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2012

2012-01-28T10:04:00.000-08:00

Well into the first month of this year and our forecasting from December is underway. We can still look back in time and get an idea of where we could be heading into the near future. Take a look at the SPY for the first half of 2011. This ETF is currently trading in the same range and I expect it will continue until some economic or political news helps with an adjustment.

Also, take a look at the VIX. It is also now trading in the same range it was in the first six months of 2011. Volatility is down and the market is slightly bullish, but overbought and is likely to move horizontally or start to pull back to some short-term support levels.

Sell 30-45 days worth of time for your credit verticals and iron condors. It's the time you'll be collecting moreso than inflation from volatility.

HAPPY HOLIDAYS

2011-12-26T18:58:00.000-08:00

Take a little time off for the holidays and relax and enjoy yourselves. The market is likely to do the same going into the end of this year. We may be experiencing a bit of a Santa Clause rally, but we'll see what the institutional traders bring with the New Year.

Bulls are Back

2011-12-02T22:45:00.000-08:00

The Pennant formed, broke, played out and the market has since rebounded like an emotional rollercoaster. Yes, emotions have run things quite high. However, can they remain high? Keep your eyes on the SPY as I always say. There was a burst in volumes taking the SPY back to the higher level - above the August and September trading level that is. Now there's a good chance it will trade above the August and September highs as long as the retail industry sees a happy holiday season.

With the VIX back in its "normal" trading range there's a good possibility the market will calm down and rapid price fluctuations will subside.

The week ahead

2011-11-20T20:45:00.000-08:00

Although there are financial firms among other companies who have issued pink slips this week, there will likely be more in the next few weeks.
There will be eyes focused on the job market in the United States and there will be a lot of focus on issues in Italy.

What does it boil down to? VOLATILITY.

Watch the VIX this week. Levels above 32 are associated with larger-than-normal price fluctuations in the market. Don't panic when it comes to increasing levels of volatility, but determine the potential trading ranges of the major indices. Unless the major levels of support or resistance are broken, the sideways market pattern may very well continue.

Market Breakdown

2011-11-17T14:04:00.000-08:00

Today was that day. We were looking at the market consolidating and forming a pennant. As it breaks down today, look for a decline of potentially $6. There is some support near $120. However, if the full distance of the pennant plays out the market could see $118. Regardless, with today's high volume, a pull back in the market followed by continued horizontal activity is likely.

SPY Pennant Break

More Consolidation - Watch Out!

2011-11-16T16:03:00.000-08:00

The SPY is closing in on the Apex of its developing Pennant. The likelihood of a break out is very high. Watch the movement, and then look for an expected move the size of the left side of the pennant. This is approximately six dollars. Once it breaks, as it surely will, there is the potential for an up or down $6 movement.

Here's the graph to look at more closely. Once it starts to make the move, there can be a short-term option trading opportunity if your confidence level is high regarding trading calls and puts.

Protective Puts Tip

2011-11-14T20:43:00.000-08:00

When you feel anxiety about the general market conditions, don't wait until several weeks after the indices have declined to determine you should protect your portfolios. Instead, identify support levels of the major index that correlates closest to your portfolio. If the index is trading very close to its support level, this is a good time to purchase portfolio insurance, in the form of long put contracts (large portfolio sizes may look into futures contracts instead).

A good starting point for investors is to reduce their portfolio exposure by approximately 30 percent if using long put contracts. Remember, long put contracts reduce market exposure, it does not eliminate it. For investors who want to eliminate risk - exiting the market altogether may be the right decision.

Here's a quick example on reducing risk. If the portfolio has 1,000 shares of stock across several securities, and the portfolio is closely correlated with the S&P 500, the investor may want to reduce the risk by purchasing the equivalent of 300 shares of the SPY (S&P 500 tracking ETF). Purchasing out-of-the-money put contracts totalling 300 deltas is the share equivalent and can be purchased to help reduce that risk.

Typically the investor should buy the puts if he or she feels strongly about a fairly significant market retracement. Small market pullbacks may not justify long puts since the puts have negative theta.

Pennant Consolidation on SPY

2011-11-12T18:06:00.001-08:00

With the highs struggling to move higher, the consolidation pattern forms a pennant, and will likely break either higher or lower within the week. However, keep your eyes on the larger range between $120 to $130.

Lower Yields

2011-11-10T22:00:00.000-08:00

While buying the living daylights out of bonds, Italian bond yields have fallen some, and the markets responded slightly bullishly today. However, is it enough to sustain the markets and take them to their next level? Will the SPY regain its strength and move beyond $130?

A tip for you is to monitor volumes as price falls back from peak points. Often this is an indication of a weakening trend. The trend of the market may not fall precipitously, but this week's slugish movement could send the market horizontally for some time, so regaining enough strength to move beyond $130....well, it may be a stretch for it any time soon.

SPY at a HIGH?

2011-11-09T21:49:00.000-08:00

Keep your eyes on the SPY - Will Europe cause more melt down? After today's trading activity it appears that fear is back on the rise. However, there has been enough bullish momentum to take the SPY tracking ETF to a higher level from its September and October lows. Watch for the SPY to trade between $120 and $130. Until it shows strength above $130 will we give the bulls more credit, but watch out for a break below $120 and insure your portfolios before and if it breaks. Be Prepared!

Iron Condors and Rising Implied Volatility

2011-06-04T21:55:00.000-07:00

Although the Vix is still rather low, it has increased in the past couple of weeks. With approximately 45 days till July expiration lock in some good returns on the major index ETF's with wide ranging strike prices - offering 60 percent probabiliy.

You're Welcome!

SPY Current Conditions

2011-05-30T13:25:00.000-07:00

Now that Memorial Day is behind us, the summer's trading activity is in motion. Although it's pretty boring at the moment, the chart above paints a picture of the current conditions. Look for a potential slide down towards $127 if the short-term trend persists. The SPY had broken the barrier, but has since then begun to slide downward - failing to keep the bullish momentum alive. I wouldn't necessarily expect a precipitous fallout, but continuing horizontally through the summer could be an easy feat for the market.

Broken the Barrier

2011-05-04T20:17:00.001-07:00

The SPY has done it again. Upward and Onward to even higher levels. Check 2007 levels, and yes, there you'll find the SPY capable of trading between $133 to $144. Now that it has broken $133, assuming it can stay above this level for a couple of weeks, it can easily trade the new zone for several months.

Boring summer, here we come.

SPY Retreating

2011-01-10T21:29:00.000-08:00

After the Septemer breakout, the SPY ran up towards the $117 to $118 area as projected in an earlier posting. Since then it has broken to a higher level, and could easily lose its steam near the $130 level, if not sooner.

The chart below illustates some of the pullback potential it has, noted by the Arrows. The arrow pointing to the right is a potential support before hitting $118/$120, and the two arrows on the far right of the graph represent a couple of potential pull back points for it. (click the browser's back arrow to return to blog)

Bullish Spy - Will it Last?

2010-12-27T22:19:00.000-08:00

Stepping up a notch, the SPY has moved to higher grounds. The Santa Clause affect seems to have delivered well this year. What will be in store for the first month of 2011? Will we experience a rather large sell off, or a 'soft landing' on the $118 technical support level.

So far the market's momentum has been strong enough to argue a sideways to bullish market moving into the New Year. We'll keep our eyes open for breaking suppor levels, but we'll also want to discover the "Zones" of the market - then learn how to "Get in the Zone."

Stay Tuned

Fence Sitting SPY

2010-11-26T23:09:00.000-08:00

I mentioned the range of the SPY in my September's posting. Once it broke out of the lower range one could see the price movement to the top of the upper range. There has been an attempt to break above the $120 resistance level. While December is typically a bullish month - Bulls beware.

The momentum in the market is waning, and as the dollar is on the rise (see UUP) we may very well see the SPY move horizontal to bearish going forward. With all this being said, the short-term charts are indicating indecision between $118 and $120, and at the same time the long-term chart is illustrating that support is holding for now. Watch for some activity in the market once the big players come back from the Thanksgiving break. The last week of November may be a telling week and show us which direction the SPY will head towards the end of the year.

Traders - Trade what you see, not what you think! In other words, wait for confirmed break outs either up or down to make decisions.

Take advantage of a New Channel (SPY)*

2010-09-25T22:29:00.001-07:00

Volatilitiy is falling, but as long as the indexes remain in a flat zone, you can still take advantage of some neutral strategies, such as your Iron Condors, Calendars or Butterflies to name a few.

Consider the recent SPY breakout and the potential new range for it. It's not uncommon to have positive returns for the last quarter of the year (October to December). Although it's a bit early for the breakout to occur, if you look at the potential movement from the resistance near $112 to the upcoming resistance near $121, the 7 to 8 percent positive movement would be on track for an average "final quarter return" for the S&P 500.

SPY as of 9-24-2010 (click on browser's back arrow to return to blog)

*This posting is for educational purposes only and should be constructed in a paper money (fictitious) account. It is not intended as a solicitation or recommendation to buy, sell or hold any security. Past performance does not guarantee equivalent future results.

Flat Market

2010-09-01T22:19:00.000-07:00

Have you made any money by buying and holding the SPY since it got into its sideways channel between $105 to $115? Nearly 8 out of 10 months now it has been stuck in this rut. Since volatility is still in a somewhat "normal" range, it is worthwile to take advantage of neutral strategies.

What are you waiting for? The fabulous sideways pattern won't last forever. However, look back in 2004. The SPY remained in a sideways pattern for nearly 11 months. Then, in 2005, it remained in a sideways pattern for 12 months - the same range we're in right now.

One day it will break. The last few months of the year are generally bullish, so for those bulls out there, after a pullback at the end of September, you may get your wish in that the SPY may jump to a higher level. Remember, though, it doesn't matter if the market pops up, or falls down. If you see it moving out of the "zone" it's in, act on it.

The Beige Book

2010-07-28T22:17:00.000-07:00

Follow the Beige Book which can help give you an idea about the strengthening or weakening of economic conditions.

The Beige Book reports on conditions in all 12 districts that are part of the Federal Reserve system and it is based on interviews and anecdotal information from coast to coast.

The latest report, compiled by the St. Louis Fed Bank, covers seven weeks from the previous Beige Book in early June and paints a picture of less-than-robust recovery.

Create a Legacy - Don't leave an Inheritance

2010-07-10T10:44:00.000-07:00

Life indeed comes at you fast, as one advertisement states. We never know what could happen to us, or what our "golden years' " needs will be. An article I read from Market Watch is yet another reminder of how important it is to teach our children the importance of investing and how to invest. Teaching them "how to fish" rather than "giving them a fish" will hopefully allow them to take care of any of our future needs, as well as their own.

Iron Condors as Volatility Subsides*

2010-07-07T22:41:00.000-07:00

The S & P 500 broke through a short-term support level recently, and today it worked its way right back above it. Volatility is still rather high, and premiums on options are making it possible to create wide trading ranges for stocks.

Take a look at Whole Foods (WFMI). Currently it's trading near $35. Using the at-the-money straddle quotes consider the construction of an Iron Condor using the $30 put for a short strike and the $40 call for a short strike.

Depending on how things go, and where the stock is trading as August earnings draws near, you may contemplate exiting early ahead of the earnings, or consider staying with the Iron Condor.

Remember, this trade should be placed in a fictitious account as a practice trade in order to help you more fully understand the concept of the Iron Condor strategy.

*This posting is for educational purposes only and should be constructed in a paper money (fictitious) account.
It is not intended as a solicitation or recommendation to buy, sell or hold any security.
Past performance does not guarantee equivalent future results.

VOLATILITY at Its BEST

2010-06-04T21:40:00.000-07:00

Take a look at the Vix my Friends. Although it isn't at the extreme levels seen back in October, 2008, by historical comparison, it is very high. We can expect continued dramatic swings in the broader markets, and, along with the swings, sellers can take advantage of the high-priced options on a month-to-month basis.

When technical support levels break down, look out. However, if the market holds on to supoprt levels, and shows signs of stability, one can capitalize of the slight downward slope in the volatility. Some strategies that can capture this volatility are Butterflies, Verticals, Iron Condors, and Single-roll Calendars.

Monitor the Markets

2010-05-02T13:55:00.000-07:00

There are market pullbacks, corrections and major corrections. With all the hype in the news in recent months, many speculate about a major market decline and a second recession or second financial melt down. Traders beware! Let technical analysis play a part of your decision making. Rather than making rash decisions, based on opining by the pundits, when you see levels of support being broken, you can then take more action beyond moderate hedging.

Look at the SPY - $117.50 may be some minor support for it, but look to the $115 level for another, stronger support level. Terrorist-type activity like that in New York City may cause some excitement in the market, but a break-down in support levels are legitimate reasons for changing your direction for trading.

Educational Trade (UNG) Butterfly*

2010-01-20T19:42:00.000-08:00

With the forecast of natural gas to climb over time, but not at a rapid rate, the UNG exchange traded can create some neutral trading opportunities. As long as the fund remains relatively flat and the volatility remains high enough to offer good returns, a butterfly strategy can be set up in your paper (fictitious) account, which can help you better understand the strategy.

Entering the trade:

Buy 1 February 11 Put
Sell 2 February 10 Puts
Buy 1 February 9 Put

All three transactions combined create a net debit of $.33 per share, or $33. The debit paid into the trade is also the maximum loss potential, plus commissions. The maximum profit potential is $.67. However, this profit can only be achieved if UNG closes at $10 on expiration Friday. Since this is an extremely low probability, a more likely best-case profit potential on the trade could be approximately $.40/share if UNG trades near $10 on Thursday, February 18, and is closed out on this day before expiration.

The potential for profit without considering commissions or other fees is near 120% return. The break-even points for the trade are approximately $9.30 and $10.70. If UNG trades below $9.00 or above $11.00 for more than a few trading days, the likelihood of the trade remaining successful will diminish and it can be closed out earlier than anticipated.

*This posting is for educational purposes only and should be constructed in a paper money (fictitious) account.
It is not intended as a solicitation or recommendation to buy, sell or hold any security.
Past performance does not guarantee equivalent future results.

Swing-Trader's Moment*

2010-01-11T15:21:00.000-08:00

With the Oil Services Holders (OIH) and the United States Oil Fund (USO) having several days of positive movement, buyers can become exhausted. The bullish sentiment is strong in the industry, so there are opportunities with pull backs. Many of the oil stocks were on the decline today, but Murphy Oil (MUR) was not one of them. It was on the move during the day even after several days of running up. With many of the oil stocks on the decline today (showing overbought conditions), there is a real possibility that Murphy Oil will take its turn and decline at least a little.

To learn how some swing traders might capitalize off a short-term price movement with options, paper trade the $60 February Put contract for $2.50 per share.

Because of the bullish sentiment of this underlying stock, this trade is intended to last 1 - 2 days at most. As a general rule of thumb, you can't trust an uptrending stock with bearish plays. This play is being put on only due to the surrounding circumstances described above. If the stock rises tomorrow instead, exit the trade - the decision was wrong.

Register for our Mentoring Services to find out more about how the option greeks might affect this trade versus other option strike prices you could have chosen. I.e. $55 vs. $60. vs $65 strike prices.

*This posting is for educational purposes only and should be constructed in a paper money (fictitious) account. It is not intended as a solicitation or recommendation to buy, sell or hold any security. Past performance does not guarantee equivalent future results.

China Petroleum & Chemical Corp (SNP)*

2009-12-31T12:33:00.000-08:00

Sometimes you will find last minute opportunities. This posting illustrates how to take advantage of one such opportunity*.

Look at the chart above (click browser's back arrow to return) to see the sideways channel this stock has been trading in for several months. Now that SNP has approached the upper side of its channel, a short-term opportunity has presented itself for the front month contract. The following butterfly trade can be constructed.

Buy +1 Jan 10 $90 Put

Sell -2 Jan 10 $85 Puts

Buy +1 Jan 10 $80 put

The transactions create a net debit of $1.60 per share, or $160 for the trade. Although the maximum profit for this trade is $340 (not including commissions or fees), a more realistic best case scenario would produce a profit of approximately $2.00 per share, or $200, if SNP trades at $85 on January 14, the day before expiration Friday.

The break even points for this trade are approximately $81.50 on the down side, and $88.50 on the up side. If SNP trades somewhere between these two amounts on the day before expiration Friday there is a potential for profit - 125 percent potential return. Above or below these two dollar amounts would mean loss up to a maximum of $160.

Nobody knows where the stock will trade by its expiration, but if it stays within the pattern, and crosses the $85 area near its expiration week, the time value that has eroded at that time may be worth collecting by closing out the trade.

*This posting is for educational purposes only and should be constructed in a paper money (fictitious) account. It is not intended as a solicitation or recommendation to buy, sell or hold any security. Past performance does not guarantee equivalent future results.

FLR - Additional Discussion

2009-12-24T18:13:00.000-08:00

Look at the chart above (click the browser's back arrow to return to posting) and monitor the stock's price as it moves above the 50-day moving average line (lighter). As the stock's price remains above this moving average the trend is strengthening. Also, watch it as it approaches its 100-day moving average (blue line). This moving average line can act as a resistance for the stock's price (see how it touched and declined away from it in October). As the price rises above the 50-day moving average line, you'll want it to remain above this line. Once it rises above its 100-day moving average line, you'll also want it to remain above this level, and you may consider exiting your position if the price closes below its 100-day for more than 2 weeks.

Stock Trading Opportunities

2009-12-17T23:50:00.001-08:00

There are those companies out there that will defy the market. FLR has shown signs of strength recently as illustrated in the graph below. The areas highlighted in red show the powerful surge of buying which is the first step of a trend reversal. (Click the Back Arrow to return to this message) This past summer investors were willing to pay as much as $56 before they gave up on it. With the momentum it's building now, a $13 increase, or 30 percent return over the next several months could put a smile on anyone's face. As the government tries to rebuild the economy and FLR receives other major contracts, its stock price may be back in the saddle again!

Crashing, Bearish Market?

2009-12-03T21:24:00.000-08:00

Rumors are all over regarding the "big market correction." However, as you look at the broader market charts, including the S&P 500, take note of the higher highs and higher lows that have continuously been building over these past several months. At resistance, the S&P may be struggling, and could pull back to its support, but watch for breaking support levels before becoming too excited about the "big" market decline.

Hedging Opportunities

2009-11-02T20:30:00.000-08:00

When broad indexes become overvalued and overbought, traders beware. To help protect from potential downside sliding that could gain momentum, learn about hedging strategies through our subscription services - some of which have small costs associated in order to protect your larger investments. Additionally the protection may add substantial reward if the market makes a severe decline.

For those valuable items you own, you will invest in insurance to cover those items from theft or loss. Similarly, as you get into option trading, why wouldn't you protect your valued investments. Do yourselves a favor and enroll in our monthly subscription services or get involved with our mentoring services to learn more about hedging strategies that can reduce risk on a month-by-month basis.

Learn About Calendar Spreads*

2009-10-15T21:31:00.000-07:00

Trade with Wisdom.com's Calendar Put Spread on Archer Daniels (ADM)

Trade set up: Buy January 2010 $31 Put @ $2.75
Sell November 2009 $31 put @ $2.10
Net Debit for this trade is $.65 (max loss)

This trade offers two rolls, and an average break-even per roll of $.325. Based on current prices, time till expiration and volatility, the roll values are approximately $.70 for each month, and a potential high-end gain of $1.40 per share (115% return potential, excluding commisssions).

Unless a level of technical support or resistance becomes broken on ADM (watch out over earnings), the plan will be to roll the calendar about 3-7 days before November and December expirations.

*This posting is for educational purposes only and should be constructed in a paper money (fictitious) account. It is not intended as a solicitation or recommendation to buy, sell or hold any security. Past performance does not guarantee equivalent future results.

Trade with Wisdom - Market Tip

2009-10-05T21:19:00.000-07:00

It's that time again - Earnings Releases. Often enough the market will yield positive returns in the last quarter of the year. After July's releases the Dow Jones Industrials Index made a nice run following a previous pullback. IBM, INTC, JNJ and JPM will be reporting from October 13 through 15. IBM is one of the heaviest weighted components in the Dow.

Watch for the impact of earnings on the Dow Index. Although the indexes have shown signs of weakness over the past two weeks, the upcoming earnings releases could be the thing that triggers the final direction of the market trend going into the final quarter of this year. Historically, the last quarter of the year will yield positive returns. Positive releases could easily add to the high possibility of another positive year-end return.

Trader Quick Tip! Calculating Probability on Iron Condors

2009-09-28T18:20:00.000-07:00

Trade with Wisdom.com - Quick Tip!

When putting together your verticals spreads, add together the deltas of your two short strike prices, then subtract the total from one. You now have the probability that the stock will close inside your range.

For example: Your short call is $50 with a delta of .30 and your short put is $40 with a delta of .30. Combined, the deltas equal .60. Subtracting .60 from 1 = .40. Your probability that the underlying security will close between your two short strike prices is 40 percent.

This posting is for educational purposes only. The posting is not intended as a solicitation or recommendation to buy, sell or hold any security, or to trade any strategy. Past performance does not guarantee equivalent future results.

GOLD - Get it while it's Hot!

2009-09-14T14:03:00.000-07:00

Gold has been on Fire lately, but maybe the flames have flown too high. If you've ever felt like getting in on the action but wondered if it's too late, you're probably right.

GLD - the SPDR Gold Shares has made another attempt at $100. However, by looking at the chart above, (click your back arrow to return to this post) you will recognize four points where this Exchange Traded Fund (ETF) has peaked and retreated. It is approaching this same area now - for a fifth time in since 2008.

The lower, yellow line on the graph represents a point where GLD has briefly risen above $96 and then fallen back. The higher, red line represents the peak. The point where prices are generally not sustainable for very long. This has proven to be true since the price has risen to these levels in early 2008.

With a strong resistance point for this ETF, we'll teach you how to construct a Vertical Call spread trade for educational purposes.

Buy - October $100 Call @ $1.95

Sell - October $98 Call @ $2.70

Credit to account = $.75

Maximum Profit on this trade = $75

Maximum Loss on this trade = $125

Return on Risk on this trade = 60%

Maximum Profit is achieved if GLD trades below $98 on October's Expiration Friday.

If you'd prefer to sacrifice some of the return, consider the $100 short call and $102 long call for a $.55 credit. The return on risk for this second vertical set up is 37.9 percent, and the probability for achieving the maximum return at the time of this posting is 60 percent.

**This posting is for educational purposes only and should be constructed in a paper money (fictitious) account. It is not intended as a solicitation or recommendation to buy, sell or hold any security. Past performance does not guarantee equivalent future results.
***Calculations for returns do not consider Commissions

Trader Tip: High Probability of Touching

2009-09-09T21:23:00.000-07:00

There are high probability vertical spread trades that yield smaller returns, but that also have greater success rates. Traders can also try out high probability vertical spreads wherein the stock's price may touch the short strike price before expiration.

This type of trade set up may include putting on an in-the-money credit spread with a high reward and small risk ratio. Maximum calculated profit is not intended to be obtained. Instead, a healthy return on the risk may be achieved depending on how long it takes the stock to touch the short strike.

If the trader's trading platform allows for it, he or she may use a limit order to exit the trade if the stock touches the short strike and a stop order if the stock goes against the trade. Simple technical trend analysis can assist in this trade.

Subscribers to our monthly educational trading services can receive detailed instructions regarding this strategy when appropriate.

*This posting is for educational purposes only. It is not intended as a solicitation or recommendation to buy, sell or hold any security. Past performance does not guarantee equivalent future results.

Trading Tip: Collecting Theta

2009-09-05T18:28:00.001-07:00

Time is ticking on a daily basis when it comes to trading options. Long call and put holders know this all too well. For those who are selling premium, however, collecting as much theta as possible adds to their return.

For those who are contemplating new theta-positive trades on Fridays, keep in mind that the market discounts options before the market closes, and you generally won't be collecting the two days worth of theta you might have expected otherwise.

*This posting is for educational purposes only. It is not intended as a solicitation or recommendation to buy, sell or hold any security. Past performance does not guarantee equivalent future results.

September Trades from our Monthly Subscription Service

2009-09-02T13:54:00.000-07:00

Join our monthly educational trading subscription and you'll receive trades like these below to help you understand various basic to advanced option strategies.

The educational Butterfly trade was put together on August 24

Strikes and Underlying:

Buy SPY September '09 $108 Put @ $5.39
Sell SPY September '09 $98 Puts @ $.90
Buy SPY September '09 $88 Put @ $.19

Net Debit = $378, which is also the maximum loss for this trade.

Although the maximum profit for this trade is $622, the realistic maximum profit for the trade was calculated to be $477, based on closing the trade early.

Educational Vertical Spread Trade put together on August 31

In-the-Money Credit Vertical:

The following trades were suggested to help educate traders regarding hedging strategies.

Strikes and Underlying:

Sell September '09 SPY $106 Put @ $4.71
Buy September '09 SPY $104 Put @ $3.26
Net Credit $1.45

Sell Septembr '09 SPY $90 Call @ $12.32
Buy September '09 SPY $92 Call @ $10.45
Net Credit $1.87

The risk on the put spread is $55 and the risk on the call spread is $13. The logic for putting on these two verticals was for protection in case the SPY moved dramatically higher or lower, which would be against the original Butterfly trade. After putting on the verticals, the risk of the butterfly was significantly reduced.

To become educated on great trading strategies like the one above, please subscribe to our monthly service.

*Complete details of these trades have not been provided in this posting to fully illustrate how the risk was reduced - subscribers to our monthly service would have been provided complete details.
**This posting is for educational purposes only. It is not intended as a solicitation or recommendation to buy, sell or hold any security. Past performance does not guarantee equivalent future results.

Option Tip: Trading Vertical Spreads

2009-08-28T15:34:00.000-07:00

Under general circumstances you will want to trade with the general market trend.

If there is overhead resistance, and you feel the market's direction will be down for a slight retracement, a bearish vertical can be applied. However, with the strength of the bulls, taking on a higher probability vertical spread can increase your odds for a successful trade.

Trader Tip: Trading credit spreads can reduce your risk of early assignment. You can gain the same results with a bull put vertical as you can with a bull call vertical, but avoid the early assignment risk associated with in-the-money short call.

Sign up for a 1/2 hour mentoring session regarding Introduction to High-Probability Trading and receive 10% off your session by mentioning this posting.

*This posting is for educational purposes only. It is not intended as a solicitation or recommendation to buy, sell or hold any security. Past performance does not guarantee equivalent future results.

Loitering at Resistance?

2009-08-27T22:11:00.000-07:00

The SPY has rallied since expiration, but seems to be stalling out once again. It's beginning to feel a bit like it did at the end of May - a few days of rising followed by a couple of weeks of stagnant market behavior. The latter part of June, however, saw a bearish retreat.

(Click your browser's back arrow after clicking on the chart to return to this posting)

The chart illustrates short-term support and resistance levels. If the SPY can't break through soon, there's a good possibility it will fall back to one of its previous support levels, indicated by one of the two lower red lines on the chart.

Pinning the Strike

2009-08-20T21:16:00.000-07:00

Option traders should be aware of the risk of pinning the strike. There has been plenty of talk of a market correction. However, look at your strike prices that have a lot of open interest. Highly liquid options that have a lot of open interest, and that are seeing heavier trading volumes going into expiration week can create a "pinning affect" at that strike price, which can unjustifiably keep prices at that strike price.

The S&P 500 and VIX

2009-08-17T22:49:00.000-07:00

The S&P 500 has been flirting with a resistance level just under 1200. Today's slide may be the beginning of its descent to its support. A movement back to 950 could easily suggest another sideways movement for the remainder of the summer. A decline only to 980 may show enough bullish strength to move the index to a higher high. However, the Vix made a splendid bullish movement today, which may suggest there will be more downward movement to the S&P 500 before it moves to a higher high.

SPY Verticals

2009-08-06T22:44:00.000-07:00

Grab some extra credits for the month of August by practicing your vertical spreads. With the trading range of the SPY and upcoming resistance, plan on the SPY closing below $103 by August expiration. Consider the $103/$104 short call vertical for $.25 credit with $.75 risk. This strategy takes advantage of time erosion and capitalizes on the remaining time value in August as the SPY remains bearish under $103.

*this posting is for educational purposes only and is not a recommendation to buy or sell any security. Past performance does not guaratee future results.

More Neutral to Bullish

2009-08-04T22:04:00.000-07:00

The markets have moved to a higher level. The SPY has broken through 95 and can now use it as a short-term support level. The past couple of months have seen $7 to $8 in range. Now that the SPY has broken through the $95 level look for it to move toward $102 and then watch for a rebound and a retest of the support.

Butterflies have worked well this summer with the neutral market and falling volatility. Iron Condors, Verticals, Calendars have all been viable strategies for the past couple of months - including August.

Bear Market, Anyone?

2009-06-22T21:36:00.001-07:00

After today's down turn, you may be feeling a bit sheepish, if not bearish! However, looking at the long-term charts, a correction is appropriate. Watch out for breaking support levels that could turn the market into an ugly scene, but in the mean time, start considering strategies that may capitalize on rising volatility.

Use this thread to share any strategies you may be employing over the next expiration period.

July Educational Trade

2009-06-22T19:59:00.000-07:00

Click Your Browser's Back Arrow to Return After Viewing Chart

For July Let's consider the set up of a Butterfly for the XLF (Financials)

Buy 2 - $10 Puts and 2 -$14 Puts and Sell 4 -$12 Puts to create your Butterfly. The channel it's trading in and the break even points will help this trade out for this month.

The chart above illustrates the trading points. The red lines illustrate the outer wing tips, or the max loss area at expiration. The maximum profit would occur at $12, but a decent profit can be made inside the break-even points. Between the $10 and $14 strike prices would represent a partial loss to partial gain to max gain.

*This trade is for educational purposes only and should be placed in a papermoney account. Past performance is not indicative of future performance.

Trade with Wisdom.com's June Educational Trade

2009-05-31T15:37:00.000-07:00

For June's Educational Trade:

SPY - Put Butterfly $78/$90/$102 Strike Prices

Debit $1262 which is the Maximum Loss for this trade.

Max Gain = $1137, which occurs at $90.

Expected Max Gain if closing out trade on Friday before market close is = $825, which occurs at $90.

Break Even Points Occur at: $84.31 and $95.68 on Friday 6/18.

These figures do not reflect volatility inflations on expiration Friday.

This trade is posted for educational purposes only and is not intended as a recommendation to buy or sell any security. Past performance is not indicative of future performance.

June Expiration Thoughts

2009-05-31T15:18:00.000-07:00

Bear in mind - no, not Bears in mind, but remember the steep rally the major indexes have had over the past few months - over 30 percent.

After significant rallies, one might surmise that the market is due a correction, or perhaps a respite from the rally. If so, this month may end up pretty boring. With this in mind, neutral strategies have been employed and will the topic of discussion.

Your Trading Strategies

2009-05-31T15:16:00.001-07:00

Feel free to use this thread to discuss any trades you may have up and coming, or to impart any wisdom you would like regarding your best practices.

May's Practice Trades

2009-04-27T21:30:00.000-07:00

For May I'll give the trade set-ups, but won't offer the credits or debits due to timing. These trades have already been put on.

DIA - Put Butterfly $87/$77/$72 Strikes (May)

SPY - Put Butterfly $76/$80$84 and Put Butterfly $80/$85/$90

SPY - Vertical $90/$91 Call Credit

RTH - Vertical $80/$85 Call Credit

IWM - Vertical $50/$51 Call Credit

*The verticals are obviously bearish. My sentiment is nuetral to bullish. For May's expiration, my expectation is for a potential bullish movement, followed by a pullback. However, there could easily be a neutral movement going into expiration.

*These trades are not intended as a recommendation to buy or sell any security. Rather, they are intended to help new traders experience and understand how vertical spreads and butterfly spreads could turn out. All trades are intended for educational purposes only. Past performance is not indicative of future performance.

U.S. Oil Fund

2009-03-15T11:57:00.000-07:00

Down to the mid $20's from nearly $120 in the summer of 2008, the USO Exchange Traded Fund presents bullish opportunities once investors recognizes that the trend has changed directions. The graphic above illustrates the recent price movement with an underlined support drawn with a red line (click browser's back arrow to return). If OPEC has their way, the price of oil will continue to rise - if so, the USO Fund will go with it. A break below the most recent level of support, however, would be a good reason to exit the fund to avoid any potential land slide. Practice trading the USO Fund as a papermoney trade to gain experience.

This post is not intended as a recommendation to buy or sell any security, but is provided for educational purposes only. Papertrading can help educate new investors. Past performance is not indicative of future performance.

Iron Condors Anyone?

2009-01-23T22:43:00.000-08:00

RTH has a history of a $15 channel. The first, upper, red channel illustrates the majority of 2008, and the price has remained relatively constant between $85 and $100. After the market decline in September and October, the channel has remained relatively constant between $65 and $80. The $15 channel remains persistent.

The horizontal channels may present opportunities for vertical credit spreads above resistance and below support.*

S & P 500

2009-01-16T21:38:00.000-08:00

On expiration Friday, the indexes show a bit of strength, but will they have enough to carry prices all the way to their resistance levels? The move down toward support has been on above average volumes, which could be attributed to the new year.

Figure 1 below illustrates the channel the index has been trading between. Watch for a bounce upwards, or a support break within the next couple of weeks. Often a short, holiday week is weak.

Figure 1 S&P 500 with Support and Resistance

Past performance is not indicative of future performance. This illustration is not intended as a recommendation to buy or sell any security, but is for illustrative and educational purposes only.

Russell 2000 (Breakouts ?)

2009-01-10T15:51:00.000-08:00

Click to view the graph and its levels of support and resistance. The Russell 2000 has shown some short-term bullish strength, but is struggling to hold on. Watch soon for a break through its support level, or a solid break through its resistance. Either breakout could present a trading opportunity using options*.

* past performance is not indicative of future performance or returns. This video and chart illustration is for eduational purposes only and is not intended to be a recommendation to buy or sell a security.

Bears in Driver Seat

2008-08-21T23:31:00.000-07:00

As you pull up a chart on the Dow Jones Industrial Average, take a look at its five-year chart. Look at the descending channel it has been in since October 2007. The last couple of weeks illustrate a resistance bounce, and it looks like we could be in for some bearish activity - utilize appropriate strategies and capitalize off the downward movement.

Remember - when the indexes are falling, the Volatility Index (VIX) is typically rising.

Vertical Calls on the Russell 2000

2008-07-22T20:58:00.000-07:00

The Russell 2000 is offering 10 percent return on August contracts. Since its most recent support bounce it has already moved over 50 points. It will soon deserve a correction and it has not moved more than 75 points (extreme) in any 24-day period, which is how many more days we have till expiration.

With a correction, a bounce and a rise, the probability of the index staying below 760 is quite high. The 760/770 vertical calls are bidding $1.00 - if filled, a 10% return can be achieved by expiration Friday.

Bullish Bounce in Action

2008-07-21T22:16:00.000-07:00

What Think Ye?

The Dow attempted an 11,000 support break, but obviously failed. It appears the bullish strength will keep the index above this level for a period of time. Don't be afraid to take advantage of short-term bullish strength, but watch for overhead resistance, and buyers beware of the might high volatility crush.

Banks go a faltering!

2008-07-14T20:50:00.001-07:00

Oh no ~ will banks start to fail? Did you see gold today. Check out ticker GOLD among others. What do you think? Are investors going to flee equities with force and flood into gold, or is this a temporary push to resistance levels?

After taking on DIA calls, I will be watching the impact that the financials may have on the broader indexes. A break through 11,000 on the Dow would justify closing calls and opening puts.