| | | | | Quick Tips To Better Options Trading
Many of the tips that I'm sharing with you today come from over 20 years of trading experience. Remember, there's no correlation between complex concepts and profitability, and I urge all of you to follow these simple trading tips diligently.
Options liquidity is generally 10% to 20% of the underlying asset and that makes it necessary to use limit orders at all times, regardless of the option that you are trading.
Avoid purchasing options that are very far out of the money because they appear to give high degree of leverage, but the odds of them expiring in the money is incredibly low majority of the time.
The impact of implied volatility on the price of options can be substantial and can completely distort and grossly over-value the price of an option. Therefore you should know ahead of time the implied volatility level of each option before you initiate either a long position or a short position.
Before you begin trading exotic strategies, learn and focus on simple positions that don't require numerous options to form a spread. Combination spreads that hold several long and short positions rarely work out and will end up costing you more commission than the potential profit on the trade.
Day trading options may seem like a viable choice, but liquidity levels make the spreads between the bid and offer unusually large and can cause you to risk much more than you originally intended when entering the trade as well as the profit potential that can be gained by opening the trade and closing the trade during the same day.
If you are a directional trader and buy options, consider entry methods that rely on low volatility levels or pullbacks instead of breakouts.
These entry methods rely on low levels of implied volatility and when the underlying asset breaks out and begins moving, the option begins increasing in value very quickly; because implied volatility levels increase drastically, making the option overvalued and undesirable for buyers.
Because options liquidity is relatively lower than the underlying asset, the time of day you enter the trade can have a significant impact on your fill price.
Entering orders during certain time periods of the day, such as near the opening or the closing when volatility is high will result in worse price fills.
While entering orders during calm periods, such as mid-day, when volatility levels are lower, can help you gain a substantially better price fill.
Do not sell premium without some type of protection in case of unforeseeable price moves. Selling naked options seems like a good idea because the majority of options that are out of the money expire worthless.
However, before the option expires it may inflate substantially in value; causing you to have to put up a massive margin deposit to continue holding the position till it expires.
It's very easy for an option that was worth $100.00 to inflate into a $2,000.00 contract in less than 24 hours.
If you sold 100 contracts and brought in $10,000.00 in premium, the same options would be worth$200,000.00, and you would have to either liquidate your account or come up with $200,000.00 in cash to cover the position till expiration.
Don't always assume that expensive options should be sold and cheap options should be purchased. You will find that the majority of the time overpriced options are expensive because positive earnings or take over news is expected from the company.
Similarly, you will find that the majority of "underpriced" options are cheap because the probability of these options becoming valuable before expiration is very low.
When I began trading options, I made the mistake of selling options because their implied volatility was very high, only to learn that the underlying stock was a take over candidate and the options continued moving higher, multiplying in value over the next two weeks.
You should avoid legging into spreads because you run the risk of the underlying asset moving against you before you had the chance to enter both (all) sides of the spread.
Furthermore, entering the trade as a spread allows you to negotiate a better price fill the majority of the time because you are combining multiple positions into one.
Never enter an options trade without having a predefined exit plan. Before you initiate the trade, your mind is completely objective since no risk is assumed.
Once you enter the trade and assume the risk that comes with an option position it becomes very difficult to stay neutral and manage the trade without a pre-defined set of rules to guide you along the way.
When planning your exit, always take into account the best case scenario and the worst case scenario in case the position goes against you.
Don't underestimate the value of basic option sentiment such as open interest and put call ratio. These very basic tools can alert you to sudden changes in both price and overall momentum of the underlying asset.
By following these simple options trading tips, you will avoid very simple mistakes that can make the difference between winning and losing. |
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| | | | | | | From the WealthPress Mailbag
Jeff K. writes…
"Thanks again for your time Roger, I am learning lot's more with your program than with all the others I have purchased in the past several years. You have a natural gift for teaching and I'm very happy to be part of the group. Keep up the great work!"
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| | | Market Action
U.S. markets showed continued weakness but rebounded off the midday lows to settle mostly higher despite some sharp remarks from Commerce Secretary Wilbur Ross on China trade negotiations. Concerns over slower economic growth on higher inflation along with the start of the FOMC meeting also played a role in the intraday weakness. However, the two-day meeting is expected to be a nonevent with Wall Street not anticipating any rate action, nor any significant change in the policy statement.
The Nasdaq gained 0.9% despite testing a low of 7,036 while holding crucial support at the 7,000 level for the 7th-straight session. The Russell 2000 was higher by 0.6% following the backtest to 1,527 but closed back above its 50-day moving average.
The S&P 500 gained 0.3% after trading down to 2,625 and coming within a dozen points of breaching its 200-day moving average. The Dow dropped 0.3% after tumbling to a session low of 23,808 before rebounding just above its 200-day moving average to hold the 24,000 level for the 5th-straight session.
Technology and Real Estate showed the most sector strength after rising 1.3% and 0.7%, respectively. Consumer Staples and Energy paced the laggards after giving back 0.9% and 0.6% while Materials were down 0.5%.
Global Economy
European markets were mixed with the Stoxx 600 Europe slipping 0.1% while UK's FTSE 100 was up 0.2%. Germany's DAX 30, France's CAC 40 and the Belgium20 were closed for the May Day holiday.
UK April Markit manufacturing PMI fell 1 to 53.9, weaker than expectations for a dip of 0.3 to 54.8.
UK March net consumer credit rose 0.3 billion pounds, weaker than expectations of 1.4 billion pounds.
Asian markets settled higher in light trading as Hong Kong, China, and South Korea were also closed for the holiday. Australia's S&P/ASX 200 added 0.5% while Japan's Nikkei climbed 0.2%.
The Japan April Nikkei manufacturing PMI was revised upward to 53.8 from the previously reported 53.3.
Japan April vehicle sales rose 0.5% year-over-year, representing the first increase in seven months.
U.S. Economy
Redbook Store Sales were up 3.5% for the year in the week ending April 28th.
PMI Manufacturing Index for April was in-line with the flash reading at 56.5.
ISM Manufacturing Index fell 2 points to 57.3 in April, which was below expectations for a print of 58.5.
March Construction Spending sank 1.7%, missing forecasts for a rise of 0.5%.
In trade news, the White House announced it has permanently exempted Argentina, Brazil, and Australia from the steel and aluminum tariffs and extended the exemption by 30 days for the EU, Canada, and Mexico. |
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Market Sentiment
The iShares 20+ Year Treasury Bond ETF (TLT) closed lower after trading down to $118.23 to snap a 3-session win streak. Near-term support at $118.25-$118 held with a close below the latter being a slightly bearish signal. Resistance remains at $119-$119.25 and the 50-day moving average.
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Volatility Index
The S&P 500 Volatility Index ($VIX) tapped an intraday high of 16.82 with lowered resistance at 16.50-17 getting split but holding for a third-straight session. The VIX has also been holding its 100-day moving average since last Friday with support at 15-14.50 still in play.
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Market Analysis
The Spider Small-Cap 600 ETF (SLY) closed back above its 50-day moving average with today's high reaching $135.57. A triple-top formation at $139-$140 occurred in mid-April and is typically followed by a backtest towards the 50-day moving average. Near-term resistance is at $136-$136.50 with continued closes back above $137 being a slightly bullish development. However, support at $134-$133.50 was breached intraday with the technical picture likely to worsen on a close below $133. RSI is trying to clear April resistance at 50-55. A close below 45-40 and March support levels would be a bearish signal for a continued backtest towards 30 and February lows. |
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Sector
The Dow Jones Transportation Average ($TRAN) has been in a relatively tight range between 10,400-10,600 the past six trading sessions. These levels have been slightly stretched to the downside and upside in five of the sessions with Tuesday's low tapping 10,293. Support at 10,450-10,400 and the 50-day moving average has been shaky following back-to-back closes below the latter. A close below 10,300 would be a bearish signal with risk towards the 10,000 level and the 200-day moving average. The 200-day MA has been holding since September 2017 with the early April lows at 10,084 and 10,036. Resistance is at 10,500-10,550 with continued closes above 10,600 being a slightly bullish development. The 50-day moving average has leveled out following a bearish downtrend from mid-March thru mid-April. RSI is trying to hold near-term support at 45 with risk to 40 and April lows on a close below this level. Resistance is at 50. |
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All The Best,
Roger Scott
WealthPress |
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