Using Options For Cheap Directional Exposure

Options sometimes get a bad rap in financial markets, especially as Warren Buffet once famously referred to them as weapons of mass financial destruction! Never mind the fact that Buffet uses options extensively in his own portfolio.

 

The beauty of options is they provide so much flexibility. You can use them to gain leveraged exposure, you can use them to hedge an existing position, you can use them to generate income, or trade volatility. The possibilities are endless, and I’ve talked previously on ChartYourTrade about how they can be used.

 

Today I want to talk about using them to gain exposure at very little cost.

 

Using Options For Cheap Directional Exposure

The strategy is called a butterfly spread. If you want to learn about them in detail, you can do so in my free course, but I’ll explain briefly here…

 

Let’s use CRM as an example because it’s a stock I know Michael and Adam are watching currently because it was in a recent Elite Stocks Setups report.

 

Let’s say we want a bullish exposure, but we don’t want to risk too much money.

 

With the stock trading around $121, we could place a butterfly trade at $130 that expires in 3 months time.

 

To complete this trade we would do the following:

 

Buy 1 Aug $125 Call

Sell 2 Aug $130 Calls

Buy 1 Aug $135 Call

 

This gives us a triangle shape profit zone centered at $130, about 7.5% above the current price. The trade only costs $50 per spread and has a maximum profit potential of $450 per spread.

 

The trade makes a profit if CRM finishes anywhere between $125.50 and $134.50 at expiry.

Using Options For Cheap Directional Exposure

I like using butterfly spreads as a cheap way to gain directional exposure to a stock.

 

I’ll do the opposite using puts on stocks that I have a bearish outlook on.

 

Be sure to check back in a few weeks and I’ll provide an update on how this trade progressed.

 

Trade safe!

 

Gavin McMaster

 

Options Trading IQ

how to stop missing trades

How to Stop Missing Trades

 
Missing Trades can be incredibly frustrating.  We put in the work, the analysis, create a plan… And then for one of a dozen reasons we end up missing the trade.  This is something that used to happen to me all the time.  It was infuriating!   …Not only because of a bruised ego, but because I’d begin to think of all the things I could have been doing with my time.  
 

How to Stop Missing Trades

In this post, I want to give you a few tactics about how to stop missing trades.  These are the tactics that I use presently and have helped me a great deal.  Don’t get me wrong, I still miss trades.  We can’t catch them all.  Part of clarity, focus, and trading in the present is having an understanding that there are literally millions of opportunities in the market.  We couldn’t possibly trade them all even if we wanted to.  

 

1. Build and Maintain Watch Lists

One of the lists I enjoy building, actively maintaining, and reviewing once a week is a “Universe List”.  This is a catchall list that houses every stock that I’m interested in for one reason or another.  Maintaining and reviewing this list consistently every week keeps me in tune with what each of the stocks are doing.  There are typically about 100 stocks on it at any given time.  It only takes a few minutes to scroll through each of the charts.  I find that it is well worth the effort to keep a pulse on what I feel are the most interesting ideas.

I’ll also keep separate lists for where the ideas came from.  For example, I’ll keep lists of what passes our ChartYourTrade MRI scanner by 80% or more on a separate list because these stocks have shown to have a greater probability of producing a significant run after having passed the scan.  Check out the 2016 case study here (2017 case study will be coming soon).

 

2. Pick a time frame and trade within that time frame

One of the things that used to trip me up would be to try to trade multiple time frames and multiple strategies all at the same time, all within one account.  I thought I was optimizing my trades.  Instead the only thing I ended up optimizing was how to lose in a hurry!
 
Now my accounts separated by time frame and I stick to one set of rules per account.  I have separate accounts for short-term swing trades, intermediate-term trades, and long-term investing for things that will be held for longer than a year.  Prior to entering any trade I’ve noticed that it is important to clearly state our intention for the trade.  It’s something that has helped keep me focused as the trade progresses.
 

3. Develop Plans, Systems, and Processes for Consistent Review

If we’re inconsistent with our work, it becomes dramatically less meaningful and it will be far more difficult to make progress.  This is another lesson I’ve learned the hard way.  What I’ve learned to do is figure out what I’m capable of given my circumstances and ambitions.  Then I’ll look at the worst case scenario.  For example, if things begin to get insanely busy at the day job for an extended period, or if something significant happens with my family and my schedule is thrown off, how can I still successfully manage my trading?
 
I’ll think through these worst case scenarios and figure out the critical path for my trading.  What’s most important, what must get done, and how long will it take.  I then look at my calendar and find blocks of time where I can consistently do the elements on my critical path.  
 
For me, the weekly critical path includes Identifying Market Health, Understanding what stocks and groups of stocks are leading the market, Identifying trades, Making plans for those trades, and reviewing my existing trades.  This may sound like a lot but it typically only takes me about 30 minutes in total over the weekend.  
 
 
Check out the video above for greater depth.  Be sure to leave a comment below with any thoughts or questions you have.

Using ChartYourTrade Stock Picks For HUGE Option Profits

A few months ago, Michael invited me to try out the services offered here at Chart Your Trade. You can read my full review here:

http://www.optionstradingiq.com/chart-your-trade-review/

 

Needless to say, I was very impressed as you can see from some of the results below.

huge option profits

 

Today, I want to take things one step further and talk about how traders could use options to trade some of the recommendations from Chart Your Trade.

The first example is on NKE, which was mentioned in the February 12 Elite Stock Setups report when the stock was trading at $65.50. An entry point of $67.31 was recommended.

NKE past that entry point a few days later on Feb 14th. Since then, markets have been a little volatile. In fact, since February 14th, the S&P 500 is down 4.09%. NKE is also down, but is slightly outperforming the market at -3.68%.

 

POOR MAN’S COVERED CALL

One of my favorite options strategies is called a poor man’s covered call. This strategy gives you exposure to the stock for a fraction of the cost and provides income potential. It’s like taking a leveraged position on the stock, so the gains in percentage terms will be magnified on both the upside and the downside.

You can read a full tutorial on this strategy here: http://www.optionstradingiq.com/poor-mans-covered-call/

Here’s an example of how an investor might set up a poor man’s covered call on NKE once the entry point was hit:

Trade Date: February 14th, 2018

NKE Price: $67.31

 

Trade Details:

Buy 1 NKE Jan 19th 2019 $57.50 Call @ $13.65

Sell 1 NKE April 21st 2018 $70 Call @ $2.05

 

Total Premium Paid: $1,160

 

This position has a similar exposure to buying 100 shares of NKE and selling a covered call. However, in this case the investor has only had to invest $1,160 as opposed to $6,731.

Moving forward to March 23rd, NKE is down 3.68%, so the pure stock investor would be -$248 whereas the poor man’s covered call is +$21. Certainly not a home run but a nice outperformance.

huge option profits

 

BULL PUT SPREAD

The second way to play NKE that we’ll look at is via a simple bull put spread. This is a very simple strategy and another easy place to start for those wanted to get involved in options.

Here’s how an investor might set up the trade based on the NKE entry signal:

Trade Date: February 14th, 2018

NKE Price: $67.31

 

Trade Details:

Sell 5 NKE March 16th 2018 $62.50 Put @ $0.37

Buy 5 NKE March 16th 2018 $57.50 Put @ $0.11

 

Total Premium Received: $130

Margin Requirement: $2,370

 

This trade gives the investor a significant margin for error, with a breakeven point at $62.24 (a 7.53% decline) and a reasonable income potential.

The trade is risking $2,370 to make $130 for a return of 5.49% in one month. NKE stayed above $62.50 at expiry and the investor would have made a full profit on the trade.

It’s important to note that in this example, if NKE fell below $57.50 at expiry of the option trade, the investor would lose the full $2,370 whereas the pure stock investor would only be down $1,481.

The above two examples show how these two option trades outperformed pure stock ownership and both achieved positive returns from bullish trades, even though the stock was down nearly 4%.

 

HIGH RETURN TRADES FOR RISK TOLERANT INVESTORS

Let’s now look at another example from the table posted at the top of this article.

NFLX is a favorite stock for option traders and it was mentioned in the Dec 29th version of Elite Stock Setups. At the time the stock was trading at $193.50 with a recommended entry point of $200.40.

That price was passed on the first trading day of the year giving investors the all clear to hop onboard the NFLX train.

Investors who purchased the stock would have made a 65.39% return from January 2nd through to March 9th.

Investors with a higher risk tolerance could have instead traded a long call.

This is a high risk, high reward trade that can pay off big if the stock makes a big move.

 

Trade Date: January 2nd, 2018

NFLX Price: $200.40

Trade Details:

Buy 1 NFLX March 16th 2018 $185 Call @ $22.80

 

Total Premium Received: $2,280

With this trade, the investor was risking $2,280 and would lose all of that investment if NFLX dropped below $185 around March 16th. But, if NFLX were to go on a huge run, which it did, the high risk trade would pay off in spades.

As it turns out by March 16th, NFLX was trading at $321 and that $185 call had increased in value from $2,280 to $13,570, for a healthy 495% return.

Considering the majority of stocks from ChartYourTrade’s Dec 29th report went on to have massive gains, traders willing to take a large risk with long calls would have done incredibly well.

Thanks to Michael and the team for all their hard work and analysis and if anyone wants to learn more about options feel free to email me at info (at) optionstradingiq.com

 

Trade safe!

 

Gavin McMaster

Options Trading IQ

run your own race

Run your own race – How ignoring opinions will help your trading

In order for us to get to the next level of our trading, whatever that may be, we need to forget about what others think and we need to not get caught up in what other people are doing (or claim to be doing).

 

How other people’s opinions hurt you…

Have you ever fell into the trap of holding a position… a stock, an ETF, an option, a cryotocurrency… and then look at your Facebook, Twitter, StockTwits, or Instagram streams and see someone presenting an opposing view to your own?  How did you respond?  How did it make you feel?  What action, if any, did you take?  …The answers here are crucial!  

IF someone else’s opinion causes us to have doubt, if it reassures us, if it makes us feel that we are ahead or that we’re behind… It causes us to have bias and it causes us to pivot from our original stance.  Unchecked, we may deviate from our trading plans, make emotional decisions, sabotage ourselves and not even realize it!

 

We need self-awareness…

It takes a long time to have both the self-confidence as well as the self-awareness to be able to see or listen to people’s opinions and not be influenced by them… Better yet, to be thoughtfully influenced by them!  …Here’s what I mean…  We need to practice being the neutral observer.  There are opposing thoughts being presented to us on every topic, everywhere, constantly.  Rather than choosing a side, try to understand both sides from a neutral position.  Don’t only understand what they’re saying but understand from where they are saying it.  Understand their “why” and their motivations for saying that they’re saying.  It is then and only then that we are able to accept a meritocracy of ideas and not simply be influenced by the person(s) with the loudest voice or who come across to us as the most persuasive.

I love this quote from Oprah. How often do you get caught up worrying what others are doing? I know I used to get caught up in that frequently and I still catch myself getting caught up in it often enough. This quote is a great reminder to forget about the other guy and run your own race.

Works in running… works in trading… works in life!

Run your own race - How ignoring others will help your trading

 

 

 

Check out these other blog posts:

The Rules Change In A Bear Market


Given the recent market conditions, I’ve been increasingly asked “how do you navigate a bear market?”  It’s important to remember that the rules change in a bear market.  Even though we aren’t there yet, it is always good to educate and prepare well in advance.  Here’s what I do:
 
 

Understand that cash is a position

First and foremost, understand that cash is a position.  This is especially true for those of you who don’t want to deal with the nauseating moves that occur during bear markets.
 
Second, for those of you who want to play, keep in mind that the rules change in a bear market.  Markets move in cycles. There are only three things any asset (stock, bond, currency, commodity, real-estate etc) can do: move up, down or sideways. In uptrends, conventional wisdom tells us to buy low and sell high. Or buy high and sell higher (for those of you who like to buy breakouts). You have also probably heard the old adage about buy the dip and sell the rip. I can go on and on but you all know the “rules” in a bull market.
 

The rules are reversed in bear markets

Put simply, the rules are reversed in a bear market. Instead of buying the dip, you sell the rip. Meaning, if you are looking for tactical trades, look to short strength, not buy weakness. Instead of buying pullbacks into logical areas of support (prior chart highs, 50 Day Moving Average line – or other moving averages- etc etc) look to short strength into logical areas of resistance (prior chart lows, 50 Day Moving Average line, etc etc).
 
The most important thing to keep in mind is that emotions rule in bear markets and the swings can be VERY erratic and very large both up and down.  It is also important to note that every bear market in history was followed by a fabulous bull market. So patience is and can be your best friend. 
 

What if you can’t short?

If you want to short but don’t have the ability to short because you do not have a margin account, find inverse ETFs to express your idea.  Two very popular inverse ETFs are SDS (2x short SPY) and SQQQ (short QQQ).

Two very good sites to research ETFs are:

  1. ETF.com
  2. ETFGlobal.com

 

Here are some other posts you may enjoy:

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