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Why GOOG Options Are A Buy Right Now

I've been talking a lot about how options are really, really cheap right now.

And to be fair, it makes sense. The S&P is in the tightest range we've seen in something like 20 years, so the options market is responding in kind.

But we're starting to see an overshoot.

Take Google Alphabet (GOOG) for example.

goog

The stock had a nice pop on earnings, and really hasn't gone anywhere over the course of a month.

What's the options market telling us?

One quick way to measure the volatility in the market is something called "price over strike."

We take the price of the straddle and divide it by the strike price of the straddle.

The Sep 770 straddle is going for $19.

That gives us a price over strike of 2.4%.

What does that mean?

If you buy this straddle and GOOG moves at least 2.4% by Sep opex, you're going to make money.

Show Me The Odds

You may ask yourself...

Well, how often does GOOG move 2.4%?

I've ran the numbers.

Looking at a 10 day trading window... so not even 20 calendar days but 14 calendar days, this is what I see:

goog-max-change

Here's how I got this graph...

I looked at the maximum gain and maximum loss of any time during that 10 day window... and took the largest of those values.

Clearly, GOOG moves a lot more than 2.4%.

How much?

This sample is over a 5 year window... I've got 1,248 samples.

The number of times over 2.5%?

933.

That means you've got a 75% chance that GOOG moves more than 2.5% in a 10 day window.

It's not just slightly better than a coin flip... it's a flip and a half.

I don't recall many times when the options market skews the odds this far into the option buyer's favor.

Pretty good odds, don't you think?

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The One Simple Trick It Takes To Get An Edge in the Market

Yet there's one question so many have trouble answering...

If everyone has access to the same information, how is it possible to get any kind of edge in the markets?

This especially holds true with technical analysis. After all, everyone is looking at the same moving averages, trendlines, and price patterns.

How can the difference between winners and losers be so big when everyone is looking at the same charts?

There is something to be said about your own psychology around risk and how you execute on your trades...

But I'm going to show you how a simple shift in your mindset can completely change how you approach the market and drastically increase your performance.

First, let's stop by the poker table.

cards

The Cards On The Table

Say you are playing a game of poker against 7 other people.

Specifically, Texas Hold'em

What information helps you make a decision?

Well, you've got the cards in your hand.

And you've got the cards on the table.

Everything else is hidden from you until all the bets are done.

And you know what? You could calculate your odds of success based on the cards on the table and the cards in your hand.

But that wouldn't make you successful.

The Mindset Shift

There's so much more going on at this poker table that can give you an edge.

What's the chip count of each of the players?

Who has a small stack and about to go on tilt, and who has a big stack that has all the time in the world?

How much has each player had to drink? Is anyone drunk enough to make stupid bets?

How long has each player been at the table? Who is looking fatigued?

Does anyone have a tell? Are they bluffing on their bets? Are they trying to slow play you until the river card?

And then you can go into your own thoughts. Are you stressed about this hand? Do other people think you're stressed about this?

There's a lot more going on, isn't there?

If all you do is focus on the cards on the table and the cards in your hand, you're going to be at a significant disadvantage.

Being successful is not about playing the cards, it's about playing the players.

How To Change Your Mindset in the Markets

Just like Texas Hold'em, everyone sees the cards on the table.

But with investing and trading, some information goes out the window.

You don't know who you're trading against, you don't know their "chip count," you don't know what kind of positioning they are coming from.

Yet, you can feel it in the markets.

In many instances, you can quantify it through technical analysis.

80% of my technical analysis is not based on the charts I see, but on how I think other people are positioned into the trade.

Where are the pain points on the chart?

Who owns this stock?

At what price will most people get stopped out or forced into the trade?

What is the overall positioning of participants and at what prices?

What new information are they waiting for to make a decision?

Being a successful trader is not about looking at lines on a chart... it's about playing the other players.

That's why there is a huge gap between winners and losers.

Get Clarity in the Markets

If you change your mindset and how you approach the market, you'll start to see things differently.

You'll realize it's not about how this moving average will support price, it's how you know it's high odds institutional buyers will step up.

You'll realize it's not about shorting a breakdown, it's how you know that there's a bunch of investors that are about to see their position go from green to red.

You'll realize it's not about chasing an earnings gap, it's how large players are being forced to chase as well and you can get in and out faster than them.

Change your mindset, change your approach, and see your performance drastically improve.

The Cheapest Options You Will See This Year

When an earnings event comes out, the premium in the options market will go down.

By a lot.

That's because the market no longer has to price in the risk of an event.

Yet there are sometimes in which the option premium gets so low that it makes sense to be a net buyer of options.

Let's take a look at an example.

vxapl

This is VXAPL, which is the VIX for AAPL options.

There really wasn't any kind of bid going into earnings, and after earnings we saw it drop below 20.

This is an incredibly rare occurrence, and it tends to revert back.

These are levels you won't see the rest of the year. And we're seeing the same kind of setup in other high beta tech stocks like AMZN, FB, and GOOG.

If you've ever wanted to buy volatility, this is the best risk/reward you're going to get.

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Get The Best Option Trading Fills

If you're looking for full time profits as a part time trader, you must adjust how you approach the market and how you execute on your trades.

I'm going to show you a simple way to get better entries and exits on your option trades so you can earn better profits even when you aren't in front of a screen.

Avoid This If You Want To Stop Losing Money In The Market

If you are a reactive trader, then you'll spend all day chasing hot stock tips and getting bad fills. You'll feel like you're doing something in the markets, but when you look at your results it's disappointing.

Your success as an options trader revolves around how you plan your trade executions before they happen.

Step 1: Pick Your Prices

This may seem obvious.

Yet it's a mistake that many new traders make.

What I've found with new stock and option traders is that they rarely get the best price on a trade.

By forcing yourself to pick the best price, it keeps you out of bad trades and allows you to tune out the noise.

Will you miss out on a few winning trades?

Sure it's possible. But you'll also be avoiding those costly reactive trades that deplete both your financial and psychological capital.

The other benefit of picking your price is that it allows you to take a step back and be a much better observer of the market.

Your opinions and biases are completely different when you're involved in a position compared to when you are "stalking" for the best price.

If you get good enough, you can develop a feel for a stock on where the pain points are and where the stop runs will be. Those are usually the best entry points for a stock.

Here's an example:

cvx

Chevron (CVX) just had a failed breakout. It cleared key resistance at 104 for a week or so, but the continued weakness in the oil space helped to bring the stock back into the range.

When we have a failed breakout, the stock tends to trade to the other side of the range, which is at 97.50. That's a price I'd be willing to get long.

Step 2: Pick Your Option Prices

This step only works when you are looking at reverting kinds of setups where you let the price come to you.

If you are trading breakouts or trend continuation plays then you'll need to be more active, setting alerts and being ready to enter on your breakout signals.

Yet if you're looking for a way to automate your options trading, this is as close as you can get.

Simply put, you need to pick your option strategy and then figure out what price that strategy will hit if the stock price comes into what you want.

Remember, options are derivatives. The pricing is derived from movement in the underlying and the implied volatility.

Let's head back to our example in CVX.

Say I wanted to use bull put spreads as a position. So I'd go out and look at the September 90/85 bull put spread.

Here's what it looks like right now:

cvx-bull-put-spread

So the current price is 0.33. That's not the kind of risk/reward I am looking for.

However, if CVX trades into my target price of 97.50, then the spread will be worth between 0.65 and 0.70. That's a better entry point.

Here's the cool thing... you can set GTC (Good till cancel) orders on this spread. That way you don't have to worry about being at your trading screen at the right time.

You've already planned your price, and planned your option strategy. What else can you do?

Step 3: Develop a Scaling Strategy

I'll be straight up with you, even if you have your perfect prices, the natural volatility of the market will try to shake you out of your position.

Why not use that in your favor?

When I work with newer traders, they view each trade as an "all or nothing" kind of strategy.

Get into the trade all at once, and if it doesn't work then you stop out.

Doing that leaves you with tighter stops on a trade, giving you higher odds you'll get shaken out of a trade.

If you can learn to use the natural volatility of the market, you can get better fills and more profits with the same amount of risk.

Let's go back to our example in CVX. My initial price would be 0.65, but I would start with smaller size and then add to the trade at 0.95 and then at 1.50.

That way if CVX really stretches to the downside I'll be prepared to take the heat and increase my odds in the trade.

Come Trade With Me

The main advantage with our premium services is that we are proactive in our trade setups.

When you join IWO Premium, you get trade setups before they happen.

No more chasing "hot" alerts.

No more having a trade reverse against you as soon as you enter a trade.

Every single trade setup is planned out at least a day before we enter into the trade.

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Welcome to Summer Trading

spy

This chart shows the S&P 500 etf (SPY), and the lower indicator is the 10 day historical volatility.

It currently sits around 5%.

That means if we were to continue to see this kind of price action, we should expect the S&P 500 to be about 5% higher or lower from these prices in about a year.

Of course, that doesn't happen, as volatility cycles from low to high... but it has been a grind.

So we've got the actual vol at 5%, and the VIX under 12% for some time.

The "traditional" response here is that it means we are due for a selloff.... that when the VIX is low and the market hasn't moved in a while it clearly means it's time to be bearish.

I'd like to point out that from what I can tell this is the consensus. And that the true contrarian bet is actually looking for more upside.

And you know what?

It would be nice to see a pullback. I would prefer it.

But the other scenario here is that vol comes off the floor but it's not the end of the world. And instead of seeing vol head back to 20%, it just normalizes to 12%.

More summer trading.

Here's the beauty of this kind of market.

When vol is low, it also means correlations are low. It's a stock picker's market.

The indexes can rotate and go sideways and pullback... and in the meantime you can have setups underneath the surface trigger.

Both to the long side and short side.

What this means is-- don't get lost in the noise.

Way to many people are getting sucked in looking for a market top and the next big macro move, when the better edge is to look for stocks moving after earnings and placing your bets there.