The current market environment has been one of the least “reasonable” I can remember.
While Friday’s open was a bit choppy, it did not suggest the rout that was about to unfold.
If you’re new to the markets, if it’s any comfort to you, this is not normal in any way. Not even for what would be defined as a whippy market.
For the market to rally 5 or 6% the prior week, gap up about 2% at the open of the new week — and then give it all back by the end of the week — truly meets the definition of what I’ve coined this market as Mr. Schizophrenic.
Nevertheless, we continue to find compelling option selling setups using the Master Trader Method, last week closing 5 for 5 winning trades.
Below is a daily/weekly chart of Below is a daily chart of iShares Russell 2000 ETF (IWM).
Trade: Under $143.27, consider shorting Dec (12/14) $148.5/153.5 bear call credit spread (5 DTE) for mid-point but limit of $.55/share (closed at $.64/share).
Technical Setup: Breakdown bearish engulfing daily/weekly, relative weakness to other Index ETFs.
Option Strategy: Bear Call Credit Spread (BCCS).
Stop Loss: $148.32.
Below is a daily chart of Facebook, Inc. (FB).
Trade: Over $140.90, consider shorting Dec (12/14) $132/125 bull put credit spread (5 DTE) for mid-point but limit of $.80/share (closed at $.93/share).
Technical Setup: Although still in a downtrend, it might be setting up a higher low after negating bear gap down on daily 12/6, relative strength to sector and broader markets, short-term income trade.
Option Strategy: Bull Put Credit Spread (BPCS).
Stop Loss: $131.78.
Below is a daily chart of iShares US Real Estate ETF (IYR).
Trade: Over $82.60, consider shorting Dec (12/14) $81/78 bull put credit spread (5 DTE) for a limit of $.32/share (closed at $.40/share).
Technical Setup: Bullish +123 continuation after bear gap negated and bullish engulfing close 12/6 on daily.
Option Strategy: Bull Put Credit Spread (BPCS).
Stop Loss: $81.18.
UNG – Under $33.43 consider shorting Dec (12/14) $40.5 naked calls (5 DTE) for mid-point but limit of $.50/share (closed at $.61/share). If triggers, will be Breakdown from symmetrical triangle consolidation after Climactic Sell Setup daily. Income trade with 95% IVR. Note: High risk because of volatility and wide spreads. Stop Loss: $39.92.
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Please read the information on Money Management below
VIDEO ON OPEN TRADES AND ADJUSTMENTS BELOW
Because your success is vital to you – and us.
Before selling options or credit spreads, we urge you to review the valuable and detailed information that we have provided for you in your Member’s Area.
You will find it by scrolling to the bottom of the page to Master Trader Subscriber Resources.
The link is Money Management Considerations When Selling Option Credit Spreads for Income.
It explains Master Trader Money Management, Trade Management, understanding the use of Contingent Orders, and much more.
If You’re in a Rush to Start
A quick simplified approach to calculating contract size is to simply base your contract size based on the number of shares permitted in your Trading Plan as if you were trading the stock or ETF.
Simple Share Sizing = $ Risk / Stop Loss
The amount of money that you are willing to risk – divided by – the stop loss amount. For example, $100 / .20 = 500 shares.
Credit Spread example, if your Trading Plan allowed you to trade 543 shares of AAPL based on the stop loss, then simply round down to the nearest hundred and short an equivalent number of contracts of the option.
Since 1 contract represents 100 shares of the underlying, this would be five (5) contracts.
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Happy trading! If you have any questions or comments, please e-mail Greg Capra at Greg@mastertrader.com or Dan Gibby at Dan@mastertrader.com
All the best,
Greg Capra
Managing Director of Master Trader
Trading the Pristine Method — Origin and End
Dan Gibby
Chief Options Strategist
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NOTE: Master Trader will show opening and closing prices of all stock and options trades. We recommend that all traders and investors use proper share sizing for positions and money management. However, we cannot recommend what that is for your particular trading style, risk tolerance, or account balance.
We urge you to calculate your own share/position size based on your individualized risk parameters, Trading Plan, and familiarity with the proposed trade strategy and risk. Advanced Management Strategies (AMS) covers in detail foundational and advanced position and money management.
NOTE: Master Trader and its representatives may have existing positions in actual or other trade recommendations before or after suggested herein. Additionally, we may manage them differently for internal purposes based on different risk parameters than noted herein.
All trade ideas and content are for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, option or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds. Investment or trading information provided may not be appropriate for all investors, and is provided without respect to individual financial sophistication, financial situation, investing time horizon or risk tolerance. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. Master Trader Consulting, Inc. is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardize Options and the Risk Disclosure for Futures and Options found here: CLICK HERE.
