al-brooks-course
11 - Trading Options for Day Trades
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Transcript 001
Time: 00:02
Bilingual Transcript
00:02 - 00:05
EN: This is Al Brooks, and this is my Price Action Trading Course.
00:05 - 00:10
EN: This module is about trading options for day trades.
00:13 - 00:18
EN: Why trade options as day trades instead of trading the underlying?
00:18 - 00:21
EN: Well, first of all, the absolute risk is much smaller,
00:21 - 00:26
EN: yet the cost and profit are about the same, and it gives you peace of mind.
00:26 - 00:28
EN: The less you have to worry about money,
00:28 - 00:31
EN: the more objective you are about your decisions,
00:31 - 00:35
EN: especially when the market is in unusual circumstances,
00:35 - 00:39
EN: moving very, very fast, as it does several times a year.
00:42 - 00:46
EN: The bid/ask spread and the commissions are too big for scalping in general,
00:47 - 00:49
EN: so it forces you to swing trade.
00:49 - 00:53
EN: It also forces you only to take very strong trades.
00:53 - 00:56
EN: These strong trades are the most profitable.
00:58 - 01:04
EN: Here’s the 5-minute Emini chart, and let’s say for whatever reason,
01:04 - 01:08
EN: you did not get long earlier and you decide to get long up here.
01:08 - 01:12
EN: You know that your stop is below the bottom of the bull spike,
01:12 - 01:14
EN: and you say, “Wow, that’s 8 points away.
01:14 - 01:16
EN: I can’t risk 8 points.
01:16 - 01:20
EN: And yet I only trade one Emini contract, so I can’t take the trade.”
01:20 - 01:24
EN: Well, an alternative to doing that is to use options.
01:24 - 01:29
EN: You could simply go ahead and buy an At The Money weekly SPDR call.
01:29 - 01:33
EN: Or if it’s still too expensive, buy slightly Out of The Money SPDR call.
01:34 - 01:37
EN: Options are a very good alternative to stocks,
01:37 - 01:40
EN: and especially a big market like the Emini or the SPDR,
01:40 - 01:43
EN: or SPDR calls, have a tremendous volume.
01:43 - 01:45
EN: They’re excellent alternatives
01:45 - 01:48
EN: to taking outright positions in the SPDR or the Emini.
01:48 - 01:50
EN: Let’s give an alternate example here.
01:50 - 01:54
EN: Let’s say you happen to buy here and you’re still long here.
01:54 - 01:58
EN: Your stop is now 7 points away, and you don’t want to risk that much
01:58 - 02:01
EN: – yet you think the market is still going a lot higher.
02:01 - 02:06
EN: You should be reducing your position size to keep the risk the same,
02:06 - 02:10
EN: but if it’s too far away and you can’t reduce your position size,
02:10 - 02:14
EN: instead of continuing to hold your Emini and using a stop that might be too tight,
02:14 - 02:16
EN: like maybe below this bar, what you could do
02:16 - 02:22
EN: is simply sell out of your Emini position and go ahead and buy a SPDR call.
02:22 - 02:24
EN: An At The Money SPDR call, a weekly call.
02:25 - 02:26
EN: That would be a very good alternative.
02:26 - 02:28
EN: Let’s say you bought it and it cost 80 cents.
02:28 - 02:30
EN: Let’s say you bought a weekly call.
02:30 - 02:35
EN: The most you can lose is 80 cents, which times 100 shares is $80.
02:36 - 02:41
EN: The most you can lose is $80, and if the market goes up for a Measured Move
02:41 - 02:46
EN: based on the height of this spike, you probably will make $80 by the end of the day.
02:50 - 02:52
EN: I usually use weekly options.
02:52 - 02:57
EN: They expire on Friday’s close, and there’s very little time value to them.
02:57 - 03:01
EN: They also cost a lot less than monthly options.
03:01 - 03:04
EN: Because they’re expiring within 1 to 5 days,
03:04 - 03:07
EN: there’s very little time value in the premium.
03:09 - 03:14
EN: The volume of the At The Money put or call can be huge,
03:14 - 03:17
EN: and that creates very small bid/ask spreads,
03:17 - 03:23
EN: especially on markets where the options are very active (for example, the SPDR).
03:23 - 03:26
EN: When that’s the case, you can use market orders.
03:26 - 03:31
EN: I would not use market orders on a stock where the spread is very big, like Google,
03:32 - 03:36
EN: but a lot of times with Apple, you can do it, and always with a SPDR.
03:39 - 03:43
EN: Some abbreviations: ATM, At The Money.
03:43 - 03:45
EN: OTM, Out of The Money.
03:45 - 03:46
EN: ITM, In The Money.
03:46 - 03:50
EN: AIL, Always In Long (clear bull trend).
03:50 - 03:53
EN: AIS, Always In Short (a clear bear trend).
03:53 - 03:56
EN: I’m not going to be talking a lot about option basics,
03:56 - 04:02
EN: so I’m assuming that traders paying attention to this module know the difference
04:02 - 04:05
EN: between an At The Money call and an Out of The Money call.
04:05 - 04:10
EN: If the SPDR’s at 140 and you buy the 140 call, you’re buying At The Money.
04:10 - 04:15
EN: If you buy the 145 call, you’re buying an Out of The Money call.
04:15 - 04:20
EN: If the SPDR’s 140 and you buy a 130 call, you’re buying a deeply In The Money call.
04:20 - 04:25
EN: If it’s at 140 and you’re buying a 135 put, you’re buying an Out of The Money put.
04:29 - 04:32
EN: What exactly is At The Money (ATM)?
04:32 - 04:35
EN: The stock is rarely exactly at the option strike price.
04:35 - 04:39
EN: For example, let’s say the stock is 140.25.
04:39 - 04:42
EN: There is no strike at that price.
04:42 - 04:49
EN: There’s a 140, there’s a 140.50, a 141, but no 140.25.
04:49 - 04:53
EN: One nice thing about the SPDR is a lot of times they’ll have strikes
04:53 - 04:58
EN: that are 50 cents apart, so on the weekly options,
04:58 - 05:01
EN: a lot of times they’ll have a 140.50 call or put.
05:01 - 05:08
EN: So if the SPDR’s at 140.40, you’re not forced to buy the 140 call or the 141 put.
05:08 - 05:10
EN: You can buy the 140.50.
05:11 - 05:17
EN: So At The Money to me is the approximate nearest strike price to the underlying.
05:17 - 05:21
EN: I prefer slightly In The Money to Out of The Money
05:21 - 05:25
EN: because the In The Money option will have a broader range
05:25 - 05:29
EN: than the Out of The Money option, and that gives me more opportunity for profit.
05:30 - 05:34
EN: When you can’t decide In The Money or Out of The Money, doesn’t matter.
05:34 - 05:35
EN: Just choose either.
05:37 - 05:44
EN: An example: let’s say a stock is at somewhere in the range between 99.80 and 100.70.
05:45 - 05:48
EN: I would trade the 100 calls.
05:48 - 05:53
EN: Even 99.80, the 100 calls would be slightly Out of The Money, but only slightly.
05:54 - 05:58
EN: So at 100.70, the calls are way In The Money,
05:58 - 06:02
EN: but I would still probably trade the 100 calls instead of the 101s.
06:03 - 06:09
EN: If it’s at 99.40, I would trade the 100 puts, even though that’s way In The Money.
06:09 - 06:13
EN: But I’d rather do that than trade the 99s, which is Out of The Money.
06:16 - 06:21
EN: Here’s an example comparing out of the money and At The Money calls.
06:21 - 06:23
EN: On the left, here’s the SPDR.
06:23 - 06:25
EN: It’s a line chart, not a bar chart.
06:25 - 06:27
EN: This is what took place today.
06:27 - 06:29
EN: We had a 90 cent range.
06:29 - 06:34
EN: The market opened up; At The Money was 141 earlier in the day.
06:34 - 06:35
EN: That’s the closest strike.
06:36 - 06:37
EN: So At The Money is 141.
06:38 - 06:41
EN: Had I bought an At The Money call at the absolute low tick
06:41 - 06:42
EN: – well, let me put it this way.
06:42 - 06:45
EN: The 141 call had a range of 59 cents today.
06:46 - 06:48
EN: The SPDR itself had a range of 90 cents.
06:48 - 06:51
EN: But if I instead bought the Out of The Money call,
06:51 - 06:54
EN: the next strike up, the 142, it’s a lot cheaper.
06:55 - 06:58
EN: It’s 20 cents instead of 60 cents to buy it.
06:58 - 07:01
EN: But the range was only 32 cents.
07:01 - 07:06
EN: If your commissions are a penny in and a penny out and the spread is a penny in
07:06 - 07:10
EN: and a penny out, that means your overhead is 4 cents.
07:11 - 07:15
EN: When your range is 32 cents and you have 4 cents’ built-in overhead,
07:15 - 07:18
EN: it’s very hard to make much of a profit
07:18 - 07:20
EN: because you’re not going to be buying the low tick,
07:20 - 07:21
EN: you’re not going to be selling the high tick.
07:21 - 07:25
EN: You’ll be buying somewhere in here, 30 cents, and you’ll be selling here,
07:25 - 07:28
EN: 40 cents, and then you have 4 cents’ overhead,
07:28 - 07:35
EN: so you’re making 6 cents’ profit on a win, and you’re losing 14 cents on a loss.
07:35 - 07:38
EN: It’s impossible to make a living when your losses
07:38 - 07:42
EN: are two times or more greater than your wins.
07:43 - 07:46
EN: On the other hand, if you have a 60 cent range, 59 cent range,
07:46 - 07:47
EN: it’s much easier to make a profit.
07:47 - 07:52
EN: You buy down here around 70, you sell up here for around a dollar,
07:52 - 07:54
EN: and you can make 30 cents on a good move.
07:57 - 07:59
EN: Okay, what happens on a Friday?
07:59 - 08:02
EN: The weekly options, they expire every Friday.
08:02 - 08:04
EN: What about trading them on a Friday?
08:04 - 08:07
EN: Should I be trading next week or the monthly option,
08:07 - 08:10
EN: which might expire two, three, four weeks out?
08:10 - 08:15
EN: If in doubt, always trade the next week or the next month to make sure
08:15 - 08:17
EN: that you’re trading an option that has good volume.
08:17 - 08:22
EN: In general, you can trade weekly options on expiration day.
08:22 - 08:26
EN: The volume is usually so huge and the movement is good.
08:27 - 08:30
EN: The time decay usually doesn’t come in until the very end of the day,
08:30 - 08:33
EN: so for most of the day, you can trade the weekly options
08:33 - 08:35
EN: right up until the final hour or two.
08:39 - 08:44
EN: In an active market like the SPDR (SPY), you certainly can trade the weekly options,
08:44 - 08:47
EN: even though they expire today, on a Friday.
08:50 - 08:55
EN: Let’s compare this Friday’s option with next Friday’s option.
08:55 - 09:00
EN: An At The Money call in the SPDR and an At The Money call in the SPDR,
09:00 - 09:03
EN: and this is right through the end of the day.
09:03 - 09:06
EN: This is today’s option expiring today.
09:06 - 09:12
EN: The range of that call was 78 cents, and it closed up here, 70 cents.
09:12 - 09:18
EN: If I traded next Friday’s option, the range was 70 cents,
09:18 - 09:21
EN: a little bit smaller, but look at the volume.
09:21 - 09:23
EN: 42,000, which is great.
09:23 - 09:26
EN: But look at today’s volume on the option trading today.
09:26 - 09:29
EN: 166,000 contracts today.
09:29 - 09:31
EN: Tremendous volume.
09:31 - 09:32
EN: You can trade it at the market.
09:32 - 09:35
EN: You don’t have to worry about limit orders, getting in, getting out.
09:35 - 09:38
EN: You can just trade it at the market, and you have very good range,
09:38 - 09:42
EN: and the market traded well right up to the final minute of the day.
09:42 - 09:45
EN: 42,000 contracts, you can also trade at the market.
09:46 - 09:48
EN: To me, I would trade this.
09:48 - 09:51
EN: Bigger volume and slightly bigger range.
09:55 - 09:58
EN: So use the chart of the stock to make your trading decisions.
09:58 - 10:02
EN: I don’t look at the chart of the options when I’m deciding,
10:02 - 10:04
EN: should I buy or should I sell?
10:04 - 10:09
EN: To me, the options are a reflection of what’s going on with the underlying stock.
10:10 - 10:13
EN: I place my entry orders in the options market.
10:13 - 10:15
EN: I can exit with limit or market orders,
10:15 - 10:21
EN: but I’m making my decisions based upon what the underlying stock is doing.
10:21 - 10:25
EN: So for example, if the SPDR looks like it’s a buy and I’d rather buy options,
10:25 - 10:29
EN: I immediately buy at the market or with a limit order At The Money call,
10:30 - 10:33
EN: assuming that I’m trading the options today
10:33 - 10:36
EN: instead of the SPDR – which I sometimes do.
10:36 - 10:41
EN: Sometimes I’ll take swing trades in the SPDR calls or SPDR puts,
10:41 - 10:45
EN: day trade swing trades, holding for an hour or two or three,
10:45 - 10:49
EN: and I’ll take scalps in the Emini, the futures contract.
10:52 - 10:55
EN: What kind of protective stops do I use with my options?
10:55 - 10:56
EN: None.
10:56 - 10:58
EN: The worst case is the option falls to zero.
10:58 - 11:00
EN: That is my stop.
11:00 - 11:04
EN: If I buy an option for 60 cents and the stock market crashes,
11:05 - 11:07
EN: the most I lose is 60 cents.
11:07 - 11:09
EN: So that is my stop.
11:09 - 11:10
EN: My stop is zero.
11:10 - 11:11
EN: It’s the cost of the option.
11:11 - 11:15
EN: If the stock goes against me greatly during the day,
11:15 - 11:18
EN: usually the option will not fall to zero.
11:18 - 11:22
EN: It may lose 20 cents or 30 cents, but will not fall to zero.
11:23 - 11:28
EN: So worst case realistically is I’m risking 20 cents or 30 cents.
11:29 - 11:33
EN: If I had a stop in the SPDR, I might have a stop 20 or 30 cents away,
11:33 - 11:36
EN: so there’s no real sense in and no need to have a stop.
11:40 - 11:43
EN: As the price of the stock changes, the price of the option changes.
11:44 - 11:49
EN: All option prices change, even if no option trades take place.
11:49 - 11:53
EN: So let’s say the SPDR’s at 140 and it goes to 145.
11:53 - 11:56
EN: Well, guess what’s going to happen to the call, the At The Money call?
11:56 - 12:00
EN: If the SPDR was up 50 cents, the call will go up 25 cents.
12:00 - 12:06
EN: In general, an At The Money put or call moves about half as much as the underlying.
12:06 - 12:09
EN: I’m not going to go into all the Greeks and the explanations
12:09 - 12:13
EN: why that’s not exactly the case, and it’s not exactly the case.
12:13 - 12:15
EN: But it’s in the ballpark.
12:16 - 12:21
EN: So let’s say I buy a 140 call when the SPDR’s at 140
12:21 - 12:24
EN: and I’m planning on getting out if the option falls 10 cents.
12:24 - 12:28
EN: I can place a stop order to get me out 10 cents below.
12:28 - 12:36
EN: However, the SPDR could fall to 139, and if no trades took place in my 140 call
12:36 - 12:40
EN: – let’s say all the other calls were trading and no trades took place on my call
12:40 - 12:44
EN: – the bid and ask could be well below my stop price,
12:44 - 12:46
EN: but I’d still be holding my call.
12:46 - 12:50
EN: My stop would not be triggered because a stop only gets triggered
12:50 - 12:53
EN: if a trade takes place in your particular market.
12:53 - 13:00
EN: So if I’m holding a 140 call and nobody is trading the calls, my strike price,
13:00 - 13:05
EN: the bid/ask spread can continue to fall as the SPDR falls,
13:05 - 13:07
EN: but my stop won’t get triggered.
13:07 - 13:11
EN: That’s usually not a problem in the SPDR because the volume is so big
13:11 - 13:13
EN: and the options are traded so actively.
13:13 - 13:16
EN: But if you trade Goldman Sachs or let’s say Baidu
13:16 - 13:19
EN: or some thinner stock, that can be a problem.
13:21 - 13:26
EN: You can still trade them, but you cannot put stops in the options market
13:26 - 13:29
EN: unless you’re willing to take huge slippage,
13:29 - 13:31
EN: and the slippage can be very, very big.
13:33 - 13:37
EN: Remember, if the stock falls a dollar,
13:38 - 13:41
EN: the value of your call will fall 50 cents.
13:42 - 13:46
EN: If you look at the bid/ask spread, you’ll see that the bid/ask spread
13:46 - 13:48
EN: is 50 cents below the price that you paid.
13:48 - 13:54
EN: However, unless a trade takes place in your particular call,
13:54 - 13:56
EN: these stops won’t get triggered.
13:58 - 14:00
EN: Let me give you an example.
14:00 - 14:02
EN: Let’s say Baidu is at 100.
14:03 - 14:07
EN: You buy the At The Money call, the 100 call, and you pay $3.00 for it.
14:07 - 14:10
EN: You say, “Well, I don’t want to lose more than 20 cents.
14:10 - 14:13
EN: I’m going to put a stop to exit at 2.80.
14:13 - 14:18
EN: So if my call falls to 2.80, I’m going to get out and take a 20 cent loss.”
14:18 - 14:20
EN: There’s a problem with that.
14:20 - 14:24
EN: Let’s say Baidu starts to sell off and it falls down to 99.
14:24 - 14:29
EN: That means the value of your call is probably now worth about 2.50,
14:29 - 14:34
EN: and if you look over at your positions, you might find you’re still holding
14:34 - 14:36
EN: that 100 call and it’s not worth 2.50.
14:37 - 14:41
EN: How could it fall to 2.50, well below your 2.80 stop,
14:41 - 14:43
EN: and your stop not get filled?
14:43 - 14:48
EN: Well, it’s because the Baidu options are not actively traded,
14:48 - 14:52
EN: and it’s possible that no trades took place in the Baidu calls,
14:52 - 14:57
EN: even though Baidu fell a dollar and the value of the call fell 2.50.
14:57 - 15:00
EN: Your stop at 2.80 only gets hit if there’s a trade
15:00 - 15:04
EN: that takes place in that call at 2.80 or below.
15:06 - 15:10
EN: So right now you’re looking and you’re saying, “Huh, Baidu’s at 99.
15:10 - 15:14
EN: My call is at 2.50, and I’m still long, and the market’s falling.
15:14 - 15:15
EN: What am I going to do?”
15:18 - 15:24
EN: If someone finally places a trade in that call at 2.10, if someone buys a call,
15:24 - 15:28
EN: sells a call at 2.10 – remember, you bought it at 3.00;
15:28 - 15:30
EN: it’s way below your 2.80 stop.
15:31 - 15:37
EN: So somebody finally buys a call or sells a call and the trade takes place at 2.10.
15:38 - 15:42
EN: This is the first trade that took place at or below your stop price,
15:42 - 15:45
EN: so now your 2.80 stop becomes a market order.
15:46 - 15:51
EN: You’ll get filled at the bid, but the bid might be 1.90.
15:51 - 15:56
EN: There might be a 20 cent bid/ask spread in the Baidu 100 calls.
15:56 - 16:00
EN: So now you’ll get filled at the bid, which is 1.90.
16:00 - 16:04
EN: So your 2.80 stop got filled at 1.90, 90 cents worse
16:04 - 16:06
EN: than you thought it should be filled.
16:09 - 16:12
EN: That’s why you cannot use stops when you trade options,
16:12 - 16:14
EN: or why you should not use stops.
16:14 - 16:18
EN: What you do instead is you look at the underlying.
16:18 - 16:21
EN: You look at the chart of Baidu, the stock itself,
16:21 - 16:27
EN: and if it looks like the premise is no longer valid, if it looks like your premise,
16:27 - 16:31
EN: your thought that the market was going up is wrong, you get out.
16:31 - 16:35
EN: So you quickly go to Baidu and you get out with a limit order
16:35 - 16:38
EN: at the best price you can, which usually means at the bid.
16:38 - 16:39
EN: Don’t be greedy.
16:39 - 16:40
EN: You’re wrong.
16:40 - 16:41
EN: Just accept it.
16:41 - 16:44
EN: You’re going to be wrong a lot in trading, and when you’re wrong,
16:44 - 16:47
EN: just accept it, get out, and look for the next trade.
16:47 - 16:48
EN: Take your loss.
16:48 - 16:50
EN: Don’t get greedy and try to minimize your loss,
16:50 - 16:53
EN: hoping that the market will go your way a little bit
16:53 - 16:55
EN: so you can get out with a smaller loss.
16:55 - 16:57
EN: When you’re wrong, just get out.
17:00 - 17:03
EN: So once you decide that you’re wrong and that your underlying premise
17:03 - 17:08
EN: is no longer working, place a limit order that gets you out within seconds.
17:09 - 17:12
EN: You can exit at the bid or even a little bit worse.
17:12 - 17:13
EN: Just get out.
17:13 - 17:15
EN: Don’t try to save a couple ticks.
17:15 - 17:16
EN: Just get out when you’re wrong.
17:19 - 17:20
EN: When do you enter?
17:20 - 17:25
EN: As soon as the Always In position of the stock is clear.
17:25 - 17:29
EN: If it’s clearly going up, it’s Always In Long, buy a call.
17:29 - 17:35
EN: If it’s clearly Always In Short, if it’s clearly falling, buy a put.
17:38 - 17:42
EN: When you exit your option, you use the price of the stock
17:42 - 17:44
EN: and the chart of the stock as your guide.
17:44 - 17:50
EN: You swing your call or your put until the Always In direction reverses,
17:50 - 17:54
EN: and you exit with a loss when a stop on the underlying would be hit.
17:54 - 17:57
EN: So let’s say you’re long in the SPDR and it’s going up
17:57 - 17:59
EN: and up and up and up and up and up, and then you decide,
17:59 - 18:01
EN: “Oh, maybe it’s entering a Trading Range.
18:01 - 18:04
EN: I’m going to put a stop below this bar.” The market falls below that bar.
18:04 - 18:09
EN: Go to your options and get out at the market or place a limit order
18:09 - 18:12
EN: below the most recent price, and get out.
18:13 - 18:15
EN: When do you take partial profits?
18:15 - 18:19
EN: Well, when the underlying – let’s say the SPDR – reaches twice the Initial Risk,
18:19 - 18:23
EN: that’s when you should be thinking about taking some partial profits in your calls,
18:23 - 18:25
EN: assuming you bought a call.
18:29 - 18:31
EN: Let’s take an example using the SPDR.
18:31 - 18:36
EN: Let’s say the SPDR is at $140, and let’s say that tells you
18:36 - 18:41
EN: that a cost of 100 shares is 100 times that, $14,000.
18:41 - 18:44
EN: So you could buy 100 shares of the SPDR for $14,000.
18:45 - 18:52
EN: The cost of one At The Money weekly call or put might be about 70 cents.
18:52 - 18:55
EN: Times 100 shares, that’s $70.
18:56 - 19:00
EN: That is your maximum loss, even in a stock market crash.
19:00 - 19:01
EN: The most you can lose is $70.
19:01 - 19:06
EN: If the SPDR goes to zero and you bought the SPDR, you can lose $14,000.
19:10 - 19:13
EN: So let’s say the SPDR rallies a dollar.
19:13 - 19:15
EN: Let’s say it rallies 1% today.
19:16 - 19:21
EN: If you bought the SPDR at 140, your profit is $140 if you bought 100 shares.
19:22 - 19:26
EN: Your profit might be $50 if you bought one call.
19:29 - 19:36
EN: If the SPDR fell 2% today, the loss is $280 if you bought the SPDR,
19:36 - 19:41
EN: but you maybe only able to lose $50 if you bought the call.
19:44 - 19:49
EN: If the SPDR fell 5% today, a big move in the SPDR,
19:49 - 19:52
EN: you would lose $700 on your 100 shares.
19:52 - 19:58
EN: However, you maybe only will lose $65 if you bought the call.
19:58 - 20:02
EN: So on the down side, the losses are much smaller.
20:03 - 20:07
EN: Even though the rate of loss might be very fast in the SPDR,
20:07 - 20:10
EN: the rate of loss in the call will be less.
20:14 - 20:16
EN: Here’s another example.
20:16 - 20:21
EN: Over here, the SPDR had a very strong breakout, a Wedge Top, very strong breakout,
20:21 - 20:26
EN: follow-through, a bar, and that probably confirms the Always In Short.
20:26 - 20:29
EN: So we have a Wedge Top, a bear breakout below the Moving Average,
20:29 - 20:31
EN: and a follow-through bar.
20:31 - 20:34
EN: Most traders would say, yeah, it’s going to go short.
20:34 - 20:35
EN: It’s a short.
20:36 - 20:41
EN: The SPDR is at 142.65 at this moment, right?
20:41 - 20:46
EN: If you wanted to trade options instead of the SPDR itself, you could buy puts.
20:46 - 20:48
EN: And when would you exit the puts?
20:48 - 20:52
EN: Well, we had a series of consecutive Sell Climaxes.
20:52 - 20:56
EN: We broke below the trend channel line and we’re trying to reverse up.
20:56 - 20:58
EN: We have a 1 bar Final Flag, a bull reversal bar.
20:58 - 21:02
EN: We have a spike, a bear spike with three pushes down,
21:02 - 21:04
EN: and we’re getting near the end of the day.
21:04 - 21:08
EN: To me, this would be a good location to exit.
21:08 - 21:13
EN: So when the SPDR turns above this bar, it’s 141.65,
21:13 - 21:15
EN: a dollar less than where you bought it.
21:15 - 21:18
EN: I would get out of the puts at the market, for example,
21:18 - 21:22
EN: or with a limit order maybe a penny or two above the current
21:22 - 21:24
EN: – the last trade, the current price.
21:27 - 21:30
EN: What took place on those 143 puts?
21:30 - 21:32
EN: This is the chart of the puts.
21:33 - 21:36
EN: This is the bar where the SPDR became Always In Short.
21:36 - 21:38
EN: You bought the puts here.
21:38 - 21:41
EN: The ask was at 85 cents, so you bought them at 85 cents.
21:42 - 21:47
EN: You exited the puts here at the end of the day as the SPDR was turning up.
21:47 - 21:50
EN: You can see the puts are turning down.
21:50 - 21:53
EN: The bid at the puts is 150, right?
21:54 - 21:57
EN: You’d be able to sell your puts at 150.
21:57 - 22:00
EN: So you bought them at 85 cents, you sold them at 150.
22:00 - 22:08
EN: Profit is 65 cents per contract, but it’s 400 shares of stock, so it’s $65.
22:08 - 22:12
EN: So you made $65 on your one put.
22:16 - 22:19
EN: When the bars are huge, the risk is very, very big.
22:20 - 22:23
EN: Position size sometimes has to be very small.
22:23 - 22:26
EN: Let’s say you’re trading the SPDR and you have a huge bar.
22:26 - 22:31
EN: You might have to reduce your position size to one-fifth normal, 20% of normal.
22:32 - 22:35
EN: The profit that you stand to gain sometimes
22:35 - 22:38
EN: just doesn’t feel worth it when you’re trading that small.
22:38 - 22:43
EN: If the market moves huge after that big bar, you can make a lot of profit,
22:43 - 22:47
EN: but sometimes you’re afraid the market may be settling into a Trading Range,
22:47 - 22:49
EN: yet your stop has to be far away.
22:50 - 22:53
EN: One alternative that you can use is options.
22:57 - 23:00
EN: Another situation that happens all the time:
23:00 - 23:02
EN: you could have problems with the broker.
23:02 - 23:06
EN: The broker’s software or order system may go down.
23:06 - 23:08
EN: You may have problems with your data.
23:08 - 23:12
EN: I have had problems with many brokers over the years.
23:12 - 23:16
EN: They don’t compensate you for problems with their software and their systems.
23:16 - 23:18
EN: It’s user beware.
23:18 - 23:21
EN: Any problem, you assume the risk and you take the loss.
23:21 - 23:24
EN: I’ve had problems with the data.
23:24 - 23:27
EN: I’d call and yell at the data people and they’d say,
23:27 - 23:28
EN: “Oh, it’s just an exceptional problem.
23:28 - 23:32
EN: It’s never going to happen again.” And then a year later, it happens again.
23:32 - 23:33
EN: The same with the broker.
23:33 - 23:37
EN: There are days that come every few years that are so huge
23:37 - 23:43
EN: and so fast that they overwhelm your broker and they overwhelm your data provider.
23:44 - 23:48
EN: Broker will say, “Oh, we’re going to make changes and it’ll never happen again.”
23:48 - 23:50
EN: The data provider will say the same thing.
23:50 - 23:52
EN: Invariably, it happens again.
23:53 - 23:59
EN: So huge volume days can create problems with your broker and with your data,
23:59 - 24:01
EN: and that’s not even considering the problems
24:01 - 24:03
EN: that you can have with your internet provider.
24:04 - 24:08
EN: So stuff happens, and your data can be interrupted, your software can lock up,
24:08 - 24:13
EN: your broker software can lock up, and you can be stuck in a trade
24:13 - 24:16
EN: or you can be stuck not knowing whether you’re still in a trade,
24:16 - 24:17
EN: whether your stop has been hit.
24:17 - 24:20
EN: It’s very, very upsetting.
24:20 - 24:21
EN: I say that from experience.
24:21 - 24:25
EN: It’s happened many times to me over the years, even though the brokers
24:25 - 24:28
EN: and the data providers swear that “We’ll fix it right away
24:28 - 24:30
EN: and it’ll never happen again.”
24:34 - 24:35
EN: Let’s take an example.
24:35 - 24:40
EN: Let’s say the signal bar in the SPDR is five times bigger than an average bar.
24:41 - 24:45
EN: If you normally trade the SPDR and use a 20 tick stop,
24:46 - 24:53
EN: but now the current bar is $1.15 tall, that means your risk here is $1.17,
24:53 - 24:55
EN: 1 tick above, 1 tick above.
24:55 - 24:58
EN: So your risk is more than five times normal.
24:58 - 24:59
EN: It’s about six times normal.
24:59 - 25:03
EN: So if you’re going to trade, you have to trade one-sixth your normal size.
25:04 - 25:08
EN: The movement may not be enough after that one big bar to make much of a profit.
25:08 - 25:13
EN: As an alternative, you may just go ahead and buy the At The Money call.
25:16 - 25:19
EN: The call is based on the underlying, on the SPDR.
25:20 - 25:25
EN: So go ahead and just buy a call on the close of that strong breakout bar,
25:25 - 25:29
EN: and only exit the call if the SPDR falls below the low of that signal bar.
25:29 - 25:33
EN: Yes, that’s far below, 117 cents below your entry price
25:33 - 25:35
EN: or your theoretical entry price.
25:35 - 25:36
EN: But that’s okay.
25:36 - 25:41
EN: You do not exit the call if the call falls below the low of that bar.
25:41 - 25:46
EN: You’re basing your trading decisions not on the chart of the call.
25:46 - 25:50
EN: You’re basing your decisions on the chart of the underlying – in this case, the SPDR.
25:52 - 25:53
EN: So here’s an example.
25:54 - 25:58
EN: There was an FOMC report here, and we had a huge bar on the SPDR.
25:58 - 26:00
EN: This is the SPDR on the left.
26:00 - 26:04
EN: This is the weekly call, the At The Money call, on the right.
26:04 - 26:06
EN: The call expires tomorrow.
26:06 - 26:11
EN: The SPDR had a huge bar and a huge pullback on the very next bar.
26:11 - 26:17
EN: If you buy the close of this bar, your stop is below the bar, 75 cents below,
26:17 - 26:22
EN: and that’s more than three times the usual 20 cent stop that you might use.
26:22 - 26:25
EN: Your alternative is to trade the weekly calls.
26:26 - 26:30
EN: If you bought a call when the SPDR is here and you held
26:30 - 26:34
EN: through the three pushes up, the 2 bar reversal, you exited over here
26:34 - 26:37
EN: – so you bought the call when the SPDR does this,
26:37 - 26:40
EN: you exit the call when the SPDR does this.
26:41 - 26:43
EN: Here’s the chart of the call.
26:43 - 26:46
EN: So you bought the call here, and you exit here.
26:46 - 26:51
EN: So you bought the call here at 71 cents and you exit here for $1.75.
26:51 - 26:54
EN: So you made 74 cents on the trade.
26:55 - 26:59
EN: This is why you do not exit the call based upon the call chart.
26:59 - 27:01
EN: The charts are much less reliable.
27:01 - 27:05
EN: You can see the call dipped well below the signal bar,
27:05 - 27:10
EN: whereas the SPDR itself never dropped below the signal bar.
27:11 - 27:14
EN: You ignore the chart of the call.
27:14 - 27:17
EN: You only look at the chart of the SPDR, and you make your decisions
27:17 - 27:20
EN: based on the SPDR, the underlying.
27:24 - 27:26
EN: Call versus stock.
27:26 - 27:29
EN: Here, the stock is an ETF, so it’s not really a stock.
27:29 - 27:35
EN: So if you bought the weekly At The Money call, your Actual Risk was 31 cents.
27:35 - 27:37
EN: That’s below the bottom of that dip.
27:37 - 27:42
EN: The profit on the call was $1.04, which is about three times your risk.
27:42 - 27:47
EN: If you traded the SPDR itself, your Actual Risk was 52 cents,
27:47 - 27:50
EN: down to the bottom of the bar after you entered,
27:50 - 27:55
EN: and your profit was $1.61, about three times your risk.
27:55 - 27:58
EN: $1.61, about three times 52 cents.
27:58 - 28:02
EN: The call, the profit was about three times your Actual Risk.
28:02 - 28:07
EN: But you had potential problems with the SPDR that you did not have with the call.
28:07 - 28:12
EN: If you had problems with your data or your broker, your risk could’ve been much,
28:12 - 28:19
EN: much worse, whereas with your call, you can only lose the cost of the call itself.
28:19 - 28:23
EN: So there’s a guaranteed floor below the market that’s not very far away.
28:23 - 28:27
EN: For the SPDR, it could go to zero and you could lose a lot of money.
28:30 - 28:33
EN: So there are some benefits to buying the call.
28:33 - 28:36
EN: The maximum risk, no matter what problems happened
28:36 - 28:40
EN: that were beyond your control – if you bought the call for 71 cents,
28:40 - 28:42
EN: you paid $71 for it.
28:42 - 28:46
EN: The maximum that you could lose is $71.
28:46 - 28:51
EN: If you bought the SPDR itself, it’s possible if your data went down
28:51 - 28:55
EN: or if the broker had problems, the SPDR could fall two or three dollars more
28:56 - 29:00
EN: before the problem was fixed, and you could easily lose $200 to $300.
29:00 - 29:06
EN: Theoretically, you could lose the full $145, which is $14,500.
29:06 - 29:10
EN: That’s not going to happen, but you certainly could lose hundreds of dollars.
29:13 - 29:19
EN: Those 145 calls today traded 120,000 contracts,
29:19 - 29:23
EN: so huge volume, and the spreads are extremely tight.
29:24 - 29:28
EN: Because of that volume and the tight spreads and the ability to use market orders,
29:28 - 29:31
EN: and because of all the other advantages that I mentioned,
29:31 - 29:36
EN: day trading the SPDR weekly options is extremely popular with traders,
29:36 - 29:41
EN: especially during unusual days where the range is exceptionally large.
29:45 - 29:47
EN: Let’s say you want to fade a climax.
29:48 - 29:53
EN: Let’s say the market has a series of climaxes, Sell Climaxes or Buy Climaxes,
29:54 - 29:55
EN: and you feel like it’s about to reverse.
29:55 - 29:58
EN: You’re not sure if you’re picking the actual extreme,
29:58 - 30:02
EN: but you feel pretty confident that it’ll happen pretty soon.
30:02 - 30:07
EN: After a series of climaxes, the market will usually have a big reversal,
30:08 - 30:11
EN: at least 10 bars, two legs (TBTL).
30:11 - 30:15
EN: And sometimes the risk is too big to scale in against the trend.
30:15 - 30:18
EN: The market’s falling in huge steps down.
30:18 - 30:22
EN: If you buy, it could have another step or two down that are huge,
30:22 - 30:26
EN: and the risk could be much greater than you would care to assume.
30:26 - 30:29
EN: An alternative is to buy weekly options.
30:32 - 30:33
EN: So here’s an example.
30:35 - 30:38
EN: A huge bull breakout on the FOMC report.
30:38 - 30:40
EN: A series of Buy Climaxes.
30:40 - 30:41
EN: Each trend bar is a climax.
30:41 - 30:44
EN: Each series of trend bars is a climax.
30:44 - 30:48
EN: So here, here, these 2 bars, these 4 bars, that’s a climax.
30:48 - 30:51
EN: Another 3, 4, here, here.
30:51 - 30:55
EN: So we’ve had a series of extreme Buy Climaxes.
30:55 - 31:00
EN: We’re in an area of a Measured Move based on the height of this initial spike.
31:00 - 31:02
EN: We had a pause and then a resumption.
31:02 - 31:05
EN: So we’re at an area of a Measured Move.
31:05 - 31:11
EN: You could argue this is a very steep Wedge Top, three pushes up – one, two, three.
31:11 - 31:13
EN: Possible Final Flag.
31:13 - 31:18
EN: So there are lots of reasons for this market to be turning down,
31:18 - 31:23
EN: having a pretty substantial pullback after such an extreme Buy Climax.
31:23 - 31:28
EN: We have a reversal bar, close below the middle of the bar,
31:28 - 31:32
EN: but a bull body instead of a bear body, so that’s a little bit less certain.
31:32 - 31:35
EN: But At The Money is 148.
31:35 - 31:36
EN: You have a choice.
31:36 - 31:39
EN: You could short this, but your risk is that the market
31:39 - 31:42
EN: may have another couple very big pushes up and you could be down
31:42 - 31:45
EN: much further than you’d want to be.
31:45 - 31:49
EN: The alternative is to buy an At The Money put, a 148 put.
31:49 - 31:55
EN: You could either exit if the SPDR goes above this top, or you could scale in
31:55 - 31:57
EN: and buy more puts higher, betting that the market
31:57 - 32:00
EN: will at least come down to your original entry price.
32:02 - 32:04
EN: You could then decide what your target is.
32:04 - 32:07
EN: You want 10 bars, two legs down?
32:07 - 32:10
EN: Well, you have one leg down, pullback, and a second leg down,
32:10 - 32:12
EN: and you could exit your puts down here.
32:13 - 32:17
EN: Here’s a chart of that particular At The Money 148 put.
32:17 - 32:22
EN: So you bought the put here, 33 cents, above this signal bar.
32:23 - 32:25
EN: You wouldn’t be placing a stop order.
32:25 - 32:28
EN: You’d simply buy at the market or you’d place a limit order
32:28 - 32:32
EN: to above the most recent price, and then you would exit here,
32:32 - 32:34
EN: which is corresponding to over here.
32:34 - 32:39
EN: You’d exit your puts at 95 cents and you’d have a 62 cent profit.
32:40 - 32:43
EN: So you bought your puts here at this signal bar
32:43 - 32:48
EN: or as soon as the market turned below; you sold out of your puts
32:48 - 32:50
EN: as soon as the market turned above this bull reversal bar
32:50 - 32:54
EN: at the bottom of that High 2 bull flag.
32:57 - 33:00
EN: Okay, the risk was small and the reward was big.
33:00 - 33:03
EN: If you took profits at the end of that second leg down,
33:03 - 33:07
EN: you made 62 cents on your Initial Risk of 33 cents.
33:07 - 33:12
EN: Even if the put fell to zero, the most you could have lost is 33 cents.
33:13 - 33:16
EN: 62 cents’ profit corresponds to $62
33:16 - 33:21
EN: because each put controls 100 shares of the underlying.
33:24 - 33:30
EN: Even if the SPDR continued up for another dollar, the put might only fall 10 cents.
33:30 - 33:34
EN: So instead of being 33 cents, it’ll fall to maybe 20 cents.
33:34 - 33:37
EN: So even if the SPDR went up a dollar, which is a lot,
33:37 - 33:41
EN: the value of your put would not fall all that much.
33:41 - 33:43
EN: So you really don’t have much risk.
33:46 - 33:49
EN: Even if the SPDR continued up another dollar,
33:49 - 33:52
EN: if you thought that your premise was still valid,
33:52 - 33:55
EN: that a big correction after the consecutive Buy Climaxes
33:55 - 33:57
EN: was likely, you could add on.
33:57 - 34:02
EN: Let’s say the SPDR went up a dollar and the value of your put fell to 20 cents.
34:03 - 34:07
EN: You could buy more puts, maybe even twice the size of your original entry,
34:07 - 34:10
EN: with the goal of getting out if the SPDR came back down
34:10 - 34:13
EN: to that original signal bar low.
34:14 - 34:16
EN: If you do add on, especially if you double up,
34:16 - 34:19
EN: especially if you feel that your premise is still valid,
34:19 - 34:23
EN: you’ll probably get out with at least a small profit and possibly a big one
34:23 - 34:27
EN: if the market turns strongly down, in your direction.
34:33 - 34:34
EN: Put versus stock.
34:34 - 34:40
EN: If you bought the weekly At The Money put, your Actual Risk was only 3 cents.
34:40 - 34:44
EN: The put only went 3 cents against your original entry price.
34:44 - 34:50
EN: Your profit on the put, 29 cents, or times 100 shares, $29.
34:50 - 34:52
EN: So it’s about 10 times your Actual Risk.
34:52 - 34:58
EN: You could’ve scaled in if the S&P moved higher and the put fell in value.
34:58 - 35:02
EN: Instead, if you traded the SPDR, the market quickly went your way,
35:02 - 35:04
EN: and the Actual Risk was only 7 cents.
35:04 - 35:07
EN: The profit, had you traded the SPDR instead of the put,
35:07 - 35:10
EN: 81 cents or about 11 times your risk.
35:10 - 35:13
EN: Comparable to what you had with the put itself.
35:14 - 35:18
EN: However, you’d be less inclined to scale in if the SPDR
35:18 - 35:20
EN: kept raising up another dollar or so.
35:20 - 35:22
EN: Not in a strong bull.
35:22 - 35:26
EN: Whereas you could do that with the SPDR without much worry.
35:30 - 35:33
EN: If you bought the weekly put, maximum risk, 33 cents.
35:33 - 35:38
EN: Actual Risk was only 3 cents and much less stress.
35:38 - 35:43
EN: If you bought the SPDR, your maximum risk realistically was $200 to $300.
35:43 - 35:46
EN: If the SPDR raced up another two dollars, three dollars,
35:46 - 35:49
EN: you could easily lose $200 to $300
35:49 - 35:52
EN: if the market went into some kind of blowoff top,
35:52 - 35:59
EN: whereas the most you could lose with the put is 33 cents, which is $33.
36:02 - 36:06
EN: These 148 puts traded 48,000 contracts today.
36:06 - 36:09
EN: Huge volume, very tight spreads.
36:09 - 36:11
EN: Again, very popular with day traders.
36:14 - 36:17
EN: Some stocks are great for the weekly options.
36:18 - 36:21
EN: Most stocks have a range of about 1% or more.
36:22 - 36:27
EN: The weekly At The Money options have about a range half that much,
36:27 - 36:30
EN: so if it’s a $100 stock, the range on the stock will be about a dollar,
36:30 - 36:34
EN: and the range on the put and the call, the At The Money weekly put and call,
36:34 - 36:36
EN: will be about 50 cents.
36:36 - 36:39
EN: And that’s plenty of room to make 10 to 20 cents’ profit.
36:43 - 36:45
EN: Okay, let’s take an example.
36:45 - 36:50
EN: $100 stock moves one dollar when the range is 1%.
36:50 - 36:55
EN: So if the average daily range is 1%, that’s a $1 move, 1% of $100.
36:56 - 36:59
EN: The put and call would move about half that much, 50 cents.
36:59 - 37:02
EN: So that’s plenty of room for profit.
37:04 - 37:09
EN: Apple, on the other hand, it’s a $600 stock right now.
37:09 - 37:16
EN: A 1% range is $6, so Apple on an average day moves at least 1%,
37:16 - 37:19
EN: so the range of Apple is at least $6.
37:19 - 37:24
EN: And that means the average range of a put or a call might be about $3,
37:24 - 37:29
EN: and the At The Money weekly put or call on Apple might cost $6,
37:29 - 37:32
EN: and the average range would be $3.
37:32 - 37:37
EN: The bid/ask spread on those weekly calls might be only 10 cents,
37:37 - 37:40
EN: which is extremely good on a $600 stock.
37:40 - 37:43
EN: So very tight spread, very big range.
37:47 - 37:50
EN: Volume lately in Apple on the weekly options,
37:50 - 37:53
EN: it’s often 20,000 contracts per spread.
37:53 - 37:54
EN: Very tight spreads.
37:54 - 37:56
EN: Usually you can trade at the market.
37:57 - 38:01
EN: With the Apple and with stocks, I generally enter and exit with limit orders,
38:01 - 38:05
EN: although Apple, when you have 20,000 contracts per strike,
38:05 - 38:07
EN: you can trade market orders.
38:08 - 38:12
EN: The tight bid/ask spread, 10 cents, you get really good fills.
38:15 - 38:17
EN: Which stocks to use?
38:17 - 38:22
EN: Any stock or ETF where the volume of the options is 1,000 or more.
38:22 - 38:27
EN: So if the average strike price, the average At The Money call today
38:27 - 38:29
EN: or put is trading 1,000 contracts,
38:29 - 38:34
EN: you certainly can day trade that weekly put or call.
38:34 - 38:38
EN: If it trades 5,000 contracts, if the At The Money put
38:38 - 38:42
EN: and call had each about 5,000 contracts, that’s extremely good
38:43 - 38:47
EN: and those are extremely good options for day trading.
38:51 - 38:55
EN: You want a daily range of at least 50 cents in an option.
38:55 - 39:00
EN: Ideally, you want the put or call to move up or down about 50 cents during the day,
39:00 - 39:05
EN: and that means the stock should have about a 1% daily range – the bigger, the better.
39:05 - 39:08
EN: The more the stock moves, the more the options will move.
39:12 - 39:16
EN: And how do you find what stocks to trade options today?
39:16 - 39:21
EN: After the first 30 minutes or so, you can scan your stocks for stocks
39:21 - 39:26
EN: that have very big bull or bear spikes, and you can use a quote page.
39:26 - 39:30
EN: You can sort based on the average daily range, the percentage daily range,
39:30 - 39:35
EN: percent the range is of the underlying price, and you just look for the stocks
39:35 - 39:37
EN: that have the biggest range.
39:41 - 39:45
EN: In 2012, stocks that usually are good on most days:
39:45 - 39:51
EN: the SPDR, Apple, Amazon, Google, Goldman Sachs, IBM, GLD.
39:51 - 39:52
EN: They’re good on most days.
39:52 - 39:58
EN: Just about any stock can be good on any day if there’s some special situation
39:58 - 39:59
EN: or news event, for example.
40:02 - 40:05
EN: This is a chart that I use for scanning.
40:05 - 40:08
EN: I have it sorted right now based on the range.
40:08 - 40:11
EN: On this particular day, at the time that I scanned this,
40:11 - 40:14
EN: Google’s range was $20, which is huge.
40:14 - 40:15
EN: Priceline, $19.
40:15 - 40:20
EN: I could also sort based upon how big today’s range is
40:20 - 40:22
EN: compared to the range of the stock.
40:22 - 40:28
EN: So let’s say this $20 move in Google is 20% of the total range of the stock.
40:28 - 40:32
EN: I can also sort on the basis of the percent change today,
40:32 - 40:36
EN: so what percentage change is Google on the day?
40:36 - 40:38
EN: Is it up 1%, is it down 1%?
40:39 - 40:43
EN: And then I take a look at the chart, the 5-minute chart, to see what’s going on.
40:43 - 40:47
EN: So Panera, for example, had 5 consecutive huge bear bars,
40:47 - 40:50
EN: so that would be a reasonable stock to just go ahead
40:50 - 40:53
EN: and buy an At The Money put at the market.
40:53 - 40:58
EN: Then the stock pattern, little Wedge Bottom, get out at the market down here.
41:01 - 41:03
EN: All right, here’s Apple on a recent day.
41:04 - 41:07
EN: There was a strong bear breakout on the open.
41:07 - 41:10
EN: We gapped up, strong bull bar, and then 4 bear bars,
41:10 - 41:13
EN: and we tried to push up again, again, and again.
41:13 - 41:15
EN: So we have a small Wedge bear flag
41:15 - 41:18
EN: and then a strong bear breakout and follow-through.
41:19 - 41:22
EN: So at this point the market’s Always In Short, probably going lower.
41:22 - 41:27
EN: So you can just go ahead – right now the market’s around 665, 670,
41:27 - 41:31
EN: somewhere in there, you just go ahead and buy an At The Money 665 put.
41:32 - 41:37
EN: Apple continues down, down, down, down, and now we’re in a very tight Wedge
41:37 - 41:39
EN: and we’ve got a strong bull reversal bar.
41:39 - 41:43
EN: As soon as the market breaks above that bull reversal bar and out of the channel,
41:43 - 41:48
EN: you exit your put and you think about buying calls if you’re really aggressive.
41:49 - 41:52
EN: Here, 2 bars later, the market’s Always In Long.
41:52 - 41:57
EN: We have small High 2 bull flag, a possible failed failure
41:57 - 41:59
EN: from the breakout of that flag.
41:59 - 42:02
EN: I think it’s reasonable to exit the puts.
42:02 - 42:06
EN: We should get two legs up from the Wedge Bottom.
42:06 - 42:10
EN: This is the end of the first leg up, so we should pull back and have a second leg up.
42:11 - 42:15
EN: I would exit the calls, and if I was trading the calls aggressively,
42:15 - 42:20
EN: I would buy here – a Wedge bull flag, one push down, two, three, four,
42:20 - 42:25
EN: or bear spike – one, two, three – and a failed bear breakout.
42:26 - 42:31
EN: I would exit the calls here and possibly buy them again here for a test of the high.
42:31 - 42:35
EN: That’s aggressively trading the puts and calls.
42:35 - 42:38
EN: I make all the decisions based on the underlying chart.
42:38 - 42:41
EN: This is the 5-minute chart of Apple itself.
42:41 - 42:45
EN: But I go ahead and I trade market orders on the options.
42:46 - 42:52
EN: Instead of selling Apple here and buying Apple here and buying Apple again here,
42:52 - 42:55
EN: I just go ahead and trade the options.
42:57 - 43:04
EN: Okay, here’s a chart of that same day in Apple, and this is a chart of the puts.
43:05 - 43:10
EN: If you bought the puts down here when Apple was becoming Always In Short,
43:10 - 43:14
EN: the puts greatly increased in value as Apple continued to fall,
43:14 - 43:16
EN: and you could’ve exited the puts here.
43:16 - 43:22
EN: If you buy them for $6.50 and you sold them for $15.80,
43:22 - 43:29
EN: you would’ve had a profit of $9.30, which is $900, $930.
43:29 - 43:33
EN: If you bought puts again here, you could’ve exited them there
43:34 - 43:38
EN: for a profit of $2.90, which is $290.
43:38 - 43:40
EN: You multiply times 100.
43:43 - 43:47
EN: Some stocks have very good volume themselves,
43:47 - 43:51
EN: but their options often don’t trade very actively,
43:51 - 43:54
EN: so some stocks have small volume.
43:54 - 43:58
EN: In general, it’s better not to day trade options if the volume is small
43:58 - 44:03
EN: because the bid/ask spread is huge, and you don’t want to pay 30 cents
44:03 - 44:06
EN: on the spread in and 30 cents on the spread out
44:06 - 44:09
EN: because it’s very difficult to make much of a profit.
44:09 - 44:12
EN: Also, it’s very difficult to get out at the price you want
44:12 - 44:14
EN: if the options aren’t trading actively.
44:14 - 44:18
EN: If nobody’s trading the options and let’s say you have a profit
44:18 - 44:21
EN: and you want to sell out of your put or sell out of your call
44:21 - 44:24
EN: – if nobody’s willing to take the other side of your trade,
44:24 - 44:28
EN: you usually have to offer a worse and worse price,
44:28 - 44:32
EN: and all of your profit can disappear as you attempt to get out.
44:35 - 44:41
EN: All stocks with options having small volumes sometimes have very active days.
44:41 - 44:46
EN: So sometimes a stock where the options trade very little at all
44:46 - 44:50
EN: can have days where the options trade extremely actively,
44:50 - 44:53
EN: and when that’s the case, you can day trade them.
44:57 - 44:59
EN: Here’s an example of Las Vegas Sands.
45:00 - 45:02
EN: The market was in a bear channel.
45:02 - 45:05
EN: We had a Double Bottom Major Trend Reversal here and then
45:05 - 45:08
EN: a Higher Low Major Trend Reversal and a 2-bar reversal.
45:08 - 45:12
EN: Let’s say you noticed somewhere around here, this huge bull spike,
45:12 - 45:16
EN: and you decided that the market was Always In Long.
45:16 - 45:21
EN: What you can do is just go ahead and buy At The Money calls.
45:21 - 45:25
EN: We have tested the Moving Average; the market’s still Always In Long.
45:25 - 45:26
EN: You could buy calls here.
45:26 - 45:29
EN: We have a Double Bottom bull flag and a Triangle.
45:29 - 45:31
EN: Looks like the market’s going higher.
45:31 - 45:32
EN: You can buy calls here.
45:32 - 45:37
EN: So you had several reasons and opportunities to buy the At The Money 43 calls.
45:38 - 45:40
EN: Once the market gets here with a Wedge Top
45:40 - 45:43
EN: and the Higher High Major Trend Reversal,
45:43 - 45:46
EN: you take your profits as the market’s turning down right here.
45:52 - 45:56
EN: This is the call, the chart of the 43 calls, again,
45:56 - 46:00
EN: for that Las Vegas Sands 5-minute chart that I just showed.
46:00 - 46:03
EN: So you buy your calls here, or you could buy your calls here,
46:03 - 46:04
EN: or you could buy your calls here.
46:04 - 46:07
EN: If you bought them here, at the worst price,
46:07 - 46:09
EN: at the top of the spike, you paid 66 cents.
46:09 - 46:13
EN: If you bought on the 5-minute bar that broke out
46:13 - 46:18
EN: on the 5-minute chart here or here, you paid about 72 cents.
46:18 - 46:24
EN: And if you exited up here, you would’ve had about 30 cents’ profit, which is $30.
46:27 - 46:29
EN: Here’s an example with Baidu.
46:30 - 46:33
EN: If you just happen to look at Baidu and it’s doing this,
46:33 - 46:35
EN: you know it’s Always In Short.
46:35 - 46:37
EN: The odds are it’s going to go lower.
46:37 - 46:39
EN: So you can just go ahead and buy At The Money puts.
46:40 - 46:43
EN: Possible Final Flag, a Low 2 short.
46:43 - 46:47
EN: Then we have consecutive Sell Climaxes and then a huge Sell Climax here.
46:48 - 46:51
EN: You could look at that and say, “Eh, that’s probably the end of the move
46:51 - 46:53
EN: or close to the end of the move.
46:53 - 46:56
EN: I’m going to go ahead and sell out of my puts,” which you could do here.
46:57 - 47:02
EN: We had a two-legged Lower Low after consecutive huge Sell Climaxes,
47:02 - 47:04
EN: so we’re probably going higher,
47:04 - 47:07
EN: especially with this bull inside bar for a single bar.
47:07 - 47:12
EN: You could buy Baidu here, or you could just go ahead and buy an At The Money call.
47:13 - 47:17
EN: Turns out it went into a huge trend into the close.
47:17 - 47:20
EN: You’d probably exit below this 2-bar reversal.
47:23 - 47:25
EN: So this is the chart of the puts.
47:25 - 47:28
EN: The last chart was of Baidu, which was in the big bear trend.
47:28 - 47:32
EN: If you bought where I showed you on that chart where the market
47:32 - 47:35
EN: was clearly Always In Short, you would’ve been filled
47:35 - 47:37
EN: somewhere around here for $1.05.
47:37 - 47:41
EN: You would’ve paid $1.05 for your puts for the weekly At The Money 115 puts,
47:41 - 47:46
EN: and you would’ve exited here and you would’ve received $3.50 for your puts
47:46 - 47:48
EN: and made a profit of $245.
47:52 - 47:57
EN: If you bought the calls at that bottom, at the Sell Climax,
47:57 - 47:59
EN: you would’ve bought the calls for $2.55
47:59 - 48:05
EN: and you would’ve exited them at $5.30 and a profit of $280.
48:10 - 48:17
EN: And that is the end of my module on trading options, weekly options for day trades.