Presented by Greg Jensen of OptionsANIMAL, and Price Headley CEO of BigTrends.com
Travis: This is Travis McGhee here with OptionsANIMAL. It’s a pleasure to have you all with us today for another one of our special webinars that we put
on, on a monthly basis. For some of you folks, I see quite a few familiar names in here a lot of OptionsANIMAL students and I’m certain that we’ve got some
Big Trends folks here as well for those OptionsANIMAL students and certainly for the big trends folks. We put these webinars on about once a month. We’ve
brought in various people to host these webinars. We try to keep these topics relevant to what’s going on in the current market environment.
We’ve done some events with a few of the CNBC cast members. We’ve done some events with Nadex the exchangestreet.com and so and so forth. I’m particularly
excited about this webinar. I’ve known Price Headley for some time now going on about five years working with him in a number of different capacities doing
webinars, speaking at live events. Aside from being an amazing human being, he’s also an incredible trader and very good with his presentation of what is a
very difficult concept for most to grasp and that is technical analysis. I don’t think there’s anyone out there that does it quite as well as Price is able
to do it.
I’m excited to pair up two great guys, two great traders. Many of you know Greg Jensen of course from our program here at OptionsANIMAL and he’s obviously
done an outstanding job in building what is one of the first and only accredited options programs out there which is just a comprehensive from very basic
to very advanced topics as it pertains to trading the markets. I think its going to be a great webinar today. For those of you who were a little curious as
to the theme, we are going to be talking today about trading inside of your IRA and taking advantage of some of those opportunities that Price, Greg and
myself are seeing right now in the market using options, using technical analysis as well as fundamental analysis to help make those decisions.
Again speaking true strategies that you can execute inside of your IRA in today’s market. I know there’s a lot of chatter going on and we’re certainly
hearing it here and I’m sure Price as well about is it too late to get involved in the market? We’re hitting all time highs in the dollar, in the SMP and
crossing some major milestones. Have we missed the run and if we have not then what can we do to take advantage of this market.
Without further ado I’ll talk a little bit about the end of the webinar as to more about OptionsANIMAL and Big Trends but I’m going to go ahead and pass it
over to Greg Jensen again the founder and CEO of OptionsANIMAL. Greg I’ll let you go ahead and get us started here and perhaps we can talk a little bit
about the boarder market and then we can start rolling in to some individual stocks.
Greg: Travis it’s a pleasure. Price it’s always a pleasure to be with you as well. I promise I’ll share the mic with you plenty today.
Price: Thanks Greg.
Greg: This concept of trading is two fold. There are two different people out there of old that I think times are changing. Before we always viewed traders
as that guy down in the pits wearing a vest and elbowing people around and you’re trying to scalp a dollar here and scalp a dollar there. That was the idea
of trading. Then that got brought in to with the adding of the internet that got brought into the regular world for us individual investors out there just
trading from our home computers. A lot of people have jumped into that idea of trading and trading for a living. There are a lot of people that do that.
One of the things that I have seen advance over the last several years as I’ve been doing this is marrying in the concept of being a trader and an
I know a lot of times you’ll hear people say you don’t want to be one or the other you can’t be both. I’m of a different belief in that I feel a lot of the
concepts that the traders of Wall Street in Chicago that some of the concepts that they have learned and refined over the years to help their business can
actually be applicable to something as simple as your IRA. A lot of the risk management ideas of how to trade inside of the IRA are starting to become much
more accepted and a lot of it comes down to simply having an understanding of how the different trading tools work. Having a realization that options don’t
always necessarily increase risk and in fact if used properly they can actually help you control risk.
To start out with just a little concept about the IRA in general for those of you who are questioning and maybe your broker is even telling you, you can
only do certain things in your IRA, there is some truth to that. You do have some limitations on how you can trade inside of your IRA. The essential
limitation is that you cannot borrow money. You can’t trade on margin, you can’t necessarily do naked options unless you have the cash to back those
That’s really the restriction but as far as actual strategies go, we’re going to talk about I’m sure a couple of different strategies today as far as cash
flow where there’ll will be strategies like the covered call or would it be strategies like credit spreads that absolutely can be applied inside of your
IRA and help you not only generate return and it will bring in some type of premium on a monthly, weekly, annual basis however you want to trade it but
also give you the ability to actually hedge risk inside of your IRA.
I know that’s what’s on a lot of people’s mind right now in this overall market is it just feels like as Travis has mentioned, you just start out. We’ve
had such a big move to the upside over the last years especially since end of November last year right after the elections. We bought them and we just had
an explosion to the upside over the last year. I know the question on everyone’s mind is can it continue or should we be preparing for potential roll over
or potential drop in the overall markets. Before we go into some of the actual strategies, Price I’d like to get your take on where we’re at in the markets
right now on an overall general feel. Do you feel like we are getting a bit toppy right here or as Travis mentioned is there still opportunity to jump in
and buy stocks and take advantage of more bullish move in 2014?
Price: That’s a great question Greg and thanks to you and to Travis for having me. It’s always a pleasure to be with you guys. I think there’s always going
to be opportunity out there in the market. You just have to know where to look and how conditions are configured. I think a lot of times people actually
world markets are fueled by the fear of the next crash or the next 2008 type of a situation. When that ‘87 crash was fresh in people’s mind pretty much
most of ‘90s it was for like they were always worried that every pull back was next start of the next ’87 crash. That’s a healthy thing if people are still
asking the question.
I remember when we launched Big Trends in ’99 I remember as I crossed 5,000 people were celebrating on CNBC saying, “We went so fast from 4,000 to 5,000 on
the NASA composite. How fast will we go to 6,000?” We lost the memory of the crash and now it was more about the fear of missing out. That’s what you’ve
got to be careful of. When we’re near the top you will see a conversion of the fear. It will not be about the fear of the drop but it will be more about
the fear of missing out on more upside gain. I don’t think we’re there yet in the ultimate top. We’re of course in a very positive seasonal period for the
market November 1st through the end of April is where the market makes typically 90% of its gains.
We came out of a very weak seasonal period. The market still put on 10% of the SNP and 15% of the NASDAQ this past six month period. Very impressive
market. What you have up here on the trade monster screen is a chart of the SNP 500 with the percent all the way that I like to show it which is the
William’s percent or percent range in the cater using a 30 bar settings so people CAN get their hands on something very specific here. You see that when
it’s that blue [percent 00:09:05] line means that if we’re covering nearly a 100 percentile level, the market is hitting new highs and you’d think that’s a
bad thing when the market’s ‘over bought’.
You can see we weren’t over bought here in mid October on this latest breakout and then it came and it keeps going up that tells me that that’s a bullish
market. You see that one pull back there in early November where the percentile came back to that 80% line or just under it, we call that a retest and that
was a key low if that market doesn’t break that low you’re okay to stay with that up trend. You see we snapped right back up with the jobs data on that
Friday and then corresponding rally since. Bottom line is yes, we’re going to do some psychological battle maybe up here near the 1800 round number we call
century marker each of those round numbers. Maybe moderately important from a psychological perspective but Greg I would say it’s very hard to call tops in
these environments. You’re going to get brief pull backs and when we get to breakage we’ll then back off and wait till the next new buy signal hits.
You’ve also appropriately got the moving averages up here that show we’ve been above that long term 200 day type of an average in blue for quite a while
and bottom line is you don’t want to step in front of that type of a bull market and trying to pick tops. You’re going to miss a lot of opportunity and
you’re going to basically end up then probably chasing in near the highs when you’re in that fear of missing out mode and you’ll endure the worst of both
worlds. My mentality is make sure that you follow a system. It doesn’t have to be the big trend system but whatever your rules are follow some rules about
how to get in and how to get out and as you say Greg, how to control risk.
If I’ve missed the move, if I’m sitting on the outside range now looking in, what I tell my students is wait for that retest, wait for that next pull back
on that 80% threshold and then you can buy that and say if we’re wrong then we’ll stop it out if it closes underneath that low. You can control your risk
to a very defined point rather than buying too high. As we all know with options whether you’re buying them or you’re selling them we’re talking here today
about more options income strategies but regardless they’re a leverage instrument and you want to make sure that you don’t put the trade on at the wrong
level where you don’t have a very reasonable risk. If you have to take on too much risk where it’s going to test you to your sleeping level where you can’t
sleep at night because of it, that’s not a good trade.
The bottom line is you’ve got to fit your strategy to something that you’re very comfortable with in both its consistency and its risk versus rewards. I
know we want to get into strategies and talk about … Especially in this environment I think you’ve got to talk about volatility which is down so much
because of this market rally. If you look at the [Vix 00:12:03], you look at techniques like that we’re going to want to factor that in as well when we
start to say what’s the most appropriate strategy for a low volatility environment versus maybe an environment where you have low path in volatility.
Greg: Those are excellent points. One of the things that I will point out, reiterate what Price just said so that it sinks into you, I’ll say it in a
different way is that every successful investor/trader that I have ever met whether it’d be a swing trader, a long term investor, a hedge fund manager,
every investor I have ever met is very systematic in how they approach the market. You have got to be disciplined enough in yourself whether it’d be
through finding training to help you get disciplined, whether it’s trial and error on your own which can be very expensive but often times is the one that
really helps you fit the experiences in but you have to be systematic. You have to be disciplined and say here are the setups I’m looking for and I’m
looking for a trade entry and here’s my way of managing risk.
If you have that all defined out for yourself before you enter into your trades, you end up as Price alluded to sleeping a lot more at night because you
have your level of risk defined and you’re not going to risk waking up one morning and having an unfavorable ruling by the FDA end up taking half of your
portfolio away one day. Make sure that you have your system defined as to how you control risk and how you approach the market.
Let’s talk a little bit about the topic in today of how to use income strategies inside of your IRA. There are a lot of different income strategies.
Primarily however what I look for in income strategy are different ways to create options. Now for the sake of time, I wish we could cover them all we’ve
only got about 30, 45 minutes here today left with you to actually talk abut the strategies. I want to talk briefly about, I would argue and say the two
most popular income strategies and number one of that is the covered call or the covered right and the other one being a credit spread.
Talking first off on covered calls just real basic education. One of the great things your brokerage platform whether you’re using tradeMONSTER like we’re
shown here, whether you’re using a company like ThinkorSwim or whether you’re using a number of different option centric brokers should have different
tools for you to do some analysis on covered calls. I don’t care what stock … What stock do you want to look at Trav? Do you care?
There you go Facebook. Let’s choose the stock of the day recently. That’s a very popular stock. A lot of talk about is Facebook having some pressure right
now because the Twitter IPO yet their fundamentals have been very strong both in their earnings report in July where we saw the big gap up in the ensuing
bullish move afterwards. Even the earnings in the last earnings report in October we’re actually very strong but you’ve seen those stocks go sideways to
slightly lower though it’s trying to hang on to this $46 level for support over the last three or four weeks.
Let’s talk about different ways to structure potential income trades on a company like Facebook. The most basic income trade is of course the covered call.
For those of you who don’t know what a covered call is it’s relatively simple. It’s a combination of the stock position and this will answer your question
Tom that you asked a little earlier in the class. What is a covered call? A covered call is a combination of a long stock position. You actually own the
underlying equity and then I’m going to sell a call option against that stock position and that’s why it comes up with the term covered. Is that option
that I’m selling which of course is the obligation to actually deliver that stock to someone is actually covered by the underlying shares that I own.
An example that you might look at is I could look as Travis has set up here, I could look at selling. You buy 100 shares of Facebook and I’m also going to
turn around and sell that equal number of contracts, in this case one contract. We’ll choose the December 50 strike call. Now what that does for me, this
little button that Travis is clicking on right now the analyze tab is it’s going to create my trade with a net debit of $45.70. That’s my overall cost, my
overall risk on the trade here. The profit is defined by looking at the strike where I’m selling the call option. The $50 strike price minus my cost basis
in the trade of $45.70. I’ve got a maximum defined profit potential of $430 or about a 9% return on investment in about 30 days.
9% in 30 days, if I actually hit that every 30 days, I’m having a phenomenal year. Of course it’s not going to always work that way and some trades are
going to work month after month and some are not going to work month after month. That’s one of the things that Price was alluding to is not only
understanding the basics of how the trade works but then how do you manage your risk in case it doesn’t work. This is one way of structuring a covered
call. Let me finish the exit points here before I go on to the different ways of actually structuring a covered call. Price I’d love to get your take on
how you specifically view covered calls as well.
This as I said the exit points here would be if the stock were to move above $50 and we do get a bounce back up in Facebook someone out there would
exercise the call option. Take my stock away from me at $50 I would realize my maximum return of about 9%. If the stock just goes sideways on me and just
trades sideways here $47, $46, $47 what eventually will happen is at the end of 30 days that option that I have sold that is about $1, little over $1 will
eventually go down in value and I will keep that cash in my account and then I can keep my stock as well and then sell it again the next month.
The risk in here of course is the bearish trend. I can still offset some of the bearish risk here and the fact that my cost basically sit down at $45.70
but my risk starts to get in here when the stock starts to get below $45.70. There’s a lot of different things that you can do to plan for that risk
whether it’s making some type of an adjustment to that trade, whether it’s having a star plus there to protect your risk or whatever tool you might use or
it may just be this is a long term company that I want to sit and hang on to and I’m just going to sell calls against it month after month and bring in
that cash flow and treat it somewhat as a dividend for stock there [inaudible 00:19:55] on.
You can structure these on a monthly basis like I’m showing you here. You can structure them weekly on many stocks and weekly covered calls. You don’t have
to wait for 30 days. You only have a seven day trade or six trade or two day trade. You can do year long covered calls where you don’t have a lot of work
associated with it but you’re going to give up some of the potential gain if you do that. That’s the basics of how to use a covered call. Price I’d love to
get your take on covered calls and how you use them and whether you think they’re a good tool right now in this market.
Price: Yeah Greg, I think it’s a great point and did a great overview of how to structure a covered call. I do think that people sometimes think the word
covered means now I’m covered by selling this option but like you said you’re only covered by the amount of premium you’re collecting. You need to make
sure that you still have an exit plan or like you said an adjustment plan to roll down your strike. If it’s starting to come down you say, when the stock
drops from $47 to $45 maybe I want buy back far out of the money 50 calls and perhaps sell something that’s maybe a little bit closer like a 47 or 48 calls
something like that.
Bottom line is that I do like covered calls. I do like them. if you’re interested in this strategy and generating more regular income. I like them now that
we have weekly options which I’m sure most folks know about weeklies but for those who don’t means that you have options that are listed with every next
Friday being an expiration point. Like Travis is showing us here we’ve got this Friday the 22nd and then you’ve got the next Friday the 29 th. You can look at each one of those up here and say, “Maybe I want to sell options maybe just near the money or just one strike overhead like
we can show here like the 48s here or the 47s depending on what your view is where you know that you’re getting the maximum amount of data that is time
erosion that can happen. Of course you’ve probably seen the chat of time premium erosion which is that time will actually erode at a faster rate.
The closer you get to expiration which means it’s like Greg alluded to if you sold just a one year option, one time for the next 12 months you’re not going
to see much decay at all in that for quite a while until it starts to get closer to the expiration. You’re better off if you’re willing to be a little bit
more proactive in doing this short term options and then doing it the following Friday and the following Friday after that. You’re going to see a dramatic
improve returns. Over time you’re going to have to occasionally make some more adjustments and if commissions hadn’t come down so dramatically like when I
started in the game trading back in 1990 commissions were … It was silly to want to do many adjustments.
They come down so much that you really get an incentive to want to be able to make some more adjustments and to want to be a little more active with your
portfolio. At least part of it to show yourself can you add value versus just sitting there watching your cash doing nothing or I would suggest if you’re
sitting on a bunch of cash, we know that the inflation rate is a lot higher than what the government’s 2% to 2.5% annualized cost of living adjustments
essentially is what they’re instead of us to keep that down which is why they promote the low inflation rate.
I’ve seen stats that show us it’s probably more on the 5.5% to almost 6% range when you count for food prices etc. Yes, wells down recently but bottom line
is you know that cash is basically trash over time. You need something like this type of a very managed risk strategy. To me covered calls are really one
of the most simple and effective ways you can start to put some money to work. The key as Greg alluded to is what’s the right type of stock to trade on?
You want to be careful about being seduced by a big option premiums as your reason to do cover call selling.
If you’re looking at say Tesla or something like that you’ve seen the stock have a huge move this year obviously. TSLA has gone up from it was in the 40s
in April it went to almost 200. Now it’s come [cratering 00:24:21] back down. You better be careful unless you’re going to be super active you say, “Look
at those volatilities.” We’re in the 60s across most of those even in the front months weeklies we’re 71%. A, check your event calendar. Make sure you’re
not stepping in front as Greg said FDA report and earning support always know that you want to be able to manage your trade.
I don’t advice putting on trades right in front of earnings. I’m usually taking money off the table in front of events unless I’ve already got a free
trade. That’s my one caviar or exception is if I’ve already taken enough cash out of a position where the remaining contracts I have are essentially risk
free I’ve got my risk capital out of the trade then you can’t afford to roll a dice a little bit into [inaudible 00:25:13] support. Most of the time you
should be focusing on risk minimization when you’re a premium seller especially because you’re worried about are those black swans, those fat tails as they
call them, those rare events that when they happen gap way against you and it’s gap set affect your ability to control risk.
That would bug you for … Maybe you want to think about some of the ETFs in addition to the SNP. If you’re looking at vehicles like even the GLD. GLD has
been pretty [voldo 00:25:43] lately. The gold market has of course had a pretty rough year. Out of the camp that, I’m more of a technician and I’ve been
more bearish on gold here because of it. You can see that gold’s volatility is on that dramatic. You say it’s not like [Testlids 00:26:00] 16%, 17% implied
volatility but if you’re looking at an ETF, for those who don’t know is a diversified vehicle of typically either an entire sector like gold prices here or
an entire group of portfolio of different stocks. You start to take some of the company’s specific risk out of that type of a situation and then focus
yourself on [inaudible 00:26:27] sector view when you look at a chart for gold; you look at a chart for any of the big sectors out there, if you’re looking
I tend to look at for example OIH as a sector I like to trade oil services stocks. They’ve been on a monster run here lately. They’re probably not as super
liquid you’d like, like the SNP or gold is. You can see it’s just in a nice steady, slow, predictable, type of a up term. We’re coming wide off right off
of what I was just talking about. One of these retests that happened here yesterday and then today we were below that level. It looks like we’re starting
to reverse and hold. If we’re going to hold it on a closing basis here around $50 bucks I figure we’re going to grind higher and that’s with oil prices
coming down. These oil services companies are doing well regardless. That’s what I’d like to see companies that are performing well in any kind of an
environment for their underlying commodity or in this case or the underlying economic environment.
This is one in which you say like we time out the covered call if we’re saying we want to be conservative if I’m buying OIH and then I’m looking at selling
an at the money or slightly out of the money type of option, I’d be very comfortable selling the 50 strike. Again these are not meant to say go out and do
this but just for educational purposes only here because you want to know where you need to get out too. Bottom line is you’re collecting about a buck
here. Like Greg was saying even if I could do that’s a 2% return essentially if nothing happens. You’re saying now that’s a December options. I don’t have
to hit home runs here, even if you could do 2% a month you’re still going to have a very respectable return and you’re going to be able to manage risk.
You can see as we look at our probability calculator you say, sure this is not a home run trade. This is one in which you’re saying we know volatilities
are relatively low for this so we’re not expecting any kind of excess volatility. We can trade it down; get it down to a slipping level on our risk
management. Now you just have to say how do I manage the major downside scenario? My rule [inaudible 00:28:40] is if I’m collecting a buck and say you were
right at the money I really don’t want to see that thing go much below my effective breakeven even at expiration which is you can see here $48.87, a buck
below current levels because I’m collecting a buck. That’s what makes that breakeven a buck lower.
You say it’s saying even … Can we stay above that level. It’s saying about two thirds of the time we can stay at that breakeven level or higher so that one
point cushion doesn’t sound like much but because OIH is so relatively consistent, that’s the kind of trend that I can probably more often than not be able
to ride out and pocket that and give myself a chance for that month over month couple percent here, couple percent there. If it’s breaking below that
breakeven level that’s where I start to say we want to either adjust or want that trade down and look back to come back to play once the market structure
sets up more favorably again.
These are the kind of things that you need to find a good relatively low risk entry point and then manage it accordingly. A long answer there Greg but
basically saying yes, that covered calls give you a lot of alternatives and opportunities in the market that essentially is still relatively low volatility
you can still basically create some really nice annualized returns that way.
Greg: I think again another important point that I reiterate the price is brought up is going back to that idea that I was talking about to begin with, is
the difference of being an investor and a trader. I think a common mistake people make when they get into the market for the first time I know I did this
when I first started trading back in the early ‘90s is I made the mistake of reading all the stories of how much money could be made in the market and
wanting to hit this home run trade. Of course I got to watch myself hit home run trades because I got fortunate enough to experience the ‘90s. It was very
painful having to break those bad habits when the internet bubble burst for me. I’m sure it was to a lot of investors.
The mind shift that I went through the change is exactly what Price was just mentioning and it was kind of those, he didn’t come out right and say it but
if you read in between what he was saying here on OIH is that, if you can have a trade that has a 66% probability of working, two out of three times when
you put this trade on, if I could do that consistently eight times out of the year and four times out of the year I manage my risks so that I either stop
out and minimize the losses or I adjust the trade to minimize the losses, what I find is that by focusing on smaller bits by trying to hit … You’ve heard
the analogy before but I’ll say it again.
By trying to get singles time over time over time again instead of trying to hit homeruns at the end you’re going to find yourself having more success and
that actually ends up being a lot more fun than happening to time it right and by long calls on Tesla right before they blew up to the upside and then you
get corky and then you bought long calls when it was breaking above $190 thinking okay it’s going to $250 and you’re still sitting on those long calls
right now that are virtually worthless because that leverage idea of options. Although you can make a lot of money that way, it’s up it’s down and it’s
very mentally challenging to trade that away. Whereas this way of trading takes a little more patience, it takes a little more discipline but over the long
run what you’ll find is your portfolio grows consistently and you can make some very good returns.
Whether you’re doing that from this cash flow means of actually doing the cover call strategy or if you actually want to go and start to do credit spreads
which are a similar type of trade and accomplish a similar type of result. Before it goes straight to credit spreads I want to answer a couple of questions
that have been asked a couple of different times. I answered it once privately inside of the chat room but I’ll answer it now again because it’s been asked
again. I’ll answer for everybody.
The question is by Palm, says, how do I determine what strike price to sell? What are you looking for? When I’ve got a stock, what strike price am I
willing to sell? As you get more practice Pam you’ll be able to choose that easier. I would say a couple of rules affirm I like to look at. The first one
is, what type of return does it get for me? I have to go back to step one of defining who I am as an investor, what I’m I trying to accomplish with my
goals? Am I trying to accomplish a 10% annualized return?
If that’s the case then I need to be looking at making about 0.8% to 0.9% per month on my covered calls and that will give me pretty close to a 10%
annualized return. That will be part of my target price as to helping me choose what strike price I would sell. The other side of that I would also argue,
a lot of that comes down to technical analysis. Often times some of the best strike prices to sell are right around resistance levels particularly if you
actually do want to hang on to that stock position for a long period of time.
If you don’t want to necessarily sell the stock, you want to own it but maybe you were going to sell some calls against it to generate some cash flow,
often times if that’s the case then I might look at selling strikes that are up above maybe a current resistance level that a stock has got because I’m
going to have to have a break out for my covered call to go into money and actually lose the stock.
Those are a couple of things I’m going to throw out that you could use. What you’ll find is ultimately that answer comes down to your own personal
preferences as to the question of how much money am I trying to make? How much risk am I willing to take? What are my personal goals and how much am I
trying to accomplish?
Price: Can I jump in there Greg?
Greg: Go ahead please.
Price: I just also wanted to add. It’s a good question Pam. Part of it goes back to in addition to your goal on your return is also saying how much
stability, basically do you want to be more of an income generated cover call seller or do you want to add some growth potential in with the income?
Obviously if you just want to generate maximum income you’re going to want to sell it pretty close to the strike or just a hair give yourself just the next
strike above where you’re at right now. The stock is at $49.50 and you sell the $50 call but if you think that like in the OIH example you’d think it’s
going higher. If you sell at $51 call then you’re only getting $0.50 rather than a buck. There’s that give and take.
If you sell a little bit further out you get more of a growth plus income portfolio. In these markets I tend to encourage people to start with more of an
income focus build a cushion selling a little bit more premium first even though yes you’re going to give up some of that upside but once you start to have
some of the markets money to play with, then you can start to get a little bit more aggressive. I wanted to also say Greg is spot on when he talked about
how you test that first move. Then sometimes the danger there is now you think that all trees grow to the sky and therefore that it continues to go. I saw
it with a lot of my buddies in Apple last year where they have seen the stock go, made some good calls from $400 to $700.
I was already out of the stock a little too early and I was saying, “I don’t know if this thing can keep going like this. A lot of high expectations.”
They’re like, “You’re crazy. It’s going to $1,000 a share from $700.” We know what happened. It went from $700 to under $400 and now has started to recover
in the low fives. Bottom line is you never want to drink the kool-aid. To me that’s the attraction of the tactical analysis or the fundamental analysis is
that fundamental matter in the long haul. In the shorter haul where a lot of these trades are being made for options traders is the technical momentum and
the technical structure of the chart is going to give you a much more objective reading about where the money is flowing right now.
Yes, you might say Apple is still fundamentally undervalued and it should be valued at $1,000. That’s fine and you can take a long term view on that with
either stock or long term or like leads options if you have a view of where it’s going to be in two to three years. Right now that doesn’t help you from
the fact that it’s in a technical vary months of a trading range based on the percent arm even though it’s improved from where it was over the last 6 or 12
months. Bottom line is it’s still in that no man’s land where you wouldn’t want to be taking any strong directional view in the very short term based on
indicators like percent arm. Eventually that will change and we will adapt and change with it.
As I alluded to earlier options are a leverage instrument whether you’re buying them or selling them. Your job as an options trader or as an intermediate
term options investor is to make sure you get your timing right so the wind is at your back. It’s a lot easier to float with the river’s current than to
swim upstream. My experience has been that. That way it prevents you from getting that blinding optimism or if you’ve been on the wrong side of it during a
down trend phase, throwing in the towel at worst possible time before the stock recovers, it’ll keep you in the sweet spot where the stock is in a good
trend phase. You see the move that it had for example late July on Apple as it was just starting to improve.
We got a little bit of that but it was below the 200 dice we were a little concerned with this last move in October, caught a little piece of that into the
latter part of October and then that stopped out early November. Right now it’s just at the top of the range, couldn’t follow through. It’s stuck in our
view despite what Mr. Icon will say or Jim Cook will say or any analyst will say. It’s going to take some more follow through to the upside before we get
our next confirmed by signal on it. Bottom line is just echoing Greg’s point that define your goals in both return and also in how much risk tolerance you
have for the particular strategy.
I know we want to get over to credit spreads so I’ll hand it back over to Greg as we start to Segway into that strategy as well.
Greg: Let’s jump right there then. In fact let’s go back to Facebook to compare, I almost said Apples to Apples while the Apple’s chart was up on the
screen. That would have been good. Let’s compare Facebook to Facebook. A credit spread trade is a trade that is just using options. Credit spreads in
general are just in reference to any type of trade that involves two different options the one I’m buying one and selling … It’s not always buying one. I’m
buying options and I’m selling options usually. It’s not always an equal number. The idea behind the credit is that I actually generate income from it.
When I’m looking at credit spreads, I typically try to involve technical analysis.
As Price mentioned, that’s a very important part of your due diligence. The fundamentals do determine your long term but the short term is driven by the
charts. To me when I’m looking at a credit spread trade I want to air on the side of probability. Some traders will be a little bit different than me and
they will say no, I want to generate the maximum amount of profit that I can from every credit spread trade but for me I would much rather air on the side
of probability rather than profitability. One of the ways to do that again is to look at the charts and determine a former high, maybe a resistance level
and maybe a former low a support level and then try to structure a trade with the idea that the stock is going to stay as Travis showed inside of this
This actually I wasn’t considering an iron condor but that actually might be the best setup right now for Facebook considering it does have a defined level
of resistance up at about 54 and a defined level of support at about 42. Whether there’s any premium in it or not, I don’t know. I haven’t looked at it yet
today. Again the way of structuring a trade … Sure there is. Here again is your December trade. I will say this, when I first started doing credit spread
trades not only were they more difficult as Price alluded to because the commissions made them harder to actually work but for many stocks the narrower
strike prices you had were $5 spreads. Some of them if they were low price stock you get $2.50 strike prices.
These advent of $1 strike prices on stocks that had high volume in open interest you can see that the bid asks spreads on most of those options are
anywhere from a penny to $0.02. What this makes for you and I is a very tradable accessible type of premium because number one, our commissions are
relatively low and we can do relatively low trades and still generate some decent premium. Now that I just went on a ramble, what were my strikes on the
upside again? What was my resistance level? Is it $54? Sorry in my mind it’s telling me … We did hit a high of $454. We don’t specifically have a $54
strike price but we do have a $52.50 and a $55. I actually think that … Giving me an unbalanced risk reward. I’m still okay doing that one.
We’ll see what the trade actually looks like. We’ll try to balance it. The spread I’ll look at doing is a bear call spread up on top selling the $52.50 and
buying the $55 for about a $0.25 credit. That minimum itself may not be a great trade but we can always look at it and say let’s look at profitability,
let’s look at probability and let’s see whether we’re willing to do this trade or not. I actually look at that and say, that’s an 84% probability of
maximum profit. An 85% probability for any profit since we calculated my breakeven at 52 50 and my maximum profit there is an 11% return on investment in
30 days. That’s actually not a bad looking trade in on itself. 11% return in 30 days with an 85% probability of it actually working.
Again, you may look at that and say I’m still not willing to take that type of risk. This is too volatile of a name, and that’s fine. Again this comes back
to you as a personal preference but some of you look at this and say, I love to use the leverage of options use the charts, my tools to help me create that
probability at a higher level and then I’ll use my trade and risk management to either help me hit my returns or manage my risk if I’m wrong. I’m actually
pretty comfortable with this trade right here. In of itself just to bear call spread. Again, it’s a bearish call vertical that I’m selling and it’s going
to give me an 11% as long as Facebook stays below $52.75 between now and December’s expiration.
How can I enhance the trade a little bit? Let’s complete it and go to the RN condor side. If you click on edit strategy I can show you the last little
piece of it and then I’ll give Price a little bit of time to give me your theory on the credit spread trades and how you use them and why. The bull put
side I want to do down below support. Remember support was down at $42. Let’s go sell the $42 strike and we’ll buy the $40. I don’t think … It’s going to
be a little bit imbalanced here. It’s not going to be a perfect looking iron condor. As you can see my legs are a little lap sided because I don’t have the
exact same spread on each side. I have a $2.50 spread on the call side and a $2 spread on the put side.
It’s relatively close. In this case you can see I’ve increased my ROI. Now instead of making 11% return I’m going to make 25% return but my probability has
gone down. I have to have the stock say between $41.50 on the low end and $53 on the high end which is only about a 65% return of hitting my maximum
profit. I’m betting that the stock is going to stay inside of a channel rather than just staying below a certain level. I can look at this trade and make a
determination. Am I willing to do this? 25% in a month, that’s a phenomenal return. Could I get that every single month? Probably not. Right now in a month
that Facebook doesn’t have earnings, they’re through the Twitter IPO, if I have my levels of support and resistance and my trigger points as to where I
actually close the trade out, this is a trade that I might be willing to go out and do.
Taking advantage again of the current pattern that Facebook is trading in inside of this channel. That’s what you’re trying to do with credit spread trades
is taking advantage of a pattern that stock is existing and you’re selling options with the idea that your pattern definition is going to hold its case.
Price tell me how you use credit spreads and whether it’s part of your trading arsenal or not.
Price: Absolutely Greg, it is part of the arsenal. I think you have to again, the bias towards the shorter term options, the one month or less options
because you’re still benefitting from the decay like you showed there was the December options and as you showed with that what could happen going forward
that if you sell too far out in time you’re exposing yourself to a lot of potential risk not just the earning period in the next quarter. We can see how
that cone if you will goes out to about $52 or down to $40 as we go forward in time that’s obviously getting past the December expiration. We want to try
to not have that exposure out there for too long a period of time.
One of the things I love about credit spreads is as you showed if you’re right 80% of the time, 8 out of 10 times those options go off the board worthless
which you want and therefore you don’t have a commission on either side to have to adjust or buy back the trade before the expiration. That’s another
benefit of credit spreads compared to some other strategies like debit spreads etc where you have to unwind the debit spread. I believe that it’s a
function of making sure that again you’re trading the right type of stock that you’re comfortable with, the volatility of that stock.
If we could go back their Travis to the Facebook chart, for example nobody would have probably expected after Facebook’s vouched IPO last year where it
went from $40 down into basically a 50% hair cut you just go out even over last year. You see what an incredible comeback for a stock that was basically
considered to be toast for most of last year and much of the first half of this year. You see the percentage in July gave us the clue that we were starting
to break out and follow through. We tried to break out in April and May, we couldn’t get followed through but we got to follow through right before the
Even if you miss the earnings gap you’ve got a nice retest back there in early to mid September, we got that violent one or two day pull back. That’s how
up trends by the way folks, up trends will typically have slow and steady progress higher and when they do have corrective activity go off and times pull
back violently. You’ll see how they get that quick little pull back there in September. You get a quick, a little one day pop down in October, day and a
half pop down and then it snaps right back up. From that perspective, that’s the type of thing that I like to see is that violent shake down.
That’s a great chance when you’re talking about credit spreads to put the trade on. In this case instead of buying a call you could do the put credit
spread there in September or mid October where you’re getting that good reasonably low risk entry point in my view and doing it from there. I like what
Greg was going with right now, it’s oversold but it didn’t follow through so it’s the bottom of the range but it still could break down and then retest
that $42. Looking at this chart from a technical perspective I’ll probably bet that $46 holds and we bounce but it’s directionless comparatively. It’s not
a strong trend either way.
That’s where your iron condor starts to make a lot of sense. If we can apply Travis the indicator set we look at the [bolonjer 00:51:34] advances for
something simple, I use my acceleration manager [bolonjer 00:51:37] advances. Let’s just use [bolonjers 00:51:38] because people know those well as an
upper panel indicator, we’ll use the classic 20 day [bolonjer 00:51:47] and two deviations and we’ll just plot that for a second. We’ll zoom in a little
bit to see the last three months activity just so people can see it right now. What a [bolonjerman 00:51:57] does it is plotted in this case we’re on a 20
day moving average and it’s essentially saying if you tag the lower band like you did in late October, that should be some support. We’re near the low end
of that band in light blue. The upper band is more of the likely expect to resistance.
Interestingly enough just like what Greg was drawing out, look at where our upper band and lower band are. Maybe a couple of points tighter in that longer
time absolute high, low range. We’ve got a range for about $44 to $52. Usually you probably want to go if you have to shade it one way or the other you
probably still want to sell your short legs just a little bit under the band. You’ll probably be thinking about $44 here rather than $45. It’s $44.65 is
the lower band. I’d probably be going down to this $44 strike and then up probably to maybe like the $52.50 strike, it looks like maybe 53. Pretty similar
to what Greg came up with drawing the highs and lows based on what the [bolenjer 00:52:54] band is telling us.
The only caution I would say is when you see those [bolonjer 00:52:58] bands tighten up where they get … If it’s gone through a slippy market where you’ve
seen if you look back at the last year Travis we might see a couple of those spots where you get that contraction and volatility and see it actually
contracted a little bit right in front of the earnings explosion where basically early July those bands were pretty tight. What [bolonjer 00:53:22] would
call low a tie [bolonjer 00:53:23] with and that was right before a big volatility explosion. You don’t want to from a technical perspective sell options
when volatility has contracted so much that then you’re potentially setting yourself up for a coming volatility explosion or expansion.
Bottom line is that yes, define the environment you’re in. If it’s up trending look for your put credit spreads and any pull backs. If it’s down trending,
what about a stock like if you’re looking at JC Penney here recently. It’s coming back a little bit but JCP has been in a strong down trend this year. You
can see … We bid at a bull market this year, what’s wrong with JC Penney? Obviously their fix play strategy didn’t work out. Booted the CEO and been
struggling for direction sense. He’s trying to actually get over bought here but it’s below the long term moving averages so I wouldn’t touch that one on
the bull side with a 10 foot pole.
Bottom line is when you’re looking at, if it’s in a down trend like it was in back there in late September or even back into August, you’re looking at
those periods where it’s was grinding lower, that’s why you’ve got to be careful about betting the bottom [bolonjer 00:54:32] band with hole it’s in a
strong down trend like that but you can balance like it did in early September. We’re close to the balance now. [Inaudible 00:54:45] it’s a little bit
strong here but basically we’re up into the 50 day resistance so you can be saying it’s not a very high price stock you’re probably going to get a tone of
premium. We’ll just look at it for a second on the options. At $9, I usually would be looking for things that are over $20 but just out of curiosity you
can see volatility is extremely high here.
What’s going on? Maybe this is one I would avoid because maybe there are some implied [vol 00:55:14] that’s two steps four perhaps a takeover. You see in
stocks like Blackberry where it got a leverage buy out to go private. Maybe there is some of that concern in the wings of the stocks too low right now. You
can see if you’re betting on it reversing back down if you were feeling aggressive and selling the $9 strike calls you better be careful that if you sold
the $9 call and bought the $10 call, you better be careful that it’s not in some of a takeover situation. That’s what I’m saying, I probably would just
move on because that volatility is a little bit higher than I want to mess with.
You might think that implied volatilities aren’t so high; you should love that because you’re selling an option here but the problem is you’re buying
another option. You can see if you sold at $9 it’s at 90% volatility. When you buy the $10 it’s at 90.6% implied volatility. You’re not benefitting per say
from that high volatility of the premium because you’re selling one, you’re buying another. That’s not a very big play here on the volatility being high.
I’m more worried about event risk in those situations. Let’s jump back out of that for a second. Let’s jump over to the SPY options just for a second
because SPY is not the most liquid vehicle out there.
You can see pop up the volatility on a consolation you’ll see, looks relatively low especially in these weekly options over the next few weeks. You see
it’s gradually projected to start escalating again as we move into 2014 and throughout the year. That might concern you a little bit thinking I really want
to sell options that have a volatility of under 10% at the end of November. It’s probably a valid concern there but as you look even into the December
options, the monthlies are about 12%. That’s back in line with where … That’s what we’re looking at right here. It’s the same thing that Greg just went
You would go through the … If we go look at the chart for a second first we say, well, what’s our potential band that we’re working with right now? You can
see we’re into some resistance at that upper band here at $180. It does not guarantee it’s going to come back down though there’s times where it will keep
on drifting higher and suddenly the trend is up. You can see that lower band is at $174. We’ve had some support around $175 off of that recent pull back in
early November. I’d be pretty comfortable without thinking that $174 on the downside and then give myself a little bit more breathing room back up.
Again like Greg was talking about the iron condor can be attractive but you’ve got to be careful with selling a call spread in a strongly up trending
market. We’ll go back to the options for one second and then I’ll hand it back to Greg here momentarily after we look at these options montage for the
December monthlies in the SPY. You say well, if we were maybe getting one more strike in there on the put side there Travis, we were selling at $174 put,
it’s at $107, $106 bid right now, there we go and you’re saying if you go out a couple of points below that you’re thinking if I bought the $172, that’s
giving me back $0.77.
I could do that for $0.30 on one side and then say what if I gave myself some breathing room just looking at the quick Travis is helping to set up a
customized spread here and saying if you sold the $174 put, you bought the $172 just as the put credit spread, you say that’s giving me a $0.30 credit,
then I’m saying that’s a two point risk minus the $0.30 means that my margin risk will be about $1.70 of potential margin there. You’re saying that’s
giving me a return of 120%. The attraction of the iron condor if we then add in the … Say you’re thinking maybe we get to $18.50 on the SMP about $1.85 on
the resistance for the market about five points higher or almost six points higher here, these options are not very expensive but bottom line is we’ve buy
say at $1.87.
Now because of that what you’ve done, again it’s a little bit, we’re still saying it’s maybe just a little bit good to give ourselves a little more room on
the up side at that round $1.85 number but now what you’ve done is the options by the expiration can’t go in both directions. They’re going to have to go
one way or the other. You have widened out your total amount of premium collected. That also reduces typically your total amount of margin you’re going to
have to put out. You can see here we’re getting about a 65% chance of any profit. We’re looking at about 30% potential return on that margin and we’re
giving ourselves a little over about five points of wiggle room on each side for about a one month whole.
You’re saying about 3% in the SMP will the market rally another 3% plus over the next 4½ weeks? That’s a consideration you have to say how bullish are you?
Given that I’m expecting that we are in a bull market but they will see a retest, a pull back over these next couple of weeks then basically if we get that
pull back that’s how you can also manage the trade a little more proactively and say maybe into the next pullback I might be willing to buy back my call
credit spread leg within the iron condor and say that’s the pullback I was expecting. In case it rockets back of off there for a final push in the end of
the year, you can sometimes further proactively manage these credit spreads and take some profit off of one side then let the other credit spread work.
A lot of details there, a lot of things to consider when you talk about iron condors and credit spreads but it is a value added strategy to give you some
additional opportunity and to control the amount of money you would have to put up as margin or in this case as we said cash secured. You don’t want to
just go selling naked options and have a huge margin requirement or thus a huge cash requirement if you’re going to do that, if your broker will let you do
that in your IRA. Your broker will let you do credit spreads in your IRA because it doesn’t require so much cash and iron condors the same way. You’re
reducing the amount of capital you have to put at risk on any one trade and that’s going to help you dramatically here. Greg that’s a lot of the reasons
why I like credit spreads and iron condors as well.
Greg: Price, it’s been a pleasure and Travis. I know we’ve got an off run … There were seven questions that were asked about managing risks sounds great,
what do I do in case of a black swan event? What are your thoughts on using protective puts on covered calls? Travis I know you’ve got the details about
this but I know part of that was going to be followed up with another potential class that we were going to offer for these people to attend. Trav, I’ll
turn over to you.
Travis: As a follow up again we talked a lot about the instrument the covered call, credit spreads, we’re just going to do another free follow up webinar
in this. It’s going to take place this Thursday at 12:00 Eastern. You don’t have to worry about hustling up and signing up immediately. We are sending an
email out with the recording of the webinar. It will include a link to sign up for the free class. You can always give us a call at that number and sign up
with us as well. We’ll get you out registered. I think we also send out a registration link via the chat room as well. You can look to see if, that
registration link is in the chat room, you can go ahead and sign up. Again, this is just another free class. We’re going to dig a little deeper into the
covered call on Thursday for all attendees today through your chat.
Also I recommend as well, go check up what Price has got over bigtrend.com. I know he’s got a number of different newsletters over there as well as
educational services on technical analysis and applying that with the options, a lot of what you had today. Go check that out. You can give them a call as
well. You give Price to call and he can get you set up with something over their operation as well. Again, I want to thank everyone for coming out today.
It’s an absolute pleasure to put on these events. I hope you found this useful and beneficial for your own trading needs both Big Trends and OptionsANIMAL
look forward to seeing you at some of our future events. Price, Greg, I thank you both and I wish everybody a great week at trading. Thanks folks.