch list is, you want to make sure that you can actually get some decent trades from it on a regular basis. So TJ I'm just curious, if your watch list if you're looking at some stocks, how often would you say you trade the stocks from your watch list?
TJ: Fairly often I would say that if I'm not trading a stock it probably comes off the watch list within three to six months.
Sarah: Three to six months? Okay, so how did you come up with three to six months?
TJ: I just found that if I'm not trading it and I haven't traded it, I probably won't trade it. There's a reason that something hasn't set up. I still may go back to it, may add it back you know further down the road but yeah it just comes off, I try to keep the watch list as uncluttered as possible and just that's just so you know nightly when I'm looking for trades, I can scan through in fine trades really efficiently and not spend two or three hours looking for trades but really narrow it down 15 minutes, half an hour being able to get through quickly of you. How do you build your watch list? What are your criteria?
Sarah: You know I watch this is something that I think you that gets better over time. Hence why are talking about that today, just like a good bottle of wine I think once you've been in the market for a little bit and you've kind of gone through different stocks and decided which ones you like and not, you can really start building a better and better watch list the longer you are in the market and I think you get much better at evaluating a stock to decide whether it's worthwhile. So for me the general rules are things like a high data stock. I love weekly option so you'll notice on my watch list I have basically the majority of those being stocks that have the opportunity to trade weekly options in. But really I want, we need to kind of be alive the stock so we need to be able to find trades in them. So for me if a stock doesn't work that means that's easy as well so if I place a trade in a stock an options trade and it hasn't worked out for me then it's done that a couple times and I'll get rid of it and I don't really want to look at it anymore. So for me that's something like Twitter. Twitter and I just don't get along, we just never have for some reason. I don't know why I'm very good at finding direction in a lot of different stocks but there's just some I'm not good at and one of them is Twitter, so why keep going back to a stock that I'm not that great in when I can go focus on some other stock. So stock like that, like if I don't do well in it I'm going to look to take that off my watch list and then it also has to produce trades. So if something's been sitting around on my watches for a long time and I can't really seem to ever find a good trade in it then I don't think there's really any point to reviewing that stock all the time. So for me, for some reason I have Whole Foods on my list and it's something I've had on my watch list forever and I do like to pay attention to everyone's well but I can't remember the last time I place a trade in Whole Foods, I mean I think it's been months but for some reason is still on my watch list and I still every couple of months go and check it out. So I guess that is breaking my rule a little bit but in general all the stocks are on my watch list are ones that I am going to be paying attention to and looking for opportunities. Now I also do a watch list and a short list, so every Monday I do spend some time trying to put together a bit of a stock list that I'm hoping to trade that week and we basically build that also on Tuesday in the trading room too and then generally I either scratch those off the list if they're no good or have placed a trade in them by Friday but they really need to produce and there's no point, there's opportunity cost in trading. And time is valuable, if you are trading part-time and you want the worked really hard so you can go do something else so say you're retired, if you want to have the opportunity to go do all those great things and you don't want to be sitting in front of the market. So you want to be able to have a watch list that can really produce for you so definitely ones that I will kind of go to very quickly on my watch list would be something like four spreads, like CMG, Amazon those are fantastic. I mean Amazon and Google right now they’re so high, that's a whole other podcast on their own. How to trade stocks over $1,000 now that we've got a few of them. Anyways I digress. Yeah, What are some tips you have for your watch list?
TJ: I think what you've said I think you've covered a lot of what the same thing that I look at. I have my watch list but I also have I would say I probably have 10 to 12 stocks that are my go-to stock every week and I don't see if a stock is working why I need to why I need variety. The only reason I really want to add variety is if that stock, if it doesn't trade the same anymore or if I can't you know if I can't read the stock anymore, if something changes that's when I want to remove the stock but I'm happy trading the same five, six, seven, eight stocks every week. It's not, you know I like variety in my restaurants I like variety in my wine but for stocks I mean if Google and Amazon are making you money every week, why look for something else stick with it till it stops working. I also have different categories on my watch list, obviously I'll have my watch list for credit spreads, I'll have my watch list for selling puts, covered calls, my watch list for buying and selling puts and obviously that all builds together. There's of a lot of kind of stocks that I you know that I have on there I also just kind of keeping an eye on, but traditionally every week I said it's the same 5 to 10 stocks that work, that I like and I have no issue trading the same stock over and over again. The other thing that I really like to do on my watch list is, I really focus on what I'm trading. So for me weekly you have the stocks have a weekly option, generally I'm looking for stocks that are at least a hundred dollars and more the higher the volatility, the higher the beta, the better I'm looking for stocks that that move. I'd like to make a suggestion to somebody about what to do is, is not to get caught up in suggestions that people are making or hey have you heard of this stock you know you should watch it, you can't watch all 3,000 stocks on the NYSC. You really need to break it down into a list a short list that works for you and I know what works for me might not work for somebody else. For example Apple, a lot of people love Apple, for me I kind of tend to steer clear of it. Are there any tips there that Sarah you would?
Sarah: okay, I love Apple. So Apple is something that I think if you're a beginner and I used to talk a lot about that about how I don't think apples the stock you want to get into, when you're first starting trading but it's you don't mind price fluctuating a little bit, Apple can be a really great stock to trade. So yeah I like to trade Apple. Okay, so I have to push back here a little bit because I'm a little shocked that you're saying that you only ever trade five to ten stocks and you do the same thing every week. I probably say I think you get into a pattern, so you might do those same five to 10 stocks a couple weeks and you definitely take advantage of that, you cash out of those trades you get in them again but at some point like the trend ends or the highs are hit and then you kind of have to shift gears to something else. So do you really think you only trade out of five to ten stocks?
TJ: I think it narrows down the problem to around that, I mean give or take. I'm not necessarily trading them. Yeah, absolutely they come in and out of favor every couple weeks but there's definitely my go-to stocks that I love, that I like, that over the years have just really done well and worked for me. It's like PCLN, I love PCLN, I've done really well with PCLN over the years, made a lot of great trades. Other people just don't want to go near PCLN because it is a big mover, it's a $1,900 stock, it moves a lot but if you can find some key strategies that work for you and that you know pay off, hey why not.
Sarah: Yeah you've been doing that PCLN trade quite successfully every Friday forever and that's a pretty good record. Anyhow so that's a good trade but I mean seems like MasterCard, so if you think about it a few years ago, I mean that stock was fantastic to trade spreads and we were selling that all the time and then it split us a lot cheaper now so we've had to change the strategy and so certainly MasterCard would have been something that you would have seen probably both of us trade quite a bit I know that was something we talk about all the time and really over the last couple years it's no longer that, I mean MasterCard is still fantastic to trade directionally in but it's not really something you can get credit in, right? So we does change.
TJ: It absolutely does and I think that goes to it as well as your strategies have to evolve as well as your watch list. I think you make a good point, I mean think of some really big stocks MasterCard, Apple, Netflix, those have all split and now our stocks where you really can't get any premium. I mean MasterCard was a $700 stock so with Apple and now they're trading in the hundreds. So you know you have to evolve we can't go back and keep trading if that set up or that scenario doesn't tell you isn't there anymore.
Sarah: Okay, so let's then move into like building your watch list. So for me when it's time to start if I want to add a few more stocks to the list and I'm interested in things, the things that I do that I find quite helpful is when I look on tradingview.com just to see what kind of news headlines there are, I really like to use net news headlines I know you guys have heard me talk about that before. I don't care so much about what's in the content to the article but the news headlines on market watch or any kind of website you look for, for your news, if the companies are being mentioned a lot it generally means that I want to write that stock down and I might go take a look at it. I'm never going to trade it today when there's a ton of headlines but it is something that I might add to the watch list or look to trade a week or two out. So that's something kind of how I will add the watch list and then certainly post earnings I find those are times to really refine your watch list and look to see whether there's anything you want to add or take off and that's because at earning so many sauce will have such a large move, like you said the characteristics can change. So again we take it back to that opportunity cost it doesn't really make sense to be reviewing stocks that no longer look like there's something that's going to have a trade setup in. So post earnings can be just a good time to basically look through those stocks and say alright or any of these I want to call off my watch list or you know did anything have a really big move so if you go on like the Nasdaq website or Yahoo whatever you want to use for your earnings the track when those are and you can see some of the really big ones, I mean granted that usually means there's headlines in the media as well that'll say you know whatever snap at all-time lows or whatever that happens to be and then I might just go take a look at that stock too so anytime after earning something kind of big move I will go take a look and see if there's anything I need to add to my watch list.
TJ: Yeah that's great. So I guess another question and a question I have for you too is once the stock is on your watch list, you monitor it for a while before you start trading it with real money or if there's a setup will you will you just start trading it right away?
Sarah: I would like to say that I always follow my rules and my rules would be that no. I need to wash it for a little bit and get a feel for how the stock moves especially a weekly auction, especially how that moves on Friday but if the stock has a lot of history then sometimes I will place it right now, that is not the norm so I certainly don't want everybody thinking that I just kind of go crazy on whatever stock I see. I do like to get to know stock but I mean today for example in the trading room there was sell jean I mean I haven't looked at sell jean a long time and a member brought it up and I was like, oh yeah I thought I haven't traded that in a long time and we pulled that up today and I definitely want to add that to my watch list because it does look really good right now and looks like some opportunities to trade. So sometimes you can kind of get ideas from different places and also because you've been trading for a long time and something like that is kind of gone off the cycle off the watch lists at one point or another and maybe it's time to bring it back so over the years over the long term, you basically do get to know a lot of the bigger stocks but they'll just be time so they will be on your watch list and times they won't and don't be afraid to take stocks off your list. Just because your buddy might be trading something and doing really well doesn't mean you need to do it, like I'm happy to come out and say look I don't trade Twitter, I know TJ you trade Twitter I don't trade Twitter if this is okay and I'm fine with saying you know there are some big-name stocks and stocks that people are very familiar with that I'm just not going to touch and I'm okay with that do you have any that you don't trade at all?
TJ: There's lots that I don't trade at all where do we start with popular ones or one so popular? I would say the biggest category that I stay away from financials, I think with the exception of MasterCard and Visa on occasion so financials and biotechs, I have learned that a lot of surprises in the biotech industry and you can see those 5, 10% moves happen overnight for really no reason, the other industries a lot of a lot of construction industries, mining, for example I'll avoid CAT and I'll also avoid a lot of the oil producers, refiners, drillers, I will however trade USO although, I like USO. We actually have a trade placed in USO right now. So yeah there's a lot that I have that I avoided, it's just been observation over the years that I just, how they move doesn't fit with how I trade.
Sarah: Okay, last question for this podcast. What are maybe your top five stocks that you like to trade and why that's sitting on your watch list right now?
TJ: On my watch list right now, USO, I like USO, Amazon, PCLN, Google, TSLA was a perennial favorite, it's always up there, it's always doing something, those are kind of my go to and then other than that there's a few others that that kind of creep in every once in a while but those are the main ones that I look at.
Sarah: okay, so for me Facebook has been awesome the last few months, so I've been all over Facebook. Apple, just all recently now starting to look really good. Netflix, and then yeah I mean I love Amazon and Google to for spreads those are pretty fantastic. Some stocks that I think, one sock in particular that has really changed characteristics over the last few months and if we talk about something that's on your watch list and you're treating a strategy and then it's shifted is Expedia. So Expedia has really exploded over the last few months, it's gone up in terms of price but also I think there's more people trading Expedia than ever and so before I was looking to trade I was doing credit spreads in those and trying to get into them like Monday and Tuesday because by Wednesday the premium had expired in them but over the last like two months I think it's a better candidate for and to do a whole whack load of more strategies in it I think there's more people trading it, I think it's moving really nicely, trending really well so that one is on my watch list but the way I approached that stock has shifted over the last few months too. It's been a good stock but it's definitely changed so I mean I think watch list are always evolving it's a living document and it's all it's never going to be just right you want to always be tweaking it. So I think that's probably a good tip to leave on.
TJ: yeah and if I could I guess leave a tip too is that you can get really scattered in the market because there's so many stocks and I think the traders that end up doing the best at the end of the month, at the end of the year are traders who have found stocks that they can consistently make money in and if you're constantly jumping back and forth from stocks to stock, you really aren't necessarily you know really learning how that stock moves and I think that you can add a lot to your trading by just narrowing your focus and focusing on a couple quality names especially when you first start trading.
Sarah: Those are great advice. Alright guys, happy trading. We will see you at the next podcast or of course you can always come see us trade live at www.shecantrade.com. Happy trading.
Sarah: Hi Everybody, Welcome to the SCT podcast, this is episode 29 and in today’s show what we are going to talk about is “Selling Puts”, it’s kind of a strategy that everybody seems to know about or have an understanding of how to do it but it is interesting that when you actually get into trading it, is to especially why you want to trade it, everybody has all sorts of different reasons. So, we are going to explore this strategy in today’s podcast and I have TJ here with me
Sarah: we are each going to talk a little bit about how and why did you, you will get both of our perspectives on it, so I think that should be quite helpful for everybody. So TJ can you start us off by just explaining a little bit about what is “selling a put”?
TJ: Selling a put is, your assumption is that the market is going where the stock is currently trading and hope that the stock stays at the same price or moves up by the expiration date of the option, what happens is when you sell the put, you collect the premium and if the stock price expires above the strike price of the Put, you get to keep the entire amount of the premium. Obviously if the stock price pushes down below the strike price of the put then the position begins to lose and you actually have to close out the position by buying back the Put for more than you sold it for, which creates a loss. You can also take assignment of the shares as well, if you take assignment on the short Put, you are actually long shares in your account, so there’s a few strategies there that we can use. Sarah, what market conditions do you like to sell Puts in.
Sarah: Okay, Yeah, you have actually got into strategy and just for people to summarize about what it actually is, is essentially what you are doing is trying to collect some premiums or trying to make some money by trading at a level where you don’t think that underlying is actually going to go and that’s essentially what a strategy is.
Now, people use it for all sorts of different reasons and there is some, certain times that I think is a good time to trade it and other times that I actually think is a really bad time to trade it. But I think it is really important to mention that sometimes if a strategy sounds too good to be true then you can get load into expecting a strategy like this to work a 100% of the time and it is really important that we get into this discussion about selling puts is that you, I think everyone needs to understand that this should be part of a diversified strategy in the market and if all you are ever doing is looking to just sell puts, I think that you are going to run into trades that aren’t going to work and a problem with the strategy is when it doesn’t work, it really doesn’t work and if you don’t really know how to deal with it at that point, that can really end up hurting an account.
So the first thing I guess, I want to mention is, it’s a great strategy, but it can’t be the only strategy because if all you have to do is go out and sell out puts on everything, everything will be fine until it doesn’t work out and I just want to make sure we are making that pretty clear. I think it is a nice way to collect a little bit of premium, I think what’s important though to mention because you're selling puts is it’s a small amount of money that you are taking in and you are basically taking in that amount and you really won’t make it anymore if you are just talking about purely selling a naked put. So that strategy alone when you go and look at the stock, let’s use stocks as an example, you can do it on a bunch of stuff but if you go and think ok, that underlying is going to move higher, so I just want to be able to take advantage of some premium that is sitting below the strike where it is trading and I don't really think it is going to go down there again so I am just going to trade there, then fine and certainly a stock that is trending would be a better stock to trade than naked put on rather than something that is consolidating and moving all over the place, so that will be a good time to trade it, I am assuming you follow the same kind of rule that you are going to be trading in a naked put in a trending stock.
TJ: Typically yes, yeah absolutely trading it. I also trade them in a sideways stock too, I think if you can sell naked pots outside of a consolidation range, a lot of the stocks will consolidate for a week or two or even longer and you are able to rip weekly’s, the advantage of Weekly options go in and sell that put a few times, while the stocks consolidating
Sarah: Ok yeah, that's true but why would you do a naked put on something that is consolidating instead of doing something that is a little more like an where at least at that point you are margin requirement is quite less and your risk is less. What would be the advantage of doing a naked put on something that’s moving sideways?
TJ: Well typically if a stock is moving sideways, the volatility at that point has decreased, you are not getting as much credit, so the naked put allows you to move a little bit further away from the prices currently trading, giving you and little bit of an extra buffer on one side of the trade so you can go out and you can go, maybe two or three strikes further away than if you were to do iron Condor at that then you need to get closer.
Sarah: Yeah that is true and I guess it also has to do with the account size you are trading with too because the reality is some of these naked puts are going to have pretty high margin requirement, Are they not?
TJ: That is true, but there is also, if you sort stocks by price as well, for example your radar screen and you watch list, you notice that there is an awful lot of stocks that trade below $100 and if you are trading a stock that’s $18 or $20 or $30, to sell naked puts on it the margin requirement is not that high. Absolutely, I don't sell naked puts on PCL on a $2,000 stock or on Google or on Amazon having to trading up around $1,000 right no. So yeah absolutely the margin requirement is higher. It also has to do with the volatility, so a lot of times we have to keep in perspective to that a lot of these strategies that involve selling put you sell them so and you are literally collecting pennies and for a lot of traders they are barely covering their commissions every time they sell these puts. In short enough 98% of the time, they work out what is that 2 times out of 10 or 2 times out of 20 even were it doesn't work, that ends up eating up all of your profits on those trade, so on the service I think there is a lure of easy money. But we have to look at the price of the stock and the credit you are collecting and lot of the times it’s pennies, it's pennies that you are collecting during that but trade for 3, 4 weeks maybe 5 or 6 weeks with a lot of these strategies.
Sarah: Yeah and that is exactly why I don't love selling puts and I would sometimes pick different strategies, you have actually identified it right there, is because once you get in that trade there is no possibility of making more and to me why would you sit in a trade when you are open to risk and you can’t make any more money and all you really have to do is sit there and it is almost like a pile on in the market and say "here I am I really hope you don't notice me, I can't really do anything about it but I am just going to sit here", so to me that kind of bothers me about the strategy, so certainly that’s why, I guess I will stick to trading it when there is something that has a trend because at least then I have that direction to hopefully keep price away from me because I am worried about being that pile on that's huge and everybody is going to see it and I don't really want anyone to see the trade I am in.
TJ: Absolutely, everybody thinks that, oh, the put that I have sold is far enough away, price might go through 50 Cent or $1, I will be OK but a lot of times people are trading the strategy around the wrong times. For example, earnings, so they will trade thinking that the stock might move $8, it moves 16, $8 against you and now you are way outside on this put and I think the other thing as well is that the people that sell it successfully or selling way out of the money and are adjusting there, they are adjusting a 15 Cent credit where it goes down the 12 cents they were adjusting, a very finite adjustments and I think that a lot of traders don't see that there is like the grey area that makes them work and the other thing towards the lure of profits and I think that what happens is that a lot of traders start selling them and the first bunch work out great, and then you say, well, you know what, if I am getting 15 sent successfully well here is 30 or 40 cents and now we are trying to collect 30 or 40 cents or 50 or 60 Cents on trades and it just drops the probability of success and that is going to be on one those trades where you end up getting hurt on the trade and at that point you are kind of bruised and you don't want to trade them again where it is not necessarily the strategy that didn't work but just kind of the greediness or the application of it.
Sarah: Yeah and so true to mention that when you are trading, learning textbook of what a strategy is and then actually going out and putting it on in the market can be two very different things because the theory of the strategies sounds fantastic and I think that's why a lot of people say they trade it because it’s kind of easy to get and in terms of options with all of these multi like strategies, it is pretty simple you go and look for an area where you don't think it is going and you just sell the put and hope it doesn't go down there. I mean it is a pretty simple concept in a book, but applying this and making it actually work over a long term in the market isn't as easy and I can't tell you how many times we both have had them. We had emails and discussions with people say that this is the strategy they use, this is the only one they use, this is all they do it and then you just say OK great and then what happens a couple of weeks a couple of months later is we get a horrible email from them later on, it says, Oh Man, probably I should've listened to you because the strategy isn't working for me anymore and I have taken the strategy that worked really well say 10 times, but these last couple of really wiped out all those profits in all those other ones because I was taking such small profit, I don’t know, just a word of caution. I do want to come back to something you said earlier as well which was about trading cheaper stocks, so was curious about what your opinion was. So with cheaper stock, is really selling a naked put kind of the only thing you can really do in cheaper stocks if you want to sell something.
TJ: I think it is a good strategy if you want credit. I think it is one of the few credit strategies that you could use on an inexpensive stock and I guess when I am speaking about in expensive stocks, really anything kind of under $50 I think is pretty inexpensive. Obviously other strategies that work are the tried and true but long puts, long calls debit spreads as well where you are buying but on the credit side I agree with you that it is the selling of the puts that really allows you to a little bit more flexibility.
Sarah: Yeah, as I said like it is a good strategy and there's lots of reasons and ways to place it, but it doesn't have to be the only one, so let's talk about getting out of them. So another popular way, obviously everybody just wants to sell the naked put and the trade works that you don’t have to do anything, that’s fantastic. So let's talk a little bit about when you are in the trade and you either made some profit what you do, or you are losing because it has come down to the strike you sold, what do you do, do you want to talk about some of the things you do first or do you want me to go first?
TJ: Yeah if I am trading naked puts, really the expiration is either same week, so 2 or 3 days later, trading on a Tuesday or Wednesday for Friday expiration or maybe a Thursday or Friday for the following week, I am typically not adjusting or rolling the trades there is typically not a lot a time to do that, they either work or they don't. I will just end up exiting the trade if it comes down into or close to the strike, obviously depending on, each trade is different when it comes back down into the support, support levels that I previously identified, I am most likely looking to potentially exit trade at that time and just taking a loss and moving on. I think a lot of time if you start adding and changing things, it really changes the dynamic and doesn't necessarily always work out better at the end.
And like you said in the previous podcast, most people wish they had the stock option adjustment, the redo button for adjustments that gone down this path. By the time they get to the end of this windy road, half of the time forgotten why they trade in the first place and are losing more money than they realize that they are losing. The other thing that I do frequently do, I mostly trade in selling puts because I want to own the stock, so for me if it pushes through this strike and it still again hasn’t gone through major levels of support, it still looks like a great trade something that I want to own, I will just take an assignment on this stock because it is intended into a covered call strategy or just own the stock if I want to, so for me it is really why do I get into it, most of the time I am showing that because I want to own a stock, I want to take assignment, so I am either getting it for a loss that really breaks below but if it breaks below a little bit I just pick up the stock.
Sarah: Yeah, I think that’s a good way to do it and it is a nice backup. It is always nice to have a plan B without having to adjust our role and that’s really what it is, so the same thing, when I am looking to do that, I want to take the trade and a stock that I don't mind owning the stock, sorry, does that make sense, I want to trade the option by selling and then if it doesn't work for me so if we end up having an option that has some value at that point then, I just take the stock instead and then of course you can roll out into all sorts of different trades there and you can keep making money on that. So I think that's something that’s really important and that’s absolutely kind of a great way especially when you are talking about the stock there are 50 dollars and under with that plan in mind to be able to pick up the stock, there is more room for you to deal with in terms of what account size you are trading with. So that is also something really good.
So I also just wanted to talk about, I just got out of HD today and I know that by the time you guys hear this, it will have moved on from that trade but I did just sell naked put in HD and I originally have sold it for 60 Cents and then today I got out of it and I made about half, so I think it was about $30 profit that I got out of the trade and that was only really after a couple of days and I want to mention that as well in terms of the positive side of that, so by taking it in something like 60 Cents and I can sell that back at 30 cents that is a really great return and I think it is important that we look at the percentage of return on a trade in order to decide when to get out, when it is working for me. So just because I took 60 cents, it doesn't mean I am going to hold this trade to the very end to make 60 cents. If there is a nice golden opportunity for me to get out of the trade and make $30 in a couple of days to me that makes way more sense to take the trade off and cash out and put the money in my pocket than it is to sit in it for another 2 weeks until the trade expires even if the stock are fine and I didn't really need to get out of it but to me that was just easy money to take off. So do you always hold your naked puts way till the end or do you get out of them quickly for profit I mean?
TJ: Typically I am selling them in stocks that I want to own, so the premium I am collecting, it may not at the time be enough to really make sense of selling it so I will hold them till the end. I am collecting 30 cents of premium or 40 cents right after that and I am making 7 or 8 or 12 cents on it that’s probably not enough, that is not going to be enough for me, so I will wait into expiration but absolutely if you are selling if you are able to sell that put for a 80 cents or a dollar and you can make 30 or 40 cents on it in a week or 10 days, yeah I absolutely agree and that is the thing we were talking, we did a course on Cover calls and actually a lot of it is the misconception of and I think it is the same thing with selling options is that paper profit, so for example your HD, you had 30 cents or 40 cents of potential profit in it, that's what you have today as you mentioned in 10 days who knows, that paper profit may have turned into a loss, so the only way to profit is to absolutely realize the cash out of the trade to turn that paper into paper money, like you said, I completely agree the only real profit is when you sell, so taking that 30 or 40 cents absolutely, like you said 50% profit on the trade is absolutely fantastic and it is much better to take 30 cents on the trade then in 8 days oh well you know at one time I had this paper profit, it is nice to talk about but until it's in your account it is not real.
Sarah: Absolutely, unrealized PNL is not the real thing, you want the hard cash you want that profit in your account that's really what we are all after here and that's really what we do I think really well and I think we both can give ourselves a nod here in the trading, I think we do a really great job of cashing it on the trades and profiting really nicely on the trades that we have got. So, I don't know I do think in summary that it is a good strategy I think anyone that's doing it kind of has to have the reason why and again you want to be able to build that case about why that strategy is good to trade v/s another one I think we have outlined a few of them specially in terms of determining the price of the underlying whether or not that's a strategy for you, picking whether or not you like to do it when it is trending market or consolidating. Everyone is going to have a different flavor and a different spin on it but it is the strategy that you and I both use and it can be really great.
Of course I do just wanted to throw out that the margin requirement on those are going to be different and some people depending on what kind of accounts they are trading, you might not be able to sell to do that strategy too. So, just to make sure for everybody who is listening today that you go and do that research on it as well. I don't want people getting into something without them really understanding the whole bit.
So I hope you guys found this really helpful, I think it was a good discussion, it is actually quite interesting to hear us each explain. I found it very helpful to hear TJ's perspective and how to trade the strategy. And hey, if you want to actually see us trade live in the training room, because we go through everything all the time and was another good week of trades, so I look forward to see you guys next week, please review the podcast and email podcast at shecantrade.com if you have any future ideas that you want to hear us to discuss. Happy trading, everybody.
Sarah: Hi, everybody this is Sarah Potter from the SCT podcast. We are at episode #28 and I have TJ here with me.
TJ: Hi, everyone.
Sarah: So in today’s podcast, we are going to talk specifically about adjusting, and rolling trades. Doing something with trades, if they haven’t really worked out the way you wanted them to. We’re going to talk about how and why you want to that. So first off TJ, I hope you can explain a little bit about what is the difference between using the term adjusting or rolling when it comes to trading?
TJ: Well, I think they’re pretty generic terms and different traders will use them differently. Usually for me, rolling is taking the same trade and moving it out to a different expiry date or a different strike price. Whereas, adjusting is changing the trade a little bit. So adding a leg, adding some stock to the trade, for example, to turn a short call into a covered call. Something like that where you’re changing what you’re doing, changing the intent of the trade.
Sarah: Yeah, you’re so right. I find that in trading, it’s kind of hilarious how everybody takes a different spin and take on different terms, I do find that a little interesting. I agree, so when you’re doing an adjusting and rolling, they are a different way to look at a trade but ultimately, what you’re doing is looking at an existing position that you have open, and trying to make a decision about whether or not you need to add some more risk to it to have a more favorable outcome than you have now. So TJ do you roll trades and when do you decide to do that?
TJ: Typically, I won’t generally roll a trade because most of the trades I’m doing are in weekly options and I’m only in a trade for maybe three days, four days. So we can adjust the trade or roll the trade but there’s not a lot of time to do it. So generally those weekly trades, we’ll just exit for the loss and regroup either back into an option in a few weeks once the chart pattern gets back to where we like it, for a new entry or we just get out for a loss and move on. And I think what we have to remember too and a really good point for any trader, is that no matter what you call it, adjusting or rolling. It’s placing a new trade, it’s adding risk to the trade, you’re adding an additional, potential of loss in hopes of making back what you lost on the first leg of the trade. But it is a new trade and it is adding risk so you really have to ask yourself, is that something you want to do? Is it better to take a small loss and walk away or is it better to potentially take a medium or large size loss with the hopes of winning back that initial loss. So for the short trades, no I don’t. I usually get out and move on. For some of the longer term long puts and calls, covered call position, protect puts, yes. And even if it expires three or four weeks out or longer is much easier and a much better candidate for adjusting or rolling and yes, on a case by case basis I will. I don’t think there’s any point of extending a trade for months or weeks or even a year or so just to break even at the end. I think it’s stressful mentally and stressful on your wallet a lot of times. What do you think about adjusting versus rolling do you do it? What’s your opinion Sarah?
Sarah: Well my opinion at the very beginning is I don’t ever really want to be doing that. That is never my goal in the trades and I think that is something that’s important to point out. There are strategies out there in the market that basically somebody is setting up the trade and their plan is to adjust as they move through that strategy and that’s really not something that we do in our room and I’d say that we’re both the same way that way. When we’re originally setting up our trade and deciding where we think something is going to go, choosing a strategy, the strike and the timeline accordingly, we’re looking to hit the home run. We’re looking to actually hit those targets from the beginning without having to adjust versus there are some strategies out there where when you place the trade your plan within the timeframe that you’re still in the trade is adjust the legs on either side. So we should mention that that is one strategy altogether. I don’t do that. For me if I’m going to adjust or roll a trade, I will do it occasionally. The only real times that I’m really even going to consider it is when I can still look at the underlying. I’m still going to look at a stock for example, and say yes, I still think things are moving in the same direction than I originally thought when I placed the trade. But along the way something has happened but now when I’m towards the end of the trade my assumption of where I think something is moving is still the same from the beginning I’ve just let’s say, ran out of time. So sometimes, if I still think the stock is going to be moving higher but my option is about to expire or time is influencing too much the price of the strike that I’ve purchased, I might have to roll that trade out or adjust it a little bit so that I have more time. So I will do that. I also will keep in mind how the market’s moving. So in fact if I look at my trades over the last couple of weeks, I actually have adjusted and rolled a couple. I think there’s specific links to why I’ve done each of those trades. I mean in the trading room we’ve talked specifically, because I always do that whenever we’re in trades, I always go through each one of the trades in the room and we talk about why we’re managing some, why am I exiting some, why am I taking profits here, and all that kind of things. But if I look at some of those the reason is one through earnings, so sometimes if I want to take advantage of an earnings announcement and let’s say I’m in a long position and the stock hasn’t popped out yet but I think that earnings is going to make that go a bit higher so I roll because I want to be involved a little bit longer. I will shift the trade. Again, making sure though that my assumption continues to be that I think things are going higher and so I’ll take the time and buy a little bit further out in terms of expiry to now take advantage of something like earnings. I will throw those on sometimes. And then also, if you’re in a trade, and let’s say it’s a couple of weeks out and we’re sitting in that trade and we’re waiting, and waiting and it hasn’t popped up yet but think it’s going to and all of a sudden one day there’s something that has happened that moved the market that wasn’t anticipated. So sometimes like some news events or something that has really changed the tone of the market, then I look at that stock I think okay that day alone really changed the move so let’s say it sold off quite a bit but I think it’s coming back quite strong very quickly. And so as long as the underlying assumption is still true, I still think it’s long, I will roll the trade out again. That’s an example of when I would also roll because I think again, it’s just time that I need on the trade as opposed to strategy. Now, if we talk specifically about adjusting TJ would you say you do more adjusting or rolling more often?
TJ: I do more rolling. And I agree with the premises. Usually, when I’m rolling it’s for extra time. So the stock is behaving the way that we wanted it to however the option, the expiry date that we chose is coming up really quickly. Trend is still there we just need to buy ourselves, literally, buy ourselves a little bit more time in the trade and just extend that allowing us to be in a winning trade. We’re not going to extend for time as if the chart pattern looks completely different than when we entered the trade and then a lot of people use rolling just to extend, extend, extend and kind of deny the fact that the trade’s not working but I think a lot of times it’s just like a bandaid you just have to rip it off the faster, the better and move on. Time that's a really good candidate that we've used with success. A number of times in the ETF, USO, it's a really inexpensive ETF trading anywhere right now kind of between a $9.50 and $11. You can pick up options pretty inexpensively on USO and you can look to, if USO makes a move, percentage wise you're looking to probably make 50-100% on that option's trade. So you're looking to turn that 15 cent option into a 30-40 cent option. And so in that case because you're looking for that to double or a little bit more price of the option you can afford to take that a couple of times. You can afford to adjust that trade a couple of times and still know that okay USO is in a really good trend. We just need some more time. So for example in a USO's bottoming out and I'm buying the call it slows down for a little bit and you know they say the $9 or $10 call that we have in the markets move sideway since we got into it. You know if I paid 20 cents for it, and I'm looking to get 40 or 50 cents out of it when I sell it then I can take that 20 cent trade I can take it twice and break even or more or do better on that trade. So I think there's some stocks in ETF's that really lend themselves to it and for me it is inexpensive ETF's or stocks that can move a large percentage in that USO is that one that we've adjusted with quite a bit of success.
Sarah: Yeah, you have done well with that one. So how many times would you roll something. Like at what point is it just too many times?
TJ: I think for USO I'd probably take two tries at it. Especially now, how the charts are pretty well kind of locked between that 9.50 and 11 dollar range is if you're buying a call at the bottom at 9.50 or you're buying a put up at 11, you're usually still in the same trend. So I'd be buying my call and usually what happens is it's not moving fast as we thought was going to so I'll extend it. If it reverses for example, if I've bought the call at 9.50 and then all of a sudden USO's trading at 8.75 or 8.50 I might take one more shot at it because it's just broken through support and we might get a bounce but that's about it. If the trend is changed, I'm not going to keep reversing my position on it just to kind of hold on the trade.
Sarah: Okay, I agree I usually find two rolls is really the most for me where, okay I just have got it wrong at that point. So after two times it's just I need to move on from the trade or take a sign with the stock maybe. But I have got something wrong here and it's like you said, time to pull off the bandaid. So that kind of brings me to a good question that I think people want to hear about is, when you start rolling or adjusting, whatever you're doing, are you at that point changing the goal of your trade to just break even or are you rolling and adjusting and you're still looking for a reward or profit on the trade?
TJ: Yeah, I think that's a really good point too and that I hadn't really thought of that too. And it's a lot of how I trade and what I talk about is well is that when you are the premise for me when I adjust or roll is to make back the loss. So I'm looking at if I've lost, say 30 cents on a trade, I'm looking to exit the next trade the adjusting trade at around that 30 or just a little bit more. I'm really just trying to break even, cover commissions, get out of the trade for 0. I'm not really looking on the second trade to go in and double up or triple up on that second trade and I think that's where a lot of people end up losing in adjustments because they see the profit, they've broken even and then they're trying to make money on that second trade and I think a lot of times, they're trying to make too much and it ends up retracing and they end up losing twice. So I don't know, why Sarah do you think that? why in trader's minds and I've asked myself this and I've asked room too, it never really got a great answer is, why don't people think adjusting or rolling is taking a new trade? Why do they talk about it like it's just extending in it has zero risk proposition with only gains to be had?
Sarah: You're so right actually. Sometimes I think probably because it's another term and I think we hear from brokers a lot like, let's just put out on the table that when you're all trading, were trading through brokers and what do brokers want from all of us? They want us to trade. And so sure they want to trade too, they want to make money, we want to protect our profits, we want to limit our risk, and of course everybody's looking for that one cash cow of a trade out there but we also do hear from brokers a lot that say, that explain rolling and adjusting as not necessarily a new trade but giving that first trade a second chance. And I think it actually relates to who we are as people and I just want to throw trading here on one side. Also look at everybody as a trader and the psychology of it all. I think every time any of us place a trade, we want to give things the benefit of the doubt. That it is going to work out. We all want something to be okay. We never want to set up something for failure. And I think sometimes when you're trading, it's important to be very conscious of that because when we start making those assumptions and thinking oh gosh I really hope it works out, this has to work, this has to work. We've really moved away from rational decision making that you need to make in the trade. And I think people just jump to this idea of it's okay, I can adjust. I can roll and it will just hide that and I don't have to deal with that right now. I can just move it out a little bit further. And I have to say that might be good in the short term but in the long term that can really bite you. I don't know if I'm allowed to say bite in the ass but it can really hurt you. And sometimes like you said, taking the band aid off quick or slow either way it's going to hurt. So what's the best way to actually get back on track? And sometimes because we hear from brokers about how it's okay we can hide this. It's okay, we can move on. I think people stop remembering that it actually isn't a new trade. But I like what you said, I think that's actually a good way to counterbalance that. So a solution into thinking that way is when you do start adjusting or rolling, rather than now looking for profit, is you're just really looking to break even to make back some of the loss and to cover commission. And that's another thing too here. We haven't really talked about that and ‘commissions’ can be another good podcast down the road. It's just talking about how conditions influence trading and that's another topic that we really don't hear about very often but it affects us every month and it affects our bottom line because we are all retail traders and we're paying commission. Let's mark that down as an actual theme to do cause I think that would be a good discussion. And I think that leads me into another idea that I wanted to make sure we're talking about, is that when we're adjusting and rolling, there is no undo button and I think that a lot of traders wish that once they start getting into adjusting and rolling that they're, secretly in their minds, they're thinking there's an undo button. And I would totally admit, I have trade right now that I wish there's an undo button on. So here's an example of a trade that's not working now, with you guys we're completely open and honest about trades, so here is one with DG I am in. I bought a call. It was long in position and then DG sold off. So I decided while I'm going to make an adjustment to that trade, I'm going to sell 72's and hold on to my 74 long position. So essentially creating a credit spread. And then lo and behold, what happened today DG shot up through 72. Like oh my god, man, where's my undo button? I didn't have it. So speaking of adjusting and rolling, I'm actually working on an example right now in DG and making the decision about what do I want to do moving forward. So let's take the same tips that we just discussed in the podcast and add that into this specific example. So right now when I'm in DG and the price of it is higher than the strike of which I sold. I have to make a decision about where do I think that underline is going. Where do I think that stock DG is going to move as it expires tomorrow. And so right now I'm actually holding the 72. I've been paying a lot of attention to how it's been pricing especially into this afternoon and that's really important when you're trying to decide whether to adjust or roll make sure you take good look at that options chain. Really look at and get a good feel for where is volume coming in, where are people lining up on that options chain, where do they put the stakes in the ground about where they think things are going. Use that information to help you with your trade to decide whether you want to adjust or roll. That's very helpful. And make the decision about okay I don't have an undo button here. I already adjusted the trades so I was long to 74 I added short the 72, what do I need to do now moving into tomorrow? For this specific example, in my mind tomorrow I'm going to evaluate; do I want to look to take an assignment on anything? If something has value, do I want to look for that assignment piece so I might be short in the stock if I keep this short position on or do I just want to get rid of the whole thing and say yeah, this is just a small loss and we'll just get out of it.. Do I want to get rid of just the 72's that I sold? So we're going to go through all that scenarios in the live trade room because I think that's really important. But for all of you in the podcast as well I hope you go through a same process of looking at a position you're in. Something I adjusted. I don't have an undo button. I was wrong about the direction that I thought something was moving and so as I move into tomorrow that is the end for me. I tried doing an adjustment on it. I am not going to go out any further. I confess up to it and say yup I got out of four or five winning positions this week and this one isn't working and that's okay. And I'm not going to continue the risk on this by rolling this out any further. I was wrong, I tried it once, I didn't get it so I have to make a good rational decision to say tomorrow's the end of this trade. Even though I have the ability and the broker's little light will flash and say hey you can do this. I'm not going to do that I have already made that choice one time and it's time to move on to look for other trades that can make me money. Cause I can make more money in the market being focused on the right trade rather than spending too much time on trades that are wrong. I don't know when you look at trades do you ever have a point where you're like I just have to stop here.
TJ: All the time and it's usually you try once, you try twice and then it's time to move on to something with better opportunity and not dwell or focus on the one trade or two trades of eight or two trades of ten that didn't work. Right? We're always focused on that one or two that didn't work when there's seven or eight or nine that have worked really well. But we're still well, like you said, as humans focused on that and I think, I don't know, I'd like to leave this with kind of a thought too and goes along to the last point in it. I think thought it was a really great point was if I'm taking a second. So for example, I have Apple. I take one trade, it doesn't work, I adjust it or roll it, and I'm looking at that second trade. Why does that second trade have to be an Apple? Maybe there's a better opportunity in a different stock in Google. So why do I have to stay in Apple just because I started trading in Apple? Maybe there's a better opportunity and I can make my loss back in a different stock and I think that's what we have to remember that like you said just because there is that rolling button on your brokerage that makes you that one click roll, doesn't mean you need to use it. And you need to really evaluate at the end of the day, is it better to stay in the original stock, and I think there's opportunity there. Or is there more opportunity somewhere else where I can make more money and I think that's kept me on the right side of things for many years.
Sarah: Those are wise words my friend and I'm sure all of you guys listening to this podcast can absolutely relate to this feeling because this is something that we all deal with. And I hope this has been really helpful for you to hear a little bit about how we evaluate trades and what we basically do with them when they're not working. I think it's sometimes really easy cause we are shorter term traders and we have so many profitable trades that sometimes a lot of the learning can come from trades that don’t work and so happy to talk through all of that. So great podcast today I think this was really helpful for everybody. We would love to hear from you though. So one is, send us an email email@example.com if there's a specific theme that you'd like us to talk about moving forward we're happy to take all of those pieces of feedback and then also please post a review. The reviews are what really helped build this podcast up and helped other people benefit from the learning that's here. So please review the podcast. Look forward to seeing you guys all guys next week and happy trading everybody.