Weekly newsletter of MYstylework - Issue #74
IN THE WRONG LANE
IN THE WRONG LANE....
Sometimes, we tend to go into things which are in hype or is in trend. I recently saw something very absurd that Heineken did to create a sneaker on beers, I mean real beer which you can drink off your shoe. I hope it is only a marketing gimmick but if the company moves into the sneaker business, I am not sure if beer mixes with the shoes business.
The same for us as investors, don't go into anything which we are not familiar as there are many enticing investments opportunities out there. Promises of quick gains or high yields never ends up good most of the time without proper due diligence or risk management.
Just look at the recent Terra Luna crash which wiped out many people's live savings or some even taken away their lives. Promises of high yields (APRs) with little effort seems too good to be true. There is no free lunch, there needs to be some work to be done before you get the gains. Including investing/trading, don't expect that the gains will just come automatically without effort. You need to study the stock, learn the strategies, spend time trading etc.
So just be careful that you do not go into the wrong lane, because you might just crash one day... stay on course and arrive safely is always the better choice.
SPX - 4145
SPX continued to be strong albeit a slight retracement on Friday. Overall it is up 15 points for the week and closed at 4145. It needs to break above 4178 to see it through the 4200 psychological resistance level.
The positive jobs report last Friday, indicating the economy is still strong despite multiple rate hikes, gave some caution to the market that the Fed can continue its aggressive rate hikes to combat inflation.
SPX futures opened red but was slowly grinding back up during the day. Although the stochastics looks overbought, the bullish momentum still looks intact with only shallow retracements as seen last week. Nevertheless, please trade longs with caution as big and sudden sharp pullbacks can happen as market will cut and take profits very quick if any major negative sentiments will spook them very fast. Hence, in our recent trades, we always mix it with elements of shorts within the long strategy to benefit from temporary pullbacks, example diagonals or even long vertical spreads.
Corporate earnings so far looks good even though most of them had given profit warnings in advance. Always easier to underpromise and overdeliver as they will get less market flack or reduce the volatility in case earnings is really bad.
Trading range for the week is between 4100 and 4200.
NDX - 13207
NDX is moving ahead for another week, 5 consecutive strong bullish week, something which was not seen for the first half of the year. Are we really going to have a better second half in 2022? Sentiment wise, I think the market is hungry for such kind of moves since many fund manager was risk on and reserved cash most part of the year. So they have to work twice harder for second half to generate the returns.
NDX daily chart is trending with higher lows and higher high, breaching 100 MA and now with 12900 as the next support level.
Notable earnings to watch for is:-
PLTR & LMND (Monday)
COIN & RBLX (Tuesday)
DIS (Wednesday)
CAH & RIVN (Thursday)
PLTR has been up 70%+ from its lows and taking a good ride up with the overall NDX momentum coupled with more positive news flows on its business. COIN also has its better days on the recoveries of cryptos for the last one month. DIS also rode on the better outlook and return on the travel sector. Apart from DIS, zacks.com has given positive ESP (expected Surprise Prediction) on both PLTR and COIN. COIN has the highest ESP of 52%, probably since it has bottomed since its last earnings in May. Probably still some low risk bullish spread to squeeze more juice out of this stock pre announcement if there is an entry opportunity on Monday.
Use zacks.com as a guide for directional bias of earnings (EPS).
Next major psychological level is 14000 and we expect this week's range to be at 12,900 to 13,650.
DIAGONAL - ROLLING OF TRADES
One of the most important skills to master in trading options is rolling of trades. If we do not know how to roll, we lose opportunities or may even make losses.
In past weeks, we have covered diagonals and one of the key elements in a diagonal trade is the short call which is subject to continuous rolling requirement during the duration of the trade.
We will cover again here the types of rolling and conditions:-
Rolling for Additional Premium
the short call generates premium and objective is for the premium to decay to zero or almost zero on/near expiry
We roll the OTM short call to generate more premium.
This is most common type of rolling where the share price is still above the long call price and we roll for another duration at OTM strike for reasonable premium. Around +/-0.5% weekly / +/-2% monthly
Rolling ITM short calls
sometimes the short calls gets ITM after entry or on expiry
when the short call gets ITM, it will be losing money. Nevertheless, the loss will be covered by the gains in the long call - Example 1. We can still roll the ITM call for a smaller credit most of the time and hope that the price close below the short call upon next expiry.
However, we still need to check to ensure that the risk profile of diagonals which stock price shoots past above the short call strike, will not become negative at one point - Example 2. Such deep ITM short calls, may cause a debit on rolling. Decision to pay for such debits is only upon our assessment that the stock price may retrace and go below the short call on the next rolling. If the price action is not expected to retrace, we should close the trade with a small gain or loss to avoid bigger losses when the price continue to go up.
If the price shoots up very fast and high above the short strike we can also exit the whole trade if:-
We do not expect the price to retrace soon
If overall trade is still profitable including credits earned from previous short call sales.
Risk profile like Example 1. Because if price continues to go higher, you will see the profit reducing more.
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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.