To Amber, the love of my life I want to wish you a Happy Birthday. I hope your day is the best it can be. I love you to death, and want to thank you for being such a wonderful wife, mother, and the best friend I have ever had. I appreciate all the love, friendship, and support you have given me. Three Cheers For AMBER!!! I love you!

Things That Make My Blood Boil...

Maybe that statement is too harsh, but I spent a good amount of time typing a great post on how to play around an earnings announcement. Sure enough, when the computer froze, said post was lost forever. Can you recall a time when that has happened to you? It felt like I lost a part of my soul. Yes, my words were that good.

I'll try again, but now I am not nearly as motivated. I am leaving in a few hours to Southern Utah/Las Vegas to play 72 holes of golf. It has been about three weeks since I last played, hence the lack of posts on trading & golf. So I will be quick and to the point....

Did anyone else have a trade on RIMM today? I received a few e-mails of people that held on to their calls (Lucky, lucky...) or had a straddle or strangle. I had a few others that had trades prior to earnings, wanted to stay in, didn't... and bailed out. This morning they are probably still in bed, and will not likely think of anything else today other than the opportunity that was missed. Emotion does that to you.

Let's put ourselves in the shoes of a situation where we own a call option. Simple? Just wait. Now we realize that an earnings announcement is next week. The trade is doing well, the company is great, the trend is awesome, and from a technical perspective there would be no visible reason to exit. THE PROBLEM IS....We don't know how the market will react to earnings. I mentioned earlier this week that you might not want this type of ambiguity in a trade. However, if...YOU UNDERSTAND THE RISKS INVOLVED...Do whatever you want! You are the boss. If you want to hold a call over earnings, knowing well that the stock could rapidly and substantially move against you, if you are positioned appropriately and want to take the risk, take it! All you can lose is YOUR money!

What if you want to protect this position from a substantial loss? Let's say that your $50 call on ABC that you bought for $2 is trading at $6 right now. Assume the stock is at $58 per share. Earnings are coming up, what can you do to protect this trade???

Buy a put.

Let's say I buy a $55 put (OTM) for $1. Cheap insurance? Your profit in this trade right now sits at $5 instead of $6, since you paid $1 for the put. On earnings, if the stock gaps higher, you will likely lose the $1 you paid on the put, but made up for the loss in profit on the call. If the stock gapped $5, your profit in the option might now be $11, but you lost $1 on the put. Total Gain= $10.

What if the stock gapped down the same amount? Your call may be trading around the price you paid ($2) but the price of the put should have gained to about $4 or $5 dollars. If your call lost $4 of it's profit, but you gained it back in the put...you are still staring at a $6 gain, which is where you were in the first place. No harm no foul!

Understand that these values are conceptual, not practical. Prices will vary, movements will vary, valuations will vary. Understand that there are variables involved. But hopefully you can see that if you are a trend trader rather than a swing trader, you will need to work through earnings announcements. This can be a great way to protect profits and hedge this event. This is essentially the protective put strategy against a call. The same can be done if you own a put...but an OTM call to protect yourself. It is cheap insurance. Many traders leg into a strangle such as this (appropriate term for this example) and you can see how it may offer protection.

I am heading towards the door, you all have a great weekend. I will not be in the office Monday, but I may post anyway. What a dedicated individual I am.



I have this interesting article I found. This is something we normally discuss in the 3-day live class. Read this real quick and as soon as your done, sit back and realize what just happened.

I cdnuolt blveiee that I cluod aulaclty uesdnatnrd what I was rdgnieg!


Aoccdrnig to a rseearch at Cmabrigde Uinervtisy, it deosn’t mttaer
in what oredr the ltteers in a word are, the olny iprmoatnt tihng is
Tahtthe frist and lsat ltteer be in the rghit pclae. The rset can be a
taotl mses and you can still raed it wouthit a porbelm. This is
Bcuseae the huamn mnid deos not raed ervey lteter by istlef, but
The word as a wlohe.

Amzanig huh?

Now I’m tinkihng aobut all the tmie I wtsead in sochol
lrenanig how to slpel…...

What were you just reading? Nothing. Those were not words, they were letters mixed together that spelled absolutely nothing. Somehow each of us were able to create something out of nothing!?

How long have you been reading? Since age 5 or 6? You have had plenty of practice, and it shows. We read effortlessly. Your mind gets into a groove where it is trained not to examine every single detail, but to see the bigger picture.

How can we apply this to trading?


Traders call this preferential bias. Preferential bias exists among all of us, whether it be through trading, profession, or reading. Once you've developed a preference for a trade, you often distort additional information to support your view. This is why an otherwise conscientious trader may choose to ignore what the market is really doing. We've seen traders convince themselves that a market was going up when, in fact, it was in an established downtrend. We’ve seen traders poll their friends and brokers until they obtained an opinion that agreed with their own, and then enter a trade based upon that opinion.

My perspective on this post is that trading will become like reading as you continue to enhance your experience. Hopefully when you start to develop this preferential bias for how you like to trade, this will promote you to stop looking for reasons not to trade. You'll stop focusing on the inconsequential details and start to focus on the bigger picture. For example, if you find yourself not taking a trade because your option greek missed your goal value by a few pennies, or the phase 1 score was only four positives instead of 5, you tend to forget why you considered the trade in the first place. Great trend, a buy signal, a big volume breakout, or whatever. Realize that when you place a trade, even if every single detail meets your criteria for a trade, and you think "this is a perfect stock, perfect entry point, perfect risk/reward..." the trade can still fail. Once you understand this, stop looking for the perfect trade, and find the trade where the upside outweighs the downside. Don't be too restrictive on your rules, and as you are learning keep record of your trades. This will help you to go back and focus on what you did well and what you did poor. As you analyze your trades, rules, etc... this will help you develop a better intuition as a trader.

I'd love to hear your thoughts, so comment if you are feeling inspired to do so. By the way, my spell check functionality went nuts on this post. Thought you'd be interested.


You heard right, I will be presenting tonight. I plan to discuss swing trading versus trend trading. I will be in Session 2 tonight. I hope to see you all there!!!

Frequently Asked Question

I am e-mailed on a frequent basis and questioned during presentations on a particular topic. I realize a majority of traders already know this, so prepare to snore away.

Let me start by painting a picture. I present a lot of potential trades in various sessions to explain concepts. Let's say I throw an example out to the group and it is discussed for a potential trade. Within moments I will receive a question, or a few follow up e-mails later on that mention the next upcoming earnings date and will ask..."Would you get out before earnings?" "Would you hold this trade over earnings?" "Would you not make this trade?" "Would you stop deleting these e-mails and answer my question please?"

Joking aside, let's examine the logic behind this question. What is an earnings announcement? This is when a company announces if they were profitable or not over the last quarter, and if so/if not what were the details? Management will give investors insight as to how business is doing, and future forecasts. Once you understand the impact these announcements have, you understand the stock will MOVE. If the company is losing money, or gives a negative forecast, the stocks can drop substantially. If the company is making money, or gives a positive forecast, the stock could rise substantially. Analysts also give you a benchmark as to what they expect the stock should do as far as a profit or a loss. If the stock does better or worse than the expectation, this will have an impact on the price. Many traders claim that earnings drive the price of the company. Obviously if the company is making money their value will rise. If they are losing money their value will fall.

Now let me get to my conclusion. Before you ask someone whether or not you should hold your trade over earnings, ask yourself why would you sell...and why would you hold? Do you really feel that you know what earnings will bring? I think we can poke around and find out what wall street is expecting earnings to look like, but DO YOU KNOW HOW THE MARKET WILL REACT? I have seen the market react negatively to good news and positively to bad news. Bottom line...I don't think that you will be able to anticipate what the price will do.

Knowing this, do you want to hold a trade or have money invested in an outcome that you cannot control? Ultimately you determine what risks you take. If you are a long term oriented investor, you might not put a lot of emphasis on this event. If you are a short term trader, you might be scared to death of it. As a short term trader, I do not hold directional trades over earnings. I will place certain trades around earnings, but will not hold a single call or put over this announcement since I have no idea what will happen to my profits, nor what the outcome will be. I dismiss ambiguity as a trader.

As I warned, many already realize this, but hopefully this may have helped those that were not sure. By the way, no e-mails asking if you should hold over earnings. Just kidding, you guys rock.

Be back shortly

Follow Up on CTSH

Last time I discussed this trade I tried to poll the audience to see who stayed in this trade and who stayed out. If you didn't read this post (about price pattern failure) please click here. When you are looking at a stock, and you think you see a pattern (i.e triangle, head & shoulders, flag, etc.) always remember..."A pattern is not a pattern until it is confirmed." What I mean by "confirmed," is the stock has broken out of this pattern like it should have, and you can look back and say, "yes, that was a _______ pattern (fill in the blank). Going back to CTSH, it confirmed an ascending triangle pattern on Sept 13th, closing above resistance and breaking out of this trend continuation pattern.

What everyone needs to realize is that even though we have a two month target of $80 per share on this stock, does not mean it is going to move right away. This is why many people bailed out a day or two later. Try to keep in mind that 90% of the time, trading price patterns is half mental. The other times it requires discipline.

Part of the discipline I am talking about is knowing in general how these trades react. A majority of the time, after a stock breaks new resistance (just like CTSH) it is very routine for the stock to come back down and test old resistance as new support. This is textbook. For all those who took the trade and followed along, I have told you to expect this to happen. As I thought about this, which occurred as CTSH closed at another 52-week high, I realized that this was a perfect exercise to walk through the emotion that a trader goes through. Even though I was here to hold your hand, and the rest of the group was here for you as well, we all experienced the exact same emotion at the same time. We all traded an option, we all experienced a small loss at first due to the re-test, and experienced a loss in time value while the stock consolidated, but we made it through alive. We conquered fear, which drives most of a traders decisions. The more you go through exercises like this and the more you are able to battle your emotion, the better trader you will become. I wanted to tell you all that you did a great job, and keep up the good work. I will introduce another pattern like this that we can follow along and use as an experiment. Be patient for this one, especially since I have been very busy lately.

Two last items before I close. First, I will be posting at least two more times today. This ought to make up for the infrequent posts lately, and second...Yes, it looks like CTSH might have a tombstone doji. If that candle is enough to make you walk away from a great potential reward, fine. Just make sure this is a disciplined decision, not an emotional one.


The Ten Commandments of Trading

Here is a compilation of my Ten Commandments of Trading. In my sole opinion, these are the "fundamentals" of becoming a successful trader. Look these over and feel free to comment at will. Keep in mind this took a couple hours to compile, so be nice.

1. Thou shalt have a trading plan

If you don't have a plan, get one. What is your approach? What are your rules? These are questions that you need to answer before you can title yourself a trader. Creating a plan gives you something to follow, an outline of where you want to be, and what is required in between.

2. Thou shalt not trade with emotion

This includes, fear, greed and lack of discipline. There is no room for it in this equation. Find a way to get a better handle on it, and or walk away from it. I can tell you from experience that you will have an impossible time being successful at trading when making emotional decisions.

3. Thou shalt embrace losing

A trader has to fight a lot of expensive enemies within himself. It is inevitable, it is going to happen, therefore you should plan for it. If I know I am going to lose, I will try and make it easier on myself in anticipation. Please do not judge the success of a trader by the win loss percentage they have. It's not about winning or losing, it's about making money.

4. Thou shalt know how to control losses

As a trader, you will have many losing trades. The idea is that if you keep them small, you give your winners a chance to outpace them. If you can successfully do this, you will be a profitable trader. Identify places on a chart that you know prices should not go in order to take your loss (broken support/resistance for example).

5. Thou shalt not turn a trade into an investment

If you didn't chuckle after you read this rule, then perhaps you need to revisit rules 1,2,3 and 4 again. Have you turned a trade into something longer in duration than expected? Do you remember why you did this? Sure...it was because the stock went against me and I figured "It will come back." When you feel the need to stay in a trade until you are right, something is wrong. Know where you are getting out before you get in. STICK TO THE PLAN!

6. Thou shalt remember: Tips are for waiters

Jesse Livermore said it best..."The fruits of your success will be in direct ratio to the honesty and sincerity of your own effort in keeping your own records, doing your own thinking and reaching your own conclusions" He goes on to further state..."The average man doesn't wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn't even wish to have to think." Wouldn't you agree? It is so easy to take the stock pick from someone assuming they have done all the work for you. Truth is, they probably know less than you. This includes commentary you listen to on the television, something you've read on a website, or discovered on this crappy blog. My point is... do your own research, trade your own trades, and be original in your analysis and activities.

7. Thou shalt repeat after me "A gain is not a gain until you sell"

Kenny Rogers said "You never count your money when you're sitting at the table." That profit is not realized, so don't mentally take inventory of it until the trade is closed and you have realized that gain. This will create emotion, and you will stay in trades for the numbers rather than the logical reasons.

8. Thou shalt not know too little about too much

I guess it is hard not to in your position. You are learning to trade. But you need to try to differentiate what you know, and what you are learning. You also must remember that the basics are called basics for a reason. They are the foundation we stand on. Next time you overrule a trend because of a candle formation, or something silly like that, remember that discipline trumps conviction. No matter how strongly you feel that the "*Double Bottom Outside Inverted Triangle Reversal Pattern" will result in a failure of the beautiful uptrend the stock has been trading in, you must defer back to the principles of discipline when you trade. Discipline will allow you to trade tomorrow, whereas the gut feeling of a new trader will send you to the poor house later today.

*- This is not an actual pattern, so please don't e-mail me and ask where to learn more about it. Just think of it as an exaggeration of a funny role we have all played.

9. Thou shalt trade with the trend

It takes a trader a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. Try to pick a style that you can easily adapt to a changing market. At times the "motion of the ocean" will differ and different approaches are warranted. It is at these times you need to be able to recognize the changes and adapt accordingly.

10. Thou shalt take the easy opportunities

You don't need to trade everything. There are opportunities that present themselves everywhere and everyday in this market. Just remember two things: Number 1: Its not necessary to play every move, its only necessary to have a high winning percentage on the trades you choose to make. Number 2: Don't go for the trades that don't totally jump out at you as an easy analysis. I call these the "Easy Trades." The trades where you are not 100% sold and convinced of what is going to happen, stay away from them.



Don't you hate starting your car on a cold Monday morning and then discovering that your gas tank is empty? I do. In fact, this very same thing happened to me this morning. Here's where it gets good...

So I pull into a local gas station and start to pump gas. To my astonishment, the price at the pump is $2.85! Why on earth is Utah charging $2.85 for gas? Apparently 3 out of 4 major refineries are slow or under maintenance. Can anyone tell me why this is my problem?

Gas has dropped nearly $20 per barrel and I have only saved .06 per gallon. This is ridiculous. Gas was stuck at $2.91-$2.95 for the last year and now with prices declining and forecasted to continue, I am appalled that my local gas station is sticking it to me like this. This morning I decided to fight back. To hedge myself from being assulted at the pump, I bought puts on UPL this morning. There was a nice break of support at $45 and looking at the long term chart, you can see the lower high/lower low effect taking it's toll. Plus, you know how I love breakouts.

Curious to see what the rest of the country is paying for gas compared to you? Take a look at this nifty chart I found....


Last Post of the Week

I spent the end of my day typing up a script for the weekly hold message when you dial in to the 800 number. Since it is a recap of the market this week, and a look ahead, I figured I would post it and see if anyone would get any use out of it. I hope you all have a great weekend, and I will see you back here on Monday.

Hello fellow traders, thank you for calling INVESTools. My name is Jeff Kohler. You might recognize my voice from our advanced trading room sessions where I teach Price Patterns, Credit Spreads, and Options Pricing and Volatility. I also present Master Talk, which is a weekly event that takes place every Wednesday night. In this event we discuss theories and applications that are cohesive with the current market environment.

I am here this week to discuss our current trading environment and to provide a short term forecast on the market. Let’s start with a recap of last week.

It was a wild ride this week as we saw prices rise and fall all over the board. Earlier this week the market rallied behind the Fed’s decision to keep interest rates unchanged at 5.25%. However, shortly thereafter we witness a counter-Fed decline as the Federal Reserve Bank of Philadelphia released a report showing that Mid Atlantic manufacturing fell to a negative valuation for the first time in three years. This left Wall Street in a state of concern that the economy might be slowing more than was anticipated. Just as we came close to all time highs, the Dow closed out the week at 11508, down .46% percent this week, while the NASDAQ closed at 2218, down .75% percent as of week end.

Bond prices have risen sharply as the 10 year note has been dropping like a rock. Bond traders seem to be making the bet that the slowing economy would make future rate increases unnecessary. With the steep drop we’ve witnessed in interest rates perhaps bond traders are betting that the Fed may DROP rates in the near future.

This predicament is also putting pressure on the dollar. The EUR/USD pair has broken out of a recent basing pattern offering currency traders a chance to profit on a potential rise in the pair to prior annual highs.

In commodity related news we have seen the price of oil plummet 4 percent this week. Only a few weeks ago the price of oil was nearing the $80 per barrel range, and as of Friday, Light Sweet Crude for November delivery finished the week at $60.27 a barrel. Analysts suspect that a continued drop in the price of oil is feasible; at least until winter demand starts to rise. The supply of oil remains high, and if we see a mild winter this year, there will less demand than anticipated.

As we look ahead…what is expected out of the market this week? The market is fearful that the economy is cooling off more than expected, so keep an eye on this weeks upcoming economic reports. The reports with the greatest potential impact for this week are New & Existing Home Sales, Consumer Confidence, and Chicago PMI. If any of these reports confirm wall streets concerns, you could see the market averages continue to fall.

As we work our way through September, remember what is just around the corner in October. This is where most companies will be announcing earnings. October is normally referred to as earnings season for this very reason. If corporate profits are down, this could weigh heavily on the markets decision to advance or decline. For this very reason I want you all to be paying close attention to the Volatility Index (symbol VIX.X in the corporate snapshot section of the toolbox). You will see that volatility is relatively low, which is a concern for market contrarians. If you see the VIX gradually start to rise, then option premiums will gradually start to rise along with it. If you are holding options during this rise, this will add to your profits, and help to offset losses.

Speaking of option volatility, this would be a great opportunity to welcome THINK or SWIM to the INVESTools community. In case you have not heard we have partnered with thinkorswim—one of the industry’s top online brokerages ranked “best for option traders” by Barron’s magazine. Think or Swim offers our students the best available trading tools and rock bottom commission rates. If you haven’t seen the announcement yet, go to the Toolbox and click on the thinkorswim banner ad at the top of the page to read all about it.

Using the ThinkorSwim platform, you can view your current option positions and modify your current implied volatility on these positions. For example, if I am expecting general market volatility to rise, I can increase the volatility values on each position I own to get a theoretical valuation of what the premiums might look like if this were to happen. If I want to get more in depth, I can run my option through a probability analysis to see what the likelihood of profitability is. Risk graphs to determine max gain, max loss, or breakeven points within your trades. Their analytics are the best in the business.

As next week unfolds, there are a few things I want you to keep a close eye on. If you are bearish on the market I would keep an eye on the Capital Goods/Construction & Agricultural Machinery group (symbol .CAM) This group has been working its way to the bottom of the list. Within this group you fill find stocks such as Caterpillar (symbol CAT) and Joy Global (symbol JOYG) breaking strong levels of support. This kind of movement generally signals a great opportunity to short shares of stock or purchase put options as prices attempt to find new lows.

If you are bullish on the market and are looking for a few bread winners to carry throughout a turbulent week, I would strongly suggest watching the Health Care Facilities group (symbol .FHF). Here you will find several strong fundamental companies in strong upward trends. The top prospects here would be Amedisys (symbol AMED), Psychiatric Solutions (symbol PSYS), Davita (symbol DVA), and Manor Care (symbol HCR). These companies are leaders in their group and are close to yielding buy signals.

I hope you have found this information useful. We have discussed a list of things to keep in mind as the week progresses. Continue to stay positive and focused on your goals and the task at hand. Be diligent and thorough in your analysis, and most importantly, stay disciplined to your rules! I wish you the best of luck this week. Happy Trading.

Last Nights Credit Spreads

In last nights credit spread presentation I discussed two potential set-up's. Normally we have a bullish trade and a bearish trade depending on everyones outlook on the market. Here are the candidates we looked at.

Bull Put Spread on the Semiconductor Index (SOX.X)
If the SOX gives a nice bounce off support, we talked about entering a trade as follows

Buy Oct 440 put
Sell Oct 445 put

Bear Call Spread on CAT
Yesterday was a confirmation of a Desceding Triangle with new resistance at $45

Buy Oct 70 call
Sell Oct 65 call

If you still feel there is a good risk reward in these trades, fire away. CAT made a nice move this morning, but the SOX hasn't given us an entry signal yet. Keep an eye on it for a bounce.

Moving Averages are Worthless

Do you use a Moving Average when you conduct technical analysis? WHY?

A moving average is an indicator frequently used in technical analysis showing the average value of a securities price over a set period. Moving averages are commonly used to generalize a trend and define areas of possible support and resistance. Using moving averages can be useful, but I say this assuming they are being used properly. All too often I hear way too much emphasis being placed on moving averages. I am creating a list of "The 5 common misconceptions of moving averages." I will try to comment on each of these concerns I have in order to better understand proper use of moving averages.

1. A moving average is confused with the word "Trend."

Too often the direction of the moving average is assumed to tell us the trend of the stock. Make sure that this is not the case. Price movements will define the trend of a stock. We try to have people focus on higher "highs" and higher "lows" to define an uptrend, and vice-versa for a downtrend. This thought process will override the direction the moving average is traveling. Do realize that price and a moving average can be moving in different directions, so emphasize price first.

2. A moving average is assumed to magically act as support

Have you ever done this? The price happens to be on the moving average, and we automatically assume it will bounce. A moving average can act as support, but there needs to be evidence that this is the case. If I look at the chart and see historically that the stock has bounced off my moving average as support and going back I am convinced of its repetition, then feel free to assume. Look at this chart below as an example. Would you expect the stock to bounce or break?

3. A moving average is assumed to magically act as resistance

A moving average can act as resistance, but there needs to be evidence that this is the case. If I look at the chart and see historically that the stock has bounced down from my moving average as resistance and going back far enough I am convinced of its repetition, then I will assume this pattern will continue. Look at this chart below as an example. Would you expect the stock to bounce or break?

4. A stock being above a moving average is relevant

If your stock is not in a steep angles trend, there will be times where it is above the moving average, and there will be times when it is below the moving average. Question: Does this matter? In my opinion, No it doesn't. If you were thinking this was important, this might go back to the assumption that a moving is support, and we need to wait until it crosses above this average in order to buy. Try this instead...Draw a support line, and as long as the stock is bouncing off this level, no matter if the stock is above or below the average, it would still be good for a trade.

5. A stock being below a moving average is relevant

See above.

Now that I have brought this out into the open, my intention was to make sure I could clear up any confusion on how to use this tool and counter offer a few ways it might be useful. In my opinion, the best way to use moving averages is to create a system of when to buy and when to sell. I used to trade moving average crossovers. I would take a short term moving average and a longer term moving average and when they crossed, this would tell me to buy or sell. Obviously this will work best in trending stocks, and not so well in flat trending stocks. Normally I don't discuss trading systems, but the old method I used was pretty popular and not something I created on my own merit. I used a 5 day simple moving average combined with a 20 day simple moving average. When the 5 day crossed above the 20 I would buy, when it crossed below the 20 I would sell. Pretty simple, and very mechanical. The nice thing about mechanical trading systems is that they require no effort from us, and take our discretion out of the equation. The only discretion we have is the stocks we trade it with. Give this a try and see what you think...but please don't over-do it!!!


Characteristics of Volatility Spreads

In order to keep the bar high, I want to provide you with a very important chart when trading advanced options. This graph will help you remember exactly how a particular spread will be impacted by things like price movements, fluctuations in implied volatility, passing of time, etc. It also gives you an idea of whether you are positive or negative in the position of your greeks (i.e. gamma positive, short vega, etc). If it does not make a lot of sense now, remember where to find it when you start to gain a better understanding of advanced options trades.

Priceless Advisory Services

I am sure many of you can relate to this video. If not, at least get a good laugh out of it. A classic example of why it is important to leave the advice from others alone and why paying for advice is a farce. Do you think there might be a little truth behind this?


Whoops...Price Patterns

Meena, thanks for the reminder! It has been such a busy week I didn't post this weeks patterns discussed in the price patterns class.

Here's this weeks victims...

RAVN- Descending Triangle
WCC- Descending Triangle
MLM- Descending Triangle
NGPS- Bull Flag
SIGI- Bull Flag
AAP- Bull Flag

I'm sure you have been watching the others from prior weeks and seen some nice trades out of them. Add these to the list and monitor them daily for breakouts.

That's right folks. I will be pinch hitting for Alan tonight in Master Talk. You will find me hosting session 2 at the regular time tonight. Despite the lack of notice I still managed to conjur up a relatively interesting lesson for this evening. As usual, I cannot disclose inside information, but hopefully you will get a lot out of it.

In the meantime the interest rate pause has come and gone. You could see the market rally in the morning in anticipation of this announcement. The 10-1 vote to pause has comforted us about the threat of inflation, and demonstrates more confidence in the moderation of economic growth. The price of oil has really taken a tumble as well, with a likelihood of breaking the $60 per barrel mark by the end of the week. What I am wondering is whay I am still paying $2.89 a gallon here in the sticks?

While I am posting, is anyone still in the CTSH trade? I am. Not a very exciting outcome yet, but the trade refuses to fail. That counts for something doesn't it? If you are in the trade....don't look at the after hours quote...


Option Cycles

I felt inclined to generate a quick post to satisfy the masses. I am abnormally busy today, so hopefully this small post will add a little value. The intention here is to explain why option chains display some months of expiration available for trading while others are not. Options are issued in cycles, which is basically a specific quarterly pattern of expiration dates tailored to each individual stock. The main cycles are…

JAJO- January, April, July, October
MJSD- March, June, September, and December
FMAN- February, May, August, November

In 1973 when options first started trading, the CBOE decided there would only be four months in which options could be traded at any given time. This is where the cycles originated. Since then they have been modified to allow every individual stock to trade current and next month expiration dates. This means that regardless of which four-cycle months are available, you will always have options available for the current calendar month you are in, and the following month. The addition of LEAPS has also changed the cycle to include more than just four months of available option expirations. Knowing this cycle will help to know what is available, and what will become available to make a decision on how much time to purchase.

Many of you figured this out already...but I needed an easy topic to write about. If I get the time, perhaps we can get into a spread trade together or something? Any "sure-things" out there? By the way, what an amazing rally out of the market today. Does this leave you cliff-hanging on what will happen tomorrow?

See you in a few...

A Significant Milestone

As you may have already heard, we announced today that INVESTools will merge with thinkorswim, the online brokerage Barron’s voted “Best for Options Traders” in 2006. This is a great move by the company and will revolutionize the way you trade options. This happens to be the company I trade with and the platform is nothing short of amazing. I have never used software or analytics that are remotely comparable to the technology they offer. This will also positively impact our options trading curriculum. You will notice we will take a bigger interest in the exotic strategies such as volatility spreads, condors, butterflies, etc.

What does this mean to you? We officially endorse Thinkorswim as the best online brokerage in existence. We will now offer much of the technology they have available on our site, along with links to trade directly from the toolbox. You are going to notice very positive changes that take place because of this. The founders of this company are former floor traders who know everything there is to know about options trading, which will substantially increase the knowledge we will offer about options trading (Hooray!).

I am excited for the company, myself, and for all of you. I highly encourage you to consider looking at their platform. I personally have no underlying interest in encouraging you to switch, other than I know it will raise your knowledge levels and provide you with the tools you need to trade options successfully. Click here to journey over to their website, or click here to read more info through the INVESTools site. Like I mentioned, I can't be anymore excited for you about this change. Happy Trading!!!

PS- If this sounded like a sales pitch, I apologize...


To "Stop" or not to "Stop"

That is a great question. Most of you know I do not use mechanical stop orders. Instead I will keep a mental stop and watch for a close beyond this particular level. Such an example would be CTSH. I did not use a mechanical stop, instead if the stock closed below that new support of $71.50 then I would exit the trade. However, if I had a stop in there it was likely to be triggered intraday...and nothing frustrates me more.

This is why I stopped using them. However, there can be a rhyme or reason to using mechanical stop orders. If you choose to use mechanical stops, there are technical indicators you can use to assist you with giving the stock enough breathing room to set a stop and a lower probability of setting it too tight and getting tripped out. Some use time stops, volatility stops, Parabolic SAR, but I am going to teach you how to use an ATR.

The use of this indicator will come after you have completed all your analysis to place a trade. Then the fun begins. “Where do I place my stop order?” Setting a stop order is mandatory if you are interested in limiting your losses, and you must limit your losses to be a successful trader. In determining where to set a stop order, a few questions to ask yourself are, how much are you willing to lose? Where is support? Where is a safe place I can place a stop that will protect me, yet not take me out on a volatile day? I occasionally hear people say that they wish there was a technical indicator that could be used to take out all the guesswork of where to place a stop. Guess what? There already is an indicator that can be used to facilitate this! The indicator is called an Average True Range, or ATR indicator.

J. Welles Wilder introduced this indicator in 1978. The ATR indicator is used to measure a securities volatility, not price direction or duration. It was originally designed for commodities since it takes daily price data into consideration, but can be used for stocks as well. The ATR is most commonly used at a 14 day time period. To see this indicator, go into the Interactive Chart and select it from the “Select Studies” drop down menu. When you add it to your chart it will give you a current reading relative to your stock. Keep in mind that a $20 stock will have a lower ATR reading than let’s say a $100 stock. The idea is to see what the indicator tells you now, and what your extreme high points and low points are. Let’s assume your ATR gives you a reading of 2.0, and a high of 3.5. This means that the stock as of now could fluctuate within a $2 price range. Over time if 3.5 is your highest ATR reading, than historically you can see that even at it’s wildest moment, the stock didn’t swing more than $3.50 during heightened points of volatility. So even if I wanted to use an extreme measure, I could set my stop $3.50 below the stock price and this would be a safe enough place to not trigger my order on a volatile day, yet still protect me from a potential breakout to the downside. You will still want to use support and resistance points to tell you if your stock breaks and one of these points, but an ATR indicator is a great way to set a stop order when you are trying to find where even the most volatile points won’t trigger it.

Play around with it, but ultimately you still are in control of what you risk on a trade. I am not suggesting you use this in place of what you have already been doing, but this might help some identify an easy to use methodology of "how high or low" you set the order above/below support or resistance.

Trading Delta-Neutral...Again

We have talked a few times about taking a pure non-directional trade, or being delta neutral on a position. Since Deltas are constantly changing this is not always feasible, but some will say you at least want to be "Delta Comfortable." This means you select a delta on a position that you are comfortable with (low, high, positive or negative). Many professional traders will balance their positions be be no delta to perhaps slightly negative. Meaning that the price can move which ever direction you want, and it will have little to no effect on your trades. I have included a graphic that shows an option chain on Google and a specific example of creating a strangle with a neutral Delta...

If I choose to purchase the GOOG Nov 420 Call, and Buy the GOOG Nov420 Put this creates a straddle. Notice the values of each options delta. The delta of the call is .51, and the delta of the put is -.51. This would mean the two values cancel each other out and equal zero. Any gain in the call would be equally offset by the loss in the put, and any gain in the put would be equally offset by loss in the call. If I were expecting a rise or fall in volatility, I might purchase or sell this straddle to profit from it.

My intention here was to show a specific example of how this works. You can also create this scenario by multi-leg option trades. Make sure you are compounding all your deltas until they equal or get close to zero. This will help you eliminate price as a factor and focus strictly on volatility.

Like it or not...

The market is quiet... CTSH is up like I promised...and I am tired. When I say the market is quiet, if you look at today's action you can see no directional bias from traders this morning. This comes despite the talk of a likely pause on Wednesday. Oil has been up, down, and back up again...and did you hear the story on the Hedge Fund that got smoked this morning? A fine example of why you keep losses small and let winners run.

I plan to keep new trades to a minimum until I get a better feel for what Wednesday will bring. I have located the list of patterns for my price pattern class tomorrow, and fulfilled most of my obligations for today. This means I will attempt to put some effort into a educational post today. I am trying to decide between an objective analysis on volatility skews or lake plays. This is why I need to figure out how to have polls on this site. That would be entertaining.

In the meantime, keep your eyes open. I will be in and out of the blog today.


What the Hell is "Pattern Failure?"

Too many e-mails rolled in to me today telling me how CTSH failed it's ascending triangle pattern. I beg to differ.

In order to correctly identify entry and exits while trading patterns, you must be able to draw a line in the sand that states when a pattern has failed. Think of pattern failure as a way for a trader to determine the likelihood that the stock will still make a reasonable attempt to achieve it's target price. If it moves beyond a certain point in the pattern, this substantially reduces the LIKELIHOOD that the target price will ever be achieved. Let's take another look at CTSH.

I have drawn the triangle pattern on the chart, and you can clearly tell when the signal was generated. 9/13 provided a close above resistance on heavy volume. This is your signal to enter the trade...but how can you tell when the pattern has failed?

Actually there are two ways to determine pattern failure. One will happen before you get a trading signal, one will occur after you enter the trade. Let's assume we are in a trade on CTSH. We got in on the 13th according to our signal, but we are losing money right now after a recent retracement.

Have you ever heard that after resistance is broken, it will become new support? That fundamental understanding of support and resistance applies to this particular trade. Now that resistance has been broken, that should become new support. NOTE: This is really important...Make sure you draw support and resistance lines with a crayon rather than a razor sharp line. That means your line should be an area more than a specific dollar value.

$71.50 was an old resistance for CTSH. After the breakout has come and gone, the price has come down to re-test old resistance as new support. If this has you worried, STOP BEING SO EMOTIONAL! You need to anticipate this and be willing to give the trade this flexibility to stop here and bounce. If it does not bounce and move higher off this new support line, and trades back into the pattern, this is when you consider it to have failed. A close above or below an old support/resistance level confirms your pattern has failed.

With a better understanding of this, you should be able to be a little less unemotional and more systematic in trading these patterns. So far what you see happening in CTSH is textbook. In fact, many traders wait for this signal instead of the breakout to enter this trade. I for one do not do this since it doesn't always re-test after the breakout. Maybe only 60-70% of the time.

If you are thinking about sending me an e-mail challenging the level of resistance drawn, or things like that, save your breath. The wonderful element of price pattern is that the analysis is subjective. You may not agree with me (and you are wrong... just kidding :) and that's great! It's an art, not a science. Once you get familiar with what a pattern should consist of, the consistency of where the prices move within the pattern, you will be able to see these patterns more clearly, and you will be able to draw these lines based on your own personal perspective. If you want to learn more about them, come to my Price Pattern presentations on Tuesday mornings in the Advanced Technical Analysis Trading Rooms, or buy a book.

If you do have questions, please post comments to this page rather than send me an e-mail. I will keep an eye on what is being discussed and pipe in accordingly. I'd rather involve everyone on your questions so more enlightenment can take place. Everyone will be better off because of it.

Friday....Let's Get Something Started Already!

Before I get an in depth post going, I wanted to share a quick story. Sorry for not posting until after the market has closed, but I am finding my Friday's are becoming the busiest day of the week. Funny thing is...I don't teach on Fridays!

Here is the story...

I was interviewing Jeter to help me better prepare minor leaguers for the shift from Columbus, OH, to NYC. We were making a video to show younger players.

“Derek, how does a young guy coming into Yankee Stadium to play for the Yankees deal with the pressure?”

His answer dropped my jaw. Here’s why.

A year prior I was watching a playoff game where the Yankees were down a run late in the game. They had a man on second and Jeter came to the plate. He settled into his stance and started waving the bat around, much more than a major league guy normally does.

“He looks like a Little Leaguer,” I said to myself. But not just any Little Leaguer, a total stud. If you played you may recall the stud hitter that everyone knew could totally jack the ball. When he got to the plate the defense swallowed hard. And that kid got up to the plate confidence was radiating off of him. When he got in the box he waved his bat around menacingly, telling the world he couldn’t wait to rip the next sacrificial offering. It looked like fun and everyone wanted to be that kid.

That’s how Jeter looked. Except he was now in the Big Leagues, playing in the playoffs. The whole season was on the line. The crowd was going wild. The tension was thick in the playoff air. The emotion dripping off the moment one pitch at a time.

And Jeter looked like a Little Leaguer having fun.

Flash forward to my interview with him…

“Well,” he says, “the big thing is to have fun. That’s how you handle pressure.”

“Come on,” I said, “with tens of thousands of people yelling, your results posted in the paper every day, your every move watched and scrutinized, and you say have fun?”

“Yes. It’s just like Little League [that’s when my jaw dropped]. It’s the same game I’ve always played and always loved. It’s fun. Sure it’s challenging, but that’s part of the fun.”

Me: “Even with 50,000 people yelling and screaming.”

DJ: “The more people, the more fun.”

Jeter is able to maintain the perspective that the game is fun. Most players I coach come to me when they’ve lost that. It’s become work. A job. A test of self-esteem. A measure of self-worth. It’s become who they are.

Stress occurs in us when we perceive a threat to us or to something we love. It may be a threat to our physical body, like a cancer diagnosis. Or it may be a threat to our emotional body, like getting yelled at by our boss.

Jeter avoids stress because he doesn’t perceive game situations as threatening. He sees them as challenging. One perception creates tension, fear, doubt, choking . The other creates freedom, relaxation, and top performance.

Question for you...Why do you trade? There are lots of ways to make a lot of money. Even more ways to make enough money.

One of the traders’ greatest challenges is to remember why he or she got into trading in the first place, and keep a perspective on it that minimizes the perception of threat.

What’s fun about trading?


What Will Tomorrow Bring?

Do you ever look at the motion of the market and automatically understand what is going on in the minds of traders? This is market psychology. The more in tune you get with the market, the more skills you will develop to help you read the minds of millions. I trade price pattern breakouts quite a bit, and in my experience the more you watch these patterns form, the easier it is to know what move will be made next. A classic example is the market today. Today's range was very short and occurred equipped with weak volume. Why?

Tomorrow will bring the patiently awaited CPI results. If results are up, confirming the likelihood that the Fed will pause next week, this ought to spark a rally. September is normally a dreaded month for traders, but thus far has proven to be quite profitable. We've seen a wild drop in the price of oil, jobless claims continue to fall, and retail is already starting to heat up. However, tomorrow can change this in an instant, so make sure you are paying attention tomorrow.

Today's hesitation means there is still an unsettling fear of inflation. Declines outpaced advances by a slim margin. Had you seen a big rise or big fall in the averages today, it would have confirmed traders had placed their bets with a more certain conviction on what tomorrow will bring. Truth be told, no "professional" can completely foresee the future. Anything is subject to change. Take all their opinions with a grain of salt, and watch the price movements. This is going to be the closest you are going to get to seeing the future. Remember, the market discounts EVERYTHING.

In follow up news...CTSH hesitated a little today, which still offers a low risk entry on a trend continuation. AAPL stalled, and so did everything else. I need to go prep for a session on credit spreads that kicks off in an hour. I will try to post again later tonight or first thing tomorrow.

Technical Difficulties Part II

I noticed a few e-mails in the repository that mentioned difficulty when attempting to refresh the blog. Apparently some are not getting the more recent posts until the following day. We need to put an end to this once and for all!

Scott left a few posts that should totally solve this problem for you. I have included his instructions verbatim....

Jeff, people can make sure one setting is adjusted on their computer and it will check for the lastest versions on their browser. Before I found this I had to refresh Yahoo finance every time I went there. Now it does it when ever I log on....When your browser is open, go to tools, then internet options, then you are on the general tab. Select the option that's something like "check for newer versions - every visit" etc. That should do it.

P.S.- forgot to include: click on "settings" button when you are in the general tab.

A big thanks to Scott for throwing us this information.

Be back in a moment.

Thank You

I must admit that I was blown away by the comments that were left in regards to yesterdays post. Mike made a comment that said "Since I am not selling my site, why do I care so much." I have been thinking about that comment ever since I read it yesterday. I finally think I know the answer to that question...."I don't know."

The idea of starting this site has been entertaining and challenging. I like the thought of passing ideas, concepts, and trades back and forth with one another. Not only so that you can learn from me, but also that I can learn from you. We all have the same underlying goal of being productive traders, and the total number of eyes and ears we have here can be dangerous...meaning we are putting together an enormous trading research department. I looked at this project as a big opportunity for all of you, but for myself included. I look forward to the time when we are all passing ideas back and forth and contributing nuggets that the group can use to become better traders. Going back to yesterdays post, when I saw that the interest might be dying off, I was taken back that perhaps nobody cares about the learning element and may only be here to find something to trade. After several comments that were left suggested otherwise, I have concluded that the numbers are not important. I will continue to talk about whatever I want. This may include trades, strategies, autism, reality television, my personal life, my golf game, things that piss me off, or whatever comes to mind. I will also continue to read your suggestions and comments. Whenever I am drifting off the path, I will rely on you to bring me back to life.

Now is actually a great time to take another step. I am soliciting all of you to come up with a concept or idea that you would like to write about so that it can be posted to the blog. It can be a trade, a concept, a strategy, whatever. If you are interested, e-mail me what you are going to write about, and as soon as it is completed, I will post it for you. A few people have mentioned their interest in this and some have already started their research. This would be a great opportunity to get your name out there within the group.

I'll be standing by. In the meantime, I will be posting again shortly.


After much deliberation, meditation, and procrastination I have decided to call another audible on tonight's topic discussion. If you had anticipated a presentation on swing trading versus trend trading, I need to set that gem aside until I am better inspired to teach it. I am struggling on how to deliver this in a specific manner to such a wide array of listeners. If your feelings are hurt, I apologize but waiting will be worthwhile I can assure you.

I am keeping the new topic a secret until the discussion tonight. Rather than throw it out there and allow you to decide that it is not something you are interested in or something you already know too much about, show up and be surprised. However, I can promise you that if you are an option trader, this will be the single most important session you have heard thus far...unless you happen to be skilled in this arena already. As an ongoing promise, I will do my part to keep it enlightening and interesting.

I also want to thank those who left comments in response to my last post. Very helpful! See you tonight!!!


After a humbling round of golf this morning, and just finishing up an Interactive Class...I am just finding time to log a post for the day. I am going to take a twist today from discussing detailed topics to just throwing out trades today. In fact, I would appreciate any opinions on this matter. I have a page counter for this site that logs all the hits it gets during the day. The numbers have dropped off by about 40% in the last week or two. I am concerned about this and want to retain your interest. I admit, I have stayed away from sharing specific trades recently from advice from my trading psychologist. She felt that the emotional pressure and superstition of sharing what I am trading was perhaps getting in my way of "doing my thing" which is making money. Since I have toned that down, my personal trading results are back on track, and of course I don't want that to change. I am thinking that perhaps some come to the site, don't see any trade recommendations, and bail.....which is fine. Leave a comment on this please. I do plan on getting back into the rhythm of putting trades out there, but for my sake I am going to take baby steps. If you agree that the lack of trade specific advice is what is causing the depleting numbers, leave a comment with your take on the matter. The intent of my blog is not to pass out freebies, but I want to do whatever is necessary to attract traffic to help everyone find a place to network.

Let's jump off and address this bull market with a few trade set-ups. I might discuss some of these on Master Talk tonight, so don't avoid the presentation because you got the material early. A few things I liked about today were...

CTSH- Ascending Triangle Breakout. Big volume, great stock, good target. Depending on how you measure the triangle, you may get a different number...$8 move.
AAPL- Great news yesterday, nice rally today, good volume, good time of the year to trade this stock.
HOG- I entered a trade earlier this week and continues to rise...great trend on increasing volume
AZN- Great stock, great trend, not quite ripe...but one to watch.
MS- Nice breakout on strong volume. Rumors of a merger, so be careful
WCG- 52 week high, great trend. Good confirmation today.

Other bounce candidates to consider...LTR & ARE. I am lacking time to walk through specifics at the moment, but will follow up as soon as I get a chance. I have positions in most of these and a few were entered today.


Trading & Golf

I mentioned long ago that I wanted to write a series about the similarities between Trading and Golf. I had read on a website long ago where a trader had made several correlations between the two sports, and I wanted to grace this topic with my perspectives and offer a more in depth feel based on emotion and psychology. I will introduce a new article on this topic each week most likely on Tuesdays. Since I play golf Wednesday mornings, this will keep the information fresh in my mind before I step out on the course. Even if you are not a golfer, try and imagine the similarities between the two, or just focus your attention on what I teach you about trading. This will help you see the bigger picture and build a stronger foundation of fundamentals based on lessons I have learned through the likeness of both professions. Plus if you love trading, I can easily turn you into a golfer.

I have traded in the markets since 1998. I am passionate about trading. I love the challenge it presents, the thrill of victory, the lessons that are taught to make you a better trader, and earning an ability to see things that will happen before they occur. Each trade I take is the next trade that will help me attain perfection in this quest. This is what drives me to keep trading. In my experience I have gone on a few amazing runs in my career, and some terrible lows. The wide array of results have really helped to groom me into a more focused and determined trader. A lesson my trading physiologist taught me is that it is not about the returns I made in 98, 99, or 03... or about the losses I took in 00, or recently in 06... it's all about what you choose right now on "this" trade. She has taught me about "being in the moment" and not trading with fear, greed, or emotion of any sorts. This has been one of the biggest lessons I have ever learned about life in general.

I have played golf since I was about 15. I didn't play on the high school team or in an atmosphere of any real competition. I am not the best golfer but I have goals to be great. I love playing golf. I love being on the course early in the morning, the smell of wet grass, and the beautiful environment around me to play in. I also love the challenge each hole presents, the thrill of victory, and the desire the sport instills in me to get better. With every swing of the club, I am chasing perfection. I want to achieve that "perfect shot" where I hit the ball square, straight, and swing through my target.

As you read both of these paragraphs I am sharing my personal reasons why I correlate the two activities. You can see I am passionate about them and for very similar reasons. There are vast similarities between them that we will touch on each week. For now this will serve as an introduction to get us started. If I have any golfers out there, please add your perspectives. I haven't been golfing for all that long and many of you can offer more insight than I could ever offer. This also goes for any comments you would like to share about your personal trading experience. Please keep it coming.

Updated Pattern Watchlist

Another strong open this morning with news on a record trade defecit, cheaper oil, and HP's Chairwoman Patricia Dunn is going to walk. I don't if it makes total sense that the market is justified in advancing on this news, but I'm going to proceed with it.

In this mornings Price Patterns class, we mostly followed up on previous patterns that gave recent confirmation. We did add a few patterns to the watchlist which included...

CELG- Descending Triangle
PSTI- Descending Triangle
BFAM- Ascending Triangle
AXE- Triple Top

Add those to your radar and continue to watch for signals. You ought to follow up on old watchlists to see how the stocks have performed. They produced significant results as a whole. Now that I have commented on the market today, I am still in deliberations on what to discuss today. I appreciate the suggestions thus far and once I feel inspired to write, I'll be back.


Why are you Chasing the Trade?

Do you find yourself doing this? You have run a search a found a potential candidate to trade. It has passed the 151 point inspection and you have topped it off with a buy signal. Success! You venture over to your account to get started and just as soon as you type the symbol and quantity, you stop like a deer in headlights. Frozen and paralyzed by the next thought entering your mind.... Market or Limit?

Juxtaposition? While some have heard "one size fits all" methods for order placement, there is no such thing. When you are about to take a trade there are several elements to consider before you make your choice. While this is not a very difficult decision for those that trade during the day, if you are submitting your order while the market is closed then this becomes a difficult judgment to make. Let's start with a definition of each order and a few pro's and con's with using them.

A Market Order is an order to buy or sell immediately at the next best available price. These orders DO NOT guarantee a price of any kind, but do guarantee you get into the trade quickly. If you are trading a stock or option, the price should be close to the asking price of the instrument you are trading. However, in an overnight scenario, fast market, or volatile conditions you run the risk of the price deviating away from this ask price. Meaning if I place a market order to be filled in the morning, the stock can gap up or down and I could pay a price that is completely different than what I was expecting. The real upside here is that I get filled and get in a trade on this stock at all costs.

A limit order sets the specific price you are willing to pay for your trade. You are essentially telling the market maker I am willing to pay "x" or better for this trade, or I am not willing to take the trade at all. If the market opens better than what was anticipated, you will miss the trade. The downside here is if the stock happens to open the morning running like you had expected it to, then you are left on the sidelines watching it move, or chasing the stock and paying much more for the trade than you initially would have if you had used the right order.

Another method of entering an order that has been wildly blown out of proportion is to "split the difference" between the bid and ask. If you are trading during the day and the price is idle, why not? If you are entering your order at night, are you nuts? I would assume that you will miss the trade more than 75% of the time doing this. Personally I will only do this during the day when prices are stagnant. I will throw it out there for a few minutes and see if I get filled. If it doesn't fill I quickly bring it back to the ask to get into the trade. If I leave the order there and the market continues to move, the ask price increases, and I keep moving the order up until I pay a price well over the initial ask price. Not a great idea.

The question is how bad do you want to be in this trade. If you want to be in and saving a few nickels or dimes is not an issue, place a market order and get in the trade. If you are an option trader (where the nickels and dimes are a big percent of your trade), and don't want to be at the mercy of the market maker, I have a suggestion. Let's say one night you stumble across a trade and the price of the option is 3.80 by 4.00. You could put in a limit at the ask, but what if you are bullish on the stock and imagine it will kick off the morning with a bullish open? Have you ever tried submitting a limit order higher than the ask price? Let's assume after a long deliberation I felt I would be willing to pay as much as $4.50 to participate in this opportunity. I could place my order at a limit of $4.50. If the market opens at 4.10 by 4.30 let's say, and I have a limit of 4.50....I will pay 4.30. Remember, a limit will give you YOUR price or better. If the market opens too high (beyond your limit) then yes, you will miss the trade. At least you have a little buffer there to anticipate a higher open.

These strategies should apply to both buyers and sellers. This is a fundamental component of trading. Once you understand that different scenarios can call for different orders, knowing the advantages and disadvantages of each will help you make the best decision for each trade.

We will leave the door open on this discussion to post comments and you feel fit. I will follow up to this in the future with discussions on other order types such as stop orders and stop limit order entry.

In the meantime, I am off to spend time with my wife and kids. Have yourself a great day.

Mixed Emotions

What an interesting morning! The market has recovered from opening lower, and offered some decent movements in the daily trend. Take a look at a 1 day chart of the dow to see the intraday movements up until noon Eastern...

If you are still watching trades from my prior weekly watchlist, there were aome very nice pattern and trade confirmations today. I tried to rally together a watchlist, but I am struggling to find good looking set-ups. I will keep looking and hopefully have a few symbols to contribute today. If not, we might have to stick to this weeks price pattern list.

I received a minimal amount of suggestions over the weekend, but we'll make it work. For those who participated, thanks.

I also want to pay my tribute to those who lost relatives or loved ones five years ago on the anniversary of such a tragic event. I can't imagine what you must have went through but want to let you know that you are in my thoughts.

In an attempt to make light of such a tragic day, eight years ago this day marked the best day of my life. My wife and I married September 11th, 1998. (If you are reading this Amber, I love you! Happy Anniversary!) 8 years strong!

I will post later this afternoon...


Market Wrap

Apparently the market is not all that concerned that another Homebuilder has come forward and lowered their guidance for next quarter. LEN warned of a potential rocky road ahead, and they are the third company to do this in a short span of time. The main reason for the strong market movement today was the fact that Consumer Debt only grew 2.8% last month. The trend of debt was growing around 7 or 8% in the last few reports, so this news adds to the headache of trying to figure out the state of the economy. One minute it looks great, the next it looks terrible.

Next week we will kick off with a watchlist for the week going forward like we normally do every week. I am a little uneasy at the moment of the trend of the market and which side I am on, but by Monday I should arrive at a conclusion. Until then, have a fun filled weekend, and don't spend anytime thinking about trading or the market. Reset your brain power, and you will be totally refreshed by next week to pick up where you are leaving off.

I had a good topic to touch on this afternoon, but I have planned to save it until Monday. I have a short list of things I want to post about, but like I said...it's a short list. This means I am soliciting again...

To send me a suggestion on what you would like to read about. Click here to send me a quick e-mail and offer me a topic for suggestion. I will continue to post watchlists, talk about trades, and give you an occasional "insight" as to what I am thinking about, but what else would YOU like to hear? I'll give you the weekend to think it over, but give me a few ideas. You don't realize how hard it is to find a new topic two or three times a day, so your help is appreciated. I might not be able to reply to the e-mail you send, but I promise that I am reading them.

Again, have agreat weekend. Continue to do your part to leave comments and post frequently. Others appreciate your efforts as much as I do. See you next week!

Is it Friday?

Today has been a pretty busy day for me. Too many projects, too little time. I wanted to post last nights trades from my credit spreads class before I forget...

AAPL Bull PUT(if it breaks)
Sell Sept 72.50 put
Buy Sept 67.50 put
Credit N/A...contingent on a breakout

BTU Bear Call (Aggressive)
Sell Sept 40
Buy Sept 45
Credit Was 1.60 (If I remember correctly)

Speaking of APPL, apparently we were not thinking as positive as we should have been. The price has stalled right at resistance. I wrote an article on Fibonacci Retracements for the website next week, and used AAPL as an example. Remember the magical ratio of 61.8%? Take a look at the chart...

This strong resistance level correlates with this magical ratio right at this moment. Interesting huh? I am working on another post to be done by later today. I'll be back later...


The AAPL of My Eye...

What's the over-under on Apple breaking it's way into new highs tomorrow? I know a couple people are in trades on Apple along with me, and for the gentleman that was considering getting out on Master Talk last night, I hope you decided to stay. Anyone else have comments on this one? I went in on Tuesday with Oct 72.50's, and if it decides not to breakout there is still good profit there... but I thought if everyone thought positive, perhaps all that positive energy would translate into a breakout we could all enjoy? Keep an eye on it. This is a great stock!

UPDATE: A comment was posted asking what I saw to take this trade. Attached is a chart...

The Concept of Open Interest

Often I get the question about why I would choose an option with low open interest. Hopefully I can shed light on why open interest is important and to better define it for those who don't fully understand what it is.

Let's start with a definition. Open interest tells you the total number of option contracts that are currently open - in other words, contracts that have been traded but not yet liquidated by either an offsetting trade, exercise or assignment. In easier terms, if I buy-to-open an Oct 50 call, I increase open interest by 1. If I sell-to-open the same option, the open interest climbs by 1. If I decide to sell-to-close, or buy-to-close, this will reduce the open interest by the amount of contracts traded. Another scenario would be if I want to buy-to-open 1 contract, and I get paired with another order that wants to sell-to-close this same contract, open interest will remain unchanged.

Many get volume and open interest confused. We have discussed what open interest reflects, now let's define volume. Volume is the total number of contracts traded. An example might be...100 contracts traded hands today, but the open interest is unchanged. This means the opening transactions were matched with closing transactions and no open contracts were left on the table. What would this tell you? Bulls and Bears were in balance today.

Now that we've stated the definitions, let's talk about the application. Many get hung up on the "1oo contracts minimum of open interest!!!" Why? If you are ever given a "rule-of-thumb" in trading, always ask "why is this important?" I will tell you a few reasons why it is important, and a few reasons why it is not important.

Realize that if you are trading options with more open interest, this means more people are interested in this trade. This is a good thing. The more people that are interested, the better the pricing will be. What if I come across an option with little or no open interest...does this mean I don't buy? You can surely pass on the option, but why would you? If other traders are not trading this option, what does this mean? Perhaps you have picked an undesirable option...or the option has just recently been issued. Do you care what other traders are doing anyway? Aren't the majority of option traders wrong anyway?

Don't tell me it is a liquidity issue. You do not have to find the other party in the trade...this is where the market maker comes in. If he has a price listed, doesn't he have to honor that price? Whether there is another trader or not, he sets the price, and if the price is right...we buy. To me it is not a liquidity issue since I have traded options with little or no open interest on many occasions. In my eyes, the only issue lies in a statement I just made. I said "If he has a price listed, doesn't he have to honor that price?" Low open interest effects the price of the option. If you have no demand, can't you manipulate the price a little? Normally in low open interest scenarios, there will be a very wide spread between bid and ask. This is something I pay close attention to when trading a low open interest option. If the spread is huge...30, 40, 50 cents or higher, I'm likely to pick another option. However if the price looks good, the spread is decent, I will be the first to grace the open interest column any day.

Hopefully this will clear up any questions on this topic. I am not suggesting to jump into low open interest options...I am saying that if the reward in the trade is good enough to warrant any risk, and the price of the option looks good, trade away.

Deal or Raw Deal?

I have gotten mixed feedback about the game I chose to play with the group last night on Master Talk. In my opinion, the game correlated very well with emotional exits and dealing with odds and probabilities. The same works with trading strategy. Do you go with the high probability trade, or the low probability trade? At what point to you take a profit in the trade? Or is that profit enough? Are you taking an exit based on emotion? It gave an opportunity for everyone to play along, plan an exit, take it, and see how things turned out, and whether or not it was a good decision, and learn from it.

If you thought the game was a bad idea, it's all good. This is why I think it is great that we offer two concurrent sessions. If I am stinking it up, perhaps the other session is discussing a topic you need to hear? I won't be offended if you choose not to listen to me...there is always hours of Q&A to fall back on. I always try to aim for something interesting or enjoyable, so next week I will try focusing on short term trading versus longer term trading and the differences between the two. Or if I feel differently between now and then, perhaps I will make you play a game of Jeopardy?

In closing, if I gave you a "Raw Deal" last night...I'll step it up next week.

Be back shortly...


An Interesting Correlation...

Ever watched the reality TV show "The Contender?" If not tune into ESPN on Tuesday nights. I have watched this show since it's inception last year. I am a boxing fan, and loved the premise of this show. I get home from basketball last night and access the recording of last nights episode via TiVo. All the first round fights have come and gone, and the fight last night was between Walter "Two Guns" Wright versus Cornelius "K9" Brundage.

In my opinion, "K9" who was lucky to be there, was the least skilled fighter of the litter. He is one of the strongest, if not the strongest person in contention though. His strategy was to get into his opponents head and to shake their ability to focus. His opponent Walter, was near the top of the list in skill. He had a lot of confidence, very finesse, and knew how to win fights. He was very good at what he does.

So in the episode, K9 spends most of his time talking about how bad he is going to beat Walter. He is getting in his face, making demeaning remarks, and doing whatever he can to get into Walters head to get him "off his game." The show did a great job of depicting how bad the two hated each other, and how their hate was going to go beyond a boxing match, but was making itself out to be a brawl.

Before the fight, Walter is talking with one of the managers there, and the manager is trying to get Walter to focus on his own strengths. Walter is the better fighter by a long shot, and as long as he goes out and executes his gameplan, he will win the fight. However, his execution doesn't go as planned.

The fights last 5 rounds. It was clear from the get-go, K9 came out and tried to bully Walter. He would try to hold him down, push him around, basically doing whatever he could do to prevent Walter from getting into his rhythm. Although K9's skill looked ridiculous at times, like he mentioned at the end "It wasn't pretty, but I did what I had to do in order to win." While Walter, who ended up losing, admitted to changing his strategy in a post fight interview. Rather than trying to win the fight, he let his emotion get the better of him. K9 was able to get into his mind and change his focus from winning the fight, to hurting his opponent in hopes to make him respect his ability. The further he strayed from his gameplan, the worse the fight was to watch.

I started to relate this to trading....like I do everything else. What happens when I try and change my strategy and deviate from what I know that I am good at doing? Imagine what happens when I forget the bigger picture of why I trade, what I need to do to get the job done, and what I need to do to accomplish my goals. I start to lose.

In closing, never lose your focus. Don't change your rules to try and outsmart or outwit the opposition. If your system is strong then it will gradually take you to where you want to be.

With that being said, Master Talk is coming up here pretty quick. I'm still trying to hammer out a presentation. We'll see what happens.

A Method to the Madness

I can't recall the inspiration that led to my article last night about delta-neutral positioning. Since it has been out there, my Inbox has been screaming that it can't take it anymore and is thinking about leaving me (meaning I got a lot of e-mails). For the most part the questions are about HOW to create a delta neutral trade. Let me use a fairly simple example...

Let's say I have a $50 stock. I purchase a Oct 50 call which happens to have a delta of .50. I also buy a Oct 50 put option which comes with a delta of -.50. As you can see my delta in this trade equals zero. This means that if the stock shoots up $5...whatever amount my calls gain, my puts will lose. This leaves me neutral to price movement. A comment I saw was to be careful shorting vega when it is high. Why? If the price moves, I am immune to price movement!

Hopefully this simple example gives you an idea. Like I mentioned earlier, I will tone it down and mix in various topics to keep everyone entertained and content.


Author's Acknowledgement

Lately these posts have been rather "deep" or perhaps too advanced in their nature. I fully understand this and I own up to the consequences. I have a lot of future posts planned that will step back from things that might be over your head, going back to basic concepts that are commonly misunderstood or taken for granted. Keep checking back with me and I can promise you will eventually get something out of all this nonsense.

Profiting With Changes in Implied Volatility

In our prior discussions on the vast subspaces of Implied Volatility we have gutted out much of it's presence and it's impact on option pricing. What we have not discussed is other applications around this phenomena. I am going back to this in an effort to answer questions I have seen posted in the comments and to answer the plethora of e-mails I have not ponied up an answered to yet.

In an earlier post I mentioned buying ITM options to render IV obsolete. Options with good amounts of intrinsic value come with less time value than ITM or OTM options in some instances. With smaller amounts of time value, this dampens the effect that IV has on your option price (Remember IV can only effect time value, not intrinsic value). But what if you don't want to buy deep ITM options? I don't blame you!

Let's discuss how to profit on changes in IV. What if IV is high, and you are expecting it to drop substantially, or vice versa? Let me give you an example I will normally trade. Straddles work well not only in situations where you are expecting a big change in price, but also when you are expecting a big change in IV. There are a few tips I want to give you about trading this strategy.

First, if you are going to trade a straddle or strangle, please don't get in the day before the announcement when the options are trading at their very highest premium. Why not get in early? I normally try to get in 2-3 weeks prior to, while IV is still rising. If you do this, and the price doesn't move too much, then both the call and put should have increased enough in value to exit the trade before earnings with a decent profit. The typical scenario I see, is people getting in right before the announcement...which is ok if you get a monster movement in price. A monster move in price will pay for both expensive options you've purchased. But there is a big pressure on you to get this large move. If you don't, you stand a lesser chance of profiting from this trade. This is why you will hear that these trades only work 30-40% of the time, is due to the entry of extremely expensive options. Make sure you consider an early entry next time to consider this strategy.

What if you are in a "day before" earnings environment or another circumstance where you anticipate IV to change drastically? Have you ever heard the term delta-neutral? Delta-neutral describes a situation consisting of positions with offsetting positive and negative deltas. The deltas balance out to bring the net change of the position to zero. This means with a delta of zero, the price can move up or down, and you will remain even on the trade. No gain, no loss. Now that I am numb to moves in price, if I am expecting a move in volatility this is where I need to focus on vega.

If I am expecting volatility to rise substantially, I want to be long vega (positive vega). If I am in a situation I mentioned earlier, day before earnings and expecting IV to crash, I want to be short vega (negative vega position). Shorting vega with a high IV, gives a neutral-position delta strategy the possibility to profit from a decline in IV, which can occur quickly from extremes levels. Of course, if volatility rises even higher, the position will lose money. As a rule, it is therefore best to establish short vega delta-neutral positions when implied volatility is at levels that are in the 90th percentile ranking. This rule will not guarantee a prevention against loses, but it does provide a statistical edge when trading since IV will eventually revert to its historical mean even though it might go higher first.

Hopefully this provides a few nuggets of information to help you understand the importance and impact volatility has and how to utilize vega in an option trade. Straddles can be a great strategy for both price and volatility movements, you just need to make sure you are creating the right trade to profit from this environment. This might be a lot to swallow, but read through it a few times and practice. As you progress through advanced options trading, this will become very important to you somewhere down the road.

I Fought the Market Today...

And I kicked the $#!+ out of it. I love that feeling you get when you have a well thought out plan, and execute it to perfection. It's not the money making aspect as much as the feeling of being right that does it for me. Despite the look of it, there actually was movement within the market today! I had a few patterns breakout this morning, a follow up move by VIP, a boost from AAPL, and a Gold rally that really made my day.

Now that the fun is over I need to focus on my presentation tomorrow night. I think I will discuss the differences between swing traders, trend traders, day traders, etc. Many people mix and match rules from different styles of trading, and hopefully I can pull a presentation out of my hat that will help. Once the trader can identify a consistent plan and mix together the right rules, the rest should be a walk in the park.

Funny story: I wrote a nice lengthy article earlier that I wanted to post. I won't give away the topic just yet...but my computer froze and I lost the entire article. Time well spent. I am leaving here in a few minutes, but will be doing a little bit of work at home tonight for about 20-30 minutes. I will fit something in a little later.


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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