Nate Bear, Lead Technical Tactician, Monument Traders Alliance
Hey everyone, Nate Bear here, Lead Technical Tactician for Monument Traders Alliance and Trade of the Day.
I launched my new service, Daily Profits Live, a few months ago, and I'm psyched to see so many members asking questions about trading and how my TPS system works.
So to help you along in your journey to financial freedom, today I'm going to answer a few of the best questions I've received in the Daily Profits Live chat.
Hopefully this gives you a better understanding of how to trade in the current markets.
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While one early investor in Facebook, Twitter and Uber says, "This is the first time that technology has made me feel this excited since I was first introduced to the internet in 1994."
It's a technology one guru calls "XRI" that could be the biggest mega-trend of this decade...
Question #1: "What's one thing you're doing when trading in these choppy markets?"
So here's the thing about choppy markets – they suck. No, really... they suck the premium right out of all the options. That's one thing that makes choppy markets hard for traders who like to trade long options.
The reason is the underlying stock prices just move around in a range, and the options essentially just lower each day due to theta decay. One thing that I've found works great in these markets is simply selling premium instead of buying it.
So instead of buying calls, I'll sell a put credit spread. Instead of buying puts, I'll sell a call credit spread. I can look at a chart and use my TPS Method alongside this strategy, and in choppy markets, I can structure my options position to take ADVANTAGE of the chop, as opposed to getting frustrated by it.
The truth is...
I love using volatility as part of my trading system.
Others may shy away from it, but I relish it because I like to look for opportunities where I can use it in my favor.
Question #2: "Can you talk a bit about 'put credit spreads.' I know nothing about them and would love to hear how you use them?" – Rick R.
Now, I don't sell naked options. I know people who do – but I also know many who have lost their shirts doing it. However, I do sell options and buy protection. This is called a credit spread or put credit spread.
Here's how it works:
The trader sells a put option with a higher strike price, known as the "short put." By selling this option, the trader receives a premium upfront.
At the same time, the trader buys a put option with a lower strike price, known as the "long put." This option provides some downside protection in case the price of the underlying asset drops.
The difference in premiums between the short put and long put is the net credit received by the trader. This is the maximum profit that can be earned from the trade.
The maximum loss of the trade is the difference between the strike prices of the two options, minus the net credit received. If the price of the underlying asset drops below the strike price of the long put, the trader can exercise that option to limit their losses.
So, for example, if I think the SPX is going to stay over $4,000 next week, I can sell the $4,000 put and then buy the $3,975 put as protection. This caps my potential downside while still allowing me to be the seller and put theta in my favor.
Question #3: "Any recommendations on good books explaining options, especially butterflies and debit and credit spreads?" – Normah
So as far as books go, I think they are great, and I have a couple that I'd highly recommend. The first book is Fibonacci Trading: How to Master the Time and Price Advantage by Carolyn Boroden. This book is a great read – and one that is really interesting for those of you with math-oriented brains! This book helps me find hidden levels in charts that I would otherwise miss, and it's incredible how powerful adding this work to your charting can be.
The second book that I highly, highly recommend – in fact, I'd say that this book is REQUIRED READING for anyone who wants to take their trading to the next level – is called Trading in the Zone: Master the Market with Confidence, Discipline, and a Winning Attitude by Mark Douglas. This book has helped me in many areas, not just trading, and I go back to it year after year to read it again. In the markets, we cannot control much of anything. What we can control, however, is the 6-inch space between our ears. This book helps me do that, and it's the most important aspect of trading.
YOUR ACTION PLAN
If you want to see how I execute these options trading strategies to navigate volatility, I recommend joining me in Daily Profits Live. Last week I went 13 for 14 on my trades for a 92% win rate. My current mission is to turn a $37,000 account into $1 million in verified trading profits.
Market Rebound? Bryan has been warning traders of a historically weak market performance in the month of May – and last week the market held true to this pattern. The major market indexes are coming off their worst week since March, but now a possible regional bank rebound, a jobs recovery and strength from Apple (AAPL) might turn things around. If Friday's bounce can extend into this week, we'll be ready.
Debt Ceiling Political Drama. This fiasco is one of the biggest potential factors standing in the way of a continued market rally. Karim, Bryan and I agree this is all theatrical – and I hope the market views it this way as well. Washington will raise the debt ceiling... because they have no other alternative. If they don't, we'll experience the first-ever default on U.S. sovereign debt.
Zscaler (ZS) Soars 18% in Premarket. The cloud security company saw an 18% premarket pop after increasing its Q3 and yearly revenue guidance. It now projects revenue between $415 million and $419 million. That compares favorably with management's prior estimate of $396 million to $398 million.
Insiders Know Something About Six Flags (SIX). SIX was up 15% this morning. Remember all that insider buying a year ago? Insiders have a longer-term outlook than traders, and Karim alerted members to multiple insider buys on SIX in real time.
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