Category Archives: Technical Trading

Options Traders…heads Up on Netflix!

One of the hardest things for me to remember is not to believe everything I see. I am a sucker for the latest “can’t lose” strategy supported by the experts. This morning I ran across a trade that looked too good to be true. I think it is, but I think it is instructive to walk through the potential hidden land mine. The event is the Wednesday afternoon release of NFLX earnings but there is a hidden trap for option traders using one commonly used earnings play structure.

The construction of the play is that of a “double calendar” spread. The underlying profit engine is an attempt to exploit the routinely seen spike in implied volatility (IV) of the options series most closely following earnings release. In this case, NFLX has weekly options which expire 48 hours after the scheduled announcement.

In order to understand the situation, let’s walk through the components step-by-step. First, is the routinely observed spike in IV seen as earnings release approaches present? As shown in the options pricing matrix below, the IV of the weekly options is substantially higher than the next series in time, the February monthlies:

NFLX Options Matrix
NFLX Options Matrix

Next, we need to get an idea of the magnitude of the price movement expected by option traders. This price range can be imputed from the break even points of the at-the-money straddle in the front most options. As shown in the graph below, this analysis gives a current expected price range of 167-203 following earnings release.

NFLX Straddle
NFLX Straddle

Now let us consider a double calendar spread with strikes selected to encompass this anticipated price range. To review quickly, a calendar spread consists of selling a short dated option while buying a longer dated option at the same strike price. An example of such a trade in NFLX is presented below:

NFLX Doublecal
NFLX Doublecal

That looks pretty sweet, right? We have projected break even points of 147.3 and 238.86 and a probability of profit (P.P.) of 100%. So all we have to do is put this on, wait for earnings, and barring any huge surprise, we take profit of 100% or more home.

What could possibly go wrong? Unfortunately there is a high probability of a sequence of events that will totally erase any profits and likely result in a loss. Go back and look at the option pricing matrix above and focus on the IV of the options we are buying. These options trade at a volatility of 60%. Is that high or low? You tell me from this historic graph of volatility in NFLX options:

NFLX Volatility chart
NFLX Volatility chart

As you can see, the current level of volatility that you are buying in the long legs of the calendar is quite elevated on a historical basis. Furthermore, the spread between statistical (historical) and implied volatilities has rarely been greater. This combination of events sets up a high probability of a “volatility crush” on the options you hold long as part of the spread. The moving parts of this crush are:

1. Cessation of the “bleeding” of juiced IV from the weeklies into the monthly series as the weekly option IV deflates massively.

2. Convergence of IV toward the value of historical volatility in order to close the huge divergence in the levels currently present.

This situation sets up a high probability for a negative impact on the trade which will almost certainly result in a loss. Do I know these events will transpire? Absolutely not, and I may be 100% wrong. Survival as an options trader is all about recognizing high probability events and structuring trades accordingly. No free cheese here; time to move along to the next trade.

If you would like to receive these reports you can register here

Finding The Best Technical Analysis Tools For Stock Trading

In a recent article a number of elements towards effective technical analysis of stocks and shares was discussed.

Many traders in today’s stock market are opting to use a technical analysis tools program which carries out all of the analytical work on their behalves and delivers stock tips which are algorithmically based right to their e-mails. At this point any kind of investor whether you’re a Wall Street mogul or a stay-at-home mom can trade accordingly without having the time to put towards the analytics.

This article is going to look at what you should look for to pick out the best possible technical analysis tools for stock trading.

First and foremost, you’ll find that you can significantly weed out the ineffective programs by making sure that the publisher offers a money back guarantee on the technical analysis tools.

This of course is a sign of good faith from the publisher but at the same time it enables you to get the technical analysis tools and receive a few of its first stock picks and gauge their performances as they progress in the market accordingly.

You should also be sure to note whether the technical analysis tools exclusively targets penny stocks, greater priced stocks, or mixes them all together. The reason for this is that tools which attempt to look at and anticipate market behavior in penny stocks as well as much greater valued stocks typically perform much worse than those which go after one or the other exclusively because it’s a completely different analytical procedure anticipating faster moving/more volatile penny stocks versus greater priced stocks.

You should also take a glance and see what sort of support the authors behind the program offer to their customers. In the ideal situation, they would offer 24 hour phone support but realistically I have found that many of these companies rely solely on their e-mail support. That’s not necessarily a reason to write them off, as often times I’ve found that they’ll respond to your queries extremely quickly.

Consumer reviews are also generally great places to find the best technical analysis tools from people who have used them themselves first hand.

Start to dominate the stock market today by using the most precise and reliable technical analysis tools available right now.

Forex Technical Analysis: The Art of Predicting the Future By Studying the Past

Technical Analysis is the easiest and most precise way of trading the FOREX market known by the forex traders community. All available information on any particular currency, and its impact on traders, and the market, are already reflected in a currency’s price. The foreign exchange market is mostly composed of trends and is, therefore, a place where technical analysis can be used very effectively. Experience in trading has shown that history repeats itself – over time, certain chart patterns become consistent, predictable and very reliable. The problem is being able of  spoting them. There’s always more than meets the eye at first glance.

Prices move in trends; and the traders who don’t know this fact obviously have no need to implement a trading methodology on technical analysis, they haven’t even realized yet. But, over 100 years of research has shown that those who trade “with the trend”, more often than not, greatly improve their chances of winning in the forex markets (i.e., making a profitable trade).

Many times finding the prevailing trend will help you become aware of the overall market direction and offer you better visibility–especially when shorter-term movements tend to clutter the picture. And many times following the trend will bail you out of an initially less than great entry point.

The main question you may be asking yourself by now  is; how does technical analysis help you to determine what the trend of the market is and how does it help your efforts to trade with the trend and not against the trend?

It is important to mention that no one is claiming technical analysis as the “magic bullet” of trading . And if you ask, which indicators are better in Forex trading? The answer is none – technical indicators should simply be  components of your overall customized / personalized trading system and not systems in and of themselves. They are like tools in a tool kit, not the kit itself!)/

As a Forex Technical Trader, your goals are:

#1) To figure out the price action of the currency pair. Price is the main concern. If the EUR/USD is at 1.3226 and goes to 1.3219, 1.3112, 1.3008 – the market is in a down trend. Despite what every technical indicator might predict, if the trend is down, stay with the trend. Indicators showing where price will go next or what it should be doing are useless. A trader need only be concerned with what the market is doing, not what the market might do. The price tells you what the market is doing.

#2) To always remember that technical indicators are only giving you confirmations based on what the market is telling you. So listen and pay close attention to the market and let it dictate which method you will use and which tool you will pull out of your bag of strategies and techniques. For only by listening to the markets will you ever be able to conquer it successfully and become a profitable trader.

Related Blogs