End of Day Post

The markets are showing some hesitation at their current levels, but haven't fully committed to a correction just yet. Any time that a chart breaks out of resistance, the probability of corrective action increases. We never want to make trades in anticipation of when this will happen or guess how much of a correction we will get, but we should always be prepared for when it happens. Continue to take advantage of the short-term by using weekly expirations and non-directional combos.

So far, we haven't seen a strong move lower, but we are early in the week and could see more of a definitive move later. The current market sentiment remains bullish. The next pullback will be a welcome indicator of bullish strength as we move into the end of the year. Keep an eye on support levels, especially the most recent levels broken by the markets.

See you on Wednesday's Mid-Week Trading Room Update class!

Have a great night,

Your Maverick Trading Team

End of Day Post

All three majors closed above upper resistance levels and into new highs. The INDU, S&P and Nasdaq closed above the major levels of 19,000, 2,200 and 5,300, respectively. This surge appears to be a continuation from the election results as we move towards this week's holiday.

The markets will be closed on Thursday, followed by a half day on Friday. This leaves the markets with just 1½ days left in trading this week. All three markets look a little overextended here and a pullback or correction should be expected from these levels. However, we might not see anything significant until after the holiday weekend.

Market volume typically dries up by mid-day on the Wednesday before Thanksgiving and then doesn't return until the following Monday. So, we will not be running a Mid-Week Update class tomorrow or writing an End of Day Post this Thursday.

Have a happy and safe Thanksgiving – we will see you on Sunday's Trading Room!

Have a great night,

Your Maverick Trading Team

End of Day Post

All three markets continued to look strong, with all three closing higher on today's session. However, the strongest of the three (INDU) appears to be topping out. INDU's surge into all-time highs appears to be looking for a top as it posted a third inside day. With the INDU up over 1,000 points in 10 days, we should expect some hesitation or a correction from these levels. The S&P and Nasdaq have a little more to go before they reach their upper resistance levels of 2,195 and 5,350, respectively.

Even with volatility dropping and the markets looking overextended here, there are still bullish opportunities out there. Look to use a combo with enough time to absorb any corrective action. You could also wait for a correction before entering bullish trades, taking advantage of shorter-term, sideways trades (credits) in the meantime.

November monthly options expiration is tomorrow. Be mindful of your portfolio exposure moving into December. With only one month left in the year, we might only see one or two directional changes in the markets. So, keep this in mind when moving into any new December positions.

See you on this Sunday's live Trading Room class!

Have a great night,

Your Maverick Trading Team

End of Day Post

The markets moved higher today as volatility continued to drop. Since Election Day, we have seen the markets steadily move higher. We don't want to associate the move with the election results, but more with the "knowing of the unknown" – i.e., allowing for money to come back in from the sidelines. This doesn't mean that we will continue higher; however, with the drop in volatility, we should expect to at least test previous highs.

The INDU has surged into new highs and the S&P is now testing the 2,180 level. The Nasdaq is the laggard of the three majors, but is now moving back into its higher range. There isn't much left this year as far as scheduled major events, save the FOMC statement in December. The expectations are for a rate increase, similar to last year. Regardless of the decision, the markets should react.

Keep balanced and don't be afraid to enter new positions here. We are seeing great opportunities in all three directions: bullish, bearish and sideways. Just be mindful of your timeframe.

See you on Wednesday's Mid-Week Trading Room Update class!

Have a great night,

Your Maverick Trading Team

End of Day Post

The markets made another move higher today going into tonight's U.S. election results. We saw a very strong bounce on Monday; however, with the VIX still above 18.50, it should only be treated as a bounce at this point. We expect the market to be volatile tomorrow, regardless of the final result. Give yourself a little more time and flexibility when entering or exiting positions. If you don't have to make trades tomorrow, then it may be best to wait until Thursday or Friday before entering new trades.

All three majors moved back up to a more "neutral area" – back above major support levels. This is obviously in anticipation of the election. Keep in mind that tomorrow's move will be mainly reactionary. In fact, it may be a couple of days before things settle down. Once the emotion and speculation is out of the markets, we can then put the focus back on the fundamentals and technicals.

See you on Wednesday's Mid-Week Trading Room Update class!

Have a great night,

Your Maverick Trading Team

End of Day Post

The markets broke down through support with a sharp move higher in the VIX. Although this is a bearish move in the markets, it is nice to finally see conviction in a direction. Multiple days with increasing volatility has extended the bearish sentiment and moved the markets into lower levels.

We aren't expecting the markets to "collapse" from these levels, but moving higher from here could prove difficult without a catalyst. Look for new bearish trade opportunities moving forward. Don't expect the markets to continue lower without a strong reaction by the bulls over the next few days. Keep in mind the shorter-term corrective action vs. the longer-term trend as we move closer to the end of 2016.

Keep an eye on the 200-day SMA of the S&P – it is a major support level for the 2016 uptrend.

See you on this Sunday's live Trading Room class!

Have a great night,

Your Maverick Trading Team

End of Day Post

The markets pushed below support levels, but closed at very different levels. All three majors made strong moves lower today, accompanied by a spike over 20 in the VIX. Even though we did close off the lows of the day, this bearish move was strong enough to potentially carry over tomorrow. We should always prepare for a counter move, but if the bulls don't post a strong day tomorrow, then we could be in for a little more selling.

We could see some weakness in the markets over the next couple of weeks. Keep in mind the overall state of the U.S. economy compared to other countries. We should expect some market volatility through the election, but take into consideration the longer-term trend (e.g., 1-year chart). A 5% correction in the markets could stimulate investors' longer-term, bringing money off the sidelines into the markets through the end of the year.

Take advantage of the corrective action, but keep in mind the state of the economy and the longer-term trend.

See you on Wednesday's Mid-Week Trading Room Update class!

Have a great night,

Your Maverick Trading Team

Selling Naked Options Strategies

Hi Traders, As I discussed in the Trading Room last night, we have seen an increase in naked option selling strategies (short calls/puts, short straddles, short strangles) among our traders. We know of several popular trading websites that have been using (even encouraging) these short option strategies lately to their subscribers. In fact, a trader from Thinkorswim (TD Ameritrade) was dubbed “Karen the Supertrader” for making a large sum of money by selling OTM naked calls and puts.

After making a name for herself and attracting millions in investor funds, “Karen the Supertrader” allegedly lost $100 Million when volatility spiked in late 2014 and August 2015 and is currently under SEC investigation by attempting to hide/delay losses by rolling positions out to later months. These strategies work in a low volatility environment, but blow up spectacularly when volatility spikes.

I wanted to share this story to stress the amount of risk that naked option selling strategies take and how vulnerable a trader can be when volatility spikes. At Maverick, we always want to prepare for worst case scenarios and there is just no way to quantify “worst case” with a short call or put. If you trade for a long enough period without risk that can be measured, then something will happen that will eventually wipe you out.

The biggest problem with selling naked calls/puts is that a trader only brings in a small amount of premium, but takes on a huge amount of risk. For example, if I brought in $1 (max gain) in premium, but carried $30 in risk, then just one bad trade can wipe out months – even years – of gains. I have never understood why a trader would sell naked options when a spread trade is superior in almost every way.

Here is a side by side example of a naked option vs. a spread trade:

TRADE SCENARIO – Stock is currently trading at $95. Trader does not think that the stock will close or go above $100 within the next month (November).

NAKED OPTION: Sold 10 contracts of the Nov $100 Calls for $1.00

• Margin/Capital Required: $19,000 (typically 20% of the underlying position – premium received)
• Total Potential Profit: $1,000
• Max % Return: +5.2%
• Max Risk: I won’t put unlimited, but let’s say that an unexpected 30% pop/drop happens in the stock (which is very possible), then that would result in a -$12,500 projected loss (though it could be much worse – e.g., if a company gets bought out for a 50%+ stock price premium)

SPREAD TRADE: Sold 10 Contracts of the Nov 100/105 Bear Call Spread for 0.80 (since bought the $105 for 0.20 to hedge)

• Margin/Capital Required: $4,200 since received an $800 credit
• Total Potential Profit: $800
• Max % Return: +19.0%
• Max Risk: Let’s again say that an unexpected 30% pop/drop happens in the stock (which is very possible), then that would result in a -$4,200 loss (which is the max loss possible)

The spread trade is superior in every single way (except for one that I will discuss), which is why I don’t understand why people sell naked calls/puts. With a spread, the return on capital is much better, the margin impact is much lower, the overall risk profile is capped and quantifiable, and you have taken out that chance that something very quick and sharp happens and wipes you out.

Contrast a spread with naked options. I have seen many traders try these low reward/high risk naked strategies. They do well until the one day when the market goes haywire and they take a $50,000 loss. It’s almost impossible to recover from that kind of loss if their typical gains are $500-$1,500 per trade. A $50,000 loss could take years to get back to break-even.

So, the one difference that some traders like to point out to me is that the Bear Call Spread only delivers $800 in potential gains vs. the $1,000 in the Naked Call. However, I think that is a backwards way to look at things. Let’s say that a trader wanted a return of $1,000 on a short call strategy. In our example, that’s easy…simply do the spread for 12 contracts instead of 10 and the trade is still superior.

SUMMARY

I am sending this email out to give anyone trading low reward/high risk (short volatility) strategies a chance to reevaluate their risk parameters and to warn anyone thinking of employing these strategies of the risks. Just do yourself a favor and buy a cheap option for 0.05-0.25 to hedge any short option positions and quantify your max risk. Remember, smart traders want returns for a lifetime…not just until the floor drops. Being paranoid and prepared for worst case scenario is the best way to survive as a long-time trader.

There is a famous saying in the market, “There are old traders and bold traders. But, there are no old, bold traders.”

Thanks for reading my rant,

Robb Reinhold
CEO, Maverick Trading