On Monday, we talked about the hidden market lesson for traders following the biggest news story of the week…
On Tuesday, I gave you my top 10 stock picks for second-quarter earnings season…
On Wednesday, I shared my three important tips for choosing a broker – and my top three…
Yesterday, I took you on a deep dive into my favorite earnings season strategy…
And today, I’m reaching into the Patterns & Profits mailbag to answer three questions I received from you and your fellow readers this week.
Let’s jump in…
Q: I tried exercising a spread recently and found that I couldn’t sell-to-open the second option. Instead, I could only buy the call option. It actually worked out and gave me a triple… But I’m wondering if I was just lucky and should have stood down because I couldn’t exercise the vertical spread? I’m not looking for any personal advice – just curious what you think happened here.
A: This reminds me of something that happened to me as a rookie trader in my twenties… I struck gold on my first trade, even though I didn’t really know what I was doing at the time. And, as a naïve trader who thought he had just conquered the market, I jumped into another trade on a stock that a bunch of TV analysts were talking up – without doing the research first.
Then, Black Monday hit – the worst one-day drop in history – and it wiped me out (and then some). I was trading “on margin,” (essentially borrowing money from my broker to trade), got my first margin call, and spent the next year trying to pay back thousands of dollars because I lucked out on my first trade.
My point is… always plan your trade and trade your plan.
If you can’t do a vertical spread, then chances are you don’t have level two options clearance. So, you don’t want to try to buy the lower strike call first and then sell the higher strike afterward. Your broker won’t let you do this if you don’t have level two clearance. If you do have the clearance but the lower-strike call you bought didn’t fill, then your limit could’ve been too tight – meaning, the price difference between the best bid and offer was too small.
What may have actually happened here is something called “legging into a spread.” This happens when you buy the call option first and then sell the call option when the market’s moving in your favor. That’s always great – until it works against you.
The best rule of thumb is to get the right clearance for your trading plan so that you don’t risk facing an unnecessary loss. I covered clearance levels and broker considerations in Part 5 of the Cash Course – you can check it out here to learn more.
Q: Hi Tom – new options trader here! You mentioned in your earnings article that periods of high volatility are a great time to profit, whether trading stocks or options. I understand how that would affect stocks, but could you explain how it would affect options?
A: Absolutely – and this is a great question to ask as a new options trader! Periods of high volatility and times of low volatility are the natural ebb and flow of the market. Now, options traders can easily find profit opportunities in any market, whether it’s up, down, or sideways. But simply being cognizant of the fact that volatility changes through time (i.e., periods of high volatility are followed by times of low volatility) is not enough.
Implied volatility (IV), on the other hand, is a measure of an underlying stock or exchanged traded fund’s (ETF’s) volatility that’s reflected in an option’s price. It is the volatility that is implied by the option’s current price.
For that reason, when market participants expect greater volatility going forward, the price of an option has the tendency to increase due to a rise in implied volatility. If market participants expect an underlying stock or ETF to exhibit high volatility going forward, options premiums will be high.
If, on the other hand, a stock or ETF is expected to show little volatility going forward, implied volatility will fall to reflect those expectations.
This is an easy way for you to remember what happens to an options premium (price) when volatility rises or falls…
Q: I watched your webinar… But, why on earth don’t you tell prospects like me that it involves options first – not at the end? Why don’t you make a product without options? It won’t have the big yields but should do very well if you have an ideal time to buy and sell.
A: Thanks for your question! The webinar you watched is one of many strategies I use to show my readers how to pocket even faster gains on the biggest stocks in the market. But it’s not the only way to make money…
I have a service that’s slanted toward stocks using the power of the Money Calendar software you saw in the webinar – and we’ve been talking about here for weeks.
It’s the same software that I use to find seasonal patterns – repeatable price moves over specific periods of time – that have happened in at least 9 of the last 10 years…
It scans millions of data points to find the stocks and ETFs that have moved higher or lower from the start date (the open price of one date) to the end date (the closing price of a later date)…
On July 12th, it helped my readers make a 10.7% gain in just 6 weeks on Amazon.com,Inc. (AMZN) – without using options.
In fact, one of my readers even sent me the following message shortly after:
“10.38% ROI. I’ll take it – thanks Tom!”
Then, this week, it delivered a 2.6% gain in 5 weeks on another expensive stock, Netflix, Inc. (NFLX).
And on Monday, I’m releasing a new opportunity on a short-term seasonal pattern with a 90% success rate over the last 10 years.
These were great questions – so thank you for sending them! I check my messages daily, so please feel free to email me at any time. Just remember, I can’t give you any personalized advice – so save those for your broker.
Have a great weekend – I’ll talk to you again Monday!
Tom Gentile
America’s Pattern Trader