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Don't Overthink It - Podcast Interview With Sean McLaughlin

I had a great luncthime chat with my good friend Sean McLaughlin, talking a ton about options.

We go over:

  • the simplest options trading strategy-- it's not what you think!
  • why focusing only on odds or theta is a recipe for disaster
  • how the execution of an idea matters just as much as the idea itself
  • some insights on how to allocate your portfolio
  • why going delta neutral on your portfolio is stupid
  • and much more!

You can listen to the chat here, we start at about the 7 minute mark

Want to learn more about our spread trading service? Click here to see how you can become a consistently profitable trader.

Profit From a Simple Overbought Trade in BA

The recent rally in stocks has been relentless.

We've nearly had 95 days in a row since the market has pulled back over 1%. That kind of streak hasn't happened in over a decade.

Yet underneath the surface the rally hasn't been evenly distributed. Tech stocks like NFLX, GOOGL, and FB haven't moved much, while large cap financials like JPM and GS have seen massive moves since November.

One stock sticks out in particular as I am seeing key signals from my indicators.

Boeing (BA) has moved from 120 to 185 in the course of a year... that's well over 50%.

And much of that movement started when the stock broke out of a range back in October.

A massive amount of value has been added over a short amount of time... but should we expect the stock to top out anytime soon?

Let's look at some numbers.

Quantitative Levels To Watch

The two indicators underneath the chart can give us a more objective view of how the stock has traded in the past.

The first indicator is a Moving Average deviation. It simply looks at how stretched we are relative to the 50 day moving average.

Currently we are 12.5% above the 50 day moving aveage. This is towards the higher end of the readings that we see in this stock.

The second indicator is the IWO Turning Point indicator. This shows us percentage movement relative to previous volatility.

Over the past 20 days (1 calendar month) the stock is up over 12%. Again, we're coming into levels that are exceedingly rare.

But here's the kicker...

Normally when we see elevated levels on the Turning Point Indicator, it usually is after a strong selloff in the market or an earnings catalyst in the stock.

Within our one month window, it has been a consistent markup higher without any kind of reversion whatsoever.

The next question is... what should we expect?

How this Stock Will Trade

Markets can correct 3 ways:

  1. Price
  2. Time
  3. Momentum

That means, if a stock is this overbought, there is no guarantee that it will selloff. It could simply go sideways, or it could rally but with a lower rate of change.

If you're going to try and step in front of this freight train, you need to make sure that you structure your risk the right way.

How to Trade It With Options

Here is a setup to consider:

Sell to Open BA Apr 195/200 Bear Call Spread

This is a limited risk, limited reward trade that makes money as long as BA stays underneath 195 by April expiration.

To put this in context, the 195 strike is currently 10 points higher than the current market price of Boeing.

You'd need to see another 5% higher for the outcome to be unfavorable to you.

Now is it possible that we rally 5% higher? Sure.

But is it probable for a 5% rally without some kind of sideways action or a pullback? No-- and that's where we make our money.

There are a few things to get you a slightly better edge in this trade...

Perfect Execution For Faster Profits

Too many traders treat credit spreads as a "set and forget" strategy. That opens you up to a lot more risk than you should be.

After all, the goal of financial speculation is to earn as much money as quickly as possible. You don't need to hang around in a credit spread for another month trying to milk out that last 0.10 in a trade.

This is why it makes sense to trade like a market maker.

Scale in, scale out.

The current mid on this spread is 0.75.

If you enter here, then add at 1.05 and 1.35 then you won't be as concerned about getting runover by a strong, strong move.

It's even better if you aggressively take profits on those adds to continue to cut your basis down.

And the final thing-- scale out of the trade, say at 0.25 on that first round.

To get an exit of 0.25, you'd need to see a move to 176 today... about a 5% pullback.

But in two weeks, you'd only need to see a pullback to 179. That's pretty reasonable, don't you think?

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How to Profit From A Stock That Has a Massive Selloff

"Buy when there's blood in the streets..." - Baron Rothschild

Success in financial speculation means you have to step up when the perceived risk is high... but the potential rewards are higher.

Like after a stock has just sold off.

Yet many times it's not as simple as "buy the dip." Sometimes a selloff builds on itself as more investors exit a position, and if you're not careful you can get blown out of a trade.

This guide will give you show you how to safely profit in a stock after it has had a massive selloff. You'll see how to find these stocks, how to avoid the riskiest parts of the trade, and how to use options to optimize your risk and reward.

How to Find Big Selloffs

Opportunities like these don't happen very often. You need to be prepared when they come along.

These three screeners can help you start your search for the best trading setups.

Bollinger Band Screener

A Bollinger Band is an indicator that tells us how much trending volatility is in a stock.

When a stock hasn't moved much, it means that the Bollinger Bands are tight.

But when the stock starts to move big, the Bollinger Bands will open up.

A simple screener to use is to look for stocks where the low is below the 3rd standard deviation Bollinger Band.

That will give you plenty of setups to start your search.

% Selloff Screener

Another simple setups is to look for stocks that have sold off a large percentage during the day.

My favorite tool to do this is using Finviz.

Simply go to the screener and select the "Performance" tab and choose "Today -5%."

One more thing you'll want to do is add two more filters-- price and market cap.

You'll want a "+Large" Market Cap and a Price "Over 50."

You won't get many setups per day, but when they show up... these setups tend to work very well.

Standard Deviation Screener

One more screener to use is to calculate the standard deviation in the stock.

If you find a stock that has a standard deviation reading under -3, then it's something to put on your watchlist.

Calculate the Risk In The Stock

Blindly going out and buying the dip on every single setup you see is a recipe for disaster. You must make sure that you answer these key questions before you make any decisions.

How Big Is The Company?

Not all stocks trade the same. The patterns and trends play out differently for large stocks vs. small stocks.Image result for size matters

It's best to focus on stocks with a high float and large market capitalization.

In other words, pick big stocks that have a lot of shares out on the market.

They have a higher odds of reversion.

What Event Just Happened?

When a  stock has a large selloff, it's generally due to some kind of catalyst.

Normal markets stay in equillibrium until something knocks it out. That's why we get the big kinds of moves.

The "kind" of event matters. If a stock just announced that it's going into bankruptcy... that's probably something you want to avoid.

However if the stock had earnings and it beat on earnings but missed on revenue... that's going to be a better condition to trade.

Is it A One Off Event?

This is crucial to understand. Let me explain with an example.

Back in 2010 I was sitting in my living room, glued to the TV screen.

They had a live feed of the oil well at the Deepwater Horizon.

It wasn't just an oil leak, it was a massive torrent of pollution headed into the water.

The biggest stocks hit were BP and Transocean (RIG).

Every time they tried to plug the hole, the stock would bounce a bit.

When it didn't work, the stocks would see massive selling.

It took nearly two months and many many points lower before these stocks bottomed.

When you look at the news on a stock, you need to ask...

"Is the uncertainty gone?"

When a stock reports earnings and sells off, most everything becomes a "known-known."

But if bad news hits a stock and we still don't know if the news is resolved...  that's when you want to stay away.

What is the Trend?

Simply put, it's easier to play good news on a bad stock.

If a stock is in a long term uptrend, then it has higher odds of institutional support as it falls back to previous levels.

The simplest way to filter these stocks:

Make sure the stock has a rising 200 day moving average.

Is It A Sector or Market Play?

When the Chinese adjusted their currency rate in 2015, it caught everyone by surprise.

The markets sold off 3% in a single day... I don't think a single stock was spared.

So if you see the market getting hit like that, then you have to worry about correlation risk.

That means it doesn't matter how much you like a stock, 90% of the stock's movement will be driven by the market.

In this case, you should focus on trading the indexes or the most liquid stocks in the index.

Trade This Market Structure For Easy Profits

I'm going to show you a simple template you can use to make buying the dip much easier.

Know How Stocks Trade

There is a concept called Levy Flight.

It's a statistical term that means a stock will tend to stick around in a range until a catalyst comes out.

After that catalyst the stock will quickly move and establish a new equillibrium range.

A great example is back when the market corrected in 2011. We had been in a range for the better half of the year when a new catalyst comes out, and then we see "Levy Flight."

We can use that to our advantage in the markets. Large, volatile moves tend to be "clustered" and then we settle down into a new range.

Here's how we can apply that to our trading setups...

The First Move is Not The Last Move

When a stock has a downside catalyst, there tend to be two lows.

First you have the momentum low. This is after all the aggressive selling has been done and the stock takes a quick bounce.

The second is the price low. This is where you have a lower low in price, but the momentum has pulled in.

That is where you want to start initiating positions.

Stocks trade differently on the first test of a price level compared to the second because the market participants and their emotions have changed.

It's easier to manage risk on that second test versus the first.

 Use Previous Support Levels to Dictate Entries

If you're buying the dip on a stock that has long term trend support, you need to know where the odds are highest for institutional buyers to step in.

Here are some of the indicators I use:

Previous support. If a stock found buyers at a key price level, then you have a higher odds that buyers will step up into those levels.

Moving Averages. For large selloffs, my main key is the 50, 100, and 200 day moving averages.

Statistical Analysis. I use an "Oddsmaker" to see how the stock has traded in the past to get an idea what my statistical margin of safety is.

So if a stock has sold off 5% and I know that within a month it rarely sells off under 12%, then I know if it heads just a little bit lower, I have good odds of starting a position.

Know the Exceptions

Of course, there's always going to be special circumstances. Sometimes the stock never retests the lows because a new market catalyst comes out.

Sometimes the stock gets a second round of bad news and has a second leg lower that you didn't anticipate.

That's why it's important to know how to keep your potential losses low while guaranteeing the odds are in your favor.

Use the Options Market To Limit Your Risk

The best way to buy the dip in a stock is to use a put credit spread, also known as a bull put spread.

This is an option strategy that gives you a little more wiggle room to the downside, just in case you're early on buying the dip.

Simply put, as long as the stock stays above the short strike of the spread, you make money. It also helps if the market rallies.

There are some ways to further increase your profits with bull put spreads...

Be Smart About Your Executions

The biggest mistake I see traders make is that they use an "all in" approach when selling put spreads.

This can be bad for you because...

  1. You don't know where the bottom of a stock is going to be
  2. If you hold on to expiration the odds further go against you
  3. You can't take advantage of volatile price movement while you're in a position

That's why I do three things to help my execution:

  1. Scale in
  2. Scale out
  3. Use GTC LMT orders

Those three things can increase your profits by 50% and massively decrease your risk.

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Twice a week, I send out my best spread selling ideas. Many of these are "dip buy" candidates.

What makes this trade service unique is that we are Proactive Traders.

We anticipate what price levels will get hit, plan our trades, and set LMT orders so we can go on with our day.

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How To Earn Stable Iron Condor Profits When the VIX Is Low

Iron condor trading is the best way to earn a consistent income in the options market without needing to pick stocks or time the market. You're able to exploit an inefficiency in the market called "risk premium" as investors are always scared about what's just around the corner.

But what if that premium gets too low? Is it still possible to build your portfolio when volatility gets too low?

Let's take a look at how it's not only more profitable... but it's also a much easier trade to manage.

Measuring Volatility To Avoid Costly Losses

The most widely followed indicator is the VIX.


This indicator measures the demand for protection in the S&P 500 options market.

Consider it like an insurance premium. If you're a middle-aged woman with 2 kids and a minivan, then you won't have a high car insurance premium. But if you're a 20 year old trust fund baby with a bright red Ferrari in Miami... then you're going to pay up.

The way we earn significant returns with iron condor trading is because most of the time, the actual risk in the market is less than what the options market was pricing in.

In other words, the implied volatility was lower than the actual volatility.

But what if the VIX gets really low?

The question then becomes... is the juice worth the squeeze?


Market Movement in a Low VIX

There are two charts I'd like to show you.

The first is the distribution of returns for the S&P 500 over a 20 day (1 month) window.


The standard deviation is 4.6%.

That means, about 2/3rds of the time, we should expect the market to at most 4.6% up or down.

Sometimes it can be more, sometimes it can be less.

Now as iron condor traders... this is where we make our money. We don't want to see large price movement in either direction.

Well, what happens when we have a low VIX reading?


The standard deviation is now just 2.3%.

That means the actual volatility is much, much less in a low VIX environment.

Remember, with iron condor trading you profit as long as the market doesn't move around as much... and in a low VIX environment this is definitely the case.

Now you're probably asking... can I even get any kinds of profits from the market?

How the VIX Is Leading You Away From Earning Returns

When the VIX is low, you may think that there simply isn't enough option premium available to sell... that somehow the credit received is not that great.

That's simply not the case.

Remember, when you trade iron condors, you're selling out of the money (OTM) options.

And OTM options hold their premium much better than at the money options. They are less sensitive.

Think about it as a market maker. Say a customer comes to you and says they want to buy some puts that are 10% lower than current prices, and they want to pay only .10 for it.

That means, as a market maker, you only get 10 bucks per contract... and if the market does manage to crash, then you're on the hook for a ton of money. You're not going to take that trade... the tail risk is not worth it.

Iron condors not only take advantage of the premium available in the market, but also the tail risk pricing. It helps to push your edge even further.

The Downside Is Not A Massive Risk

Here's the thing...

When people ask me if it's a dumb idea to sell volatility when the VIX is low, what they're really asking is...

"What if the market crashes?"

And that's a fair question.

Let's take a look at an iron condor trade put on in a low VIX environment.

Now take a look at where the expiration breakeven levels are.

The upside is 2370...

And the downside is 2127.

That means you have about 100 points of upside "cushion," and about 150 points to the downside.

Why are they different?

It's because investors are always going to be scared about the downside, not the upside.

You can sell options that are further out on the downside because there is more premium available.

In fact, it's much easier to manage the downside risk than the upside risk.

Have a Plan in Place

It should be clear now that a low VIX is not something to worry about when trading iron condors. They can be the most lucrative periods for iron condor traders because the actual risk is lower, and the downside is actually a little easier to manage.

Yet you must make sure you have a plan in place if things move against you. Because at some point they will.

Do you have a foolproof trading plan for each of your iron condor trades?

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Revealed: How to Prepare For the Next Big Move In The Markets

I remember it like it was yesterday.

In August of 2015, the S&P 500 sold off 3% in a single day.

400 points to the downside in the Dow.

The next day, we came off another 500 points.

We finished on the lows headed into the weekend, and then the following Monday the markets crashed.

The catalyst that set this all off was a surprise Yuan devaluation by the Chinese. This led to a series of events in the currency market, which triggered all sorts of nasty things in stocks. The market is now about 30% higher off those lows, but at the time it was pretty harrowing to watch.

Could it have been avoided? Could you have sidestepped costly losses in your portfolio or put on hedges that allowed you to safely navigate the market through an ugly period like that?

It can't be guaranteed, but it is possible.

I'm going to step through some of the warning signs you must watch, and what you can do right now to protect your portfolio.

Before we get started, I want to give you a warning.

You're not going to get an easy answer. There is nuance. I won't treat you like a child and try to scare you with end-of-world scenarios. If you're looking for a reason to sell all of your stocks, you won't find it here. Instead I'll show you what I'm looking at right now and the strategies you can use to protect yourself.

Watching The VIX

One of the biggest myths out there is that a low VIX means that it's time to sell stocks.

The usual story is that a high VIX means "fear" and a low VIX means "complacency." Well, that just simply isn't the case. In fact, when we have a low VIX it tends to lead to higher stock prices.

The concern you should have is a low sustained VIX... meaning when we have had complacency that has persisted for longer than a month.

Here's a chart with the price of the VIX removed, and only the 20 and 50 day moving averages. This allows us to look at the average close on the VIX over a 1 and 2.5 month timeframe.

This telsl us, that over the past month the average close on the VIX is right around 12. Since the market crash that has only happened one other time-- Summer of 2014. Back in July of 2014 the VIX had a closing level of 10.32%-- extreme levels.

Is it a warning sign? Yes. But it can take a while for actual selling to come into play. From that low VIX reading in 2014, it took a month to see any kind of selling in the market. It then took another 2 months before any true fear came into the market... and it took an Ebola scare for sellers to come into play.

The other thing to keep in mind is that the VIX is a measure of expected volatility in the future... so we should also look at past volatility to see how rich the premium is.

Here is a chart of the 20 day historical volatility in the S&P 500:

Over the past month we've seen an actual volatility of around 6%. That means if this volatility continues, then the VIX is actually still overvalued.

This means we have some small warning signs in the volatility markets, but it may take a while for them to actually work out.

What other warning signs should we look out for? Here's a simple one...

Bollinger Band Compression

If you want to look at how tight a market's range has been, simply look at the Bollinger Bands. This technical study can tell you how well the market has been trending, and identify powerful inflection points in the market.

Here is what the market currently looks like:

Over the past month, the Bollinger Bands have drastically compressed. This means that we have not seen any kind of trending action and the market has been very quiet.

When we see this kind of "pinch" in the Bollinger Bands, it means we have a high odds of seeing trending action soon.

This does not guarantee that the big move will be a selloff. In fact, it's possible to have a catalyst in the markets and we see volatility expansion to the upside. Yet most of the time... when we see volatility pick up it's because sellers found a reason to sell and the market is selling off.

Here's a better way to look at it. Instead of reading the bands, we can measure the distance between the upper and lower Bollinger Bands.

The Bollinger Band width on the S&P 500 currently sits around 1.7. That's not the lowest we've seen, but it's still quite low.

If you go back and look at other times we have hit these levels, they tend to precede a selloff. Remember, it's not guaranteed... a good example of upside vol expansion was in September o 2012:

The trouble I have with believing that we're due for a new bearish cycle is that we haven't truly seen the euphoria needed to really suck a lot of new people in. Which brings us to...

Watch The Lotto Stocks

There are a handful of names to follow that you can use to gauge how "hot" the market is getting.

When these names start to run it means the speculators are out in full force and feeling really comfortable in the market.

For a stock to get on this list, it needs to be a "brand name" stock that doesn't have a huge capitalization, or is a new issue.

A good example is BABA. When it ran from 82 to 120 in a month after it's IPO... that's how you know the market is starting to run hot.

Past "Lotto" stocks I've used in the past are GPRO, TWLO, BABA, DRYS, GMCR, CREE and a few others. Most of these names aren't on the list anymore because the market participants changed.

One of the reasons why I'm not super bearish here is that we really haven't had a new crop of runners pop up yet. One space I'm watching is the resurgence in the ag space-- stocks like POT and MOS.

So with this in mind let's talk about what I think will happen in the near term.

My Prediction On the Markets

A low VIX and low actual vol don't necessarily lead to market selloffs. I think it will, eventually, because stocks go up and down. That's just the normal cycle.

The market looks ready to be setting up for a breakout. So I don't think it makes sense to get aggressively bearish here... instead you want to start layering on hedges into that breakout.

So far, earnings season hasn't been a disaster. We are starting to see separation in the market, with large cap financials seeing some profit taking, while names like NFLX and TXN start to see breakouts.

My bet here is that we will rally into earnings season, and then investor psychology starts to anchor onto the next big Fed meeting, which is in the middle of March. We'll probably see profit taking and maybe a little fear into that event as we don't know what the Fed will do. We may get a little shakeout as the animal spirits in the market try to convince the Fed that another near term hike would be a bad idea.

Start looking for story stocks. NFLX is probably on there, so is POT. If they start running hard, that means we're close to a pivot high. From there you want to start looking at some smart long vol exposure.

How to Trade It

There are a handful of strategies to consider with this scenario.

Buy VIX Calls

Before I get started with this, remember that the VIX is a statistic. The actual numbers you're trading against are in the VIX futures.

So while the VIX is sitting at 12, the March VIX future is at 15.

The trade to look at is to buy the VIX Mar 15 Call for 1.50. This is not something you want to hold to expiration. Instead, you want to wait for the pre-Fed scare to come into play and then take profits into that.

The other reason I like VIX calls is that they are cheap.

Here is a chart of VVIX, which shows how expensive the premium is on VIX Options:

With any reading sub 80%, and you want to look to buy VIX protection simply because it's the best deal you can get right now.

Buy SPX Put Spreads

Look, buying puts straight up is fine if you absolutely nail the top, but if the selling comes a month later, then you're screwed because the time decay losses are larger than the gains you made from the selloff.

Instead, consider put spreads. They take advantage of another anomaly in the market right now.

Media preview

This is a chart of the SKEW. It shows how expensive out of the money puts are compared to at the money.

What this means is you can buy put spreads and reduce your overall cost and risk through this.

Consider this trade: Buy to Open SPX Mar 2260/2200 put spread at 13.80... you can also do a similar trade in the SPY options.

With this spread, you're buying the 2260 at a vol of 11.42%, and selling the 2200 at a vol of 13.44%.

All you'd need is a 30 point move to the downside and you're in the money.

Now at this point, I wouldn't consider this trade... but if the SPX ran to 2300 on a clear breakout, then I'd start layering into these spreads.

Sell Spreads in Individual Stocks

One more edge we can pull out of the market...

Stock correlations have, and continue to be incredibly low in the markets.

That means stock picking continues to be a form of risk management.

Here are some of my recent trade ideas:

How to Profit From The Next Move In The Banks

Look for This Stock to Breakout into Earnings

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Each trade setup has:

  • A chart of the stock to see where I'm finding tradeable levels.
  • Descriptions of the setup so you fully understand the reason behind the trade
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  • The exact option spread to take
  • The prices to execute based on our key price levels
  • Further risk management instructions

Selling spreads is the best way to play stocks consistently.

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