Tasty Trade Brokerage

The fine folks over at the Tasty Trade Network are going to open their own brokerage firm this coming January 2017 called Tasty Works.  Now you will be able to trade on a platform using their concepts and philosophies.  They have integrated a lot of functionality of the Dough platform into their new one to help you make decisions while trading and have made it remarkably user-friendly.  Have a look at the site for yourself and sign up if you want to be notified when they go live.

Double Calendars

To increase your probability of success for a longer duration you can increase the width of your profit window by deploying a double calendar spread.  This is similar to an iron condor but with spikes on the end for greater profit, sort of like a double tent.  A double calendar contains a calendar spread on the call and the put side. The profit potential in the middle of the profit window gets smaller as you increase the distance between the strikes on the call and put side.

Again only deploy calendars when there is low volatility and look to exit the trade earlier rather than later.

Probabilities of Calendar Spreads

When looking at calendar spreads you still have to take into account the probabilities.  A regular calendar spread has a low probability of success and the curve is not wide enough to keep the trade on for any extended length of time. This is why you have to exit the trade early say within 3-4 days because you mitigate the inherent low probability by not holding on to the trade for long. Shorter time frames increase your probability of directional success.

Earnings Season

Earnings season is here again so this is the time to cue up the volatility plays.  Premium will be richer during earnings season because of the potential for big moves.

For a complete calendar listing of earnings you can check here:

http://www.bloomberg.com/markets/earnings-calendar/us

Calendar Spreads

I've been gone for a while trying to develop a strategy that fits my personality and temperament. I had studied so many differents strategies and I needed to simplify.

The one I came to that caught my attention was Calendar Spreads.  I heard it was Tom Sosnoff's (from the Tasty Trade network) first trade.

Calendar spreads involve buying an option in a "back" month usually 40-70 days until expiration and selling an option in the "front" month usually 15 days until expiration.  The point of a calendar spread is to take advantage of time (theta) decay which begins to exponentially take effect 15 days from expiration.  Because the back month options are more expensive you will have a debit from your account and you are using the front month option to bring it's cost down.

The trade is usually put on during low volatility because you are essentially buying an option.  You want volatility to increase so it will also increase the value of your option.

After doing some back testing I came up with a sweet spot that seems to work for max profit and max success.

• Implied volatility (IV Rank) of 12 or less
• 40-70 days til expiration for the back month
• 15 days til expiration for the front month
• 25% Probability in the money on the front month
• Exit the trade at 10-12% profit 
• Exit the trade between 3-4 days or if negative hold closer to expiration for theta decay
• Trade liquid underlyings of at least 500,000 daily volume trades 
• Trade underlyings that don't have wide moves

You have defined risk because you can not lose more than the cost of your investment.  I tried my back tests on DIA and SPY and most of the trades were successful. The thing to keep in mind is that the trade is directional, meaning, your best chance of success is to make the right assumption at the direction of the underlying but what helps you out even if you are wrong in your assumption is if the underlying moves sideways after it moves. You make up any losses on the time decay feature of the trade. Of course the optimal situation is if the underlying moves in your direction, then you can take profits.

Brexit and What to Do Now

Last week the market got broadsided and no one saw the Brexit coming.  It goes to show you that the market is unpredictable and that trends don't last long.  When you have your profit take it.  If you have been down for a while just wait and things will change.  

As for this coming week, I think the volatility will continue but be more dramatic.  It's not a good idea to put on any iron condors because one leg will be hit hard.  

It will be difficult to gauge the fair market value of anything in these market conditions because the European economy is in limbo until key decisions are made about the countries that make up the UK. You also have the Fed who will probably hold off on raising rates because of the uncertainty.  These and other opposing forces could swing the market wildly next week.

If I had to make a trade (and I think I'm going to sit this one out) I would probably play the extremes. Since we dropped hard on Friday, I would look for a short bounce on Monday and then a drop.  As for the rest of the week I would have to wait and see.

The one thing that is very appealing is that the IV rank across the board is medium to high and options prices are very lucrative at the moment, so if you have the stomach for it, you could make a nice profit.

Buying Options

For the longest time I have been of the mind that I will never buy options because of the time decay feature that exists.  I’ve since amended my stance on buying options because there are circumstances when they may be useful.

These situations are when the stock is experiencing low volatility thus making the options prices cheaper.  When this occurs you can benefit greatly when the stock moves big in one direction.  Volatility will increase dramatically when if the price falls and decrease dramatically if it rises.  Being on the right side of the move can be very profitable in a short space of time.

When buying puts or options because of low volatility environments make sure you pay attention to the following:

• Get filled at the right price
• Buy further than 30 days till expiration so time decay won’t hit you as much
• Look for explosive opportunities for when the stock is going to move quickly in one direction
• Don’t hold past a few days because time decay will eat away at your intrinsic value
• Use the TTM squeeze to time your entries 

Current Trading Plan 6-7-16

It’s important to realize when your current plan may not be working and you need to change tactics.  Your overall assumption may still be correct but the market is notorious for defying logic.

I've been getting beat up with my short play on the SPY and all common sense would say short the market because it's at its highest. The trader’s manifesto is to buy low and sell high but this market seems to want to go higher even when there's bad news.

Since the trend is moving up and this trend has bucked several attempts against it, I got out of my bear call spread and bought an August 19 call at 218 strike price and now I'm finally making money instead of losing money. It's hard to time the market and the other trader maxim is appropriate here, the trend is your friend.

I figured the market is going to go up at least to 214 and I'm still in keeping with my buy low/sell high philosophy because I'm buying low premium.  Maybe that’s the lesson , buy low premium and sell high premium. 

Market Update 5-27-16

There is a reason people say the trend is your friend.  When the market is moving in a certain direction it has momentum and you have to respect that energy and let it tire itself out.  Don’t get in the way of a Mack truck as it’s barreling down the road.  Let it run out of gas and then you can watch it go back downhill. Today may be a big day because of the holiday and the Fed.  If someone opened an ETF on volume then I would be bullish on that because that’s the only thing I’m sure of right now.  

Market Update 5-25-16

Got out of my SPY bear call spread at 50% max loss.  The market conditions completely shifted and I was completely wrong about my short term prediction.  Housing data and strong earnings went against me.  I'm still overall bearish until wages rise, unemployment numbers come down and banks start giving mortgages to people with credit lower than 730.  However, I am short term bullish.  We might see the pullback at the end of the week when people start to go away for the Memorial Day weekend.

Market Update 5-24-16

We had some good numbers in the housing market data that helped to drive the S&P and other indexes higher today.  If you had the guts to be bullish at the end of yesterday's trading you did great today.  I thought about it but held back because of my bias to the downside. 

I sold some calls in the SPY this morning because of my overall bearish position.  We'll see what happens tomorrow but I think we are very overbought at these levels and I'm looking for the S&P to go back to at least 205.

Volatility is Great For Profits

I've been paper trading over the past few days just to keep active (I was stacking my investing funds into the preferred stock PFF for safe keeping while I figured out a plan).

Here are my results:

Granted if I was using real money I would have used spreads instead of naked transactions and made about half, but over the past few days I've made over $5,000 in paper money trading the volatility in the market.

I stuck to trading the SPY exchange traded fund because it's what the market is beta-weighted to anyway.  If the S&P goes up most stocks with solid balance sheets and good earnings will go up and vice versa.  

My approach was to wait for a pullback to around 204 or a jump in price to around 206. When the price went up I would sell call options and if I was in my position too early (meaning the stock continued to rise) I would buy put options to increase my bias to the downside (negative Deltas).

When the price would go down I would liquidate my positions when I made 50% profit or more and begin selling put options.  Again, if I was too early I would buy call options to increase my bias to the upside (positive Deltas).

Current Trading Plan 5-21-16

There's a fight going on right now between the bulls and the bears.  No one is going to win in the short term because there is not enough market data or any world events to say the market is going to go down.  On the other side, there is not enough data to say that it will go up. 

The middle and lower class are not making enough money to sustain retail earnings and the banks aren't lending like before allowing them to buy things on credit.  The engine of the economy has stalled and the only thing to restart it is to increase wages for all workers and to open lending opportunities for lower income earners.

As for the short-term market direction, after the big drop we had this week we have recovered already and it will probably make it to 206 on the S&P. However because of the tension in the market and the trigger happy bulls and bears when we reach around 206 the market will be smacked back down to around 203. 

As most people know the market climbs slowly but falls down fast.  Generally, I'm bearish because we are overbought at these levels. If there is a big swing to the upside I'll sell calls and buy puts.  Conversely, after a big swing to the downside I'll sell puts and buy calls. 

Current Trading and Investing Plan 3-14-16

As the saying goes..."Buy Low and Sell High."  We are at all-time highs in the market so basic common sense would tell you to sell.  You. of course, want to look at the context of the market but all things being equal it would make basic sense to be on the sell side of the market at this point.  

The best way to get in at this point for traders would be to sell calls and/or buy puts.  I wouldn't use iron condors at this point because of the potential of the market to go down quickly.  

For longer term investors who are in a dollar-cost averaging strategy, I would hold off buying anymore shares until the market dips some more.  If you just have to buy and can't stop yourself, only buy small lots but make sure they are dividend paying stocks.

Current Strategies For Today's U.S. Stock Market

The current U.S. market conditions will remain volatile until there is a longer trend of higher wages, consistent job growth, low rates and low inflation.  Outside effects of China and other world markets will have little effect on U.S. based companies.  Low oil prices will also have little effect on U.S. based companies, if anything they will help bolster them. 

If you are investing long term continue to buy dips in the market using the dollar cost average strategy.  If you are day-trading options set your iron condors wide because the jumps may be large. The range on the SPY should be between 180 and 200.  Or you can sell bull puts and bull put spreads when the market goes down to capture the higher implied volatility prices.    

There is an article in Marketwatch showing the growth in jobs and wages so we are headed in the right direction but it will take some consistency to create a foundation for the volatility we are experiencing.  The middle class is the engine of our economy and if there is no fuel in the tank we can't go anywhere.

Marketwatch Article