A long strangle is long one call at a higher strike and long one put at a lower strike in the same expiration and on the same stock. Such a position makes money if the stock price moves up or down well past the strike prices of the strangle. There are higher costs and risks with these strategies, as I discuss below.
Strangles are low risk plays, one side of the options will go up in value when the other side goes down in value the majority of the time.
- If one side becomes worthless it generally means the other side is worth a lot.
- You can make money on strangles even when you do not know which way the market will move.
- It is much less stressful to hold a position with a hedge in place.
- The big risks are transferred from the option buyer to the option seller in this play.
- Strangles lose small with small movements but win big when there is a big move. The are asymmetrical in their construction.
- When one side of the option sellers blow up their account due to an outsized move you will be on the other side of them and be the trader their capital flows to.
- Strangles can be played on any time frame.
- With the strangles the winning side has a growing delta and the losing side has a shrinking delta.
- Strangles can be used to capture trends, volatility, and reversals.
Where is the risk? (more…)
1)In panics there is almost nowhere to make money without taking excessive risk
2)Timing entries and exits to oversold & overbought conditions helps achieve low-risk/high-reward entries
3)There is no such thing as a safe investment
4)Markets are dysfunctional, corrupt, and have no oversight
5)To let a stock prove itself to me, prior to jumping in based on my analysis alone (more…)
Contrary to popular belief by the majority of the general population and even investors and traders stocks are not tied to their fundamental values or even the companies that sold the shares to raise capital. Stock prices are tied to simply what the current buyer and seller in the market is willing to exchange ownership for. That is what determines price, nothing else. So the big question is what are the rules that govern the change in a stocks price?
The laws of economics governs price movement in the market. There are three laws articulated by legendary trader and market pioneer Richard Wyckoff that captures what causes current price reality and what changes it.
The Law of Supply and Demand
The excess of demand (buyers) over supply (sellers) causes a stock’s price to go up. The excess of supply over demand causes a stock’s price to go down.
The price is determined by the law of supply and demand.
The price moves up and down to balance the supply and demand to the equilibrium.
“The stock is only worth the other people are willing to pay for it”— (more…)
Above is the Monthly chart of
It was a bad day for most stocks , but it was a bloodbath for embattled oil giant BP.
Shares of BP dived 16 percent , driving the stock price to below $30 per share, the worst drop on record for the company. The British energy giant closed at $29.20 per share. More ominously, investors and traders rushed to dump their BP: Trading of the stock occurred at four times normal volume today.
As a result, the asset-rich company is now trading for less than its book value, which is essentially all the assets it has — oil fields, oil rigs and so forth — minus intangible assets and liabilities.
In English, this means that investors and traders think that the company is now actually worth less than all the hard assets it owns. That’s a confidence trade.
Today, BP is worth $91.4 billion. In mid-April, the company was worth $180 billion.
BP will be forced into a pre-packaged bankruptcy hit the markets like a torpedo into a well head.
What is interesting is that companies are usually very quick to respond to market rumors. So far BP has been silent and has yet to issue any statements regarding the speculation of a bankruptcy filing.
I have no other information than what is being reported on the wire services. If BP is to make a statement dispelling the speculation they had better do it soon.
- Concentrate on what is important. The most important thing when I am trading is profit and education, to some extent. You can get to profit many ways but your actions need to all bend towards that one objective. Me talking about my position takes me away from analyzing the position. Also, for me, it makes me less flexible. Now I am thinking about what the market is doing and how I look to other people. Also, if you are going to talk your book the most effective way is to get out into it, albeit the most unethical.
- Start with a logical thesis. For example, leave out the fact that you said the following about the company “offers a useful, attractively priced service to customers, is growing like wildfire, is very well managed, and has a strong balance sheet,” but still decided to short the company anyways. I realize this statement does not always mean a stock price is going to rise but the next logical step does not mean the stock is going down.
- Follow your plan. Do not make reference to your strategy as the following “outright frauds (our very favorite), industries in decline or facing major headwinds, weak or faddish business models, bad balance sheets, and incompetent,excessively promotional and/or crooked management” and not follow it. See above statement.
- Do your research before you make a trade. Don’t use anything with the word “monkey” in it for research purposes and tell someone about it. Also, 500 people is not a very big sample size.
- And finally, don’t act like a loss is the end of the world or a win. If you are doing the right things, your best and worst days are always ahead of you. After the trade is over the next trade is the most important, once again assuming you are doing the right things.
Nothing is ever going to prevent you from losing but there are several things that can prevent you from winning over a long period of time.
Mark Minervini, U.S. investing champion in 1997, averaged a 220% return per year from 1994 to 2000 for a compounded total return of 33,500%. Yes, we all know that these astonishing figures coincided with a major bull market, but how many traders came anywhere close to his record during this period?
In Trade Like a Stock Market Wizard: How to Achieve Superperformance in Stocks in Any Market (McGraw-Hill, 2013) Minervini shares his SEPA (Specific Entry Point Analysis) trading strategy. It’s essentially a trend following/breakout strategy that screens for such variables as earnings surprises and relative strength and that looks for catalysts driving institutional interest. It relies on both fundamentals and technicals. Its focus is on youthful small- to mid-cap stocks.
There are strong echoes of Bill O’Neil, Ben and Mitch Zacks, Richard Donchian, even Jesse Livermore in Minervini’s work. That he borrows from such luminaries is not surprising. Having dropped out of school at the age of 15, he subsequently became “a fanatical student of the stock market. … Over the years,” he writes, “I’ve read an incredible number of investment books, including more than 1,000 titles in my personal library alone.” (p. 3) (more…)
There are some major day trading mistakes that just about every new trader will make early on in their career. The ones who survive are those who can recognize these mistakes and take corrective action.
The first mistake many day traders make is to skip the planning phase of the day or a trade. Every day you sit down in front of your monitors you should have a general plan for the day. You should understand the major trends and support/resistance of the major indices, and the stocks you plan on trading. In addition to that, once you see your stock setting up for a trade you should have a plan that includes an entry, a target and a stop-loss before you even pull the trigger on the trade.
Another mistake that we often see in day trading is the inability to exit on a losing trade. If you have issues with getting out of the market when your pre-planned loss has been hit on your own, try using stop-loss orders. Never. Never ever ever move a stop loss order once it’s been placed. This requires some discipline but it will save you tons of money in the long run. You should never be hoping that your stock will turn around, and go where you expected. You should be executing your plan to the letter.
On a similar note, you also never want to move your targets. If you keep moving your target away from the stock’s current price, you’re never going to take your profits. A typical day trading exit strategy is to take profits at predetermined levels as you proceed into green territory. This means that before you’ve entered the trade you’ve chosen two or more targets. You exit a portion of your trade at each target. Now, if you think your stock is going to trend for the day, you can plan for that too. This is called a trade-to-hold. It doesn’t mean you move your target, but rather you try to stay in the trend by setting a trailing stop. A trailing stop can either be automatically set at a certain percentage or point value behind the stock price, or you can mechanically keep moving your stop loss up to obvious points of resistance or support behind your trending stock. (more…)
This is not like any other ABC list you might have come across about trading stocks. There are no real terms here. The following is the ABC’s of successful stock trading.
A – Action, nothing happens until you DO SOMETHING.
B – Bear trap, don’t get sucked into it.
C – Cash, not making too much when you are holding cash.
D – Due diligence, don’t jump into a position blindly.
E – Early, the best traders make a move before its popular.
F – Fear to lose money, the hardest thing to overcome in trading.
G – Greed, try to make a quick buck, and lose a quick thousand.
H – Humbled, no trader is immune from bad trades.
I – Ignorance, following recommendations blindly puts all the blame on you.
J – Justification, the more you have to convince yourself, the less likely the trade will probably work.
K – Keep discipline, stick to your strategy and have faith it will work.
L – Losses, accept them and move on. Don’t dwindle on the past.
M – Money, what makes the world turn.
N – Never is impossible, in the stock market ANYTHING can happen.
O – Only if I had…, the worst statement a trader can make.
P – Perception, moves the market more than the actual facts.
Q – Quality vs. Quantity, which one works best for your system?
R – Realized Profit, you haven’t made or lost any money until you sell.
S – Strategy, never enter a position until you know the exit plan.
T – Trade Triangle Technology… need I say more?
U – Understatement, everybody succeeds in the stock market.
V – Value, reason traders buy and sell because they think the stock price should be higher or lower.
W – Write downs, something you don’t want to see a company do too often.
X – Xcited (I know, I know), nothing feels better than executing a profitable trade.
Y – Your alone, at the end of the day the only person who cares about your account is you.
Z – Zenith, where we would like to exit your stock position.
Seventy one years ago, on Thursday, November 28, 1940, Jesse Lauriston Livermore, entered the Sherry Netherland Hotel where he took a seat near the bar and enjoyed a couple of old-fashioned. After an hour Jesse Livermore got up and went in the cloakroom, seated himself on a stool, and then shot himself in the head with a .32 Colt automatic. How could the man who is still regarded by many as the greatest trader who ever lived go out this way by taking his own life? It just doesn’t match the rest of his life.
In his youth Jesse was know as the “Boy Plunger” because he looked younger than his years and he would take big positions when he traded against the bucket shops of his day. The bucket shops let traders bet on a stock price, but no trade was executed, the house covered if you were right. How good was he? He was banned from the bucket shops one by one, it was like getting kicked out of a casino because you beat the house so badly with outsized gains. He went on to trade in stocks and commodities and did very well becoming a millionaire many times. Unfortunately he also went bust many times. He made his biggest money in the market crashes of 1907 and 1929, it is said that J.P. Morgan himself sent word asking for Jesse to please quit shorting stocks. In 1929 the day of one of the biggest market meltdowns he returned home and his wife was scared that he had lost everything, he surprised her by making the biggest money of his trading career. He ended up with the nickname “The Great Bear of Wall Street” because of his shorting activity.
Here are some of his most insightful quotes from his book “How to Trade in Stocks”
“All through time, people have basically acted and re-acted the same way in the market as a result of: greed, fear, ignorance, and hope – that is why the numerical formations and patterns recur on a constant basis”
“Successful traders always follow the line of least resistance – follow the trend – the trend is your friend”
“Wall Street never changes, the pockets change, the stocks change, but Wall Street never changes, because hu (more…)
I was born in Shrewsbury, Mass to a family of subsistence farmers. I was thin and often sickly as a child, but a very good student, especially in math. I ran away from home at the age of 14 with the blessing and help of my mother to avoid being pulled into the life of subsistence farming that my father intended for me.
My first job was as a quote boy (posting stock quotes on a chalk board) at Paine Webber in Boston, Mass. At the outset I had no money, no contacts, no education and no support…not exactly a traditional formula for winning the game of life. However, it was here, in these early years, that I noticed the patterns that the stock quotes followed, began to develop my system for trading the markets and made my first trades.
My first trades were made in what were then known as “bucket shops.” These were generally unlicensed brokerage houses that were little more than backroom gambling houses. Most bucket shop customers lost money, but I did not because my trading was based on the “tape” (the ever-changing stock price patterns printing on the ticker tape). I am known as perhaps the best pure “tapereader” of all time. It was also during this time that I came to be known as the Boy Plunger for my willingness to place large “bets” on trades for which I had great conviction. (more…)