Options Trading: How to Counter Trend Trade

In this video, John Napolitano of Top Trading Pros discusses how to counter trend trade and create these trades with defined risk and reward. Instead of simply shorting a stock, John recommends using a bear call spread with an obligation to deliver a hundred shares at a specific price, protected by a call option. It’s important to analyze risk/reward profiles and let the market dictate strategy. Using put options as a safer alternative to selling shares is also discussed, but consistency and education are emphasized for successful trades.

00:00:00 In this section, John Napolitano from Top Trading Pros focuses on how to effectively counter trend trade and create counter trend trades with defined risk and reward. Instead of simply shorting a stock like Oracle, which has been pulling back for the last two days, a bear call spread can be done with an obligation to deliver a hundred shares at $125 with a call option bought on top of the trade to protect oneself. The wider the strikes chosen, the more risk will be presented in the trade, which makes it important to figure out risk/reward profiles and what makes sense for particular situations. It is advised to let the market dictate what is happening and align one’s strategy with it.

00:05:00 In this section, John suggests a safer way to play a short strategy in options trading, which involves not only selling shares but also buying put options. However, with the prices of put options increasing by 17% each day, it’s important to keep in mind that incorrect trades over time can affect your overall P&L. Consistency is key in making successful trades, and the speaker recommends watching more videos, subscribing to their channel, and checking out the Top Trading Pros website to receive education on options trading.

How’s everybody doing today? John Napolitano here with you from Top Trading Pros. I hope everybody’s having a fantastic day or evening whenever you’re watching this video. Reason for this video is I’ve watched some interesting price action in the NASDAQ the last couple of days. As most of you probably know, the NASDAQ or the technology weighted part of the market has been on a tear since the beginning of the year.

Lots of people have made lots of money, but unfortunately lots of. Other people are trying to play catch up, and that is probably what’s happening right now. And one of the things I want to talk about when creating this video is how to countertrend trade effectively. A lot of times when something rips really hard, the temptation is to go short and to put a lot of capital into a trade like that and potentially risk unnecessary amounts of money.

And to not have a really good plan in place in the options market. I teach my students at Top Trading pros that there are many ways you can issue a countertrend trade without necessarily having to spend a lot of money or just draw, buy straight, put options, for instance, which could tend to be expensive in a higher volatility environment.

As we’re sitting here right now the VIX is actually up. Quite a substantial amount. It’s about up 17% today. So obviously volatility is returned to the market a little bit this morning. There was some futures expirations in that market, so that might have something to do with it. But bottom line is volatility spiked a little bit.

So in an environment like this, when the Nasdaq is at an all time high in at least the last year, it’s up 30%. Basically what you want to do essentially is do credit spreads do trades that give you defined risk and defined reward. And what I mean by that, instead of just going ahead and shorting something like this, I actually have Oracle on my screen right now.

As you can see for the last two days, it is. Pulled back. So it has refused to go any higher, at least for now. So this seems to be a little bit of a ceiling, this 1 25 price right here. So what I teach my students is, listen, it’s really easy to go short something like this, but we have certain tool in our toolbox that I teach our students how to effectively trade things with defined risk.

So if you don’t think it’s going to get past this little line that I drew, if you think that maybe it found a little bit of a top here. Maybe it’s going to pull back for maybe a couple of days or even a week. You can do something called a bear call spread. I teach my students how to do a bear call spread, when to do them, what expiration dates to use, and what strike prices to use.

If you want to learn these types of strategies, please spend some time with us. You can check out our website, top trading pros.com. We’ll keep doing videos like this basically to educate people who want to just get their feet wet. But check out our website. We provide education, not only free education, like this video, but we also provide coaching and other types of products and stuff like that for those who are interested.

What you would do in a situation like this is essentially sell the one twenty five call options. When you sell a call option, unfortunately you have a major obligation to deliver a hundred shares at 1 25. Guess what? You probably don’t have those a hundred shares at 1 25, so that would be a naked call option, which is what you don’t want to do to protect yourself.

You would simply buy a call. On top of a trade like this. So maybe you would sell the one 20 fives and maybe you would go ahead. My screen is not going to fit here, but I think you get the gist of this. You’re going to maybe sell the one 20 fives and buy the one 20 eights or buy the one 30 s. Now keep in mind the wider strikes that you pick, the the wider strikes that you pick, the more risk you’re going to have in that particular trade.

So there’s ways to figure out what your risk reward profile is. And there’s ways to figure out what makes the most sense for any particular situation. So this would be a situation where I would look to maybe capitalize on a trade like this within the next couple of weeks. I would not be in this trade more than a week or two because really all I’m anticipating is a mild pullback.

Remember the trend is still up. And that’s the problem with countertrend trading. I’m not looking to make, I’m not looking to hit a home run here. What I’m doing is I’m looking, I’m expecting this to meander around, maybe do something like this for a little while, and then, maybe if the market decides to go higher, eventually I.

Maybe it will break out to a new high. So that’s pretty much what I’m anticipating. That’s what the market is giving us too. So I also teach my students, which is really important to essentially let the market dictate to you what’s happening. Right now the market looks a little tired. So chances are stocks like Oracle that have had a wonderful run are also going to get tired.

So you have to align your strategy with what’s going on in the marketplace as well. That’s another thing we teach our students how to come up with these types of ideas every single week. So I hope this short video is helpful. I’m just showing you a safer way to play a short strategy instead of just going out there and selling shares and risking all that capital or just buying straight put options, which are basically 17% more expensive than they were yesterday.

These are things to keep in mind. So we don’t want to over time, those types of incorrect trades affect your overall p and l. And at the end of the day, it’s making money is what counts. Being consistent is what counts. And these are types of strategies that will help you along your way.

So if you have any interest in this stuff, keep watching these videos. Please and subscribe to our channel. We’ll keep putting out content and talking about things as they come up. And if you want to provide receive some education from us, check out our website, top trading pros.com. Please enjoy the rest of your day.

I hope you guys are doing great and I will talk to you guys soon. Take care everybody.