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RTW Podcast |

RTW 001 – Best Options Trading Strategies Part 1

Best Options Trading Strategies – Part 1

In this first episode of the Real Traders Webinar Podcast we’ve chosen… “Part 1 of a 4 Part Series On… “Best Option Trading Strategies!”

Watch as Marc Nicolas, Founder of Day Trading Zones & Kevin M from Merlin Capital Management share their absolute… “Best Option Trading Strategies!” In total, at the time Im writing this, there are 4 parts in this series… But it continues to be added to every month!

Don’t forget to signup for these LIVE EVENTS for FREE by visiting http://www.RealTradersWebinar.com/hangouts! In this episode you’ll learn strategies such as… Best Options Trading Strategies & Specifically The Best “Weekly Options” Trading Strategies! http://www.RealTradersWebinar.com/hangouts

Best Options Trading Strategies - Best Weekly Options Strategy You'll Learn

Best Options Trading Strategies | Best Weekly Options Strategy | You’ll Learn In This Podcast…

Here Are Just A Few “Trading Strategies” You’ll Learn In This Episode…

3:37     A Trading Strategy On How to Make Money With Credit Spreads… By Picking The Correct Range!  

6:45     3 Strategies That Allows You To Profit From Credit Spread & Options!

10:06   The 3 KEY Components To WINNING With Credit Spread Options!

10:38   Options Trading Strategies That Make Money BY SELLING!

13:03   What Is “Time Decay”… And How It Effects Your Options Trading!

13:52   The Power Of “Time Decay! 23:23   Credit Spread Option Trading Strategies… BREAKEVENS!

26:40   When To BUY Your Options… And When To SELL Your Options!

41:38    Credit Spread Option SELLER Trading Strategies For Making Money!

49:03   How to Find Buyers & Sellers Through “Support & Resistance!”

56:16    How to Overlay & Confirm Your Option Chain Using Delta Formula!

56:44    The Range Of “IV” (Implied Volatility) You Want To Look For!

1:15:09   Credit Spread Options Trading Strategies “CheckList!”

1:32:38   LIVE Q&A Learn this and so much more… http://www.RealTradersWebinar.com/hangouts

RTW Podcast |

RTW 005 – Master Technical Analysis

In this episode you’ll discover…

“How to Master Technical Analysis For Your Day Trading” 

Free Trading Education - Real Traders Webinar

Low Market Volatility Portend Future Risk?

The consideration of market volatility from a value-oriented perspective is quite different than traditional risk considerations. Rather, from a value slant, the current period of low volatility is raising additional risks, not opportunity. It is important that investors understand this and know what to expect from their investments during the next period of high market volatility.

Consider the simple premise:

  • Low Market Volatility precedes Market Turbulence
  • High Market Volatility precedes Market Opportunity

The period marking the biggest risk is in the low volatility period right before a shift in period (or regime) from low volatility to high volatility. The problem we as investors face is that the two periods are asymmetrical. Low volatility periods are marked by longer time frames and positive escalator-like returns. High volatility periods are punctuated and marked by negative elevator-like returns.

In my opinion, the shift from low volatility to high volatility is when valuation risk is realized. Why? Because low volatility periods generate a reinforcing feedback loop that drives greater participation in the market both in traditional long-only, buy-and-hold strategies and through the use of leverage. During this period, valuation plays second fiddle to market returns. The shift to a high volatility period clears the imbalances in the market whether it is in valuation, leverage, or resetting long-term growth trends.

Therefore, investors want exposure to the low volatility period and not the other. However, timing is difficult and investment strategies must be optimized between the two. Value investors sensitive to the price of the market are likely to reduce exposure through increased cash as the imbalances continue to build. Unfortunately, that will drive underperformance relative to a fully invested, buy-and-hold strategy during periods of low volatility — making it less appealing, when it is likely most appropriate.

Volatility Clusters

Volatility tends to be influenced by its most recent state. Back in 1963, Mandelbrot wrote “large changes tend to be followed by large changes, of either sign, and small changes tend to be followed by small changes.” This volatility clustering is what delineates periods of low and high market volatility. Figure 1 from James Montier at GMO suggests that volatility troughs are cautionary points before market downturns. In a research note I published last week, I discussed how those periods marked by red were also at times when Shiller’s 10-Yr Cyclically Adjusted Price-to-Earnings (CAPE) was at 24X or greater and the trailing 12-month earnings were significantly above the long-term average.

Figure 1: GMO’s Risk Does Not Equal Volatility Exhibit

(click to enlarge)

Source: GMO (I Want to Break Free 2010 White Paper)

Figure 2 details the last 10 years of the S&P 500 (SPY) combining the 50-day historical (realized) volatility and the actual return on an adjusted price basis (prices are adjusted for dividends received). The browned-out areas reflect the periods of high volatility based on the volatility reading relative to its long-term average. The last high volatility period was during the contentious 2011 US debt ceiling debate. Clearly, you can see the asymmetry between the low and high volatility regimes. The crossover of volatility above its long-term average is closely associated with (local) market tops.

The current low volatility regime has been in place since February 2012. Our current market return over this period has been ~29% or ~19.8% annualized. Despite my concerns last summer when volatility was approaching the long-term average — volatility briefly kissed the average before receding again.

Figure 2: S&P 500 SPDR Total Return & 50-Day Volatility (Annualized)

(click to enlarge)

Reinforcing the Low Volatility Period

There are several factors that can support a self-reinforcing feedback loop that stabilizes the low volatility period. In this current environment there are several:

  • The S&P 500 is at an all-time high. Any investment bought and held over the past 10 years will be positive. (The key is buy-and-hold, and not panic-and-sell).
  • Use of margin (borrowing to invest) in the equity market expands during low volatility periods. The contribution to any positive momentum (and trend) by its nature reduces volatility.
  • Regret versus the “Great Rotation” is driving new investors and fresh capital into the market.

Drawdowns Recovered

Consider that at any time over the past 10 years — an investment (buy-and-hold) in the S&P 500 (including dividends) would be positive today. Even the 50+% drawdown that began in October of 2007 was finally recovered last August on a total return basis. In other words, the S&P 500 is at all-time highs on a total return basis.

Instead of showing the market at an all-time high, consider previous declines experienced in a portfolio that held only the S&P 500. This is a risk measurement tool called maximum drawdown. Maximum drawdown calculates the peak-to-trough decline in an investment (in this case, the S&P 500). When it is at 0%, the investment is at an all-time high. The recovery in the decline in October of 2007 took almost 5 years (August 2012). Therefore, the memory of the 2007-2009 decline, while painful, will fade for those who maintained a strong discipline in a buy-and-hold strategy. Those investors with cash in 2009 have done very well.

Figure 3: SPY Maximum Drawdown

(click to enlarge)

Margin Debt

With the market at all-time highs and the memory of losses fading, leverage through the use of margin debt is increasing. While margin debt as an absolute number is influenced by the overall size of the (growing) market — clearly the generation of peaks indicate investors’ increased level of risk taking based on the low volatility environment and positive market momentum.

By definition, the existence of positive price momentum will lower the volatility of the market, which creates a powerful reinforcing factor. As shown in Figure 4, the recent spike in margin debt coincides rather tightly with current low volatility period.

Figure 4: NYSE Margin Debt

(click to enlarge)

Regret, not a “Great Rotation”

Is there really a “Great Rotation” from stocks to bonds, or is this really a matter of buy-and-hold gaining traction? We have already shown that given the market highs, a buy-and-hold strategy initiated over the past 10 years would be positive. Furthermore, a dollar cost average program such as in a 401(k) would have done even better.

Consider those investors who have been on the sidelines since the 2007-2009 market downturn or have allocated retirement contributions to a money market account? How long can an investor stand idle seeing the past 4 years of stock market gains pass them by when all they had to do was own the market. Pyramis Global Advisors recently put the issue in terms of investors balancing two types of regret: Active and Inactive.

  • Active: Active Regret reflects the regret of losses sustained in a market downturn. Active Regret fades over time along with the memory of the losses.
  • Inactive: Inactive Regret reflects non-participation in market upturns. As markets continue to rise, Inactive Regret builds.

Analysis of capital flows into equity mutual funds and ETFs helps put the Active/Inactive Regret theme in context. During the 2009-2012 time period — money flows into equities were essentially flat. This would suggest the dominance of the Active Regret, which remained strong given the recent memory of the 2007-2009 market downturn and distrust in the market. However, data from Pyramis shows that for the first 5 months of 2013, money flows into equities has been decidedly positive, which suggests that after 4 years, the Inactive Regret for many investors has become more influential (and intolerable) and investors have shifted capital back into the stock market (largely at the expense of money market funds).

Recap

  • The S&P 500 has been in a low volatility period for 17 months and shown solid gains.
  • Current volatility is ~13% versus long-term average of 17-18%. In March, volatility reached a low of ~9%.
  • Memory of losses has faded as any investment in the S&P 500 over the past 10 years would be positive today using a buy-and-hold strategy and retaining dividends.
  • Leverage based on NYSE margin debt has accelerated during the most recent low volatility period with a near-term peak currently in April.
  • Based on mutual fund and ETF flow data, cash is moving back into equities for the first 5 months of 2013 after being flat the previous 4 years.

Timing the Next Shift

Few long-term investors will get the timing correct on the next shift in the volatility period. Value investors in particular are notorious for being too early both in raising cash to early and buying too soon. While initial timing calls are proven incorrect and the low volatility period is sustained, the market continues to climb, confidence increases (and caution declines), valuations expand, and leverage is utilized.

While timing is a challenge, a caution flag is clearly warranted under the current market conditions. If Mr. Montier were to update the chart in Figure 1, a fifth red circle would likely be added to March of this year. Besides the low volatility conditions, the current period is similar to those four other market periods identified in red circles based on the S&P 500 10-yr CAPE of 24X or greater and trailing 12-month earnings significantly above the 10-year average.

Conclusion

Regardless of the style of investing from value-oriented, passive indexing, or tactical allocation strategies, know that all portfolio strategies and asset allocations will likely be stress tested at some point in the near future. As the low volatility period shifts to a high volatility period — valuation risk will likely take center stage again.

The conclusion is left to a sobering and important reminder from John Hussman, a portfolio manager known for his caution in discussing the current market climate:

There are actually numerous investment disciplines that I believe are effective over the long-term, including a buy-and-hold approach. The problem, in my view, is that investors constantly switch their discipline when it isn’t performing well at the time. Since 2000, a buy-and-hold approach would have required an investor to suffer through one 50% market loss and a second, distinct 55% market loss. Frankly, I think another one of a similar order will complete the present market cycle. Over the very long-term, buy-and-hold investors have done fine, particularly combined with good value-conscious stock selection. But the drawdowns can be intolerably deep from our perspective, and the full-cycle returns following points of rich valuation tend to be particularly disappointing compensation. I expect that this will be true over the coming decade as well.

 

By Matthew Crews

Iron Condor Options Trading Strategies by DayTradingZones | Real Traders Webinar

RTW Podcast |

RTW 005 – Master Technical Analysis

Financial Markets

With Fed Meeting on Tap, Investors Await Bumpy Ride By Matt Nesto

A month ago, the Fed’s revelation that the downside risks to the economy had diminished triggered an immediate four-day selloff following the June FOMC meeting. While that dive ultimately served as the set up for what would become a very powerful and positive July for the S&P 500, the seeds of worry that caused the last slump are still very much rooted in the minds of investors.

A barrage of clarifications by Ben Bernanke and several other Fed heads has seen rates pull back in, and in turn, allowed stocks to take off and set fresh new highs.

Related: Bernanke Is Too Transparent, Creating ‘Bizarre’ Market Volatility: Munson

“I think this next Fed meeting is going to be much ado about nothing,” says Paul Schatz, president ofHeritage Capital in the attached video. “I don’t think it is going to be anything different than what he said (in Boston) just two weeks ago.”

While Schatz acknowledges the effect “the Fed’s media parade” has had on markets, he feels that the recent rebound in treasuries, which saw the 10-year yield (^TNX) ease back down to 2.5% from 2.75%, is more the result of what’s happened in the equity markets than economic news.

However, given the outgoing Fed chief’s well-established commitment to communication, Schatz says there’s always the risk that the market could misinterpret something – even something that’s been said before.

Related: Yellen vs. Summers: Traders Placing Bets on Next Fed Chief

“The Bernanke Fed has tried to be very open and transparent, sometimes confusing people because they’re so open and transparent,” he says.

Ultimately, no matter how many times and ways it has been said before, the Fed will soon start reining in its “easy money” stance. As much as stock and bond investors everywhere already know this, it appears that they prefer not to be reminded of the inevitable, which is why Fed day, once again, will be fraught with risk.

RTW Podcast |

RTW006 – 5 Master Keys To Disciplined Trading

 

 

5 Master Keys To Disciplined Trading

by Norman Hallett

RTW Podcast |

RTW 004 – High Probability Day Trading Strategies

High Probably Day Trading Strategies…
By Rob Booker

 

 

High Probability Day Trading Strategies

http://www.realtraderswebinar.com/bookersfo | You’ll Learn In This Podcast…

In this episode of the Real Traders Webinar Podcast you’ll learn… “High Probability Day Trading Strategies”… By Rob Booker, Founder of Booker SFO. Be sure to signup for the our WEEKLY LIVE EVENTS for FREE at http://www.RealTradersWebinar.com/hangouts

 

RTW Podcast |

RTW 003 – How to Time Your Entries & Exits… With Swiss-Clock Precision!

How to Time Your Entries & Exits
With Swiss Clock Precision…
By Barry Burns

 

 

How to Time Your Entries & Exits

How to Time Your Entries & Exits | You’ll Learn In This Podcast…

In this episode of the Real Traders Webinar Podcast you’ll learn… “How to Time Your Entries & Exits… With Swiss-Clock Precision” by Barry Burns, Founder of Top Dog Trading. Be sure to signup for the our WEEKLY LIVE EVENTS for FREE at http://www.RealTradersWebinar.com/hangouts

 

RTW Podcast |

RTW 002 – Best Options Trading Strategies Part 2

Best Options Trading Strategies – Part 1

In this first episode of the Real Traders Webinar Podcast we’ve chosen… “Part 1 of a 4 Part Series On… “Best Option Trading Strategies!” Watch as Marc Nicolas, Founder of Day Trading Zones & Kevin M from Merlin Capital Management share their absolute… “Best Option Trading Strategies!” In total, at the time Im writing this, there are 4 parts in this series… But it continues to be added to every month! Don’r forget to signup for these LIVE EVENTS for FREE by visiting http://www.RealTradersWebinar.com/hangouts! In this episode you’ll learn strategies such as… Best Options Trading Strategies & Specifically The Best “Weekly Options” Trading Strategies! http://www.RealTradersWebinar.com/hangouts

Best Options Trading Strategies - Best Weekly Options Strategy You'll Learn
Best Options Trading Strategies | Best Weekly Options Strategy | You’ll Learn In This Podcast…

Here Are Just A Few “Trading Strategies” You’ll Learn In This Episode…

Here Are Just A Few Things You’ll Learn In This Episode…

In this replay of the “RTWWH (Real Traders Webinar Weekly Hangout)” you’ll learn… * A Trading Strategy On… How to Make Your Assumptions Using “Support & Resistance!” @ 3:45 * The 3 Step Process For Finding Credit Spreads With The Highest Probability Of Making Your Money! @ 5:21 * How to Confirm Your Support & Resistance By Looking At Your Delta & “PIM (Probability In Money)”… And What Range Your Delta NEEDS To Be At, To Be A Go! @ 5:45 * How The IV (Implied Volatility) Can Keep You From Making Wrong Moves! @ 7:20 * When To Buy Puts… And When To Buy Calls! @ 10:50 * How to Set Your BZCS (Buffer Zones For Credit Spreads) For Safety! @ 18:14 * The Time Frame Where CS’s (Credit Spreads)… Start To Decay & Drop To Zero! @ 21:16 * A Formula For Finding (CS’s Credit Spreads)…That Can Make You Money 7-9 Times Out Of 10 (Or More Specifically 68-95% Of The Time!) @ 22:35 * How The IV (Implied Volatility) Can Keep You From Making Wrong Moves! @ 27:50 * Understanding “1st, 2nd & even 3rd… SD’s (Standard Deviations)” @ 35:16 * A Trading Strategy For Calculating Strike Zones That Give You 85% Probability Of Profit! @ 36:07 * Multiple “CS (Candle Stick) Patterns For Checking CS (Credit Spread) Probabilities! @ 46:36 * Explanation Of Theta, Delta, Gamma And Vega! @ 54:25 * 4 Different Strategies For Turning A “LCS (Losing Credit Spread)… Into Profit! 1:18:04 * And So Much More! If you like this hangout & would like to sign up for even more value… We do LIVE Weekly Hangouts over at Real Traders Webinar, which you can claim your seat to by visiting the following link… http://RealTradersWebinar.com/hangouts Click The Following Link To Get Your… Free Online Trading Education!