Do not follow people blindly into trades. It's your money, make sure you have your own plan. If you like someone's idea, it's fine to take the same trade, but know why you're taking it, don't just take it because Person A is in it.
FinViz.com is great for scanning stocks and sectors.
Must read for those thinking about taking their trading to the next level:
Never turn a day trade into an investment.
Don't focus on hitting home runs, try and get on base and eventually you'll drive that ball 500 feet.
Good blog about market auction theory/volume profile/value areas/etc.
Below are some essays on what to expect and how to approach this path. Trading stocks is incredibly risky, but it's also an excellent way to master oneself and become financially independent.
Warning: Spoiler! (Click to show)
Just know the overall market will always rule over your stock. If the market is tanking, regardless of how fundamentally perfect your stock is, it'll tank with it.
The stock market is designed to take your money. The only way any of us get paid is by taking money from each other. You go out there thinking your money is going to work for you, that you'll easily make money, you'll lose most of it. Sure, you could get lucky buying and holding something long enough, but more often than not, unless your fundamental analysis was spot on and you bought at the perfect entry level, you'll sit there flat, in the red or green slightly.
Check out investopedia.com for the terms you may not understand. If you want to day trade, check out InvestorsLive's Textbook Trading DVD. It'll save you money in the long run if you go out there each day and sling size without a plan or clue. Contact him on Twitter @InvestorsLive if you're interested in buying his second DVD as well, he may be willing to give you a better price on the bundle.
If you want to invest, you need to learn fundamental analysis. To me, you still need to learn technical analysis since yeah, you could have the right fundamental idea, but if you bought a stock at the wrong price level, you could see it work against you for months before it works in your favor.
Avoid adding to a losing position to get your cost down. It's one thing if your plan from the get go is to nibble and add at a lower price, but most people that start off will buy a stock at $30, add when it hits 25, add when it hits 20, go all in at 15 and wind up cutting it off for a horrendous loss at 10.
William O'Neill's How To Make Money in Stocks is a good book for those learning
I recommend Jesse Livermore's How To Trade Stocks as well.
If you're looking to learn options or the ichimoku cloud, I highly implore you to join KeeneOnTheMarket.com for a few months. There's no one better to learn options from than him and his team. He's a former market maker, and I've learned a ton personally from him these past few months.
Investors Underground has also been very helpful on my journey (InvestorsLive's chatroom), but if you're going to join that, you'll basically need the DVDs to learn how they trade.
Learning and using candlesticks is very important. Steve Nison's Japanese Candlesticks book has been spoken of well. I personally haven't read it yet.
All in all, I'd spend 3 months to a year paper trading before I would put any real money in the market. 90% of retail traders fail in their first 18 months. I've blown up, guys in here have blown up, in order to avoid blowing up, develop the positive habits from the get go is imperative. Learn how to trade without your emotions getting involved. Take the time using the simulator so you could se yourself failing and learn from your mistakes without losing your hard-earned money and taking the emotional and psychological hit.
Check out @mrockrulez on twitter and read the whole timeline. Modern Rock is a professional that made a million in a day once off FNMA. Read every tweet he wrote on that account and ask him questions if need be on his other account @modern_rock
The stock market doesn't care about you. The stock market is always right, you're the one that's periodically wrong. Always use a stop and manage your risk. Don't buy stocks that are extended out of fear that you'll miss the move. Everything comes back to Earth in time.
The more you immerse yourself in technical analysis, the more you'll learn and the better you'll get. Treat every stock like it's a piece of **** and you'll have longevity. Never fall in love with any company because these companies don't give a **** about you (i.e. GTAT). Never listen to the talking heads on TV since most of them are morons with no skin in the game. Learn how to create a plan, follow it and manage your risk. Trading is like boxing, you're gonna get hit in the face, you're gonna get knocked down, the key is to keep your losses small so they don't consume your gains. I personally am a day trader, it works best for me, and when I day trade, I'm usually willing to risk ten cents per share to make thirty cents to a dollar plus. If you're not getting at least 3-1 on a trade, it usually isn't worth your time. You also never want to put yourself in a position for blow out risk.
This summer an institution bought 250,000 NOK August 9 calls. The stock traded around 7.50 at the time. I put 5 grand into it thinking this guy knew what he was doing, i mean come on, he's risking three million here. Few months went by and they expired worthless. No one cares about you or your money but yourself. Always do what's in your best interest and avoid getting emotional. If you have a plan, if you know you're risk, you'll have no reason to ever be afraid.
If you're trading options, just know the last thirty days until expiration have the highest theta (time decay) and if there isn't intrinsic value, there's a good chance they'll go to zero.
Scaling and Sizing for Bigger Profits
An essay/convo I had with Zyzz regarding TSLA and its future Warning: Spoiler! (Click to show)
That's why I always try to tell people to study more/help teach them so they could be privy to any potential warning signs. Long term investing isn't for me because that GTAT story is my nightmare. I sleep better at night being cash or only having a small portion of my money in a couple of small option plays. But, long term investing is great once you get in at the right level. I've got a buddy on the sidelines waiting for the next crash to jump in and buy everything on the low. He doesn't have the time to learn like I would want him to learn, but if he's buying after everything is cut 3/4 there is a better risk-reward.
My theology professor made a killing after the last crash. He bought F at $2, SKS around there and had a sick average on JPM (he might still be holding at this point, haven't talked with him in a minute).
For someone with a longer time frame, it wouldn't be that hard to learn enough to keep you afloat and safe at night.
Brian Shannon's book is solid for newcomers looking to learn more. He gives you a decent breakdown on how to read trends, when they start to change, etc. He gives you a good idea on the different timeframes. It's $76 which sucks but it may be helpful in the long run.
I'd recommend Jesse Livermore's book as well since it's a good read.
Remember Zyzz, entering the stock market just to make money is dangerous. It's more about risk management once your money is in play. Best question to ask yourself when entering a position is how much could I lose here vs my potential gain?
I started trading in 2011 and then took a few months to a year off when I started working the graveyard shift. Ironically, a lot of the positions that I had but liquidated wound up doubling or more until 2013 when I reentered the market. Was I a good fundamental investor, or was the market just that hot and easy? Although I had good quality companies in mind GLW, TIF, OVTI, etc. I think it was more of the latter that made it possible. That's how easy the market has been. If you held long enough, and the company wasn't hemorrhaging money, you almost always doubled your money or came close.
That easy ride may be ending, and I just want you to be prepared and aware of what could be in store for us in the future. The fears could be overblown, the market could double in a couple of years, but the moral of the story is to know how to trade/invest vs instilling in hope and trust. Because the market doesn't care about us or how great our companies may be. If the market is gonna dump, it's gonna steamroll over as many people and equities as possible.
Any questions or anything, please ask away.
You have the right idea with TSLA, don't get me wrong, I just want you to be prepared and familiar with the market a little more before jumping in at what may or may not be the top.
This link below, and Grittani's blog in general, is mandatory reading for any aspiring trader. Learn from the mistakes the pro's make.
7 Deadly Sins of Biotech Investing/mindset to Avoid when trading this sector
Rules to Trade By Warning: Spoiler! (Click to show)
Never hold common stock into earnings reports. Play earnings reports with options (preferably spreads—I typically use fun bucks, 200-500 of risk to potentially make 500-1000 or more). Buying calls outright before a catalyst event will leave you vulnerable to the drop in implied volatility. You could nail the direction of the event, but the IV will drop after the catalyst and you could very well see your calls stay flat or decrease in value.
Use the at the money straddle to get your measured move target that the market makers are implying.
Go with the line of least resistance. Trading countertrend is incredibly difficult and not for amateur traders.
Know your stock's pivot points: support and resistance.
If you need hope, move on.
Find and trust your intuition.
Price action and price momentum tell you everything you need to know. Low volume on highs is usually a sign of distribution.
Limit noise and intuitively decipher news.
Have a plan, but adjust if needed. Quickly noticing your original plan was wrong and being able to flip from long to short in an instance is the sign of experience.
Minimize losses with stops. Whether it's a hard or mental stop, always have one and never change it. You could always reenter a stock, but you may not be able to regain the inventory and confidence lost from terrible drawdowns.
Greed will bankrupt you. We're here, first and foremost, to collect a paycheck. If you don't like taking profits, do something else. It's better to get the meat of the move and leave some food on the table than not eat at all.
Pigs get slaughtered.
Look for multiple time frame breakouts and breakdowns.
Try and use limit orders as opposed to market orders, especially on illiquid names.
Find your niche. Focus on a select few set ups, master them, pound them, and slowly branch out. This game is a lot like baseball.
Never chase an extended stock that's made its move due to short squeezes, and never fight a turd to the short side that's experiencing float rotation.
Treat your charts like an athlete treats his game film. Analyze your entries and exits after each trading day and understand why you took the trades you did and didn't.
If all you want to do is make money, do something else, you're gonna blow up your account. You trade for the challenge and freedom it represents. Focus on trading well consistently, not making big kahuna money.
Don't ask people for stock advice, learn how to trade on your own. If you have questions about your positions, ask others what they see, the potential resistance and support levels and how you could develop your own conclusion. It's your money, you need to do what's in your best interest.
Buying front month out of the money options is incredibly risky. Options have their highest theta (time decay) in the last thirty days until expiration. Sideways action will see your options dwindle in value.
Weekly options are very gamma rich, you have the potential to make the best percentage gains, but they also decay at an alarming rate. A weekly option on the day of expiration will go to zero if the stock is trading sideways if it doesn't have any intrinsic value.
Find the time frame that works best for you.
Find the indicators that work best for you. I personally use VWAP on 1 minute charts, and the ichimoku cloud on the 5 minute bar, 15 minute, 30 minute, 60 minute, and Daily.
Always short with set risk. Shorting stocks naked leaves you vulnerable to blow out risk since theoretically a stock could climb forever.
Never fight the trend or put yourself in a position for blow out risk. With options, pick a dollar amount you're comfortable losing if you don't feel like managing risk.
Never sell calls or puts naked. Writing options has its benefits, but naked selling leaves you vulnerable to blow out risk.
Always manage your spreads on the day of expiration, or else you will be assigned stock if your spread is in the money.
When the market is a chopfest scaling in and out is pivotal. It might be best to sit on your hands if you struggle in those environments.
Respect the process, with hard work, it will work in time.
Always adapt and add new weapons to your arsenal each year.
No edge, no trade. You don't need to trade everyday, you need to trade the best set ups you excel at.
Never overtrade and give back your profits from the morning.
Pay it forward. Don't be egotistical or greedy. Give back to those in need when you can.
KOTM earnings report trading plan Warning: Spoiler! (Click to show)
Quizzes and Options Study Material
Cool site that focuses on reported hedge fund positions
Intraday set ups I've been focusing on: Warning: Spoiler! (Click to show)
HoD rejection—works best with extended stocks and could be just a scalp, be ready to take profits if it starts to base or grind. Could always readd into a pop if there's a lower high made.
Failed follow through momentum
Weak open red/green
Green/red and late day fades
Cloud breakouts and breakdowns
Opening range breakouts and breakdowns
Utilizing my plan from scan the night before
Using premarket highs and lows as a guide, coupled with over/under whole and half dollar marks
I blew up an account between January and March of this year, why, because I traded without a plan and with too much size. Keep it simple, have a plan and monitor your position sizing. Keep your size smaller will help you be less emotional.
Brokers Warning: Spoiler! (Click to show)
I use ThinkOrSwim for charting.
ETrade is good for OTCs, especially those that are less than .009. But their borrows suck.
CenterPoint has the best borrows, but you need at least 50,000 in your account for them to accept you.
InteractiveBrokers has decent borrows from what I understand.
Know your stocks tendencies, create a spreadsheet composed of the stock's price action from open to close, and from high to low to calculate a stock's tendency.
TSLAInsitutionalOrderFlow.xlsx 55k .xlsx file
You can get a stock's history from YahooFinance, pick a ticker, click historical prices and input the information into Excel
Traders worth following on Twitter courtesy of Wiz.
Warning: Spoiler! (Click to show)
@TraderPlanet (lots of good info on their website)
@offshorehunters (posts good swing trade setups and owns VXX/UVXY when market is down)
For fraud reports definitely
Muddy Waters Research (@muddywatersre)
Gotham Research (@GothamResearch)
@InvestorsLive (of course!)
@WallStJesus (dude posts a lot but most if valuable options info)
@JaguarAnalytics (options stuff)
@hillmf (posts a lot naked women in between useful knowledge)
@OphirGottlieb (posts some tremendous graphs with good fundamental data)
@StockEnigma (posts a good watch list each night usually)
For news and ideas
If he accepts you @thenotablecalls
If you have problems with your emotions, find yourself too energetic or jittery, start meditating and practicing the art of being zen.
Chatrooms worth subscribing to:
InvestorsUnderground (day trading)
Studying under Nate and AK has made me a better trader.
InvestorsLive Textbook Trading
Nate's a brilliant dude that's taught me and Wiz a lot of what we know.
Brief breakdown of the Ichimoku Cloud which I learned from KOTM. AK refers to it as the best indicator in the world and I agree. I personally don't use 10, 20 day SMAs, etc because I feel like there's no real edge in them. Too many people use them. Warning: Spoiler! (Click to show)
You could get the cloud for free on StockCharts.com and through ThinkorSwim.
Intraday, the cloud works best on the 5 minute and with trending stocks (Keene loves using it for AAPL, TSLA, FB, TWTR). And at the open, he likes to use the break and close above the cloud as a buy signal, and below it a sell signal.
Using the cloud with the daily chart, when the stock is above the cloud and the lagging indicator is trending upward, it is in bullish territory. When it is below the cloud, it's bearish (and if the lagging indicator crosses the cloud to the downside that's considered confirmation). Inside the cloud, is considered neutral territory.
Here's TWTR's daily with the cloud:
The lagging indicator is the red line. The 9 period average is the blue, and the 26 is the pink. So far this one would be consider bullish since the stock is above the averages and the cloud and the lagging indicator is trending higher.
Here's FEYE's daily
As you could see it's below the cloud and lately when it tested the cloud, it failed to break above it. And the lagging indicator is trending lower.
It's a guide like everything else. I like using it along with price action to see how I want to plan trades, where to stop out or add in.
Looking at SPY here
It broke under the cloud, the dip got bought up and now it's back into the cloud. If it closes above the cloud and continues trading above it, we're in decent shape. If it breaks down below the cloud and trades beneath it for significant time, that's correction territory.
Example of HoD rejection Warning: Spoiler! (Click to show)
FB 1 minute, nice example of HOD rejection and VWAP failing to provide support Warning: Spoiler! (Click to show)
Books Warning: Spoiler! (Click to show)
Brian Shannon's Technical Analysis Using Multiple Timeframes
William O'Neil's How to Make Money in Stocks
Jesse Livermore's How To Trade Stocks
David Linton's Cloud Charts
The Metaphysics of Wall Street by Justin Stone
1. The Intelligent Investor by Benjamin Graham
2. One Up on Wall Street by Peter Lynch
3. The Five Rules for Successful Stock Investing by Pat Dorsey
4. The Neatest Little Guide To Stock Market Investing by Jason Kelly
5. How I Made $2,000,000 in the Stock Market by Nicolas Darvas
6. A Beginner's Guide To Investing - How To Grow Your Money the Smart and Easy Way by Alex H. Frey
7. Stock Market Investing For Beginners - Tycho Press
8. Financial Fitness Forever by Paul Merriman
9. Live It Up Without Outliving Your Money! by Paul Merriman
10. First-Time Investor Grow and Protect Your Money by Paul Merriman
11. 101 Investment Decisions Guaranteed To Change Your Financial Future by Paul Merriman
Trading In The Zone
Beyond Fear and Greed
Markets in Profile by James Dalton
Saw this list posted on the Twitter. He's also worth a follow.
@canuck2usa: Trading Books I like The Bible of Options Strategies-Cohen / Five Waves to Financial Freedom: Learn Elliott Wave Analysis cont/
@canuck2usa: Trading Chaos: Maximize Profits with Proven Technical Techniques/Trading for a Living: Psychology, Trading Tactics, Money Management cont/
@canuck2usa: Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk/Technical Analysis of the Financial Markets-Murphy
@canuck2usa: Market Wizards, Updated: Interviews With Top Traders
@canuck2usa: Option Volatility & Pricing: Advanced Trading Strategies and Techniques
@canuck2usa: Technical Analysis of the Futures Markets by John J. Murphy.
@canuck2usa: Following the Trend: Diversified Managed Futures Trading
The Daily Trading Coach: 101 Lessons for Becoming Your Own Trading Psychologist Hardcover by Brett N. Steenbarger
Basic OTC Rules Warning: Spoiler! (Click to show)
Learn Level 2 and learn which market makers play games like NITE
Good liquidity is a must
3 Bar/day rule usually has some credence
Read all @Mrockrulez tweets
Do not invest more than you can afford to lose, there is halt risk with these
LincolnList is a good resource for trading wisdom.
Basic chart/candlesticks patterns Warning: Spoiler! (Click to show)
Discussion of Value Areas Warning: Spoiler! (Click to show)
Understanding and Using Value Areas (watching the above video is a must) Warning: Spoiler! (Click to show)
I'm gonna try to be as clear as possible here so bare with me. To understand what I'm about to write, you need to check out the value area discussion video I have posted in the OP to get an idea how to set this up on your charts and use it. I use the value area for the month (if it's January, i'm drawing my lines from December's value area) and the day in my charts. For the month, I can draw my lines out and leave them for the entire month. For the day, I have to redraw them every morning since I'm using the prior day's information.
To get the month, I use the daily chart and switch the volume profile parameters from Daily to Month. Draw my lines and I switch back to the 15 or 5 minute and change the parameters back to Daily so I can get the value areas for that current day. I like to use the value for the month and the day simultaneously so I get a macro and micro feel for the stock.
If something is trading below value, the bottom of value should be resistance. If it breaks into value, that could be a long signal and there's a decent chance it will be magnetized to the point of control (the middle line). Usually you wanna take some profits at the point of control. If something is trading inside of value and tests the top of value, you can take a short at the top of value with a stop just outside of it, or you could buy the break above value with a stop just inside of it. If you take the short, you're looking for a move back to the point of control to take some profits. If it is within value and tests the bottom of value, you can play for a bounce with a stop just under value or you can take a short with the break below value with a stop just inside value.
Let's take a look at AAPL these past two days:
The pink lines is the value area for the month, the green are for the day.
As you see, it gapped above it's value area for the day and broke into value for the month. You could've taken a long here with your stop just outside of value and targeted a move to the point of control. I don't necessarily like taking shorts or longs off the point of control so I would've been finished with the trade at that point.
On Friday, it opened above value for the day but rejected it and traded back into value. You could've taken this as a short signal with a stop just outside of value. The point of control was really near the top of value so you could have taken a target at the point of control and left a little on as you saw it fail to provide support and you could've targeted the bottom of value. Conversely, you could've played the bounce off the bottom of value once it held value with a stop just under value targeting a move back to the point of control.
Nothing's perfect, but trading stocks is all about probability and this is an edge that looks decent and works well for a buddy of mine from the KOTM room.
TOS cut off the bottom of value for the month so what's visible is the top of value and point of control for the month. The bottom is around 74.76.
I had two plans this morning and I always have two plans. It's what I learned from Investors Underground. My plan was to buy the break above value for the month, or short the rejection of value for the month.
Unfortunately, I had an AAPL call spread on and for whatever reason after I took profits this morning and closed the spread I lost buying power for the day so I couldn't follow through on my plan. But as you can tell, FB rejected the top of value for the month, rejected the top of value for the day and cut through the point of control for the day as well. It got near the bottom of value before finding support and rotating back to the point of control. (My bottom of value price level is a little sloppy since I put it back on real quick. You want to be more careful during market hours making sure your price levels line up correctly)
TWTR is another example. Broke above value for the month yesterday, today it broke above value for the day. Nice moves following both breaks of resistance. Could've bought the dip this morning o/u the top of value for the month if you're into bounce plays.
It's not a guarantee and deciding whether to play a bounce or short could be predicated on the stock's overall strength as well as the greater market, but once you get a feel for a few names, you sort of just know which to choose.
Trading value areas is a nice resource that gives you a defined risk and a bit of an edge you may not have otherwise had. Instead of obsessing over each tick, you have a plan outlined and you know what you're willing to lose from the get go. Follow your rules and this could be a lucrative strategy if it interests you.
Basic Option Rules Warning: Spoiler! (Click to show)
If the spreads are wide, it’s probably not for you if you’re a novice trader. Nothing worse than struggling to find an exit plan, especially on expiration. There’s ways around it, like shorting stock against your calls on the day of expiration (if you’re in the money), but it’s a headache for most new traders.
Front month options have the most theta, if you’re buying out of the money calls and the stock trades sideways or goes up slightly, you’ll be vulnerable to losing your whole investment. Pick back month options if you want to swing something that’s chopping around, or monitor your position closely. Sometimes it’s worth paying a little extra to have more time. If you want to play front month, try to keep your size lower so if they quickly deteriorate against you, it isn’t that big of a deal. You could always roll your position as well if you feel uneasy but still like the name and idea.
Learn your greeks and study implied volatility. If IV is high, you don’t necessarily want to be buying calls outright. You may be better off utilizing spreads like iron butterflies to collect premium and put time on your side. Make sure you manage your spreads and options positions on the day of expiration in order to avoid being assigned stock.
Weeklies have the highest gamma, you get the biggest potential return, but you have the biggest potential risk. I day trade weeklies, but if you’re a swing trader, and particularly new at this, you might be better off using monthlies or initiating a spread to put time on your side.
Find the measured move the market makers are implying by using the at-the-money straddle. If I’m doing an earnings play or playing a catalyst event, the measure move target for that week’s expiration is the first thing I look at. If the stock is at $30 and the straddle is $6, I might do a 34-36 call spread, or a 34-36-38 butterfly, or conversely if I’m bearish, I might look at a 26-24 put spread, or 26-24-22 butterfly. I always look to sell the level the market maker is implying it could go to.
Know your options, know the intrinsic value and the time value, become educated in this field.
If you want to use options as stock replacement, use deep in the money calls or puts.
With iron butterflies, your risk is the max the spread could be worth, so however wide your legs are minus the premium you collected, that is your risk. If you’re right and you pin the move, the spread should go to zero and you keep the credit. Just make sure to close your spread on expiration to avoid headaches.
With normal butterfly spreads, as long as each leg is even, and your two long legs add up to the short leg (i.e. 10-20-10), the max you could lose is the price you paid, and your potential gain is the width of the legs (so if it’s a $2 wide fly, you could potentially receive that on the day of expiration if you pin the move). Nailing a butterfly overnight could give you an easy triple, but you won’t get full value until all of the premium gets sucked out of the short strike on expiration. If I have decent size, I like to sell half at a double and potentially let the rest ride to expiration but you could very well see the stock fly through your strikes and render your spread worthless so if you’re in account building mode, consider locking some or most in.
Never sell options naked. You don’t want blowout risk and for most of us, it just isn’t worth it to be writing. If you want to put time on your side and collect premium, utilize a spread that gives you at least even money risk (i.e. a bear call spread where I sell the 41 buy the 40 for .50, max I could lose is .50 per 1 lot if the stock trades above 41). I personally don’t like even money risk, so when I collect premium, I usually use an iron butterfly that gives me .15 to .30 of risk and .85 to .70 of credit potentially (on something $1 wide, $2 wide, I need to collect at least $1.50 to take the trade).
On Fridays, if you’re looking to buy weeklies, they will go to zero more often than not if the stock moves slightly or sideways. Consider using the following week’s expiration, or look for something with intrinsic value. You could get some sick returns on Fridays if you buy something cheap and it goes on tear the last hour of the day, but that’s lotto territory and it’s luck more often than not.
IV will always be lower after events, so if you have calls outright that are out of the money, they will take that volatility hit and drop in price.
If you’re looking to play unusual options activity, you need volume to be greater than open interest. Ideally, you’d like to get into something when paper creates the biggest block in open interest. UOA is tough though since you have degenerate paper (guys that keep losing and buying more, see this a lot in SRPT), and you have to decipher if the trader is buying options against a long or short position. Repeat buying is usually a positive sign if the stock is in a good trend (if it’s trending lower, it could be DG paper).
Breakdown of Fibonacci's
Warning: Spoiler! (Click to show)
Some good light reading material in here
Basic Guide to UOA
Warning: Spoiler! (Click to show)
If you’re playing UOA, volume needs to be greater than open interest to ensure the calls/puts were bought to open and were not closing. The most conviction is when paper creates the largest block in open interest.
Be careful with front month premium. Paper has bigger balls than us, they can afford to lose occasionally and not be affected. Front month premium has the highest gamma and theta, you could see your options expire worthless if the stock moves sideways. However, you could have your best percentage gains as well. Be smart with your position sizing and either manage risk, or pick a dollar amount you’re comfortable losing.
If you’re following WallStreetJesus or any other guys posting UOA on TWTR, you need to try and get in at the same level as paper or within a nickel or so. If you chase the option, you could be subject to a volatility hit. Remember when calls/puts are bought, volatility increases. If you’re chasing contracts that were bought by paper for .30 and you’re buying them at .75, you may have missed the trade and your favorable risk-reward no longer exists.
Paper doesn’t know you nor care about you. If you feel uneasy with the way a stock is trading after following paper, either decrease your size or exit. Sometimes paper, because of its balls, will buy options that take a hit initially but eventually come back tenfold. I bought UPS contracts following paper, $115 calls for .20. They went down to around nickel bid before UPS rallied to $110 (new 52s) and the contracts became nice winners. Always do what’s in the best interest for your account and avoid getting emotional. You could always buy less size initially to give yourself room to add in if you desire.
Sometimes paper will short an ETF via puts while holding individual names long as a hedge against their position. You may see a big put buyer in an ETF but that could simply be protection. Either avoid ETFs or be cautious and aware of the trend. Remember, it’s your money at stake, you’re responsible for your wallet.
Ideally, you want to follow UOA where the volume is greater than the stock’s average daily volume. Someone could buy 10,000 GE puts, but GE trades a lot of stock in a day so paper may not be controlling as much as you may have expected with the large lots bought. I bought some GE $26 puts (at the money) that expire in a 9 days since the option price was cheap and the stock’s chart looks weak. I think there’s a good chance the stock could sell off a dollar before expiration, but if it trades sideways or higher, I need to call it a day and get out of the position. Time isn’t on my side and the fact that it trades so much stock in a day doesn’t necessarily help me. However, there’s a good chance these go in the money and become absolute blow out winners if my thesis is correct within the next few days so I took the play on a risk to reward basis.
Some avoid rich options bought, i.e. calls in the money or that cost $4 plus. Others avoid cheapies (stocks under $10 or calls/puts less than 30 cents). Cheapies are considered lotto tickets since they could double easily. However, they’re cheap and could very well go to zero. Be intelligent and careful when taking a position.
You’ll see WallStreetJesus talking about wise guys, steam, repeat buying, those are sometimes the most profitable trades since paper continually comes in and sweeps options. They show a demand and don’t care about price, they just want to build a position. Of course, when there’s steam, volatility is rising so always be careful and don’t get too far ahead of yourself. Also, don’t break the Messiah’s balls when the wise guys are wrong. It happens on occasion, they’re human. They came in and bought a ton of CODE calls the past few months, unfortunately their batch of 29 and 30 calls expired worthless in November. However, they had the right idea and CODE had a merger I believe yesterday giving the stock a healthy bid. Their timing could be off, their idea could be wrong, they’re human just like you and me.
If implied volatility is cheap, odds are it’s going to get cheaper. If implied volatility is expensive, odds are it might get pricier. AVNR has recently had a takeover for $17. Jan 17 calls have an IV of around 6 currently and the options spread is .10 by .15. Theoretically, volatility could come in and double the price of the options rather easily, but with the takeout price being known as 17 bucks, the speculation is sapped from the trade and there’s a good chance theta eats up the remaining value. There’s little surprise left in these contracts.
Sometimes paper comes in and buys deep out of the money calls in certain names. That could be a volatility play if they think IV is too cheap. They could come in and be scalping IV.
Sometimes paper gamma scalps. They buy options and short the stock simultaneously to be delta neutral. They use the stock’s average true range to short stock and to cover. If the ATR is .80, every time the stock goes up .80 they’ll short, every time it goes down .80 they’ll cover, all while holding their calls in the interim. The same could be applied to puts. If you see calls bought while the stock is under the ichimoku cloud or in a down trend, this could be an opportunity to gamma scalp. It’s a concept that isn’t for beginners and requires a larger margin account.
For the most part, you want to avoid buying puts when the stock is above the ichimoku cloud (unless it looks like a topping pattern, lower highs, distribution, etc.) and you want to avoid buying calls under the cloud (unless there’s some higher lows, bottoming pattern, accumulation wicks, etc.). This is a safer way to protect yourself from the possibility that paper is buying calls against a short position and puts against a long position. Jan 50 TXN puts were bought when Texas traded around 50 bucks and above the cloud. TXN continue to rise and the puts decreased in value. With TXN making new highs and trading over $55, there’s a good chance those puts were bought against a long stock position.
You usually want to take the position paper is taking, but if it’s front month premium that’s gamma and theta rich and you’re uncomfortable, you could buy back month options and pay a little extra for protection against time decay. Just know there might not be as much volume and volatility and those calls may not increase the same amount percentage wise as the front months and it might be tougher to exit your position. However, you’re sacrificing that gamma and IV for protection against theta so it is what it is.
Sweeps are great. With a sweep someone will come in and sweep the offer across multiple exchanges in order to get filled. Shows more demand and conviction.
Volatility crushes happen. Be careful and protect yourself against that possibility if out of the money options were bought prior to a catalyst event/earnings report.
Try and take targets along the way. Sometimes after the initial steam these trade sideways or lose a little value. Pay yourself and lock in gains, and if you want you could keep a couple on if you like the idea the a lot.
Be weary of degenerate paper, avoid buy/writes, and proceed with rolls at your own discretion. Manage your risk or pick a dollar amount you don’t mind losing.
Volume Profile Trading Warning: Spoiler! (Click to show)
One thing i'll say about credit spreads, if you're collecting 65 cents in premium and risking $4.35, that's a horrible trade. I don't care what someone says about the probability of the trade working out makes it worthwhile. It's horrible risk-reward. Try and get even money bets or better.
Basics of Market Profile Warning: Spoiler! (Click to show)
Using Market Profile, the 80% Rule
Example of volume profile Warning: Spoiler! (Click to show)
Some videos worth checking out Warning: Spoiler! (Click to show)
McClellan Oscillator info
Anyone else has stuff worth sharing, please do, and let us start a new chapter in our trading careers when we are in the 10% that trade well consistently.
Always have fun, always manage your risk, and always give back when you can.
Edited by JohnnyRedStorm - 7/6/15 at 3:53pm