Sample 2014 Trades 1

Transcription

1 Sample 2014 Trades 1

2 Sample 2014 Trades By Doc Severson Copyright 2015 by Doc Severson All Rights Reserved This training program, or parts thereof, may not be reproduced in any form without the prior written permission of Trading Concepts, Inc. No claim is made by the Trading Concepts, Inc. that the (option) trading strategies shown here will result in profits and will not result in losses. Option trading may not be suitable for all recipients of this Training Program. All comments, trading strategies, techniques, concepts and methods shown within our Course are not and should not be construed as an offer to buy or sell stocks and options they are opinions based on market observation and years of experience. Therefore, the thoughts expressed are not guaranteed to produce profits in any way. All Opinions are subject to change without notice. Each option trader/investor is responsible for his/ her own actions, if any. Important Notice - Risk Disclaimer: Options Trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the options market. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to buy or sell options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in our training program. The past performance of any option trading strategy or methodology is not necessarily indicative of future results. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual option trading. Also, since the option trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, certain market factors, such as lack of liquidity. Simulated option trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those that may be shown. 2

3 Table of Contents The Approach to the Market in Non-Directional Index Trades 5 Semi-Directional Index Trades 10 Directional Index Trades 12 Directional Equity Trades 16 Summary.And What About 2015? 18 3

4 The Approach to the Market in 2014 First off, to understand why we traded a certain way in 2014, we had to know what the character of the market was that we were trading, and where the edge was located. If you ve watched the previous videos in this series, then you ll know that the market was showing the following characteristics: Trend: the market was in a very strong uptrend. Corrections: we would periodically see slight corrections in the price, always accompanied by an extreme V-bottom and strong rally on the right side of the chart. Complacency: the overall market was very complacent and fear was lacking, driving down options premium. As you saw in the last video, that caused us to be net buyers of premium and not net sellers. This means that we just had a different mix of strategies in our Income Pyramid as shown in Figure 1: Figure 1 We favored strategies that allowed us to buy inexpensive options, yet we continued to sell options with some changes in approach to our game. Let s show some example trades from 2014, starting with the bottom or foundational level of our Income Pyramid, with the Non-Directional Index trades.. 4

5 Non-Directional Index Trades As explained in the earlier content, the market became very difficult to trade nondirectional options strategies due to the strong trend and low premiums. That doesn t mean that we couldn t pursue these trades at all, however it did mean that we needed to be more selective and patiently wait for our edge. Let s cover the Iron Condor trade example first: Iron Condors Many mentors advise to keep playing the Iron Condor month in and month out regardless of what s happening in the market, but I think that s a poor approach when the underlying market is clearly not providing an edge. Since the majority of our trades are on these US Index ETFs, we needed to change our approach. Simply put, we needed to wait for the chart to show a high probability of near-term consolidation. If you know anything about how I view a chart, I m using my proprietary Fractal Energy approach; this breaks down the chart into timeframes that are separated by 5x from each other, and measuring the linearity of the move through the choppiness index. This gives me a high degree of accuracy in understanding whether a chart is about to go into range expansion or a trend, or range contraction or a consolidation. Figure 2 5

6 Figure 2 shows the SPY chart going into a condition with a very high likelihood of range contraction, or a consolidation. This was on November 25th of 2014, which is when I established the bearish leg of the Iron Condor at the SPY 215 level for JAN2015 expiration. This is not yet the time to establish the bullish leg of the Iron Condor; the price is too high and would create too narrow of a range for the trade. We saw the entry for the bullish leg a few days later on December 12, as shown in Figure 3: Figure 3 Note how the price has pulled down to a support level; we also know that when price does drop like this, we get the added benefit of a spike in implied volatility, which will help inflate the options premium and give us more distant vertical spread entries. You can see the net effect of this with our bullish SPY entry at the 186 level for JAN 2015, creating an Iron Condor that was effectively 29 SPY points, or 290 full SPX points wide, as shown in Figure 4. 6

7 Figure 4 You can see the huge amount of range that we had with this trade, yet we had to create this edge by the proper chart read, which allowed us to increase the range and our margin of safety. In Figure 5 you can see how this trade ended up: Figure 5 7

8 The point here is that Iron Condors in 2014 needed a very specific edge, which was to know whether the chart in question was about to enter a consolidation pattern or not. This read gives us a much stronger edge vs. the normal options trader that is usually looking at a current consolidation and thinking that it s a good fit for a trade like the Iron Condor. Unfortunately, odds are that the edge has already passed and the chart s getting ready to move into the next trend, running over one of the Condor legs. Time Spreads If the Iron Condor is running into a challenge because of low volatility, why not place a trade using a strategy that favors low-vol conditions? The Time Spread excels under those conditions. Basically, we re selling a short-term option and buying a longer-term option, with the idea that the time value of the shorter-term option will erode more quickly than that of the longer-term insurance option. Well, that s all great in theory, but there are many things that we have to get right before placing a time spread. Price movement and changes in implied volatility - both front and back options - play a huge role in how successful this trade is. Once again, on November 24th we saw a high probability of short-term consolidation, per Figure 6: Figure 6 We felt that the price would go somewhat sideways-to-down over the next several trading days. We placed a DEC/JAN 207 Put Calendar on the SPY by selling the DEC 8

9 207 Put option, and simultaneously buying the JAN 207 Put option. The overall trade was a debit, so it cost us money out of pocket to set up the trade, and we were looking to make 10% on our capital risk for an exit. Notice that just a few trading days later, the price on the daily chart (right-most chart) had indeed gone essentially sideways: Figure 7 And this had allowed us to secure our target 10% return on capital: Note also how the Time Spread secured a nice return in a much shorter period of time versus the Iron Condor. The Time Spread was probably our #1 income-generator during 2014, simply because the characteristics of the trade matched the edge that the market was giving us. Even in a hyper-trending market, you can still find short-term sideways consolidation. Now we ll move one step up the Income Pyramid to the Semi-Directional options strategies.. 9

10 Semi-Directional Index Trades As we get further up the Income Pyramid from Figure 1, we take on more directional risk so we re going to back down the capital for these strategies. Basically, a semidirectional index trade is a cash-secured, or naked put trade where we re selling puts on a chart where we WANT to be assigned the stock at that price. If we are assigned, then our job switches over to sell call options against our shares until we re relieved of our stock. After the rally of 2013, index stocks/etfs became a lot more expensive so I had to be much more selective about when to sell. The key qualification was always, do I want to OWN the stock at that price level? On January 24th of 2014, we had a nice pullback in price that allowed us to sell at a level which corresponded with us wanting to own the stock at that price, as I show in Figure 8: Figure 8 The dotted orange line corresponds to a strong balance area and the price would be unlikely to just plummet through that level; at the very least we d see a lower high set up which would allow us to sell off the stock if assigned. 10

11 A few weeks later, as expected the price rallied away from our position and allowed the option to expire worthless, allowing us to keep the original credit and look for the next entry. Figure 9 This trade produces low, but steady and low-drama returns. This example produced about a 1% return on our capital during this timeframe. We could have picked up a much larger return at the cost of taking on more risk. Again, the option was selected at the level at which I was a willing buyer. Even though the TREND of the market supported this strategy nicely, the fact that the price had been elevated after five straight years of positive returns led me to become more cautious and only sell this strategy when my price was available. As 2014 came to a close, we also started selling puts against other ETF stocks that were showing much better value. Now we continue up the Income Pyramid to Directional Index trades 11

12 Directional Index Trades Most of the time I m looking for the non-directional trades, simply because over the past decade, they ve been my most reliable income weapon. And over time, stocks spend 80% of their time chopping around, and only 20% of their time trending. This is why the period from 2013 to 2014 was such a departure; that equation was reversed. So instead of sitting back and griping about the lack of opportunity, why not take what the market is giving us? If it s going to trend 80% of the time, why not find some way to take part in those trends? In this section I m not going to go into extreme detail about each strategy, but just show you some possibilities. Figure 10 shows a setup for the 8/21 EMA crossover strategy: Figure 10 The red line (8 ema) was crossing above the blue line (21 ema) so we entered long with a call option, and sold this position the very next day as our exit signal showed up, per Figure 11: 12

13 Figure 11 This simple strategy generated a modest 28% return in about one day. 13

14 But just going long is not the only direction that the market goes; even during the 2013/2014 timeframe of gonzo trends, there were some deep corrections. Let me ask you; would you short this market? Figure 12 Doesn t make sense to, does it? This is where we continually set up trades like this with the Hindenburg Strategy so we can anticipate/participate in corrections that usually unfold far too quickly to play, as we can see in Figure 13: 14

15 Figure 13 This 10% correction on the S&P gave us a nice 98% return after commissions: And as you might imagine, there are literally hundreds of ETFs that we could play, with an almost infinite number of setups occurring over the course of a year. We don t get greedy, however, usually only focusing on a handful of ETFs at any one time so that we can improve our edge in the ones that we do play. But what about individual stocks? Am I saying that we should NEVER play them? Well, per the Figure 1 Income Pyramid, we do, but with the smallest amount of capital to account for the increased risk that we take with these instruments. Let s see one of those setups. 15

16 Directional Equity Trades Just like with Indices/ETFs, there are many different ways that we can express our directional edge through options strategies. Long calls and puts are not the only way to do so, and rarely makes sense with a small account where a single call option might represent a big chunk of your capital. Why not use a limited-risk strategy where we re only risking a few bucks to potentially make a whole lot more than that? Figure 14 shows a trade on CELG, or Celgene that was setting up for what I thought would be a rapid rise in price. Figure 14 This is the opposite situation of the Iron Condor setups where we looked for conditions that were conducive to a consolidation. Range contraction leads to range expansion, and the late-november consolidation on the daily (right) chart was creating the potential for a strong move. The problem with stocks like CELG, however, is that the high implied volatility creates some expensive options. Just buying a call option might be the wrong strategy even if the price goes higher, due to vol crush that is the new traders worst enemy. In this case we set up a simple, inexpensive debit spread by simultaneously buying and selling near-term options. And one calendar week later, we saw the move hit our exit signal in Figure 15: 16

17 Figure 15 A nice, sharp move is all that we wanted, and no more. This setup gave us a 54% return after commissions with only 3.5 days of holding time, due to the holiday week. It s all about determining the character of the market and giving the market what it wants, by expressing trend with the correct setup. 17

18 Summary.And What About 2015? When you put all of these different strategies and the approach of the Income Pyramid together, it creates a much more consistent blend of strategies that ultimately will smooth out your income P/L curve. Look, the market s either going to be trending or consolidating.something will be working, and it s up to you to ensure that you manage risk on those strategies that are going against the grain of the market. And with a better read on where the market is about to do and where it s going, chances are that you can AVOID placing strategies that will not fit what the market wants. And that s when things get much easier. So What About 2015? We ve already put one month of 2015 in the bank, and so far it s very different from what we saw in Am I trading Time Spreads right now? No, the volatility splits are all wrong. Are we still seeing V-Bottoms? Yes, to some extent, but we re also seeing lower highs and very heavy tape that is far different from the groundhog day price action of the past two years. As I write this in early February 2015, the US Stock Market is on the verge of an explosive trend that will catch most traders off guard, yet it s not yet ready to reveal its eventual direction. The point here is that the constant edges that we saw throughout 2013 and 2014 have already changed and new edges are presenting themselves. Those who can decipher those edges fastest, and translate them into actionable plans and strategies.will have a huge edge on the rest of the market participants. My first test might be wrong, as we can t sit on the sideline forever waiting on the market to determine its actions but before long my approach will be strongly aligned with the character of the 2015 market. I hope this short video/text series will help you align your approach to the market as well! And if you feel that the task is incomplete or beyond your skill set at the current time, then please look for the fourth video in this series, which should be available shortly. Trading Concepts, Inc. 18