In response to yesterdays post "Do you see what I see?" It sounds like there were several that saw what I saw. A beautiful breakout. As you know I love those set-ups and take trades on these all the time.

There were interesting perspectives shared about this trade. A flag breakout, a cup and handle, a moving average crossover, etc. Another great way to see how different individuals see different things. Didn't it all turn out the same in the end? Sure it did!

I must admit, I initially felt this was a nice cup and handle pattern at the top of this upward trend. However, the right hand side of this cup is also a flag pattern that caused the breakout. Here is the difference in analysis...

Cup and Handle Target- a 10 point move within the next 6 weeks (difference between top and bottom of cup (69-79) pattern started in early-mid December).

Flag Target- a 7 point move expected over the next 1-2 weeks (height of the pattern (72-79) pattern started on the 23rd).

So a difference in analysis could cost you $3 in reduced gains. I say once the stock hits 86-87 you tighten stops or start watching closely. If the stock wants to keep moving great, if not take the easy money and bail.

Nice trade everyone.

Recommendation: Have a great night and come back for more tomorrow.

Whew! That Was Close!

The Fed announcement has come and gone. A seemingly optimistic reaction by the market has caused some nice intra-day movements to take advantage of. Does anyone else out there sit by the screen on the minute charts looking to scalp a few ticks on the indices or e-minis? You can't tell me that this type of trading doesn't stir at least a tiny bit of emotion. Can you?
So rates are unchanged again at 5.25%, the verbiage was decent and the signs were that the recent indicators are suggesting firmer economic growth and hopefully a stabilization in the housing market.

In any event, price speaks pretty loud here doesn't it? Dow up triple digits at the moment. Did anyone take that US Steel trade from yesterday? I'll talk about it on my next post.


Do You See What I See?

Let's go through a quick exercise to get loose. I have a chart of United States Steel (X) posted in front of you (click on the image to enlarge). After a solid earnings report and a declaration of a dividend, US Steel is making new highs. Is there a trade here? What do you see and most importantly what would you trade and why?

The ORBC Debacle: Updated

I talked with Tom at ThinkorSwim a few minutes ago. He gave me another update that you should be aware of.

Apparently ORBC is an AMEX only product. Normally an option will trade on various exchanges, but this one trades on the AMEX only. AMEX is not an electronic order flow system. This means options are traded pit-style here. Similar to how they did back in the 80's.

There are very very few issues that trade AMEX only but if you do trade these in the future, refrain from using a hard stop order. As the market maker widened the spread, and filled you at a price that was against the rules, had there been no pending order to sell, you would still be in the trade.

A big thanks to Tom and his staff for the great organization that they are. I can't believe I caused such a mess. My fault.

Tuesday Trends

Don't get your hopes up about posting any real movements out of the averages today. Ahead of a Fed meeting there is too much caution to see any convincing buying or selling. Unless you want to break it down to individual issues, overall market movement will likely resume tomorrow afternoon.

Oil has rebounded a bit here this morning and a few Dow components released earnings announcements. 3M missed and is down $4, PG profit are up but shares are down $.9, and MRK disappoints while shares are down $.30.

Who cares, right? Let's move on.

I have more info on the ORBC trade I want to add. I'll create another post for it in a minute.


The Friggin' Watchlist

It is 9:30 p.m. Mountain Time. The kids just went to bed, the wife is reading, and here I am creating a blog post. Yes, I have a life...but I also have some down time and I am one hell of a guy. So without further delay, here's this weeks goldmines.

The Patterns

Bull Flags


Bear Flags


Inverse Head & Shoulders


Symmetrical Triangles

AKAM, HOLX (5 yr), KFY, DECK, HNT (pennant)

Ascending Triangles


Triple Top





Other Interesting Stocks

Goodnight already. See you tomorrow as the market treads water. Visualize in your mind that you'll be making money regardless of what the market does. I will visualize creating a few posts in a timely matter. Let's see if it works.

The ORBC Debacle

Here is the scoop. If you had a stop triggered on this trade today you are the victim of a Fast Market/Maximum width. I made various phone calls today to get the story straight. Three different online brokers, a former options market maker, and an AMEX exchange representative. I heard a couple different stories. The first story was the funniest. A retail customer probably used a sell limit order at .70 for a size of 200 contracts. Since the bid ask size on this option is about 20 x 20, every available price was picked off all the way down to .70. We know that this cannot be the case since it is a violation of exchange law. If the stock price is at $13 and you have the right to buy at $10, this option is worth $3. By rule, I am fairly certain that the .25 rule comes into play. Correct me if I am wrong, but by rule this option cannot trade by more than .25 below parity (intrinsic value). Meaning $2.75 is the lowest it should trade.

Why did traders get kicked out then?

Second story is the non-existent "Manning Rule" in the options market. The Manning Rule prohibits an NASD member firm that is holding a customer limit order from trading for that member's market making proprietary account at a price that would satisfy the customer's limit order without executing that customer limit order. The rule is applicable in the extended hours session. So I was told that the market maker could have created this trade (being on both sides of the market) to flush out a few stops. However this would have created too much directional risk for this person, and not a tremendous amount of incentive.

So here is how it really happened...

The final story that made sense was that the exchange approved the spread to be widened due to a fast market/maximum width reached. This does not happen very often but will in circumstances where you are dealing with an illiquid market and a ton of orders come into play. When market-makers want relief in the bid/ask spread because of something unusual happening in the stock, they will call for floor officials, state their reasons, and if it's warranted the floor officials will declare a "fast market" for the stock (the term probably came from market conditions changing very quickly), which allows the market-maker to widen the bid/ask spread. The floor officials usually decide how wide they can make the spreads--2 or 3 times normal width, depending on how extreme the conditions are.

As many noticed, we created quite a racket in these options and caused the exchange to declare a fast market and open the spread to 3.60 x .70. This will cause traders to avoid trading this option until the spread narrows, and subsequently booted all kinds of stops.

The Good News:

Since you cannot trade an option this far below parity, the exchange approved price adjustments to be honored at 2.80. If this has not been reflected in your account, GET ON THE PHONE. This can turn a loser into a big winner.

In closing I hope this was a good learning experience, but it turned a good profit once your price is adjusted. Here is another risk of trading illiquid options. With such a cheap stock, it's worth it to just buy the stock outright...isn't it?

Roll Out Your Red Carpet

I have a great feeling about this week. Roll out your red carpets and get ready to make money this week. It's nice to kick off the week on an up note. I noticed a bunch of good looking picks filtering through the chat today. I am putting a few stocks together for the weekly watchlist. I hope to get this up after lunch.

How about that "Trade of the Week" last week. Up another 9% today. Unreal. For those that don't know what in the world I am talking about, on Wednesday last week between Master Talk and the Marketcast the stock ORBC was used as a nice ripe growth candidate. Since then it is up huge, not to mention what the options have done.

Anyhoo...next post will be the watchlist. See you after lunch.


The Weekend

Here we are, at the close of another week. Be positive about your results so long as you are learning from your actions. Each Friday I try to encourage the group to forget about all of it over the next couple days. It is an essential ingredient to successful trading. Creating balance in your lives, that is.

I will have a watchlist for Monday as usual, and we will discuss these ideas throughout the upcoming week. Until then, have a great weekend.


Keep Your Head Up!

This chart speaks for most of the recent breakout trades we discussed. Had we panicked mid-day yesterday....we would have booked losses already based on emotional reactions, instead of following our discipline and watching these stocks come back and do what our original analysis had suggested that these trades do. As you look at ICE (above) note how it held it's breakout point around 130. As I always try to teach, don't focus on the specific dollar amount (ex. $130.43) and use that as a definitive do or die point for this stock, but give it more of a "zone." I would have personally given this up to about $129 in order to be right. We'll see what happens, huh?

What about our small cap trade ORBC. Normally I don't trade a lot of these, but I think it was spot on with the trend, and the breakout of it's IPO price. You can see a lot of day traders started rocking this one on the breakout. The options have tripled not to mention the stock is already up over 15%.

Nice to end the week on an up note, even if it was marginally above breakeven. What is going on out there today? You guys ready to party, or ready to plunder?


Planning Your Bet Size

Plenty of questions have been passed around recently about position sizing and money management. If you ever hear me use the words "play defensively" this is what I am referring to. Properly sizing your bets and how you manage your money is the key ingredient to being a successful trader. Allow me to elaborate.

Successful trading is not always winning or losing. It is how you distribute your capital, withstand emotional decision making (psychology), and staying disciplined to your rules and financial goals. Money management is a defensive concept and keeps you alive to trade another day. Lets go over a few of the specifics in order to effectively plan your betting (position) size. Keep in mind if your ideas here are to be told exactly what YOU should do, close this window now. As usual, I try to promote original thought, and the reasons behind concepts, but since you and I are different people, what works well for one of us, might not be in the best interest of another (disclaimer).


Risk is the likelihood of a loss. At the moment we take a trade we are at risk of a loss. Positions are constantly fluctuating in value and there are many variables that influence risk. In order to account for this risk you have to consider these variables. Assuming we are talking about options... stock conditions, news, fundamental conditions, volatility, and time. Having done this research you need to quantify a likely risk (how much the stock could move) and a comfortable level of risk (what you are comfortable losing on this trade). Not just with the individual trade but as a portfolio as well (stop & bet size).

Keep Losses Small

Hate hearing that yet? Here is how you do this: To generalize the concept and use round numbers, assume I have a one dollar account :) I don't want to blow up my account anytime soon, so I need to spread out my capital. Most traders claim to use 1, 2, or 3% at risk on any one trade. Here is how I like to do it. I like to fluctuate. Some times when I am hot I fluct up, and when I cool off, I fluct down. In this trend I have been steady at 2-3%. Why? I have been winning more than losing and I want to optimize this. Back in July-August when I had my worst losing streak ever, I was trading at 1/2 - 1 % per trade. Apply this to your account immediately, or at least scale back how much you bet. It will keep you in the game longer, and keep the losses in line.

Become a risk manager

To manage risk is to control and direct the probability of a loss. Whether this is through taking offsetting positions (hedging), portfolio weighting, or adding/subtracting into a position, be thorough when considering your possibilities. As options traders, many don't realize the opportunities we constantly miss out on. Such as selling premium against existing trades when things cool down (but don't move against us). I have heard many comment on the way ThinkorSwim (not a recommendation or endorsement to trade with them) let's you position your account to see aggregate delta, theta, gamma, and vega positions across the board to better manage risk. A very nice tool I must say.


Many don't realize that if you take trades that are too correlated to one another, it is just like doubling down on a position. If you see more than one trade in a group that is setting up nicely, trade the ETF. Diversification is not a negative it is a positive, and an essential puzzle piece to keeping a healthy portfolio.

Calculate Trade Risk

Now you have decided the amount to allocate to a position (1-3%) how many shares/contracts should one buy? I'm looking at this option that costs $1.00 per share, and I have $1000 to spend. Should I buy 10 contract and risk all $1000?

Not necessarily.

As you analyze the trade, what if it is right at support. Meaning a close below this would tell you that you were wrong and to exit? You wouldn't need to risk the whole premium...but you'd probably be able to risk half with a little wiggle room left. Your analysis concludes that 50% of that premium is what you want to risk. At $50 a contract you could purchase 20 contracts now, and still not have more than $1000 at risk. Even though there are more contracts involved, the risk amount doesn't change. Now that you've optimized your bet size, you stand to make a better profit since there are more contracts involved!

If the option at expiration was now worth $2, had you purchased the 10 contracts, you would have made a $1000. Had you optimized your bet and traded 20, you would have made $2000, without a penny more than $1000 at risk.

Hope these points helped. Now I am tired. After a nap I will try to come back with something else to throw at you.

I Miss You Guys

Can we just get back to the way things were (cue violin music). In all seriousness I will try to make up for the lack of posts recently. My transition into our content department has been a little hectic. Thanks for your understanding and continued support.

Here is a quick review of the trades we looked at in Master Talk last night. It looks like some of the favorites were breaking out again. Go figure.

LVS- Hmmm... Resistance? Too early, but keep it on your mind.

GS- @#%*! A close below 212-213 and I must dismiss this one.

ICE- A close below 130 is my loss threshold.

ATI- I hated this one to begin with, but a close below 98 today and I am done.

ORBC- "Trade of the week" in yesterdays Marketcast. The stock took out it's IPO price today just as we anticipated. The Mar 10's are up a buck as we speak! The stock is up 4%! Yes this trade was a little different than the normal high flying stocks we've watched, but hey...a winner is a winner.

CTSH- $82ish...

Collectively this is one of the biggest ass kickings I have ever seen. Market influenced? Of course it is!


State of Amusement

Back to my stance from a few days ago, I consider earnings season to mean "Neutral Market Conditions." It is tough to rely on trend, indicators, etc when a day like today the market posts gains on profit reports from Yahoo, Sun Micro, etc. Make sure you trade strength or weakness primarily in individual issues for the next few weeks, and be cautious around your earnings announcements.

Anyone watch the State of the Union? Bush calling out for expansion of health insurance coverage and a reduction in gas consumption. Right on dude. I hate political topics, so I will stay away from opinions for now. But in response to his speech, how have stocks responded?

Health Care Index ($HCX) Currently up about 1/2 a percent.

Oil Index ($OIX) Currently down about a third a percent.

Other indices moving higher: Pharmaceutical, Broker Dealer, Gold, & Internet stocks.

Good movement thus far out of the market. Great things are setting up. Such as my next post...

Be back in a minute.


Money Management FAQ

As you can see I am taking the time effective route for my blog posts today. I have a deadline I need to meet by tomorrow and I am desperately behind. I had outlined some thoughts on money management, but haven't had an opportunity to let my pen bleed yet. Therefore, I am going to recycle a good Money Management FAQ I received several months back. This is a great start to get some of the basics covered before I add my two cents.

Rest assured, I won't be this negligent forever. Tomorrow is another day!

In the twenty-first century it has become fashionable to manage one's own investments, yet few traders implement disciplined, professional money management strategies. During the stock market bubble, limiting risk was an afterthought, but given the recent price action, it’s time to get serious about management of money and risk. Professional risk and money management strategies are the foundation for success. Essentially, money management tells you how many shares or contracts to trade at a given point.

Money management is a defensive concept. It keeps you in the game to play another day. For example, money management tells you whether you have enough new money to trade additional positions. Don’t confuse money management with stop placement. Stop placement does not address the how much question.

Money management is risk management. Risk management is the difference between success or failure in trading. Trading correctly is 90% money and portfolio management, a fact that most people want to avoid or don't understand. Once you have the money management down though, your discipline and psychology is 100% of your success.

Money management optimizes capital usage. Few have the ability to view their portfolios as a whole. Even fewer traders and investors make the move from a defensive or reactive view of risk, in which they measure risk to avoid losses, to an offensive or proactive posture in which risks are actively managed for a more efficient use of capital. Trend Following risk management formulas and philosophies are key to increasing profits while controlling risk.

Q. What are some issues addressed by money management or bet sizing?

A. For example:

How much capital do you place on each trade?
What is the heat of your trading.?
Capital preservation v. capital appreciation.
When do you experience expectation of success?
When must you take a loss to avoid larger losses.?
If you are on a losing streak do you trade the same?
How must you prepare if trading both long and short positions?
Does a portfolio of long and short allow one to trade more positions?
How is your trading adjusted with accumulated new profits?
How is volatility handled?
How do you prepare yourself psychologically?
Have you tested your bet sizing?

Q. Does money management impact a decision to trade the same number of contracts or shares in all markets?

A. Yes. Money and portfolio management rules dictate the number of contracts or shares. Precise formulas set forth size. A trader who uses a constant trading size gives up an important edge in much the same way a blackjack player does when always betting the same regardless of what cards are on the table. Common single contract/share measures of trading system performance such as win/loss ratio, percent winning trades, etc. are of little value to decision-making when using Trend Following systems (and the Turtle system). Often the best trading approach, when tested on a single contract/share basis, will turn out not to be the best approach when money management strategies are incorporated.

Q. What about short term trading? Isn't short term less risky, and therefore you don’t need money management strategies?

A. Short term trading is not, by definition, less risky. Some people may mistakenly apply a cause and effect relationship between using a long term strategy and the potential of incurring large loss. They forget profit and loss are proportional. A short term system will never allow you to be in the trend long enough to achieve large profits. You end up with small losses but also small profits. Added together, numerous small losses equal a big loss. When you trade for the long term, you have a more positive expectation in terms of the size of the move. In the big picture, the larger the move, the larger the validation of the move. If you were trading some short term pattern predictive system you would never be able to participate fully in the big trends. Big trends make the big profits.

Q. How does money management impact drawdowns?

A. All systems have drawdowns. You can't have a profitable methodology, without taking some calculated risks as well as some losses. Trend Following drawdowns are a function of the risk level desired. Risk level among Trend Followers varies depending upon the size of the profit they seek. For example, if you sought 100%+ a year gains you must be prepared for the possibility of a 30% drawdown. Anyone who promises you can make 100%+ with only the possibility of a 5% drawdown is lying.

Q. Can you manage margin issues?

A. Required margin has little to do with money management considerations. For example, if the margin was dropped from $5000 to $2500 on a particular stock or commodity, must you trade twice as many shares or contracts? Of course not. Margin issues are not money management.

Q. Is slippage a concern with money management?

A. No one wants bad fills. But Trend Following for the long term places far less emphasis on perfect fills for success. In contrast, short term traders' transaction costs and skids on their fills affect their bottom line to a much greater degree.

Q. What is the win/loss ratio of Trend Following management? Can it experience many losses in a row?

A. Trend Following systems (and the Turtle system) trade for the outsized large move. Several big trends a year are your key to success. The strategy cuts your losing positions quickly. Consequently, a few big trades will make up the bulk of your profits and many small trades will make up your losses. Winning trades can range from 35-50%, but that percentage reveals little information since we expect more losses (of smaller value) than winners (of much larger value). Win/loss ratio, while a favorite of the novice trader, has limited use in terms of Trend Following analysis.

More Trading Errors

I printed these out a long time ago I can't recall exactly where I got it or who wrote these, but I feel it would be appropriate to add these to prior lists we have discussed on the topic.

Error: Confusing trading with investing. Many traders justify taking trades because they think they have to keep their money working. While this may be true of money with which you invest, it is not at all true concerning money with which you speculate. Unless you own the underlying commodity, for instance, selling short is speculation, and speculation is not investment. Although it is possible, you generally do not invest in futures. A trader does not have to be concerned with making his money work for him. A trader’s concern is making a wise and timely speculation, keeping his losses small by being quick to get out, and maximizing profits by not staying in too long, i.e., to a point where he is giving back more than a small percent of what he has already gained.

Error: Copying other people’s trading strategies. A floor trader I know tells about the time he tried to copy the actions of one of the bigger, more experienced floor traders. While the floor trader won, my friend lost. Trading copycats rarely come out ahead. You may have a different set of goals than the person you are copying. You may not be able to mentally or emotionally tolerate the losses his strategy will encounter. You may not have the depth of trading capital the person you are copying has. This is why following a futures trading (not investing) advisory while at the same time not using your own good judgment seldom works in the long run. Some of the best traders have had advisories, but their subscribers usually fail. Trading futures is so personalized that it is almost impossible for two people to trade the same way.

Error: Ignoring the downside of a trade. Most traders, when entering a trade, look only at the money they think they will make by taking the trade. They rarely consider that the trade may go against them and that they could lose. The reality is that whenever someone buys a futures contract, someone else is selling that same futures contract. The buyer is convinced that the market will go up. The seller is convinced that the market has finished going up. If you look at your trades that way, you will become a more conservative and realistic trader.

Error: Expecting each trade to be the one that will make you rich. When we tell people that trading is speculative, they argue that they must trade because the next trade they take may be the one that will make them a ton of money. What people forget is that to be a winner, you can't wait for the big trade that comes along every now and then to make you rich. Even when it does come along, there is no guarantee that you will be in that particular trade. You will earn more and be able to keep more if you trade with objectives and are satisfied with regular small to medium size wins. A trader makes his money by getting his share of the day-to-day price action of the markets. That doesn't mean you have to trade every day. It means that when you do trade, be quick to get out if the trade doesn’t go your way within a period of time that you set beforehand. If the trade does go your way, protect it with a stop and hang on for the ride.

Error: Having profit expectations that are too high. The greatest disappointments come when expectations are unrealistically high. Many traders get into trouble by anticipating greater than reasonable profits from their trading. They will often get into a trade and, when it goes their way and they are winning, they will mentally start spending their winnings, and may even borrow against their anticipated winnings to take on additional risk. Reality is that you seldom make all of the money available in a trade. I cannot count the times that I had for the taking hundreds or thousands of dollars in unrealized paper profits only to see most of those profits melt away before I was able to or had the good sense to get out. One trader I know had $700 per contract profits in a short eurodollar trade. The next day his position literally imploded on news of a 50 basis point cut in interest rates. He was lucky to get out with $350 per contract. The money from trading often doesn’t come in as fast or as plentifully as you have expected or been led to believe, but the overhead costs of trading arrive right on schedule. False profit expectations have caused aspiring traders to leave their job before they were really successful. The same false hope causes them to lose the money of friends and family. False hope causes them to borrow against their home and other fixed assets. Too high expectations are dangerous to the well-being of every trader and those around him.
Error: Not reviewing your financial goals. Before you make a position trading decision, or before you begin a day of day trading, review your motives and your goals.

• Why are you trading today?
• Why are you taking this trade?
• How will it move your closer to your goals and objectives?

Error: Taking a trade because it seems like the right thing to do now. Some of the saddest calls we get come from traders who do not know how to manage a trade. By the time they call, they are deep in trouble. They have entered a trade because, in their opinion or someone else’s opinion, it was the right thing to do. They thought that following the dictates of opinion was shrewd. They haven’t planned the trade, and worse, they haven’t planned their actions in the event the trade went against them. Just because a market is hot and making a major move is no reason for you to enter a trade. Sometimes, when you don’t fully understand what is happening, the wisest choice is to do nothing at all. There will always be another trading opportunity. You do NOT have to trade.

Error: Taking too much risk. With all the warnings about risk contained in the forms with which you open your account, and with all the required warnings in books, magazines, and many other forms of literature you receive as a trader, why is it so hard to believe that trading carries with it a tremendous amount of risk? It’s as though you know on an intellectual basis that trading futures is risky, but you don’t really take it to heart and live it until you find yourself caught up in the sheer terror of a major losing trade. Greed drives traders to accept too much risk. They get into too many trades. They put their stop too far away. They trade with too little capital. We’re not advising you to avoid trading futures. What we’re saying is that you should embark on a sound, disciplined trading plan based on knowledge of the futures markets in which you trade, coupled with good common sense.

The Trade Repository

Here is this weeks short-list. A few price patterns and bounces you ought to deposit in your watchlist. However, upon withdrawal of ideas, please leave a few in return. After all, this is a give and take relationship, right?

Triangles & Flags
ODP- Descending Triangle

BKS- Symmetrical Triangle

GYI- Descending Triangle

MMP- Ascending Triangle

ARNA- Descending Triangle

BOL- Ascending Triangle

IN- Symmetrical Triangle

FDS- Flag

VIP- Flag



Now that I have gotten this off my chest, I am off to go trade. I'm working on a few things for money management & psychology topics. Hopefully I get them posted relatively early.


Leading Indicator

Here is an interesting article about the amazing correlation between the Superbowl winner and Dow Jones performance. The statistics are mind blowing. If you have never heard of this before, click here to take a look.

Buy or Sell Volatility?

If you typically use volatility like I do to select option trades, here is a small list of things to watch this week. No technical analysis has been used yet on these stocks, just volatility analysis. These stocks led their respective categories.

Cheap Calls- COF

Cheap Puts- AAPL

Expensive Calls- ISRG

Expensive Puts- DO

Interesting Call Volume- LVS (Market is expecting a takeover, awesome earnings, or favorable news perhaps?)

Interesting Put Volume-DECK (Market is expecting bad earnings, or bad news possibly.)

Interesting Put/Call Volume- NVLS (Very high put volume in relation to call volume, another bad expectation going on)

Fire It Up...

Ouch. What a great way to kick off another week. A triple digit loss in the Dow, followed by a nice 25 point loss thus far in the Nasdaq. This is the biggest one day loss we have seen in awhile. I had almost forgotten that the market can do this every now and again.

In short I am frozen like a deer in headlights this morning. No new trades yet, no new exits taken yet either. I have a few things on my radar, but won't touch anything until the end of the day. I will get my weekly watchlist published here by this afternoon, and I am mowing over a few topics to try to lay down this week (Money Management, Trade analysis, maybe some psychology?). Feel free to suggest topics as you feel necessary.

Until then, keep an eye on support, believe in your trades, and follow your rules. I'll be back in a few.


Back By Popular Demand

When I think "Earnings Season" I think Straddles & Strangles. They go together like lamb and tuna fish... (perhaps you prefer spaghetti & meatball?~ Big Daddy 1999 all rights reserved). Anyway, let's talk about the strategy. After all, we haven't done so since last earnings season, and we need a refresher!!!

Starting with the premise of this strategy, their are two useful ways to utilize this trade.

First: Taking this trade in anticipation of a substantial price movement. A movement big enough to override the loss on one side of this trade.

Second: Options are at historically cheap levels and you take this trade in anticipation that option premiums will eventually rise. You buy both calls and puts expecting both to gradually increase with a rise in implied volatility, but not expecting large price movements yet.

As some may know, a straddle or strangle consists of buying calls and buying puts (Straddles = same strikes / Strangles = different strikes). That's right, you are an option buyer times two! We all know the issues with buying options... lower probabilities of success mixed with double the time decay. However, as the educated optionaddicts you are, many of you know how to override these problems.

Problem #1- As you get closer to earnings, option premiums rise in value.

Solution: Stop buying options right before the announcement! Look at a chart of avg. implied volatility for your stocks options. You'll see that with most, volatility tends to get very high every three months, and low in between. Yes, there is a cycle that takes place there. Some stocks will have a large range, others will not. Every stock is different so analyze them on a relative basis. As you get closer to an earnings release prices tend to rise, so trade in anticipation of this. In October I did a strangle with MSTR including the public and walking them through the process. It worked extremely well, and mostly because we got in three weeks before the announcement. We bought the options at the bottom of the pricing barrel before the became expensive.

Problem #2- Time Decay

Solution: In reality, if implied is increasing at a good amount, this totally takes care of time decay and then some.

Solution 2: Stop buying options that are so sensitive to time decay. Instead of buying 1 month options, buy 2 or 3 months out. This means your theta will be smaller and vega will be larger!

Problem #3- Stock Selection

Solution: If you are going to place this trade, it is not appropriate on just any random stock. Do some research! Watch the news! Whether it is a company announcing FDA results, clinical trials, court verdicts, product news, earnings, etc....pick the stock that should blow everyone out of the water! The more likely the stock is to move in large amounts, the more probable a successful outcome is using this strategy.

I think I covered everything, but I gotta run and go record the Marketcast anyway. If I missed a point, leave your comments here. I will clean them up when I get back.

You guys rock!

Another Soft Landing

I was very surprised to see the market absorb the blow-up in IBM this morning. I figured the market would be down 50-60 points by now. I would prefer that in comparison to days like this where you go up a little, down, a little and overall take no direction on the day. Emotions flare, accounts churn, and blog posts suck (content wise, of course).

As always, don't expect anything out of the market during earnings season. Each days movement is always news driven. Make sure you are adaptable to the market instead of trying to predict which way the market will move. Truth is we don't know the biggest upset, disappointment, or surprise on wall street. If you are not trading small, conservatively, or defensively, I would suggest you consider doing so.

Has anyone traded any explosive straddles/strangles yet? If not, but you are thinking about doing so, get in early!!!!! Please. Get the options when they are cheap. You'll have a higher probability going into the trade.

If you could, someone throw me an idea of a topic to discuss.

Recommendation: Fight the urge to jump ship.


Beware (Part II)

Big Blue (IBM) is getting killed in after hours trading. This is likely to cause a significant down day in the Dow tomorrow since they are one of the biggest components. Tighten stops tonight if you can. Between this blow up, existing weakness in technology, and expiration day tomorrow, it is likely to be one hell of a Friday.

Never Turn A Trade Into An Investment

Have you ever heard this term before? If you haven't I am sure today is a great day to hear it since I imagine plenty of you out there are debating this very topic. I can't recall the number of times I had done this as I was first starting out. I get into an option trade, everything looks good, feels good, tastes good, etc. then a day like today comes across and really hammers the option premium. As you look at the new (much cheaper) option premium, you start rationalizing holding this option since you've already taken a beating, you think it would be acceptable to roll the dice with what little premium you have left to give this loss more rope in hopes that the stock comes back.


Did you know that the great and powerful Oz that hides behind the curtain on Wall Street has ways of hearing these thoughts? And when he hears you say this, he makes you pay. He sucks up your trading capital faster than you can continue to hand it out. This creates unreasonable losses. Can't have those.

This is why I prefer not to buy lots of time until expiration. Naturally we have a tendency to wishfully think. Instead of intuitively being able to maximize profits, we intuitively try to maximize the chance of profits. One of the worst things I hear new traders say to me when debating on whether to take a loss or not I always hear..."Well....I have until ______(Insert your month of expiration)." Try to refrain from using an expiration date as an excuse to let losses run. This is why I usually bad mouth Leaps and longer dated options.

When you are getting ready to take a trade and you are selecting an expiration date...ask yourself if you really plan on being in the trade for that long. Make sure the expiration date you select is cohesive with your trading style and chart analysis.

That's all folks...


Be on the lookout....there is a bad case of drawdown going around, and I don't want any of you to catch it. There is a lot of red tape being printed today, and a lot of it is going on in my account. If you didn't dial in to Mastertalk last night, here is the list of stocks that were discussed...

ICE, FO, VFC, MA... collectively they are all getting the crap kicked out of them. The blowout in technology has me a little worried, but I won't officially call this move bearish yet. A little more needs to unfold before I start to tremble. However, if anyone has a good story to tell or a good trade they took, I would love to hear.

For anyone else, if you have something you'd like to learn about today, suggest a topic, since I will have an hour available to write this afternoon.


Late Start As Usual

It's Wednesday, which means I don't typically kick things off until the day is halfway over. I will be teaching Mastertalk tonight (Session 1). Anyhow, market is dull as usual, exchange stocks are back up offsetting my losses in casinos. It's funny how these two groups offset the account most days.

If you have any trades you want to post, please feel free. ICE looks like it might be popping out of a flag today for those who missed it, or were begging for an add point.

I have a few things I need to get started on, but I will return. Eventually.


Orlando Conference Finalized

I must thank Chris & Catherine for the recent comment that made me physically get out of my chair, walk down the hall, and ask what date & time I will be presenting in Orlando. Here it is folks...

Tuesday February 20th 8:00-9:15 a.m.

If you are looking at the conference schedule, I will be the segment that says "Live Trading Rooms- Stocks." The topic will be "Technicals for Stock Analysis." Honestly, I would probably hit one of the other classes if I were you, but I will try to make it as interesting as possible. It will involve technical analysis (which is good) but I was told not to go too advanced.

Sorry about the wait everyone. See you at the "after-party."

Missing The Million Dollar Trade

I cannot believe oil is down again!!! Despite this unbelievably cold weather making it's way across the country, there are no bidders out there. At the moment oil is down a whopping $2.29 at 50.70 per barrel. It's like a bad dream or something. Can it go lower? Didn't I ask that at $58, $56 and $54 per barrel? I can't believe I am on the sidelines. I want to throw up.

So much for the comments that filtered in a couple weeks ago about oil being a good "long term" opportunity. I always use the words "long term" as a code word for crap, since its root is not in my vocabulary.

Recommendation: A flute with no holes, is not a flute. A donut with no holes, is a danish.

Greatest Hits

Pretty corny, right? Well, in the comments I typically reference my "archives" as a solution for redundant questions. Since it could take a person hours to browse the archives, I figured I would take some of the classics and create links to these posts on the right hand column. If you have a question on a certain topic (implied volatility, stop orders, spread trading, etc) take a look in the greatest hits section to see if it is there. If you have suggestions for upcoming greatest hits, you know what to do with them...

Just joking. Send them as usual and I will do my best to offer quality contributions.

Da Watchlist

Welcome back from what I hope was a decent weekend. I take it you are ready to pick up where we left off? Me too. Here is my routinely posted Tuesday morning price pattern watchlist. Do your worst.

Ascending Triangles

Descending Triangles

Symmetrical Triangles

Bull Flags

Bear Flags





Another trade I had on the request line was BUCY. A huge symmetrical triangle breakout that took 5 months to form. As most of you know I hate patterns that take more than about 2 months to form. Beyond that time frame it takes the stock forever to reach it's target and I have a hard time sitting still in trades that take forever. There are better ways to tie up your money, right? Take a look at the chart below...

Based on the pattern that formed from August up until late December, we have a $13 point wide pattern that should come due within the next five months. I passed on this trade for the reasons I mentioned earlier, but I have received many e-mails from students still in it.

The initial breakout was good for about an $8 move ( I am not counting the gap within the pattern), then came the retracement. Pretty good volume in that pullback which meant many traders took profits and were not looking for the longer term price target of $59. In any event, we are getting pretty close to confirming the hammer back on the 9th. If I were in this trade, one thing I would be watching is if the stock shows reluctance to get back to it's prior high. If this is the case, I would be very tempted to sell in the 51-52$ range. So far the candles look very indecisive over the last 5 days, and volume has been trailing off. That has me worried since the market has been somewhat strong. Any other opinions out there?

Secrets Revealed!

The reason I have been tied up quite a bit this week is because I have been making a shift within the company. I have been asked to help contribute my efforts to the Investools content department. This will not mean I will stop giving my presentations throughout the week, but I will definitely be cutting one or two. As soon as I know the specifics I will let you know.

In the meantime I have been moving my things around and relocating my office. This might take me another hour or two, but after that I will try to get a solid post in before the weekend.

How is everyone doing out there today? Are we making any money?


I was tempted to short oil at $55, and now trading at $51.88. So much for discipline. Oil ought to be breaking $50 shortly...can you believe it? Just 4 months ago analysts predicted 100-120$ per barrel.

Stocks still continue to be resilient. Today's gains were mostly driven by large caps rather than small caps. Look at the Dow components for example. Early today 29 of 30 were posting gains on the day.

A few of my favorites were moving higer... ICE, AZO, LAMR, LVS, PSA, BIDU, GLDN, etc.

Anyhow, I am busy as hell today (again) let's take another stock to analyze.


Todays price action was interesting. Many stocks advanced...but CROX on an intra-day basis reached resistance and turned down from it. I still think the outcome could be bullish, depending on this next retracement.

If this next retracement doesn't reach support back at $41.50ish, yet turns back up towards resistance, you are likely to see a cup and handle out of this stock. There are still plenty of buyers in this stock, according to the rise in volume on the way up to resistance. Definitely wait for a break of resistance in the $48 range to take this trade. Price target would be at least $6 over a 2 month period. Once it breaks I would go one strike out, and probably two months until expiration.



I swear I am losing my mind lately. I have tried looking for it, but no success. For those who were going to participate in my Mastertalk presentation tonight...I have bad news. I got my wires crossed and I am not teaching tonight. I will be back in the saddle next week. Alan and Kelly are running the show tonight, so grace them with your presence and have a good one tonight. Hope I didn't bust up yer plans.

Tomorrow I will return with more charts to analyze. There were tons posted and I have chosen about 3-4 more that I want to talk about. So have a good night tonight, see you tomorrow.

Took Long Enough...

Unanticpated events, have cause a serious hiccup in my post frequency. Hopefully I can roll out one stock, and do the rest tomorrow morning. Thanks for you patience.

As I looked through each stock that was requested, I tried to take a handful of the more complicated looking charts to help you make sense of them. Several of the stocks mentioned were fairly easy to interpret...whether it is in a simple uptrend, pattern breakouts, or stocks with strong momentum. The five I chose to write about were a few that looked a little tougher to read. PLEASE NOTE: I am making sense of the price charts of these stocks, not analyzing fundamentals, industry groups, lake plays, etc. Anyway, Let's get started...


It looked like there were differing opinions on this chart in the comments, so I want to throw in my two cents on it. First, I see neither a double top, nor an ascending triangle. Why? Well a double top must confirm with a break of $37.50, or create a lower low. This has not happened yet. I would also disagree with this being an ascending triangle, since it must confirm with a break of $42.50. This too, has not happened yet. "A pattern is not really a pattern until it is confirmed." I know you all know that, and that you were probably looking forward into the future to guess what the outcome would be. As of nbow it is too early to tell if this will be an ascending triangle, symmetrical triangle, double top, triple top, etc. Rather than give it a name so early, let's discuss the facts. Here is a copy of my chart...
What is most interesting to me in this stocks price action are the last two retracements to support. Look at the difference between the two. Can you spot any differences? I can...

On the first retracement there were 9 down days, 2 up days taking a total of 11 trading days to reach support. The daily ranges on these 11 days were average/slightly larger than an average range.

On the current retracement down to support, we are 16 days into this retracement and still not at support. The stock is taking a little more time than its previous retracement to go down. Notice that the candles have been shorter trading range days, and a few dojis there as well. It seems the stock is not as adamant about going down as it was on the last support bounce. Avg volume is alos a lot lighter on this retracement than it was on the prior retracement.

Bottom line: If the stock shows any type of reluctance to break support on this potential topping pattern, I would see a fairly good trade here to the upside. A bounce at support could cause this stock to want to try and test resistance again. From $38-$43 a five dollar reward is in the making. Granted this is shaping up as a channeling (sideways trending stock) opportuinty, but a trade I would take at $38. A close below $38 would be my risk. Awesome risk reward.


ICE up another $6 this morning!!! This stock is like an ATM machine. What a fantastic run it has been so far. Hopefully many are still holding their positions in this one. What about a few other breakouts today?

AAPL, VOL, DLB, PSA (finally), MAC, PL, BIDU, and SPWR.

I am working on the post I talked about yesterday. I should have that up soon.


Technical Difficulties

I apologize, but between my slow computer/internet and this crap site, the outlook on getting my final post up today is doubtful. I'm revising my opinion from hold to strong sell. Anyhow, this is a good opportunity for all of you just coming in from work. Post some stocks already! I said I was willing to choose five and in no specific order. Hurry and leave your symbols before tomorrow morning and I will go thumb through them, choose five and write up a summary for tomorrow.

My intention was that this could be a useful exercise to compare opinions on various charts. I am looking for other similar ideas to engage yet provide useful information. As always, my contact link is on the right hand column, or click here to send and e-mail and provide suggestions. See you all tomorrow.

The Request Line Is Now Open!!!

How about I take a few requests today? Have you recently come across a stock or a chart you are having trouble analyzing? If so, leave a post with the symbol and a quick description of what your question is . I will take the chart, draw lines, add indicators, write notes, etc and then post this chart to illustrate my opinion (from a technical perspective and an option perspective). I will take around three-five stocks total, so please don't dump off you watchlist here. Leave me a comment and I will have the response back to you in a few hours. This might be a good way to mix it up today.

Beware! Falling Prices Ahead!

Just when you thought crude oil couldn't be sold any lower. I am amazed, yet excited to see this blowout in the price of oil. This seems to be the only reason the market is above water this morning. Do you think the prices continue to fall? The signals aren't there yet it is still hard to resist temptation. $54.04 per barrel for February delivery and dropping. A benign winter is defintely taking precedent over the threat of global supply getting shut down. Burn baby burn!

As I have been writing, the market is now under water. Go figure. What do we see moving today?

BEN finally broke out. This was one from last weeks watchlist. Along with AZO, LAZ, AH, and FMCN. These are new additions to this weeks list.

Did you think I would forget price patterns?

(Potential) Triple Tops- ASF, IEX, and PRAA
(Potential) Double Top- JCP
Triangles- TSAI (Descending Triangle), CGNX (Symmetrical Triangle)

Anyone have something they want to talk about? I am fighting off the urge to talk about synthetic options (which isn't very hard to do actually... you should try it).


Translating ATR To Option Premiums

I wasn't sure if I wanted to open this can of worms, but I figured "hell with it" let's do it! Weeks ago I talked about indicators used to set stop orders. Average True Range was one of the indicators discussed, and in my opinion one of the best ways to set a trailing stop order on a stock. How does a stocks average true range help you exit an option trade though? Here are a couple ways...

With all the wonderful technology now days, there are many capabilities as far as setting orders are concerned. Contingent orders, bracket orders, OTO (One Triggers Other), etc. Using these orders makes it fairly easy to sell an option based on a trigger defined by the stock price. For example, if I am using ATR on a current trade, and let's say that ATR is a value of 1.5, and the stock price is currently $50. I can set an order to sell my option contingent on the price of the stock reaching $48.49 (a penny below my current ATR). This would be something that would need to be adjusted daily, especially if you are away from the computer often.

What if you wanted to translate an ATR into an options premium? We can use black scholes to give us a theoretical interpretation of this difference. Let's use an example.
LMT just broke out today, and the price is currently about $94. The current ATR of LMT is about $1.25. Let's say we wanted a Feb 90 call, which is currently priced at $5.30. We are going to purchase this call, but want to set a stop specifically on the value of the call if the stock dropped one value of it's current ATR, which is $1.25. Below is the current option parameters input into the black scholes calculator, along with a version that includes a stock price at $1.25 cheaper. Take a look...

Based on current parameters, theoretical value is $5.10 (current ask is $5.30). Based on a $1.25 drop in the stocks value would mean the option would trade roughly at $4.15, which is roughly a $1 difference in premium. You could set the option as a $1 trailing stop, but this equation we just did does not take time decay into consideration, nor changes in implied volatility. However, it is a way to at least get a trailing stop on your option based on the stocks ATR.

What a complicated business we work in, huh? There are various other ways that this can be done that I did not mention. Otherwise I would be here typing this for days. If you have a few alternate suggestions (or criticisms), please feel free to leave them.

Let's Get The Ball Rolling...

Can you make heads or tails of this market yet? Me neither. However, it is better that the market is only slightly down than really down. That is if you are still bullish. I am amazed that oil prices continue to drop. We'll see how that continues to hold up.

Got any good stocks for the watchlists this week? I have too many. My patterns list is full, but I can't pass them out until tomorrow morning anyways. If I hand out all the free treats before my class, for some strange reason attendance suffers. So tomorrow morning it is.

However, what about stocks making new highs or bounces? I'll share a few if you will...
PS- If anyone out there traded that cheap stock I posted last week, VDSI...Nice Work!
New Highs Today (Still Early In The Trading Day)
Bouncing off old support or resistance levels
I will be here if you need me. Another post coming later in the afternoon.



Try to do your best to shake off this "weak-end" of the market this week. As always take the week to cleanse yourself of stress and emotions that do not belong in our work place. Feel free to e-mail me suggestions over the weekend, and I will be back here Monday morning with a full watchlist and ready to take house-calls (or puts).

Have a great weekend!!!

Break Out Your Rules!!!

Another suggestion I had is to open a thread here today to discuss trading rules. This is a great idea to see other traders rules, and to openly discuss them here in a forum type atmosphere. All of my trading rules have been aired out here many times, but please feel free to post a few of your own.

This can be as detailed as what types of stocks you trade, to what technical indicators you use, and how you use them. Any types of confirmation used, time of the day you trade, reasons you wont trade, etc.

Leave anything you can, I will monitor the comments and try to make contributions when appropriate.

Let the games begin!

The Four Percent Model

I had a request to talk about the 4% model. If any of you have read Martin Zweig's book titled "Winning on Wall Street" this model gained it's popularity through this publication.

This method was developed by Ned Davis and it is basically a very simple trend following technique. It is very easy to calculate and analyze. The only complication is having access to the Geometric Value Line Composite Index (symbol $VGY) where you need weekly closing prices to calculate your signals.

The premise is that this method will keep you in the market during upswings and short on the downswings. Here is how it is calculated...

A buy signal is generated when the index rises at least four percent from a previous close. A sell signal is generated when the index falls four percent from a previous close. Remember that to do this you will need to use weekly closing prices to calculate signals, which are very long term signals compared to what we normally deal with here. I will quote a study I located on this model that talks about how accurate or beneficial it would have been to use it...

"From 1961 to 1992, a buy and hold approach on the Value Line Index would have yielded 149 points (3% annual return). Using the Four Percent Model (including shorts) during the same period would have yielded 584 points (13.6% annual return). Interestingly, about half of the signals generated were wrong. However, the average gain was much larger than the average loss--an excellent example of the stock market maxim "cut your losses short and let your profits run."

Again, just another technical indicator out of the hundreds that exist. Hopefully this was useful or was an easy to understand explanation of a new indicator to add to your arsenal. As always I love requests, so feel free to keep sending them.


Sorry For The Late Post!

This happens to be the first free moment I have had all day. As I watched the market today, I couldn't help but feel that this is actually more of a positive sign than a negative one. If the market held on to those early losses, I would be a little more concerned than I am right now. Plus for those who attended Mastertalk last night and participated in the trades I presented, congrats. If you were not there, I mentioned the following...

ICE- +$5.21 @ $121.01 (also up another $.80 in after hours)

BIDU- +$3.59 @ $126.00

CTRP- +$1.63 @ $67.21

LEAP- -$0.63 @ $61.64 (not worried yet)

PSA- -$0.74 @ $98.44 (Watch for a re-test of old resistance)

Some other noteworthy trades came from the watchlist earlier in the week (AVB, NKE, VDSI), and a post that filtered in about BLUD. Also keep an eye on GPS...good news today about same store sales.

What are some topics you'd like to cover here in the short term? Leave them as comments if you would. Thanks!


MasterTalk Tonight

It's Wednesday night again, and we only have a couple hours until go time. If you have a topic you'd like to learn about, leave me a comment. I am struggling to find my usual inspiration to decide on a topic.

By the way...Session Deuce tonight.

Come On In...The Water Is Fine!

How is trading treating you today? Despite a great open, and giving it all back there are definitely plenty of things to choose from on today's menu. The exchanges are going nuts, such as ICE and CME. BIDU made a huge move today, and the casinos are making somewhat equal advances (LVS- +$1.78 WYNN- +$1.77). An email came in that showed an awesome pattern confirmation today. Take a look.....

INFY: Ready for the bad news? Earnings are just around the corner. It is a picture perfect pattern and I am debating on taking the trade towards the close and holding on up until the announcement. Do you think there is enough potential in that amount of time to warrant the risk?

If you have any other menu items please feel free to post them.


Leading Indicator???

Interestingly, foreign markets have been doing extremely well while US markets sleep. This ought to be a good indicator of how the market will open tomorrow. Bullish as usual. The Xetra DAX was up 1.3 percent, the FTSE up 1.5%, CAC 40 up 1.4%, Hang Seng up 1.7%, TSE up 1.2%, JSE up 1.7%, everything is going up!!!! This is likely to bleed off into US markets tomorrow morning, so be prepared to get off and going. Now that January is here have you heard of the "January Effect?" If not here you go...

"The January effect is a general increase in stock prices during the month of January. This rally is generally attributed to investors buying stocks that have dropped in price following a sell-off at the end of December by investors seeking to create tax losses to offset any capital gains."

The first couple days of January are a great barometer to how the month of January will perform, and the month of January is a great barometer as to how the entire year will perform. As for me and mine...

Price Patterns

Here is a short list of patterns I used in my presentation this morning. Feel free to jot them down, pick them apart, or do whatever is needed to add them to a list somewhere. A few of these are pretty close to signaling a breakout. As always, any additons you can offer to the comments page are very much appreciated!

UNH- Bull Flag

FDS- Bull Flag

PRU- Bull Flag

NKE- Bull Flag

BAM- Maybe a Head & Shoulders if it turns down soon?

AAP- Symmetrical Triangle

VDSI- Ascending Triangle

COGN- Symmetrical Triangle

SNDK- Descending Triangle

Other noteables: GRMN, PSA, KBH, DHI, ICE, CVX, APD, AVB, SLG, FWLT

Open For Business

Can I say it is good to be back? Not yet. The market is closed in observance of the passing of President Ford, which means we don't have anything to trade. It is also weird to see the market closed four days in a row. This hasn't happened since Sept 11th. I will get the Price Patterns post up shortly so you have ammo to use during the week. I also have only gotten through half my unanswered e-mails. It will be good to be back as soon as that is taken care of.

Before I stoke this fire again, I want to issue a public "thank you," which goes out to Lisa who was so generous to devote her time to opening posts, singing us songs, and offering us snacks while I was in So Cal visiting the Magical Kingdom. Next time you want to go to Disneyland after Christmas, my advice is to wait. The park sold out while we were down there and people were everywhere. Despite the crowd, it was still a great time and the kids loved it. Anyhow, Lisa....we all appreciate your efforts, THANKS!!!
So now that vacations are over, let's get back to the grind. Price Patterns...coming up shortly. Until then...


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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