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