Trader’s Digest: The 10 Stories We’re Reading Right Now
Wonder what traders are talking about today?We’re here with the top 10 stories we’re sharing with colleagues today, covering topics like:Why Hayman Capital Management’s Kyle Bass sees parallels with 1987The widespread belief that volatility is dead10 tips for success from Apple (AAPL) founder Steve JobsAnd more!So check out these links right now and get up to speed:1) Kyle Bass says this will be the first sign of a bigger market meltdown (MarketWatch) The stock market may never go down again. Maybe not such a far-fetched notion, when you consider the Dow industrials yesterday nailed its 50th record close of the year and paid a visit to the 23,000 milestone, which it looks set to revisit and maybe stick to today.Read the Story ==>2) Traders have never been more confident that volatility is dead (Business Insider) Traders have never been so sure that volatility in US stocks is over, at least looking one month ahead. Nothing quite demonstrates that mindset more than the chart below.Read the Story ==>3) How Implied Volatility Works (T3 Live) If you don’t understand implied volatility, you don’t understand options. Period. Read this article and learn how implied volatility impacts the price of an option.Continued Reading ==>4) China’s Xi lays out vision for ‘new era’ led by ‘still stronger’ Communist Party (Reuters)Chinese President Xi Jinping on Wednesday laid out a confident vision for a more prosperous nation and its role in the world, stressing the importance of wiping out corruption and curbing industrial overcapacity, income inequality and pollution.Continued Reading ==>5) Bitcoin is a ‘speculative bubble’ and unlikely to become a real currency, UBS says (CNBC) Cryptocurrencies like bitcoin are in a “speculative bubble” and are unlikely to become mainstream currencies, according to UBS. There are over 1,000 cryptocurrencies, bitcoin being the biggest by market capitalization, and many have seen huge rises in value over the past few years. Bitcoin for example is up over 470 percent year-to-date.Continued Reading ==>6) Treasury secretary: Pass a tax bill or markets will tank (Politico) Steven Mnuchin has a stern warning for Congress: You could blow up the stock market if you fail to cut taxes. The Treasury secretary said Wall Street’s big run-up following the election of President Donald Trump is largely based on expectations of Congress passing a major tax-relief bill, and failure to do so could have significant consequences.Continue Reading ==>7) 6 Tips for Picking the Right Stocks for Day Trading (T3 Live) 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. If you ever find yourself asking yourself “what should I trade now,” then this article is for you.Continue Reading ==>8) Volvo Prepares to Take on Tesla with a Revamped Polestar (Wired) Volvo is in the midst of a reincarnation. The Swedish automaker is leaving behind its former life as the maker of super safe, super boxy wagons, and embracing an existence dedicated to technological prowess, electric propulsion, and svelte design.Continue Reading ==>9) Google’s AI can create better machine-learning code than the researchers who made it (TNW)Google’s AutoML system recently produced a series of machine-learning codes with higher rates of efficiency than those made by the researchers themselves. In this latest blow to human superiority the robot student has become the self-replicating master.Continue Reading ==> 10) Get Steve Job’s 10 Rules for Success (YouTube) Watch this video and learn 10 important rules for success from Apple (AAPL) founder Steve Jobs, including why you must have passion for what you do.
Continue Reading -->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. If you don’t understand implied volatility, you don’t understand options. Period. What Is Implied Volatility? Implied volatility is exactly what it sounds like: it is the amount of volatility implied by the price of an option. Put another way, by paying a certain price for an option, we are implying that the stock will have a certain level of volatility. There are 7 basic factors that determine an option’s price: The price of the stock The strike price Type of option Time to expiration Risk-free interest rate Dividend policy Implied Volatility Factors 1-6 have something in common: they are pre-determined. Implied volatility is different because it is determined by how much we pay for the option in question. Options are effectively insurance. A call option is an insurance contract that pays off when the stock rises. And a put option is an insurance contract that pays off when the stock falls. And like a car, the faster a stock moves, the higher it costs to insure it with options. It costs more to insure a Dodge Viper than a Honda Odyssey minivan. Why? Because there’s more potential for trouble (volatility) with a 645-horsepower sports car than a minivan. (WARNING: This video may Not be Safe for Work…) An Implied Volatility Example with Tesla As we’re writing this on October 17, 2017, Tesla (TSLA) is trading at $354.72. The implied volatility on the TSLA $355 December calls expiring in 59 days is 40%. What exactly does that 40% number mean? To successfully trade options, you don’t need to understand all the nitty gritty of options math. But you do need to understand the basic fundamentals of options prices. So let’s jump back to Statistics 101 so you understand what that 40% implied volatility number means. We use implied volatility to lay out the implied 1-standard deviation move in the underlying stock. This is the movement that is expected 68% of the time. Here is the formula to determine a 1 standard deviation move using implied volatility: Stock Price * Implied Volatility * Square Root of Calendar Days/365 = 1 Standard Deviation For our Tesla example, this becomes: $354.72 * 40% * .40205 = $57.05 This implies a 68% chance Tesla will move $57.05 or less by expiration in December. Put another way, it implies a 68% chance that Tesla will stay between $297.67 and $411.77. (calculated as $354.72 minus and plus $57.05) If implied volatility was just 30% instead of 40%, there would be less implied movement. And if it was 50%, there would be more implied movement Take a look at this table of implied stock movements at different implied volatility readings: As you can see, if implied volatility on our option is 30%, the implied movement (up or down) is just $42.78. And if it was 50%, it would imply movement of $71.31! You don’t need to do this math every time you look an option. Just remember this: the higher the implied volatility, the more movement in the underlying stock you need to make money on the option. Why? Because the higher the implied volatility, the more you’re paying for the option. Implied Volatility Levels on Different Kinds of Stocks Remember our car insurance comparison. The insurance company will charge a lot of money to insure a 645 horsepower Dodge Viper because there’s a lot of potential for trouble. Sellers of options are no different: if a stock can move a lot, the options seller (who is in effect selling insurance) will require a high premium for the related options. Here is a table showing implied volatility readings for at-the-money call options expiring in 59 days on 5 popular stocks: Applied Optoelectronics (AAOI), a very volatile semiconductor stock with a $860 million market cap, has 60% implied volatility. Snap (SNAP), a volatile tech name, is at 54%. And Pfizer (PFE), a slow moving pharma giant, has implied volatility of just 14%. Why the difference? AAOI and SNAP are much more volatile, so options seller demands higher options prices — which means higher implied volatility. Since Pfizer doesn’t move much, the seller must charge a lower price to draw in options buyers. Our TSLA Option Under Different Implied Volatility Scenarios Let’s take a look at our December TSLA $355 call one more time. Using the CBOE’s options calculator, we can calculate the price of the option under various scenarios. With a stock price of $354.72 and implied volatility of 40%, the December 355 call has a value of $22.95. But if we assume implied volatility of 30%, the value of the option drops to just $17.28. Here’s a table showing the value of the option at different implied volatility levels: As you can see, at 50% implied volatility, the option would be worth $28.61. Implied vs. Future Volatility As we’ll discuss in our next article on time decay (or theta), options are decaying assets. All things being equal, an option loses value every single day. You need movement — or volatility — in your favor to offset the impact of that time decay. So when you buy an option, you are essentially going long volatility on the underlying stock, ETF, index, or commodity. You are saying that the actual volatility in the future will be greater than the implied volatility that is currently priced in. And all things being equal, if you are long options, you want implied volatility to rise. However, there are some differences between calls and puts. When stocks fall, implied volatility typically rises. That’s great for owners of put options. But it’s not so good for calls, because a falling stock price will hurt the options price, and offset the impact of higher implied volatility. Implied Volatility
Continue Reading -->Sentiment Report: Bears Fight the Pain Trade
We’re closing out another week full of record highs as the market eats everything it sees and smiles. The SPX, Nasdaq Composite, Nasdaq 100, and Dow Jones Industrial Average made new all-time highs, which had the bears coming out of the woodwork to say traders are too complacent. Is that true? After all, sentiment has been super bullish as of late, and higher prices typically means But let’s take a look at our 4 sentiment indicators to see how traders are feeling. (click here for a primer on the sentiment indicators below) 1) VIX Spread – Bullish Since October 6, 2014, when the CBOE changed the VIX calculation methodology, we’ve had a total of 58 days with a VIX low under 10. 58 of them have happened since April. And with Friday’s 9.59 print, we’ve had 16 in the past 16 days. So we’re either looking at a new normal of incredibly low expectations for volatility, or the crowd has gone mad. Meanwhile, the 3-month spread is at +4.1, which means traders are very bullish. However, the spread be wider if the VIX curve wasn’t so flat, which itself is a sign of very low expectations of volatility. (click here for a primer on the VIX spread) 2) CNN Fear & Greed Index – Bullish The Fear & Greed Index is at 78, down substantially from last week’s multi-year high at 95. The F&G Index operates on a 1-100 scale, and a reading of 95 qualifies as extremely greedy. So again, we’re seeing extraordinary bullishness. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 39.8% of individual investors are bullish, up slightly from 35.6% last week. This is slightly above the long-term average of 38.5%, so it’s basically neutral. 4) CBOE Equity Put-Call – Neutral The CBOE Equity-Put Call ratio was at 0.70 on Thursday, which is above the long-term average of 0.655. This indicates some skittishness ahead of Friday’s CPI report, which turned out to be weaker than expected. The 10-day moving average is 0.641, which is slightly below the long-term average, indicating higher-than-normal demand for call options. I would call this basically neutral. Put demand has definitely been picking up since early December, when traders were going nuts for call options. Conclusion Out of 4 sentiment indicators, we have: 2 bullish (down from 2 last week) 2 neutral (up from 1) 0 bearish (down from 1) Last week, I declared “the bulls are clearly insane. They think they’re destined to ride into the sunset on a magic carpet made of cold hard cash.” Insane or not, the bulls were right to be insane because the market has simply refused to break down, and in fact, may be tracing out a classic bull flag. I was awfully temped to get long volatility this week, and I’m glad I resisted the urge because the current market scenario — a slow grind up without much intraday movement — is deadly to long volatility trades. Why? Because it kills you a penny at a time. At least if you lose in a one big whoosh, you can be done with the trade and move on. What we’re seeing now is one of the nastiest pain trades I’ve ever seen.
Continue Reading -->Inside Sami Abusaad’s Swing Trading Watchlist
In this special video, Nightly Game Plan Moderator Sami Abusaad walks you through his current swatch list with his top swing trade picks so you can see how he spots potential setups. Typically, Sami focuses on a single swing trading setup, but since there weren’t any noteworthy trades, Sami decided to take you inside a key part of his trading process instead: In the video, Sami will show you: The sideways trend in QQQ, which provides a backdrop for bullis trades The recent broken uptrend in Activision Blizzard (ATVI) Chicago Bridge & Iron’s (CBIE) Weekly Sell Setup Sami’s 1-2-3 Play in Foot Locker (FL), which gave him an initial profit of $723* The Climactic Setup in Green Dot (GDOT), which may be reversing Norstrom’s (JWN) breakdown bar And more! *(click here for a breakdown of our P&L calculations) Click here to learn about Sami’s Nightly Game Plan
Continue Reading -->Trader’s Digest: The 10 Stories We’re Reading Right Now
Wonder what traders are talking about today?We’re here with the top 10 stories we’re sharing with colleagues today, covering topics like:The message from the Fed in today’s Meeting MinutesWhat the incredible passive investing/ETF boom means for tradersTips for success from billionaire Richard BransonAnd more!So check out these links right now and get up to speed:1) Fed Inflation Debate Finds Some Officials on Rate-Hike Fence (Bloomberg)Federal Reserve officials held a detailed debate last month over whether forces holding inflation down were persistent or temporary, with several policy makers looking for stronger evidence of price gains before supporting a third interest-rate hike this year.Read the Story ==>2) Vanguard is nearing the $5 trillion milestone — but here’s where the rush could end (MarketWatch) Given how this market shakes and shakes it off, another record for the Dow may well be in the offing. It’s no secret, then, that this can’t-go-wrong bull market has pumped up the demand for low-cost, passive mutual funds and ETFs.Read the Story ==>3) 9 Tips for Picking the Right Stocks for Swing Trading (T3 Live) As a swing trader, one of the most important decisions you’ll every make is choosing which stocks to trade. You can learn all the winning setups in the world, but if you trade the wrong stocks, you’re going to lose money.Continued Reading ==>4) Spain takes step toward direct rule over Catalonia’s independence move (Reuters)Spanish Prime Minister Mariano Rajoy took the first step on Wednesday toward suspending Catalonia’s political autonomy and ruling the region directly to thwart a push for independence.Continued Reading ==>5) Ethereum First: Investment Product Opens for Trading on Nasdaq Exchange (CoinDesk) A first-of-its-kind investment product focused on ethereum is now open to investors on the Nasdaq Stockholm exchange. Announced today, CoinShares, headed by former JPMorgan Chase trader Daniel Masters, is launching an exchange-traded note (ETN) for ether, the cryptocurrency that powers the ethereum blockchain.Continued Reading ==>6) FX Markets Are Stuck in Low-Volatility Quicksand With No Escape (Bloomberg)Currency markets are trapped by low volatility and only a fundamental break of historic proportions can shake them free. Foreign exchange trading has become significantly less responsive to shocks, and when currencies do react it typically isn’t long before they go calm again, according to a study by Bank of America Corp.’s Alice Leng.Continue Reading ==>7) 8 Interviews with 8 Top Traders (T3 Live) One of T3 Live’s most successful content features has been our “Meet the Traders” series, which gives you the backstories of our top traders and educators.Continue Reading ==>8) Investors giving ‘cash incineration engine’ Tesla a lot of rope, but may soon lose patience (CNBC) Tesla shares have crushed the market’s performance for years, but patience is starting to run thin among some investors after Chairman and CEO Elon Musk’s too ambitious Model 3 production goals.Continue Reading ==>9) Market Wizard Tony Saliba on Options Trading (HowMuch.com)The Market Wizards books blew my mind. The original book was one of the first ones I read on trading when I jumped into the industry in 1998. And Tony was the only options trader profiled.Continue Reading ==> 10) Tips for Success from Billionaire Richard Branson (The Tim Ferriss Show/YouTube) Podcaster Tim Ferriss sits down with billionaire Richard Branson for a wideranging discussion on everything from coping with dyslexia, PR stunts, and even Bitcoin.
Continue Reading -->If Loving This Market Is Wrong, the Bulls Don’t Wanna Be Right
It’s been quite a week, with the SPX, Dow Jones Industrial Average, Nasdaq Composite, Nasdaq 100, and Russell 2000 all making new all-time highs, leaving the bears crying on the floors. Now, sentiment was certainly bullish last week. But have the bulls gone completely insane after Thursday’s run up to SPX 2552.51? Let’s take a look at our 4 sentiment indicators to see how traders are feeling. (click here for a primer on the sentiment indicators below) 1) VIX Spread – Bullish Since October 6, 2014, when the CBOE changed the VIX calculation methodology, we’ve had a total of 53 days with a VIX low under 10. 52 of them have happened since April. And with today’s 9.11 print, 15 of them have happened in the last 15 days. So the VIX is still breaking new ground… underground, that is. Meanwhile, the 3-month spread is at +5.2, which means traders are extraordanarily bullish. (click here for a primer on the VIX spread) 2) CNN Fear & Greed Index – Bullish The Fear & Greed Index is at 95, marking a multi-year high. The F&G Index operates on a 1-100 scale, and a reading of 95 qualifies as extremely greedy. So again, we’re seeing extraordinary bullishness. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 35.6% of individual investors are bullish, up slightly from 33.6% last week. I’m really surprised this indicator hasn’t moved much as the market has soared in the past couple of weeks. However, this reading has been pretty depressed all year, so maybe we shouldn’t be surprised. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio was a 0.69 on Thursday, which is above average of 0.655. This indicates some skittishness ahead of the Friday jobs report. The 10-day moving average is 0.636, which is slightly below the long-term average, indicating higher-than-normal demand for call options. I would call this moderately bullish, with a little less enthusiasm than last week. If we see more rock-bottom readings, that could be a sign of true complacency. Conclusion Out of 4 sentiment indicators, we have: 3 bullish (flat from last week) 1 neutral (up from 0) 0 bearish (down from 1) We have 3 bullish, 1 neutral, and 0 bearish indicators this week. 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. I can see both sides of the coin here. The bulls may be insane… but they may also be right. Timing market turns based on sentiment indicators is awfully tricky. And remember, the trend can go on a lot longer than may seem reasonable. In particular, we’re in a whole new era for the VIX. No one knows how long this new era can go on. We’ve seen the VIX go through multi-year declines before, and who knows how long this one can go on? The lows in volatility feel like the highs in the Nasdaq in 1998-2000 or the housing highs last decade. I do suspect upside from here is limited, and I’m tempted to get long volatility via VIX calls or a similar instrument. But I admit — I’m having an awfully hard time making the decision.
Continue Reading -->3 Keys to a Great Trading Journey
The view of the Swiss countryside is breathtaking as it whips past my panoramic window. As I gaze outside, I catch snippets of conversations in at least 3 different languages With this as a backdrop, I begin to think of journeys. Today’s journey is a train trip through the “Golden Pass” from Lucerne to Lake Geneva. It’s one of the most amazing landscapes on the planet. It’s a small trip inside a 5-week “workcation” to Europe, which is just a small part of my larger trading journey. Every day, people from all walks of life become traders for all different reasons. I found my way to trading while searching for a better way to live. I spent most of my life working 50-60+ hours week. I read about places I wanted to see but never actually went anywhere. I decided I needed to define “a better way to live.” The next step was to find a vehicle, get in, and step on the gas pedal. A few years ago, either someone started making building materials heavier, or I started getting older. I also wanted more time with family and the resources to see the world. So I needed a job I could do from anywhere. Like many people, a search for flexibility and opportunity led me to trading. My trading journey started out like the mountains I’m looking at: rocky. I had the misfortune of doing really well for the first couple months of trading, and I got enough information to really hurt myself. I paid for my trading education in multiple ways. I didn’t know as much as I thought I did, and I quickly lost money that took me years to earn. I had to admit to my wife and family that I had lost so much of what we had worked for. And then I decided to invest in myself with a T3 education. Ironically, the free seminars and books I consumed only cost me money. With a proper education, a plan for success, and most importantly, membership in a supportive trading community, I was able to achieve my goals. Mentioning a 5-week work-cation in Europe sounds like bragging — we can all agree on that. But to me, it is the realization of two goals I wrote in my first trading plan: to spend more time with my family, and to see the world. Don’t get me wrong. This didn’t happen overnight. Like anything worth doing, success in trading requires hard work. Learning technical chart patterns is incredibly easy. The real work is staying disciplined and grinding it out trade after trade. And then tracking those trades to learn from your mistakes and successes, and understanding the nuances and psychology of the market participants. And even that pales in comparison to learning about yourself, and figuring out what it takes to make yourself a success. But if a former custodian, fence builder, and construction worker like me can succeed in trading, then anyone can! The keys to any good journey are simple: 1. Do your Research Before You Start There are a million ways to make money in the market, there are a million and one ways to lose it. So find the education, methodology, and a mentor that makes sense to you. T3 Live has some of the best traders, educators, and mentors available. We have different rooms and moderators, each with their own unique trading personality. 2. Have a Road Map for Success In trading, a strong trading plan is the map to success. Trading without a plan is like baking without a recipe. You can do it, but you’ll find it awfully hard to repeat any successes. 3. Find Companions That make the Trip better Find companions that make the trip better. My companions are the moderators and members of the T3 Live Black Room. We are a community of traders who work together each day to improve ourselves and each other. If you want to achieve your trading goals, come to the Black Room and start your journey. Attend an open house, take a course, find a mentor; because you can’t ask a book questions in real time. Click here to learn about the T3 Live Black Room, where Mark Harila serves as a trading mentor.
Continue Reading -->The Collapsing VIX Just Set a New Record
The VIX hit a low of 9.53 early this morning, marking the 13th straight day with a low in the VIX below 10. This is the first time in history we have seen such a streak. In late to July August, we had a run with 17 of 19 days showing a sub-10 VIX. Let me break down just how bizarre these numbers are. Since January, 2, 1990, the VIX has dipped below 10 on exactly 69 days. 50 of these 69 days were after April 2017. 30 of these 69 days have been after June 2017. Now, on October 6, 2014, the CBOE began using a new method for calculating the VIX to incorporate weekly SPX options. For the sake of an apple to apples comparison, let’s look at those numbers. Since then, we have had a total of 51 days with a low in the VIX below 10. 50 of 51 happened after April 2017! And 30 of 51 happened after June 2017! This is historic… and insane. So is it time to bet on a spike in the VIX? I am considering doing so… but don’t think it’s easy money. Yes, volatility tends to mean-revert, but good luck figuring out when. Here is a 20-year monthly chart of the VIX: As you can see, there have been extended drops in the VIX. For example, the VIX had multi-year downtrends from 2003-2006 and from 2012-2014. We very well could be in another one now that extends to 2018 and beyond. And all of those massive spikes you see on the chart? They were very short-lived, and there’s no guarantee you could have acted quickly enough to lock in massive profits on volatility bets. And while you’re waiting for a spike, what’s happening to your SPX/SPY puts and VIX calls? They’re getting eaten alive by time decay. 2017’s absurdly low volatility feels like the inverse of the tech stock highs of the dot com boom. We all know it’s irrational. But it’s incredibly difficult to predict the end of the craze. I am strongly considering allocating a small amount of capital to far out-of-the-money VIX call options. Why? Because just as the market is underestimating volatility now, it’s likely to overestimate it in the future. The CBOE also recently introduced VIX options with an 8.50 strike price, which is likely a reaction to the VIX’ 8.84 print back on July 26. I suspect that when the VIX has its next megaspike, we’ll look back at this news as a contrarian indicator
Continue Reading -->Scott Redler on CNBC: Is It Time to Buy Oil?
This afternoon, T3 Live Chief Strategic Officer Scott Redler appeared on CNBC’s Futures Now show to break down the action in crude oil and energy stocks. Crude hovering above $50 and @RedDogT3 says THIS could be your best chance to buy into year-end pic.twitter.com/1qYbwBKOav — CNBC Futures Now (@CNBCFuturesNow) October 3, 2017 In this video, Scott breaks down: Exactly where crude became buyable for momentum The best place to buy crude oil Why the next oil move could be to the upside 2 resistance areas oil could hit Scott’s forecast for oil in early 2018 A stop level oil traders can use What just changed in XLE Where traders can buy XLE, and where it can go Why Scott respects the technicals more than the fundamentals
Continue Reading -->4 Names to Watch: Update
Two weeks ago we highlighted 4 names to watch for the upcoming weeks. In the video below, we break down the recent action in the market and revisit those 4 names to see how they have done. The 4 names are: Tesla (TSLA), Caterpillar (CAT), Michael Kors (KORS), and Target (TGT).
Continue Reading -->