Options Trading Newsletter - Issue #29
IMAGINE... How your world will be if money was not a problem...
IMAGINE...
We have all been there....
Dreaming and imagining how life will be if we have no worries about "Money"....
Some people say "Money" is evil and we should be comfortable with what we have and perhaps "Health" is more important....
But the fact is, however evil "Money" is... it does solve a lot of things... it takes away our worries....it help us pay our bills, take care of us when we are sick....it gives our family the necessities of life and many more it can do...
My journey to a life of financial freedom started very young....but it does not mean the first thing I did had gotten me there... it is an accumulation of experiences that leads us there.
I recall, after I finished Form 5, I worked at this direct marketing company to sell vacuum cleaners. So a few of my friends went for a preview to learn how we can sell vacuum cleaners and the speaker showed us the wonders that vacuum cleaner can do, including dry cleaning sofa and curtains!!! The killer and sure sell feature is sucking up bed bugs, and once you see all the black stuff sucked out of your bed...you are going to get one of those vacuum cleaners for sure!! The price of the vacuum was around MYR9,000+ even more expensive than your Dyson and that was more than 30 years ago...
So we were sold that the product was great and we imagined making $10k+ a month...hey, we were only 15 years old back then. The thought of earning $10k a month was financial freedom for us.
So our little journey in the real world started after that sales preview... we were given a choice of taking a $900 salary per month or go on pure commission.... so we gave up $900 for potentially getting $10k.
So we learned to do a live demonstration of the vacuum cleaner and then became vacuum cleaner specialist. The whole thing was scripted to the dot...what you do and what you say...we get a manual each for that. So looks and sound simple, right?
The job involves only 3 things.
#1 Canvassing - the team leader will put us up in a van and drop us at a housing area where we go door to door to ring the doorbell with objective to get an appointment for a free cleaning, no obligation demonstration. We will do like 3 days of canvassing a week.
#2 Making Calls. On days we are not at the field, we were to make calls for those who have gave us their contact during canvassing to set appointments for the live free demonstrations. Also, we were given some cold contacts to make the calls with a scripted conversation.
#3 Do a live demonstration. We go to the house and clean 4 things. 1st is the carpet. They are impressed..... 2nd is the sofa.... even more impressed.... 3rd is dry clean the curtains....surprised that vacuum can clean curtains....and 4th is the bed...this final one is the "Sale" because if money was not a problem, they would have bought the vacuum after they see the result.
At the end, we asked the closing statement "So Mr/Mrs you saw how our vacuum can make your life easier and healthier, how would you like to pay for it, would it be cash or card?" And we continued to nod our head and smile after the question....
Little did I know at 15 years old, we were already thought NLP.
We ran around doing this for around 5 weeks and I sold 1 unit and took a commission of $1200. Thereafter I switched jobs for a nice desk doing ATM machine reconciliations at HSBC.
Well, what's the story behind? It all starts with the Imagination and belief that what you do will take you there...to make $10k selling vacuum cleaners or to financial freedom.
But will it be the ONE? Maybe not, but you always learn and grow from it if it was not. What I learned during my vacuum cleaner canvassing days is about sales and marketing and also about customers psychology and up till today after 30+ years, it is still the same...we all use the same method in sales and marketing and it is evergreen...the product/service can change...but the customers are always the same.
If I had not this Imagination of where I will be if "money was not a problem", I would not continually find opportunities in life and ended myself as a Trader in the stock market!
“Imagination is everything. It is the preview of life's coming attractions - Albert Einstein”
MARKET UPDATE
SPX - The bouncing Ball
SPX closed lower for the week by 26 points to 4433. Nothing much but it sure put a lot of stress to a lot of people who are getting used to the market going up and up month after month. It only retraced around 2.5% from its highs and already sending jitters and I cannot imagine if it breaches the EMA50 and go down 10% and that will hit the panic button causing chaos in the markets.
This time, the bounce does not look so imminent...or at least so easy as the past 7-8 earlier bounces which bounced up the next day from the lows touching or closing the 50EMA. As you can see last Wednesday the market bounced up and Thursday, it dropped but managed to recover the losses at end of the day and Friday it closed lower again. It seems that the market is not so confident anymore as compared to the previous 8 bounces. One bad news being propagated by the media will be enough to push the market down to 5%+ lower than the current highs.
There are obviously some reasons why the market can be more sensitive nowdays compared to the past. First is the rise of retail investors, especially on popular stocks like the FANGS and the tech sector. Secondly, the increase in use of AI or BOTs trading with predefined entry and exit rules.
The first market selloff will be triggered by negative news manipulation and over reaction of the retail investors triggering stop losses and margin calls of weak hands or speculative retail investors and thereafter triggering trading algorithms selling rules to be hit before the trade algorithms buying rules kicks in. Of course, in between these some institutions may also sell off some positions to take on opportunities to buy them back at a lower price. The companies will also accelerate their buybacks during times like this because the drop may be purely irrational against the valuations which are still intact.
As traders, we will try find opportunities that present during times like this to profit from the market. Of course, at times, we will also see red during the bloodbath but if we can also capitalise on collecting some blood in the market, we can replenish the pints we lost for sure.
We'll see the week ahead if there will be more blood or we are going in for a 9th bounce for the year!
NDX
NDX closed 15333, 1.1% down last Friday with the big boys taking much of a downside hit. Facebook was down $8+ (2.2%) and touching the 50 EMA again and seems too tempting for a bullish trade again as what we did in the August dip. We will be a bit patient to see if it can recover back to 367 levels next week before deciding. FB closed around 365 after bungee tipping 50EMA last Friday. It shaved off around 5% from its highs just a week ago.
Apple also lost around 7% from its high after the EPIC case came out. It closed down @2.70 to 146 last Friday. I will look at an opportunity when it goes to the 144 levels. The launch of iPhone 13 did not do much last week but the news of positive China sales may come off more positive to the stock price next week. If the NDX overall index shows a bit more green next week, I am sure Apple and FB will be the ones to help make it a greener bar for us,
Same like its other brothers Google is going nowhere since its high. It also shed around 4% of its weight since its high. As the general market was not going anywhere I took an opportunity to collect some premiums with a bear call spread. The theta decay was quite fast with 25% premiums gone 2 days into the trade. With 13 SD away, I should see the position shaved off with 50% profits by next week with just some few more down days in the stock.
The only exception to its 2 other FAANG brothers, Netflix and Amazon. Generally it has not been a one way drop but some green days within the week. For me, I have been a Netflix subscriber for many years now, although we hardly watch it. There's already so much on youtube and also free to air apps and if you are not an avid follower of new series, technically there is no reason to subscribe. But Netflix has made the subscription fees so low MYR57, I think, I would hardly feel that it gets charged to my credit card for years just like that. Having it but not watching it does not cause a pain in the pocket but just on the days you feel like watching a movie, it's there!
For NDX, I would say, it still have a bit to give up as the retracements this round is a bit too little, so far only around 2.5%. Shaving it off to 4-5% from its high before it gives me more comforting level to do directional trades on its component stocks.
China stocks seems to be a bit positive at the close of the week. BABA seems to be bouncing off its 152/153 levels, the levels which I have mentioned already a few times. Hope this can continue to hold before we see some light ahead for this poor BABA.
Did I say I was assigned on a BIDU bull put spread which went deep ITM during the August expiry? Okay, you would have asked why in the world would there be an assignment on a put spread and how was that even possible. Well, some smart guy assigned me the shares on the short put leg before I had the opportunity to roll the trade to the following month.
So I had to decided to close the put spread which had a profit of around $2900+ and decided to keep the assigned shares for a while as I had a bit of confidence that the stock was oversold due to all the China bad news coming out and the next support being at 133 level. In between, I sold a covered call to earn more income to offset the losses from the 100 shares assigned. BIDU price recovered significantly after that and net net from a position of max loss of around $370, the trade turned around to a gain of $2k+. Thank the impatient guy who gave me this trade by assigning me early. Otherwise, I would have continued to roll it OTM like the same position I had in another account earning only a gain of 130 after more than 2 months.
Don't ever panic when you are assigned shares, have a clear head and see what are your options.
CSP PORTFOLIO PERFORMANCE (UP 11.7%)
(Portfolio performance is on MYstylework's Portfolio and is not a recommendation to buy and for informational purposes only. You are adviced to seek your own professional adviser's views and perform own due diligence when evaluating any stock, options or investment trades)
It was unexpected with just few days till expiry, one position which almost depleted its premiums turned sour. That was YUMC which fell as someone threw the chicken out of the building and as you know chicken cannot fly!
It gave a profit warning due to the escalation of Covid in China and expects that sales will drop by 50%. To me, they just reduced the seating capacity by 50% due to crowd control and closed some stores at affected cities. The whole drop may and claim of revenue dropping by 50% may be an over reaction. Anyway, it continued to drop all the way till last Friday. We rolled the trade over for a week for a credit to see if there were recovery opportunities.
Another one was KWEB, which we also had to roll forward to next month. The price was dropping and only made some recovery at Friday close, which was an probable early assignment had we not rolled it early. We rolled to next month for a small credit.
The 2 assigned position on PLTR and GDRX, had been called away because the market price shot above the covered call price which was equivalent to the strike price on assignment. So we did not lose money on this assigned trade and purely gained from the premiums sold over time and not participated in any upside capital gains. Arising from this the earlier gains in the portfolio due to the capital appreciation was given away, causing the YTD returns this week to drop a bit.
Further, the assigned China stocks is also not improving and is up a week and down a week. That portion has setback the portfolio returns by around 11%+. Anyway, we will get back on the right foot as and when these stocks recover in price. GDRX and PLTR took 6 months for us to get it out of our investment portfolio.
EXPECTED MOVE....
One of the most commonly used data in setting out and deciding our credit trades is Expected Move.
The expected move is derived based on the price of the underlying stock and the implied volatility and can be computed for each date to maturity of the options series. Okay... if you do not understand a single word earlier...nevermind as technically unless you are a maths geek, there is no real reason to know the full formula.
All Options platform will give you a number for each expected move for every expiry date! Below an example of expected move for Facebook at each expiry date. It is shown with a +/-[number], boxed in red below.
Pick 19 November expiry for example. The Expected Move number shown in the platform is +/-33.78. Facebook is trading at 364.72 now. So till 19 November, Facebook stock price is expected to move either -33.78 to 330.94 or +33.78 to 398.50. This expected move is shown with 68.2% probability which is also a 1 standard deviation move up/down.
So what do we use this for?
We use this data to plan our trades in placing where our strikes should be. One common example is doing an earnings trade. Example if we are selling premiums we want to place our earnings trade above the expected move so that likelyhood of it hitting our strikes after earnings announcement is low.
Or if we are doing a naked put, we would also want to place a trade further away to or close to the expected move to avoid a breach in our strikes on expiry.
Or we are collecting premium from a covered call, we would also try to do it around the expected move so we can still get both the share price upside and collecting premiums for free.
There are many more ways we use it in planning our trades. Once you understand this concept, it will make choosing your trade strikes easier and also a bit more mechanical.
Of course, along time if there is a volatility crush (implied volatility reduce) then the expected move for the same expiry date will also reduce accordingly, resulting in our trades moving beyond 1 standard deviation and increasing our probability of profit even more. That's the reason why we sell premiums when the IV is high and when IV is high the Expected Move is also going to be wider from the current stock price.
TRADERS TALK
Did you hear last week's Traders Talk?
I was speaking on why you should not invest in property but instead learn how to buy property. Is there a difference, yes for sure!!! Listen to Traders Talk Series 13 if you have not done so. View Past Traders Talk
I have even got the highlights here for a sneak peak...Sneak Peak Traders Talk
Remember to join us every Tuesday 7.30 pm on my Facebook Page. Follow-us so you will be notified when we go live!
Visit and follow us at our Facebook Page for more contents!
Access here >>Facebook Page<<
DISCLOSURES
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf
MYstyework is an Online Financial Literacy Educator and materials provided is solely by MYstylework and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. MYstylework, through its contents, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. MYstylework is not in the business of transacting securities trades or an investment adviser.
CONTACT
support@mystylework.com