Case of the "Thursdays"

For some reason I am starting to hate Thursdays. I was able to trade from home early this morning (which is nice), and came into work a little later than usual. I had a deadline on Monday that I just fulfilled today. I feel so much better that it is finished though. It was a weekly article I write that goes to management. Just a little market commentary. I also have been working on developing a new trading room for all the advanced options students out there. It will be on Option Pricing and Volatility. This will be a great way to learn more about greeks, and alternate ways to profit from options other than from price movement. Very intense content. It starts Monday mornings at 9:30 a.m Eastern. Yes, this Monday morning. To get there, go to the Trading Rooms schedule and click on Session 3 on Debit Spreads. At the bottom you will see my session and it will go live on Monday morning. Hopefully I will have my slides ready by then.

So enough about me...what's going on with YOU? I notice that we have had several posts to different articles and I would love to see that continue. Many traders will read YOUR posts, and this will provide more intuitive discussions between all of YOU! Wouldn't it be nice to network with others out there? Keep trying to do your part. Please post anything you would like. Just remember that when you do post a comment, if it happens to be a question directed to me, send an e-mail instead. I do not have a "reply" function to your posts.

Here is the article I finished today. If you trade credit spreads on Price Pattern breakouts, then it is right up your alley. I'll post later...for right now I need to prep for the Credit Spreads trading room!!!

Here it is...

Weekly Market Commentary 8-17-2006
Jeff Kohler
PHD Coach / Trading Rooms Instructor

A week of good news has helped to put a few pieces of the puzzle together for investors. We have seen a variety of positive news events this week. A few events included an extinguished terrorist threat, a cease-fire agreement in the middle-east, and positive Consumer Price Index and Producer Price Index results. This has provided temporary relief to traders about the warning the Fed has given about inflation, and has provided a nice drop in the price of oil. While this may look like a short term bullish circumstance, has this really changed the overall conditions of the economy?

Martin Pring, the author of Technical Analysis Explained states “As in a court of law, a trend is presumed innocent until proven guilty.” We can relate this to the market in two ways. First, the S&P 500 has started an uptrend in the short term. This ought to provide short term traders opportunity to profit on bullish movements until this trend changes. Second, in terms of the bigger picture we are still well below prior highs from earlier in the year. If you look at a 5-year chart you can see that if a lower high is established, this can help illustrate a continued bear market. Going back to Martin Pring’s statement, we need to respect this trend until we are provided something otherwise.

Despite market alterations, as a trader you must always be ready to adapt to changes and willing to modify strategies in order to reach that common goal we share of being a productive trader. The question remains “What Works, and Why?” This week we are going to discuss a strategy that many INVESTools students have used through these last few months called a Bull Put Spread. Since the current of the market is traveling in an upward direction at the moment, this trade will profit on rising prices while offering limited risk and a high probability of reward. To illustrate this example look at the chart below of Research in Motion (RIMM).

RIMM confirmed a trend reversal signal called a “Double Bottom” almost a week ago. A double bottom is a significant signal in a downtrending stock. A downtrending stock will make lower “highs” and lower “lows.” When most stocks have reached the end of this downtrend they will fail to make a lower “low,” and this is when a support level or “bottom” forms. As you can see in the chart, RIMM found a bottom near $62. This alone does not mean we take a bullish trade, but when the stock confirms a higher “high,” this is when you haven confirmed a reversal in the trend. When RIMM broke our signal price of $72 accompanied with heavy volume, this is a great opportunity to enter a bull put spread. Here is an example of a trade entered on 8/10/06, the day of the breakout.

Buy September 65 Put @ $0.70
Sell September 70 Put @ $2.80

This trade resulted in a credit of $2.10 to the account. Why does this trade work? The reason this works is that this is a high probability trade. Our probability is based on the fact that this break of resistance at $72 will now act as new support for the stock to fall back on (theoretically). As long as the stock stays above $70 (which is the strike of the put we sold), then the investor will walk away from this trade realizing 100% of the credit paid. It is a good idea to pick a strike price in this trade that the stock price is unlikely to hit. One last advantage to this trade is the fixed level of risk it offers. In this trade the worst loss we can take is $2.90. This is the difference between the strike prices minus the credit paid.

Many INVESTools students are finding success in this market trading this strategy. Many are able to outperform the market while mitigating their risk. INVESTools encourages its student base to participate in strategies like this that offer consistent returns, high probability of success, and offers low risk. You can learn more about this strategy by participating in my Advanced Options Trading Rooms session every Thursday evening at 8 p.m. Eastern.


About me

  • I'm Option Addict
  • From Saratoga Springs, Utah, United States
  • I am a professional trader and an instructor for Investools. I've had relations with the markets for 9 years. Born in Concord, CA, but reside in Saratoga Springs, Utah. Father of THREE, Husband of one.
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