Happy Halloween!!!

Happy Halloween everyone. Have a fun time making the rounds tonight...I know I will. If you are not out making the rounds, make sure you are passing it out by the truck load.

I have been creating a few new "treats" for the trading blog, and today we will test one out. I want the capability to do an audio clip whenever I feel like it. I am set up to record, but being able to post it to the blog was the challenge. I think I have that officially taken care of. We are going to test this out by posting the copy of the INVESTools MarketCast on here today. This should work out great for those of you who have not yet been able to access it yet. There wasn't a lot going on in the market today, so todays clip isn't all that entertaining. But anyway, I am only using the file to test and see if accessing an audio file will work. I won't be making a habit of posting the MarketCast to the blog, but perhaps my own version.

Anyway, Here goes nothing......CLICK HERE!!!

If this is a "bull market" why am I losing money?

It was yet another quite, relatively unchanged day in the market. Consumer confidence fell a few tenths of a percentage point (big _____ deal.) Market was down a good amount in this afternoons trading, but came back to close down just a few points. Is this a sign of strength?

I'm sure you all knew that. But what are you going to do about it? Are you closing out bullish trades? Even worse, are you getting into bearish trades? In your opinion what works right now? Even more importantly, why?

Spread traders don't have all that much of an advantage right now (do they ever? :), since any volatility in the market has already left after earning announcements, and most companies that have announced have now reset the IV meter back down to relative low levels. Not to mention the VIX is also at a historical low. This means option premiums are relatively under-inflated across the broad markets. If premiums are under-inflated....shouldn't we be buying them?

I have said it more than once and I will say it again. Stay with this trend until it tells you to do otherwise. I am thinking that as long as we close above 12,000 then there is no concern about the market trading flat or even potentially becoming bearish one day. I am still looking to buy calls. They're cheap!
Who has good trade candidates out there? I added a little to NVDA today...but will be short lived since earnings are on the 6th. I almost added to AAPL today, but I chose not to. Perhaps tomorrow? If you have any trades of interest, let's take a look. Thanks for your comments in advance.

FAST Response

I love this game. The first part of the homework is to read the comments. This clearly points out how there are so many different sides to a trade. I find it very interesting to see everyone's perspective, so thank you for sharing.

Would you mind if I point out a few things I see on this chart? Through creative illustrations, I am going to try to teach many of you something new today...

I see a price pattern on this chart. One that is referred to as a "Flag." A flag should consist of two components.

  • First: There should be a price movement that resembles a flagpole.

  • Second: There should be price action that resembles a flag.

In essence, when you see this type of price movement on a chart, it should visually look like a flag. Here is a snapshot of the actual chart. Compare the two and see if you can spot any resemblance.

As you analyze this chart, notice the breakout above $40 which occurred a few weeks ago. The stock almost ran straight up to $43. This price action is going to be our "flagpole." From the top of this flag over the course of the next two weeks this price action represents the "flag." I have drawn trendlines around it to help create the visual effect needed to see it.

Let's talk about what a flag is. A flag is a continuation pattern. This one here represents a "bull flag." These are found in uptrending stocks, and it represents a consolidation before the stock resumes it's bullish trend. I use the word "represents" since this is not actually a bull flag yet. In fact a pattern is never a pattern until it has been confirmed. For this to confirm this formation, we need it to close above the resistance line I drew to start working towards its target price.

Yes, I said target price. You can actually measure these patterns to determine how much the stock will move in price. This is why price pattern trading is so popular. Each pattern carries with it predictive value, meaning if confirmed, you should know exactly where the price is going, and how long it will take to get there. Interesting huh?

Once FAST breaks this resistance line, it should move a minimum of $3.50. Depending on which option you purchase, set a stop so that you are not risking more than 1 or 2 percent of that $25k.

Example: 2% of $25k = $500. That is the most you can lose on this trade. If the options I want to purchase cost $2.50... I can buy two risking the entire premium, I can purchase 4 risking half the premium, or I can find a creative equation to make sure that if push comes to shove, I am out of this trade with only a $500 loss.

If I size this way, it would take a losing streak of 50 trades to wipe me out. Not going to happen, right?

Keep an eye on FAST for a confirmed breakout!


Riddle Me This...

Assume you have a $25,000 account. You are looking to place a trade on Fastenal (FAST)...

First off, would you trade this? If so, when...how much would you trade...and what would your target price be on this set-up? Leave your comments on the comments page, and tomorrow I will follow up on this with a thorough analysis.

The Seven Deadly Sins of Trading

I had a suggestion to write this post after my write-up on my personal "Ten Commandments" of trading. Here are a few mistakes you will never want to make. Take it from someone who has already crossed the line before you, and here to advise you that you don't want to make the same mistakes.

Our money is hard earned and does not deserve to be thrown away over preventable instances. I will list my own personal 7 sins, feel free to add or subtract from this list in the comments section.

1. Trading an inappropriate position size.
Simply put...if you risk too much, you'll lose too much. In my eyes, this is the single most important rule of trading. Risking only 1-2% of an acct value is crucial to staying in the game.

2. Not knowing when to take the loss.
If you cannot answer the questions "Where am I taking the loss," and "Where is my profit target" then stay out of the market. If you leave these decisions for later, then you will make them emotionally, which will be the worst decisions a trader can make.

3. Trading on someone else's research or recommendation.
We have all heard stock tips thrown our way. Sometimes we might even hear people throw out potential trades that they are watching and become tempted to jump in. Sometimes I throw out stocks that I am trading and I am watching. The problem is that you might not know what this person is watching for, what strategy this stock fits, or what types of efforts are thrown into their research. If you take these stocks into consideration, make sure they are trades you would have likely come across on your own by conducting your own research.

4. Over Trading
Do you find yourself taking low quality trades to be more active? Stop it!

5. Trading without a trading plan or trading rules
You have all heard this a hundred times, so hear it again. What is your approach? Why? For instance, I am an options trader. I know what signals I take, I know the types of stocks I take them on, I know when to enter and when to exit. Make sure you are this familiar with your own plan you you have a benchmark to measure up against.

6. Trading without appropriate market knowledge
Do you fully understand every element of the strategy you are trading? Pro's & con's, risks & rewards, etc. Are you placing proper emphasis on the important things (ex. price, volume, etc.) and minimal emphasis on the more glamorous but less important items (ex. candle patterns, oscillators, etc.)? Is your strategy cohesive with the market environment and with the trend and condition of the company stock? One of the worst trades I ever took was on a strategy I really knew nothing about.

7. Trading with emotion instead of discipline
Trading with emotion will bring down your empire. Understand yourself and your tendencies first before making expensive decisions. As you create a trading plan, it will help you to reduce emotion and enhance discipline. Each person is different, but we will all fall down if we don't eliminate situations where we rely on emotion to make choices. Get started right away.


A New Turning Point

I want to send out another "thank you" to each of you that actively (or in-actively) participate and stop by this blog. All of your comments, feedback, suggestions, questions, etc. have been so educational for me in this process. Thanks for all your help.

I am very interested in the community/education/application potential that this site has, and I have recently made some changes and actions to take us in that direction. I appreciate all your patience while I have been experimenting with this site, and I have good ideas of how to optimize the experience when you participate.

With this being said, we will be undergoing a few changes here and there. The changes might be gradual, but I am interested in getting the word out about this blog and focusing more on getting the "group" involved through examples, application, and communication. This will include more application of different tools, methods, analysis, and trade examples being illustrated.

I am going to start using creative marketing to get more traffic into the site. Pass the word along if you know of anyone that could benefit from a group site like this. If you know of Ed Seykota's "Trading Tribe" you know how valuable this environment could be to a trader. It's like having a support group to fall back on. At least it will be like this when we are finally off and running.

Anyway, I will be busy this weekend gathering material and shopping for tools/software/ideas to implement on the site. Thanks for all your efforts and support through this process. We have all learned a lot and the best is yet to come.

Have a great weekend.

Microstrategy Trade Follow Up

This was a trade I outlined about three weeks ago in my Options Pricing and Volatility class, and I have received several e-mails asking about it. In the presentation I talked about how to increase the odds of success in a straddle by getting in to the trade earlier than the day or two before expiration date. The reason straddles have a low probability of success is that investors wait until the last minute to buy the options. By doing this, expectations have risen so much this causes the options to be so far overpriced that the anticipated move has already been priced into the options.
Microstrategy (MSTR) was our case study. Three weeks ago we purchased a 105 call (@$6.60) and 105 put (@$5.80) when the stock was trading at $105. We went with an ATM straddle because if IV were to rise and the price stayed relatively quiet, these options would have the greatest sensitivity to rising IV. In addition we were delta neutral, which meant at first we would be immune to price movement...unless it really started to take off, which it has. Afterall, isn't that the expectation with this strategy? Pick a stock that moves on or prior to earnings? At least that is why I trade them.

You can see the price has popped quite a bit on positive expectations, and IV has risen about 10%. The value of the call options are $17.00 and the value of the puts are $0.30. Overall as of today, this trade has seen a 40% return. Nice work!

An Article Submitted By a Reader

To our little option trading community,

I, like many of you, have been working incredibly hard to become what I've always wanted to be: A professional trader. It has been a rocky road, and to be honest, there have been a few times where I almost quit. But I never did, because I am determined to be among the 10% of the trading community that is successful. In doing so, I have kept a trading journal, where I detail each trade: What the prices were, why I entered the trade, what my target is, what my negative exit is, etc. After I close the trade, I enter the result and try and sum up the trade in a few words. What I've found from this journal is that some comments appear frequently. I've taken these comments and put each of them into a list called "Trading Rules Learned the Hard Way." I'm not going to list them all here, because many of them you've all heard before like "position sizing is key" and "make sure you take a loss quickly when you're wrong."

But of the many lessons I've learned about trading in the last year, the one I've made the most consistently, and the most costly has been failing to wait until the end of the trading day to make decisions. Whether buying or selling my options, especially lately, I have made several mistakes that could have easily been prevented just by waiting until the end of the day. Which brings me to another point: If you're going to take the time to keep a journal, analyze your trades, and create rules to follow, make sure you follow them! I wrote this rule down 3 months ago and let me show you how not following this rule has cost me recently (I apologize for not having charts to insert here):

1) CTSH. On 9/14 I bought calls on CTSH after the ascending triangle breakout the prior day. In my journal, I entered "Exit on close below $71.50." The next day, the stock traded down intraday to $70.65 and I sold the calls. Where did the stock close? $71.50. It never closed below that point. Thankfully I realized my mistake and reentered a trade, but not without taking an unnecessary loss. Journal entry: "Never trade before end of day."

2) NGPS. On 9/21 I bought calls on NGPS on a flag pattern breakout. The problem? I bought the calls at the high of the day mid-morning and by day's end the breakout was hardly there. The stock returned to my purchase price and then sold off well below. I wound up taking a decent loss, when it should have been minimal. Journal entry: "Wait for end of day to enter orders!"

3) BNI. On 9/27 I bought OTM BNI calls when the stock was at $72.99. The stock went on a huge run up to my target of $80, then retraced slightly. I had a decent short-term trendline drawn in with multiple touchpoints. My exit was the earnings announcement or a close below this trendline. On 10/19, the stock sold off mid-day, and at $77.75 I closed my position for an 81% gain. Pretty good gain right? The stock rebounded to close above the trendline and continue higher. Today it closed at $79.49. Had I waited, I would have had a MUCH larger gain. Journal entry: "Do not sell before afternoon!"

4) SIGM. On 10/18, I saw what looked like a flag breakout so I bought calls when the stock was $18.94 mid-morning and volume looked big. It turns out that it was only a rectangle and I had bought at the top (resistance). Brilliant. Yes, the stock is over $19 now, but not before retracing to under $18 first. Had I waited until the close, I would have seen clearly that the stock was at resistance. I'm still in this trade, but my journal entry says, "Midmorning breakouts don't matter!"

5) BLUD. On 10/18, I saw a big spike breakout mid-morning and jumped all over it. Look at the huge burst before the consolidation. I wasn't going to miss the follow up move! What happened? 6 more down days before today's fortunate (for me) spike upward. Had I waited until the close, I would not have taken the trade. Journal entry: "breakout failed today. Wait until the close to make trades!!"

6) I saved the best for last. This is the stock that caused me to write this article. SEIC. On 10/19 I caught SEIC bouncing off 2 levels of support and bought calls on it. Yesterday (10/25), The stock closed below my diagonal trendline, but still slightly above my exit support level, so I didn't exit the trade. However, last night (10/25) I examined the stock and saw what looked like a clear head and shoulders top. The only thing missing was the volume, but the stock was sitting on the neckline. I was ready in the morning and the stock gapped down hard on huge volume and I quickly exited the trade for a decent, but manageable loss when the stock was $55.50.

But that's not all. I executed my FAVORITE move and bought OTM puts when the stock dropped to $54.60. I figured I'd hit my $52 target in a couple of days maybe on this volume! Lo and behold, the stock rocketed back up and actually closed at $56.38. Since it's still below the neckline, I'm still in the bearish trade, but had I waited until the end of the day, 1) I could have exited my calls with a smaller loss and 2) I could have entered my bearish trade with a much greater chance of success rather than a big hole to climb out of. Journal entry is too explicit to repeat here but suffice it to say I was pretty hard on myself.

You should notice that for over a month I've written the same rule over and over and continued to break it even as recently as this morning. True failure is not making mistakes trading, but not preventing them from happening again. It's like walking into the same wall and bumping your head again and again.

In summary, and I cannot stress this enough to new traders: You MUST have the patience to let most of a day's trading pass by before making decisions. Breakouts often fail, selloffs often reverse, and you will lose if you don't let it sort itself out. Yes, you will occasionally be right. You will get out of a trade that continues moving against you or get into a trade that continues moving with you. However, I have found (call it painful backtesting) that over the long haul, you will still be far better off waiting out the storm.

Hope you get something out of this! Thanks again!

Brett Atlas



I don't normally like to post articles that are as lengthy as this one here, but when the quality is there I will make an exception. There are a few sports references and examples (which might not interest all of you), but overall I thought this was a great article. If you have the time run through this and give it some thought.

What It Takes to Be Great
Fortune on CNNMoney.com
By Geoffrey Colvin

Research now shows that the lack of natural talent is irrelevant to great success. The secret? Painful and demanding practice and hard work What makes Tiger Woods great? What made Berkshire Hathaway (Charts) Chairman Warren Buffett the world's premier investor? We think we know: Each was a natural who came into the world with a gift for doing exactly what he ended up doing. As Buffett told Fortune not long ago, he was "wired at birth to allocate capital." It's a one-in-a-million thing. You've got it - or you don't.

Well, folks, it's not so simple. For one thing, you do not possess a natural gift for a certain job, because targeted natural gifts don't exist. (Sorry, Warren.) You are not a born CEO or investor or chess grandmaster. You will achieve greatness only through an enormous amount of hard work over many years. And not just any hard work, but work of a particular type that's demanding and painful.

Buffett, for instance, is famed for his discipline and the hours he spends studying financial statements of potential investment targets. The good news is that your lack of a natural gift is irrelevant - talent has little or nothing to do with greatness. You can make yourself into any number of things, and you can even make yourself great.

Scientific experts are producing remarkably consistent findings across a wide array of fields. Understand that talent doesn't mean intelligence, motivation or personality traits. It's an innate ability to do some specific activity especially well. British-based researchers Michael J. Howe, Jane W. Davidson and John A. Sluboda conclude in an extensive study, "The evidence we have surveyed ... does not support the [notion that] excelling is a consequence of possessing innate gifts."

To see how the researchers could reach such a conclusion, consider the problem they were trying to solve. In virtually every field of endeavor, most people learn quickly at first, then more slowly and then stop developing completely. Yet a few do improve for years and even decades, and go on to greatness.

The irresistible question - the "fundamental challenge" for researchers in this field, says the most prominent of them, professor K. Anders Ericsson of Florida State University - is, Why? How are certain people able to go on improving? The answers begin with consistent observations about great performers in many fields.

Scientists worldwide have conducted scores of studies since the 1993 publication of a landmark paper by Ericsson and two colleagues, many focusing on sports, music and chess, in which performance is relatively easy to measure and plot over time. But plenty of additional studies have also examined other fields, including business.

No substitute for hard work

The first major conclusion is that nobody is great without work. It's nice to believe that if you find the field where you're naturally gifted, you'll be great from day one, but it doesn't happen. There's no evidence of high-level performance without experience or practice.

Reinforcing that no-free-lunch finding is vast evidence that even the most accomplished people need around ten years of hard work before becoming world-class, a pattern so well established researchers call it the ten-year rule.

What about Bobby Fischer, who became a chess grandmaster at 16? Turns out the rule holds: He'd had nine years of intensive study. And as John Horn of the University of Southern California and Hiromi Masunaga of California State University observe, "The ten-year rule represents a very rough estimate, and most researchers regard it as a minimum, not an average." In many fields (music, literature) elite performers need 20 or 30 years' experience before hitting their zenith.

So greatness isn't handed to anyone; it requires a lot of hard work. Yet that isn't enough, since many people work hard for decades without approaching greatness or even getting significantly better. What's missing?

Practice makes perfect

The best people in any field are those who devote the most hours to what the researchers call "deliberate practice." It's activity that's explicitly intended to improve performance, that reaches for objectives just beyond one's level of competence, provides feedback on results and involves high levels of repetition.

For example: Simply hitting a bucket of balls is not deliberate practice, which is why most golfers don't get better. Hitting an eight-iron 300 times with a goal of leaving the ball within 20 feet of the pin 80 percent of the time, continually observing results and making appropriate adjustments, and doing that for hours every day - that's deliberate practice.

Consistency is crucial. As Ericsson notes, "Elite performers in many diverse domains have been found to practice, on the average, roughly the same amount every day, including weekends."

Evidence crosses a remarkable range of fields. In a study of 20-year-old violinists by Ericsson and colleagues, the best group (judged by conservatory teachers) averaged 10,000 hours of deliberate practice over their lives; the next-best averaged 7,500 hours; and the next, 5,000. It's the same story in surgery, insurance sales, and virtually every sport. More deliberate practice equals better performance. Tons of it equals great performance.

Not all researchers are totally onboard with the myth-of-talent hypothesis, though their objections go to its edges rather than its center. For one thing, there are the intangibles. Two athletes might work equally hard, but what explains the ability of New England Patriots quarterback Tom Brady to perform at a higher level in the last two minutes of a game?

Researchers also note, for example, child prodigies who could speak, read or play music at an unusually early age. But on investigation those cases generally include highly involved parents. And many prodigies do not go on to greatness in their early field, while great performers include many who showed no special early aptitude.

Certainly some important traits are partly inherited, such as physical size and particular measures of intelligence, but those influence what a person doesn't do more than what he does; a five-footer will never be an NFL lineman, and a seven-footer will never be an Olympic gymnast. Even those restrictions are less severe than you'd expect: Ericsson notes, "Some international chess masters have IQs in the 90s." The more research that's done, the more solid the deliberate-practice model becomes.

Real-world examples

All this scholarly research is simply evidence for what great performers have been showing us for years. To take a handful of examples: Winston Churchill, one of the 20th century's greatest orators, practiced his speeches compulsively. Vladimir Horowitz supposedly said, "If I don't practice for a day, I know it. If I don't practice for two days, my wife knows it. If I don't practice for three days, the world knows it." He was certainly a demon practicer, but the same quote has been attributed to world-class musicians like Ignace Paderewski and Luciano Pavarotti.

Many great athletes are legendary for the brutal discipline of their practice routines. In basketball, Michael Jordan practiced intensely beyond the already punishing team practices. (Had Jordan possessed some mammoth natural gift specifically for basketball, it seems unlikely he'd have been cut from his high school team.)

In football, all-time-great receiver Jerry Rice - passed up by 15 teams because they considered him too slow - practiced so hard that other players would get sick trying to keep up.

Tiger Woods is a textbook example of what the research shows. Because his father introduced him to golf at an extremely early age - 18 months - and encouraged him to practice intensively, Woods had racked up at least 15 years of practice by the time he became the youngest-ever winner of the U.S. Amateur Championship, at age 18. Also in line with the findings, he has never stopped trying to improve, devoting many hours a day to conditioning and practice, even remaking his swing twice because that's what it took to get even better.

The business side

The evidence, scientific as well as anecdotal, seems overwhelmingly in favor of deliberate practice as the source of great performance. Just one problem: How do you practice business? Many elements of business, in fact, are directly practicable. Presenting, negotiating, delivering evaluations, deciphering financial statements - you can practice them all.

Still, they aren't the essence of great managerial performance. That requires making judgments and decisions with imperfect information in an uncertain environment, interacting with people, seeking information - can you practice those things too? You can, though not in the way you would practice a Chopin etude.

Instead, it's all about how you do what you're already doing - you create the practice in your work, which requires a few critical changes. The first is going at any task with a new goal: Instead of merely trying to get it done, you aim to get better at it.

Report writing involves finding information, analyzing it and presenting it - each an improvable skill. Chairing a board meeting requires understanding the company's strategy in the deepest way, forming a coherent view of coming market changes and setting a tone for the discussion. Anything that anyone does at work, from the most basic task to the most exalted, is an improvable skill.

Adopting a new mindset

Armed with that mindset, people go at a job in a new way. Research shows they process information more deeply and retain it longer. They want more information on what they're doing and seek other perspectives. They adopt a longer-term point of view. In the activity itself, the mindset persists. You aren't just doing the job, you're explicitly trying to get better at it in the larger sense.

Again, research shows that this difference in mental approach is vital. For example, when amateur singers take a singing lesson, they experience it as fun, a release of tension. But for professional singers, it's the opposite: They increase their concentration and focus on improving their performance during the lesson. Same activity, different mindset.

Feedback is crucial, and getting it should be no problem in business. Yet most people don't seek it; they just wait for it, half hoping it won't come. Without it, as Goldman Sachs leadership-development chief Steve Kerr says, "it's as if you're bowling through a curtain that comes down to knee level. If you don't know how successful you are, two things happen: One, you don't get any better, and two, you stop caring." In some companies, like General Electric, frequent feedback is part of the culture. If you aren't lucky enough to get that, seek it out.

Be the ball

Through the whole process, one of your goals is to build what the researchers call "mental models of your business" - pictures of how the elements fit together and influence one another. The more you work on it, the larger your mental models will become and the better your performance will grow.

Andy Grove could keep a model of a whole world-changing technology industry in his head and adapt Intel (Charts) as needed. Bill Gates, Microsoft's (Charts) founder, had the same knack: He could see at the dawn of the PC that his goal of a computer on every desk was realistic and would create an unimaginably large market. John D. Rockefeller, too, saw ahead when the world-changing new industry was oil. Napoleon was perhaps the greatest ever. He could not only hold all the elements of a vast battle in his mind but, more important, could also respond quickly when they shifted in unexpected ways.

That's a lot to focus on for the benefits of deliberate practice - and worthless without one more requirement: Do it regularly, not sporadically.


For most people, work is hard enough without pushing even harder. Those extra steps are so difficult and painful they almost never get done. That's the way it must be. If great performance were easy, it wouldn't be rare. Which leads to possibly the deepest question about greatness. While experts understand an enormous amount about the behavior that produces great performance, they understand very little about where that behavior comes from.

The authors of one study conclude, "We still do not know which factors encourage individuals to engage in deliberate practice." Or as University of Michigan business school professor Noel Tichy puts it after 30 years of working with managers, "Some people are much more motivated than others, and that's the existential question I cannot answer - why."

The critical reality is that we are not hostage to some naturally granted level of talent. We can make ourselves what we will. Strangely, that idea is not popular. People hate abandoning the notion that they would coast to fame and riches if they found their talent. But that view is tragically constraining, because when they hit life's inevitable bumps in the road, they conclude that they just aren't gifted and give up.

Maybe we can't expect most people to achieve greatness. It's just too demanding. But the striking, liberating news is that greatness isn't reserved for a preordained few. It is available to you and to everyone.


Did you hear that the median price for a new home dropped the largest amount the market has seen in over 35 years? Almost a 10% drop! Despite this movement, this market rallied towards the end of the day to finish up about 30 on the Dow and up about 22 on the Nasdaq. Does this mean it's a bull market?

Back to this housing data...I have been attempting to dabble in real estate, since it is relatively small work for good consistent chunks of money. I must admit that this move in the housing market really weighs on profits. What can you do?

Speaking of the housing bubble, watch XHB. This of course is the ETF for homebuilders. Ever since reaching a significant low in July, there has been slight but steady upward movement ever since. Homebuilders are a liquidity driven market and by nature are a leading indicator in the whole sector rotation phenomena. They are a must have in a watchlist when conducting market analysis.

If you find yourself in a position like me where the housing bubble has effected you in a negative way, use XHB to hedge your positions. That information would have been more useful yesterday, right?

I have a few things to clean up around here...I will get another post in shortly.

Do You See What I See... Part II

Thanks again for all the responses to last night's trade. I have drawn a few things on the chart to illustrate a few things I have seen and where I stand on this trade. Take a look...

Like many of you, I also saw an ascending triangle forming. With resistance at $46.5, an entry signal would be taken with a closing price above this resistance. Since I had already been with this stock for some time, I used this movement today to add to my position. Yes, the volume was subpar on this movement, which means there is a slightly higher probability that $46.5 might not act as a very strong support going forward. However, retail is typically strong this time of the year, the trend here is amazing, and the market is still kicking @$$ and taking names. Last note, even though the pattern measures around 3-4 points wide, remember that this is only a minimum.

Think this is a good/bad trade, leave some comments. Share your opinion with the group, inquiring minds want to know! If you want to hear my opinion.....

Recently Asked Question

I stumbled across a good question recently that was posted to the blog. I am going to throw it back to the group to see who can come up with the right answer. Here is the question:

"When does the implied volatility spike before earnings begin? For example, SPG reports monday but the CBOE chart shows IV dropping even into today and we're less than a week away."

Basically the question is two-fold. First when does implied volatility rise before earnings, and two why would it be dropping a few days before earnings?


Do You See What I See?

Here we go again. Same format as before. Here you have a chart of American Eagle (AEOS). I want you to look this over, then leave a post telling everyone your thoughts/analysis. If you do not know how to leave a post, click here.

Try to follow this format if you will...
Give me pro's & con's of taking this trade
When would you get in? (what signal will you use?)
What would you trade option or stock?
If an option, which month and strike?
What relevant piece of info did you notice about this trade that nobody else did?

Add or subtract from that as you see fit. Try to respond to this asap since I am likely to provide my take on this tomorrow afternoon.

By the way, to any listeners I have left on my Credit Spreads trading room, I will not be presenting tomorrow. I have been working on trying to get an article I wrote posted on Forbes magazines website. Wish me luck, and I will try to get started a little earlier tomorrow.

Timely Posts...or Lack Thereof

Where have you been all day? It's nearly dinner time and nothing has come across the blogwire? Wednesdays are typically my busy day, however since I do not teach Master Talk tonight, do I really have an excuse? Yes.

Blogger was down for maintenance. So here I am in the comfort of my home, ready to fill a couple posts in order to not leave everyone stranded today.

Let's first digest the market and talk set-ups. By the way, the number of posts on the "Breakouts" article was impressive. For those of you looking for trades, thank all your peers for adding value to the site.

What did we see in the market today? Any unexpected actions? The Fed paused today, which was the expected action that they would take, but what about the RE-action? The market started off well, retraced, advanced, declined and rallied to a slightly higher....and another record close on the day. The Nasdaq, with help from AMZN, led the way today with a good solid gain finishing up about 12 points.

What will tomorrow bring? Good question. If the rally in oil is over, and we see a pull back in crude futures, I am bullish. The price of oil and the market have really moved in opposition of one another lately, so keep an eye on it. If oil continues to move higher, the market might exhale for a few days in search of the next higher low.

I didn't close any positions yet, but depending on the potential "counter-fed" movement that could occur tomorrow, I remain open minded and ready. What about trades to get into going forward? I still like the breakouts, and a pull back in the market averages will give great opportunities to find support bounces in uptrending stocks.

I will submit another post in a few minutes of a potential price pattern trade.


Another Day Another Dollar

The market moved slightly faster than the speed of smell today. Such is the case going into "pre-event" days such as tomorrow. The market will be quiet tomorrow up until the announcement. If you are not sure about tomorrows reaction, you might consider tightening stops, or exiting positions where you don't want to risk your profits.

I think the potential for an upswing is about nil, right? The market has concluded a pause rather than a cut or hike, but the policy statement is going to be the icebreaker. So what do you have left over as far as a market reaction is concerned? Either a slightly up or slightly down day, or you have a large down day. How about them odds?

Speaking of odds, who is favored in tonight's Game 3 of the World Series? You have Detroit pitching another lefty (Robertson) against St. Louis' Carpenter. Who's your favorite?


I have tried to encourage those who have access to partake in my daily audio commentary on the website. If you have not had access to it at this point, once the new website converts, everyone will be able to partake. The reason I bring this up is that I have been encouraging everyone to trade breakouts (especially on retail...KSS, SHLD,PLCE, AEOS, ANF, OMG, etc.) since this has been the most rewarding strategy the market has offered as of late.

For those who have not heard of this strategy, you place a trade when a stock happens to close outside a support/resistance level. In this scenario, we are looking for stocks breaking resistance and moving into new highs.

The requirement other than a close above resistance is a good level of volume. Typically on breakouts you would look for better than average volume. The more volume the merrier. These are the only two requirements. In attempt to hedge the question: Yes, this means we are not using a MACD, Stochastic, or Moving Average for these. They have no relevance in this trade.

Let's throw a few more stocks out there. As of early there are a few stocks that might close at new highs today...






Obviously I missed a few since I only spent 5 minutes looking. Make a few contributions to this list if you have them. This will be today's fishing hole for those who can't find anything going on.

Price Patterns

Here are the patterns from this weeks class. Before taking any of these trades, understand what each pattern means and what type of breakout should result from the listed pattern. If you are not sure where to find this info, why not attend my class? Humor me at 6 in the morning why don't you?

CVD- Symmetrical Triangle

EOG- Symmetrical Triangle (look at the 5-year chart)

VIP- Ascending Triangle

HAWK- Descending Triangle

ABC- Ascending Triangle

WDC- Symmetrical Triangle


15 Common Sense Rules For Traders

Common sense can be brutally honest sometimes. As traders we get so focused on the little inconsequential detaisl sometimes that we miss the world around us. I have had this discussion with too many people over the last two months that told me they were bearish on the market and were taking a beating on the "high probability" that the market would reverse. Who sets those odds by the way? Are trends more likely to reverse than persist? If so, why the hell are we studying technical analysis?

Take a look over these trading rules I stumbled across last year and see if there are any realities that surface from them. Each time I look these over it reminds me of the realities of what we do here.

1. No matter what you read about trading, until you use an approach and test it with your money on the line you will never learn how to trade. Paper Trading is NOT Trading!

2. If it were really possible to "Buy Low Sell High" or "Cut your Losses and Let your Winners Run", then almost everyone would be making money rather than losing it.

3. Remember that there is ALWAYS someone on the other side of your trade who is using a trading technique exactly the opposite of yours who hopes to make money with his system.

4. If 90% of all traders lose money, they must be following generally accepted trading rules. The 10% who win do not!

5. You trade your beliefs and your beliefs about your system. If you have a problem with yourself, fix yourself first.

6. Impatience, Fear and Greed will make you poor. Any need to trade is rooted in greed and impatience.

7. If you really understand the markets then YOU KNOW that there is the same opportunity on every time frame, in every market, every single day.

8. Waiting for the perfect trade is "chickening out", and caused by your lack of faith in yourself or your system.

9. Any hardwired, automated trading system sold that truly works 70 or 80 or 90 percent of the time in every market would be worth hundreds of millions of dollars and would not be for sale at any price.

10. Asking "How small an account do I need to begin trading" is asking to be wiped out.

11. Having a series of winning trades early can be more hazardous to your account than a series of small losses.

12. Learn to trade before you trade. If you win or lose without understanding why, you will never develop a winning strategy.

13. Ninety five percent of everything you hear from everyone about the markets and the markets "reasons" for doing what it did or will do are lies. Neither you nor anyone can predict the future. You can only make educated guesses about potentialities.

14. Asking someone (such as using a service) for advice on where the market is going is a sign you should be on the sidelines until you understand the market better. If the upcoming market direction is not obvious to you, you should not be risking your money. You will lose often enough even when you are right.

15. There is NO GUARANTEED way of making money in the Markets or anywhere else. NONE, NADA, ZIP, ZERO! All you can do is increase your knowledge about yourself and how to estimate the probability of placing a winning trade. Then trade by taking controlled and measured risks.

Homework Assignment on AT

If you have not read the comments to the homework before reading this click here and read them first. This is the first part of the answer.

What a diverse number of responses! Some would buy puts, some would buy calls...some would hold over earnings, some wouldn't...some saw the set-up as an ascending triangle, some saw the set-up as a symmetrical triangle...some would buy Nov, others Jan! Look at all the different responses. Some offer pertinent analysis, such as the spin-off which created the discrepancy in the charts (nice work "smokeisms"), or other posts which offered info that was relevant to what AT had done on past announcements, but not going to help us make the trade based on today. The assignment was created to tel me what you see, and what you would do. How do you feel you did?

Great job and thanks to all that participated. I learned more about all of you by reading these. As you can see, no two traders are truly alike in how they do what they do. Do any of these different approaches tell us what the stock is going to do? No they don't, so it is important you have a good plan in place no matter what it decides to do.

Let me give you my take. Despite the spin-off that took place last month (which is not incorrect data by the way) we can clearly see a triangle break. Take a closer look...

Friday represented a confirmation of this pattern. Today you can see a trace back to old resistance as new support. Mike Z made the only comment on how he would exit if this new support level didn't hold up. Nice work Mike, I would do the same. Friday also offered the volume needed to confirm this breakout so the trade set-up is there. The triangle is three points wide, and should hit this target within six weeks. Under the usual circumstances all you would need is a Dec option with a $60 strike (if you are aggressive) or $55 strike (if you are conservative). HOWEVER...Earnings are announced on Friday. A lot of comments mentioned no trades would be placed due to this, some said they would hold over earnings based on what the company did in the past. Perhaps I need to run my post about holding over earnings again?

Could you still enter the trade and get out before earnings? Sure, if you saw something here that led you to believe the stock would hit that $3 in a week...why not? Consider your R/R though. Let's say you picked up the Nov 60's at $.80 (you would only buy the Nov since you will be in and out in a week). If you hit this target of $60 in about a week, theoretically...your options would be worth about $1.50 (give or take) thanks to the Black Scholes. Do you like this scenario?

The next questions is, what is the probability that the stock will hit this price in 4 more days? Very, very low. This is why I didn't take this trade as of Friday, even though I had it on a list for some reason. Earnings would have forced me out before I would have a chance to profit.

So the end result is, a low risk reward, a low probability, and a chart situation that threw many up in arms. In my book this made a good example to look over. I think we should do this once a week, don't you.

Good work everyone.

Monday Morning

What a solid open today. I told you bears to stay away from the temptation to call the top. Apparently the market does not see a top right now. Oil futures look to be in a downtrend. Lower highs and lower lows, and the price is down another dollar to $58. As oil drops, this stimulates traders to buy....

I added to several positions today. I am also scared that I have a little too much going on in retail right now. Have you ever created an over correlated position in a group/sector and watched it go against you? I guess I am just trying to get as much as I can while the getting is good. The market only moves like this once and a while, and your job as a trader is to recognize it and get it too.

We'll get to last week's homework in a minute...


You Make The Call...

Alright...case study #1. This will be your homework for the weekend. I have a stock chart listed below, the symbol is AT, which is Alltel Corporation. Take a look at this chart, and think to yourself what you would do with this. Would you buy? Would you sell? What would you buy or sell? An option? Which one? What do you expect the stock to do? Why? Based on what? What would your rules be? Rather than send me an e-mail about it, leave your comments below along with your name if you'd like to participate. Have a great weekend folks, we'll revisit this on Monday.

When Good Trades Go Bad...

Did I say I added to OMG yesterday? OMG! It has not triggered an exit yet, but yesterday I loved the entry. Tell you what....take a look at the chart below in my Bollinger Bands post (Or bring it up in the toolbox). Look over the set-up as of yesterday, and tell me what you see that would have been a direct warning that this retracement today was likely to happen. Respond as a comment, and kudos to the first correct answer.

Also I wanted to thank you all for the outpouring of e-mail I received. If one of those e-mails happened to ask a question...bad timing on your part. I doubt I will be able to answer questions in a flurry of e-mails like that, but keep those questions in your mind, we'll get them eventually. Also, if you are newer to the blog and still have questions, read my posts! Most of the questions I receive are something I have already answered in prior posts.

Anyway, I will be back in a few. I have a fun exercise we'll try to get going today.



So here is the deal. Attendance has dropped again on the blog. No I am not in tears about it, but I would like to hear your thoughts and feedback about this site. I know my posts come in flurries, or sometimes hardly ever. I know some prefer to be thrown a few trades, which I do in moderation. But I want your opinion. You can do this by sending me an e-mail, leaving a comment down at the bottom, or filling out a survey over on the right hand column underneath my archives. I just updated the poll again today.

I have had a few suggestions that I am entertaining. Right now I am working on a link to a daily podcast on this blog. I am in the process of trying to find a place to host my files and we can listen to a daily audio clip about stocks we are following or just a general market overview hosted by yours truly.

Another suggestion I received is to create videos to post on the blog. It would be similar to a trading room session, where you watch a video of what is on my computer screen, and I walk through charts, analysis, and other elements as well. It would be easier to see what I am seeing rather than to try to interpret what I am writing. I'd like to see this happen also. It's easier to present than to type these lengthy posts each day. What a time consumer!

So give me your thoughts. I promise I will read each e-mail, and jot down your suggestion. What is interesting to me is to see what the public wants to see. I want to keep this innovative, interesting, and entertaining. Do your part and lend me a hand! Click here to send me an e-mail, or fill out the poll on the right hand column if you prefer. See you tomorrow.

Speaking of OMG...

By the way, I added to my OMG position today. OMG!!! More Nov contracts, strike at 65. I tightened up my risk to this recent low at about $56. We'll see what happens. Anyone like that set-up today? Does this look similar to that VIP trade from a couple months back?

Bollinger Bands

It would be rare that you mention the name “John Bollinger” in front of a trader and have them draw a blank. Well, if you find yourself drawing a blank right now, let me provide a background. John Bollinger is one of the best-known analysts, market commentators, and market technicians in the trading industry. He is also the creator of the Bollinger Bands, a technical indicator we will discuss today. His Bollinger Bands are one of the most widely used indicators for measuring stock volatility. Bollinger Bands consist of a mean and two price channels. One set above the average, and one set below. These price channels, or “bands” are standard deviations of the stock being analyzed. Typically the bands are set at 2 standard deviations, which will encompass 95% of the price movement. 1 standard deviation will encompass 68%, and 3 deviations will gather 99%. These bands adjust to volatility, meaning they will expand during points of heightened volatility and contract during times of low volatility. When a stock price reaches a lower band, it could be considered “oversold” and when it reaches it’s upper band it could be considered “overbought.” Now that a foundation has been laid, let’s talk about how we will be using them.

As mentioned earlier, Bollinger Bands contract during low levels of volatility. It is believed that volatility will cycle just like the markets do. After a surge of volatility, we would expect volatility to die down. After the low volatility cycle, we would anticipate volatility to ramp up again. A “Squeeze Play” is when you find a Bollinger Band channel that is at a significant low (at least a 6 month low) indicating volatility is at a significant pause in it's cycle. The stocks found would then be analyzed in anticipation of a breakout. However, please use caution in your analysis. It is recommended that you also use RSI or some other oscillator to help confirm direction of the stock movement.

Check out this chart below on OMG. Since Bollinger Bands are a trending indicator, I have taken a trending stock to apply them to. I have also drawn a series of ovals. The light blue colored ovals indicate the width of the channel at a significant relative low. The orange colored ovals indicate when the stock had punched through these channels....I will get to these in a moment.

If you look at these squeezes, you can see the result is a nice pop in the stock which sparks a trend. After this trend, you can see volatility die down again, and then pop again. Like I mentioned earlier volatility will cycle. I built a search in the toolbox that is called "The Notorious Squeeze Play" found in the momentum archives of the strategy searches. It has helped to locate stocks in a relatively narrow bandwidth. Once the stock has confirmed a break of this narrow channel, you try to take a trade in the direction of the prevailing trend.

Another method of using these...one that I traded myself, is at these points where a stock has broken it's band. Take a look at the points highlighted in orange. Since two standard deviations will corral 95% of the price movements, 5% of the time the stock travels outside it's own statistical pathways. During these times of movements of improbable distances, notice how the price tends to travel back into the channel. I used to take these trades, but I was using 3 deviations rather than 2. That would give me a higher probability (in my eyes) that the stock would retrace. It might be worth some backtesting if you find it interesting.

Notice how I did not discuss the bouncing off upper channel to lower channel. I don't find results that are very consistent with this method. So officially I will not be taking any questions on it :) Use support and resistance instead.

Hope this post was insightful. If you have no interest in Bollinger Bands, tune in later today as I discuss something extremely important....such as reality television, things that piss me off, or additional wildly random topics.



I think this is a good topic to discuss. Read this quick piece on overconfidence. It's something that I am sure we all can relate to.

Overconfidence is a particular kind of trap that springs shut when people have or think they have special information or personal experience, no matter how limited. That's why small traders get hurt trading on no more information than “hot-tips.”

Here is an example. Everyone say "hello" to Tim. Tim is a farmer. He raises hogs and purchases huge amounts of feed to provide for his hogs. Tim has a large farming operation which is quite profitable. He takes 250 hogs a week to market. Because of a steady flow of hogs from his operation to the market, Tim has no need to hedge his hog business because he is able to dollar average the prices he gets for them. But Tim does want to indirectly reduce the cost of the feed he has to buy, so he purchases soy meal futures. Tim listens to weather and farm reports all day long. He attends meetings of other farmers, and tries to gather all the information he can that might help him be more profitable. But Tim has a major problem, called tunnel vision. When he looks out at the grain fields in the area where he lives, whatever he sees there he extrapolates to the whole world.

In other words, if Tim sees that the surrounding fields are dry, he suspects that all fields everywhere must also be dry. One year Tim witnessed a local drought. He checked with all the local farmers and they said they were truly experiencing drought conditions. He looked at the news on his data feed, and sure enough it said that there was a drought in his area. In fact, the entire state where Tim raises his hogs was undergoing drought.

Tim wasn’t too concerned about his own feed bins. He had plenty of it in his silos from previous bumper crop years. Tim decided to be piggish and speculate on what he considered to be inside information. He called his broker and bought heavily into soy meal futures. Tim was confident. He was sure that soy meal prices would explode upward some time soon, and that he was going to make himself a small fortune. Tim's greed may have turned him into a hog. However, the futures he purchased started moving down and the value of his investment began to shrink markedly. What Tim failed to do was to have a broader perspective. Everywhere else that grains were grown, farmers were experiencing rain in due season. The drought was localized almost entirely within the state in which Tim did his hog raising. Tim lost because he was confident in the limited knowledge he had.

What should be done?

We all need to broaden our horizons. We need a humble attitude relative to the markets. We can never afford to wallow in overconfidence in what we perceive as special knowledge. A trader can never afford to let his guard down. Tim thought he knew something that others hadn’t yet caught onto. In so doing, Tim made another mistake as well. He heard only what he wanted to hear.


Feedback Please!

If anyone by chance listens to the Daily MarketCast on the Online Education Center, we attempted a hybrid of two instructors conversing about market conditions and upcoming events. I would love any feedback, including criticisms. You all have been great about generating quick and reliable feedback. Thanks!

P.S. I figured I wouldadd this gem since it is an important change in how options expiration is handled...

Starting with October expiration, the OCC rules have changed so that the automatic exercise threshold for in the money stock-settled options is now $.05 instead of $.25. That means that all long equity options that are $.05 or more in the money will be automatically exercised. Cash-settled index options will continue to be automatically exercised if they are $.01 or more in the money.

I created a poll on the right hand column of the blog. I plan to update this a few times during the week. For now, submit a response to today's question. I need a good contrarian indicator right about now :)

If you have been following this blog for a while, then you probably have a good taste for how I trade. I trade quickly and I trade aggressively. Do you really want my secret reciepe? I trade low probability trades on high probability set-up's that have high reward potential. Did everyone get that? In English, I trade cheap options on potentially big price moves. Does that sound better?

I love the debate about option buying versus option selling. I love the argument! Do you trade high probabilities of success in exchange for small rewards, or do you trade low probabilities of success in exchange for large rewards? Every person answers that question differently for their own reasons. Me...Personally I love to gamble with winners for hopes of landing "the big fish." You will never do this in a selling based strategy, since the only gains you collect are small premiums up front where you stand a higher probability of collecting that premium. Not to mention a very small probability of taking the mother of all losses.

Option traders will mostly tell you that options are meant to be sold. This statement is partially true, if you think about it. This is said only due to the fact that premium melts. The only way to overcome this is to have directional price movement make up for the loss of time decay. Most professional traders have concluded that picking market direction is impossible and irrational. Would you agree with them?

A student of technical analysis who use simple price charts to illustrate how prices move in trends would disagree. I think speculation is possible, but not always probable. Big difference. When I mentioned I like to trade high probability set-up's, or potentially big price moves, this means I like to trade breakouts. Stocks that are reaching new highs, or breaking out of patterns into new territory equipped with volume, is a high probability event in my eyes. I still trade trends, but not as aggressively. I don't consider a support bounce as high of a probability as I do a breakout.

Trading breakouts has evolved the way I trade options. Because I trade higher probability events, I justify buying options with a lower probability of success. That's what I said...I trade out-the-money options! *But Jeff...I heard if you trade OTM options, eventually you'll be out-of-money!!! LOL!!!* Since an OTM option requires price movement to be successful, if you are not careful you could lose all your money. This is why I normally go one strike out, and give myself between 15-45 days of time to be successful. (Most breakouts I trade, I am only in for a couple weeks on average.)

Think of it this way, when I trade a breakout I am expecting this OTM option to become ATM or ITM. I am also expecting this to happen very quickly. Let me refer to the Black Scholes calculator to give a general example of a typical scenario you might see as I trade this way.

Let's say that ABC stock is trading for $52 per share. I am expecting a $4 move on this stock to take place over two-three weeks. Let's assume I buy an option one strike out that has 40 days until it expires, and volatility is at an average level of 30%. Here is what the price of the option would look like.

I am paying $1.05 for the call. Since this option has no inherent value, the price will fluctuate quite a bit. This is why I can't use a stop here. I would trigger a loss almost every time I trade. I use a mental stop based on the stock, but I position this trade so that I expect to lose 100% of the premium. However, if 100% is lost, I only lose 1% of my account...this means I need to be wrong 100 times in a row to wipe myself out. Possible?

I must admit, I am wrong a lot. Last year I would quote being right only 35-40% of the time I traded. It was a tougher market, but this win/loss percent is nothing to brag about, right? What if I told you I returned 285% last year. Would you still think I was a bad trader?

Back to my example. Let's say I get this price movement I was expecting. Only a $4 move in about 20 days let's say. Is this possible? This is easy! I'm not expecting too much, just a nice breakout. Changing my new stock price to $56, and subtracting half the time, take a look at the return.
This is just an "average" example of a win. I don't always win, and the losses can be a good portion of the premium paid. On average 40-60% of the premium paid. But there are also big winners to add to this equation. Someone e-mailed me a quote a while back that I think would fit nicely here.
"In any given trade there are five possible outcomes."
A Huge Loss
A Loss
A Gain
A Huge Gain

I do my best to try and eliminate huge losses through money management, position sizing, and strike rules of exit. By eliminating the huge losses, I am now left with four potential outcomes. The odds of making money are now more in my favor by subtracting this outcome.

Since we have also talked about trading volatility as it rises, here is a look at how that profit would change if we added a slight increase in volatility.

In review of what I have discussed with you, hopefully this justifies my irrational, aggressive approach to trading options. I trade OTM options on breakouts. I buy a month or two of time, and exit after I have reached my price target. I take losses as small as I can, but size my position around the assumption that 100% of the premium is on the line.

I write this because there are still piles of e-mails asking how I trade, or if I would sell my trading rules, or why I take this approach. Hopefully I have shed some light and examples of what my thought process is. I will monitor the "comments" left about this post to see what you felt I left out of this equation.


Anticipating the Bounce Follow Up

Here are follow up's to the trades we have discussed in the last couple weeks. Included are follow up's from the anticipating the bounce article, Master Talk trades, and the Price Pattern trades. I've moved out of all the puts with losses, so I have not stayed in touch with their prices as of today. Here is the list, enjoy.


KSS- Nov 70's @ $1.70 today at $2.75 UP 61.8%
WCG- Nov 60's @ $2.50...exited on Friday on broken support LOSS
STA- Nov 50's @ $0.45 today at $0.85 UP 88.9%
SHLD- Nov 170's @ $7.10 today at $7.95 UP 12%
YUM- Nov 55's @ $1.70 today at $3.30 (Yes I held over earnings, I liked the risk) UP 94%
C- Nov 52.50's @ $0.25 today at $0.20 DOWN 20%
JBX- Nov 55's @ $2.60 today at $2.85 UP 10%
OMG- Nov 50's @ $1.10 today at $8.85 (Sweet) UP 704%


UPL- Nov 45's exited on 10/10 with loss on higher high LOSS
EOG- Nov 60's exited on 10/12 when my trendline broke LOSS
RTP- Nov 180's exited with loss, broke resistance on 10/12 LOSS


USNA- Nov 50's @ $1.25 today at $1.75 UP 40%
FAST- Nov 40's @ $2.30 today at $3.50 UP 52%
HITT- Nov 50's @ $1.80 today at $4.20 UP 133%
VLO- Nov 59's @ $3.20 today at $4.65 UP 45%

For Matt
CTSH- Oct 75's @1.80 $ today at $2.75 UP 52.8%

Success Magazine Online Education Center

For those looking to get to the Online Education Center through Success Magazine, click on the Education Tab, then on the left hand side click "Access Online Courses." That will get you to the OEC, and the MarketCast is on the home page there.


Have A Great Weekend

I hope you all go celebrate your profits this weekend. If I have not mentioned this to you already, go to the Online Education Center (OEC) located in the upper right hand corner of the toolbox, and once you get there, make sure you are listening to the Daily Market Cast. Myself and two others are updating this every day with current market analysis and trades to watch. I am trying to figure out a way to post this on my blog. Until then, listen on the site. I'd love to hear your thoughts or suggestions.

Have a great weekend!

I Am Sad To See This Week End...

Wow. It has been a great week this week. It almost seems to easy, doesn't it? I bet each of you are thinking the same thing. Hopefully you had a chance to enter a few of the breakout trades I mentioned earlier this week. USNA and VLO are leading the way...and this is the first week in a long time where I haven't had at least one bad trade. I love winning streaks.

I will try and get a solid post in by this afternoon. For right now I gotta run, there is too much going on this morning in the market.

Time to do the "Happy Dance."

P.S. The stocks we looked at on the Credit Spreads class last night were...PLCE, AEOS, NBL.


Emily and Paul's Searches

Thanks to everyone for a great event last night. A special thanks to Emily and Paul for lending me a hand to demonstrate the ProSearch tool. I can't count the number of e-mails received looking for the link to these searches. Since my Inbox is on it's last breath of life, I will post the links to these searches here on the blog. These are links to the INVESTools site, so if you access the site through Success Magazine, these links will not work. However, since I am a very helpful individual, I have copied the criteria we used so you can create the search in ProSearch.

Paul's Search for Puts


Emily's Breakout Search


I will direct all royalties to Paul and Emily's addresses. At least until I can open up a paypal account or something. Just kidding, but thanks again to them for a couple great searches.


This news came out on Yahoo this morning...

TEANECK, N.J., Oct. 12 /PRNewswire-FirstCall/ -- Cognizant Technology Solutions Corporation (Nasdaq: CTSH - News), a leading provider of IT services, will announce results for the third quarter ended September 30, 2006 on Thursday, November 2, 2006 pre-market open.

Those of you that have November options get to hold on for a while longer.

Is everyone enjoying this rally today?


The Greatest Trading Quote of All Time

"Let me warn you that 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."

This quote was given by the greatest trader that ever walked the earth, Jesse Livermore. This is by far my favorite trading quote ever. I know this from experience, so do many of you. You don't take someone else's trade just in case they haven't researched it properly if at all. This won't be the quote I share tonight, but this will set the tone for what we are going to discuss.
I plan to discuss how to build the best and baddest searches through powerpro search tonight. If you are required to find your own trades, you are going to need the right tools to do it.

I will be in Meeting #1 this evening. See you there

Cheap Education

I am in a scramble for time today. This is what happens when you spend the morning and afternoon golfing. I am hammering out a topic for Master Talk this evening. Of course, I need to provide an offering to the faithful participants of my trading blog, and I decided to share a quick story I read a while ago from a Professional Trader...

"Back in 2004, I joined Kingstree Trading, LLC, a proprietary trading firm in Chicago. There, I had the good fortune to get to know--and observe--many successful traders at work.

One lesson particularly stands out in my mind. A trader saw buying come into the market, and he quickly jumped on board. He saw that the odds of taking out a recent high were good, given the size of the buying. To his surprise, however, the trade stalled out before the target and reversed. He quickly exited with a tick loss.

He turned to me and said, "I just paid for information."

When the market bounced higher a few ticks several minutes later, the volume was weak. No big players were taking the long side. He aggressively sold and quickly made a couple of points.

He placed a good trade, and it didn't work out. He didn't view that as a threat, as a loss, or as a failure.

He viewed it as information. The market was telling him that we weren't going to take out the recent high.

How he entered the first trade and exited it and how he used the loss to prepare himself for the winning trade: *There* was a clinic in trading psychology.

If your setups are valid, there are only two kinds of trades: Those that make you money and those that give you information."

The same applies to all traders. There will be trades that profit, and trades that teach you lessons. Keep records of each of your trades and be very detailed in your description of why you are taking the trade. If something does not go as planned, revisit your line of thinking to criticize your approach, rules, or system. This will help to build a better trader out of you.

I like this story for a couple reasons. First, the trader saw a trade, and instinctively took it. Be willing to put it on the table when you see the opportunity. Make sure you are ready and willing to take a chance, but be even quicker to admit if you are wrong. That's the other element I liked about this story.


"LEAPS are Evil"

I wrote the title in parenthesis since I am not taking the credit for said statement. I am willing to look at both sides of this coin though. I will start with the strategy in general and then come back to this quote. Bear with me...

Does anyone out there trade LEAPS? If so...WHY? I will take the role of a critic now and criticize any LEAP option traders. I can see the reasons someone would use to explain why they trade them....

"It's like owning the stock at a discount!"
Follows the stock closely (1:1 Delta)
More time until expiration...One day it will be profitable!!!

LEAPS are supposed to be long term options, right? This means we hold them over long periods of time in order to capitalize on longer term trends, etc. I would wager a bet that not one trader out there who trades LEAPS has held on to one longer than 2 months. Despite having anywhere from 7 months to 2 years I would be surprised to see that someone has help a LEAP longer than two months. If you have held one longer than two months, I will double down that you have not done it more than once.

Am I Right?

Why is this? Why would you trade LEAPS when you are not taking advantage of them? It is supposed to be the same approach as trading stock is. Intended for longer term holding through longer term trends, offers leverage, and offers you a discount to purchasing the stock. Have you looked at the price of the premiums? Let's use an example. Assume I love Apple Computers. Let's say I want to buy the first available LEAP. I would be looking at Jan 08's. To get 1:1 movement with the stock I would take the 50 strikes. They offer a delta of .888 which is close to .89, which gets rounded up to .90, and that puts us where we want to be. These options cost $29.40!

I can tell you that I know enough about my myself not to take a trade that doesn't offer me an advantage. I know that I could never hold a trade that long, so I don't trade LEAPS. Ask yourself, if you are not going to use the full amount of time until expiration, why would you pay for it?

Let me get back to the comment I heard the other day. I have been spending time learning the ways of the floor trader, and how they discount all analysis but price movement and probability. As I talk to this gentleman about his experience in the trading pit, we start to talk about LEAPS, and then this comment surfaces.

Like I said, floor traders discount all methods of technical analysis. This includes the three premises all technical analysts live and die for...

Market Action Discounts Everything
Prices Move in Trends
History Repeats Itself

As I started to dig deeper I could see that this comment was based solely on price structure. Which makes complete sense. Can you really put a price tag on that much time? A market maker can't...there is not enough liquidity or enough of a market to make an efficient price structure. Take a look at how they compensate...(Click to view larger image)

By increasing Implied Volatility for each extending month, this creates a larger premium for you to pay. The lack of activity creates huge spreads, and I was told that the maker knows that the order coming through is a retail order. Apparently institutional money doesn't trade LEAPS.

As I asked more questions, this gentleman claimed that one should never buy more than 150 days of time. This makes sense to me. This is what I teach. I have always suggested trying to gauge how much time you think you need, buying a little extra, and getting out after the stock has made your move. While I do not promote buying too much time, buy a little more than you were expecting to use. Just in case.

To tie this together, I don't have anything against LEAPS. But I do have something against the trader that buys them, and doesn't really use them. If I were you I would buy less time and get more contracts if you are the trader that doesn't take full advantage of them.

By the way, let's not go in the direction of "What if my strategy would be selling covered calls against my LEAPS" because those little premiums don't absorb the stock losing significant portions of it's value. When you start selling strikes lower than the strikes you purchased, you are in a bear spread.

I think I am done for the day, see you tomorrow.


Before I start the next post, I want to thank those who left comments about what evolved into my personal pity party. I didn't intend for it to sound like I was fishing for compliments or criticisms, but for those who did....thanks.

Tom left a great comment that I think everyone has room to apply into their own life. He said "Jeff, I am reading a small book titled, "The Four Agreements", #3 is; Don't take anything personally.The quick lesson is that nothing others do is because of you. What others say and do is a projection of their own reality, their own dream (or lack thereof). Be immune to the opinions and actions of others, do what you do because you want to and because you believe in it."

So feel free to say whatever is on your mind. Tell me whatever you feel. If the trade looks like junk, if my analysis is poor, if my teaching is nonsense...say whatever you want. I don't take offense to what you think, but others could learn from it.

I will work on my immunity. Just remember that if you leave a comment on my blog, and come back to it the next day and it says "access denied..." Apparently I need to work harder.

Sears Revisited

On a post dated back on 8/4, I called out SHLD as a potential Cup and Handle pattern as it started to turn up and looked to have established the handle of this mysterious pattern. It reached resistance a few days ago for those who traded this pattern up to resistance, but todays activity looks to have confirmed this cup and handle pattern which means the trend continues here. This is a longer term pattern signal, which would require a longer term strategy to capture it's $60 point move over time. Got patience?

Price Patterns

This morning in the Price Patterns class we took a short tour of prophet's price pattern search feature. If you were not there, we discussed that the only way to get access to this class is through the 4-day live class here in Utah. I say that only to hedge the numerous e-mails that would end up in my lap asking how to get access.

Here is the short list of stocks I presented this morning that had emerging or completed patterns. Add these to the list of patterns we have discussed each week for the last few months.

USNA- Symmetrical Triangle

FAST- Ascending Triangle

HITT- Ascending Triangle

ASF- Pennant

DBRN- Flag


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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