Options Trading Newsletter - Issue #23
BUYING HOPE!!! Many people spend money buying hope knowing the fact that "Hope is For the Hopeless" This Newsletter Issue Is A MUST READ!!
BUYING HOPE...
I recall the days that I visit the regular chicken rice shop around my office area just to catch the Indian lottery vendor for the monthly Lottery ticket (BIG Sweep). The grand price is usually MYR3 million and there is also a jackpot which can be above MYR10 million depending if there was previous claims.
Have you ever wondered why people buy this lottery when most of them never strike more then MYR3.00 which is the price of a piece of this paper?
Let me tell you why and if you have the same reasons as me...
I buy it to get a piece of HOPE.. Hoping for the one day which I will be able to strike the grand price and make my claim for MYR3 million and be able to enjoy life with the new found gold. But frankly, most of the time I never even checked the results when it was out. At time of writing, I had 4 pieces of lottery in my wallet, the exact ones you see above, which I took out to check the results....it was for a draw on 5 April 2020!!! Unfortunately or as expected, I did not strike even any dust!!!
I am very clear the reason why I bought the lottery, it was just for the HOPE....the same "Hope" that I will become rich and attain financial freedom, freedom that will allow me to do the things I love... and not bound by any restrictions by other people. But unfortunately, for me and many other people, this kind of "Hope" did not or will likely not materialise in our life.
So instead of buying lottery and hoping to strike it rich, I harness my efforts on other ways which will make it more probable in fact with certainty to achieve financial freedom. If you research further, in fact if you are reading this newsletter, you have already found yourself a vehicle to do that. The next step is always yours to decide. I have decided for myself and enjoying the rewards, I hope you can too...
PS. Find your vehicle, take action and don't just hope. Treat the Lottery in your pocket as a bonus...
MARKET UPDATE
SPX - COME ON FOR A NICE BBQ....
If you are in the market everyday, you might become numb of the situation which is happening weekly. The SPX keeps going higher every week and if you look really on the grounds, things have not really improved, many businesses are struggling to survive, especially those brick and mortar business. Are we really kidding ourselves to put the real economy benchmark to a set of indexes of the strongest company in the US market (S&P 500) which may potentially have businesses which are resilient or adapted (with loads of cash to burn) to the new economy during this pandemic.
For every McDonald's store, there are thousands of mom and pop restaurants which are struggling, for every Home Depot store, there are thousand of brick and mortar retail shops closed, for every Nvidia factory, there are thousands of factories barred from operating due to lockdowns (at least in Malaysia) and the whole things goes on, we are comparing between the best and the middle and lower sector of the economies.
Of course, it does not matter to a lot of people because those who are smart enough would have already turned to the market to generate income. Those who have not, is going to get themselves into financial distress if not already in distress now. If you are not aware, during the pandemic and even now, the rise of retail investor in the US markets and even worldwide markets are unprecedented. They are like fuel to the market, with each new entrant, more fuel is put to power up the market...
It's like a bonfire here.... while it still burns, bring your marshmallow and chicken wings for a nice BBQ....
NDX
The NDX as usual is also aligned to the SPX movements most of the time. NDX also once again reached all time high at 15184. Hold and beware of the emerging mini double top pattern similar to the one which appeared in April/May this year before the plunge back to the 100 EMA.
With the positive news of the job additions on the US markets last Friday, it will not be surprising that market makers starts to create bull traps next week to get people in before they sink it down. I will monitor closely the price actions, next week and be a bit lighter in my positions.
I entered the FB trade mentioned last week before it can drop low enough to 342. The FB trade is now running at 27% profit and I may pull it out if FB hits 370 level. Lets see how this plays out and I hope NDX can hold another 1 week before any bearish pinbar appears.
The China big boys have not been going any where for whole week but stocks like Tencent has seen some recovery after the big drop the weeks before. I guess investor continue to shy away from China stocks after the saga on the education stocks which wiped out 70 to 80% of the values in one single day... The risk against rewards are too big to play around with other people's money. But as a contrarian and an individual trader, we always have upsides and flexibilities to make better than market returns because we are not bound by rigid rules and can always take opportunities when it arises quickly. I am still holding to my China trade positions (negative now) and can withstand this until end August before I need to take quick action to cut them out. The China stocks better run up quick or run down hard, if they go up, I make the profits and if they go down hard, I may be able to exit with a scratch. If they stay between, I die of a slow death.
CSP PORTFOLIO PERFORMANCE (UP 10.1%)
(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)
There was hardly any significant movement in the portfolio. With the China ETFs continue to go nowhere. I guess investors are still shunning away till there are more significant news or indication coming out from China regulators. The problem is when this comes out, it will already be too late.
So I am always looking for entry opportunities if the price and IV is right, even to the extent short term, we may suffer a drop in the portfolio returns. Because when it shoots back up it will definitely be fast and strong.
The Shanghai Composite Index (SSE) and the Hang Seng Index (HSI) both showed a recovery after the flush down about 2 weeks ago. SSE went above the 200 EMA while HSI is half way back to 200 EMA from its low. But probably the resurgence of Covid in many cities around China is also causing the weakness in the markets on fear of a big surge in infections like the last round in 2020. But certainly the possibility will be low as far as how the Government reacts to curbing any spread as soon as one Ant is seen infected, the whole town or city is sent for testing and quarantine.
Last week, we still saw opportunities to get a bit of CSPs done to line up the September expiries. One thing which I am watching closely is the consumer sector especially the food and restaurant chains. DPZ, MCD, SBUX, YUMC, QSR have been running up before slight retracements after earnings. With the pandemic still lingering around, 2 consumer sector which has done well is Restaurants (I guess it is the deliveries/drive through) and also the apparel sector like shoes....like at NKE, SKX and even UA and FL is riding it high... Besides SKX which I frequently have CSP positions, I got to look at the rest if there are opportunities and risk as some of these like FL and UA used to be very bad stocks.
BULL SPREADS...
What do you do when you do not have enough capital to trade Cash Secured Puts (CSP) on high priced stocks?
Imagine putting a CSP on Amazon which is priced above $3k, you will need to secure it with $300k of capital for a premium of close to #3k (delta 20 strike) which will give you around 1% premium for a 40+ day trade.
Can your heart take it to enter a $300k trade and touch wood, some bad stuff happen to AMZN, god knows how bad it will be for it to drop by $200 and your trade will go from $30 to $90 losing immediately $6k and if it maintains there till expiry, you may end up picking up the shares at 20k of unrealised loss. In fact that kind of drop actually happened 2 weeks ago after AMZn announced its earnings, so it is not impossible.
So how do you trade premiums on these high priced stocks? One way is to do spreads, it can be Bull Put Spread or Bear Call Spreads. What happens in a spread is that you are capping your risk with a Buy Put or Buy Call depending on which side your trade is. The max risk will be the spread width of the sell and buy PUT/Call. Example, a Bull Put Spread on Amazon of Sell 3130 Put + Buy 3120 Put. $10 width for a premium of 1.62.
This Bull Put Spread buying power is $833 with a max loss of $838 as opposed to a max loss of $300k for a pure cash secured put. This is definitely something more palatable for smaller accounts. The probability of success is not too bad running at 78% for a 40 day DTE. Frankly, I have been trying for some days already to enter into one Bull Put Spread myself but I was still a bit greedy on the premiums. I put a higher premium waiting for AMZN PRICE to drop a bit more and if I get the trade, I get it, if not I will pass. AMZN could easily drop down by another 100 points back to 3200 levels.
Another stock which I am running bull put spreads for past 2 months is Goldman Sachs (GS). At every pullback, I find opportunities to enter into bullish trades and collects premium. I try to work between delta 25 or lower. So far for 2 expiry cycles, I milked some premiums out of GS, but at the moment, GS has shot up too far up. Lets wait for a pullback for another opportunity perhaps.
As said, Bull Put Spread works great for stocks above $200 where you want to earn the premiums but limit your risk.
Next week, we will touch on repairing bull put spreads in case the price goes south.
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 8 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
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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.