Category Archives for Articles
Traders Don’t Have the Tax Bill Blues… Yet
Two weeks ago, I said “volatility is finally picking up!” Just like we’ve seen throughout 2017, like clockwork, the bulls came back in to push all indices up to fresh record highs. On Thursday, the S&P 500 set a new all-time high at 2657.54, with the Dow Jones Industrial Average crossing over 24,000 for the first time ever. Traders have been buying because they expect a tax reform bill. But on Thursday evening, the GOP push hit a wall as some lawmakers objected to the bill because of concerns over the Federal deficit. That sent futures down Friday morning, so let’s see how traders are feeling in the face of sudden uncertainty. (click here for a primer on the sentiment indicators below) 1) VIX Spread – Bullish Yesterday, I pointed out that the VIX was surprisingly strong despite an impressive stock rally. This morning, the VIX is up 2.1% at 11.52, giving us a 3-month spread at 3.33, indicating traders are bullish. But keep an eye on the VIX. It’s been up for 5 of the past 6 days, and if equity markets weaken, it could spike. This gives us a 3-month spread of about +3.95, which means traders are very bullish. (click here for a primer on the VIX spread) 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is 73, up substantially from 54 last week. This index operates on a 0-100 scale, so a reading of 73 qualifies as moderately greedy. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 35.9% of individual investors are bullish. This is flat from last week’s 35.5% reading, but it’s still way off the 45.1% level from three weeks ago, which itself was the highest since since January 5, 2017. The long-term average is 38.5%, so a reading of 35.9% is basically neutral. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio was at 0.55 on Thursday, which is well below the 0.655 long-term average. The 10-day moving average is 0.574, which is very, very low. In fact, it’s the lowest 10-day moving average since December 16, 2016. And the 3-day moving average, which I use to measure short-term bullishness, is 0.590. That’s the lowest since December 21, 2016. These numbers point to aggressive bullishness. Conclusion Out of 4 sentiment indicators, we have: 3 bullish (up from 2 last week) 1 neutral (down from 2 last week) 0 bearish (flat from last we) The permabears are still saying that everone’s all-in bullish and 100% complacent… and they’re right. However, keep in mind that sentiment was even more positive back on October 6 when I declared: Let’s not mince words: the bulls are clearly insane. They think they’re destined to ride into the sunset on a magic carpet made of cold hard cash. Of course, I hedged myself by adding that “the bulls may be insane… but they may also be right.” And they were right! All the indices have hit multiple record highs since then, while the bears are still on the floor crying. But maybe things are changing. Tax reform is now a mystery and the VIX may be on an upswing. If the bulls rush to the exits, they may face some trouble — there’s an awful lot of them, and only so many can fit through the door at once…
Continue Reading -->T3’s Top 10: Our Most Popular Articles for November 2017
What’s popular with the thousands of traders that make up the T3 Live community? You’re about to find out with our top 10 articles for November 2017, ranked by visits to our website. You can get a look at a top trader’s account statements showing $78K+ in profits from 4 weeks of trading, watch Scott Redler’s best-ever webinar, and even learn to game plan like a top trader. We’ll start with number 10 and work our way down to number 1: 10) $78,059.89 in 4 Weeks of Trading Earnings Sami’s no one hit wonder. Watch this video and you’ll see Sami’s actual account statements that show $78,059.89 in net profits since October 16. 9) You Just Lost $5,000 Trading. What Do You Do Next? How can you recover after a losing day? What do you do when you’re frustrated and angry because you know you could have done better? 8) How Implied Volatility Works In our introduction to options trading, we discussed some basics of options, like the differences between calls and puts, how options contracts work, and why options is a zero sum game. Now we’re going to dig into the single most important options pricing concept: implied volatility. 7) 6 Tips for Picking the Right Stocks for Day Trading You can spend years learning about moving averages, gaps, trendlines, and indicators. But if you’re day trading the wrong stocks, you’re setting yourself up for failure. 6) Black Room Game Planning with Sami Abusaad Ever want a look at a top pro trader’s watchlist? This is your chance to get the inside scoop on Sami’s top trades. 5) Video | Knowing Exactly When to Trade Rob explains how to get that feeling of conviction by knowing exactly when you should be in a trade, and WHY. Enjoy today’s 9 minute training video. 4) Sami Abusaad: $12K+ in Profit in 1 Day with Nautilus Nightly Game Plan Moderator Sami Abusaad takes you through an Earnings Play in fitness equipment company Nautilus (NLS). In total, Sami earned $12,115.50 in this one-day trade! 3) Trading Scans | The Foundation for Winning Trades In this special video, you’ll learn how using trading scans can unlock highly profitable opportunities. You’ll learn how to spot potential capitulations at the end of a momentum trade, plus explosions to new trends. 2) 6 Tips for Picking the Right Stocks for Day Trading If you ever find yourself asking yourself “what should I trade now,” then this article is for you. We’ve put together a list of 6 simple, effective tips for picking the right stocks for day trading. 1) Scott Redler Talks the Red Dog Reversal, H-Sell Setup, ROKU, and MORE! In this special live training webinar hosted by TradeStation, T3 Live Chief Strategic Officer Scott Redler breaks down his 2 favorite trading strategies: the Red Dog Reversal, and the H-Sell Setup.
Continue Reading -->Sentiment Report: Traders Still Happy with the Low Vol Grind
In last week’s sentiment report, I said “volatility is finally picking up!” And then it collapsed all over again as the post-election bull market raged on, with all major indices including the Russell 2000 breaking to new all-time highs. The VIX fell back under 10, and the bears are once again asking “is this low-volatility grind ever going to end? Traders were in a pretty decent mood before Thanksgiving, and they’re looking happier Friday morning with futures bid higher. So let’s take a fresh look at our sentiment indicators to see how traders are feeling on today’s Black Friday “holiday.” (click here for a primer on the sentiment indicators below) 1) VIX Spread – Bullish Last Wednesday, the VIX hit a 3-month high at 14.51. It’s around 9.85 Friday morning.. That’s extremely low by historical standards, but it’s become the new normal… at least since the summer. This gives us a 3-month spread of about +3.95, which means traders are very bullish. (click here for a primer on the VIX spread) 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is at 54, up slightly from 50 last week. This index operates on a 0-100 scale, so a reading of 54 is neutral. Before last Thursday’s big reversal higher, it was actually at 35. On October 6, it hit multi-year highs at 95, so it’s obviously come back down to earth. Funny — a lot of folks thought that 95 reading meant we were peaking. But markets kept pushing higher, showing how difficult it is to time tops and bottoms with sentiment indicators. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 35.5% of individual investors are bullish. This is up from last week’s 29.3% reading, but it’s still way off the 45.1% level from two weeks ago, which itself was the highest since since January 5, 2017. The long-term average is 38.5%, so a reading of 35.5% is basically neutral. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio was at 0.57 on Thursday, which is well below the 0.655 long-term average. The 10-day moving average is 0.629, which is below the long-term average. Both point to bullishness. Conclusion Out of 4 sentiment indicators, we have: 2 bullish (up from 1 last week) 2 neutral (flat) 0 bearish (down from 1 last week) The permabears are still saying that everone’s all-in bullish and 100% complacent… but the numbers point to moderate bullishness. If you want to see full-on 100% bullish insanity, go back to October 6 when I declared the following: Let’s not mince words: the bulls are clearly insane. They think they’re destined to ride into the sunset on a magic carpet made of cold hard cash. Of course, I hedged myself by adding that “the bulls may be insane… but they may also be right.” And they were right! The Russell 2000 shook off its cobwebs, tech picked up steam, and the bears got take to the woodshed. I suspect that with a few more days of upside, sentiment could go full on psycho bullish. And that’s not out of the question. Friday’s off to a great start already, and low trading volumes (due to the holiday) could exacerbate movement to the upside.
Continue Reading -->Chef Scott Redler Shares His Secret Turkey Recipe
Family + friends + food + football + fitness (say that 10 times quick!) makes Thanksgiving one of my favorite holidays. And believe it or not, I’m pretty handy in the kitchen. I cook like I trade, and I trade like I cook. I keep things simple, and I go with what works. I’ve been using this turkey recipe since my parents moved to Florida 14 years ago, and it’s what I’ll be serving my family on Thursday afternoon. Ingredients List Turkey 3-4 long celery sticks 2 sticks of butter 2 oranges 3-4 lemons 2 sticks of butter 4 whole onions 3 big hunks of garlic Salt Pepper Paprika Ms. Dash seasoning 1 can of pineapples 1 jar of orange or apricot jam The quantity of ingredients depends on the size of your turkey. Just scale up or down as you see fit. We usually get a frozen 20-pounder. And oh yeah — make sure you have a quality knife! It will make your life a lot easier. I’ll take the bird out of the freezer Monday morning so it will be defrosted by Wednesday evening, when I do my prep work. You know me. Whether I’m trading, running, or cooking, I never show up for battle unprepared. If you start getting things ready before Thanksgiving, you’ll get better results with less stress on Thanksgiving… just like in trading! I’ll dice up 4 whole onions and 3 big hunks of garlic, and toss them in a large bowl. I then add salt, pepper, paprika, some Mrs. Dash seasoning, and mix it all up. Then, I’ll stuff it into the turkey. I’ll also put half a can of pineapples in there, and jam a stick of butter right in the middle of all. Then, I pour some orange juice and lemon juice over the turkey skin — just enough to get it wet. In a separate bowl, I’ll mix up more salt, pepper, and paprika for the skin. I spread it all over, making sure to get in all the nooks and crevices. Don’t be cheap! Then, I’ll wrap the turkey in a big bag and leave it in the refrigerator overnight. On Thanksgiving morning, I’ll cut a few long celery sticks in half and put them on the bottom of the pan. Then, I take the turkey out of the bag and place it on the pan. There will be a lot of juice in the bag. Transfer it to the bottom of the pan, and be careful not to spill any. It’s a real pain to clean up! Then I’ll mix up more salt, pepper, and paprika, and sprinkle it on top of the turkey. Now it’s time to stick the bird in the oven. After an hour, start basting it every 15-20 minutes. Take juices from the cavity and squeeze it on top of the turkey. Also, rotate the pan every hour or so. It should take about 4 hours to cook. Just follow what your meat thermometer says. When there is about 20 minutes to go, pour a jar of orange or apricot jam in a bowl, and add a softened stick of butter to it. Mix it together, and brush the turkey with it. Stick the turkey back in, but keep a close eye on it. We want a nice crispy skin, but we don’t want to burn it. Once the turkey’s done, take it out and let it sit for an hour before you carve it. By the way, if you’re not experienced in the art of carving up a turkey, this video will help you get it right and impress your family: Delay your carving as long as you can — turkey tastes best just when it’s cut! If you give this recipe a shot, take a picture, post it on Twitter, and tag me (@reddogT3) so I can see it! Have a great week, and an even better Thanksgiving!
Continue Reading -->Volatility Returned. But Is There Any Fear Out There?
Volatility is finally picking up! The VIX hit 3-month highs on Wednesday, and we’ve had 4 down days in the last 6. And traders are finally starting to believe we’re on the verge of seeing the first real shakeup since the 2016 Presidential election. So let’s take a fresh look at our sentiment indicators to see how traders are feeling after the shakeup. (click here for a primer on the sentiment indicators below) 1) VIX Spread – Bullish As noted above, the VIX hit a 3-month high on Thursday. It’s since come back down towards 11 on Friday. This gives us a 3-month spread of about +3.60, which means traders are moderately bullish. As you can see in the chart below, the VIX may be breaking out above its depressed 50 day moving average the way it did in August: (click here for a primer on the VIX spread) 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is at 50. This index operates on a 0-100 scale, so a reading of 50 is perfectly neutral. Before Thursday’s big reversal, it was actually at 35. On October 6, it hit multi-year highs at 95, so it’s obviously come back down to earth. Funny — a lot of folks thought that 95 reading meant we were peaking. But markets kept pushing higher, showing how difficult it is to time market moves from sentiment indicators. 3) AAII Sentiment – Bearish. The latest AAII Sentiment Survey shows that 29.3% of individual investors are bullish. This is a major collapse from last week’s 45.1% level, which itself was the highest since since January 5, 2017. The long-term average is 38.5%. 4) CBOE Equity Put-Call – Neutral The CBOE Equity-Put Call ratio was at 0.64 on Thursday, slightly below the 0.655 long-term average. The 10-day moving average is 0.652, which is right in-line with the long-term average. So it doesn’t get more neutral than this. Conclusion Out of 4 sentiment indicators, we have: 1 bullish (down from 3 last week) 2 neutral (up from 1 last week) 1 bearish (up from 0 last week) The permabears are still saying that everone’s all-in bullish and 100% complacent… but the numbers tell another story. If you want to see full-on bullish insanity, go back to October 6 when I declared the following: “Let’s not mince words: the bulls are clearly insane. They think they’re destined to ride into the sunset on a magic carpet made of cold hard cash.” Of course, I hedged myself by adding that “the bulls may be insane… but they may also be right.” And the bulls were right, with the major indices continuing to march higher. Trader aren’t bearish. We all know that. But based on the numbers, it’s fair to call the crowd neutral. This is ultimately good for the bulls. The more doubt there is, the more potential upside firepower. In particular, if the Russell 2000 can stage a comeback, we could see a major spike in confidence… along with a major spike in price. Just remember, sentiment follows the action, which makes it awfully tricky to use to time trades. Plus, sentiment can stay at extreme levels for far longer than you think is reasonable. So always use this information as color — not as specific buy/sell signals.
Continue Reading -->Did Rolling Stone Jinx Tesla with the Magazine Cover Indicator?
So at 10:45 a.m. yesterday, I got an email with the subject line “The Most Important Person of Our Generation.” It came from Neil Strauss, author of the infamous pick-up artist memoir The Game: Penetrating the Secret Society of Pickup Artists: I know what you’re about to ask… And I can neither confirm nor deny that I read The Game. So, to whom was Neil referring as “The Most Important Person of Our Generation.”? Tesla (TSLA) CEO Elon Musk, whom Neil just profiled for a Rolling Stone cover story: Rolling Stone covers focus on entertainers, followed by politicians and athletes. I looked at hundreds of Rolling Stone covers going back to 1990 and I found exactly one CEO cover story… and it was about an even bigger tech icon. It was the October 27, 2011 issue commemorating Apple (AAPL) founder Steve Jobs, who had died 3 weeks earlier: Even in the late 1990’s dot-com boom, there wasn’t a single tech-focused Rolling Stone cover story, let alone a CEO story. And of course, this has me thinking about the magazine cover indicator. The magazine cover indicator says that a dramatic magazine cover story (typically a major business magazine like Fortune or BusinessWeek) can be a contrary indicator. The most famous example is BusinessWeek’s The Death of Equities cover in August 1979, which preceded the biggest bull market known to man. Chart from FinancialSense.com So did Rolling Stone ‘jinx’ Tesla? And the wider world of technology of stocks? Let’s see. In Neil Strauss email, he said he “spent the last nine months in and out of his world, working on this profile…” 9 months back from November 15 is February 15. Let’s assume that Rolling Stone spent a month before slating Musk for a cover story. In January, Tesla traded between $210.96 and $258.46. It hit $389.61 in September before pulling back to $312.49 when the story hit. Here’s what the stock chart looks like: Since Tesla’s at a bit of a crossroads now, only time will tell if Rolling Stone put in the ‘jinx.’ Or maybe I should put it another way. Only time will tell if Elon Musk marked a top in his ego — and by extension his Tesla/Solar City/Space X juggernaut — by agreeing to a Rolling Stone cover in the first place. So we’ll see. But what about technology overall? We know it’s been ripping since the election. But here’s a 20-year monthly chart of the S&P Technology ETF (XLK): Let me be clear: the magazine cover indicator should not be mixed up with actual science or rational analysis. It’s mostly valuable to permabears desperate for attention on Twitter. But I can’t help but ask: wouldn’t it be funny if tech topped out just as Rolling Stone broke tradition to put Elon Musk on the cover?
Continue Reading -->7 Things to Know Before Your First Options Trade
Welcome back to our Introduction to Options series! By now we’ve covered: 1) The ABC’s of Puts and Calls 2) How Implied Volatility Works 3) Theta: The Options Trader’s Kryponite 4) 3 Simple Options Strategies Beginners Should Know Today, we’re going to close out our series with 7 key things you need to know before you place your first options trade. These simple tips will help avoid common pitfalls that can destroy your profitability, so we hope you enjoy it! 1) Start with 1 Contract Yes, you want to swing for the fences and make a big fat pile of cold hard cash with your first options trade. But winning traders know that we’re not in a spring. We’re in a marathon. We recommend that you start slowly. So if you want to buy call options, just start with 1 contract, and carefully track your trade’s progress. Likewise, if you’re interested in multi-leg strategies like bull/bear call spreads or iron condors, just use one contract for each leg of your trades. A big part of your options trading education will come from actual trading — so make that education as inexpensive as possible! It’s very easy to make mistakes with options trading, particularly when it comes to order entry, and it’s best to start with small dollar amounts and work your way up. 2) Be Careful Getting in the Pool Naked Think twice before putting on naked short options positions. A naked short position is one in which you are short call or put options without an offsetting trade that limits your risk. The risk is astronomical and if the underlying stock makes a big move against you, your account will be damaged. So before putting on trades, consider the risk-reward, and makes sure the odds are in your favor. Shorting options can be very lucrative — especially in a volatile market when premiums are high — but you must be very careful. We recommend getting the guidance of a more experienced options trader before considering such a trade. Shorting options is especially risky ahead of earnings and other events. Case in point: take a look at this chart of online retail giant Amazon.com (AMZN). As you can see, it gapped up on 10/27/2017, the day after it reported a stellar third-quarter earnings report: Let’s say that when Amazon was trading around $980, you thought there was no way it could get above $1000. Ahead of earnings, you could have shorted the December $1,000 calls for around $28. So for each call you shorted, you would receive a credit of $2,800. Let’s look at what happened to this option’s price after earnings. The December $1,000 call closed at $25.15 on October 26 before the earnings report hit. And after Amazon beat expectations and skyrocketed, the option opened at $70.80. It then went over $100. It’s now trading at $131. Let’s assume you covered at $100 on the dot to keep things simple. This means you: Went short at $28 ($2,700 per contract) Covered the short at $100 ($10,000 per contract) That’s a net loss of $71, or $7,200 PER CONTRACT. A 3-contract trade would have put you out $21,600! So please, know what you are getting into when shorting options. And watch the calendar so you are aware of any stock-moving events. 3) Don’t Go Overboard with Out-of-the-Money Options In our last article on basic options strategies, we showed you this table explaining the differences between in-the-money options and out-of-the-money options: As you can see, out-of-the-money options have a higher chance of expiring worthless. But many new options traders love them because they have a lower up front cost. Beginners especially love far-out-of-the money options because they look so darn cheap. But there’s a reason they look so cheap… it’s because they’re lottery tickets. They don’t cost much, and there’s a low chance they’ll actually pay off. That’s not to say they’re inherently bad. Just be aware that with out-of-the-money options, especially those that are far-out-of-the-money, you’re rolling the dice. Plus, be aware that far out-of-the-money options can be very illiquid. It’s not unusual to get in a position (often at a bad price, because market makers often jack up the prices on out-of-the-money options), and be unable to get out because no one is interested in buying your particular options. It’s just like the roach motel: you check in but you don’t check out! 4) Be Careful with Your Entry Prices Like stocks, options have a bid and ask price. (the ‘ask’ is also called the ‘offer’) The bid is the price buyers are willing to pay. The ask is the price at which sellers are willing to sell. But if you are always buying at the ask and selling at the ask, you’re getting ripped off. Let’s look at red hot streaming media play Roku (ROKU). With the stock trading at $45.27, here are the prices of the December $44, $45, $46, and $47 calls. This is an extreme example so you can see just how easily you can get fooled by looking at the bid and ask. Let’s say we’re looking at the $44 calls. The market maker would LOVE to sell us those options at $6.80 (the ask). That’s like walking into a used car dealership and taking the first price the salesman offers up. Odds are we can actually get filled somewhere near the middle of the bid and ask. The midpoint of the $5.50 bid and $6.80 offer is $6.15. So if we bid $6.20-$6.30 or so, odds are we’d get filled. Heck, we may even get filled at the exact midpoint of $6.15. But let’s say we got filled at $6.30. That’s a savings of $0.50, or $50 per contract. On a 10-contract trade, that’s a difference of $500. This is an extreme example. Roku is a fast-moving new IPO. Options on tThese types of stocks typically have extremely wide-bid ask spreads. But we want you to understand the importance of not blindly placing orders at the bid
Continue Reading -->3 Options Strategies for New Traders
Welcome back to our Introduction to Options series! By now we’ve covered: 1) The ABC’s of Puts and Calls 2) How Implied Volatility Works 3) Theta: The Options Trader’s Kryponite Now we’re going to dig into 3 basic options trading strategies that are perfect for beginners. We’re going to teach you 3 options trading strategies that allow you to speculate on 3 scenarios: A stock making a big move higher A stock making a small move higher A stock doing nothing But before you start, there’s one thing you must understand about options trading: for every stock scenario you can think of, there are 1 million ways to play it with options. Let’s say Amazon.com (AMZN) is trading at $1,000, and you think it’s going to $1,500 in one year. Here are 7 ways a trader could use options to speculate that move: Buy call options Buy bull call spreads Sell put options Sell bull put spreads Buy a butterfly spread Buy a risk reversal Buy a call back spread Every strategy has pros and cons, and no single one is best. Please note that all examples in this article are pure hypotheticals — they are not endorsements of these particular trades. Strategy #1: Buying Call Options to Speculate on a Big Rally At the time we’re writing this, Gilead (GILD) was trading at $75.00 Let’s assume we are very bullish on the stock, and believe it can hit $100 in the next 12 months. The simplest way to speculate on such a movement is to buy call options. You’re probably asking yourself yeah, but which ones? We can choose between in-the-money, at-the-money, and out-of-the-money calls. As a quick reminder, for call options, in-the-money options have strike prices below the current stock price. At-the-money options have strike prices that are about the same as the current stock price. And out-of-the-money options have strike prices above the current strike price. You can see relationship here: So which one is best? In the money, at the money, or out of the money calls? The answer is… none of them and all of them. Let’s look at the differences. Here’s a table detailing the major differences between in and out-of-the-money options: Let’s look at some numbers to illustrate these differences. Here are the prices of GILD call options with 24 days to expiration, with the stock trading at $75: The at-the-money $75 call is priced at $1.98. The in-the-money $70 call is $5.40. And the out-of-the-money $80 call is just $0.65. And as you can see, the in-the-money options cost more up front, and the out-of-the-money options cost less. This is because the in-the-money options have intrinsic value, and have a higher chance of being in the money at expiration. And that’s the tradeoff: you pay more for in-the-money options, but the option has a higher likelihood of being in the money. On the flipside, out-of-the-money options cost less up front, but give you a lower likelihood of success. And because they cost less, out-of-the-money options can give you a bigger percentage gain if the underlying stock makes a big move in your favor. Let’s take a look at possible payoffs of each option at expiration under a variety of price scenarios. On this table, here is what each option would be worth at expiration under different price scenarios: Let’s assume GILD goes flat, and is at $75 at expiration. Focus on the middle column of that table. As you can see, if GILD went to $75, the $65 calls would still be worth $10 ($75 – $65) — just a little less than the $10.77 cost. And the $75, $80, and $85 calls would be worth zero. Now let’s take a look at the P&L of these options: As you can see on the right column on the table, if GILD is at $85 at expiration, the $65, $70, $75, and $80 calls would have value: The $85 calls would expire out of the money and be worthless, giving a 100% loss of the $0.19 premium paid. The $65 calls would give you the largest dollar profit at $9.23. Here’s a third table showing the P&L on a on a percentage basis: As you can see, the $80 calls would give you the highest profit at $669% They cost just $0.65, and rose to $4.35. But remember the trade offs we discussed earlier: Out-of-the-money options cost less up front, but give you a lower chance of success. And because they cost less, out-of-the-money options can give you a bigger percentage gain if the underlying stock moves in your favor. We can also choose between shorter-dated and longer-dated options. If you recall from our article on time’s role in options pricing, longer-dated options cost more than shorter-dated options. As you can see on this chart, the more days there are to expiration, the higher the price of the option is: The call option expiring in 3 days costs just $0.88. And the one with 31 days to expiration costs $2.77. Through this options series, we’ve compared options to car insurance. A call option is an insurance contract that pays off when the stock rises. Ask yourself this: would it cost more to insure your car for 1 year? Or 2 years? Obviously, you pay more for 2 years of insurance coverage than 1. Why? Because over a 2-year period, there’s a much greater chance of something happening than over 1 year. So how should you choose which call options to trade? There is no simple answer. We recommend figuring out where you think the underlying stock could go within a certain time frame. Then, decide what’s more important: paying more money up front with a higher chance of success (in or at-the-money options), or paying less up front with a lower chance of success (out of the money options). Strategy #2: Buying a Bull Call Spread to Speculate on a Small Rally At the time of this writing on November 9, 2017, shares of
Continue Reading -->Did Traders Wake Up with the Shake Up?
On Thursday, we had our first hint of real volatility since October 25. The the SPX dropped -1.1% to an intraday low of 2566.33 before a bounce up to close at 2584.62. The VIX also rose over 20% to 12.19 before faltering. This came on the heels of some minor equity market deterioration as small caps and banks retreated. So let’s take a fresh look at our sentiment indicators to see how traders are feeling after the shakeup. (click here for a primer on the sentiment indicators below) 1) VIX Spread – Bullish As noted above, the VIX spiked over 20% on Thursday before coming back down, and it was at 11 Friday morning. This gives us a 3-month spread of about +3.50, which means traders are moderately. (click here for a primer on the VIX spread) 2) CNN Fear & Greed Index – Bullish The Fear & Greed Index is at 54. This index operates on a 0-100 scale, so a reading of 54 is almost perfectly neutral. 5 weeks ago, the index hit multi-year highs at 95, but it’s come back down to earth. Funny — a lot of folks thought that 95 reading meant we were peaking. But markets kept pushing higher, showing how difficult it is to time market moves from sentiment indicators. 3) AAII Sentiment – Bullish The latest AAII Sentiment Survey shows that 45.1% of individual investors are bullish, flat from last week.. This is above the long-term average of 38.5%, so it shows bullishness. In fact, this 45.1% level is the highest reading since January 5, 2017. AAII sentiment has been depressed throughout 2017 despite the market hitting a nonstop streak of all-time highs. This seems like a notable change. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio was at 0.64 on Thursday, slightly below the 0.655 long-term average. The 10-day moving average is 0.631, which is slightly above the long-term average, indicating higher-than-normal demand for put options. I would call this very slightly bullish. So it looks like the little Thursday shakeup has had little to no impact on traders’ general bullishness Conclusion Out of 4 sentiment indicators, we have: 3 bullish (down from 4 last week) 1 neutral (up from 0 last week) 0 bearish (flat last week) Make no mistake, the crowd is bullish. But it’s less bullish than last week, and certainly less bullish than 5 weeks ago, when the CNN Fear & Greed Index was hitting multiyear highs. Incidentally, the VIX was setting new all-time records for weakness. So while the permabears are still saying the crowd is complacent, I’m not convinced. On October 6, I said this: Let’s not mince words: the bulls are clearly insane. They think they’re destined to ride into the sunset on a magic carpet made of cold hard cash. Turns out those bull were right, though they’ve backed down from their optimism just a bit. Now we’re about to see if sentiment has pulled back enough to set the stage for another rally. I’d keep a close eye on the Russell 2000. It it rockets back up, the bulls are bound to go gaga once again. For now, it looks like a failed bull flag pattern is on the table: In an ideal world, the bulls will at least push it back into that upper range. Then again, the bulls haven’t needed an ideal world to find reasons to keep on buying. We’ll see if that changes.
Continue Reading -->T3’s Market Wrap: How Do You Like Dem Apples?
Traders had two questions heading into Apple’s (AAPL) Q4 earnings report yesterday after the close: 1) Can the company produce enough iPhone X units? 2) Can the company sell enough iPhone 8 units? Apple answered both questions with an emphatic yes, proving once again that the Apple supply chain rumor mill can’t be trusted. The media does a great job of sniffing out Apple product announcements, but they’re awful at figuring out just how much product the company is selling. We’ve been hearing a lot of rumors about weak iPhone demand, and we know now that they had zero basis in reality… not that the bears would admit that. Apple reported EPS of $2.07, smashing the $1.87 consensus. Revenue was $52.6 billion, easily beating Wall Street’s $50.7 billion forecast. iPhone units were also above expectations, as was Q1 revenue guidance. Apple shares hit an all-time high at $174.26 this morning before some minor profit-taking hit. We still have to see what happens with Nvidia’s (NVDA) earnings report on Thursday, but make no mistake: tech earnings season has been nothing short of fantastic. The October nonfarm payrolls report was released on Friday, revealing that the economy added 261,000 jobs in October, missing the 310,000 Wall Street consensus. The unemployment rate was 4.1%, besting the 4.2% expected. However, the big story was Average Hourly earnings, which were unchanged. Economists expected growth of 0.2%. The numbers point to a strong labor market that isn’t generating much wage inflation. Workers are in demand, but pay just isn’t going up. The lack of wage growth means the Fed could continue to undershoot its inflation goals. The US dollar and Treasury yields fell after the numbers hit, but reversed afterwards. Gold shot up but dipped back into the red. This morning, T3 Live Chief Strategic Officer Scott Redler said that “yesterday, SPX broke below 2567 momentarily, and we now have the 2566 low as our new point of reference. As long as that holds, not much changes. We didn’t come close to that 2566 low, implying that the bull move remains fully intact. The relentless bid that keeps stock pumped in the face of a chaotic news flow is proving endlessly frustrating to the bears. Every time there’s a sign of trouble — like the recent weakness in the Russell 2000 — it quickly gets reversed and we see new headlines celebrating all-time highs. Now it seems like the only element left is time. The market’s been zooming higher and higher ever since the Presidential election. The longer time goes on, the greater probability of an unexpected shock. But betting against the likelihood of a shock has been the best trade in the market. The VIX can barely stay above 10, there’s almost no intraday movement, let alone run-of-the-mill 5% to 10% drawdowns that used to be fairly common place. So unless we get some actual technical deterioration in the charts, the only thing the bears can hope for is a shock that comes out of nowhere and destroys faith in the system. Sooner or later, something bad will happen. It always does. But good luck predicting when…
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