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Earlier in March, Ophir Gottlieb from CML Viz did a webinar for my readers demonstrating his Trade Machine backtesting and option scanning software.

It was pretty cool, you should definitely check out the replay:

The password is CML12345

https://vimeo.com/258429940

One of the strategies he demonstrated was called a Bull Mammoth, which you can read about here:

https://tm4.cmlviz.com/faq/mamo_technicals.php

When I was looking through the scanner recently, I noticed that a trade had been triggered on March 26th in UNH.

Here you can see the results on UNH when the Bull Mammoth scan gets triggered.

Pretty impressive with 8 wins and 3 losses over the past few years, but the wins resulted in +$15,770 and the losses resulted in -$3,455.

I was tempted to enter the trade, but I was a little wary given that I am new to the software and we were also in pretty full on correction mode at the time. So I decided to sit and watch it which was unfortunate because the trade has done really well.

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The strategy called for buying a 14 day to expiry, 70 delta call which was the April 6th, $215 call. At the close of play on March 26th, that call was trading at $6.00 and UNH was at $219.05.

As of April 4th, UNH has risen to $228.79 and that April 6th call has risen to $13.75 for a gain of 129%, so I really did miss the boat on this one.

If you want to try out the software at a discounted rate, you can do so here:

https://cmlviz.com/register/cml-trademachine-pro-options-trading-iq/

I’ll keep you posted on any further testing and examples that I do with the software.

Trade safe!
Gav.

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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A couple of great charts came across my desk this week, so I wanted to share them with you.

1. VIX Futures Curve

Despite the gains made on Thursday, we’re still in an environment of backwardation which can mean it’s not quite time to get back into full bullish mode just yet. Keep an eye on when this one flips to contango.

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2. Haliburton

Very tight Bollinger Bands on this one, look for a potential breakout in either direction soon.

3. Kraft Heinz Co.

Defensive name with a good dividend that is deeply oversold. Starting to get interested here.

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4. GOOGL

Very strong support around $1000, then below that, not much until $920.

5. NYHL

Crossed below the 50 period moving average for the first time in a while. Bulls will want to recapture that level quickly.

6. $NYA and !NEWLONYA

Nice divergence here that predicted the rally on Thursday. Stocks in general were making new lows, but the number of stocks making new lows was declining.

Hat tip to Mark Arbeter and Tom Bowley for some of these.

Trade safe!
Gav.

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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Volatility brings opportunity. We’ve certainly seen volatility in Facebook stock recently with the FTC’s investigation into the company’s privacy practices.

With the stock dropping from a high of $195.32 in February to a low of $149.02 recently, volatility has jumped from 15% to above 40%.

That means option premiums are significantly higher than they were a short time ago.

Of course, things could get worse for Facebook from here, but for those traders willing to take a view that things will settle down and the stock will recover, there is plenty of opportunity to be had.

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Here’s three trade ideas for traders who think Facebook’s troubles will be short-lived.

Just a reminder that these are not trade recommendations and you should do your own due diligence and consult with a licensed financial advisor before making any investment decisions.

  1. BULL PUT SPREAD

As the name suggest, this is a bullish bet that will do well if FB stock recovers. The trade can also be set up with a large margin for error, by trading an out-of-the-money spread.

Going out to September and selling the $110-$100 put spread generates around $93 premium per contract on capital at risk of $907. Should the trade expire worthless, the trader would make a 10.25% return on just under 6 months.

There is also a 28% margin for error should Facebook trade lower over the next few months.

Traders wanting to achieve a similar return in a shorter timeframe would need to place the spread much closer to the current price. For example, to generate the same return from the May put spreads, the trader would need to use the $125-$115 strikes. Profits on an annualized basis are much higher, but the margin for error is smaller.

  1. PUT RATIO SPREAD

I’ve talked about put ratio spreads here recently and I do like them in the case when a stock has suffered a precipitous decline.

Going out to June and buying one $125 put and selling two $115 puts can be done for a slight credit. This means there is no risk at all on the upside and a large profit zone is created between $105 and $125.

Traders who think FB might continue to slowly decline and end in that area in a few months might consider this strategy.

As with the bull put spreads, the risk is that FB continues to fall hard in the early part of the trade.

  1. POOR MAN’S COVERED CALLS

Poor man’s covered calls are another strategy that I wrote about in detail recently.

To execute this strategy a trader might by an in-the-money call expiring in January 2020 and sell a shorter-term, slightly out-of-the-money call.

These are three bullish trade examples, but traders could also do the opposite if they think the stock is going to remain bearish.

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Either way, it should be interesting to watch this stock over the coming months.

Trade safe!
Gav.

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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Back on January 7th, I asked “Will 2017’s Worst Performing Industries Bounce Back in 2018?

At the end of 2016, I noticed that renewable energy had experienced a really tough year or two and sure enough, they bounced back in a big way in 2017!

The 5 worst performing industry segments for 2017 were:

Shipping
Oil & Gas Drilling & Exploration
Dairy Products
Sporting Goods Stores
Long-Term Care Facilities

Dick’s Sporting Goods Inc. was one that stood out to me due to the fact that it had recently recaptured the 50 day moving average and that average was starting to turn upwards. At the time DKS was trading at 29.12 and it has now hit 35.01 after rising by over 6% today.

The stock is above the 50 day average and the 200 day average and the 50 has grossed above the 200 in what is known as a Golden Cross.

Time will tell if the trade continues to work out, but so far it is looking good.

Trade safe!
Gav.

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Backtesting options strategies is crucial before committing live capital. There are a couple of tools out there, one of which is run by CML VIZ.

I’ve always been interested in their software, so I reached out to the owners and they agreed to gives us a demo. You can watch the replay here or watch directly below:

The password is CML12345

If you want to take advantage of the special offer mentioned at the end of the webinar, you can do so here:

Here is an example of some of the backtesting that can be done, this example is using TSLA:

Trade safe!
Gav.

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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Getting paid while you wait, I like the sound of that.

A cash secured put is a conservative options strategy that can be used to purchase a stock for lower than the current price.

Let’s say you’re happy to buy AAPL at $173. You’re definitely going to be happy to buy it at $165.

Let’s work through an example.

A trader wants to buy APPL shares, but wants to wait for a minor pullback before getting involved. With the stock trading at $173.09, the trader wants to wait until it hits $165 before making a purchase.

Instead of waiting for a pullback (which may never come), the trade can sell a cash secured put with a strike price of $165.

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The April 21st, $165 puts are currently trading for $3.20, so by selling this option the trader collects $320. He also has an obligation to buy AAPL at $165. It’s important to remember that even if the stock drops to $100 between now and April 21st, the trader still has to buy APPL for $165.

Let’s say AAPL does fall below $165 and the trader is assigned 100 shares. The total cost would be:

100 x 165 – 320 = $16,180.

This gives an effective purchase price of $161.80.

Not only do you need to be okay with purchasing the stock at this price, you need to have the money reserved to make the purchase.

Which Month Should You Sell?

In this example the trade was happy to buy AAPL for $165, but which month should he use? We used April in the example, but what if we chose a longer or shorter timeframe?

Option premiums will be more expensive the further out in time you go, but the rate of time decay will be slower and the annualized return will be lower.

Let’s compare April and November to illustrate the point.

The April put is trading for $3.20 and the November put is at $10.05

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If AAPL stays above $165 and the puts expire worthless the returns will be as follows:

April $165 put – 1.94% or 11.06% annualized

November $165 put – 6.09% or 8.14% annualized

You can see that the return on the November put is higher on an absolute basis but lower on an annualized basis.

What Are the Risks?

Every strategy has its risks and this one is no different. There are two scenarios that create a downside in this strategy.

First, if the stock does not move lower but instead moves higher. If this happens you will not be assigned on the stock, which means you will not receive the shares that you wanted. As the stock moves higher, you will be left watching and missing out on the gains it could have provided.

If the stock makes a huge move higher, a cash secured put strategy will significantly underperform outright stock ownership. For this reason, cash secured puts are best used on stocks on which the trader has a neutral to slightly bullish outlook.

The second situation is having the stock move lower and then continue to move lower. In an ideal world, you would want to the stock to move to your strike price, get assigned the shares, and then have the stock take off higher. Unfortunately, things don’t always work out this way.

But, think about it this way, if you were happy to but APPL at $173.09, you are still better off because your cost basis is much lower at $161.80.

Also, remember that if you are assigned shares, you can continue to generate income from those shares in the form of dividends and selling covered calls.

Conclusion

If you are a long-term investor or just want to acquire stock at lower than the current price, cash secured puts can be a nice way to do that.  They have several advantages if you can afford the time to wait and you get the added bonus of being paid while you wait to take ownership.

If you want to join me for an upcoming webinar, I’ll share exactly how I trade this and other options strategies.

Trade Safe!
Gav.

* This article originally appeared on See It Market

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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Running this website does have it perks at times, and sometimes that involves getting free stuff.

At the start of this year, Michael Lamothe invited me to try out some of the offerings from Chart Your Trade.

Lamothe is the founder of Chart Your Trade and is also a fund manager and private investor. Some of the tools and scanners he has developed automated his three hours a week process for analyzing stocks.

Within Chart Your Trade, there are three different Products and Services – MRI Scanner, Elite Stock Setups and Advanced Stock Reports.

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MRI Scanner

This app is an awesome way to scan the overall health of the market as well finding some of the best growth stocks.

When you log in to the scanner, you can choose to run it for All Scanners or specific scanners such as Relative Strength, Accelerated Earnings, Fund Ownership, Sector Leader and Super Sales.

After running the scanner you get a list of stocks that passed. This is useful for a couple of reasons. Firstly, it shows you the leading growth stocks in the market and secondly, it shows you the overall strength of the market generally – if the numbers of stocks passing the scan is increasing, that’s a sign of underlying strength in the market.

As Lamothe says – “As the list expands, the market internals ‘under the hood’ are getting stronger. As the list contracts, the internals are starting to get weaker.”

This can be an important indicator for investors to know when to increase or decrease equity exposure.

Hovering over the ticker symbols will bring up the chart of the stock, which is quite a cool feature. So it really does take seconds to drill down into the strongest stocks in the market and then see the chart all in one place. You can also export the list into excel.

Here is some further information from Lamothe about the MRI Scanner:

“On of the things that lead to my trading success was being able to identify broader themes in the market. Stocks often travel in packs. They say “birds of a feather flock together”…well, the same is true of stocks! When multiple stocks from the same industry group begin passing our scans simultaneously, it’s a sign that something is happening within that industry group and it warrants us to take a closer look at the stocks within that group. Often we’ll see several stocks within that group setting up in similar basing patterns. When this happens, it could be signaling a group move. If that’s the case, hang on to your hats!”

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Another feature of the MRI Scanner is the Industry Group Rotation Report. This scanner shows how many stocks from each industry have passed the scanner compared to a particular date in the past. Knowing where the money is flowing into or out of can be crucial for success.

Lamothe also has detailed instructions on how to export the data into excel and organize it into an extremely user-friendly format. See below:

This heatmap takes minutes to maintain and gives a clear indication of money flow. For example, in the above screenshot, we can see that in April money started from into Regional Banks and that sector remained strong for the next two months.

Really useful information to have for any put sellers out there.

The final part of the MRI scanner is the New Highs vs New Lows Report. Again, this gives a really quick snapshot of the strength of the market

Here’s what Michael has to say:

“By monitoring the New Highs vs New Lows list every day or even every week, we can see how robust the market’s trend truly is and if it is about to change! I’ve personally captured numerous trend changes through this sort of analysis.”

The price for the MRI Scanner is $19 per month or $199 per year, but you can get the first month free using this link and the coupon code “1dollarscan”

Elite Stock Setups Membership

Elite Stock Setups is a report authored by Adam Sarhan who has over 20 years of stock market and portfolio management experience. You may have seen him on CNBC and Fox Business.

The report contains Adam’s best 10 stock setups including entry points and full technical and fundamental analysis.

Here is an example from Feb 10th:

< Click to Download >

Below are the stock movements for the 10 stocks between Dec 31 and Jan 31:

As you can see, I think the results speak for themselves. All 10 stocks were winners and only 2 underperformed the S&P 500 in that time. The majority of them saw significant outperformance!

The price for Elite Stock Setups is $47 per month or $497 per year.

Advanced Stock Reports Membership

This report is sent to member three times per week – one full weekend report and two intra-week updates.

The weekly report is broken down into 5 sections:

  • FLS Playbook – This section contains a quick summary of the market action and conditions as well as details of what positions are currently held in the portfolio and stop loss levels. This section also contains working orders that Adam and Michael are watching.

  • Recent Pullbacks & Rallies / Chart of the Week – This section contains some of the most relevant themes influencing the market for the week.
  • Year to Date Scorecard and Weekly Review – This section gives a quick snapshot of the market, important support and resistance levels as well as trend analysis.

  • FLS Leaders List – Similar to the IBD Leaders list, this section shows the current leading big cap stocks in the market.

  • Elite Stock Setups – This is the same report from the Elite Stock Setups Membership showing the 10 best stocks to watch with detailed analysis including entry points.

The price for Advanced Stock Reports is $97 per month or $997 per year.

Overall I found the tools from Chart Your Trade very useful. The MRI Scanner is an awesome way to get a quick snapshot of market strength while also showing the leading growth stocks. IT’s also very affordable at only $19 per month.

The results from Elite Stock Setups speak for themselves with some amazing returns during the sample period.

The added bonus you get if you sign up for Advanced Stock Reports is that you get open access to Michael and Adam for 3 months. You can pick their brains as much as you like.

The guys are giving a deal to Options Trading IQ readers on the Advanced Stock Reports of 3 months for $27, go to this page and use the code “3for27”.

Also, if you want to try the MRI Scanner you can get the first month for $1 here using the coupon code “1dollarscan”.

If you sign up, let me know what you think of the service.

Trade safe!
Gav.

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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Covered Call writing involves buying 100 shares of a stock or ETF and simultaneously selling a call on those shares. It is a very popular strategy for income investors and has the ability to produce outsize returns in flat, down and slightly up markets.

The issue for some investors is that the costs can be prohibitive, this is especially so for those with smaller accounts.

Take AAPL for example. With the stock trading around $170, an investor would need to have around $17,000 in order to trade just 1 covered call.

There can also be issues with diversification. With so much capital needed it can be very difficult for smaller investor to create a diversified portfolio.

A Poor Man’s Covered Call is a strategy designed to replicate a standard Covered Call trade, but with a much lower capital outlay. This strategy is also used as a reduced risk method of generating a similar return.

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With a Covered Call position, the trade would be required to purchase at least 100 shares of the stock which could potentially tie up thousands of dollars in capital.

With the Poor Man’s Covered Call, a long-term, deep in-the-money call is used as a substitute for the 100 shares. Sometimes, this call can be purchased for a fraction of the cost of 100 shares and have a similar payoff.

Traders should be aware that this is basically the same as leveraging your portfolio. Gains and losses in dollar terms will be very similar between a standard covered call and a poor man’s covered call, but the percentage returns will be more amplified using the poor man’s approach.

ADVANTAGES AND DISADVANTAGES

The below table shows some of the advantages and disadvantages of the poor man’s covered call in comparison with a regular covered call.

BEST UNDERLYINGS FOR POOR MAN’S COVERED CALLS

Similar to regular covered calls, traders should focus on stocks they think will be neutral to slightly higher over the course of the trade.

Some traders (myself included) prefer trading stocks and ETF’s with lower volatility. As such, the P&L fluctuations won’t be as high on a day to day basis and the trade can be easier to manage. Each to their own though.

My preference is focussing on blue chip stocks that I am happy to own for the long term. Stocks in the Dow Jones Index for example area great place to start.

I also like using this strategy on ETF’s. Poor man’s covered calls are a great way to gain exposure to a particular region or sector. In the past I’ve used this strategy extensively on IYR and EEM.

ETF’s have no stock specific risk and they aren’t subject to earnings announcements. Therefore they are much less likely to suffer massive price moves based on a news event.

A simple portfolio could be created using ETF’s.

Let’s say an investor has the following target allocation:

The investor could then use these ETF’s and trade poor man’s covered calls. Let’s assume a portfolio size of $25,000:

CHOOSING STRIKES PRICES

Alan Ellman, The Blue Collar Investor suggests the following formula when trading poor man’s covered calls:

Difference between the 2 strikes + premium generated from the short call > cost of LEAPS

When choosing the long call there is a trade-off between how much capital you want to spend and how much time premium is embedded in the LEAP. We want to pay the least amount of time premium possible because time decay will work against us on the LEAP.

I like to look around Delta 0.70 to 0.80 for the LEAP and I always check how much time premium is embedded in those strikes.

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The deeper in-the-money the LEAP call is, the less time premium it is likely to have. The less time premium it has, the more it will behave like the underlying stock.

For the short call, I like to be slightly out-of-the-money so that there is still some potential for capital appreciation in the trade. But, it also depends on the underlying stock. If I think the stock is going to be flat, I might consider an at-the-money call to increase the income portion of the position and forego any potential upside from the stock.

When selling the call, investors should aim to make sure the time premium in the short call is greater than the time premium in the LEAP. Usually this is not difficult.

The further in-the-money the investor goes with the LEAP call, the less time value, but the option will cost more.

HOW TO DEAL WITH EARNINGS REPORTS

Large drops (or gains) after earnings happen more frequently than is implied by statistical probability. For example, earlier this year, I ignored my rules and held a position on NWL over earnings, only to see the stock drop 25%. Ouch.

As I’ve said numerous times in the past, when it comes to earnings, it’s best to avoid them. For this reason I prefer sector and county ETF’s that are not subject to earnings announcements.

When trading poor man’s covered calls on individual stocks, it’s best to try and avoid earnings.

ADJUSTMENTS

When it comes to adjustments, the process is very similar to that which you would employ for regular covered calls.

If the stock goes up, we will likely see some losses on the short call. That’s generally ok, because the long call will have gone up by a proportionate amount. In this case, there is probably no adjustment needed because we’ve made some good gains on the long call.

If the stock hasn’t blown too far through the short call, we can also think about rolling out in time and also rolling up, provided we can generate a decent credit.

If the stock has moved down, we can roll the call down to lower strikes. By doing this we can collect more premium and lower the capital at risk / max loss.

We can also roll out further in time if we want to generate a higher credit and we don’t mind being in the trade a bit longer. Time decay will pass more slowly on the longer-term short call however.

If the stock has gone down, we should also re-asses our assumption on the stock. Do we still want the exposure? Do we think it will rebound?

One benefit of the poor man’s covered call when the stock declines, is that implied volatility will likely have risen. This can mean the LEAP may not have declined as much because its value is being propped up by the higher implied volatility.

Rolling down means we can collect more premium when rolling the sold call.  Or, we don’t have to move it as far to collect the same amount of premium.

If the stock moves to the sweet spot right around the short call at expiry, I generally keep the exposure and roll out to the next month. If I’m still bullish I may also roll further out in price to give myself some more capital gain potential.

If you can do this a few months in a row, you can significantly reduce your cost basis.

Generally, I leave the LEAP option alone. Spreads are wider with LEAPS so it can be hard to get filled at the mid-point which can get expensive if you are making multiple adjustments. For this reason I tend to leave the LEAP alone through the course of the trade.

POOR MAN’S COVERED CALL EXAMPLE

I’ll now walk you through a trade example from 2017. The trade worked really well, but there were a couple of mistakes I made, or things that I could have done better. See if you can spot them.

With this strategy, I like to avoid individual stocks and love the sector ETF’s. The example today is using IYR – the iShares US Real Estate ETF.

Ultimate Guide to the Stock Repair Strategy

This is an instrument that I’m happy to hold for the long term. I always want to have some exposure to real estate in my portfolio.

Other than the 2008-2009 period, this ETF tends to have a slow and steady rise higher as you can see below. Since 2013, dips have been excellent buying opportunities. This type of setup is perfect for a poor man’s covered call.

Here are the details of the trade:

Trade Date: January 18th 2017

IYR Price: $77.73

Trade Details:

Buy 5 18th Jan 2019 $68 Calls @ $11.89

Sell 5 17th March 2017 $80 Calls @ $0.94

Total Premium Paid: $5,475

If we check back to our formula, this fits our criteria:

Difference between the 2 strikes + premium generated from the short call > cost of LEAPS

The difference between the strikes is $12 + $0.94 premium received = $12.94 which is greater than the cost of the LEAP at $11.89, so we are good to go.

At this point IYR has risen slightly to $79.85, just below my sold call at $80. The trade is +$780 as the LEAP has risen to $13.28 and the sold call is also showing a small profit thanks to time decay. The sold call is trading for $0.86.

At this point there isn’t a huge amount of profit potential left in the trade, but I still wanted exposure to IYR. As such, I close out the March $80 call and roll it out to April $80.

By doing this I was able to bring in an extra $230 in premium.

Date: March 2nd 2017

IYR Price: $79.85

Trade Details:

Buy 5 17th March 2017 $80 Calls @ $0.86

Sell 5 21st April 2017 $80 Calls @ $1.32

Premium Received: $230

BEFORE ADJUSTMENT

AFTER ADJUSTMENT

Once again, the trade is working out well. A couple of weeks out from expiry and IYR is trading right at the short call. I take the opportunity to roll out again and bring in some more premium. This time I also roll up by $1 to give myself some more capital gain potential.

Rolling out to June and up to $81 brings in another $390 in premium.

The position is +$975 at this point.

Date: April 11th 2017

IYR Price: $80.01

Trade Details:

Buy 5 21st April 2017 $80 Calls @ $0.40

Sell 5 16th June 2017 $81 Calls @ $1.18

Premium Received: $390

BEFORE ADJUSTMENT

AFTER ADJUSTMENT

(note the graphs from here on are off slightly for some reason. On the upside it should slope slowly down to the right rather than being horizontal)

At the end of May, IYR had dropped back to $78.92 and my $81 June short calls were basically worthless. At this point I rolled the calls down to $79 and out to July.

This roll brought in another $430 in premium.

I’ve also gone backwards a bit in the trade due to the drop in IYR. Previously I was +$975, now the trade is back to +$720.

In hindsight, I was possibly a little aggressive rolling down the calls and didn’t give myself enough room for capital appreciation. Within a few weeks IYR was back up near $82.

Date: May 31st 2017

IYR Price: $78.92

Trade Details:

Buy 5 16th June 2017 $81 Calls @ $0.06

Sell 5 21st July 2017 $79 Calls @ $0.92

Premium Received: $430

BEFORE ADJUSTMENT

AFTER ADJUSTMENT

With IYR back up at $81.76 my short calls were well and truly in the money so I decided to roll up to $82 and out to August. This adjustment actually cost me $885 which was a bit painful.

If I hadn’t rolled the calls down so low in the previous step, I could have avoided some of this pain.

The loss on the July calls has been offset by gains in the LEAPS however and the whole trade is back to +$1,120.

Date: June 26th 2017

IYR Price: $81.76

Trade Details:

Buy 5 21st July 2017 $79 Calls @ $2.69

Sell 5 18th August 2017 $82 Calls @ $0.92

Premium Paid: $885

BEFORE ADJUSTMENT

AFTER ADJUSTMENT

By August 8th, IYR has dropped again to $79.95. The trade has gone backwards a little bit, but not too much thanks to the time decay on the August calls. The trade has gone from +$1,120 to +$945.

Again, I decided to roll down to the at-the-money strike of $80 and out another month to September.

Given that the August calls were almost worthless and the September $80 calls were trading for $1.22, I was able to bring in $585 in premium.

Date: August 8th 2017

IYR Price: $79.95

Trade Details:

Buy 5 18th August 2017 $82 Calls @ $0.05

Sell 5 15th September 2017 $80 Calls @ $1.22

Premium Received: $585

BEFORE ADJUSTMENT

AFTER ADJUSTMENT

Moving forward to September 1st, IYR has risen from $79.95 to $81.44 which has seen the position go from +$945 to +$1,270.

At this point, my September $80 calls are in the money and have very little time value left, so I decided to roll out to October and up to $81.

This adjustment cost me $190 but gave me more time premium.

Date: September 1st 2017

IYR Price: $81.44

Trade Details:

Buy 5 15th September 2017 $80 Calls @ $1.62

Sell 5 20th October 2017 $81 Calls @ $1.24

Premium Paid: $190

BEFORE ADJUSTMENT

AFTER ADJUSTMENT

IYR stayed pretty steady over the next 5 weeks and by October 16th was trading at $81.29, basically the same spot it was on September 1st. This was perfect for the trade and saw the position go from +$1,270 to +$1,685.

Over the 5 weeks, the short calls declined from $1.24 to $0.51 and the LEAP call held its value at $13.65. This is because there was very little time premium in the LEAP and theta decay is very slow on the long term options.

For this adjustment I decided to roll out to December and up to $83. This adjustment brought in $100 in..

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  1. Don’t enter a trade if you are unsure of the trend. Never buck the trend.
  2. When in doubt, get out, and don’t get it when in doubt.
  3. Only trade active markets.
  4. Distribute your risk equally among different markets.
  5. Never limit your orders. Trade at the market.
  6. Don’t close trades without a good reason.
  7. Extra monies from successful trades should be placed in a separate account.
  8. Never trade to scalp a profit.
  9. Never average a loss.
  10. Never get out of the market because you have lost patience or get in because you are anxious from waiting.
  11. Avoid taking small profits and large losses.
  12. Never cancel or stop a loss after you have placed the trade.
  13. Avoid getting in and out of the market too often.
  14. Be willing to make money both sides of the market.
  15. Never buy or sell just because the price is low or high.
  16. Pyramiding should be accomplished once it has crossed resistance levels and broken zones of distribution.
  17. Pyramid issues that have a strong trend.
  18. Never hedge a losing position.
  19. Never change your position without a good reason.
  20. Avoid trading after long periods of success or failure.
  21. Don’t try to guess tops or bottoms.
  22. Don’t follow a blind man’s advice.
  23. Reduce trading after the first loss; never increase.
  24. Avoid in getting in wrong and out wrong; or getting in right and out wrong. This is making a double mistake.

Free Covered Call Course

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Not all volatility is created equal. If I mention the words Contango, Backwardation and VIX Curve Structure, your eyes might glaze over.

When we get a volatility spike, not all options are affected equally.

Let’s go back to last year when we saw a pretty decent volatility spike on August 10th, 2017. That day, the S&P 500 dropped 1.45% and VIX rose from 11.11 to 16.04, a gain of 44.37% which was one of the largest one-day gains on record.

However, just because VIX rose by 45%, doesn’t mean that the implied volatility of all options increase by 45%.

Download the Implied Volatility Calculator

You can see in the chart below, that the near-term options were affected the most rising from below 12 to near 15.

The furthest dated options only rose from about 16 to 16.5%. So long term options were not impacted nearly as much as the short-term options.

This is why I never trade weekly Iron Condors.

In this 3-minute video below I explain a little bit more about this.

https://youtu.be/JpFj-PehmbY

If you want to learn more about volatility you might enjoy these articles:

How Does SVXY Work? 

VXX and VXZ Explained

Gaining a thorough understanding of volatility is crucial if you want to be a successful options trader. I hope you enjoyed this quick lesson.

Notify Me When Coaching is Open Again

If you have any questions on this stuff, please drop me an email or leave a comment below.

Trade safe!
Gav.

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