Simple Trades for a Complex Market?
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Simple Trades for a Complex Market?

John F. Carter - February 10, 2016

Hi everyone, this is John. Welcome to the free video. Let's take a look at a couple of case studies here, of three recent trades. One that we're still in, two that we closed out today.

These markets have been extremely volatile. What kind of stuff do you look for here? First of all, we're looking for trend continuation, and by definition, trend continuation is when the 8, 21, 34, 55, and 89 period moving averages are all stacked on top of each other, with the highest one on top and the lowest one on the bottom. And in that case, if you see a squeeze, you can expect a continuation of the move.

There's a couple of things you can do here. You can short the stock, BIOGEN, if you have a fairly large account and you're comfortable with that. Or buy a put. If it goes down, you can make money.

The third option, which a lot of people don't consider, is to sell an at-the-money call credit spread. That typically gives you a 1:1 risk to reward ratio If the stocks falls, you make money. If it trades sideways, you make money. If the stock explodes higher, you only lose a little bit of money. In the case of BIOGEN, we sold the 265 - 270 call last week, for $2.40. That's $240 per contract, and we did ten contracts.

And today we bought them back at $0.40, and we made an additional $225 on the trade today. But net made $2100 on the trade, without any stress, in a very volatile market.

So that's an example to the downside. What about an example to the upside? This one has what I call "price divergence." It's little more nuanced. So, here, yes, we're in a downtrend as defined here.

But we saw: 1) Unusual options activity up here. A lot of people potentially in the know are making a bet that the stock is going to go higher. This was brought to our attention by Chris. A gap needs to be filled. From there, look for: On the smaller time frame, do the moving averages start to cross? If they do, then typically you can get that rally.

00:02:54,180 --> 00:02:57,660 It's a trickier kind of a trade. If you're buying the stock, you got a lot of volatility. If you're buying calls, you've got this layup move, but then you want to get out.

So, what kind of trade allows you to just hold on through the wiggles, so you don't get shaken out? We go back to put credit spreads. In this case, a slightly out of the money put credit spread. We sold it for $1.57. The $86 put at the time was $2.12. So we bought the $81 put for protection, just in case this thing imploded. And we're getting premium decay here, and right now, the stock is at $87.25, which is above the put we sold, which is good. We could buy this back tomorrow for $0.72, if we opened right around here.

So right now, there's profits of $4250 in this trade, and we didn't really have to do too much. If we can get to about $0.30, I would definitely buy it back, and what I like about this is that even in a down market, this thing is continuing to show strength. We purposely set up a position to take advantage of confusion and lack of conviction. In this market we want to set up trades so they can benefit from either up or down.

For tomorrow? What's interesting is we do have a squeeze setting up on the Nasdaq. The daily chart is pointing down. It's also very extended. If the squeeze triggers long, we could have a decent short covering rally back to 4058. We want to look at some safe ways to potentially play that.