Price Direction: A 50/50 Probability?

If you buy into the idea of probabilities and statistics and the fact that direction is a 50/50 probability. Then you would also agree that with enough occurrences that the up days vs down days should be about 50/50 (same concept for weeks or any other time frame). In the quick analysis I put together below it is evident that direction on any given day or week follows a normal distribution and JNJ’s current price run to the upside is an outlier way out on the right tail of the distribution curve with 17 consecutive up weeks.

Analysis Based On Weekly Closes (10 year data set)

Just on up weeks vs down weeks alone we are looking at a 5-6 standard deviation move which only happens 1/100 times. This coupled with the fact that price to the upside has also made similar moves away from the mean is what makes this trade so attractive. It’s just a numbers game.

Good Luck Trading!

In The Money Trades


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Anatomy Of A Trade

Last week for all of you who are following I finally traded my first futures option on the /ES. To bring everyone up to speed before I go further let me remind you what I did last week. It was last Sunday night (4-21-13). The /ES was up 9 points in the Sunday session and since it was the only thing that was tradeable I was interested in selling a call to serve two purposes:

1) Scalp 4-5 points on a pull in as we rolled into the normal US trading session. I thought there was a chance that the futures would reverse and allow me to possibly scalp some profits. I do need to add that we were within 1/2 a futures point from getting filled on the scalp.

2) To initiate a short position on the /ES at all time highs. Since I sold the short 1,555 call for 32.5 points it would get me an effective short of 1,587.5 only about 4 points away from all time highs.

The markets irrational move to the upside has continued as investors poor money into anything with some possibility of a return of more than they can earn in money markets or bonds...which is much closer to zero. As I write this the /ES is currently trading at 1,586.50. But lets update you on what I have done with this trade as it has moved against me.

First let me tell you that the above risk profile shows you the aggregated position that I now have in /ES. As convicted as I am in this trade I have to realize that markets can do crazy things and I am not willing to be a hero as I am always trading with longevity in my mind. So as my break even on the short call began to become in danger I had to do the prudent thing and define my risk to the upside. So lets outline the different adjustments I have made to this position:

1) I sold 1,415 put @ $4.10

2) I sold 1,550/1,530 putspread @ $4.50

3) I bought the 1,615 call to spread off my risk to the upside @ $4.35

All in all you will see that on a net basis I have collected $36.75 in option premium. Now look we have 53 days left until the expiration of these options. Looking at the risk profile you can see that I have a peak in profitability at the 1,550 strike price. So other relevant stats:

Downside Breakeven: $1,398.50
Upside     Breakeven: $1,592.00
Profit rage: 1,398 to 1,592 = 194 point profit range (with short bias)

1. Profit in 1,415 - 1,530 range = $837.50

Margin Requirement: $2,873 (risk capital)
Max Gain: $1,837.50 (at $1,550 /es, potential return on capital of 64%)
Max Upside Loss: ($1,162.50)

I know I have put out a lot of numbers above, but these are the things I am watching. You will also notice that I left my risk to the downside open as we are so far away that I am not concerned with the downside at the moment. If we move 175 points, I may look at protecting the downside...but that is not likely in my opinion.

Until next time I continue with my bias to the downside. The risk/reward at all time highs favors playing the market with a short bias. I will continue to update you on this position and what I do with it.

Good Luck Trading!

In The Money Trades

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JNJ Finishes Up 17th Consecutive Week

I really don't have to say much here, as many of you that have been following the blog know I am short JNJ with conviction. We made another new high this week and closed up for the 17th straight week in a row. Call me crazy but I am sticking with my bet that this thing is going to have a down week. And I honestly feel that the higher this thing goes the harder it is going to fall. My first target is $80/share and as low as $76/share.

I had previously mentioned that I was going to roll my $85 puts out a month if I did not get the move lower I was looking for, but after watching the price action the last few days of this week. I decided to keep the May puts in place with 21 days to go until expiration.

We will see what happens next week.

Good Luck Trading!

In The Money Trades

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Trading Commissions...The only cost to trade!

The barrier to entry to trade these days is so low with firms providing data and trading platforms for free to all customers. There is no reason why any retail trader should be paying to use a platform or receive market data feeds. For online brokers, this is now a cost of doing business.

The only cost you have as a retail trader is commissions. And even these have been commoditised over the last decade. Now that is not to say that brokers are not going to try to squeeze a higher commission rate to the uninformed trader. I have talked to a lot of new traders lately on the topic of commissions and the fact that they are negotiable.

As many of you know reading this blog, TD Ameritrade is our preferred and recommended broker for all traders. I have been with Interactive Brokers and TradeMonster and it does not even come close to what the ThinkOrSwim platform offers. With that said I want to share a few insights on negotiating your commissions.

After helping a few traders get their commission rates lower of the the last few years I have found the sweet spot to where TD Ameritrade is willing to start a new trader until they build up some account activity.

1) $1.50/contract for option trades (no minimums)
2) $5min or  $0.01/share for stock trades ($5 for 100 shares, $6 for 200, etc)

If you are opening up a new account with TD Ameritrade you get your first 60 days of trading for free, so I would wait to negotiate the commission rate until after your free trades are up.

Over time as you become more active you can go back to the negotiating table to get your commission rate lowered on the option trades and have them remove the $5 minimum for the stock trades. I personally have a $1 min or $0.01/share.

Good Luck Trading!

In The Money Trades




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Who buys at all time highs???

As I write this post this morning the markets are back within arms length to ALL TIME HIGHS! I really don't know how you can buy all time highs. If history tells us anything, buying all time highs whether in the stock market or in the housing market or any other market for that matter is a losing trade. But we have to remember that the markets can stay irrational for longer than expected. If you don't get too big for your pants, you can weather the storm.

In continue to be a difficult environment to sell option premium given the super low volatility environment. 

Positions: Short /ES, Short JNJ, Short GME, Long CLF, Long NLY,

Markets at all time highs are not great on my portfolio but I do have 2 pieces of saving grace:

1) I have positive theta

2) I am long CLF and that is offsetting negative P&L as we move higher.

Good Luck Trading!

In The Money Trades

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Stay Small, Stay Out of Trouble

To expand on my post from yesterday about patience. I want to talk about a very important element that allows patience in a position, and that is staying small. If you trade too big RELATIVE to your personal account size, you are likely to be forced to exit the trade before the trade works in your favor. Many trades myself included have all experienced the pains of trading a position way too large given our account size.

There is this predisposition out there that the only way you are going to make money in the financial markets is if you are trading 10 lots of options and 1000 shares of stock at the time. This is not the case, and if this is your mentality you will likely ensure yourself trouble. We have all read the stories of traders blowing up their account.

I personally think a good rule of thumb is to not risk more than 5% of your account value on any one position.

Good Luck Trading!

In The Money Trades


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Sometimes Patience Is Hard

Sometimes the hardest thing to have in the markets is patience, I know this all too well as when I first started trading my attention span was that of a rock...thats right I was all over the place. But know I find trades that I like and I extend my duration (thus my patiences). I have seen huge improvements in my trading by doing this, but in the short term this sometimes means some pain. Luckily with options we can trade around a position to reduce cost basis (whether short or long).

The biggest thing to remember if you are going to trade like this is to TRADE SMALL. You can't be a gun slinger trading like this. If you trade too large in the context of your account, you will never be able to stay with the trade long enough to see it work out. And you risk blowing up your account. This is probably the biggest change I have made over the last 5 years trading, and thats my trading size. I use to think that I always had to trade in 5 and 10 lot trades. I almost felt ashamed by trading a one lot. But not anymore.

I have also realized that there are certain strategies that I am comfortable with in individual stocks and others that I will only use on indices. You have to find what works for you.

This post was inspired by my current position in JNJ and a comment that I got on my short call position on the /ES. I was asked if I was worried about the unlimited risk on the short call I sold on the /ES. The answer is NO! That does not mean however that I am unaware of the risk to the upside. But I am comfortable with the position due to its size and the different strategies I have at my disposal to trade around the position.

JNJ Testing Patience

This chart is starting to look pretty parabolic and so strong for a consumer staples company. We are working on putting in the 17th consecutive week to the upside. I have been short this name a few times over the last few months and cashed in some profits early on. But then a week and a half ago as I analyzed the chart a bit further my conviction to the downside has grown and I got short naked $85 puts when the stock was trading around $82-$83/share. As I write this JNJ is making another new high at $85.68. The up move is starting to look like a strait line and the only thing I can liken it too is throwing a ball up in the air, eventually the energy your transferred to the ball as you through it up in the error runs out and then gravity puts pressure on the ball to fall back to earth.

I am committed to seeing this position through and because I have stayed small I can have patience and I feel like the move is right around the corner. We all know that when it comes to price movement, we take the escalator up and fall off a cliff to the downside. I am looking for a drop in price and uptick in volatility in JNJ in the coming sessions. As you can see from the above chart my initial price target to the downside is $80/share, but I do think that $75 is possible. I will also remind everyone that has been following this position that I do have plans to roll the puts out a month if we don't get the move I am looking for this week.

Lastly I would like to mention that because I chose to use puts to define my risk I have lost less on my long puts that the stock has risen if I would had just been short the stock.

Good Luck Trading!

In The Money Trades

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Trading Options on /ES for the first time

So Jason and I have talked about trading /ES for so long...and one of the big benefits that I have thought ever since he started trading /ES is the extra trading time that comes with trading futures contracts. For those of you that don't know, the futures markets only shut down for 45 min/day during the week and is closed on Friday through Sunday evening before it opens back up. There are a few times when I see markets trade on a Sunday afternoon that I would like to put some kind of position on going into the open on Monday. Well I finally executed a trade in options on /ES.

It feels like the steam has been lost to the upside in the /ES for sometime and I have a short to neutral bias. So with the /ES up 8-9 points last night (at high) I decided to sell a call for almost 32 points (was ATM option). I am looking to make about 4-5 points on this option. But I sold it with the mindset that I would be okay being short at my breakeven price which puts us at the highs for the markets around 1590. Otherwise I am happy to make the 4-5 points. So I really look at this as two possible positions:

1) A scalp for a nice overnight trade or a swing trade.
2) A nice short entry at all time highs...would rather be a seller than a buyer at these levels.

I do have to admit however that I was apprehensive to execute my trade last night, not because I was not comfortable with my trade idea, but because it was the first time I have traded this product. With that said I did not sell the top, we were up only about 6 points when I executed my trade.

I have a limit order in to make about 4 points on this short call in TOS and will let that work this morning. A few more points lower on the /ES and it will get filled. It feels likely that it will get filled this morning based on how its trading (down 3 points as I write).

The only caveat that I would give to traders venturing into a new product is to make sure you understand the product and what price movement means to your P&L. I had to refresh my memory that each point in the /ES is +/-$50.

Good Luck Trading!

In The Money Trades




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JNJ Finishes Up 16 Consecutive Weeks

When you look at a weekly chart of JNJ it has had an amazing run up. It has finished higher 16 weeks in a row. I started getting interested from the short side around $81-$82 share. At first I got short via some put spreads and on a day last week we had over a $1.50 sell off in the stock where I cashed in the put spreads for a decent return of about 30% on total risk for a few days of holding. After watching JNJ close up another week (making it 15 consecutive weeks), I saw the opportunity to put the same putspread on for close to the same entry price as the first time. And too my amazement JNJ continued higher, at some point in the middle of this week I closed the put spread for a loss and bought 6 ITM puts @ $85 strike price. My conviction has increased and each consecutive week higher adds another level of confidence with the probability of decline more likely.

JNJ has gained over 21% in the last 16 weeks with no real pullback in price...at least not on a weekly basis. I think the first weekly close can get us down to the $80 price level and that is my first price target. $75 is in the realm of possibilities. With only 27 days to go until my put options expire, I will be looking to roll them if we do not get the move I am expecting this next week. Another weekly closer higher would have consider rolling up and increasing my size to 10 contracts. The higher this stock goes relative to its parabolic formation, the higher reward I see.

Good Luck Trading!!!

In The Money Trades

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So you wanna be a trader? Be prepared!

This guest blog was provided to us by Bogdan Giulvezan (BinaryOptions.com), who has been trading both Forex and binary options for the last few years.

I don’t want to sound pessimistic, in fact I’m one of the most optimistic guys I know, but I’ll tell you right from the start: it’s gonna get rough out there and no matter who you are, no matter how well trained you are, the market is going to bring you to your knees…and that’s when winners will choose to get up and losers will walk away. Who am I and what’s my right to talk? Just a guy who weathered the storm and chose to keep on going.

Losing…That’s the first step forward.

I had my share of losing and I learned the hard way that success in trading is not achieved overnight. Like a fool I failed to see the difference between luck and skill and I thought I am good…in fact I was just wrong. One of the things I didn’t realize in my early trading days was that I will lose some and win some. I naively thought I will enter the trading game and hit it big, without ever losing…then the first loss came along; and the second… and they kept on coming. My confidence started to shake and I wasn’t sure of myself anymore. I couldn’t make a sound decision anymore and probably a deer in the lights of a speeding car was more determined than I was…all because I wasn’t prepared and I didn’t know how to deal with defeat. Or rather, I didn’t understand at the time that loss does not equal defeat; it’s just a part of trading and a step forward because it will make you see things you were too blinded to see before.

Give me your best shot!

It is no secret that the psychological aspect of trading plays a big role but maybe sometimes we fail to see just how big that role is. I often compare a great trader with a great boxer. Bear with me and you will see where I’m getting at: no matter how good a boxer is, he knows for a fact when he gets in the ring that he will be punched in the face. He will take some and give some, but after the first couple of punches he takes, he doesn’t start to question his skills or his strategy, he keeps on fighting because the punch he just received is no surprise to him…he knew this will happen even before he stepped inside the arena. In other words, when you see something as a distinct possibility and prepare for it, you are never caught off guard and you carry on with your plan. Just how the great boxer knows he will have his hand raised when the final bell rings if he follows his plan, a great trader must have the same mentality: ok, I will lose some, but my overall balance will be positive if I keep on track. And if I think of it, we have a major advantage over the boxer: he cannot control how hard his opponent will hit him, but we can control how much we want to lose on a trade. Cool advantage to have!

Wrapping it up

To be honest, I started writing this article because I read Jason’s article “How I blew up my account” which made me remember some of my mistakes (yes, I have plenty) but it also gave me a feeling of confidence because I saw how somebody can overcome adversity and still manage to move forward. The ability to do that lies within us; losses don’t have to make us stop and just like George Soros said, “It doesn't matter how often you are right or wrong - it only matters how much you make when you are right, versus how much you lose when you are wrong."

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Where we are on the SPY

The SPY continues to grind its way higher on the back of investor complacency. As you all know I have been a devoted believer in the rally until recently. We got my minimum expectation of 30 points lower on the SPY and during yesterdays session we traded right back up to highs on the SPY and near lows on the VIX. So apparently there is no fear in the market, but it still just does not feel right. I don't have a huge position on, but with the market up yesterday I was short an equivalent of 60 deltas and was actually up $220 on the day.

Notice in the above chart the range that I drew in blue. Yesterday I decided to put a very wide Iron Condor with December expiry. And those blue lines represent my breakeven points.

Last week I got short JNJ via some putspreads that I covered on Monday with JNJ trading down over a buck. Well yesterday I had an opportunity to put the same trade back on around 10 cents higher than the original trade. This thing is up 15 consecutive weeks in a row and still has a reading of over 81 on the RSI on a weekly chart.

I am only using about 20% of my capital and am going into this mornings open with a short delta equivalent of short 155 shares of SPY.

Good Luck Trading!

In The Money Trades

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Long Vol in Low Vol Environment

On Monday I posted that I moved to 95% cash and that I thought short term that we could see some weakness in the markets. I also added a comment to that post that because of this thesis, I decided to get long volatility via the VXX. I sold 5 May '13 puts @ $1.24 with a $19 Strike price.

Above I have a 4 hour chart of the VIX. The thing I want to point out is that the VIX has been below 15 for all of 2013 except for 2 days. One of those days was the 35% spike on February 25th. I have 44 days til expiration to see a spike in volatility and plenty of time for theta to work for me. My goal is to capture about 50-70% of the premium I sold.

My break even is $17.76 and I would look to roll if we actually continued lower towards my break even before I close the trade. Remember when we had the spike in VIX in February I was short vol with a covered put position in the VIX. At these prices I don't like that trade as much, which is the justification of being long.

Remember I took off the VXX, I think last week for most of the max return with plenty of days til expiration.

Good Luck Trading!

In The Money Trades

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Why I am still short the ES

I'll be honest and say that I haven't seen an ES quote in about ten calendar days. I have happened to catch some general market numbers when I'm passing by TV screens at lunch the last few days, I know my short is looking ugly. But here is why I'm still short:

1. Roughly 13% of the current total value of the S&P  has been gained in the last 90 days, that seems a little extreme. Those types of moves rarely come with no pullbacks. So if I wasn't already short I would be shorting here, this really is the main reason for continuing to be short.
2. Markets can only do three things, go up, down, or sideways. The odds of these three options are supposed to be random over the long haul; and in 2/3 or 67% of those outcomes, I can make money. Though the market has done nothing but go the wrong direction since my initial short back in the last week of December, I've still managed to cost average up my position by 40 points. I know from experience what I can do in sideways or down markets.
3. From a trader's perspective, you can't lose 90 days in a row and then walk away, at least I can't. That's equivalent to selling your longs when the market crashes simply because you can't stand the pain anymore. But I'll be honest and say this has been a painful short and the reason why I'm only passively paying attention right now. I'll know when volatility is back. You can't wait for the market to turn ugly to put on a short, but again that's just this biased trader's perspective. I will also admit that at this point the goal has been modified to reclaiming a large part of my losses and no longer trying to break even, that will have to come in the long run and not this particular trade.

I rolled my two short contracts a few weeks ago and have yet to update my spreadsheet. I don't even know my current cost average. I know the rough number is I'm down about $9,000, so with two contracts a break even is 90 points away. That's actually not far fetched if there is a correction, but I'm not waiting for 90 points to pull the plug. If we got a down move or return of volatility I anticipate bringing in one contract well before then and attempting to trade around. If I get unlucky and pull in a short and the market continues to fall, then I've still got one short on.

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Is Volitility DEAD? Will the market ever trade lower?

Anyone that has been reading this blog over the last few months knows that I have been bullish for all of Q1 and have been projecting a bullish story for all of 2013. Overall I continue to be bullish for the year, but short term my opinion is being challenged. The S&P 500 finished Q1 up 10% on the year and volatility has basically traded near historical lows for a big part of the quarter besides the 35%+ spike in February.

This morning I happen to be watching the SPY trade up to test the $157 level. But it failed and reversed course. This is one of many instances of the last 1-2 weeks where we have had a pretty large reversal in the market. It feels like a tuggle war is taking place in the markets.

The VIX is popping 10% as I write this.

Volatility has been dead, but there is a certain level of complacency that is making me a bit nervous in the short term. I am starting to believe that we could see a correction lower. I am initially thinking that it could be in the tune of 30 points to start. I would re-evaluate if this occurs.

With that said I have actually lighted up on a few positions that were pretty deep in the money. With 9 months to go on a lot of my positions, today I had the opportunity to close those positions for close to 60% of the gain in some cases.

Before today I was close to 95% invested...after this morning I am more like 10% invested. Now don't get me wrong, I typically want to have passive positions on. But something told me this morning that it was a good opportunity to move to cash and wait for another opportunity to re-enter the market at lower prices. So until then I will likely sit in a large cash position.

Maybe we will get a pop in volatility that would allow me to put my covered put position back on in VXX. If we could see vol back in the 20's, it may also bring some opportunities to sell some premium.

Good Luck Trading!

In The Money Trades




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