It's Halloween and I got to see all the kids dressed up in their costumes heading off to school. It is so much fun to see how excited they get. Even the scary costumes are too much fun...
The scariest thing today is the Fed announcement!
Bill Poulos is in a holiday mood, too...
For a limited time he is making available his rather popular report, "Profit Pulling Swing Trading Principles."
The idea is to help folks like you and me spend a little less time looking for trades. He is providing complimentary access to the report, which reveals concepts to:
** Shave hours off your trading routine...
** Identify the "sweet spot" of a trend, which provides the greatest potential...
** Where to place your stop loss (It's not where most traders place it...)
** Reveal why selling short can dramatically boost returns and why long positions can often be more risky that short positions...
** Remove the guess work from your trading and reduce your trading related stress...
There are many other tips shared by Bill in this report, but he is only making it available on a complimentary basis for just a few days.
Happy Halloween!
-Chris
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Wednesday, October 31, 2007
Sunday, October 28, 2007
Stock Market Update And Trend Trading Video
This week the market sold off several times during early trading, only to claw its way back in the afternoon. It was like the bulls were playing a "goal line defense," denying the bears any meaningful progress.
Monday saw the S&P 500 open at 1,497, following the prior Friday (Oct. 19th)'s sell-off. It clawed back up to 1,506.
On Tuesday we got up to 1,519, then sold off early on Wednesday only to reverse and close back at 1,515, just 4 points shy of the prior close. Early selling was again present on Thursday, but the market again reversed and closed at 1,514, down just one point.
Friday saw us finally push higher, closing at 1,535. So, we saw some upside by week's end and can head into the weekend on a positive note.
The "line in the sand" was apparently drawn at 1,500 on the SPX this week. We dipped below that level during intra-day trading, but we consistently closed above it. Friday saw the SPX break the bearish trend line but volume was not resounding, so I will be interested to see whether we follow through next week.
The market is trying to determine whether it wants to continue its bullish trend, or whether earnings growth will no longer justify higher equity prices. We all know that it is significantly easier to make money in the market when we trade in the same direction as the trend. The trick is finding the trend!
The above like will take you to a video presentation by Brad Stafford from MarketClub. In this video, Brad shares some techniques he and Adam Hewison use to find trends and trade them. There is no registration required to view this video.
Trade well!
Christopher Smith
TheOptionClub.com
Monday saw the S&P 500 open at 1,497, following the prior Friday (Oct. 19th)'s sell-off. It clawed back up to 1,506.
On Tuesday we got up to 1,519, then sold off early on Wednesday only to reverse and close back at 1,515, just 4 points shy of the prior close. Early selling was again present on Thursday, but the market again reversed and closed at 1,514, down just one point.
Friday saw us finally push higher, closing at 1,535. So, we saw some upside by week's end and can head into the weekend on a positive note.
The "line in the sand" was apparently drawn at 1,500 on the SPX this week. We dipped below that level during intra-day trading, but we consistently closed above it. Friday saw the SPX break the bearish trend line but volume was not resounding, so I will be interested to see whether we follow through next week.
The market is trying to determine whether it wants to continue its bullish trend, or whether earnings growth will no longer justify higher equity prices. We all know that it is significantly easier to make money in the market when we trade in the same direction as the trend. The trick is finding the trend!
The above like will take you to a video presentation by Brad Stafford from MarketClub. In this video, Brad shares some techniques he and Adam Hewison use to find trends and trade them. There is no registration required to view this video.
Trade well!
Christopher Smith
TheOptionClub.com
Sunday, October 21, 2007
Black Monday Crash Re-Visited
Friday was the 20th anniversary of the 1987 Black Monday market crash.
Heavy equipment maker Caterpillar (CAT) lowered its 2007 outlook based on slow U.S. economic growth. 3M, a diversified industrial firm, said it has to lower prices on some products due to competitive pressures.
These two DJIA components weighed heavily on the market, pulling the large cap indexes down by about 2.5%. The small-caps fared worse, shedding about 3% of their value.
Volume was higher, fueled in party by the fact that options were expiring. Yields on Treasuries slid, indicating that investors were selling their equity positions and seeking the "safety" of government securities.
There is little doubt that investors are jittery and it would not be surprising if we continue to see volatility in this market. I remain bullish on the market, but do suggest that you keep a close eye on any positions showing weakness.
My portfolio mains delta and theta positive. Those positive deltas have increased over the last week, but I am not tamping them down with new negative delta positions. My expectation is tht we will see the market trade higher, and as it does, I will then look to add reign in those positive delta positions.
The bottom line is that as long as I am bullish, I am willing to ride these corrections out.
Trade well!
Christopher Smith
TheOptionClub.com
Heavy equipment maker Caterpillar (CAT) lowered its 2007 outlook based on slow U.S. economic growth. 3M, a diversified industrial firm, said it has to lower prices on some products due to competitive pressures.
These two DJIA components weighed heavily on the market, pulling the large cap indexes down by about 2.5%. The small-caps fared worse, shedding about 3% of their value.
Volume was higher, fueled in party by the fact that options were expiring. Yields on Treasuries slid, indicating that investors were selling their equity positions and seeking the "safety" of government securities.
There is little doubt that investors are jittery and it would not be surprising if we continue to see volatility in this market. I remain bullish on the market, but do suggest that you keep a close eye on any positions showing weakness.
My portfolio mains delta and theta positive. Those positive deltas have increased over the last week, but I am not tamping them down with new negative delta positions. My expectation is tht we will see the market trade higher, and as it does, I will then look to add reign in those positive delta positions.
The bottom line is that as long as I am bullish, I am willing to ride these corrections out.
Trade well!
Christopher Smith
TheOptionClub.com
Friday, October 19, 2007
Updated Market Analysis for Stock Options Traders
On Tuesday I shared a video from Adam Hewison demonstrating potential concerns in the stock and equities market. This week we have in deed seen some selling.
I am now passing along some new information concerning this selling. When I became aware of these data points, I thought some of you might be interested.
Trade well!
Christopher Smith
TheOptionClub.com
I am now passing along some new information concerning this selling. When I became aware of these data points, I thought some of you might be interested.
- The broader Indexes (S&P, NYSE, R2000) all show notable buying during the recent 3-4 day pullback. Usually (90% of the time), this analysis method shows selling during price declines. I was quite surprised to see this but that only reinforces my theory that listening intently to CNBC is a great way to become a lemming rather than a leader in this industry. At least when it comes to market direction. Of these indexes, small caps (R2000, IWM) have experienced the least amount of buying.
- Banks (KBE) - selling has increased and is now at the highest level in more than a year.
- Homebuilders (XHB) - selling is still heavy but is only half of levels experienced just a few weeks ago. These comparisons still hint of a bottom but I'd like to see a re-test of recent highs from the last two weeks before I'm more confident.
Trade well!
Christopher Smith
TheOptionClub.com
Tuesday, October 16, 2007
Traders Are Nervous, Perhaps This Is Why...
This week is the anniversary of Black Monday, so if you're nervous about the market right now you're not alone...
Why are so many traders nervous this week?
There are several possible reasons, but it could be because this week is the 20th anniversary of BLACK MONDAY, the crash of '87. Many reading this email may be too young to remember the biggest single day drop in the history of the Dow Jones Industrial Average, but I was a young man at the time and remember quite well.
On the 19th of October 1987 the Dow dropped now less than 23% in one day. So what was the biggest single day loss during the infamous crash in 1929? It was 12.9%
on October 28th 1929.
Can it happen again? That's the question BARRONS posed on the front page of its weekly newspaper.
I have just completed watching a new video to show how you can protect yourself no matter what happens to the market.
You can watch it here. No registration is required.
This could be a rough week, so be sure you keep an eye on your trading and your risk.
Trade well.
Christopher Smith
TheOptionClub.com
Why are so many traders nervous this week?
There are several possible reasons, but it could be because this week is the 20th anniversary of BLACK MONDAY, the crash of '87. Many reading this email may be too young to remember the biggest single day drop in the history of the Dow Jones Industrial Average, but I was a young man at the time and remember quite well.
On the 19th of October 1987 the Dow dropped now less than 23% in one day. So what was the biggest single day loss during the infamous crash in 1929? It was 12.9%
on October 28th 1929.
Can it happen again? That's the question BARRONS posed on the front page of its weekly newspaper.
I have just completed watching a new video to show how you can protect yourself no matter what happens to the market.
You can watch it here. No registration is required.
This could be a rough week, so be sure you keep an eye on your trading and your risk.
Trade well.
Christopher Smith
TheOptionClub.com
Sunday, October 14, 2007
How Stock Options Are Priced
Discussion continues on our message board about how options are priced. I love seeing these discussions because it means that members of TheOptionClub.com are developing their understanding of what options are and how they work.
There is always a bit of mental energy needed to grasp these concepts. You have to struggle with the concepts a bit before they sink in. Once they do, you will find that you have a much better sense for how an option will respond to changes in the market.
This is critical. As option traders, we look at the market and question what is likely to occur in the future. Are prices likely to rise? Will volatility fall? As we answer these questions, we begin the process of selecting an option strategy to take advantage of those changes or hedge against them.
I put together a video that introduces these concepts. It's only about 20 minutes long, so it is not a complete education but it will introduce the subject.
Use the above link to access the video. I hope you find it helpful as an introduction. After you have viewed it, be sure to visit our Yahoo! Group where you can review the ongoing discussion and post your own questions and observations.
Trade well!
Christopher Smith
TheOptionClub.com
There is always a bit of mental energy needed to grasp these concepts. You have to struggle with the concepts a bit before they sink in. Once they do, you will find that you have a much better sense for how an option will respond to changes in the market.
This is critical. As option traders, we look at the market and question what is likely to occur in the future. Are prices likely to rise? Will volatility fall? As we answer these questions, we begin the process of selecting an option strategy to take advantage of those changes or hedge against them.
I put together a video that introduces these concepts. It's only about 20 minutes long, so it is not a complete education but it will introduce the subject.
Use the above link to access the video. I hope you find it helpful as an introduction. After you have viewed it, be sure to visit our Yahoo! Group where you can review the ongoing discussion and post your own questions and observations.
Trade well!
Christopher Smith
TheOptionClub.com
Sunday, October 7, 2007
When is an option over or under priced?
The real answer to this question is that options are rarely, if ever, over or under priced. Today's options markets are very efficient and options tend to be "fairly priced" at all times.
The better question to ask is whether an option is relatively expensive or inexpensive. Just because an option is expensive does not mean that it is "over priced." There may be a very good reason why the option price has increased; e.g., an anticipated earnings release. There may also be very good reason why an option is relatively inexpensive; e.g., a planned take-over.
As the market becomes more concerned about future price movement, there is a willingness to pay more for options to protect equity positions or to take advantage of anticipated price movement. Once those concerns pass, option prices will likely fall to lower levels.
This whole discussion boils down to a study of implied volatility and how it can be used to assess current option prices. An option is only "cheap" or "under priced" if you expect implied volatility to increase. Conversely, an option is only "expensive" or "over priced" if you expect implied volatility to fall.
You can quickly determine the current implied volatility for any option through any decent options broker. Once you know what the current implied volatility is for an option, you can then compare it to where implied volatilities have been in the past. You can also compare current implied volatility to the historic volatility of the underlying security.
When comparing current implied volatility to where implied volatility has been in the past, you are looking at the changing market expectations for the future volatility of the underlying security. As IV rises, it reflects greater uncertainty and concern in the market for the future price movement of the underlying stock.
For example, you might see IV rise as a key earnings date approaches followed by a return to prior levels once the news breaks. That news may be the catalyst for a large price move, up or down, or it may unfold as a non-event despite the heightened uncertainty that preceded it.
A comparison of implied volatility to the historical volatility of the underlying security allows you to assess whether the market's expectations are consistent with what the stock or index has done in the past. As we have all read in any prospectus or financial disclaimer, past performance is not an indication of future results.
So, if you see IV rising or falling relative to historic volatility, it does not mean that the option is "over" or "under" priced. Rather, it should prompt you to question why the market is pricing in a greater or lesser amount of future volatility. Once you identify the catalyst for the IV change, you can then determine whether you want to be long or short vega.
There are several tools out there that can assist you in this analysis. The "right" tool is largely a function of personal preference. Your goal is to assess current implied volatility for purposes of determining whether you prefer being a net buyer or seller of options.
More information is available on our web site. You might consider reading the article entitled "Implied Volatility - Buying And Selling Stock Options" for further discussion about how IV can impact your trading decisions.
Christopher Smith
TheOptionClub.com
The better question to ask is whether an option is relatively expensive or inexpensive. Just because an option is expensive does not mean that it is "over priced." There may be a very good reason why the option price has increased; e.g., an anticipated earnings release. There may also be very good reason why an option is relatively inexpensive; e.g., a planned take-over.
As the market becomes more concerned about future price movement, there is a willingness to pay more for options to protect equity positions or to take advantage of anticipated price movement. Once those concerns pass, option prices will likely fall to lower levels.
This whole discussion boils down to a study of implied volatility and how it can be used to assess current option prices. An option is only "cheap" or "under priced" if you expect implied volatility to increase. Conversely, an option is only "expensive" or "over priced" if you expect implied volatility to fall.
You can quickly determine the current implied volatility for any option through any decent options broker. Once you know what the current implied volatility is for an option, you can then compare it to where implied volatilities have been in the past. You can also compare current implied volatility to the historic volatility of the underlying security.
When comparing current implied volatility to where implied volatility has been in the past, you are looking at the changing market expectations for the future volatility of the underlying security. As IV rises, it reflects greater uncertainty and concern in the market for the future price movement of the underlying stock.
For example, you might see IV rise as a key earnings date approaches followed by a return to prior levels once the news breaks. That news may be the catalyst for a large price move, up or down, or it may unfold as a non-event despite the heightened uncertainty that preceded it.
A comparison of implied volatility to the historical volatility of the underlying security allows you to assess whether the market's expectations are consistent with what the stock or index has done in the past. As we have all read in any prospectus or financial disclaimer, past performance is not an indication of future results.
So, if you see IV rising or falling relative to historic volatility, it does not mean that the option is "over" or "under" priced. Rather, it should prompt you to question why the market is pricing in a greater or lesser amount of future volatility. Once you identify the catalyst for the IV change, you can then determine whether you want to be long or short vega.
There are several tools out there that can assist you in this analysis. The "right" tool is largely a function of personal preference. Your goal is to assess current implied volatility for purposes of determining whether you prefer being a net buyer or seller of options.
More information is available on our web site. You might consider reading the article entitled "Implied Volatility - Buying And Selling Stock Options" for further discussion about how IV can impact your trading decisions.
Christopher Smith
TheOptionClub.com
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