Options Trading Basics: How to Manage Risk

Outline

  • Introduction
  • John discusses the recent market volatility and the reaction to the news from Fitch, a credit rating agency.
  • Mentions the decline in the NASDAQ, S&P, and Russell indices, as well as the spike in the volatility index (VIX).
  • Introduces the importance of knowing how to hedge and protect oneself in markets like this.

  • The 60-20-20 Rule
  • Explains the 60-20-20 rule, which states that the market has about 60% influence on the movement of a stock.
  • Emphasizes the need to consider the overall market conditions and not focus solely on individual stocks.
  • Shares personal experience as a money manager and the importance of understanding the big picture.

  • Protecting Yourself in a Market Downturn
  • Discusses the need for a methodical approach to trading, specifically through top-down analysis.
  • Mentions the use of a dynamic approach to adapt to changing market conditions.

  • Introduces swing basket trading as a strategy that involves trading in multiple names and being both bullish and bearish based on sector analysis.
  • Hedging Strategies
  • Describes hedging policies and practices, including adding bearish exposure to the portfolio.
  • Mentions the use of bearish trades like buying put options on QQQ or SPY.

  • Explains swing basket trading as a way to balance day trading and swing trading.
  • Importance of Coaching and Community
  • Highlights the importance of coaching in learning any new skill, including trading options.
  • Encourages viewers to join their community for support and growth.
  • Mentions the availability of free content, an ebook, and coaching opportunities on their website.

  • Conclusion
  • Summarizes the key points discussed in the video.
  • Encourages viewers to spend time learning and engaging with their community.
  • Ends with a farewell and invitation to join their journey.

Summary

In this video, John discusses the importance of hedging and protecting oneself in the market, especially during times of volatility. John, who has an institutional trading background, emphasizes the need to understand that individual trades are not isolated and are influenced by the overall market. John introduces the “60, 20, 20 rule,” which states that the movement of a stock is about 60% influenced by the market, 20% by the market’s sectors, and 20% by stock picking ability.

John uses the current market situation as an example, noting that the NASDAQ is down almost a full percent, the S&P is down half a percent, and the VIX (volatility index) has spiked to 16. John explains that even if one does thorough research on a stock, if the overall market is moving in a certain direction, the stock will likely be affected as well. John emphasizes the importance of understanding the bigger picture and not solely focusing on individual stocks.

To protect oneself in such situations, John recommends a methodical approach called top-down analysis. This approach involves considering the market, sector, and stock picking ability in a systematic way. John mentions that at Top Trading Pros, they have their own spin on top-down analysis and create a dynamic watchlist of stocks to trade every week. They do not rely on trading the same few stocks but adapt to the changing market conditions.

John also discusses their hedging practices to protect their portfolio during market downturns. They explain that they grade the market each week and if it goes from an A+ to a lower grade, they add bearish exposure by adding bearish names to their watchlist or purchasing bearish options. John mentions that they teach swing basket trading, where they trade in multiple names, both bullish and bearish, based on sector analysis.

John emphasizes the importance of coaching and being part of a community of like-minded individuals to learn and grow together. They invite viewers to explore their website, subscribe to their channel, and access their free ebook to learn more about protecting portfolios and trading options in multiple directions. John concludes by encouraging viewers to join their community and take the journey with them.

Hello, everybody. This is John Napolitano here with you live at Top Trading Pros. I am the options instructor at Top Trading Pros. If you don’t know who I am, I just wanted to introduce myself to some of those who aren’t familiar with us or our channel. If you like options, or if you’re interested in learning them the right way from a professional institutional trader feel free to like this channel, feel free to leave your comments on the bottom and feel free to subscribe.

Also you can check out our website, which has plenty of free content and newsworthy things available. Top trading pros. com. So the reason why I’m writing this video and talking to you guys live here today is because we just got some pretty interesting news out of the markets here that Fitch, one of the major ratings agencies.

Decided to downgrade on the U. S. debt. Now that has happened before a couple of years back I don’t know if you guys remember this or not, but the markets went absolutely haywire last time this happened now Fitch is the third tier credit rating agency. It’s not Moody’s or S& P So I think so far the markets are shaking it off a little bit But the NASDAQ is down almost a full percent.

The Russell is down almost about 80 basis points. The NASDAQ is down. I’m sorry, the S& P is down half a percent and the VIX now spiked to 16, the volatility index. So there is a reaction to this. And this kind of wants me, this kind of propelled me to create this video because one of the things I teach my students, we have 90 day coaching available for those of you who are interested.

We also have courses available for sale on our website too. But if you’re interested in learning how to protect yourself in markets like this, it’s very important to know how to hedge. I have an institutional trading background. I worked on Wall Street for over 20 years, and one of the important things you have to understand is that none of your single trades live in a bubble when you’re a retail trader.

And you’re used to putting on trades. What oftentimes happens is you’re so focused on the individual stock that you’re trading, whether it’s options or stocks, that you’ll lose sight of the big picture. And as a money manager, who has been doing this for over two decades, you have to realize that we don’t live in a bubble.

So there is a rule out there that I teach my students called the 60, 20, 20 rule. And what that basically says is any given day, at any given time, the market itself has about 60% to do with the movement of a stock. So regardless of news or what’s going on, or unless there’s like a specific headline or something like that, if the market is moving in one direction, it has about a 60% weight on what’s going to happen to the stock that you’re dealing with.

So you could do all the homework in the world, but if the stock market decides to roll over, what I’m telling you is your stock is probably going to be down too. Thank you. And if you don’t believe me, check out the futures market right now. I’m going to show you right now exactly what I’m talking about.

The futures, as you can see, are all in the red right here, and this is the pre market right here, and it looks pretty darn ugly. This is a heat map of the S& P 500. So if you look at this heat map right here, you’ll see exactly what I’m talking about. There are some good stocks that are in this heat map, and there are some so-so stocks that are in this heat map, and there are some lousy stocks that are in this heat map, and they’re all more or less in the red today because of the news that I just mentioned.

So how do you protect yourself in a situation like that? You could spend all your time and energy researching stocks, but that 60 20 20 rule will get, if you’re not aware of how it works and what goes on, it can get you in trouble. So the other 20% has to do with the stock market’s individual sectors.

And then the 20%, the other 20% does have to do with some stock picking ability. So you have to put all of those things together. through a methodical process that we teach our students called top down analysis. It’s not something that we’ve made up. It’s not something that is different, is new to the top, is new to trading, but we here at top trading pros put our own spin on it.

We have our own way of looking at things and we come up with our own watch list and the options market on a weekly basis. So we change the stocks that we trade every single week. We don’t trade the same boring old 10 or 15 names. I’ve seen a lot of things on YouTube where, Oh, if you trade these only three stocks, you’re going to do just fine.

And you know something, maybe it works for those people, but it does not work in the real stock market. You have to have a dynamic approach to the markets because the markets change every single week. You have to change every single week. So that’s how I look at markets and that’s how I teach my students.

When the markets are going down like this, what exactly can you do? I have hedging policies and I have hedging practices that I do, and I have a certain step by step approach that I take every single week where I grade the market and I say to myself, okay, if I’m at an A plus this week, and now, today’s Wednesday as I’m sitting here, if the market goes from an A plus down to a B minus or a B, I have to add some.

bearish exposure. So what I’ll simply do is I’ll start hedging. I’ll start adding bearish names on my watch list, or I’ll start adding QQQ or SPY put options, which are bearish trades into my basket. So we teach swing basket trading at top trading pros, where basically what you’re doing is you’re trading in a 10, 15 different names.

You’re bullish and bearish at the same time. Based on sector, based on analysis. It does not necessarily require a rocket science. It’s not something that’s overly complicated. It’s a step by step process that I teach and it’s effective and consistent, and it allows you to. Basically swing trade and have a full time job.

It allows you to do other things where you can day trade during the day and swing trade at the same time. It allows you to do all those things, but basically when something like this happens, when you have this unexpected news, you have to take action and that is the key to anything. If you are interested in how to protect your portfolio, If you’re interested in learning how to trade options in multi directions at the same time, spend some time with us, spend some time on our website and subscribe to our channel.

I’m going to create lots of free content. For those of you who are interested, we also have a free ebook available for you on our website to get your feet wet. But the most important thing when you’re learning any new skill, whether it be trading options or whether it be anything is you have to get coaching.

Coaching is the most important thing. So that’s what we have in our community. We have a community of like minded people like yourselves. We help each other. We grow from each other and that is the key to success. So I hope you take this journey with us, spend some time getting to know our community and I hope to see you all soon.

Take care everybody. Bye bye.

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