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