- Greeting and overview of video topic: Proper trading options during difficult times
Difficult Market Conditions
- Recent events causing market volatility (war in Middle East)
- Markets can shrug off geopolitical events if localized
- But volatility increases due to headline risk
- Important to separate emotions from trading decisions
- Currently still in a downtrend but markets haven’t collapsed
Importance of Trading Strategy
- Most important aspect is having the right trading strategy
- Many trading gurus provide alerts but not education on strategy
- Weekly coaching provides customized game plan and reviews potential roadblocks
- Must know when to apply different trading strategies
Trading Strategies for Volatile Markets
- Increased volatility gauged by VIX index being elevated
- Requires options strategies beyond simple long puts or calls
- Example trade: bear call credit spread on NVDA after negative chip news
- Sell OTM call and buy further OTM call to cap risk
- Generates credit upfront and profits if stock stays below short strike
- Better than buying expensive puts in high implied volatility
- Encourage exploring options more with videos and free ebook
- Options allow part time or full time trading to generate wealth
- Be sure to subscribe and get additional educational materials
Hey, good morning everybody. This is John Napolitano from Top Trading Pros. I hope everybody’s having a great week so far.
Reason for this video is I wanted to talk about proper trading options during difficult times. I know the events of the last couple of weeks with the war in the Middle East has drove a lot of people crazy and got people very frustrated,rated and emotional and rightfully so. There’s a lot of terrible things that are going on and obviously our television sets and on our social media and what have you, we see lots of bad things and terrible things on television.
However, sometimes the markets largely shrug off the events that are going on geopolitically, as long as they don’t spread to other regions and stuff like that. But it does cause volatility because what happens is headline risk comes out. There might be news like today, for instance, there was news today that Iran is seeking an oil embargo on Israel,so the price of oil spiked up for instance.
But these are kind of like little news headlines that come out here and there. And it’s very important as a trader to separate your emotions about what’s going on with your trading because the market has largely shrugged off the events in the Middle East. I’m not saying the markets are fantastic right now.
We are currently still in a downtrend on the S P and the Nasdaq and so on and so forth. However, markets have not fallen apart yet and that is something to kind of keep in mind when you’re putting trades together. So at Top TradingPros, one of the things we do, which is extremely important, is probably the most important thing we do is coaching.
We don’t just give trade alerts trade ideas, we do that too. Obviously we have a free ebook if you check out our website toptradingpros.com, please like and subscribe to this channel if you want to see some videos on strategy and different videos about options markets to get your feet wet on the subject.
But for the most part, one of the most important things we do is weekly coaching, where we come up with a weekly game plan. We talk about it, we answer questions, live back and forth. And we also, on a weekly basis, in a separate meeting, we cover basically any roadblocks that you might have, any problems that you might occur with your trading strategy and stuff like that.
Because with options there is another step when you trade options, you have to be bullish or bearish and you have to decide what direction to go in with whatever it is you’re trading. But it’s very important also to kind of have the right strategy and that’s something that is very overlooked. With all the YouTube videos that I see out there, with all the content that I personally see, one of the things that I feel that is missing and one of the things I’m trying to add is just what strategy to know when to use the right strategy at the right time.
And in this particular environment it’s no different because volatility has increased even though markets have not fallen apart. So what do you do? How do you set up trades like that? Well, I’m going to give you one example of something I put together yesterday. I’m going to share my screen with you really quickly here.
And as you can see, when you wake up in the morning and you see a sea of red, you see oil obviously spiking downhere. The VIX, the volatility index, is up here. I’m going to kind of start with that.
I’m going to show you that basically, as you can see, although markets haven’t really fallen apart, the VIX has definitely. I’m going to increase the size view here you can see the VIX is quite elevated compared to where it was at the end of the summer back in September and August. Here the VIX is kind of flirting back with 20 again.
So when you have that, the reason why as an options trader, it’s so important to look at the VIX is because that basically is the gauge to tell you whether your options are cheap or whether your options are expensive. So whether you’re bullish or bearish almost doesn’t matter. You have to pay for your option premium.
Whenever you buy something, you have to pay for it, whether it be on the long side or on the short side. And when volatility spikes like this, you have to come up with other strategies. And that is kind of what I teach.
And one of the things that we do in coaching, the right expiration dates, the right strike prices at the right time. So what I did was I put together a trade yesterday on Nvidia, which I’ll share with you here. Basically I’m a little bit bearish on Nvidia.
After the headline news came out yesterday that Biden was going to pretty much curtail chip sales to China, there was some news on that. So that obviously affects Nvidia’s bottom line. So sometimes geopolitical news and stuff like that might be good for the country or it might be good politically or what have you, but it’s not good for the actual individual stock.
And as you can see, the stock put in a nasty kind of head and shoulders formation. As you can see right here, I’m not the best artist, but here’s basically the eyeballs right here. I know this is kind of a silly drawing, but here is the face, right? And then you have the two shoulders here, very clear.
And then as you can see, it is below its moving averages. Had a really ugly day yesterday, down about 4%. And there’s some follow through in the pre market right now by about 1.7%.
So my trade was actually correct for now. But basically I had a feeling that it would not really get past this 145 area.Like here, I kind of was using this as my line in the sand, this 20 day moving average.
Basically. Now in a situation like this, the volatility was pretty elevated in this name. So I’m not going to just buy straight put options.
What I decided to do was do something called a credit spread. So essentially instead of going on the short side with put options, I decided to do a bear call spread where I’m selling calls. So I sold the 445 calls, which basically leaves me naked if I left them by themselves.
But what I did was I bought the 150s on top of them in order to protect myself. So basically what I essentially did wasI basically gave myself a credit. So essentially when you put a trade like this together, I could actually do it from scratch here.
When you do it basically like this, what you’re essentially doing is you’re kind of capping your upside because you’re not allowing the trade to completely put options. Gives you unlimited reward potentially if the stock goes to zero. But all I really want out of the stock, I’m going to show you the chart one last time. I just want it to kind of hang out here,kind of maybe just stay below this line that I drew right here.
That’s all I wanted to do. If Nvidia just kind of hangs out here for a couple of days, I’m going to have a 100% profit target, which is fantastic. And I’m not really putting up that much risk.
So one of the things you can do is to go out for just a few days here. I could just go out in November. I could even go out shorter.
I could go out for 16 days. And essentially here I’m paying basically $1,300 for the 445s. So if I go ahead and sell,those are the call options.
That’s a lot of money. The put options at $1,200. So again, that’s a lot of money, a lot of capital to put at risk on the long side of the short side.
So what I essentially do is I sell a vertical spread where I’m doing the 445. And again here you can see that I’m going to show you the reward to risk profile. I’m taking in $217 credit, which means, like I said, like I showed you on the chart, if it stays below 445, I’m going to take in $217.
And then my total risk on a trade like this, I’m going to show you right now, let me get rid of this trade. Basically, if I went ahead and did this trade, I’m going to take in the 217. You can see the blue profit target is here and down here.
My maximum loss is going to be $283. So I’m risking 280 to make 217. Now you’re probably going to scratch your head and say, wait a minute, that doesn’t sound like a good deal, but number one, that’s without the stop, obviouslyI’m not going to watch this thing make a maximum loss.
I will have risk management in place where maybe if the premium was to increase to let’s say $350, I would probably just stop myself out of the trade. So it’s basically I’m going to set it up to be essentially a two to one trade. So I’m taking in 217 and maybe I’m risking about $125 or something like that.
That’s the kind of trades that I put together in environments like this. Because as you can see, I don’t know if you can see this on the left hand side, but the implied volatility of Nvidia is around 50%, which is really high. Now, Nvidiatends to be high anyway because it is a volatile stock.
It’s always kind of in the headlines with AI and so on and so forth. But these are really important trades to set up and learn how to do properly. Okay? So if you don’t trade the right way, if you’re just getting trades in your inbox from the gurus telling you what to do and stuff like that, that’s great.
But those strategies don’t always work. Over time, what will happen is eventually markets will shift, markets will change and the strategies or the one or two strategies that they show you will not work. You have to have multiple strategies.
You have to learn this the proper way. So I encourage you all to explore this a little bit further. Options are a fantastic way to generate wealth for you and your family.
You can do it part time or full time, which is fantastic about it too. So check out our website toptradingpros.com, check out all our videos, like and subscribe to this channel and get our free ebook.
Just sign up for our information and you will not be disappointed. Hope you guys have a fantastic rest of your week.Please be careful out there and I will talk to you guys soon.
Take care everybody. Bye.