Another Potential 10% Drop? | Technically Speaking: Trading the Trend

[Music] [Music] hello and welcome to technically speaking trading the trend weeks to months my name is james boyd we welcome you to trend thursday and uh the trend has actually been more down so we'll actually talk about that we'd like to welcome walter jx orlando chuck annette dom alfred vj uh jx sandeep bill and many others hello and good afternoon to you so just real quick as we're getting started remember we do post education content on twitter all of us instructors do and also just real quick as we're getting started remember that the content is intended for educational informational purposes only options are not suitable for all investors we'll talk about those here today and also remember when we demonstrate the function of the platform we're going to look at actual symbols if we actually talk about futures and futures option trading remember that involves substantial risk not suitable for all investors there is a separate risk disclosure statement to trading futures as well like on options and also remember when we actually discuss the paid money platform that is for educational purposes only and also remember when we talk about the option greeks remember there's four option greeks and know that those are those are a measure to something like direction time and volatility now just real quick actually as we take a look at uh our agenda items i want to actually talk about the market and i actually want to kind of talk about portfolio delta because everyone when the markets actually go down not everyone does the same and i want to talk about portfolio delta and what it really means and maybe how to actually decrease sensitivity to downside direction we're going to talk about the three ways actually the investor could do that number two we're actually going to talk about some current positions and or management and rolling protection okay and the third one we're actually going to talk about is new positions in the context of what type of trends you're actually seeing on the on the chart so what that actually said let's go actually go ahead and i'm going to go ahead and bring up the just the spx now i think the million dollar question maybe literally million dollar is where's the support the spx this chart we're actually looking at the weekly chart and if i kind of were to kind of make this a little slimmer down here you know when we actually came off this in in late 2020 in 2021 you know we had where the blue line was actually above the red okay we had actually bullish momentum and there was a strong trend etc center but then you actually go back and kind of see what happened is the moving average cross over to the downside a couple weeks ago weeks not days weeks this is looking a weekly chart yeah like a lower high and we're kind of thinking hey maybe it might go more neutral well it didn't go neutral since the fed we've actually seen i don't know how many days in a row i think it's been down nine out of the last 10 trading days and you actually see that there's not a whole lot of support in here now the reason why i like these candles is you're going to notice that these represent their the orange and the green colored candlesticks side by side these represent higher lows higher lows higher lows higher lows are potential support levels but they're not support levels the only real support level we can actually really see are you down there damn it okay the only support level we can really see is down at 35.38 so if someone were to ask us hey you know if we're talking about the s p how much further do you think it could drop i i don't think it's actually off the table to actually really think that the s p couldn't drop another eight percent nine and if you guys should go down to 33 61 if you did that that's not thirteen and a half percent but james it's fallen so far already that doesn't have anything to do with support now if we were to get a counter trend rally which we that means that we've actually made a lower low which we have today again feels like groundhog day okay lower low but if it were to go back up this upside where the kind of the temperature moving averages we're really talking about 42 30 38 so you could go up about 300 points and you would still be in that downward trend okay so what does this really mean for a stock investor like us well this means that if someone's trying to buy stock it is very difficult to actually find stocks that can that can really go up despite the indexes going down so much so the number of bullish candidates has shrunk dramatically and that's why i use the language on tuesday that i think we've crossed the bridge as far as actually trying to actually be more bullish i think there's going to be more examples of trying to be more bearish because so many stocks are getting pulled down per the indexes now when you actually take a look at let's say super quick on the nasdaq front now i am not john mcnichol john mcnichol his middle name i think should be fibonacci and john mcnichol actually talks about for example using fibs a lot for potential support and resistance levels and if we go down to the co bid low again we're talking about a weekly chart if you actually look at this you're going to see that the nasdaq has hit today the 50 line now the deeper you draw back so this is where we started this is where we rallied up to and we pulled back on the nasdaq 50 of the rally you start pulling back like greater than 38 there is a real risk of actually pulling back to these deeper retracement levels like this whole rally never started okay james that's kind of very bleak what you just went over but let's kind of talk about this for just a second okay now we want to talk about portfolio delta okay we know that if an investor were to buy stocks buy stocks buy stocks buy stocks buy stocks or do long options or whatever we know that if you buy stocks or you do bullish options what it actually does is it makes the delta in the portfolio flat negative or positive what would you say if i go out right now and i go out and buy a whole bunch of stocks 10 stocks 500 chairs each what is it going to do the portfolio delta am i going to be positive delta neutral delta negative delta well the biggest actually thing is as a as the investor actually buys more shares or does more both option positions they actually make their delta steeper okay so if an investor went out and did 10 bullish positions that line represents their delta in their portfolio the steeper that line is the more sensitivity they have to upside direction which would be good if they were forecasting that but if the market were to go down that's not good and there are some investors that i just talked i mean there are investors you just summed up what happened they didn't realize that when you buy buy buy buy buy it just steepens the line even more you have a greater sensitivity now let's kind of talk about some ways the investor might say well how could the investor bring this line down a little bit how could they do it well number one is i think one thing they could actually do is they could actually exit their positions right they might just exit their stocks in general now i'll be honest i think if if investors were really gonna exit i think they've probably already done it before today okay if someone isn't getting stomped out i don't know if they even have a stop maybe they're set a stop at a penny okay i think this is probably if they were stomped out it probably already happened bulk majority okay if anyone got in recently those trades probably got under pressure quick as the market drug down now what happens is if the investor set stops what does it do to this line it actually makes it where the line actually drops now is that good or bad well it's actually good because it means that there's less positions to go down on okay now number two how else could you actually decrease that line well one thing that we've talked about quite a bit is protect what do we actually mean really by protecting well what we really mean by protecting it it could be which we'll talk about just briefly it might be something like a cover call cc it might be a pp a protected put and it also might be let's say the collar okay now this is also how these three could be helpful protective foots are probably going to be more helpful than cover calls the collars are probably going to be more helpful than the protected foot and the cover call okay that collar kind of stands out okay the collar is a covered call the collar is a protective book it's the hybrid of those two and when actually someone actually does the collar what it actually does is it makes their delta even lower so if you said which investor here is probably feeling the most pain uh without a doubt the investor who is actually having the most pain is the investor is just long only okay they're long only and they haven't exited and they haven't used any protection the one other thing i want to bring out here is well james how else could an investor actually bring the portfolio delta down well the third thing we actually talk about in options with using with trends is hedging what could a hedge be what could a heads be now the hedge actually might be the index okay and the index could be maybe the cash index some of you are thinking of the etf as well we'll go with that i know we're going with that but it also might be for example let's say a future okay which if you have a question on let me know but a lot of times with people heads they usually say look i'm gonna buy a put on the index i remember i said the index could be the cash the spx you might be thinking about that etf okay okay so we're talking about the same thing okay as far as the idea the other one actually might be let's say could the investor actually do let's say a future now if the investor actually did that or these three combined what you're going to notice is what's going to happen to their portfolio delta their line's going to flatten off even more and what does that really mean it means that investor that's using exiting protecting hedging there they could still be down but they're probably not going to be as sensitive to market declines that's these are big things that these two portfolios have really been doing it's been trying to exit some it's protecting it's been protecting a lot of them and it has historically also even used hedging okay now let's kind of i want to go to roy's question here okay so first off i want you to think about so if you said what is the takeaway from talking about this i remember one of the most frustrating things when i got started investing james boyd would actually just be this guy right here just buy a whole bunch of positions hope they go up over time the problem with that is sometimes you don't always get that condition and you get market pullbacks having an understanding of exiting is critical having an understanding of protecting is critical having an understanding of hedging is critical you can't just count the market goes up and mask my me my stupidity or ignorance ignorance is someone who is maybe hasn't educated themselves yet okay so we want to kind of talk about these things like exiting protecting and hedging and the goal of actually these is when we get downtrends is to reduce the steepness of the portfolio delta to make it less painful i don't think anyone says what i really like is i like a very painful pullback yes sign me up i don't think anyone said that to me now let's kind of talk about this okay now now roy i'm gonna actually kind of take your question and what i'm gonna do is one of the questions that roy asked was when does protection become let's say too much well let me let me kind of just take a stock and if you don't mind i'm going to use let's say a stock example given like coca-cola okay and i'm going to use this as an example and let's say the investor said james i want to actually find a stock that's been in an upward trend and they actually want the stock to actually go higher okay get it now one thing that we actually know about when you're in a more volatile market okay so let's say the investment says the current stock price and i'm just gonna use this as an example okay so i can't answer that as uh just yes or no i have to look at kind of the numbers of it and let me explain to you what the numbers are telling you to answer that question so if you look at a stock like coca-cola and someone said i want to get in the stock is at 63.67 okay we know that if an investor sets a stop in higher volatility environments like we see now setting stops could be probably a futile exercise the probability of being stomped out is really really high so let's say the investor says i don't want to go that route i want to buy a long put okay well we asked the investor well how far do you want to go out on that long put and the investor says back to us well what i'd really like to do is i'd maybe just like to go out about the next let's say 36 sixes days and i want to buy a put right below where we are now so stock is at 63.72

the st right is at 62.50 okay so let's kind of write that in now by the way i want you to notice that delta is at 40. okay so it's not it's right at the upper range of what we're talking about delta 3040 but it's uh it's right there so let's kind of go back to the 6250 and we're asking the question roy's question is how much is too much well let's kind of talk about it so what is the debit well the debit there if someone we're going to buy that is a dollar 66 okay so here it is so what are we so if i said a dollar 66 is it good enough just to say well i i just don't want to spend anything at i mean and if i said it's a dollar sixty six and a thousand dollar stock and it's a dollar sixty six and a hundred dollar stock are they the same no they're not so the whole idea is we wanna kind of put this in percentages okay all we're gonna do is gonna say how much is it for the put how much is it for the put relative to the stock price okay so all we're going to do and what i'm going to kind of show right here is we're just going to look at these percentages okay now i'm going to kind of tell you if we were in a lower vol volatility market you'd probably see the low end of this number at one percent i've always said and we'll continue to say the median number probably for many stocks is one and a half percent and a high number roy and everyone is probably two percent okay now where'd you get these numbers it it and i i never actually by the way i would actually say lower to medium volatility markets okay when i say lower to medium what what do you mean by that i've been thinking like maybe the vix maybe between let's say 13 to 18. somewhere in there

and so if the investor went out and said i'm going to buy listen 20 to 50 days expiration delta 30 to 40. the numbers will probably come out like this that's the range you're going to see if you use that kind of template but here in our current market what's the issue well if we actually have higher vix environment then we know that's actually inflating the option premiums you inflate the option premiums you're going to see that many of the ones we've talked about as of just lately they've been right around 2.5 so roy the reason why roy is asking that question is how much is too much i think invest so the dollar 66 represents how much the stock has to go up to break even so i'd have to go up a dollar 66 or another way to say that is the stock would need to go up 2.6 percent okay now roy if you were going to ask me and say for our class example how much maybe what might be the cap of what the investor might be willing to consider to say i'm gonna buy a long put well they maybe they say two and a half percent this is a little bit above it but maybe the investor says you know what jeez james if i could buy this for you know maybe a nickel less and that's where you got to think about roy you got to think about if i change this price a nickel you know we're really kind of seeing they're at two and a half percent now why is that percentage higher well it's higher because the volatility is higher so if you're going to kind of ask me and say for our class examples what would be the upper echelon threshold i'd say two and a half percent but i would say that's not normal okay i would say that's in a higher volatility environment okay now remember what's a way the investor could get around this the investor can get around that if they just colored the position they wouldn't have to worry about adding because you got to remember what's the break even okay and we're going to move after this i just break even at expiration well it's what did the investor buy the stock for 63.67 and you're going to add what did the investor pay for the put so at expiration the stock would need to be at 65.33 the investor bought the stock then bought the put you add those together the stock and expiration has to be this price or higher now roy and everyone i'm going to say this i'm going to push back a little bit why are so many people so concerned about how much the puts are if they can if they could just call her the position maybe they don't have 100 chance so that's why they're asking the question okay i understand but why would they actually want to increase the break even if they could just potentially color the position that's all i would say there okay all right now so we know when an investor actually does a position like this what does it do in terms of the delta it's lowering the sensitivity of the portfolio investor one man they they really get pulled back on quite a bit someone who actually uses protection such as like a cover call protected put in collar they can have losses but the losses won't be potentially as severe let me see an example of that let's show this okay so i'm going to bring up an example and one of the stocks that i'm going to show is a stock for example let's go actually bring up the one that we did the reason why i brought this up was we did an example historically on coca-cola where the paper money account bought the shares of the stock okay now what you're going to notice is the stock is slightly down and what you're going to notice is the stock is down 591 dollars and it also has a long put as well okay so now here's the problem the put is protection not indefinitely it actually has an expiration just like eggs milk bread food whatever okay and you're gonna see that that has only eight days remaining for the protection so what happens in this case if the stock were going to close below the strike but what it could actually do is it would it could actually trigger the sell sale of the stock at 64 and the position would be exited the investor doesn't have to do that the broker should do that anything that's in the money meaning the stock is below that strike they should exercise that means the investor exercises their right to sell the shares at the strike price now what you're going to notice is if the stock goes down somewhat okay notice the value of the put why would the value of the put go up talk to me here why does the value of the put go up what makes that put more valuable well the value the value of the long put becomes more valuable if number one the stock actually goes down that's all the obvious the second one maybe not as obvious is does volatility increase so if we looked at this position and said if they just had a stock only they would have actually been down the investor would be down 591 but if the investor actually had the long put too they can at least have something to try to offset some of those losses how many of you are thinking man it would have been so nice to have something to offset some of the stock losses let me show you a bloodbath but if you actually look at a stock let's say like apple where we talked about this bearish but the stock actually here you know the stock has actually really been pushed down a lot well the farther that the stock actually goes down the more protective the put can could become now if you set a stock investor only they're down thirty nine hundred dollars if the investor actually had a put on that too the put is valued at twenty five hundred dollars it's not being down thirty nine hundred the net is down just thirteen sixty seven i know what you're probably thinking you're probably thinking james i feel a little remorseful okay about actually not having or considering cover calls i feel remorseful potentially about not considering protected puts i feel remorseful about not considering collars and as we talk about that does this mean that it's for everyone the answer is no okay but the biggest actually thing is it is an option to try to reduce the sensitivity to direction now in our example here i just want to kind of show you that now uh we'll we'll talk about that annette in just one moment but i i want to kind of just bring up and i want to kind of see if there's any questions with left with what we just talked about because what we just kind of talked about is the portfolio we talked about delta and i want you to self reflect how much delta do you have if you've been exiting stocks it's going to push the delta line down if you've been protecting stocks it's going to push the delta down even more if you actually hedge a position whether it's an index an etf or the future it's going to push that line down even more and the bonus of that is that investor might not be down as much as the overall market now if you said james which of those three do do our does our class really use the answer all of them okay lots of people that are remorseful okay but here's the deal i think it's one thing to kind of see it it's another thing to actually understand it and do it my father always used to say james if you know it so well why haven't you done it the way that you really know it is you do it because if you don't do it then you don't really know i think i think he had something i think he was right right so as we show these examples we prove that we know by practicing now let's kind of talk about really the third item here and i want to kind of now bring up okay i want to kind of really bring up an example uh but first off i want to kind of just stop and see are there any questions so first off is this helpful that we talk about this my concern as an educator is if someone just has all long positions they need to fully understand that is the most risky type of trade if they don't ever consider exiting protecting or hedging they never actually change that uh slope of that line of the delta line and that's why it becomes so painful so by using or considering one of those three maybe all of or two or three three or three it can be helpful as far as making it less financially damaging but also the second thing is making it where the investor is understanding that the trend has changed and they're trying to change the sensitivity to different types of trends okay now uh let's kind of go back and actually take a look at i'm going to show you an example and let's kind of talk about maybe a trend that's maybe not bullish okay let's look at a stock example given like bby okay now we're going to look at a stock like bby and i'm going to ask you some questions here if we looked at this i want you to kind of tell me where you see support okay where do you see support where do you see the support now i kind of always think if i had maybe a horizontal line maybe like a ruler in my hand right i kind of be thinking like okay was there any support lately if i if i kind of took a ruler can i touch a number of these lows if i kind of took a ruler and i kind of said where's potential resistance i'd probably say those are probably the boundaries right 100 and 121 somewhere in that ballpark okay now the problem was we got below that couldn't really mount a charge to the upside and then lately really been below the 10-day moving average and that has been something that's been like tattooed in my mind when you get below the 10-period moving average on a weekly chart oh the price action could be ugly even though it looks like it's an area of support you got negative momentum and a negative trend with you so if we go down and look at this and say what's potential support it's trying to actually hold an 89 but not doing a very good job got down below that if we said anything below that we might say maybe in the ballpark let's say 75 now let's kind of talk about big picture here what type of environment have we actually been in terms of inflation what type of environment have we actually been in terms of consumer confidence if we get rising costs cpi number was 8.3 yesterday ppi today was 11

year-over-year and if you actually kind of get a slowing down of the economy we know that best buy just sells a lot of good stuff especially if they're nice products but they sell a lot of like discretionary items you might not necessarily have to have them now if investors start making decisions like i want it but i don't need it what might actually happen with the sales the earnings of the company but it might drop okay now we don't know for sure it's going to drop maybe they kind of hold up better than other companies but the risk might be to the downside right i think in your own personal life when you've actually let's say had less money do you continually go out and just buy more stuff when you don't have money you try not to right now if we take a look at this let's say the investor decides they want to do a bearish trade so let me kind of go back and say one thing here okay i said this at the beginning of the year one person didn't like it but nevertheless when we talk about bearish traits okay we need to kind of have some foundational understanding of like what type of bearish traits i've said since january 2nd this year that the base of the understanding of bears traits would be verts verticals short call verticals long put verticals we've talked about the differences there if the investor actually said james i want to even be more bearish than that they actually might say let's say long puts but as roy has mentioned sometimes those long puts can be expensive you can still buy them but it just means the the higher the price for the long puts the bigger the debit the lower the break even if you caught the classroom yesterday we also brought up if you combine these two my gosh this sounds like collars if you combine these two a vertical a bearish vertical and a long put you actually just get what the investor calls a short synthetic which is a caller without owning the stock and why doesn't the investor want to own the stock because the dead gun thing's been going down okay so what i want to do is i want to show let's kind of imagine that the investor said james i'm brand new i just want to learn actually maybe how to try to trade a downtrend and i want to kind of start with step number uno let's say the investor says you know what james i want to maybe buy a put that's a foundational understanding buy a put where the investor thinks the stock could go below and stay below that strike price when someone buys a put they typically are trying to buy a strike where the odds of the stock being below that strike are high so some investors might try to go at the money or in the money okay so we're going to look at the 87.5 and then what we're going to do is we're going to actually buy no buying the 87 and a half and then sell the 82 and a half now watch what happens we're going to right click on the 775 for the 8750 strike right click gonna go to where it says buy and they're gonna go to right there where it says vertical okay now how many of you in the recent drop be honest with james i promise i there's no one here the only one here is jax i won't tell anyone talk to me okay let's have a conversation with james here okay i'm not going to tell anyone how many of you have actually seen trends that have been down and you said i know i could actually practice buying the put but i really don't want to pay for it how many of you guys and gals i think all of us actually do that we're like a consumer right we don't really want to pay for anything or we don't want to pay that much for it the beautiful thing about the long put vertical is it sells to put below we talked about the 82 and a half and what that really does is instead of just paying solely for the long put it counters that or kind of get something back by selling the put and it makes the debt the cost okay less why is that of interest well because when the investor pays less it actually means the break even is not as low okay now i think this is really important here okay one of the advantages of the vertical is the investor is somewhat long vega volatility were to expand it could be helpful okay if you take a look at this we got a break even max profit max loss let's make an assumption here that the investor says james i'm new i i i'm just brand new do not want to risk more than 500 this would be doing two contracts now if you did two contracts we're really talking about about 476 dollars okay now here's the deal i think if if someone said to me james i'm on i'm going to be honest with you i knew the trend was probably down i knew there's a good chance it was going down but i didn't want to pay for the long put you got to go back to your toolbox and you got to ask yourself is the long put the only type of tool in the toolbox and the answer is no it's not now if the investor said even beyond that if they actually said james i'll be honest i don't want to pay for anything period okay the investor then might say i might consider the short call vertical where that's not a debit it's actually a credit okay and think if the investor in the last two weeks might have just practiced a short call vertical or a long put vertical for crying out loud we know where maybe that would have been would have been helpful but i think the biggest thing is we kind of think like a consumer i got to pay for the puts that's not the only tool in the toolbox verticals would be the foundational understanding of just being bearish okay now the investor might use a long put vertical if they want a higher maximum gain relative to the risk it's going to actually change this to two contracts and if the investor actually changes the two contracts confirm and send this has now been changed for the two contracts max profit max loss since it now has two contracts it's two hundred and uh two dollars and sixty cents because there's two contracts now i i i just have to make sure we're on the same page how many of you the next time you see the market going down what have you learned the next time the market actually goes down or the next time that you the stock actually goes down what have you learned have you learned something about protecting have you learned something maybe about using hedges okay maybe with the indexes the etf with futures have you learned something about the importance of exiting maybe in general and and i want this picture to be ingrained in your mind if the investor does not exit some doesn't have to be all some they're going to have the steepest portfolio delta and that will if it goes down it could actually hurt the most the reason why people protect or exit or hedge is they're trying to drop the sensitivity to direction okay now what i want to do a lot of you are oda is actually saying hedging by puts that's actually funny uh i won't even comment on that right now so here's the deal the biggest actually thing is when you look at this is and again i think what happens is a lot of people actually always go back to oh i'm going to do long puts i'll be honest there's some people that know about long puts through through but they don't like buying puts unless they're on that lower tier remember we talked about the percentages you know if they can't find stocks that maybe have those percentages that long put might not be for them okay now i'm going to show you what i really mean by that i'm not going to go super in depth because i want to look at another example but let's say the investor said james i notice kind of sometimes in your webcast and i'll just kind of say this i mean we do do examples of i teach the class on callers and callers is really like stock protection right so callers is just where the investor they own the shares might say james i admit it i'm cheap i'm cheap okay i don't want to pay for the put i don't want to pay for it and so they used the premium from the call to pay for the put so i had someone actually tell me one time when i explained that concept to them they said james i'm a cheap person i don't like to pay for anything the caller stands out to me because at least i can have someone else's money i understand with that money there's an obligation for it but at least someone else can help me pay for the protection i said if that helps you actually understand it better then i'm for it okay now let's actually kind of take a look at just real quick the market let's look at one or two more examples we take a look at the market dow's sitting at the 562. now remember i don't get any pleasure out of saying this okay we kind of go back and say we know the market is down but could it go lower i want to ask that question to all of us if we look and kind of see from a long-term trend trader do you where do you see support tmtm where do you see it ira where do you see it steve where do you see it we go back and kind of say where do we see long-term support we actually might say it down at 291. now if we went out today and we tried to find bullish examples i feel like we would be trying to find needles in a haystack okay probably going to get more manure on us than needles some of you have been in farming know what i'm talking about okay if you take a look at this okay so you know it it might just continue to drop and that's kind of one thing that's kind of catching a lot of investors off guard is when is it going to go from the lower low to the lower high okay so what i want to kind of do is let's kind of look let's look at another example now we know that interest rates have actually been really going up and they've gone up aggressively and we kind of talked about how this can affect certain areas so example given what i want to do is i want to look at let's say example given like general motors now one of the things my 14 year old daughter said as we were driving down state street the other day is dead how come the car dealerships have been so empty and what our car dealerships do is they park all the cars on the outside and if you look past the outside ring there's no cars in the middle we know that there's been ongoing supply issues that you would have thought that would have got fixed by now now the other thing i want to kind of hit this company with is or just kind of the the industry in general is historically they've been able to do this zero percent for four years zero percent for six years zero percent for eight years or something very low my question i have for companies like gm or ford or others is can they really do the zero percent anymore can that and if they're not able to as much or or they're not willing to might that actually hit their sales a little bit which then could affect their earnings so let's gonna show an example let's say the investor said you know james i'm cheap i don't want to pay for anything we know that if the investor does a long put vertical they got to pay for it if they want to do a long put they got to pay for it so let's say the investor said james i'm brand new okay just take me in the shallow end of the swimming pool okay i don't want to drown i want to kind of learn how to play a bearish trend but maybe kind of have some buffer if i'm wrong okay fine if we look at this trend what do you see so if i look at this trend what type of trend do we see do you see any type of price pattern that is on the chart here anything talk to me here well if we actually take a look at this if we said well we kind of have a horizontal support and then if we kind of went back a little bit we'd say james it kind of looks like maybe there's a little area of resistance and that resistance is kind of like right here now if we kind of said what type of pattern really has lower highs and equal lows if i checked it's probably a decent triangle which is a continuation pattern okay off the trend prior to getting inside the triangle now this is the daily chart what does it look like on the three year weekly so when we actually take a look at this on the three year weekly we go back we ask ourselves the question where is potential support now we might push back and say well james it's at the support level the problem is if the index go keeps going now what happens to the stocks near the support level the support level tends to on a majority basis not hold and we might say well james i see a support level at 35 but again if the indexes drop what's the likelihood of that stock holding above the support level the answer is not high so if it starts dropping down below 35 which we're at 35 it could be katie bar the door kitty bar the door to where well candy bar the door to potentially the next support level which would probably be in the basement area of about let's say 24 or so 24 might even be at that covid low there which was let's say 18. okay and i'm going to mark this chart for us so on the upside we're kind of we're going to put these markers here and this would be our example so now is it is it that the investor are they trying to be bearish no they're just seeing trends that are really bearish and they're trying to put on a strategy that matches that trend so when we say trend trader a trend trader could be someone who's trading the trend up but it could also be someone who's trading the trend down and so we want to acknowledge that the trend is not up and if the trend is down we're going to go back to the toolbox and say all the three kind of tools in the toolbox verticals long puts or short synthetic which is the hybrid of both those might the investor consider if the investor said james i would like a credit based trade i want a trade where maybe i could have some ability to be somewhat wrong the direction and still get the potential credit or have a higher probability to do so so let's say the investor says you know what james i want to sell the 37 strike now if they invest itself with 37 strike that's where they think the stock could stay below on this type of strategy the investor does not need the stock they probably don't want the stock because the stock is going down so this is truly a bear strategy they right click on the 37 bid sell gonna go right to where it says vertical now what you're going to notice is 37 and then if the investor did a five point wide spread it's going to give a credit here but dollar 14 per contract now this is a little different than when we looked on the long put vertical the short call vertical has a lower maximum gain the maximum gain is the credit on this type of trade since the stock could actually go up somewhat it could go up from 34.89

as long as it's below 3814 or lower okay it's below breakeven they haven't lost the way it actually makes the most is that the stock stays below the 37. now if the investor said james i i'm willing to risk a thousand dollars a thousand dollars on this would be again to contracts now let me kind of wrap this up like this okay what happens to that delta line in the portfolio if the investor starts doing more protection what actually happens with that delta line if the portfolio if the portfolio starts doing more bearish type of trades it drops okay the one thing we want to do as trend traders is we want we don't want to be so delayed in trading what the investor sees and i think all of us are probably guilty of that of just being delayed like a month after the fact they finally submit to what the trend is showing and then consider it it kind of goes back to being seeing it trading it see it trade it and not having a 30-day lag to finally consider applying the trade or consider so if this is okay the investor is actually going to send that order the 37-42 the june option there it's a short call vertical now i'm out of my time here today but what we actually did is we showed the bearish example of bbm bbbm best buy we also did the example of general motors your takeaway actually here today that i want you to do is i want you to practice if you say you know james i i'm kind of at step number one then i want you to practice the verticals if you say james i'm at step number two i want to practice these long puts i want to be more directionally bearish fine step two if you actually said james i know both of those i want to use what you talked about yesterday which is a short synthetic which is just using step one and two together so i'm out of my time here today thank you so much for your comments and your participation remember that when we get take a look at these indexes there could be potential further risk of the downside when we look at the indexes chances of a counter trend rally are becoming higher and higher as it drops lower lower from the resistance nevertheless we still see that trend on an intermediate to longer term pullback and short term so with that said about my time here today remember with what we discussed it was done for example illustrated purposes only and i wish you a great day take care and also remember to subscribe to our trader talks channel as well take care bye-bye

2022-05-13 14:21

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