End Of Day Post

The markets closed higher today as we close in on Thursday's highly anticipated FOMC statement. We don't expect the markets will be able to sustain a move outside of support or resistance levels until Thursday's announcement. We do, however, expect some market volatility as we approach Thursday's event.

Overall, we are slightly higher for the week. On Monday, the markets closed slightly lower (less than 1/2%) and on very light volume. Today, the volume did increase (but not by much) as all three majors added over 1%.

The focus is on Thursday's FOMC statement. There isn't any benefit to loading up on new trades until after the announcement. We need to watch the market's reaction Thursday, then look for triggers Friday or even Monday. Don't try and trade the announcement. Stay patient and make any adjustments you need to tomorrow to prepare for some volatility come Thursday and Friday.

Have a great night,

Maverick Trading

End Of Day Post

The markets closed in positive territory, but well off the highs of the day. We have seen both bullish and bearish action this week, with very little ground being gained by either side. The markets look to be establishing a range here and are even showing some signs of consolidation.

Tomorrow's move could have an impact on this week’s current consolidation pattern. We will see if one side can gain any ground on the other or if we simply continue sideways into next week.

Volatility is still high and has yet to test its support right around the 20 level. This probably won’t happen without a strong bullish surge in the markets, so we should still stay cautious if the markets continue to consolidate. There is still a lot of speculation to the Fed’s next move, and it should be the market's main focus as we move closer to next week’s meeting.

Mid-Week Outlook:

• Bull: 12%
• Sideways: 44%
• Bear: 44%

Have a great night,

Maverick Trading

ABY: Highlighted Trade From One Of Our Traders

Another great setup in Abengoa Yield plc (ABY), an electric utility company out of the U.K. One of our traders used support and resistance levels for entry and target.

There are many different trading strategies available to take advantage of this type of setup in the options world. This particular trader used a vertical put spread, with strike prices selected from support and resistance areas.

Typically, for the strategy chosen, the risk is the premium paid and our traders aim for a 50%+ return. At Maverick Trading, we pride ourselves on our community of traders. Every week in our live Trading Room, our traders share their favorite new trade setups (like the one above from last week) with all of their fellow Maverick traders.

NOTE: Chart(s) courtesy of FINVIZ.com.

End of Day Post

The markets made a decisive move higher today, with all three majors closing up +2.5% on average. We went into this past U.S. holiday weekend with a pretty bearish pattern in the markets. We didn’t get the follow through to confirm another bear move, though, as the market action was to the upside since today's open.

A move like this is hard to digest without more data, especially coming out of a long weekend. Is this a bear rally...or something more? Usually, the volume and volatility can help, but we saw very little out of both. The VIX did drop, but only slightly, as the volume in the S&P was average at best. The only thing that we know for sure is that the markets have retraced a little more than half of last week’s losses.

Over the next couple of days, we should be able to identify short-term support and resistance levels if the volatility continues to stay at these levels. Keep an eye on the volume this week – specifically, if one market direction exceeds the other in size.

Have a great night,

Maverick Trading

Diagonal/Vertical Spreads + Portfolio Risk (Part 1 of 4)

From Our August 2015 E-mail Archives: One of our traders sent a multi-question email about his recent trading. Our Head Trader, Robb, answered with a 1,500-word reply. No one can ever say that Robb is a man of few words! So, we are going to break up the original email into four parts. Today, we present the reply to Question #1 of 4.*


-----Original Message-----

From: Thomas G.
Subject: Trades

Robb,

Hope all finds you well. I have a few questions from my recent trading.

1. Diagonals – In my Trading Plan, it says that if I'm down on the diagonal option spread at expiration, then I either take the trade off the table or use lower lows to exit the trade. If I bought September and sold August and I'm down, then is there a way to sell against it again since I'm down overall in the trade? Editor's Note: We will show the answer to this question this week and the answers to the remaining three questions over the coming weeks.
   
   
2. Verticals – In my Trading Plan, it says keep vertical option spreads until expiration to increase my R/R (Reward/Risk). So, when do you scalp these or take them early, if ever? I placed a trade on CAT this week: a 77.50 / 75 vertical. I'm up a little on the trade and I do believe it will get to 75. However, I'm not as confident in CAT staying below 75 until August expiration with it being this extended to the downside. Maybe I just picked the wrong strategy or time frame; however, if it were to bounce, then I can't just see holding it to a max loss...but I also don't want to cut my winners.
   
   
3. On lower lows, is it a closing low or just a lower low during the day?
   
   
4. When I trade my account, I often have over 20% of my portfolio at risk. If I had less than 20% and I was trading at 2% per position, then I would have 6-8 trades on at a time. Are 6-8 trades of $3k-$4K invested at a time enough trades at a time? I'm over trading currently (I'm trying to work on that!), but I don't want to under trade either.

Sincerely,

Tom


-----Reply Message-----

Hi Tom,

Thanks for your questions. I’ll try to answer them as best as possible:
Editor's Note: Answer to Question #1 below. We will show the answers to the remaining three questions over the next three weeks, respectively.

Diagonals – One of the nice things about diagonal option spreads is that they offer a large number of choices when making adjustments.

In my personal Trading Plan, I allow myself to "roll down" the diagonal to a horizontal (sell same strike as the long call, but the front month) as long as the stock hasn't broken any major support points (mostly the 50-day simple moving average). We did a video on rolling from diagonal spreads to horizontal spreads a while ago. Click the image to the right to watch the archived video.

The biggest risk to making adjustments is that, for the most part, you are making the adjustment out of a place of weakness – where you have a loss and you are just trying to mitigate the loss.

One of the things that I have found is that price action is the biggest proof of telling me whether I got the trade right or not. If the trade is going against me, then it's a good sign that the stock is likely to continue to go against me.

Each time that you make an adjustment in options, you increase your risk and lower your reward. That is why I only allow myself one (1) adjustment per trade since traders (including myself in the past!) sometimes keep making adjustments to a losing trade and all they are doing is digging a bigger hole and adding to their risk/losses. Most times, it is best to just take the small loss and move on to the next trade.

Hope this helps.

Robb

* NOTE: Some original wording has been modified for legibility.

End of Day Post

The markets closed slightly higher, but well off of intra-day highs. The markets were hesitant as we move into the Non-Farm Payrolls data tomorrow morning at 8:30 am ET. A slight miss on the payrolls might be just what the doctor ordered. It would signal that the Fed would be less likely to hike rates at the upcoming meeting. However, it also wouldn't be a terrible number for the economy as a whole. With a much better or worse number than expected, the markets may not like that quite as much. Of course, price action will be the deciding vote.

The broad markets seems indecisive at these levels. The long-term trends have been broken to the downside. The short-term trends were over-extended on the downside (way below moving averages) and are starting to work off that oversold condition. In fact, broad markets have established higher swing lows this week. Most often, this will end up resolving in the direction of the longer-term (weekly chart) trend. In this case, that would mean at least one more leg lower toward prior lows. If the short-term rally starts to fail, then the risk-reward would be favorable to adding some bearish trades.

Mid-Week Outlook:

• Bull: 17%
• Sideways: 27%
• Bear: 56%

Have a great night,

Maverick Trading

End Of Day Post

The U.S. markets continued lower, following a confirmation of a bear rally pattern set yesterday. All three majors suffered losses today – just shy of 3% – as China’s weakness continued to weigh on the U.S. markets. Today’s bearish action could have been fueled from a weaker than expected manufacturing number out of China. We have been watching China’s economy slow down for some time now and there really are not any surprises with it. However, it appears to help fuel the bearish action.

Regardless of any cause, these markets remain in bearish control here. We haven’t seen the VIX drop below 24 since this bearish move started. New support on the VIX was set in early July around the 20 level and, since the breakout, has yet to even be tested. This should lead us to believe there could be more selling to come.

We have seen some major swings in oil over the last few days, which can be a sign of a bottom, although this “bottoming” action could last for days or weeks. Best not to try and time any sort of bottom here; rather, let’s wait until one develops with confirmation. This momentum should carry us back to retest the lows set last week.

Have a great night,

The Maverick Trading Team