Bear Market Strategy Training – The Bear Call Spread
Video 1
Video Part 2
OK, now let me show you how some example of how this works in the real world. This is a copy of some VIP trades using this strategy…
Hi Trader,
The last two weeks of VIP picks provide us a great learning opportunity so I’m going to focus on the last two weeks in this Trader Training.
First of all I want to answer a common question about the VIP picks. A lot of people ask me about trading weekly options right when they come out and get listed or on Thursday or Friday. I want you to know that most of the time I like to wait until Tuesday around 9-noon to make the pick and have my team send it out.
To quote Uncle Jesse, “I’ve been tradin’ stocks since Moby Dick were a sardine”. I’ve had enough experience to believe Mondays can be weird and dangerous days. For example, 25 years ago to today the Dow had it’s biggest crash ever. I was 26 years old and working on the trading desk as the assistant to the Head Trader of the firm. That day all hell broke loose. Our trading terminals went out, the phones were jammed and that was just in the trading department. Out in “the Bull Pen” where the brokers work, the shit had hit the fan. Guys were going crazy. One guy was personally wiped out in his own account. Guys were crying. Clients were hysterical. They carried one guy out on a stretcher. I’m 51 now and I still prefer to avoid doing anything in the market on Monday unless it’s selling a stock I bought at the close on Friday that gaps up big on Monday morning. And I do make weekly options picks on Monday however if the market is stable.
The other reason I like to wait until Tuesday to make the weekly options picks is because this way, we are only in the stock market 4 days and this greatly reduces our exposure to risk. Another reason is that the weekly options quotes tend to stabilize better by Tuesday. And lastly, I have never seen a week yet where I couldn’t do on Tuesday what I would have liked to do on Monday. Waiting 1 day never diminishes our trading opportunity. In fact there are several trades you can make on Wednesday and Thursday before Friday’s expiration.
Here are a few more questions I want to clear up. First of all I always look at the broad market’s trend before I plan my weekly options credit spread trades. If the broad market is up I plan to use the Bull Put Spread if it is down I plan to use the Bear Call Spread. Plan your trades in the same direction as the broad market and you’ll have better success more often. As you know, not all stocks have available weekly options. I take the ones that do and run them through Trend Point software. I’m looking for stock that are trend in the same direction as the broad market but more aggressively. Then I use Trend Point’s support or resistance points to guide me in selecting the options spreads on the weekly options stocks.
OK, now lets look at these two VIP picks…
This was sent to the VIP Members
This week’s VIP stock and options pick is a Bull Put Spread on Google.
Here is how you create this credit spread…
Sell Google 725 Put
Buy Google 720 Put
Net credit limit .19
The 725 Put is trading at roughly .95 – 1.05
The 720 Put is trading at roughly .70 – .80
So it should be easy to get at least .19 if not a little more.
Ok, now let me share my thoughts with you on this pick. Even though GOOG is down today as I write this, it is still within the context of an uptrend. Also, with GOOG down right now, we have a nice entry point for the week because as GOOG stays in it’s up trend and bounces back up, we’ll be even deeper out of the money at the end of the week. As long as GOOG stays above 725 thru Friday’s close, this trade will win.
You should also know that this is not the only spread in Google that is good to trade. You can choose a spread that is higher than this and make more money. The key thing to consider when determining which spread to pick is to ask yourself, “will the stock stay above my higher strike priced Put through the week?” Obviously, I like the spread I picked for you here, but based on that key question, you may want to choose a different spread.
Trade Well,
Jack
OK, let’s look at a few things here. At the time I sent this out, Google was trading at roughly 757 per share. The spread was at 725. As long as GOOG stays above 725 by Friday’s close, this trade wins. That’s what happened.
Now let’s move on to this week’s VIP pick…
Hi Trader,
This week’s VIP stock and options pick is Google with a credit spread between the 665/660 Put options.
We’ll create a credit spread by selling the 665 Put and buying the 660 Put.
This trade was a little different. I knew Google was going to release earnings this week and that makes a stock more volatile and more risky. For example, PriceLine dropped 100 dollars per share in 1 day on a bad earnings report. Google was trading at about 740 per share but with the earnings risk I decided to go as deep out of the money as possible which is why I picked the 665/660 credit spread. As you already know, Google was a disaster for investors but this trade on Google was a winner because as long as GOOG stayed above 665 the trade wins. By staying deep out of the money we can avoid the risk of a disaster and still profit. There is no other way to make money in the stock market like this. I was wrong about the direction of Google but I was right about how low it could go. That’s a beautiful thing about this strategy, you can be wrong and still get paid.
I cannot over emphasis the benefit of staying deep out of the money with your credit spreads. The reason a trade like this works is because 1. the broad market was bullish, 2. this stock was more bullish, and 3. our spread was deep out of the money. But the fact is, in the case of this trade, the ONLY reason it worked was because it was deep out of the money. Even in a disaster.
Trade Well,
Jack
PS. If you are not getting the VIP picks, you really should be.