Have No Fear In Your Trading..

It is imperative that you attack opportunities with gusto. If you are a volatility trader and you see a volatility spike, you must get in there immediately and start selling premium. Natural Gas a few months ago is a great example. I would be a net long trader of natural gas and UNG and as you can see from the chart, it traded always around the $20 level for the last couple of years..

ung

But as you can see from the chart, UNG which normally had volatility of 30% ( When volatility is 20% or lower, it is better to trade debit spreads as the likelihood is that volatility will expand and the options will become more expensive therefore enabling you to make a profit) spiked to 70%. As this in my opinion was a temporary anomoly that would correct, one was able to sell calls up to 25% out the money from the price of the etf..

You see, this is what volatility traders do. Even though everyone would agree that UNG will rise in the long term, the short term volatility gave great opportunities for selling calls and puts. Volatility spikes which increases your probabability of profit without getting exercised on your stock..

So be on the lookout for volatility expansion and this is when you must get in there and start trading. Volatility like everything will revert to the mean meaning that you statistical chances of volatility contraction are high..

In Layman terms, you sell options when they are expensive and buy them when they are cheap. This gives you the best statistical chance of success if you are a seasoned swing trader..

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Buying Puts To Protect A Long Portfolio

To avoid draw downs, one can buy puts in a long portfolio. As i write, precious metals seem to be continuing their decline. Goldman Sachs came out with a target last month for Gold which was $1000. This is definitely possible as steep declines like this get rid of the weak hands. If you are holding leveraged funds like UGL or AGQ, I urge you to buy some protective puts maybe 3 months out. I think this is a prudent play as if your longs go against you and you are also using margin, you may have to sell your longs if you are issued a margin call. Puts will give you some cushion. Yes you may lose all your money on your puts but if this is the case, that would mean, your longs would have rallied off the lows and you are 100% long again.

This intermediate decline could get scary in the metals sector. If we get $1000 Gold, we could get $14 Silver easily. Precious metals at those levels would set up a fantastic buying opportunity. Remember that Silver went to $50 back to 2011 and dropped back to $30 in less that 2 weeks. Markets go up different that they go down. The same may happen again and as a result may wipe out many a portfolio. At this juncture, even through the metals are well prices, I would urge and caution investors to buy some puts for protection or insurance..

The risk is too great when holding leveraged longs. Margin and leverage are double sided swords. You can make fantastic returns when the market goes your way but you can be wiped out when the market turns against you. If Gold, for example drops to $1000, that’s a 23% drop from where it is. If you are holding a leveraged instrument like UGL, that would be nearly a 50% decline..

These leveraged instruments are not for long term play because along with the 50% decline, these ETF’s decay alot which means in a declining market, they decay day by day. Let me give you an example..

UGL today is trading at $47.15. If it drops 50% ( which would mean Gold would drop to $1000), it will trade at $23.58.

Now just say it takes 8 months or so for Gold to regain the $1300 level. Because of the decay in these ETF’s, I would bet that UGL would be trading at around the $42 level. Do you see this, Gold is trading at the same dollar price but the ETF is drastically lower.. These are definitely not for long term holds…

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Possible Trades I See Right Now

First off is bonds. Bonds in my opinion are extremely overbought and I can see a sell off coming soon. If you stay small, TMV would be a good option here. This is the 20 Year Short US bond. Options on this ETF are trading at about 32% so the option premium is not that good. Long term, I see interest rates going up and bonds generally trade inversely to interest rates so when interest rates rise, bond returns will fall. I think ultimately interest rates will have to rise to cool off any inflation in the forthcoming years.

Precious metals seem a cracking buy right now when you look at the fundamentals. They are way off their highs in 2011 but so much money has been printed in those last 3 years. I see gold bottoming soon ( It could easily go $150-$200 lower but it will be short term to shake out the weak hands) and then I see Gold spiking hard both this year and next. Always throughout history in times of inflation, hard assets have held their value. Commodities such as oil, gold, agricultural commodities have always held their value in times of currency turmoil..

Speaking of agriculture, sugar is a great long term play here. Sugar is 70% cheaper than its all time recorded high. There is nothing that is 70% cheaper today that it was 30 years ago. I see Sugar spiking in the next few years so again this is a good long term play.

The US market has to fall. There may be a bubble phase left in it but ultimately it has to fall. It will fall when the market forces override central bank interventions. Up to now, interventions have been able to stabilise and move the market upwards. This will not continue for long. One day the market will say no to increasing interventions and that will be the day the market will revert to its mean. All markets eventually revert to their mean. Think about it for a second. Lets look at the property market. Prices are falling, there is not activity and the government or central banks realise they are loosing massive revenue through fees, transactions, stamp duties, etc. What do they do? A number of things. They talk it up, they introduce tax incentive schemes ( if you invest in a house, you pay less tax, etc) they reduce interest rates for first time buyers. They do everything in their power to stimulate the market in order to attract buyers. Smart investors know this is false, they know its temporary and they know that ultimately the market will override the interventions..

This is what is happening in the US stock market at present. The market is going up because of interventions ( not because of real investors). This can go on for a while but ultimately its false because its temporary. One day the market will say no more to the interventions or the funny money will stop. Either way the market will revert to the mean and stock valuations will become normal once again so if you are a stock investor and would like a buy and hold vehicle, I would urge caution and patience..

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Using Probabilities In Your Trading

As I have discussed previously on this blog, probabilities and volatility are very important factors when trading options. When you combine the 2, you set yourself up to win. You must look for stocks or etfs with volatility over 50. This covers the volatility part and ensures that you will collect enough option premium. Secondly, you cover the probability part by trading a lot. This is an area where investors struggle. This is because they dont trade enough. You have to trade alot and in different stocks to make the probabilities work out.. Lets go through an example or two..

Ok, first up is Twitter.

rrrr

As you can see ( the orange line). Volatility was up near 100% and is now dropping. This is a prime canditate for our strategy. Depending on your directional biase, you can sell a call, a put, a credit spread, a , strangle, an iron condor, etc. The good thing about the stock is that its volatility is on the upper side of its range. If the volatility keeps dropping, traders who sell premium in here will be rewarded.

Facebook is another stock that has good volatility at the moment..

fbbbb

As you can see, volatility spiked in the last 2 weeks. Its on the way down again but this is again a prime canditate as it has rich volatility..

Finally, Tesla is another prime canditate for trading..

tsla

Again, a burst in volatility has occured. This should revert to the mean so selling volatility in there should be profitable. You need to trade small and trade alot of different stocks. By doing this, you are mitigating risk and putting the odds firmly in your favour. Look for volatility spikes, get in there and sell premium and take profits when you have 20-50% max profit… Rinse, wash, repeat…

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Stock Market Bubble Phase Back On?

Well it look like the FED has rescued the market as the markets over the last few sessions has rallied hard and is now above support at the 1840 level on the S&P500. If the bubble phase is still on the cards, we may still be looking at a 20-30% gain from here. Because I know this rally is only temporary and once and for all, the market forces will overpower the interventions from the FED, I will stay frosty.

If you want a piece of the action here are a few stocks you can use to go long. Nevertheless if we don’t get a stock market bubble and you get these stocks put to you.., then I believe you can trade them as long term holds..

First up in Coca Cola (KO). Look at its chart over the last 30 years and also their dividend information and you will come to see that price always recovers in this stock. Another market leader that dominates its sector is McDonald’s (MCD). Again people are always going to need food and fast food at that. As the world population grows, this company will open more restaurants and as a result more profits will be made. Its a proven recipe. All they do now is buy prime real estate to leverage the company even more..

Third up is IBM. Again this is a market leader and even if we get a market crash, this stock has shown that it consistently rises over time..

I for one believe that there is far more opportunity in the precious metals and commodity sectors. The problem with human behaviour is that we rush in to buy when we see a sector going up such as the S&P right now. Nevertheless this market is near its all time highs and I for one have learned the lesson not to buy stock at all time highs. Silver and Sugar for example are stocks well below their lows. Even though these commodities may be dropping at the moment, I see them with far more possibilities than US stocks..

We must learn to invest when there is pessimism and sell when there is optimism. If you do in life what the majority are not doing, then you are probably right on with your strategy..

If we get this bubble phase, it will be short lived. Don’t get caught because as I have said before, markets come down completely differently to how they go up..

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Stock Market Very Volatile – GDXJ

Stock Market Very Volatile today with violent moves in each direction. At first we were down over 10 points on the s&p only to finish the day 12 points up!!. Today you had a viscous 28 point swing but these types of days bring great opportunities for traders such as the following…

1. Twitter was up huge today – over 11% due to news about them buying another company. Anybody short puts – I was short the May16-34Put could name their price when buying back the put as the buying really got into a frenzy in twitter going into the close. Volatility was up again giving volatility traders opportunities to sell more premium.

twtr

I am also short the 53 Call May 16. I didnt liquidate this today – I only liquidated my profitable put. I have to watch this position closely as if twitter moves like it did today, its price will be all over my call strike and I will have to either roll or liquidate for a loss. Nevertheless, we are still nearly 20% away from my strike so I have some breathing room yet. This is the advantage of trading volatility stocks – you can get further out and your probability of success is much higher as a result..

Gold stocks took a hammering today. GDXJ was down over 4% at one point. SSRI was down over 6%. While some people are saying the gold will go to $1000 an ounce and it may do, I am a cash flow trader and I dont think of what-if scenarios. I took this opportunity to buy into the heavy weakness today. What I mean buying into the weakness was to sell naked puts. I did so on GDXJ and SSRI. When you consider that the all time lows on the GDXJ are $28.82 which occured last December, I see little risk. I sold the MAY16 – 32PUT FOR $0.8. Now if the likes of goldman sachs is right and gold goes to $1000, obviously GDXJ will go lower than the current all time lows.

My attitude is this. I believe that the gold bull market is nowhere near finished. If GDXJ goes to $25, I will not roll my position as I believe that it will easily eventually be well over $32 a share so I will let the stock be “put” to me. This is the best attitude when selling puts. You must sell them on stocks/etf’s that you really want to own. Also GDXJ is

1. An etf
2. A basket of the gold junior mining stocks put together.

This instrument can never go to zero + its volatility is around 50%. I thought the risk/reward was definitely on my side provided you stay small and dont go crazy with the amount of contracts you sell..

gdxj

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Volatility Chart – Twitter

Look at the chart below and follow the the orange IV. This is the the implied volatility of Twitter. The higher this is, the richer the option premium is. Option traders look for spikes in volatility and then they sell into that volatilty on both sides, the call side and the put side if needs be. When the volatility comes back down to normal levels again, the trader makes money as he buys back the initial sold options much cheaper..

nchart.j

Todays trading – Bought back some twitter puts. Sold a Facebook call early in the day when facebook was up over 3% and bought it back later when both volatility and the price contracted a bit.

Tesla came on my rader again also as its volatility has really spiked in the last week and you can get some cracking value in there..

nchart.jtss

The problem with a stock such as Tesla is that its a $200 stock. One needs quite a bit of buying power to sell naked options in there. A good alternative would be an iron condor or credit spreads on either side..

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Is The US Stock Market Going To Fall From Here?

The market dropped another 17 points on friday and has now broken through support around the 1840 level. If the fed cant rescue the market soon, I would think that the bubble phase could be off the table… The next FED meeting is April the 30th. This could be tricky for Yellen as if the market keeps dropping, I dont think she will be able to announce another “Taper”

On the other hand, if she and her team can rescue the market and the S&P is up around the highs again at 1900 at the end of this month, then she could definitely taper…

Either way it goes, traders much stay on their toes as a market like this could easily go either way..

Stay Frosty..

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Using Volatility To Trade Strangles

Strangles are an excellent choice for a volatilty investor. For example lets look at TWTR. This stock is currently trading at $40.05. Now we are going to go through a strangle example in TWTR

twtr

Ok as you can see, we can sell a 35 put for $2.20 and a 50 put for $0.90. The credit that you would collect for putting on this trade would be $3.10 for every contract sold. The implied volatility of twitter at the moment is up around 80%. This is why the option premium is high and you can get further out. For example, you can go out to $30 for example and still be able to collect some premium. This impossible with other stocks as the volatility is simply too low. The advantage of this trading strategy is your probability of profit is high. The stock in some cases can move up to 20% in one direction and you still make money. So for example, lets say twitter moves to $50 in the next few weeks and starts to test your call side. Your sold put at the stage would be in the money. You can take profits on this put and roll it up to a 35 put for example. Also, you can roll your 50 call by going out another month and selling a 55 or 60 call, etc. When a stock has high implied volatility, you can be aggressive in your trading, taking profits at will, whilst always rolling down or up depending on what side is being tested.

Another advantage is when volatility contracts, your options will be cheaper meaning you can take profits even if the stock doesn’t move. I have seen scenarios where a trader sold a 50 call when the stock was at 40 and bought the call back when the stock was at $45 and still made money. This was because of volatility contraction, definitely an advantage that volatility traders have. When a volatility trader sees a spike in premium, they relentlessly get in there and sell premium.

Of course the ultimate is having a fundamental analysis trader who trades stocks & elf’s with high implied volatility. Here for example in a strangle, you can be more aggressive and instead of selling a wide put, you can sell near to the money put because you are confident or don’t mind if the stock goes below your bottom strike..

Finally strangles are also good for buying power. They are like an iron condor, your buying power only gets reduced from one part of the trade. The put/call are treated as one so your buying power will decrease far less that selling 2 naked puts for example..

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