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We're Seeing a Blow Off Top in Silver

If you haven't been paying attention, Silver has been on quite a tear lately.

Here's a daily chart of silver futures:


The chart also has Bollinger Bands, which show us when a market is seeing movement larger than normal.

And for three days in a row now, silver has been above its upper Bollingr Band. That defines a parabolic move, and often it is a blowoff top.

That last candle?

Silver moved from 19.84 and hit a high of 21.22. 7% in a single day.

That in and of itself is interesting, but here's the kicker...

... that entire move happened during a 3-day weekend, not regular trading hours.

When we see a big move like that and it's not during a normal market session, we tend to see yet another attempt of those recent highs. I wouldn't be surprised if it cracked back above 20 this week.

Into any short term strength and I'll be looking to fade it.

Keep in mind, this is a short term trade. If we look at where silver sits on a longer term basis, this is probably the start of a new trend higher.


Timeframes matter. Short term, I'm bearish and it's worth a look to take the short side.

Yet into any weakness that feels like the bulls giving up, then it's worth a look to start a new longer term position and play for the move into the 27 level.

Want to know the exact way to play this using options? Join IWO Premium and you'll get the setups I take every day to earn money in the options market.

Breaking Down the Brexit

During a slow summer trade, Great Britain rocked the markets by voting to leave the eurozone.

The Dow Jones Industrial Average plummeted 800 points.

It looked as though the end of western civilization was upon us.

This harbinger of doom would bring plagues, locusts, rivers of fire...

Cats and dogs living together! Madness!

Yet, all it took was a single week, and we are already back to post-Brexit levels.

dow futures

What the heck happened?

I'm going to lay it all out for you so you can get a better feel for how markets actually work.

Don't Look at The Dow

If all you do is focus on the "big 3," you'll never see the entire picture.

The big 3 are the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100.

What do they all have in common?

They are all US-based indexes, and the are large cap stocks.

If you had been paying attention at all for the past few months, you would have seen a sustained "risk off" trade going on in stocks.

For example, look at the Russell 2000 index. This is made up of smallcap stocks, which tend to be viewed as riskier instruments as they can move around a lot more.

When the Russell underperforms the S&P 500, it means that there is a "risk off" feel for US stocks.

So while the S&P 500 is within spitting distance of all time highs, the past year's action has not been great for small cap stocks.


Watch Across the Pond

The Brexit news would mainly affect two areas: Britain, and the rest of Europe.

How have those indexes performed over the past few months?

First, let's look at the FTSE 100-- it's like the Dow Jones in Great Britain:


From the highs from May 2015, the index dropped 22% to the lows put in back in February of 2016. Since then, it's been a choppy mess.

We can also look at Germany for the other side... the DAX is the main index to watch for German stocks:


Same kind of movement as Great Britain... dropping almost 30% off the highs from 2015.

Clearly, the narrative in these markets is different than what we are seeing in the US. While the Dow doesn't look half bad, there has been siginficant technical damage in European markets, even before the Brexit vote took place.

It Was A Known Unknown

Often times when we have an event like the "Brexit," it has a tendency to fade the first move.

And the bigger the hype of the event, the higher the odds that the event will be faded.

The phrase is called "buy the rumour, sell the news."

So we came into June knowing that the Brexit vote was going to happen.

It was all anyone could really talk about.

And if fund managers were scared about the risks, maybe they would park their money into safer stocks and divest out of Europe for a while.

It's possible that the drops we saw in the markets several months ago had already started to price in some of the Brexit risks.

So when everyone is expecting the markets to run lower... it's possible that those investors who were anticipating that are already out before the event, or have hedged their bets. This creates a floor so the market doesn't find followthrough.

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3 Reasons Why Our Iron Condor Service Is Winning

While the rest of the market is flat, our IncomeLab portfolio is up 13.29% YTD.

Last year, we were up 60%.

What's our strategy?

All we do is trade iron condors, an option trading strategy that gets results as long as the market stays rangebound.

1. No Trading Weeklies

If you sell premium on short term options, you have the ability to earn fast returns.

But that comes at a price.

If the market moves too fast, you end up getting blown out of the trade with no ability to adjust or manage your risk.

And there were two big moves in the past year...

The market crash in August 2015, and the correction at the beginning of 2016.

A lot of people got hurt by not planning for those kinds of moves.

It may seem lucrative to trade iron condors on weekly options, but the risk is too great if a big move does come.

2. Take Profits When You Can

There's no law that says you have to hold iron condors all the way to options expiratio.

In fact, doing that can introduce a lot more risk to your position.

You may be trying to pull the last bit of premium out of the position, but what you'll find is that the position will be "stubborn" for that last round of profits and you'll be stuck holding onto the trade.

Our goal at IncomeLab is to earn money as quickly as possible and not expose ourselves to uneccessary risk.

That's why we have a set of guidelines on how to take profits when a position is working for us.

3. Hedge Before You Have To

Way too many traders view iron condors as "set and forget" strategies.

In fact, they are dynamic risk positions that should be managed aggressively before the trade gets away from you.

We have a complete trading framework that dictates exactly when to adjust our trade to reduce risk.

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The Move In the VIX Doesn't Matter

The way the VIX has acted over the past two weeks is something that I've not seen...

... probably ever.

The VIX has run from a low of 13 and spiked all the way to 21.


Now this move on its own is not too crazy.

In fact, I would consider this par for the course in terms of how volatility acts.

(And yes, I'm typing this on my laptop while watching the final round of the US Open. Golf is on my mind.)

What really sticks out here is the lack of price movement in the SPX.

Normally, price leads the VIX. If the market sells off, investors get scared and buy SPX puts... which drives the VIX higher.

Yet, the market has been absolutely quiet.



Sure the market has sold off, but the actual volatility sits under 9%.

As option traders, we want to watch the spread between the expected fear (using the VIX) and the actual fer (using historical volatility).

And the kind of move that we've seen absent ANY kind of true downside... well, I don't think we've seen it before.

It's All About The Brexit

The reason we're seeing such a strong move in the VIX without any kind of big selloff comes down to one thing:

The British referendum to leave the EU.

We are seeing expected fear "spillover" into equity risk premium.

Want to see something really crazy?

Here is a chart of FXB -- it's an etF for the British pound. It tracks the movement in the currency markets.


The lower chart shows the implied volatility for FXB options... basically the VIX for the currency.

Here's what I know about reading currency vol...

... anything above 15% and there's some serious shenanigans

... anything above 20% and the market's pricing something really ugly

... anything above 25%? It's not unprecedented but you only see it when the market has already crashed or is expecting a crash.

To put this in perspective, FXB vol hasn't been this high since the market crash in 2008.

This is where the "spillover" theme comes into play.

At some point, hedging currency risk gets too expensive to do.

So if you're a trader needing some "risk off" exposure, at some point you make the choice to pick up puts in the S&P 500 market instead of currencies.

That movement ends up building on itself, and all of a sudden the VIX has spiked to 20.

It's Getting Priced In

The bearish thesis here is that the VIX is full of "smart money" traders that are anticpating the collapse of western finance.

Thing is, I know plenty of stupid option traders. And given how saturated the vol markets are, it's very difficult to say that divergences like this are some kind of a big signal.

I am concerned about one thing... it seems when the markets really selloff there's some kind of move in currencies that really shake the markets.

The crash from August 2015? It was from a change in Chinese currency rates.

The pullback in January 2016? Related to the Fed.

The big drop in 2012 was from the "Fiscal Cliff."

And every summer swoon has been from Greece or PIIGS or some other risk out of Europe.

So of course, the Brexit vote could move the markets.

Yet this is something that we would call a "known unknown."

We know that a market moving event is coming, and a ton of people are hedging into the event.

What happens if everyone is hedged? Then the fear in the market disappates and the actual move in the market is lower than what is being priced in.

That's what this feels like right now.

Unlike, say, the Fiscal Cliff in 2012, if we do see a Brexit vote it will end up being a lot of risks drawn out over the course of months. It's not a straight up/down risk, but the market is pricing it in as such.

What's the Next Move

Here's my prediction on how this will play out...

It's very possible for the SPX to continue to selloff, maybe trade back to the lower end of the range.

Yet into any kind of selling, the VIX will not continue to skyrocket.

That's because traders will be using any downside action to take profits on their hedges... and the uncertainty surrounding the Brexit vote will start to get sucked out of the premium in the options market.

After that, we'll go back to the narrative that's dominated the market for a year now-- the "will they won't they" news risk around another Fed rate hike.

Now if I'm wrong... if the Brexit vote comes through and the VIX stays up... that's a bearish signal that the markets are about to break.

How To Profitably Trade The Volatility Markets

My favorite vol related trading instrument is VXX. It's a volatility ETN that perpetually sucks.

It's down like 99.999% since it started.

And we know it will perform like that because of how it's structured.

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5 Lessons To Learn From This SEC Investigation

Shocking news in the option trading world has come out recently.

A well known options trader has been involved in an SEC fraud investigation.

The easiest path to take here is anger, or perhaps to mock the whole situation.

And for those skeptics, a victory lap may be in order.

Yet I'd like to take a step back and see what we can learn from this. If you have any experience in options trading, this will be crucially important to read.

Before we dive into what potentially happened, remember that this is currently an open and ongoing case. Facts and revelations may completely change by the time it is settled.

I'm taking a few guesses here and I'm also pulling from my own experiences to give you crucial lessons if you want to succeed as an options trader.

Enter the Supertrader

A few years ago, a woman from Tennessee came onto a financial show and talked about her strategy. The headline was that "Karen the Supertrader" had earned over $41 million dollars trading this strategy.

She became a kind of a cult figure in the options world, showing how this simple strategy could be used by anyone to earn significant returns in the market.

Since the SEC investigation became public, the videos have been since taken down. However I have looked into the strategy her firm used as to whether it was possible to earn those returns.

Diving Into The Strategy

The way they earn returns is to sell options and profit from the time decay.

What made Karen's technique interesting is the use of margin.

She would "stress test" her positions, figure out how much stretch the market could have, and size up so that the value at risk was her net liquidation value.

So far, nothing out of the ordinary.

The returns she got were $41 million dollars.

Now, the only way to get those returns is by taking outside money.

Which is what they did. Her fund (Hope Investments) took in something to the tune of $90 million dollars. And with that size and the kind of market environment we had from 2009-2013, it was very possible to earn those kinds of returns by selling options.

What the Strategy Looks Like

Here's an example option strategy that would be similar to what Hope Investments would put on.

Sell to open SPX Jul4 1950/2200 strangle @12.00

The risk and reward is pretty simple.

If the S&P 500 trades above 1950 and below 220 going into options expiration, then you keep the credit of $1200.

There's other considerations here like position sizing, scaling in, scaling out and so on.


This is a "high odds" trade, meaning that you should expect to make money most of the time.

The tricky part is how you manage the trade when it goes wrong.

Where it Turns South

From reading the SEC investigation, it appears that things started to fall apart around the end of 2014.

That makes sense. A lot of option sellers got smoked then.


In case you don't remember the backdrop of this trade...

The ebola scare had started to take hold of the markets. The S&P sold of from 2,000 to 1,825 over the course of a few weeks. It got ugly out there.

That's probably not where things fell apart. It was on the rebound.

After the capitulation in October, the market rallied back to 2,000 just as fast.

And then it continued to squeeze.

Overeager option shorts started selling calls way too early. And too many people got short.

It setup the case for a massive short squeeze.

This happens a lot more than you think. A recent example is March of 2016, where Goldman Sachs put out a note that calls were way too cheap. The S&P rallied another 100 points since that call.

So in late 2014, coming into obvious resistance everyone sold calls too early. And call sellers got ran over.

When you are a net seller of options, the biggest risk is not to the downside... it's to the upside. It's much harder to manage a losing income trade to the upside.

So that's my guess here. They were doing fine, but then sold too many calls in size and got runover on the Ebola trade.

This in and of itself wouldn't be a problem with the SEC.

It's that they got greedy.

Bad Incentives

Once I read how they took a performance fee, I knew that it was the main reason why the SEC went after them.

A normal fund structure is "2 and 20." That means you take 2% of the total assets for overhead and you also get to keep 20% of any gains.

The fee structure for Hope Investments was 20% of realized gains...

Every single month.

When you sell options every single month, you can plan for that cash flow (until things go bad).

If you're trading your own accounts... not a huge deal.

But if you're trading serious size... man you can pull out a massive amount of cash every single month.

Yet if things go wrong, you can end up in a serious drawdown.

One way to manage those losses is to roll the bad options further out in time. You get stuck in the trade for another month, but it allows you to work your basis down in the position.

It's not a terrible strategy.

But when you tell your investors you "realized profits" on that roll... that's where you can screw up.

The monthly performance fee can set you up to be tempted in ways unimaginable when you trade your own accounts.

Consider this scenario...

You get smoked on a bad trade, and it may take 6 months to work back those losses.

That means you won't get that monthly performance paycheck for quite a while. The well has dried up.

But if you just do some fancy accounting, that gravy train can keep going... a very significant amount of money.

What would you do in that situation?

Would you have plenty of integrity and own up to your investors that you screwed up?

Sure it's easy to say sitting behind a keyboard...

Yet the incentive structure makes it an even harder decision to make.

They See Me Rolling...

When you get into a massive drawdown as an option seller, you can get stuck into the rolling trap.

You try and figure out some fancy options technique to get you back to breakeven, even if it takes you months to do.

I've been there. It sucks.

You may get you capital back, but you end up with a massive depletion of your psychological capital.

My guess here is that this is what happened with their fund, and they couldn't keep the numbers game going.

The Major Takeaways

I could go into a lot more detail about this case, but since it's ongoing I don't want to try and speculate too much on this.

Yet I think we have enough to get the lessons we need.

Lesson 1: Protect Your Capital

In terms of capital, I'm not talking about money.

I'm talking about psychological capital.

There are trades you can put on that are losers.

And sure... you can find a way to get it back to breakeven.

You can roll the trade, you can oversell spreads, you can convert a trade into an even more complex option strategy.

Yet there are some times you just need to take the loss and put your capital to more productive trades.

If you try and stick in this trade, you'll end up with blinders. You'll be so focused on working a bad trade to breakeven that you'll miss out on all the other opportunities in the market.

Lesson 2: Don't Blindly Use Odds in Your Trading

This is going to fly in the face of many other "gurus" out there, but I believe that using odds alone for your trading strategy can lead to disaster.

Say you sell an option. Let's say an AAPL Jul 90 put option.

Immediately, you psychologicall anchor onto that level.

And you start to say to yourself...

"There's no way AAPL can break 90."

It doesn't matter your religion, you must understand that the Market Gods exist.

And when you utter that sentence and send it to the universe...

The Market Gods hear.

And they reply:

"Oh yeah? We'll see about that."

At some point you're gonna get smoked on a trade.

How you manage that bad trade will dictate whether you will be successful at this game or not.

Lesson 3: Learn To Manage Risk

Here's the thing... I'm not saying that selling options straight up is a bad strategy.

In fact, I think the strategy they use at Hope Investments is incredibly lucrative and profitable in the long run...

... if you know how to properly cut your risk.

Blindly expecting the odds to eventually be in your favor is bad voodoo. The Market Gods will come after you.

The major risk in selling options is how your directional exposure (delta) can increase as the position moves against you.

Knowing how to manage that delta is half art half science.

But you have to do something.

You can use delta band trading, hedging with futures, buying options, buying complex spreads.

Will it cut into your returns? Of course. It's the cost of doing business.

But you still have to do it. Because once you get stuck into thinking "oh it'll come back..."

The Market Gods will hear.

Lesson 4: Don't Be A Dumbass Accountant

Take a scenario...

Say you sell an SPY 200 put option for .80.

And the market tanks.

So you buy back that put option at 1.20 and then sell another put option further out in time for 1.60.

Did you make money?

No, you didn't.

You have a loss of .40 from the closed option and no p/l from the new contract.

Stop deluding yourself.

If you roll options, treat it as a single position and track your basis on a mark to market pricing.

I've had people who have shown me trades where they got blown out on some put sales with massive losses... and it took them 9 months to get back to any kind of profit.

And they believe that they made money every single month through some BS accounting.

Don't lie to yourself, and especially don't lie to any of your investors.

Lesson 5: Limit Your Risk

I think selling options naked have a time and a place.

Yet if you're looking to create consistent, sustainable income from options while keeping risks low, then you should look to other trading strategies.

My favorite is iron condors. They are simple to manage and easy to understand.

The way we trade iron condors at IWO is a little different... we are much more aggressive in our risk management as we don't want to tempt the market gods.

If you want to learn all about iron condor trading, click here for your free iron condor toolkit.