You may see us use the term “mental stop” when we talk about potential trades in futures or stocks that don’t have liquid options markets.
What do we mean by mental stop? It indicates a price point at which we fully intend to exit any given trade.
How do you set a mental stop? Use your broker software to set an alert at a price point you consider your mental stop. If the alert goes off, manually exit the position immediately.
Doesn’t that take away the automation and bring human emotion back into play? Yes, but trading is about discipline and this is a great way to train yourself to be a mechanical trader manually rather than relying on an automated order. Don’t second guess yourself. If the alert goes off, exit the trade.
Why not just use automated stops? The market is efficient, but manipulation still exists. We have been trading for a long time and have learned a very simple lesson about stops…they always hit. We have experienced much lower hit rates with mental stops vs hard stops. We can’t argue with results, so we keep things stop purely mental.
Is there anything else I should know about stops? Yes, regardless if you’re using a mental stop or a hard stop, you should understand that the market knows where the majority of the obvious stops will be placed. Make sure you give your stop some breathing room in conjunction with the obvious level. That will help decrease your hit rate, just be sure the risk reward still makes sense.
Get your mind out of the gutter…that’s not what we mean!! ;-)
This is in reference to Technical Analysis. You see, Technical Analysis can be extremely complicated or fairly simple. I choose to keep it simple.
What do you mean by “keep it simple”?
The more indicators you use to confirm a trade scenario the less trades you are likely to make. Reason being, the chances of a technical studies disagreeing with your stance increases as you invite more studies to the party.
Sure, it’s nice when the situation arises where a plethora of technical studies all point to the same conclusion, but that’s rare. The only way to become a great Trader is to trade, and if you’re spending all of your time analyzing a position with a variety of technial studies, you are taking away from your actual trade activity.
You still haven’t answered the question. How do you go about keeping things simple?
My method of keeping it simple is by slimming down the amount of items I look at when analyzing a trade. Price action is the primary component I look at when scanning for trade ideas. Volume and Implied Volatility play a huge roll as well.
Aside from price action, volume, & implied volatility, there is no single technical study we have to see a confirmation in. I may take a look at the 50 & 200 day Moving Averages, Fibonacci Retracements (if the price action permits), RSI, MACD, and the likes, but if I like the price action I place a trade regardless of what the studies are saying.
Does this result in a winning trade every time? No, but neither does spending hours mulling over technical studies. Trust me, there have been plenty of occasions where I’ve spent hours analyzing trades that looked like sure things only to see them fail miserably. That’s why these days I keep it simple and focus on being an Active Trader rather than an “Active Analyzer.” The end result has been a dramatic increase in not only my portfolio value, but my abilities, knowledge, and confidence as a Trader.
Keep it simple! It’s worth a try. Worst case, you lose some money and go back to your over analytical ways. Best case, you find a new beginning and totally change your game as a Trader. I’d say that’s a risk/reward worth pursuing, wouldn’t you?
The trade idea was the Aug 75/80/115/120 Iron Condor, which would have easily filled @ 1.90 during the final hour had we worked the trade.
How does the trade look now that earnings have been announced?
Here’s a LNKD 1 day 1 minute chart…
The initial reaction to earnings was positive. The upside move quickly retraced during this morning’s melt down, but is settling in well now @ 94.00.
We would be exiting this trade right here had we entered. To cover the spread, the current “Mid” is 0.75 and the “Nat” is 1.35. This isn’t the most liquid spread in the world, but money would have been made even at the worst case scenario “Nat” fill.
We could get filled pretty quick if we worked the exit at 1.10, which would result in a gain of $80 per spread…a return on risk of 25.81%. Another win for the earnings trade idea posts!
As mentioned yesterday, we did not trade this spread since this was LNKD’s first report. Now that we have a better feel, we may trade it next time. If you read our earnings analysis and entered the Iron Condor, congratulations!
$QQQ has taken a 10.60% beating since putting in a high of 59.83 less than two weeks ago on July 26th. We played the resistance level when it was trading at 59.00, but we exited that trade WAY too early (still made money though). Now that it’s back at support, we closed our eyes and placed a trade that catered to support.
Members, check your inbox for details on this QQQ trade alert.
30 Year US Treasury Bond Futures ($ZB_F) have rallied in a big way since breaking R1 (primary resistance highlighted by the blue horizontal line) @ 126’25. Today, the rally has taken Bonds to R2 (secondary resistance highlighted by the yellow horizontal line).
This rally in Bond Futures resulted in a break of 32.00 support in TBT that we have traded several times. Fortunately, we did not play it this time around as explained in out 'Don't Worry, Be Happy' post.
This morning, we liked the look of the reward to risk scenario in TBT given the R2 130.00 level in Bond Futures. We could not resist the trade and sent an alert to Premier Members.
At the moment, this trade is going against us after a strong break through 30.00 psychological support level. That said, the strategy we personally played has no stop risk which allows us to hold through this continued selling pressure without being forced out of the trade. We are considering adding to the position here to lower our average price, but have not made that move just yet.
Bottom line, Bonds are going nuts here. This may or may not be the right time to fade them, but with the proper strategy you can start positioning short in an intelligent manner. It’s always tough to fade this type of move, but Bonds look overbought to us here.
Risk in trading should and can be examined by different means, some of which follow.
Period of Exposure
All things else being equal, the risk of a trade is proportional to the amount of time that one is in the trade. The shorter the time exposure is, the smaller the effective risk. Day trading futures is a good case to illustrate this. Commonly, futures trades are just minutes in duration, from open to close. In general, few go longer than a day. Lack of market exposure makes for a good night’s sleep. At the other end of the scale, consider the exposure period of a trader (investor) having a buy-and-hold position in a stock or ETF. If the answer to the question, “hold until when?” is left open, go figure. Not only is the trade risk high, the exposure period is virtually infinite.
Probability of a Loss Event
The period of quarterly earnings announcements has more risk associated with it than “normal” periods. The presence of other activities affecting market sentiment (e.g. FOB meetings, announcements) increases risk. The current debate about U.S. debt limit is a perfect example of government political antics affecting trading risk.
Knowledge & Competency of the Trader
I believe that a novice traders’ risk exposure is greater than more experienced traders. And from personal experience, I’m of the opinion that a novice trader tends to overestimate his trading readiness and proficiency. Depending on the individual, it can take some time for this to be corrected. Sometimes, the trader goes broke before his enlightenment comes. Interestingly, this effect is present even in novice traders that consciously prepare themselves by education and training. The brokers apparently agree, because I believe that brokers routinely assess client trading activity and reach their own conclusion as to what “class” a trader belongs in. I’m told that Classes range from 1 to 5, with Class 5 having the greatest trade proficiency. A ‘5’ being the top. To my knowledge, the traders’ Class is not indicated anywhere in the account. The trader usually can sense which Class he is in by considering the buying power reduction assigned by the broker to his trades, or in the extreme outright order rejection. A trader with a Class less than about 3 would be discouraged from selling naked puts, for example.
One needs to be conscious of the fact that ones’ personality affects trading performance. A trader experiencing anxiety of any sort can be expected to perform badly. Medical situations, family concerns, other environmental situations interfere with the process and affect the outcome. This is a complex subject, requiring a lot of introspection. In my opinion, ignoring it is not an option.
Consideration of risk should never be far from mind.
CSTR is the name that is often pair traded with NFLX because if their Redbox kiosk business. They recently had a nice run, but have dipped from 60 to 50 in the past week. How will earnings move the stock? What are the best trades ahead of earnings? Let’s find out.
Current stock price is 50.65
Aug 50 Straddle @ 5.35 ask
Aug 47.50/52.50 Strangle @ 3.15 ask
Expected move is calculated as follows: (5.35+3.15)/2 = 4.25
upside move is 54.90
downside move is 46.40
(The objective with earnings trades is to stay outside of the measured move while keeping Options trading principles in mind.)
Sell Aug 55 Call @ 0.95 (naked)
Sell Aug 45 Put @ 0.65 (naked)
Sell Aug 45/55 Strangle @ 1.80 credit (sell 1 Aug 45 Put, sell 1 Aug 55 Call)
Sell Aug 42.50/45/55/57.50 Iron Condor @ 0.87 (passes the one third width of the spread test). This spread consist of the following; buy 1 Aug 42.50 Puts, sell 1 Aug 45 Puts, sell 1 Aug 55 Calls, buy 1 Aug 57.50 Calls. Max potential gain is $87 per spread, max potential loss is $163, there is a 11.75 point lower b/e to upper b/e range, and the probability of b/e or better is 64%. Check out the risk plot profile for this trade below…
We favor the Iron Condor here (if you couldn’t tell). Defined risk is always nice when playing earnings.
Side Note: Both the Aug 36/37 Bull Put Spread @ 0.36 and Aug 55/57.50 Bear Call Spread @ 0.51 are a no go. As noted in the SBUX analysis, if the credit is not one third the width of the spread it is not worth trading.
It seems there is no ceiling with regard to how ridiculous the current US leadership can be.
At least there’s a ceiling to how much they can spend…right?
Think again. Here’s some fun facts about the US Debt Ceiling:
In 1917, the first debt ceiling was set at $11.5 billion
The current debt ceiling is $14,294,000,000,000 ($14.294 trillion)
It has been raised 74 times since March 1962, and approximately 100 times since inception.
Since 2001, the ceiling has been raised 10 times! That averages out to once a year for the past 10 years.
US accrued debt hit the $14.294 limit on May 16th, but “creative accounting” has allowed the powers that be to continue borrowing until August 2nd before the ceiling is officially breached.
So what’s the point of a debt ceiling if it’s just going to get raised?
I personally think it’s good that the ceiling keeps everyone aware of the debt situation and initiates debates. That said, at times the process of getting the ceiling raised is such a circus act that it seems it may be better to do away with the limit altogether. After all, what good is a limit if it is always raised?
For the most part, the market is ignoring this whole debt ceiling fiasco. While the media is hyping up the debt ceiling situation the market is paying attention to earnings, which are stellar (approx 82% of S&P have beat). There is not much fear priced in, and based on the price action the market has no doubt that a deal will be made and the ceiling will be raised. After all, you didn’t really think the most influential/powerful country on earth would default did you?
Nice intrady bull flag in BIDU per the 2 day 2 minute chart. Before we enter a long position for a day trade, it must break above 153.40 resistance (blue oval in price area) on a spike in volume (blue oval in volume pane).
The flag pole measures approximately 3.50 (153.50-150). Therefore if the breakout occurs, we will look to exit around 156.50-157.00. Our stop will be 152.10, we would be risking around 1.50 to make around 3.50. Good trade.
UPDATE: Bought BIDU @ 153.74 for a day trade
UPDATE 2: Sold BIDU @ 154.11 for +0.24%. Lunch time!
Throughout the life of the trade, we frequently update members as to our thoughts on the position, modifications to the trade if any, and exit alerts when it’s time to exit.
This morning around 11:30 EST, we decided it was time to book profits on this trade. We quickly sent an EXIT ALERT to members. Since we showed you what the ENTRY ALERT looked like on this trade, it seems fitting to share the exit alert as well.
All details of the trade can be found below. Everything down to “Update 1” was shared on the initial Sneak Peek blog. Everything below “Update 1” is new to this post. The exit alert is explained in “Update 4” and the actual fill on the exit is “Update 5”. Let us know if you have any questions about the layout of this alert.
The icing on the cake in this trade is the fact that TBT had a significant sell off around 1:00 EST. The timing on this exit was solid, and we may re-enter this position or a similar bullish TBT position now that it is back at 32.00 support.
Max Potential Gain: $80 per contract if TBT expires at or above 32 on August expiration
Max Potential Loss: $3,115 if TBT goes to $0 by August expiration (highly unlikely). $200 loss more likely.
Break Even: $31.15
Probability of Success: approximately 63.84%
Portfolio Management: If these Puts are exercised, the buying power effect will be approximately $3,115 per contract (long 100 shares from 31.15 basis). We do not want TBT to make up more than 5% of our portfolio holdings. Therefore, an account size of $65k should not sell more than 1 contract. An account size below 65k should not participate in this trade, and may consider selling the Aug 30/32 Bull Put Spread (sell 32 Puts, buy 30 Puts) as an alternative.
Note: Naked Puts is a high risk Options Strategy. Do not follow this trade if you are not prepared to go long 100 shares of TBT from 31.15 basis per contract if TBT fades and the shares are “put to you.”
Analysis: TBT has proven support at 32.00, meaning it’s a level where buyers are comfortable stepping in. TBT had a parabolic move after its most recent successful test of 32.00 support, and is now retracing almost 100% of that upside boost. We see this as a great opportunity to put a bullish position on the stock.
Rather than out right buying the underlying, we have opted to sell Naked Puts in an effort to either collect premium or obatin shares of TBT at a price approximately 4.15% cheaper thank the current price point. The boost in volatility has inflated the price of these options today, which is icing on the cake in our eyes.
Click play on the video below for a visual analysis of this trade…
UPDATE 1 (7/11/11 2:30pm EDT): filled @ 0.88
UPDATE 2 (7/13/11 4:25pm EDT): Bonds remain in demand. The support level at 32.00 in TBT is being put to the test, but so far it is holding. Bernanke’s questions today was not exceptionally positive for equities, so it is no surprise that there was a rally in bond (flight to safety).
We will continue to keep a close eye on this position, but for now intend to hold this into expiration. When we entered these Naked Puts, the objective was to either keep the premium or get long TBT from an attractive price point. We are fine with either scenario. That said, we will be sure to consider that some people may have played the 30/32 Bull Put Spread alternative and keep you up to date on what we would do had we taken that position.
UPDATE 3 (7/15/11 2:41pm EDT): Bond volatility continues. Earlier today we thought about covering the Short Put position, but getting long TBT from a cost basis of 31.12 would not be a bad thing so we intend to ride this trade out. That said, you could cover here at around 0.75 for a decent return on capital. Furthermore, if you followed the alternative 30/32 Bullish Vertical suggestion, you can cover here @ 0.50 for a gain of approx 0.15 depending on your fill.
Bottom Line: If you prefer to bail on this bond volatility, there is absolutely nothing wrong with that.
If you chose the alternative TBT Aug11 30/32 Bull Put Spread, you can cover it @ 0.40 for a gain of approx 0.25 here, sweet!
We intended to hold these Naked Puts into August Expiration, but we have a solid capital gain in tact here and we are noting buyers at the 125 level in Bond Future (/ZB). Furthermore, it doesn’t hurt to take profits here and free up some capital for other ideas.
This is not the end of TBT…expect more TBT trades in the very near future. We anticipate a pull back here, in which we will position bullish into once again. Nice trade here!
UPDATE 5 (7/19/11 11:36am EDT): Covered TBT Aug11 32 Puts @ 0.54 for +0.34, a gain of $34 per contract.
AAPL is an incredible company. I use their products every day, and intend to continue doing so for the unforeseeable future.
Today after the bell, AAPL reports Q2 earnings. Let’s take a moment to analyze the situation, just like we did with GOOG last week.
We will use the Weekly Options, which expire this Friday. AAPL stock is currently trading at 377.00…
Closest to the money Straddle is the 380 @ 21.85 ask
Closest to the money Strangle is the 375/380 @ 19.25 ask
(21.85 + 19.25) / 2 = 20.55
The expected move in AAPL is 20.55, or 5.41% up or down, at this very moment in AAPL. This will vary throughout the day, but it gives us a general idea.
Let’s take into consideration the fact that AAPL has moved 20% since the June 20 low near 310 (chart below). Also, AAPL is currently in new highs. Regardless of the fact I absolutely love this stock, I cannot be extremely bullish here.
We are holding a Aug 335 340 375 380 Iron Condor from 2.50 credit, and intend to hold it until the Monday or Tuesday of August expiration week. This mean we are expecting a muted or moderately bearish reaction to earnings. Even if there is a pop, we do not expect it to hold. Of course, we are human and may be wrong but the trade made since at the 2.50 fill.
Let’s pretend we are not in a position already here. We would likely favor the 395/400 Bear Call spread, or 400 or 405 Short Calls here (both Weekly Options positions). That really goes against our emotional attachment to AAPL as a company, but given the recent 20% upside move we feel a massively bullish earnings report is already priced in here.
It’s a tough call, so it’s probably best to stay away.