Trading Options: Basic Strategies

Transcript

Hey, everybody. How are you? John Napolitano here on this Thursday morning right after a Fed day.

I am the top Options instructor here at Top Trading Pros. I just wanted to quickly introduce myself to those of you who don’t know me. I’m an institutional trader for the last 20 plus years.

I left that business and I’ve been trading my own capital for about four or five years. And I am with Top Trading Pros Right now as their options instructor, trying to simplify options for the average person. I think that options get a bad rap for being super complicated and super difficult to learn.

They’re really not. Otherwise I wouldn’t be doing it. I am surely no rocket scientist, but basically there are somethings you have to know.

So at Top Trading Pros, we have a whole bunch of stuff you can look at. We have free content like this YouTube video.If you like our YouTube videos, please like and subscribe to this channel.

We do plenty of free content every single week, not only in options, but in stocks and in forex as well. We also have our own website, Toptradingpros.com, which has plenty of free content for you guys to get your feet wet and learn a little bit about what we do.

The main thing we do is we do lots of trading, but we also do lots of coaching and teaching. And we are a like minded community of people just like you who want to learn how to get out of the daily grind. So, without further ado, I’m going to talk a little bit about what happened yesterday with the Fed meeting and how to profit and capitalize from a market that is declining.

So I’m going to jump into my screen right now and I’m going to show you a quick, simple strategy that I teach my students all the time, where you don’t necessarily have to pick a specific stock when the market goes down.Everything tends to go down when there’s a correction going on or when there’s some sort of downturn occurring.And that’s what we see here.

This is the futures market right now. In the pre market, rather, the QQQs or the Nasdaq index has gapped down and we are actually looking to pretty much open up down 1% on an already declined market from yesterday’s Fed Meeting. So what I told people to do is you can’t really trade the news, you don’t really know what’s going on, and soon and so forth.

You don’t really know what Chairman Powell is going to say or how the market’s going to react. So what novice traders do all the time is they try to guess. They try to come up with some sort of idea of what they think might happen.

And what I tell people all the time, when you trade based on how you feel or what you think might happen, that is100% how to get yourself in trouble. What you do have to do is trade what’s happening in front of you. And you can’t be biased in one direction or another.

You have to be comfortable going in the up direction, just as comfortable as you are going in the down direction.The great thing about trading is that you can make money either up, down, or even sideways in the options market,believe it or not. And that’s some of the strategies I teach my students.

So I’m going to jump into this. This is a chart on the Nasdaq. Like I said, I’m going to show you guys a quick five minute strategy just to kind of show you some of the stuff that goes on.

So bottom line here is I circled a little area right here where all day long the market was kind of going sideways, as you can see right here, I have one indicator on my chart right now. Just one. I know you might think I’m crazy.

A lot of people are like, John, where are all your Oscillators? Where are all your secondary indicators? Where are all your moving averages? And so on and so forth. Guess what? Nine times out of ten, a lot of times, they can lead you in the wrong direction, and they can lead you making early or bad decisions. So one line that I look at on the Intraday Is something called VWAP, which I teach my students.

VWAP stands for volume weighted average price. A lot of institutions use VWAP as their benchmark to get in and out of different securities. So it is a very important little gauge to have institutions, meaning hedge funds, mutual funds, insurance companies, big banks, so on and so forth, they make up for the majority of the volume that trades on the New York Stock Exchange.

So if they account for 80% of the volume on the exchange, or even 90%, guess what? You should probably pay attention to what they’re doing and try to see what direction they’re going in first, because that is usually where the momentum is going. So that being said, I noticed that VWAP was kind of boring all day long. You can see that the market was just kind of following VWAP.

It was kind of just chugging along, which makes sense because nobody really knows what the Fed is going to say when they’re actually on television. So once Chairman Powell got on TV and started yapping, the stock market, as you can see, started to get a little positive. It started to kind of rebound a little bit here.

And you had a couple of higher shadow candles here where the market was actually trying to break above VWAP.And then all of a sudden, the main theme came out. Basically, the bottom line is chairman Powell.

His language was, we’re going to stay higher on rates for longer. And I think that was the overall negative theme that caused the market to roll over. At what point did that exactly happen or what language did he use? Doesn’t matter.

That was kind of what started to happen. So once we broke VWAP here in the five minute chart, this was my entrypoint, basically. This long, nasty red candle right here, this is where I entered a short position.

I bought put options on QQQs, and as you can see, there was no looking back after this. Now, that doesn’t always happen, so obviously we have to protect our risk. If, let’s say, he said some positive things and the market started to rebound, we would have probably broke VWAP like we did here, and we probably would have kept going higher.

So what I usually do is a potential exit if I want to manage my risk, obviously, and exit for a loss, I would wait for a closing five minute green candle above VWAP here, and that would have been my small loss. I would have gotten inhere and I would have gotten in there, gotten out there, rather. No harm, no foul.

It would have been a quick trade, it would have been a ten minute trade and I would have been out. It would have been a small loss, no problem. But that did not happen, clearly.

We kept going lower and lower and the more you break away from VWAP like this, the nastier it got. And sure enough, at the end of the day at 04:00 p.m., I was deciding whether to close out the position or not, but I decided to stay in it.

And the main reason why was because of this heavy volume at the end of the day and obviously a nasty closing candle at the end of the day as well. Now, at that point you could have managed your situation. You could have taken maybe half the position off and done something like that.

But I chose to stay in. And as I’m sitting here right now, the market’s down another 1%. So it was the right decision in hindsight.

And basically I had the whole market behind me. I had Powell behind me and I had VWAP behind me. I had three pieces of edge that I like to call it, that basically told me to stay short.

So what I try to do is when I put a trade together, I try to come up with the best edge possible that gives me the best odds in my favor. And this particular one kind of lined up perfectly, so I wanted to point that out. They don’t always work out like that, but these are the things we teach our students at top trading pros, short term strategies as well as swing strategies, how to set them up, what strategies to use, because straight calls and straight puts don’t always work.

There are spread strategies that you have to learn as well. They’re not complicated, but they do require some rules and you have to learn how to use them properly. So if you’re interested in this sort of stuff, please check us out onour website toptradingpros.com.

Check out our YouTube videos. There’s plenty of free content for you guys to just learn some of the terms and get your feet wet. And I hope to see you all very soon.

Have a wonderful day, everybody. Take care. Bye.