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SCT Podcast

Watch and Learn from Sarah and TJ every week as they share their trade set ups, market analysis and most importantly, tips to help you trade better than ever. Each episode will share the realities of trading options and the markets. You will hear tips and tricks by retail traders, for retail traders. Yes, finally a show that delves in to trading for people just like you! We are well known around the world for a consistent approach to the market with a down to earth approach to trading. We believe that anyone can trade, but you need to have access to real trading information without the gimmicks, which is why we do what we do, to help retail traders. If you want to get right to meat of trading, this show is for you.
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Apr 20, 2018

Facebook has been volatile since the issues they have had with the privacy of user data.

Now that the issue is out and many people have forgotten about it, is it time to once again start buying Facebook?

In this episode of the SCT podcast the SCT team will discuss where they think Facebook options will move next, and whether you should be buying calls or puts.

Apr 20, 2018

This earnings season will be different, expectations will be high, and traders are expecting earnings to dig the S&P500 out from the recent lows. 

In this episode of the SCT podcast the SCT team discusses if they think this earnings season will be different, what to watch out for as a trader and how to manage trades during this potentially volatile time.

Apr 5, 2018

How do you keep calm when things get stressful? Trading is like any other activity in life, it can be stressful, how you deal with that stress can make the difference between success and failure.

In this podcast the SCT Trading Team discusses how to keep calm and trade on. Try taking some of the strategies that give you success in other areas of your life and apply them to trading.

We can all manage the stress of trading, listen to the podcast and get some great tips to help you stay calm while trading options.

Mar 30, 2018

The technology sector has been split lately, with some companies like Netflix making large gains, while companies like Facebook and Amazon have seen their stock prices dramatically reduced over the last few weeks.

In this Podcast the SCT team discusses their views of the tech sector and if they think there are opportunities to trade. Tune in to hear the team discuss where they believe opportunities exist in the market.

Mar 22, 2018

The new hot sector in Canada is Cannabis stocks. In this episode of the SCT Podcast, Sarah Potter and the SCT Team discuss cannabis stocks if they are right for your portfolio, are the companies over valued and if there is potential to make money in this emerging sector.

Mar 19, 2018

Creating good trading habits is essential to having success when trading. Whether you trade every day or once every few months, effective habits will make sure that you are maximizing your chances in the market.  In this podcast the SCT Team discusses how they have set up good trading habits and how they have fixed some of the bad trading habits that every trader deals with.

Mar 2, 2018

In this episode of the SCT Podcast Sarah discusses what it's like to trade for yourself. Trading options and having an understanding of the market is a valuable skill. Whether you are trading every day or just want to have a more informed discussion with your financial planner. Learning and understanding stocks, options and trading can be a benefit to you.

Feb 22, 2018

Trading can be stressful, what can you do to reduce the stress. In this podcast Sarah Potter discusses how she deals with the stress of trading and some helpful tips to make trading less stressful.

 

Feb 15, 2018

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.

Feb 9, 2018

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.

Jan 12, 2018

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.

Dec 27, 2017

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.

Dec 21, 2017

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.

Nov 17, 2017

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.

Nov 3, 2017

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.

 

Oct 12, 2017

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.

Sep 22, 2017

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.

 

Sep 14, 2017

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.

Sep 7, 2017

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.

Aug 18, 2017

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.

Aug 11, 2017

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.

 

Podcast Transcript

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.

 

Aug 4, 2017

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.

Podcast Transcript

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

 

Jul 28, 2017

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.

Podcast Transcript

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.

 

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