Trading Strategies – Bobby's Trade Journal

Moving to Advanced Option Strategies

When traders start trading options, they learn as much as possible about calls and puts and rush out to buy some contracts hoping for a big move and a big profit. When that doesn’t happen, there’s two possible routes a trader will take. The first type of trader will rush out and buy another contract on something and hope that one is profitable. The second kind of trader will analyze his/her trades and try to determine why it didn’t work. These are the two main possbilities excluding the small variations on these scenarios.

When a trader buys a call or a put and the stock moves away from the intended direction or stays put the trader loses money. In some cases even if the stock moves in the correct direction, the options still loses premium and the trader can’t make profit. Meet Theta. The time decay. The time decay on an option will accelerate as the expiration draw near. Closer to expiration the time decay on an option can be so much as to negate any small move by the underlying in the correct direction. So a buyer is losing money unless the stock makes a good move.

On the other hand, the seller of the option is liking the time decay with each passing day. For a seller the time value of an option is on a one way road. It’s decreasing and never increasing. This means if the seller can sell the correct option and use the correct strike, he or she can be a happy trader at expiration.

This is where a trader must learn new strategies and advanced option strategies that are designed to benefit from certain scenarios. Butterflies, Iron Condors, Condors, Vertical Spreads, Calendar Spreads, etc.

I am moving towards learning about selling Vertical spreads and incorporating this strategy as part of my money making strategy. I will discuss some of the option strategies in the coming posts. I will post more about selling the option premium instead of buying it.

Pullback or Rally

The current market is drawing out two strong opinions from the trading and investing group. Some say that it has run up so much, it simply must pullback before further continuation. These are the shorts. They hoping for a short and lower prices before they join the upward leg. The second group is the people who say that market momentum is such that it will continue upwards, no correction necessary.

To confuse the issue more, some expert say this is the bottom, it will go up from here. Other experts say that the market definitely fall lower during the year later on with or without upward move.

One thing is for certain more analysts are joining the upwards move camp with each week.

In the middle of all this where do the normal traders, swing traders stand? It seems necessary to know for the trader, when swing trading, whether the market is headed up or low, so they can trade the right side. It’s easy to tell them, just go with the flow. But if there’s a moderate pullback day such as 100pts down, that trader will lose lot of money betting on the wrong side of the securities. It’s hard to really predict. Unfortunately, many experts have been saying that it’s really hard to determine the direction. They say it could go either way. But the investors and traders are watching the prices rise everyday a little more and good oppurtunities are going.

Hopefully, a clear direction will emerge. At the time of this writing, I’m slightly bullish. In other words, I have a bullish position on one stock. I’m not against taking bearish position on other stocks at the same time. Even when the stock is big and moves with the indexes.

New Year, New Trading Resolutions

So the new year has officially started with the market running on the 2nd. This late rally can be called many things. Bear market rally, Santa Clause Rally, January Effect, and other names involving existing or non existing characters. That means it unclear which way the markets will trend. If they’ll trend, that is. The market may just stay in a range for a little while before defining a direction.

This means to a daytrader that they will have to start monitoring closely to see if the market is range bound or starting a trend. Depending on that, a daytrader will have to use the correct strategy.

Additionally, many securities are running on their own a little and not mirroring the DOW. Which is good and bad. It’s good for those that may find a good trend and benefit. It’s bad, because it may not help identify a trend early enough.

Leaving all the market stuff aside, it’s a good time at the beginning of the year to sit down and make some trading decisions. The last year has been educational. I will be refining my trading rules and will be defining a clear risk management strategy for my trading in the coming year.

Markets Are Still Down

Well, the market is still down. The indices are painting red with no worry. What can ths mean to us daytraders? In the past, my posts have been focused on going long and on indices showing long term buying signals. In these posts, what’s not reflected is that despite the long term indicator signals the potential to daytrade is still present.

So today was a 600 pointer red day! Well after a number of green days, this is a first red day. Probably the market will pull up in the morning. At this point it would be good to enter some short term short trades. Buy puts, short shares, buy reverse ETFs, etc. Having said all of that, let’s see what the DOW charts show.

The Fibonacci retracement shows that the DOW retraced to .618 level, then just powered thru all resistance to the down direction. It will probably go up to .382 or .50 level then go down. Seems the 0.00 level might be easy. It’s a previous known low in recent days. There’s a little resistance at today’s close.

Actually, that is almost 700 pts!

What are ETFs?

ETFs are exchange-traded-funds. The best place to get information is investopedia.com. An exchange traded fund tracks an index, commodity, or a basket of assets like an index fund. This explanation is from investopedia.

To explain it a little, an ETF trades like a stock on an exchange. You buy/sell the ETF just like you buy/sell a stock thru your broker. You use the same tools. You chart the ETF. You analyze the technical indicators, and you can also trade options on the ETF. It depends on the ETF, but most have option chains.

So how does it help you?

Very good question. First remember that an ETF can track an index or a commodity or a basket of assets. So you can have an ETF that tracks gold. Or tracks silver. If you hear from your friend that gold is spiking really nicely lately and you verify that thru your analysis then you have two options if you decide to be long on gold.

Go down to the local store and buy some gold coins.
Login to your brokers site and buy the ETF that tracks gold – GLD.

Here’s how Ameritrade’s explanation of this ETF reads:

The investment seeks to strive to reflect the performance of the price of gold bullion, less the Trust’s expenses. The Trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the Trust terminates and liquidates its assets, or as otherwise required by law or regulation. The Trust is not managed like an active investment vehicle, and it’s not registered as an investment company under the Investment Company Act of 1940

That’s good because now instead of constantly making trips down to a physical shop with your gold coins, you simply buy/sell online thru your broker. Similarly, you can buy/sell silver and other commodities.

That’s an example of an ETF that tracks a commodity. What about one that tracks an index? Fret not!

If you see that S&P 500 Index is uptrending and you wish you could just ride the index as opposed to figuring out which stocks in the index are doing good or which stocks in general are doing good, then you could simply trade the ETF SPY. This ETFs seeks to duplicate S&P 500 Index’s performance. You can trade options on SPY bigger leverage.

So it benefits you by knowing that when an index is doing well, you can buy the ETF tracking the index’s performance. It won’t make you rich overnight. Consider that an index may fall 500 points but that’s typically 2-3% move. Options will give you bigger leverage.

Trading ETFs by definition doesn’t give you a big benefit in % returns. But it gives you a benefit in not having to guess the direction of your holdings. You can daytrade the ETF like any other stock for small or big gains.

You can trade options and daytrade options on ETFs also.

UltraShorts – What are they?

What are these UltraShorts? Are these some kind of stocks, bonds, derivatives, etc? Or are these just regular shorts made out of jeans?

Well, the Ultrashorts are sort of a fund that go in the opposite direction of the underlying Index. I will give a brief explanation below, however, you shoudl read ProShares site to get more details.

In short, the ProShares are ETFs that are designed to be traded like any stock using any brokerage. These are funds that go in the opposite direction of the underlying index. There are Short ProShares and then Ultra Short ProShares. Short ProShares are designed to go up when the index goes down and vice versa. Ultra Shorts are designed to give double yield. Hence, the Ultra part.

Examples:

Short Dow30^SM

This will go against the DOW movement. So on down days, you buy this and expect it to go higher.

UltraShort Dow30^SM

Others shorts/ultrashorts: QID (Nasdag 100 UltraShort), PSQ (Nasdag 100 Short).

So these shorts provide for a generic way to trade the market/index itself as opposed to trading a given stock which may or may not be trading along with your index.