End Of Day Post

The markets gave back their gains from yesterday as we continue to see consolidation at these levels. We haven’t seen the markets give or gain any ground over the last couple weeks, but this was to be expected over the holidays.

Volume has been very light, and regardless of tomorrow's action, we shouldn’t put too much emphasis on any "one" move without volume behind it. Tomorrow is the last trading day of 2015 and we don’t expect much, so consider keeping your fingers off the trigger until later next week.

Happy New Year,

Maverick Trading

End Of Day Post

The markets closed higher for a second day in a row, as we look to be bouncing off of lower support. The markets took a hard turn down on Thursday and Friday last week, just a day after the FOMC raised interest rates. We were expecting a bearish reaction to an interest rate hike; however, it is unclear on how far or long it would go. With only one trading day left in the week, we don’t anticipate much more from these markets.

Support looks to be holding this week. After Friday’s volume spike, we should see volatility slow down through the end of the year. We expect the markets to float back into their respective ranges as the year comes to a close, so don’t expect too many directional trading opportunities in the short-term. Enjoy your family and friends this weekend, and keep your trading activity light over the holidays.

Have a great night,

Maverick Trading

End Of Day Post

The markets gave back all of yesterday’s gains, as investors try and digest the latest Fed move. Yesterday, the FOMC increased interest rates by 25 basis points, which sent the markets higher into the close; however, today’s action paints a very different picture.

An interest rate hike has been in the works for some time and was almost expected. However, being this late in the year leaves little time for investors to take action. We have been noticing a whole lot of volatility over the last few weeks and these last two days have definitely followed suit.

We should expect volatility to continue as the markets try and decide where to go next. An interest rate hike usually has a short-term negative effect on the equity markets, but stay mindful of overall support levels – until they are broken, we are still range-bound. Once volatility subsides, we should see more of a directional market and, with the holiday approaching, we should see a decrease in volume.

Tomorrow is December’s expiration, the last monthly expiration of 2015. Follow your plan and make sure to address your December positions. Tomorrow would be a good day to just sit back and watch, given the market's current level and reaction to the Fed’s move.

Have a great night,

Maverick Trading

End Of Day Post

The markets moved higher today after putting in a decent reversal signal on Monday. We continued to see volatility in these markets, along with a decent amount of volume, as all three majors put in a hammer candle on support. Even though the S&P gained just over 1% today, we did close off of the intra-day highs. The S&P is off of its previous support level, but still below its moving averages.

Tomorrow brings us another FOMC statement. As always, we should expect some volatility like we have seen over the last two days, regardless if action is taken or not. Continue to stay balanced – our outlook is still sideways through the end of the year. However, we have been getting the move back into consolidation levels as discussed in Sunday's weekly Trading Room.

Keep an eye on the market reaction to tomorrow’s event, or lack of it. In either case, take your time and be slow to make any major adjustments to your portfolio or positions. Once the volatility calms down, you will have an easier time making adjustments. Look to add positions or make changes later in the day tomorrow or even later in the week, if so desired.

Have a great night,

Maverick Trading

End Of Day Post

We are still seeing some intra-day volatility, as the markets continued to move sideways. Although his week’s movement has been to the bearish side, we have yet to break major support levels. Today’s movement, as with yesterday, did show bearish retracement from intra-day highs. These patterns could indicate another test of short-term support levels (2040 on the S&P 500).

Nothing much has changed over the last few trading sessions, so continue with a sideways outlook and follow your personal trading plan. We will see retail sales and the PPI tomorrow, but we aren’t expecting much out of either number. We will be interested to see how this week finishes – specifically, if support is broken or if the bulls jump in.

Have a great night,

Maverick Trading

End Of Day Post

All three majors made another step lower today; however, we are still seeing consolidation overall. We have seen some volatile moves since Wednesday of last week, but the markets haven’t gained or lost any ground. Volume has stayed pretty much average as the bulls and bears look to be testing each other with little follow-through.

Volatility has been a little higher than expected over the last few days, but we are still moving sideways as a whole. Continue to keep this outlook until we confirm a move outside of the markets' current ranges. Look to take advantage of range-bound stocks if opportunities present themselves, but make sure to keep yourself adjustable. By using weekly expiration cycles and not over committing to any one direction for too long, we should be able to take advantage of continuing sideways markets.

There is not much going on in the headlines as of late. We did see a small drop in the NFIB small business index, but didn’t notice any significant market action associated with it. We still have the PPI and retail sales due out Friday, along with the weekly jobless claims number on Thursday. At this point, we can't be sure if any of these numbers will have an impact on the markets, but we should stay mindful of them regardless.

Have a great night,

Maverick Trading

End Of Day Post

The markets headed lower for the second session in a row, as we have now broken shorter-term support levels. The markets established – and broke out of – a very tight range created over the holiday week. Since Tuesday, the markets have been steadily retracing back down towards their respective lower channels, breaking below the base set last week.

We have seen a decent amount of economic news this week, which could be the primary factor for the increase in volatility. We still have the non-farm payrolls report due out tomorrow, which we expect will add even more volatility.

Technically, this looks more like a bull pullback – still well within an overall sideways range as investors react to economic results. These moves are speculative at best. Without any hard action taken by the Fed, we should continue to treat them as such. Stick to trading range-bound markets until this sideways trend is broken.

Have a great night,

Maverick Trading

Trading as a C Corporation

From Our November 2015 E-mail Archives: Our Head Trader, Robb, replied to an e-mail from one of Maverick's traders who had just passed the Maverick trader qualification program. He had a question regarding starting a C Corporation and the estimated cost.*


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

From: Omar L.
Subject: Re: Approval for Capital Sharing

Good morning,

First and foremost, I want to say thank you for making all of your traders pass the qualification program. It has helped me build a solid foundation. I do not have a scanner, so I am faxing the attached documents this afternoon.

I do have a couple of questions about starting a C corporation. What is the first step in starting a C corporation and what is the estimated cost?

Best Regards,
Omar


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

Hi Omar,

The process of starting a C corporation (or S Corporation or LLC) is actually very easy. However, just because it's easy to fill out the required forms doesn't necessarily mean that it's easy to do it correctly. You will have to do a bit of research first.

I would say the best thing to do is to educate yourself. There are tons of articles and websites that will teach you the differences between corporations, what you can legally write off and how to structure things. Of course, there are companies out there that are willing to do this for you for a price, but they will simply be consulting and filling out the paperwork for you.

Once you understand and know what you are doing, the next step is to choose the state that you will incorporate in. Most people simply pick the state they live in. However, some people will incorporate in another state. For example, many people in California go elsewhere since fees in California are much higher than everywhere else. The fee to register a corporation in most states is typically between $50-$200 – in California, the fee is around $800.

Go to the state's website and search for corporations or incorporating. On that page, there will be instructions on what forms to fill out and how to complete them. Many states just have a template where you fill in the blanks and it creates your Articles of Incorporation for you. The Articles are the main paperwork that the state needs (along with your fee...of course, they never forget to ask for that!).

Once registered with the state, you need to register with the IRS and get your Tax Identification Number. I believe it is Form SS-4 – "Application for Employer Identification Number (EIN)" – that needs to be submitted to the IRS.

Once you are registered with the state and the IRS, you can now go to banks/brokerages and open corporate accounts. This is where it gets tricky since we are getting into the accounting now. I always tell our traders that the registering of a corporation is easy and can typically be done on their own. However, the accounting of the corporation definitely needs to be done by someone who knows what they are doing.

Your first step will be putting capital into the corporation, but you need to determine if it is a loan, buying of shares, etc. Then, you need to generate income and expenses in the business through your activities. Again, there is a lot of great information out there and I know that by logging in the hours to learn it, you will know what to do. Legally, I can't offer any specific advice.

Alternatively, you can hire a CPA at this point and have them do everything for you. A good CPA will only cost a few hundred dollars for a simple S Corp or LLC tax return. A C Corp will likely cost a bit more. We have a firm called Trader's Accounting that we refer a lot of our traders to if you feel that you need help at this point – contact us if you want more details about their firm.

Please feel free to send any further questions that you have to me.

Thanks,

Robb

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

End Of Day Post

The markets pushed through a very tight consolidation area that we have seen developing over the last few days. Expectations were for the markets to move more sideways going into last week's U.S. holiday, so we weren’t too surprised that we ended up with a very tight basing pattern. Today’s move could be considered a breakout of a short-term basing pattern. However, these basing patterns did develop over a light week of trading, including a half session last Friday.

All three majors are still well below their high resistance levels set this past summer and we still expect to see range-bounding stocks through the year-end. The development of this small basing pattern over the last few days could create a shorter-term bullish opportunity. We should still respect the overall market's range; however, taking advantage of bullish surges and bearish corrections can prove profitable.

Timing will be the biggest factor for those who are willing to try and take advantage of smaller directional moves. Keep your exposure in mind over these shorter-term trades, as over-trading can become a problem. Range-bounding stocks, in the long-term, can also yield some good returns to the sideways player. Being patient and allowing stocks to move back and forth between support and resistance levels can be less labor intensive, but will test your discipline and your initial trade setup.

Have a great night,

Maverick Trading

End Of Day Post

Today looked to be the start of a pullback; however, the markets regained their losses, closing slightly higher on the session. We anticipate that the markets will continue moving sideways going into the holiday, with just 1.5 trading days left this week. All three majors are still below previous support levels, but back inside their ranges.

We will see a decent amount of economic news tomorrow, including jobless claims and durable goods orders. Reports like these can always have an impact on the markets, based on the severity of the results. However, given the holiday just around the corner, any reaction should be temporary at best. Expect this range to tighten a little over the next couple of days. We don't anticipate too many opportunities until early next week.

Have a great night,

Maverick Trading

A Better Alternative to Short Puts

From Our November 2015 E-mail Archives: Our Head Trader, Robb, sent an e-mail to one of Maverick's traders regarding his short/naked put position and suggested a better alternative to trading naked.*


-----Message-----

In this case, there was only an e-mail from Robb to the trader and no original e-mail message from the trader. At Maverick Trading, we constantly review our traders' accounts to ensure proper risk management. Robb was doing this when he came across a trader with short put options in his account. Robb sent the e-mail below, which we believe is important for all of our traders to see.

---

Hi Tom,

As I was going through trader accounts, I wanted to drop a quick note to you. I noticed that you were in several Short/Naked Put positions. While the Short Put position carries some serious risk, we definitely like it better than a Short Call position.

Whenever I see someone selling/shorting options, I want to make sure that they understand that the math shows a Bull Put Spread (or Bear Call Spread) is superior to a Short Put as far as % return and absolute risk.

To illustrate this, let’s use your five (5) contracts short position in KMI December 25 puts:

Short Put Position

• Position: Short 5 x KMI - December 18th – 25 puts
• Entry Price: 0.90
• Profit Potential: $450 (less commissions)
• Absolute Risk: $12,050 (While this is the absolute risk if the stock goes to $0, we understand that is very unlikely; however, this is the absolute risk and you will occasionally have trades that lose 50%+)
• 2 SD Risk: $1,905 (A 2 standard deviation move down was calculated at 20.29 at the time of your trade entry)
• Return on 2 SD Risk: 23.6%
• Margin Required: $1,685
• Return on Investment (margin): 26.7%

Now, let’s compare the above to a 5 contract position of a KMI December 18th 22/25 Bull Put Spread.

Bull Put Spread

• Position: 5 x KMI - December 18th - 22/25 Put Spreads
  • Short 5 x KMI - December 18th - 25 puts: 0.90
  • Long 5 x KMI - December 18th - 22 puts: 0.20
• Total Credit: 0.70
• Profit Potential: $350 (less commissions)
• Absolute Risk: $1,150 (While this is the absolute risk if the stock goes to $0, we understand that is very unlikely; however, this is the absolute risk and you will occasionally have trades that lose 50%+)
• 2 SD Risk: $1,150 (A 2 standard deviation move down was calculated at 20.29 at the time of your trade entry)
• Return on 2 SD Risk: 30.4%
• Margin Required: $1,150
• Return on Investment (margin): 30.4%

Comparing the two side by side, you can see the Bull Put Spread delivers both a superior Return on Risk and Return on Investment. When you look at Absolute Risk and even a 2 standard deviation move, the Bull Put Spread is superior.

At Maverick Trading, we always discuss capital allocation. In the two scenarios above, the Bull Put Spread will tie up less of your trading capital. This would become even more evident if this was a higher-priced stock. If you did the same analysis above on a $100 stock, then the margin on a Short Put would be just below $10,000, while the Bull Put Spread would still be $1,150. When compared side by side, the Bull Put Spread has much better “math” (and, thus, makes more sense) than the Short Put strategy.

With that said, there is a price point where the Short Put and Bull Put Spread are fairly comparable. We have found this to be around a $10-15 price on the underlying stock. Even then, though, the Short Put will always carry more Absolute Risk, which still makes the Bear Put Spread superior.

Hopefully, I have laid out everything in logical detail. While I don’t hate the Short Put strategy, it is so much better to just buy a far out-of-the-money (OTM) spread. I tell traders that if you want to sell a $100 put, then also buy a far OTM $90 put for 0.10. It changes the entire dynamic of the trade and makes it safer because of the Absolute Risk of the Short Put strategy. I suggest that you take a look at your trading plan and see if this makes sense for you.

Thanks,

Robb


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

End Of Day Post

The markets hesitated once again after another strong move higher yesterday. Overall, we have seen a pretty decent move to the upside this week, as each upward move is followed by a stagnant sideways day. There are some signs of reluctance from the bulls after each move higher. So far, we haven't seen an answer from the bears. The markets appear determined to get back to last week's levels.

We haven't seen much from the news headlines. With no change in the Fed policy, we should expect more of the same. Take into consideration, and respect, current support and resistance levels. We should continue to see opportunity in the out-performing stocks and sectors as we enter December's expiration next week.

Continue to implement bullish to sideways strategies into your portfolio and stay adjustable on a weekly basis if possible. November expiration ends tomorrow after the close. Make sure to address your positions and make the necessary adjustments for Monday.

• Bull: 65%
• Sideways: 35%
• Bear: 0%

Have a great night,

Maverick Trading

End Of Day Post

The markets hesitated today after a strong bounce on Monday. In light of the devastating terrorist attack overseas, the markets showed resilience and rallied on Monday’s session. The markets had already been moving lower previous to the terrible event and could have been due for a bounce, although today’s candlestick looks to have put a temporary halt on this recent bullish push.

The U.S. markets have been experiencing their first "real" pullback over the last couple of weeks since climbing back into previous highs set earlier this year. This pullback has been a little more aggressive than we anticipated. However, in comparison to the bullish surge off the bottom, it is pretty much in line. Technically, we are in the middle of a possible higher pivot low being formed, with tomorrow's candle being the last needed piece of confirmation.

So far, the markets are acting as discussed in Sunday’s Trading Room, with high volatility Monday and indecision today. Where the markets go from here will be a strong indication to overall sentiment.

Have a great night,

Maverick Trading

When Do Options Become Too Expensive?

From Our October 2015 E-mail Archives: Today, our Our Head Trader, Robb, answers a question from one of Maverick's traders about when an option becomes "too expensive."*


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

From: Alonzo D.
Subject: Trader Question!

Hi Robb,

You often speak of paying too much for an option. What is the max that you are willing to pay in time value for an option that you go long on? Long Call/Put vs. one leg of a spread.

Thanks,
Alonzo


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

Hi Alonzo,

Thanks for the email – it’s a great question. The concept of “too much” is all relative to the trader, so I can only give you my personal feedback.

As you know, options prices are due to time and volatility. Since time is fixed, volatility is really the thing that will increase the price of the option. So, Implied Volatility (IV) will be the thing that makes it “too expensive.” However, IV is simply a result of supply and demand for the option – using the Historical Volatility (HV) of the underlying.

Efficient market theory believes that the market price is the “correct price.”If you believe the efficient market theory (which I do), then every option is priced correctly. Thus, for me as a trader, “too expensive” simply means my Risk/Reward is no longer worth it.

Let me give you an example.

CMG has earnings tonight [October 20, 2015] after the close. Let’s say I wanted to buy at the money long calls going into the report, as follows:

• CMG Price: $712.52
• CMG November (next month) 710 Call Price: $35.00

When I am building the trade, I have to figure out T.E.S.T. (Timeframe, Entry, Stop and Target) and run the numbers. I have to plan out my max risk (projected or absolute) and my reward potential. Let’s use the following numbers for CMG:

• Timeframe: 2-3 days
• Entry: 712.52
• Stop (abandon or adjust price): 642.52 – I simply used ATM long calls and puts added together to get the projected move of CMG after earnings.
• Target: 857.50 – I used a 61.8% Fibonacci extension to get this number. Remember, though, that targets are nothing more than slightly educated guesses as to where this is going.

Now, let’s calculate the Risk/Reward of the long call play with exiting at both our stop and target prices. I used a risk graphing calculator to get these projected values in 2 days. I also used a 50% drop in IV since that is fairly typical with an active stock after earnings.

• Risk: $3,427 (you are basically at max absolute risk since the original call price was $35)
• Potential Reward: $10,750 (projected value at 857 CMG price after 2 days and 50% drop in IV)
• Reward/Risk Ratio: 3.13

We are finally at the bottom line where we decide whether the option is “too expensive.” If it can’t justify the risk with at least a 2X reward, then this is when I say the option is too expensive.

As you can see, things like stop and target prices are subjective to each trader and can lead to different numbers. As we always say, “Consistency is the most important thing in trading. Even though two different traders use different numbers, they should have close to the same results after thousands of trades.

So, after my long, detailed answer, the short answer is when there is not enough upside to justify the price of the option.

Hope this helps,

Robb

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

End Of Day Post

The markets made a decent move lower today, led by weakness in energy and materials. The S&P and INDU both fell below their 200-day MA’s; however, both are still above major support levels for the time being. Although recent economic reports have been pretty much flat, rumors of a possible rate hike in December continue to loom. This has created some volatility in the markets and could continue to do so moving forward.

The markets have been in a pull back all week and today’s move was the largest so far. Technically, we are still in a corrective pullback, as all three majors are still above major support levels. We will see more economic data tomorrow – specifically, the PPI and retail sales, either of which could have an impact on tomorrow’s action.

Market sentiment seems to be focused on the threat of an interest rate hike or the worry of weakness moving forward. Either way, this move lower doesn’t appear to be finished just yet.

Mid-Week Outlook:

• Bull: 50%
• Sideways: 39%
• Bear: 11%

Have a great night,

Maverick Trading

End Of Day Post

The markets have been in a steady pullback over the last few days, which has brought us back to support levels. Today’s candle could be the beginning of a higher pivot low formation in the markets. If these support levels hold, then we should see some decent bullish opportunities moving forward.

Make sure that the lower pivot has formed before moving into aggressive bullish trades. Until the next bullish move is confirmed, continue to take advantage of horizontals and diagonals. Staying adjustable makes it easier to increase our bullish exposure if the markets decide to continue higher from here.

Stay patient in your trades – corrective market action can create unfavorable movement in both bullish and bearish positions at the same time. Keep in mind that we are trading the overall trend and not just a move.

Have a great night,

Maverick Trading

End Of Day Post

The markets hesitated for a second day in a row, with little bearish presence. With the markets at these levels, we will continue to keep a bullish – but cautious – stance. We aren’t seeing enough bearish movement to justify aggressive long positions here. It would be nice to see a bull pullback out of these markets before entering more bullish trades, but we might not see one of significance for a little while.

Not much has changed over the last week and we should continue to respect – and trade – the markets in front of us. We have seen slow moving, stubborn bull moves in the past. If played cautiously, they can generate decent returns. Continue to follow market sentiment. Things could be looking a little over extended out there, but stay true to the trend. Don’t try and guess a top here...you will be wrong.

Mid-Week Outlook:

• Bull: 14%
• Sideways: 59%
• Bear: 27%

Have a great weekend,

Maverick Trading

End Of Day Post

The markets continued to push higher as they look to be closing in on the upper range set earlier this summer. This bullish move has been very direct, with very little bearish resistance. Earnings results have definitely played their part – although they haven’t all been great, there seems to be more bullish reaction than bearish.

The markets are showing signs of over-extension as this bullish move continues. We don’t want to try and guess a top or quit taking advantage of bullish trades; however, leaning towards a more sideways outlook could help reduce exposure with a market correction. Overall we need to stay bullish along with the current market sentiment.

Continue to follow earnings results as we continue through the season. We have seen some great opportunities out there, especially after results. So, stay diligent and follow your rules.

Have a great night,

Maverick Trading

End Of Day Post

The markets closed flat on today's session after putting in a decent move yesterday. With yesterday's move, all three majors are comfortably back into their summer ranges. This last bullish surge was fueled by some good earnings results and from an FOMC announcement, in which no action was taken as the Fed will continue to monitor the economy.

We have experienced a very direct move back above the 200-day moving averages (MA's) in these markets. We should expect this bullish move to slow down over the next week or so, as we enter deeper into our old range. Earnings results should create some directional opportunity moving forward. This could be a nice thing to have if we indeed find ourselves back in a market range, so let's keep an eye out for relative strength and weakness.

Mid-Week Outlook:

• Bull: 53%
• Sideways: 36%
• Bear: 11%

Have a great night,

Maverick Trading

Getting Assigned In A Vertical Spread

From Our September 2015 E-mail Archives: Today, our Head of Trader Development, Joe, answers a question from one of Maverick's traders about what to do when getting assigned in a vertical spread.*


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

From: James L.
Subject: Assignment

Hey Joe,

I was wondering if you could help me understand what I would do in a situation where I get assigned. I've been demo and live trading for a while, but haven't been assigned yet. I want to be prepared and not go into "panic mode" when it does eventually happen.

I'm guessing the action would depend on what kind of position I would be in. For starters, let's say that I'm in a vertical that's well beyond max gain in the week of expiration and I get assigned stock.

Would you hold the position for max gain through the expiration or close out the stock followed by the long leg?

Thanks!

James


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

Hey James,

With a vertical spread, it is fairly simple.

In the scenario that you described, an In-the-Money (ITM) vertical spread, you would simply allow the whole thing to "same day substitute." At expiration, both options would be worth money and both options will be replaced with stock.

Since you are long one side of the vertical spread and short the other, shares will be assigned long and short. Following the guidelines of a vertical spread, you should have had the same amount of contracts long and short. So, upon assignment, your newly acquired long and short shares will cancel each other out, leaving you the difference +/- your original credit or debit.

The idea is not to panic, which will certainly take some getting used to.

If you would like some examples of similar situations, I run an options expiration class each month on the third Thursday (two days before the monthly expiration cycle ends). We cover Maverick's positions, along with any trader positions they would like discussed via the questions box.

EDITOR’S NOTE: Remember, when you are long the original vertical spread (i.e., a debit spread), then you want the spread to go to full value (as above). If, instead, you are originally short the vertical spread (i.e., a credit spread), then you actually want the spread to expire worthless.

I hope this helps,

Joe

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

End Of Day Post

All three majors look to be hesitating after pushing through their 200-day moving averages last week. We have seen some earnings reports add fuel to this bullish move, as we now find ourselves back into this past summer’s range.

Earnings should continue to drive market sentiment, as bullish sentiment seems to be the most prevalent over the last few days. We should continue to follow earnings results, along with new tests of support and/or resistance, as we move back into the year’s previous range.

We are still seeing bullish and bearish opportunity, although we should not be too aggressive in either direction. Make sure to add a sideways element to your strategies if available. Now that we are back into previous ranges, look to earnings results for any change in relative strength and weakness moving forward. This could take a few days, so be sure to follow your sector charts.

Have a great night,

Maverick Trading

Traders Must Certainly Understand Uncertainty

From Our October 2015 E-mail Archives: One of our traders asked how much weight to give to other elements of the markets. Our Head Trader, Robb, replied with his thoughts based on nearly two decades of trading experience.*


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

From: Mark G.
Subject: Quick Question If You Have A Moment

Hi Robb,

Mark here – one of you junior traders. One of the struggles I've had this year deals with correlating data (not sure if that's the right term).

For example, everything on the chart for the S&P 500 Index ETF (SPY) right now is telling me to go long. My weekly and daily charts have broken key levels, plus my weekly and daily moving averages that I look at have either broken or are about to break key levels. If this were just an ordinary stock called "XYZ", then I'd be going long.

What stops me is not the chart itself, but the fact that it's an index and shouldn't other elements of the market (like bonds, gold, etc.) be behaving in a certain way?

I needed to balance out my portfolio with some longs, but i didn't pull the trigger on some setups because I saw things like the bond markets going higher as we were approaching new highs, which signaled to me stocks going down – which didn't happen.

How much credence should I (or rather, do you) put in other elements of the market when determining your outlook or your decision to enter long or short positions?

Mark


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

Hi Mark,

Thanks for the email. I think your question is a great one and the answer is not a short one.

When you go out and perform your research, you will inevitably find conflicting data, which leads to confusion and uncertainty. The first thing you need to understand is that THERE IS NEVER CERTAINTY!

One of the biggest problems that I have seen in all of my years in this business (and working with tons of traders) is that many traders who are left-brainers (i.e., analytical) often try to fit the market into boxes and categories where the outcome is certain.

For example, in engineers' minds, if the process is correct and everything is hooked together correctly, then the desired result will ALWAYS happen. When it doesn't work, then they believe that there is something wrong or missing in the process. They also believe that once they figure that out, then they will achieve the desired results.

Now, this is how most things in life work....except trading. Ha! Just kidding.

To have the correct outlook, you need to think more like a poker player than an engineer; that is, you need to understand that it's all about odds and there is never certainty. As a poker player, you aren't consumed about winning every hand. Rather, you are concerned about only playing hands that have high win/loss ratios, fully knowing that even with an AA (ace, ace) in your hand, you will still lose 71% of the time if playing with 6 people. Before taking a bet, successful poker players wait until they get the right hand at the right position on the table against the right players.

As traders, we need to think the same way. We are not trying to predict what will happen in the future. That's a fool's game and never works. We need to think like the poker player and think about odds and risk/reward. The first thing that we need to do is build a system (trading plan) that outlines the exact things/correlations that have to happen before you take action. The more inputs that you put into your plan, the less setups that will trigger since there becomes conflicting data. Whenever you have conflicting data, it doesn't match the setup criteria and the trade can't be taken. At Maverick Trading, we like a more simple trading plan/system that is accurate and timely and much easier to use/navigate.

To answer your question, I think you are throwing in way too many inputs into what you are looking for in a trade setup. If you go out to the markets and research and score everything, then you will almost always be confused. In the rare time everything does match up, then it's highly likely that your stock/market is in the last gasp of a trend and there is a major trend reversal in store. That's what I've found in my life in the markets. Once everything gives you the green light you were waiting for, the trend is likely over.

I recommend that you first go back to your trading plan or implement new inputs into your analysis and ignore everything else. In your example, you mentioned the SPY on the daily chart is bullish, but the weekly and monthly charts look kind of bearish. Your time frame will determine which inputs you want to use.

For example, my trades usually last 2-3 weeks, so I am not too concerned with weekly or monthly charts. All my analysis needs to be done on the time frame that matches my desired trade length. If I have a 2-week trade, then I don't care what happens to it next month. All that matters is that 2-week time frame.

Secondly, you need to choose which other markets you will use as inputs and ignore the rest. I personally think that both gold and oil don't correlate well with equity prices, but I do think that bond prices have correlation worth watching. However, there will be periods of time where the gold and oil markets will have much greater correlations on equity prices than the bonds do. Now, if I am using bonds and you are using gold, then sometimes your inputs will be more accurate than mine. However, over a few years there really isn't much difference as long as we stay consistent.

To sum it all up, figure out what your inputs are going to be for your checklist/setups and ignore everything else. Then, follow them religiously. Understanding your inputs will work better in some markets and not so much in other markets. I know we would all love to perfectly pick and choose which indicators will work in the present market conditions, but that is pure fantasy. Consistency is the key to this business and is FAR more important than the gold market's correlation on equities.

Hope this helps,

Robb

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

End Of Day Post

The markets made a big push higher today, driven by earnings results and comments from the European Central Bank (ECB). In a statement today, ECB President Mario Draghi said the ECB would be willing to deliver more economic stimulus measures. This had a very positive impact on the U.S. markets, as fear of overseas weakness has hindered these markets for quite some time. All three majors posted gains north of 1.5% on the session.

We now find ourselves breaking back into previous support levels: 17,400 on the INDU and 2,050 on the S&P. A stronger global economy will play its part in adding bullish fuel; however, earnings will be the main factor to any continuation of bullish movement. We need to see if the markets can move deeper into their old range set back in the spring/summer of this year.

So far, earnings have been more positive to this point – although not all positive reports have been met with buying. AMZN, GOOG, MSFT and T are all moving higher after hours with favorable results.

Mid-Week Outlook:

• Bull: 15%
• Sideways: 68%
• Bear: 17%

Have a great night,

Maverick Trading

End Of Day Post

The markets posted two flat days this week as we are now approaching the next level of resistance. This last bullish surge has pushed the markets out of their lower range. It has been a pretty steady bull move off of the bottom set a few weeks ago, including a small two-day retest of resistance once it was broken. The markets are now testing levels not seen since July and, if broken, will put us back into the summer range area.

With continued bullish strength, the markets could recover the majority of the correction that we witnessed in late-August. This would move the markets back into their higher range; however, without stronger economic numbers and strong earnings results, we shouldn’t expect to move higher from there. Without any major unexpected events, we should expect the markets to continue churning forward at a pretty dull pace (at least through earnings season).

Have a great night,

Maverick Trading

End Of Day Post

The markets made a decisive move higher from resistance levels. We wanted to see if these markets could gather enough strength to push higher – and today’s action looks to have done just that.

Our next resistance point will be the area where the markets fell from in late August. This looks to be a strong move by the bulls; however, we still have some strong resistance ahead. Look to add some bullish diagonal trades, if possible. Stick with the adjustable shorter-term weekly expiration, if available.

Earnings season is off and running. Although we haven’t seen many results just yet, we do expect results to have an impact on the markets, even if it is only for a day or two. Our main focus should be on the overall market sentiment. Let’s see if today’s move can continue into a trend and how it holds up to earnings results.

Make sure to address your October monthly positions since they will be expiring tomorrow.

Mid-Week Outlook:

• Bull: 5%
• Sideways: 55%
• Bear: 40%

Have a great night,

Maverick Trading

Diagonal/Vertical Spreads + Portfolio Risk (Part 4 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 broke up the original email into four parts. Today, we present the reply to Question #4 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?
   
   
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. Editor's Note: We will show the answer to this final question this week.

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 #4 below. This completes the 4-part series.

“How many positions and portfolio at risk?” I wish this was a question that had a black and white answer; however, there are just too many variables. We don’t have a rule on how many positions a trader can take since the number of positions isn’t as relevant as the amount at risk is.

The ideal number of positions really comes down to you as a trader. That is, you have to decide for yourself how many positions you can carry at once and manage all of them well based on your trading plan. Personally, I top out at around 20 positions. Any more than that and I find myself making mistakes or forgetting to make exits/adjustments. With that said, we have traders who can effectively manage more than 20 positions.

On the other end, we do think that there is such a thing as not enough positions. At Maverick, we look at trading as an overall numbers game and not about the individual trades you may have on at any one time.

If you are only trading 2 or 3 positions, then you are much more likely to be overly focused and concerned with your trades. Traders tend to make these trades too big in relation to position sizing rules. With so few trades, you have the risk of getting an unlucky piece of news that comes out and blows up a trade or two. If you only had 2 trades (especially with too big of position sizes/risk), it will lead to a big monthly drawdown. This is when traders make mistakes and don’t take small losses; rather, they tend to dig a deeper hole.

In contrast, if you have 15 small trades, then you are putting yourself in a position where your monthly returns will be determined not by a stroke of good or bad luck, but by correctly charting and managing the basket of trades. Even if 1 or 2 of the 15 trades are hit by bad news, you should have plenty of others that work your way – especially if you have a fairly balanced number of bullish, sideways and bearish trades.

In our opinion, 6-8 trades per month are about the minimum. You will have to test yourself to understand what your personal maximum number of trades is. Just cut down the average position size to carry more trades and you should see smoother results (i.e., less account volatility).

As far as your question of risk goes, it’s not about how much capital you have invested, but how much of that capital is at risk. One of the reasons that we believe in always carrying both bullish and bearish positions is to allow us to use more of our account sizes in trades without carrying huge risk in case the market spikes/plunges.

One of the best trading tools that our traders have access to is the Risk Management tool in their Interactive Brokers account. It basically takes a trader’s basket of trades (bulls, bears & sideways) and draws a risk graph of what would likely happen if the markets spike +5% or drop -5%. This allows our traders to see how much of their account is at risk from an unexpected move in the markets. It gives them a worst case scenario where – if everything went wrong – they could see the impact on their account. Then, a trader can make an educated decision to, for instance, never carry more than a 30% worst case scenario.

Hope this helps.

Robb

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

End Of Day Post

This bullish move looks to be running out of steam, as we closed slightly lower on today’s session. We have seen some very small-ranged days as of late, which is an indication of slowing momentum. The S&P and INDU are above resistance levels, as the Nasdaq continues to lag behind.

We could see our first test of support over the next few days and are interested to see if it can indeed hold. We haven’t seen any great opportunities in directional trading this week; however, a market pullback should create some opportunity.

Earnings season should stir things up a bit moving forward. We will start seeing results pick up over the next couple weeks. There could be some good earnings plays out there, so make sure to research a few different ideas before jumping into an earnings play. You must have a plan for exit, whether or not you get the desired move. A ratio spread can carry a large max risk if it is not adjusted immediately after the event (check your risk graphs!).

Not much has changed since last week. Nothing really huge in the headlines.

Have a great night,

Maverick Trading

End Of Day Post

The INDU and the S&P pushed through resistance levels, with the Nasdaq not too far behind. The markets started off slow, but picked up momentum to the bull side after the FOMC minutes. The Fed’s stance hadn’t changed much from its last meeting, with no rate hike planned for September. The Fed is still focusing on continued weakness overseas and keeping an eye on economic stability at home.

After today’s FOMC minutes, all three majors turned higher since we will probably not see a rate hike in September. We will see if today’s move has any follow through tomorrow to confirm a move out of the markets upper range. We could see some bullish trades trigger here (which is great), but don’t over-extend yourself too far in one direction just yet. Today was only the first test above resistance and we will indeed need to see a little more before changing to a more bullish outlook.

Mid-Week Outlook:

• Bull: 11%
• Sideways: 31%
• Bear: 58%

Have a great night,

Maverick Trading

End Of Day Post

The markets took a little break today, as they have put in a decent up move over the last few days. We have seen some bullishness in the markets since Wednesday of last week. Today, however, we look to be slowing as we are now approaching resistance.

All three majors are still within their respective channels, but now testing resistance. We should expect some hesitation at these current levels tomorrow, whether or not the markets retest or break out. Either way, we will need at least another day to confirm a breakout or bear rally.

Not much has changed in the markets as we are now at our upper channel resistance levels. As always, stay patient and balanced.

Have a great night,

Maverick Trading

Interview with Maverick Trading's Head of Operations

The team here at Maverick Trading are big fans of the podcast "Trading Story" and its creator, Brandon Clay. We were honored to be asked by Brandon to be a guest on his show.

Our Head of Operations, Jon Frohlich, spoke with Brandon about proprietary trading and his own experiences trading the markets.

Click here to hear the entire interview.

End Of Day Post

The bulls edged out the bears today, as we regained all of the day's losses to close flat on the session. Yesterday's move confirmed a lower pivot point in the markets. However, with amount of bearishness we have been seeing lately, we were not quite sure how far up this bounce would go.

Today's move does indicate bullish presence and could suggest that we make another bullish move tomorrow (Friday). Hammer candles are usually a bullish sign, but we did see a very similar pattern last Thursday which was overshadowed by a shooting star the next day. Try and keep this in mind as we close out the week tomorrow. Let's take advantage of either direction.

There are many opportunities out there, so take them as they confirm. We are still within the trading ranges of these markets and can benefit from a 3-5 day move in either direction. Stay mindful of support and resistance levels as they are tested.

Mid-Week Outlook:

• Bull: 6%
• Sideways: 34%
• Bear: 60%

Have a great night,

Maverick Trading

End Of Day Post

The markets closed flat on today’s session after a very bearish Monday. Today started to the bull side and looked like we could see an oversold bounce, but the bulls couldn’t gain any ground. All three majors are still slightly above major support levels, but threatening nonetheless.

We are still seeing strong bearishness in the markets here. There is still weakness coming out of China, but this move has had its own life/agenda for some time now. With an impending rate announcement that can come at any time through this year, we should stay to the bear side of things. Once action has been taken, we will need to see its reaction. Until then, it's best to error to the bear side.

Don’t try to guess bottoms. We are very close to major support levels and expect them to be tested a few times over the next few days. Continue to react slowly to major moves, and make sure to add a bull or two if you find yourself over-exposed to the bear side.

Have a great night,

Maverick Trading

Diagonal/Vertical Spreads + Portfolio Risk (Part 3 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 breaking up the original email into four parts. Today, we present the reply to Question #3 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?
   
   
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? Editor's Note: We will show the answer to this question this week and the answer to the remaining question next week.
   
   
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 #3 below. We will show the answer to the remaining question next week.

What makes a lower low – intraday or end of day? It actually doesn’t matter as long as you treat them both the same.

Let’s say that Trader #1 defines a "lower low" as intraday and Trader #2 defines it as end of day. Let’s also assume that there is price support of ABC stock at $50/share and that both traders have the plan to exit if/when ABC stock goes below $50 based on their criteria.

• Trade Scenario #1: In this trade, the stock breaks below $50 intraday, but then recovers back above $50 by the end of the day. On the next day, the stock takes off to the upside. Trader #1 exited on the first day since his criteria was intraday while Trader #2 was still in the trade because her criteria was end of day. Trader #2 stayed in the trade and made a profit as the stock moved upward, while Trader #1 took a loss.
  
  
• Trade Scenario #2: In this trade, the stock also breaks below $50 intraday and then recovers back above $50 by the end of the day. However, on the next day, the stock gaps down to $47 at the open. Trader #1 exited on the first day since his criteria was intraday, while Trader #2 was still in the trade because her criteria was end of day. Trader #2 stayed in the trade and exited on the second day at a significantly larger loss this time.

As you can see, there is no right answer since both of the above scenarios can occur. However, over 1,000 trades, both Trader #1 and Trader #2 will likely have very similar performance results if they stick with their criteria and are consistent. It’s why we stress at Maverick Trading that consistency is the most important thing in trading once you have developed your trading plan.

I personally use end of day since I have found there are a whole lot of emotions on days where the moves are big and pierce through support/resistance areas. I’ve found I make less mistakes when I use end of day.

Hope this helps.

Robb

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

End Of Day Post

The markets closed well off of their lows today, as we appear to be searching for the next level of support. We did see a strong move from the bulls towards the end of today's session. This has left us with a bullish hammer candlestick pattern (if it is confirmed with strength tomorrow).

Stay patient in making any drastic bullish decisions here. We could see continued weakness tomorrow, so make sure the markets are trading well above yesterday's close before taking action.

The markets current move lower is right in line with what we have been expecting this week. The markets did touch support levels intra-day, so we should respect this current candle pattern. Give yourself some time for the markets to develop a pattern before jumping into any new trades here. There is really no advantage into entering trades early, especially going into a weekend.

Mid-Week Outlook:

• Bull: 3%
• Sideways: 42%
• Bear: 55%

Have a great night,

Maverick Trading

SHW: Highlighted Trade From One Of Our Traders

Here we have a nice bearish trade in Sherwin Williams (SHW). This company manufactures and distributes paint coatings and related products world-wide. Our trader identified a breakdown through a support level – on a day in which the overall markets were also moving lower.

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 continued to show signs of bearish control since last week’s FOMC statement. Since Thursday’s Fed announcement (and decision to leave interest rates unchanged), we have seen a dominant amount of bearish action. Thursday ended up giving back all gains, followed by Friday confirming a move lower from resistance.

Technically, we are moving lower from a shooting star pattern set at resistance on Thursday. We confirmed this move on Friday and are seeing its continuation so far this week. We did finish off of the lows today, which could indicate another bullish attempt early in tomorrow’s session. However, we must wait until the close to evaluate the overall market pattern. We do expect volatility to continue as the markets try and stabilize at their next level – wherever that may be.

Make note of support and resistance levels. If these levels are broken (in either direction), then we will see opportunities present themselves. Take trades as they trigger, but keep your overall outlook and time frame in mind. Make sure to include positions for both shorter-term and longer-term to stay adjustable as sentiment changes.

Have a great night,

Maverick Trading

Diagonal/Vertical Spreads + Portfolio Risk (Part 2 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 breaking up the original email into four parts. Today, we present the reply to Question #2 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?
   
   
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. Editor's Note: We will show the answer to this question this week and the answers to the remaining two questions over the coming weeks.
   
   
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 #2 below. We will show the answers to the remaining two questions over the coming weeks.

Verticals – Vertical spreads are great for managing and sitting through volatility. If there is anything I have seen over the years, it is that volatility is the biggest contributing factor to why most traders end up losing money. For the most part, even an intermediate trader is quite good at identifying trends, reading charts and identifying entry points.

As you know, the market does whatever it wants and whenever it wants. There may be two big up/down days that can ruin any trader's position if they have "live" stops/exit points attached to the trades. Using verticals gives you a fantastic way to set a "hard stop," where you only lose a predetermined amount of capital but allows you to "stay in" the position in case it recovers.

For example, let's say there is a stock trading at $50 and a trader buys 500 shares of that stock. He puts in a stop at $49 for a projected loss of $500. The very next day, the Fed President says something that the markets don't like and the stock plunges to $48 before recovering back to $50 later in the day. The trader's stop loss kicked him out of the position on the quick drop down, even though the stock quickly recovered back to the original $50 entry price.

As an alternative, the trader could have utilized a vertical spread position sized for $500 max loss. By doing so, the trader may now sit comfortably through the $50 to $48 to $50 volatility since there is no stop loss in place.

The downside to using a vertical spread is exactly what you pointed out: When the stock moves your way early in the trade, you don't get a lot of realized profit on your vertical spread and you typically need to hold the position into option expiration to get all the benefits of the remaining time decay. This leaves you open to having a profit on a trade only to see the trade reverse and give back that profit – and even possibly move into a loss!

The mistake that many traders make is they take their winning spreads off at 50% profit, but leave their losing trades to lose 100%. If you do this, you will need a long-term win/loss ratio above 75% to be profitable, which is pretty much impossible.

So, if you do something before expiration on verticals, make sure that it is equal on both sides. My own personal rule is that I will take profits on a vertical spread at 80% of the max potential gain if there is more than 2 weeks left to expiry. The premise is that I can take that capital and reinvest it in a trade for that same month. At 2 weeks or less to expiry, my rule is that everything goes to expiration (unless I need to make an overall change in the portfolio’s bullishness/bearishness).

Specifically, on your CAT trade, I suggest that you look at weekly options if you find yourself good at calling 1-2 weeks, but are not confident on your abilities after that.

Hope this helps.

Robb

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

End Of Day Post

The Fed kept interest rates unchanged, referencing low inflation and wanting to see further improvement in the labor markets. The initial reaction to the statement was to the upside, as the markets shot higher from an already bullish start to the day. The markets did turn lower, with the classic "overreaction...then second reaction" market behavior, closing on the lows of the session. Both the S&P and INDU closed in the red with the Nasdaq up, but only by 5 points or 0.10%.

There was a bearish tone in today's close; however, tomorrow's action will be key to see if that is indeed the case. The "non-action" from the Fed carries with it an argument for both a bullish and bearish outlook. Bullish in that money is still inexpensive to borrow and should allow for more growth in the short-term. Bearish in that the Fed still sees instability in the markets, and raising rates now could cause problems moving forward. Either way, today's move doesn't shed much light on where we go from here.

Tomorrow is option expiration for September. Earlier today, we were preparing for a volatile end to the month. In light of today's reaction to the Fed statement, though, we might not see as much as earlier anticipated. However tomorrow plays out, make sure that you address your September positions. Give yourself the morning to see what happens after today's event is fully digested by investors. We could see a big move, or none at all, so best to prepare for either.

Mid-Week Outlook:

• Bull: 25%
• Sideways: 20%
• Bear: 55%

Have a great night,

Maverick Trading

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

Be Careful Trading VXX and UVXY

From Our August 2015 E-mail Archives: One of our traders had a question about trading volatility. Our Senior Risk Manager, Corey, replied with a detailed explanation of why Maverick Trading trades VXX and UVXY differently than other assets in the market.*


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

From: Roman F.
Subject: Trade Alerts

Hello,

Thank you for the ideas and updates, I check them every time.

I have one question about today's ideas: VXX. I constantly trade it and would like to confirm something. It looks like it's overbought and reached the resistance levels, but it opened above 17.00 today and still trending above this level. Why did Maverick Trading go long puts for 16.00 (delta 0.31, theta 0.02)? I have entered this position today with long puts at 18.00 (delta 0.51, theta 0.02).

If you have a chance, could you explain it for me?

Thank you in advance,

Roman


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

Hi Roman,

Thanks for the question. We trade VXX [iPath S&P 500 VIX Short-Term Futures ETN (Exchange Traded Note)] a little differently than we would most other assets in the market. The reason is that this is a flawed asset that is nearly always on its way to zero.

I have included a chart to the right (click the chart to make it larger) that shows VXX since its first trading day. It appears that the shares first started trading in 2009 for around $6,500 per share.

Did they bring this to market at such an expensive share price? The answer is of course, "No." This simply shows what one share was worth in 2009 compared to what it would be worth today. In other words, for every $6,500 invested in VXX in 2009, it is worth around $17.50 today (a loss of 99% of your investment).

The creators of the VXX reverse split this ETN whenever the share price drops. So, if you bought 100 shares at $100/share, then you have invested $10,000. If the shares fall to $10.00/share, then your $10,000 is only worth $1,000 today. If they come in and reverse split the stock, it won't help or hurt your situation. If they take that now $10.00/share price and boost it back up to $100.00/share ($10 x 10 = $100), then they will divide your share count by 10 at the same time. So, you now will only own 10 shares of the $100/share stock. If the stock falls again and again and again and they keep reverse splitting the stock, then you eventually have fractional shares (and essentially nothing).

The VXX and UVXY [ProShares Trust Ultra VIX Short-Term Futures ETF (Exchange Traded Fund)] work differently than most ETFs. This is due to their not really being able to "own" anything. A stock ETF is backed by shares of the companies that it tracks. Gold ETF is backed by Gold. VXX and UVXY track volatility, which is only a market gauge. In addition, VXX and UVXY have to use the futures to track volatility. Since volatility trades in "contango" (i.e., long-term volatility is a lot more expensive than short-term volatility), this is not a good thing.

To track volatility, both VXX and UVXY have to constantly buy expensive and sell cheap futures contracts. This creates a negative yield in VXX and UVXY that, over time, has them always going to zero (although they counteract this by constantly reverse splitting the shares). You can make money bullishly on VXX or UVXY only when there is a gigantic increase in volatility and even then you might not be able to outpace the decay.

In summary, we would be very careful and suggest avoiding VXX and UVXY as bullish candidates for the reasons above. However, trading them to the downside can be very advantageous.

I hope this helps.

Corey

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

End of Day Post

The markets closed higher for a second day in a row, putting an end to the current surge of selling. GDP for the second quarter was revised slightly higher than expected, and the weekly jobless claims report decreased from last week. Both of these reports are indicating that the U.S. economy is still showing signs of strength and could have contributed to today's rally.

Today's close did confirm a new pivot low in the markets. This doesn't mean it will hold or we will necessarily continue higher, but a bounce here can trigger new opportunities in both directions.

The VIX is still in dangerous territory, so we should continue to stay cautious. Technically, the last two days should be viewed as an oversold bounce and/or the start of a bear rally pattern. Overall, our longer-term outlook should stay to the bear side. We are anxious to see how Friday plays out and what pattern the market gives us going into the weekend.

Continue to wait for confirmation before entering new trades. We just established a pivot low in the markets, so there is no reason to try and guess how far this bounce will take us.

Mid-Week Outlook

• Bullish: 14%
• Sideways: 48%
• Bearish: 38%

Have a great night,

The Maverick Trading Team

SLB: Highlighted Trade From One Of Our Traders

Another great trade made in Schlumberger (SLB), a basic materials company specific to oil and gas equipment and services. This trade is a nice example of using increasing volume to extend a possible target ‐ in this case, to the downside.

There are many different trading strategies available to take advantage of this type of setup in the options world. In this case, our trader wanted to take advantage of favorable volume. The trader decided to use a diagonal put spread, with the ability to adjust and take advantage of further gains.

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 appeared to be making an oversold bounce today; however, another round of selling sent them even lower into the close. The INDU made a 600 point swing today – up over 400 points earlier in the day and then closed down 205 points to end the day.

Today's action is the continuation of the same move that started last Friday, as the markets continue to search for support. The market action today is a testament to why we need to see the formation of a pivot point before taking action in directional trading. This amount of volatility can be dangerous and unpredictable and guessing here will just cost you money...no reason to try and catch a falling knife.

We have seen some overseas weakness, specifically out of China. However, there really isn't much in the headlines to warrant this type of market reaction. That being said, there is an enormous amount of fear driving this current move and we should continue to expect high volatility.

If you are going to take new trades here, then ensure that they can survive this volatility. Consider lower position sizes and increasing trading ranges for better probability. Options could be a little more expensive here and have wider than average bid/ask spreads. Make sure to take this into consideration when entering or adjusting positions.

Have a great night,

The Maverick Trading Team

Managing Collar Trades Before/At Expiration

From Our May 2015 E-mail Archives: One of our traders had a question about Collar trades before/at expiration, so he asked our Head Trader, Robb, for some guidance.*

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

From: Evan S.
Subject: Collar Trade Management

Robb,

I just watched the "Retirement Planning – Session #3" class that you did on April 28, 2015. I had a quick question on trade management for the Collar trades; specifically, what needs to be done before/at expiration? The risk graph looks like a vertical spread, but as I'm thinking through it, the trade management will not be the same. In thinking through it, I believe that you should do the following if:

1. Above Max Gain - Do nothing, short call will be exercised and you receive full premium, long put expires worthless and you will sell the stock


2. Below Max Loss - Receive the full premium on the short call and it expires, long put will be exercised and stock will be sold


3. Between Max Gain And Loss - Do nothing, receive full premium on short call and it expires, long put expires worthless and you keep the stock

Is this correct? Basically, you never have to do anything...it is just a matter of "Do you sell the stock or not?", right?

Thanks,

Evan S.


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

Hi Evan,

You have the right outcomes if you just let everything get exercised. However, there are actually some things that you can do to hold onto your underlying ETF/position. Here are the choices that you have on each:

1. Above The Call That You Sold
1. Do Nothing – You were correct about the outcome
2. Buy Back The Call That You Sold – You may end up taking a loss on closing this short Call (if you are paying more to close the Call than you originally collected). However, you should have a nice profit overall. This is due to the stock having increased much more than the loss in the short Call position. By buying back the Call, you have removed the cap on the upside and are now back to a simple long stock position (with a profit). You would either let the long Put just expire worthless or close it out if there is any value left.
3. Roll Up To A Higher Strike – Let’s say that you own an ETF and sell the $35 Call for $1.00 when the ETF is at $34. The ETF moves higher (unexpectedly, since you placed a Collar) towards $35.75 and looks to be breaking out. You could buy back the $35 Call for probably close to where you sold it and you could sell the $36 Call for $0.75 (or whatever the market price was). You have now given your underlying an extra $1 of profit. You would either let the long Put just expire worthless or close it out if there is any value left.


2. Between Max Gain and Loss
   1. You are correct in your analysis and there really aren’t other choices.
   
   
3. Below The Put That You Bought
1. Do Nothing – You were correct on your analysis
2. Sell The Put For A Profit And Hold The ETF – Obviously, this is the correct choice if the stock/ETF has reached a bottom and bounces higher from there. You will simply sell the Put for a nice gain, which offsets the loss on the ETF. I just did this in my retirement account two weeks ago on a long Direxion Daily Russia Bull 3X ETF (RUSL) position when it hit $36. I bought Protective Puts and closed out the Puts when the ETF pulled back to $31. I still hold the position.

Hope this helps,

Robb

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