Send Filthy Rich Dirt Poor
To Your Inbox
June 23rd, 2022
Most Successful Options Strategy
Fed Chairman, Jerome Powell, stood before congressional lawmakers yesterday and said the central bank is determined to lower inflation and has the tools to accomplish its goal. In the meantime, he said the US economy is strong and is able to handle the continued rate hikes until inflation lowers from 8% to less than 3%.
The market opened lower but finished up for the day. We did edge out a new higher-high and lower-low than the previous day, but we closed around the same price as Tuesday. That’s been one of the challenges in trading the last couple of months. We’ve had massive down moves, followed by quick snap-backs. There’s money to be had if you’re a day trader. But if you’re a swing trader, you’ve had to deal with several periods of price fluctuations that eventually return to the same levels as days before.
Here’s a chart of the S&P 500, and you can see from the shaded box that the market started off around $4475, and 17 days later, despite a near 200-point run-up, it came right back down and finished at nearly the same level it started.
Now, let’s zoom out and look at the last six months.
Each shaded box represents a period of similar, flat trading, even though the overall trend has been heading lower. This type of trading can make directional trading a challenge. Within each shaded area, the market has had larger than usual expected moves up and down, but by the end, it finishes flat. One day the market drops 50 points and stops you out and over the next five days the market returns, or vice versa.
When the Volatility Index (VIX) is above a reading of 20, it is usually indicative of a period of higher volatility, and therefore higher option premiums. In this environment, you don’t normally want to be a buyer of options. It’s like the housing market. It’s much better to be a seller right now.
Ok, but if the market is moving more than the expected move, what about using a straddle option strategy, where you buy a call and a put at the same strike price for the same expiration? That requires a big move in a direction quickly, so while it may work if you time it just right, it doesn’t work over a period of time when the market comes back to the same level as when you entered the trade. Not to mention with the heightened volatility, options become expensive, so buying an overpriced call and a put requires an even bigger move in one direction or another. You’re paying more due to the increase in risk in the market.
Selling options for weekly premiums can be a good strategy if you know how to navigate the extreme peaks and valleys each week.
For example, selling naked puts in this environment can quickly go against you with a 50-point move in the wrong direction. You may have to accept shares and work your way out of the position. Selling credit spreads benefit from time decay and neutral markets, but you have to be confident the market will come back if you find your spread down one day. Believe me, I’ve put on a bearish credit spread only to have the market go up 600 points in a day. Hanging on to a losing trade, hoping that the market comes back down can work in this environment, but might test your emotional limits.
So, how can you navigate through the ups and downs each week and still sell option premium? You’re going to have to keep reading to find out a strategy that is quickly becoming one of my favorites.
How do you play a long-term bear market, but a short-term bullish reversal? Well, I’ll give you two stocks that I’m looking at today. I have one bullish idea and one bearish idea for you. Given the market conditions and the continued congressional hearings this week with the Fed, these are short-term ideas.
The first is Daqo New Energy (DQ). Energy has been suffering lately, but DQ recently broke out of a long-term resistance line and is looking to turn that into a support line. Even though Energy once again took a dive yesterday, DQ actually finished up for the day. The next area of resistance is now around $78. It’s currently trading at $67.45.
And if you think the market is going to turn around soon and keep going back down, here’s a bearish play.
I have been bullish on a post-covid summer travel season, but inflation seems to be taking its toll and companies like Marriott (MAR) have been suffering since its April peak. Right now Marriott is resting at support, but if the market does turn back down and Marriott breaks through the support line, there’s not much support after that until about $126. It’s currently trading at $136.
If you’re an options trader, you have several ways you can play those two stocks over the coming days, or weeks.
What is the most successful options strategy to use on these? Well, it really depends on a number of factors like volatility, market sentiment, days to expiration, and so on. There are so many variables that it can get confusing. There is one option strategy that is quickly becoming my favorite though.
The Traders Reserve team put together a special presentation about the different ways you can use weekly options trading strategies for steady income. How much income per week? We set a pretty lofty goal for ourselves.
TONIGHT at 7 pm EST We’re going to reveal exactly what happened when two adventurous traders set out to prove whether or not they could make 5k per week.Oh, I almost forgot – the results we’ll share with you have come in the midst of the worst bear market since 2008-09. You won’t want to miss this live reveal.
If you have any questions, comments, or anything we can help with, reach us at any time.
Email: [email protected]
Phone: (866) 257-3008
Jeff
Guest Writer, Filthy Rich, Dirt Poor
Editor, Wealthy Investor Society