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A Continuation Pattern in IBM

After forming an island bottom back at the beginning of the year, IBM shot off like a rocket, running from 120 to 150.

It has since worked off its overbought condition and looks ready for another move higher.

Watch this video to see my technical take on the stock as well as an option trading strategy to consider.

3 Trading Outcomes for Apple This Summer

how-do-you-like-them-applesWhile the broad based indexes are spitting distance from new all time highs...

Things have not been as good in Apple land.

If you need to "blame" something, well you've got a long list.

Introduction of new competitors.

Poor iWatch sales.

Squeezing margins.

Whatever the case is, the big gap down that the stock saw after its earnings has probably priced in a lot of the bad news.

Yet, you can't just say the market is being completely efficient here.

If you can read the psychology of the market, then you can get a better edge in the stock.

AAPL Is Not A "Stock"

This may seem like a nonsensical idea, but AAPL really isn't a stock anymore.

(At least, you shouldn't treat it like one)

Sure, it represents the underlying shares of a company...

But that's not why many people trade it.

Think about it:

This is the most heavily traded, liquid stock in the world.

It's liquidity rivals many other broad-based markets.

In fact, we can go so far to even call it a mini-index!

AAPL has more in common with gold futures than it does other stocks.

It's more a source of liquidity and a store of value.

Think about it, if you're a fund manager that has a mandate to be invested 95% in stocks...

Meaning you can't hold a cash position...

You can't just park it in anything.

If you want to get in and out of an asset quickly, you don't want to have a bunch of slippage.

So what do you do?

You park it in AAPL... not just because you think the company is good (well, you still think it's good), but also you can sell your shares quickly without dumping the stock.

At some point the company matters... and we see that when the stock gaps around on earnings.

Have I convinced you a little bit?

This matters because the way you trade indexes and commodities is a little different than how you trade individual stocks.

Higher liquidity leads to more mean-reversion.

With that in mind...

A Look At The Chart

aapl

This is a weekly chart of AAPL.

If you could put this chart into a single word or phrase, what would it be?

Optimism? Sure doesn't look like it?

Panic? I don't think so.

When I look at this chart I see "impatience."

This impatience stems from a few areas.

First, we have the true believers in the company. They're invested for the long run and they actually care about the fundamentals.

Well, up to a point. Because if you aren't making money from it, the mood can easily sour.

Those fundamental investors are looking at a nasty gap down on earnings due to disappointing numbers.

And all those people who say they hate technical analysis... they're lying because they've got this exact chart pulled up, watching this level at 93.

The second group are the "liquidity" crowd, who use AAPL as a trading instrument and a way to "store value."

(In fact, I think AAPL and gold have a lot in common. Strong opinions held both in the bull and bear sides, and both assets only trend maybe twice a year. Food for thought...)

This liquidity crowd is growing impatient because AAPL stopped going higher.

I know it sounds stupid simple, but if you're parking your money in an asset, you'd like to see that asset rise.

And when stocks go down, liquidity tends to dry up.

I think the past few months has been an unwind of those who have used AAPL as a trading vehicle.

There's probably another few "profiles" we could build out in terms of who is playing the stock, but no matter what...

Everyone is looking at the 93 support level.

And what happens when everyone looks at the same level?

That's where I get my trade ideas from.

The 3 Trades to Consider

The first trade possibility is the failed breakdown.

aapl1

Because everyone is looking at this support level, it will have a higher initial failure rate.

Think about it...

If you're scared about a breakdown in AAPL, odds are you've already sold. You're not waiting for the actual break.

What ends up happening is the breakdown has no followthrough at all. Once investors and traders start seeing that in the tape, they pile on top of one another to reenter at a "better" price. This takes us back to 93 and probably a swift move to 100.

The second scenario is the all clear fade.

aapl2

In this case, the 93 level holds and we start to head higher.

The sentiment quickly shifts and the earnings gap gets faded. Complacency hits and we head back above 100, which is a big psychological level in and of itself.

If we bounce hard here, there will be a good shorting opportunity into that 100 level.

The third is what I would call a dip buy failure.

aapl2

If we get a clean break under 93 with proper followthrough, we'll find a point where all energy has been spent in the short term.

The first "dip buyers" will come in here, and hope for a bounce.

Odds are the first dip won't be the final move.

We'll need to wait for those dip buyers to get stopped out.

Into that stop out will be a great long term entry point on AAPL. I'd look at selling puts or doing a covered strangle.

It's Like Poker

The way to truly be successful at poker is understanding the motivations of the other players at the table.

The same holds true for stock trading.

Everyone has the same data.

Everyone has the same charts.

The way you win is taking it one step further and learn the motivations of the other participants. From there you can get better reward to the risk you take and build wealth over the long term.

What You Should Do While You Are Waiting For A Market Crash

Here's Where We Sit:

spx

Since the low in 2009, the markets are nearly a triple.

And to be honest...

We've gone nowhere for well over a year.

(With two pretty big corrections in between.)

What's more...

It's been years since we've seen a cyclical bear market.

And it's been years since we've seen a proper recession.

The risks out of China, high yield debt markets, and what the Fed will do next... these are all potential catalysts that could bring further weakness into the markets.

I have a question for you:

Are you truly prepared for what will happen next?

It's not just about expecting downside... are you OK with missing out on any potential returns if you're wrong?

Why It's Amazing To Be A Retail Investor

The beauty of all this is... you don't have any mandate that says you have to own stocks.

Or that you have to own 100% stocks.

And it's not even an all or nothing play. You can easily scale out of some investments and still have skin in the game.

The Catch-22

The biggest risk that permabears rarely talk about is the missed opportunity cost.

Think about all the ugly catalysts we've seen since 2009...

the debt ceiling...

the Eurozone falling apart...

the other shoe to drop in commercial real estate...

It's always going to look ugly out there.

Yet if you've been on the sidelines this whole time, you've missed out on massive upside in the markets, along with returns coming from any dividends that you take in.

The Passive Way to Fix This

As I said before, nobody is forcing you to be 100% invested in stocks.

Let me take an example...

I ran a study a while back that showed the performance of a 60/40 portfolio.

60% S&P 500

40% TLT (long term bonds)

With rebalancing done at regular intervals.

It's not a super optimized portfolio, yet what I found was that after the market crash in 2008...

It was back at its "high water mark" in only 9 months.

Diversification really works.

A No Yield Market

The problem that I'm seeing right now is the inability to find good risk-adjusted returns.

Because treasury yields are so low, it's difficult to get any kind of decent return without being forced into riskier trades.

Yet there's another way...

Potentially a more profitable way...

To keep getting returns while keeping your risk low.

A New Path

There's an asset class that is becoming increasingly popular...

Volatility.

By trading in this asset class, you can potentially get much larger returns than you would in the market without having a ton of risk involved.

I'd like to show you a simple volatility trading strategy known as an iron condor:

This trade makes money if volatility is overpriced in the market.

(And 80% of the time, it is!)

The best part about this trading strategy?

You're only in the market for a month or two at most.

Which means you can get in and out without having to worry about the next market collapse around the corner!

How nice would that be?

How to Get Started With Iron Condor Trading

Iron condors are a complex option spread.

At first it can be overwhelming if you don't know what you're doing.

Wouldn't it be nice if you knew exactly...

- when to enter a trade?

- what option strikes to use?

- exactly how to adjust the trade?

- when to exit for profits?

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Up 60%, not bad.

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How TWTR Stock Will Play Out Over The Next 5 Years

From it's 2013 high of 74, TWTR is now a $15 stock.

twtr

In this analysis piece, I'll be focusing more on the lizard-brain side of things.

Where the power of the narrative matters more than valuations.

The "turnaround" story has been going on for a year or two now, and I think we're approaching the desparation phase of the company.

I believe that this story will play out exactly like Yahoo did over the past several years.

The Yahoo Analog

Here's the basic timeline of what happened to Yahoo...

2007 - The original founder of Yahoo comes back and serves as CEO. It doesn't go so well... not necessarily his fault but just an overall lack of direction and talent suck out of the company.

It's driftwood.

2008 - Microsoft makes a bid for yahoo at a pretty nice price, but it falls through. Some view this is as an overall failure.

And then the market crashes.

In 2009 Yang steps down and Carol Bartz becomes the CEO. Nothing really happens over two years and investors are impatient. Carol Bartz leaves in 2011.

In 2012 they cycle through another CEO and finally land with Marissa Mayer.

This is where things get interesting.

During this whole time, over in China, a company named Alibaba has been growing. And growing. And growing.

Alibaba's CEO, Jack Ma, is friends with Jerry Yang... and it just so happens that Yahoo owns a sizeable stake of Alibaba.

Investors start to realize this.

And they buy YHOO stock as a proxy for Alibaba.

Over the next two years, YHOO's stock runs from 15 up to 50.

Sure, you could say that the fundamentals at Yahoo are improving but the way it's being traded... it's just a proxy in anticipation of the Alibaba IPO.

Once the IPO hype of Alibaba fades, so does YHOO stock.

And that's where we are now.

Here's the chart:

yhoo

Twitter Mad-Lib

All I'm going to do here is take the exact same narrative and talk about what will happen at TWTR.

I'm breaking out the crystal ball.

July 2015 - The oroginal founder of twitter comes back and serves as CEO. It doesn't go so well... not necessarily his fault but just an overall lack of direction and talent suck out fo the company.

It's driftwood.

October 2016 - Microsoft makes a bid for twitter at a pretty nice price, but it falls through. Some view this as an overall falure. [Note: any MSFT bid for TWTR is not public knowledge, but I have a feeling that it did take place and is non-public information]

And then the market crashes. [Eh, it kinda did... just not 2008]

In late 2016, Jack Dorsey will step down and someone from outside the company. Probably a woman. Nothing really happens over a year or two and investors are impatient. That CEO will leave, an interim CEO will come in for a few months.

In March of 2017 they land another CEO.

This is where things get interesting.

During this whole time, an old app called "Periscope" was spun off into its own company, and twitter owns a sizeable stake.

Periscope made a pivot into live sports, cleaned up their product, and now have content that rivals youtube and cable providers. The timing could have been better but they're starting to accelerate.

Investors start to realize this.

And they buy TWTR stock as a proxy for Periscope.

Over the next two years, TWTR stock runs from $9 to $30.

Sure, you could say that the fundamentals at Yahoo are improving but the way it's being traded... it's just a proxy for the Periscope IPO.

Once the IPO hype of Periscope fades, so does TWTR stock.

That's where we will be headed into 2018.

This is the analog chart:

twtr-after

Markets Are Fractal

That's about as far out as my crystal ball goes, and obviously it's more of a game than a reasonable investment strategy... but it's close.

Will this narrative take exactly 18 months? Eh, could be longer, could be shorter.

If anything, this exercise will help you understand that the psychology of investors and others involved in "the game" is fractal in nature, and stock prices have a tendency to reflect that.

The best way to play it is through covered calls. Odds are the stock will be in "CEO Hell" for at least a year... so selling puts and calls against common will allow you to get your basis down into the single digits.