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Trading Stocks vs Options: Which Is Better? I’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. Stock Trading vs Options Trading Stock trading vs options trading, what should you trade? What is better? Is it better to trade stocks or is it better to trade options? That’s what we’re going to talk about today. I will also show you practical examples from trades that occurred today, so let me jump onto the desktop. Now, I want to use an account size of $20,000 as an example here where I’m comparing whether it is better to trade stocks versus options. Depending on your account size, just multiply the numbers that I’m showing you by whatever your account size is and you’ll get the idea. So the idea is, on a $20,000 account, we want to risk 2% of the account. This would be $400, nothing more. Comparing Stock Trading vs Option Trading Now, as we are comparing stocks and options, here are the things that I want to compare. First of all, I want to write down how much we are risking stock trading vs options trading. I also want to write down the reward, how much are we planning to make on the stock or the option. Based on this, I want to write down the risk/reward ratio, and also very, very important, the buying power. What is the buying power? The buying power is the amount of your account that you need to reserve for this trade. It is not the risk and you’ll see this in just a moment. Let’s take a look at some very specific trades that happened this morning. INSW Stock Trading vs Option Trading The first trade that I want to discuss is INSW . So this morning (at the time of this writing) on the PowerX Optimizer, INSW came up as a trade, as a buy to open. And the idea here is that we are buying 239 shares based on a $20,000 account at $22.84. Our stop loss was at $1.67 and I was trading 239 shares. I want to keep it a little bit easier for all of us with the math so let’s round up and call it 240 shares. What is our risk? Per one share, we are risking $1.67 and we are trading 240 shares, meaning that our risk is exactly $400.80. So here let’s just round it to $401. Now, what is the potential reward that we are looking for? Here we are looking for a reward of $8.62 per share. $8.62 times 240 shares, so we’re looking to make $2,069. So we’re putting this into our table, $2,069. So the risk/reward ratio here, PowerX Optimizer is calculating it, it’s 1:5.16 so let’s just say 1:5.2. Now for the buying power. Again, we are buying 240 shares, and the cost per one share is $22.84, so we need $5,482 in buying power. So this is how much our buying power will be reduced when we enter the trade. Now, let me ask you, is this making sense thus far? Just so that you know what happens when you’re trading the stock? And again, we are trying to risk around 2% of the account here, $401. Now, let’s take a look at the option here. So I prefer to trade the in the money, I’ll do another article on the difference between ITM and ATM. But here we are talking about the $22.50 call, and the risk was $172 per one option. So if we want to risk $400 overall, we’re dividing this by 172 and we can trade 2 options risking $344. We’re risking a little bit less and this is just based on the price of the option. In terms of the reward, we’re looking to make $6.80, it’s $680 per one option and we are trading 2 options, meaning that if this trade works out, we would make at least $1,360. Now, according to The PowerX Optimizer, we were making a little bit less. So let’s take a look at the risk/reward, the PowerX Optimizer calculated for us. So the risk/reward was slightly lower at 1:3.95. Now we’re rounding it up so it’s 1:4.0. So as you can see, the risk/reward ratio when trading the option is slightly worse but here’s the deal. What is the buying power that we need for this? The buying power that the broker will deduct from the overall buying power in the account is our entry price. So here we were trying to enter at $2.16, we can round it up to $2.20, and since we are trading 2 options this means that our buying power is $440. Can you already see what the difference is between stock trading vs options trading here? Your buying power is less than 10%. Now, keep in mind, the buying power is not what you’re risking. The buying power is just how much of your $20,000 is being held in reserve for this particular trade. So you can’t use this money anymore. If you trade the stock, you would still have around $14,500 left. However, if you’re trading the option, you would still have $19,500 left. Is this making sense thus far? TVTY Stock Trading vs Option Trading The other trade that I want to show you is TVTY . Here we wanted to trade 392 shares, so let’s just round it up to 400. Now let’s discuss the risk first. So the risk is $1.02 per one share. We’re taking $1.02 times 400 shares, meaning that we would risk $408, which is still within our parameters. We were planning to risk around $400 so here it would be a little bit more, it would be $408. Now, if this trade works out, here is what the reward would be. So the reward is $5.61, that’s how much we are trying to make on this trade. And if we take the $5.62 times 400 shares, we are trying to make $2,248. So the risk/reward, if we look at this, is 1:5.5. Now, here is the buying power that we would need. TVTY is trading at $11.30, so this is where again, $11.30 times 400 shares, we need $4,520 in buying power. Again, not a big deal if you’re trading a $20,000 account, it will be reduced and you’ll have less money to trade right now, around $15,500. Very, very, very important, this is not the risk. This here is the buying power that is needed. Our risk is $408. Our risk here per one option is $141. So if we want to risk $400 overall, we’re dividing it by $141, it’s 2.83. Now, in order to make it all a bit easier to compare apples with apples here, I am actually saying that we would trade 3 options, and $141 is what we are risking per one option, so $141 times 3. It’s a little bit more than our $400, but I think we are still OK here. So we would risk $423. Now the potential reward per one option is $444. So this is where we take $444 times 3, and again, this is where we are looking at $1,333. As you can see, the risk/reward ratio here is worse than if we would trade the stock. It is 1:3.15 so we are rounding it again to 1:3.2. Again, it would be better to trade the stock, but you’re using quite a lot of your buying power. For the option, all you need, all that is reduced, is your entry price, and the entry price it’s $2.47. So let’s say $2.50 times 3 is $750. As you can see you need less buying power, but you also have a smaller reward. But this is why I say usually on a smaller account, it makes sense to trade options instead of stocks. Now the other important thing, especially when you trade a retirement account, is that you don’t get a margin account. This means that you cannot leverage the money that you have in the account and you cannot short stocks. So in the US, in a retirement account, you cannot short stocks. However, what you can do in a retirement account is that you can trade put options, and with put options, you can bet on a falling market. So this brings me back to the question… What is better, stock trading vs options trading? Well, this is why I wanted to show you a direct comparison using a real-life example. This way you see exactly when it is more advantageous to trade stocks, and when it is more advantageous to trade options. Long story short, often for smaller accounts, since you use less buying power, it makes more sense to trade options. And now you have a direct comparison between stock trading vs options trading that will hopefully help you decide what is best for you.
TVC:NDQEducation
by rockwelltrading
Do not gamble on earnings This stock is a perfect example of why you shouldn't yolo trades on earnings. The pattern looked great, and the stock is very bullish and also in a great sector. However, something happened on earnings. I don't really care what happened all I know is it effected the stock price severely. The thing about earning is that a company could come out with the best possible news but end up still tanking the stock price. Why? I have no idea and neither do you. best bet is to not trade earnings .
NASDAQ:CYBREducation
by The_Level_Two
2
Melvin Capital: the adventures of an infinite size short sellerYet another degenerate bites the dust. In the markets, there is a once every 100 years 5 sigma event every few months. Some of you may remember the James Cordier of optionsellers dot com emotional apology video, after he got wiped out by a short squeeze on Natural Gas in 2018. I looked into it back then and this guy was an out of the money naked option seller using extreme leverage. These people, that get wiped out, every time they are psychopaths. This time we are looking at stocks, and the guy running Melvin Capital was a madman. This guy single-handedly shorted between 50 and 100% of Gamestop all available shares. The ADV is ~3.5MM shares which is around 5% roughly. I do not trade stocks (I do Forex CFDS & CME commodity futures) but I know enough to know shorting all by yourself more shares in percentage than the second highest shorted stock entire short interest, that's asking for trouble. I do not know what limits one should set, as a famous stock expert would say "it depends on your personal risk tolerance", but the adv would be a good place to start maybe? 5% of float seems big but reasonable? When he shorted CD projekt he only used 0.6% of the outstanding shares according to this article. Funny thing: they say he did not make as much as he should have because the rate was not favorable. They know this or they are guessing? The reckless CEO of Melvin did not bother to open an FX position to hedge? He likes to live dangerously, or maybe he was making an FX bet. www.world-today-news.com On this page they claim to have a list of stocks Melvin is short of: whalewisdom.com Reddit found a troll in a very dangerous position, and so they went whale hunting. But I think it's other institutions that took down the whale actually, and the heroic "little guy" just joined late (as usual) and is now left holding the bag. Melvin loss was entirely the responsibility of the head manager, risk managers and whoever came up with the idea of shorting more than 50% of shares. It's always the same story. Before getting wiped out James Cordier published (on another site) a trading idea called "option selling opportunities so good they're scary" and was persuaded he could not lose. I bet the same happened here. Gabe Plotkin had big success (50% returns, one of the best funds), got lucky and made easy money, got excited (this is the "don't get emotional" part), went in big, and then got punished. I doubt Gabe Plotkin and James Cordier are excited today.
NYSE:GMEEducation
by MrRenev
11
How to Choose the Right Stocks to Invest inIn this analysis, I'll be talking about the two approaches you can take in choosing the right stocks to invest in: the top down, and bottom up analysis methods. I have seen posts explaining the top down and bottom up analyses by time frames, but that's not correct. Time frames don't have anything to do with this approach. If you wish to check out my other educational post on how to properly use the fibonacci retracement tool (as many people get confused with this as well), click on the post below. Bottom Up Analysis Explained - The bottom up method is the method that the majority uses to analyze stocks. - The investor first chooses a stock that he wants to potentially invest in. - Then, he analyzes the financials of the company, and compares it with that of other companies in the same industry - Afterwards, he assesses the industry itself, and decides whether the industry as a whole is prominent and healthy - Lastly, he takes a look at the entire macroeconomic situation, and assess if this is the best time to get in the stock that he has his eyes on. Top Down Analysis Explained - With the top down method, everything is done in the same way, but in reverse. - The investor first asks himself what the macroeconomic situation is like, and which country he should invest in. - He even takes a look at factors like demographics change (which is actually much more important than most people think it is) - Afterwards, the investor takes a look at which sector he should invest in. - Once he chooses a sector, he goes through all the individual companies he could potentially have his money on - He goes through a list of the companies in that sector, and compares each and every one of them. - Once he chooses the most prominent company in the sector, he takes a look at the company's financials, and decides whether to invest or not. Conclusion Broadly speaking, there are two methods of approach in choosing the right stocks to invest in. Since most retail investors hardly conduct top-down analysis, it might be a good idea to test out different approaches in choosing winning stocks. If you like this educational post, please make sure to like, and follow for more quality content! If you have any questions or comments, feel free to comment below! :)
TVC:SPXEducation
by Michael_Wang_Official
3
My Personal Plan For 2021I’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. My Goals For 2021 In this article, I want to talk about my goals for 2021, and how exactly how I’m planning to achieve the goals, so I thought it would be fun to write them down and share them with you. Now, as you know, goals need to be specific, measurable, attainable, relevant, and time-bound. Now, I will show you my financial goals both for trading, because after all, this is what I love to do, but also for wealth building. After that, I will share with you the goals for my company, Rockwell Trading as well as my personal goals, and also my goals for this channel. FINANCIAL GOALS Trading For Income For my financial goals, let’s kick things off and start with trading. The plan here is to trade for income, and my target goal is to make $15,000 per month. This is meant to cover my living expenses. Now, here’s the deal. This is a rough estimate of how much I have in living expenses. So this means that I am looking to make $180,000 per year. For this trading plan, I opened a new account. I put in $250,000 into this new account, and it is a margin account. Since having a margin account doubles your buying power, this turns that $250,000 into $500,000 of buying power that I will use for trading to achieve this goal. To figure out how much buying power I needed, I needed to figure out my living expenses. So as far as I know, my living expenses are around $9,000 per month. You might be wondering, “If your living expenses are only $9,000 a month, why would I try to make $15,000 per month?” Well, very easy, there is this thing called taxes and I want to account for it. This cost is estimated. Quick side note. By now you may be wondering why I seem to be unsure of exactly how much my living expenses are. I will cover this later in this article. So, again, the goal here is to trade for income. My next goal is for wealth building. Wealth-Building Goals One of the avenues I like to use for building wealth and one I’ve very knowledgeable about is real estate. So the plan here is that this year, I plan to buy a 10 million dollar apartment complex. Now, I’ve already been investing in apartment complexes for the past few years, but the rough idea of the financials is: - 7 million dollars will be used through financing. So I will find a bank that is basically financing 30% of this. - I’m actually planning to raise 2 million dollars through investors. - The last one million dollars will be my own money that I’m putting into this deal. This is very typical for how investing in commercial real estate is done. Now, here is the plan. The goal is to sell this for 15 million dollars in three to five years. So we’re selling it for 15 million. Then, of course, we have to give back 7 million dollars to the bank, right? Because we’re borrowing 7 million dollars. 2 million go back to the investors because everybody needs their money back right? Then 1 million dollars will need to go back to me because I also want to make my money back. Now, this is only ten million dollars. That leaves five million dollars in profits that can be divided among the investors and me. So essentially, I’m planning on making two million dollars based on the one million dollars that I invested, which would be a very healthy return. Throughout this whole process, I’ll show you exactly how this process unfolds as it happens, and what apartments I’m looking at with video updates on my YouTube channel as they happen. My other plan for this wealth-building goal is possibly buying a resort in Mexico, and here’s why. Those of you who already follow me know with my company, Rockwell Trading, we do have a Mastermind program, and we have Mastermind meetings at least three times a year. Now, recently due to covid, we weren’t able to have these in-person meetings, but if buying a resort in Mexico is feasible, then not only could we host our Mastermind meetings here in the future, I can also rent these rooms out for Airbnb. Now while I have experience with real estate, I’ve never been in the hotel business, so this might be a really stupid idea, but maybe it is a good idea. Right now this is just a goal, and will look into the details deeper to figure out if this will be feasible. Cryptocurrency So we talked about trading for income and wealth-building with real estate. My next financial goal has to do with something that I definitely have on my radar is that this year, and that is cryptocurrencies. Some of you know that in the past, I’ve been very, very public about being completely against cryptocurrencies, but I can’t deny that Bitcoin had a fantastic run this year. Bitcoin is now trading above $30,000. So guess what? Seems I was wrong. Moving forward I will definitely be looking into Bitcoin and other cryptocurrencies more closely, and fortunately, I have access to some fantastic resources of experts on cryptocurrency that I will interview for myself. I will also share these findings with you on my YouTube channel, and future blog posts throughout the year. My Goals For Rockwell Trading At my company, Rockwell Trading, we offer The PowerX Optimizer Software, and I am determined to make this the very best software in the world. For this, I am planning to release PowerX Optimizer 2.0 in the first quarter of this year, and I’m also developing an awesome trading log that will be integrated with PowerX Optimizer. So why do you need a trading log? Well, with this trading log it will be easy for you to analyze your trades. We all need to analyze our trades, and so this is definitely something that I will tackle this year. One other feature that I want to look into is possibly being able to execute trades through PowerX Optimizer by integration with actual brokerages. As it stands right now, you use The PowerX Optimizer to find stock, and then you have to enter the trades into a broker platform separately. I want to see if I can make this process easier, because, I have the same challenges. I see it on PowerX Optimizer, and now I have to enter it into the broker platform, so not only making trading easier for myself, but for everyone who uses The PowerX Optimizer. I’m constantly thinking of ways to improve The PowerX Optimizer, because not only do I believe in it, but I believe in Rockwell Trading as a whole. I believe this company, Rockwell Trading, can be an Inc 500 company. I am super passionate about trading, creating the best trading tools, and showing you the very best trading strategies that you can use to grow your account. It’s because of this drive I have to provide awesome value for you, that makes me believe we can make their list of the fastest-growing companies. Now I’d like to move on and share my personal goals for 2021 with you. PERSONAL GOALS Writing More Books The first of my personal goals for this year is, I want to publish two more books. So the first book, as some of you are already aware, will be on The Wheel strategy, which is a trading strategy for trading options. Right now I’m in the process of giving the book one final proof-read before sending it to the printers, and I only have a few more chapters to go, but I will be rolling this one out shortly in the coming weeks. The second book I’m thinking about writing will cover wealth-building strategies, which will cover what I’ve been doing over the past years to become a multimillionaire. When I came to the United States in 2002 18 years ago, I had $30,000, and today I am a multimillionaire, so I know a thing or two about how to build wealth. I think this would be another great book to share with you, that you can get a lot of value from. Buying A Plane Here is an absolute crazy personal goal that I have for this year, and you might actually say that this is a stupid idea, but for years I have been dreaming & fantasizing about owning a private plane. I’ve decided that 2021 might be the year where I make this a reality. Now again, this could be an absolutely stupid idea. Don’t get me wrong, I’m pretty smart about how I spend my money, and I’m not planning to buy a 10 million dollar jet because here’s the deal. A private plane is an expense, not an investment, right? However, everybody is allowed to spend money however they want, and this might be one of the things that I decide to splurge on. For other people, it might be exotic vacations, for me, the idea here is a private plane. So it’s smaller like an executive plane, and this is the kind of plane that I’m looking into. I’m definitely not planning to fly it myself, so no worries there. I’m planning to have a pilot fly it for me because I have no idea how to do this. I will look deeper into this and see if buying a plane actually makes sense or not? These are some of my personal goals. Now, in terms of habits, there are also a few habits that I want to start doing this year. HABITS Keeping Track Of My Finances First of all, I want to track everything. What do I mean by this? Well, when I say track everything, I want to get better at tracking my wealth, which would be my net worth. Now I have a rough idea of what my net worth is, but I should be probably getting much better about this so that I know at any given time how many millions I have. You see, the challenge is once you have money, it’s not that important anymore, but I want to do this and I also want to get a little bit better about tracking my expenses. Remember earlier, when I was talking about how I wasn’t sure exactly what my monthly expenses were? This is where being better at keeping track of finances, as a whole comes into play. I said that I’m planning to trade for income on my YouTube channel and that I think I need $15,000 a month, but I actually don’t know exactly how much I need. So I need to get better about keeping track of my finances. Health & Fitness I also want to get better at tracking my weight and calories. I’m 51, so I’m getting older, so it’s important to take care of this. I want to track everything from my water intake, calorie intake, and what kinds of food I’m eating. I also want to keep track of my workouts, and as of now, my workouts are very, very easy to track because it is actually zero, so I want to be better at getting exercise as well. My YouTube Channel Now how does all of this affect you? I mean, why would you even care about all this? Well, this is the beautiful thing about my channel. If you’re interested in what I’m doing with these goals, I’m planning to post videos there throughout 2021. Five times per week, I will post a daily stock market update. I used to talk about what was going on in the markets during the “Coffee with Markus” live streams. These are now separate, daily videos, 5 days a week, and this will be in four minutes or less. Two to three times per week, I will continue the “Coffee with Markus” live streams, but without the market updates, as they will now be in the other videos. I am planning actually keeping you updated on the wealth-building strategies I was talking about, with video updates. I will post videos updating everyone on the progress of my goals, and, of course, I also will continue to post videos covering the very specific strategies that I will use for trading. When it comes to trading, I will continue to show you exactly the two strategies that I’m currently using, which is The Wheel strategy, and the PowerX strategy. If I decide to trade any other strategies this year, I will post videos about that as well. I will share videos with my real estate adventures, which as of right now, is where I’m planning to invest in a 10 million dollar apartment, possibly buying a resort in Mexico. I’ll be sharing everything with you, the good, the bad, and the ugly. I also want to cover topics I haven’t covered before, for example, credit cards. I have a bunch of credit cards and I’m using them wisely, so for instance, topics about credit cards like, “The Apple Card, is it worth it?” I have 3 American Express cards so I’ll cover whether or not they’re worth it. I also can tell you that right now I have 650,000 airline miles, so I will show you exactly what I’m doing to get all of these points because, with 650,000 airline miles, you can go around the world several times. Another topic of interest is that interest rates are low right now. So we will talk about, for example, LOC these lines of credit, or does it make sense to refinance your home? I have been looking into refinancing my home and I will let you know what I found of whether it makes sense or not, and other strategies to employ when interest rates are low, and then when interest rates are high. For example, when interest rates are high, I will cover high yield savings accounts as well as CDs. YouTube also has these so-called “shorts” and these are videos below one minute or less. These will be videos that I do as a quick reference guide. So for example, what is the bid/ask spread? What is Theta in options? Recap So let’s just briefly recap, I wanted to share my goals with you for 2021 and they are: - Will publicly trade here for income with a new $500,000 margin account, with the goal of making $180,000 a year. - For wealth building. I’m planning to buy a 10 million dollar apartment complex, and am looking into buying a resort in Mexico for the Mastermind meetings for Airbnb? - I will look into cryptocurrencies and see which cryptocurrency. Does it make sense to invest in Bitcoin? Are there any other cryptocurrencies worth investing in? Is it better to maybe invest in gold or silver? - I will look into publishing two books. - Improving the PowerX Optimizer Strategy. - I’m looking into if a private plane is a stupid idea or not. - Keeping better track of my health and finances. - Becoming an Inc. Fastest Growing Company. - Providing more content on my Youtube channel. So long story short, this will be an exciting year. I am super excited for 2021. This is the first time ever that I’m doing anything like this, and I will really be pulling back the curtain throughout to show you everything that I personally do. I hope that you find this not only interesting but that these are also strategies that you can employ in your life right away, but this really depends on what stage of life you’re at. You might be at a stage where you are still trading for growth, trying to build an income, and I will show you very specific trading strategies for doing this. It might be that you have a retirement account and you’re looking back right now. You’re getting your initial statement and you say, “You know what? This hasn’t been doing anything over the past year and I want to have better wealth-building strategies.” If so, there will be videos on my channel as well. Sometimes you might be wondering, “Does it make sense for me to open an American Express account or to have an American Express credit card?” Or something relating to this. And I will share all of this with you. Hope that you’re enjoying this. And this is what you can expect from me in 2021.
TVC:NDQEducation
by rockwelltrading
3
15 Types of Financial Market Participants ExplainedIn this post, I’ll be going over the 15 types of financial market participants as listed above. You want to keep your friend close, and your enemies closer. As an investor or a trader, jumping into the market without knowing what these entities are doing is like jumping into a battlefield with just a stick in your hand. So understanding the roles of each of these entities can help you significantly later as you mature as an investor, especially if you’re a beginner. Investment Banks - Investment banks buy, sell, and issue stocks and bonds, lead mergers and acquisitions, conducts market research, and provide asset management services. - They act as a bridge between people who want to invest their capital, and people who need investments. - Investment banks can be more specifically divided into two types: bulge brackets and boutiques. - Bulge brackets are general investment banks like Goldman Sachs, JP Morgan, Morgan Stanley, and Deutsche Bank. - Boutiques are more specialized investment banks such as Lazard, Evercore, and Guggenheim. Structure of an Investment Bank - A general investment bank can be divided into three offices: the front, middle, and back office. - The front office consists of four divisions: the investment banking division, sales and trading, asset management division, and research division. - The front office refers to the divisions that directly interact with clients, and are in full charge of generating profits for the company. - The image of investment bankers portrayed in movies generally all refer to the front office. These are the people who make six figure monthly salaries. - The middle office is in charge of supporting the front office. - They are responsible for risk management or capital management. - The back office is in charge of the operations of the investment bank as a company, so it includes IT, HR, and other administrative teams. Front Office Divisions Explained 1) Investment Banking Division (IBD) - The investment banking division is in charge of everything that happens in the primary market. - The primary market is where securities are created, and the secondary market is where those securities are traded. - Normally when retail investors invest, it all happens in the secondary market. - In the primary market, investment banks offer a variety of services including the issuance of stocks and bonds, leading an IPO, or leading an M&A. - Teams are normally divided by sectors, but they can also be divided into specific teams depending on the deal they’re doing. - Their day to day work involves company valuation, industry analysis, analyzing a company’s financials, preparing for presentations, and financial modelling. (When I say financial modelling, I mean that they use excel. They don’t really use extremely sophisticated statistical models in this division.) 2) Sales and Trading - When you think of Ivy League alumni who work in finance, it usually refers to people in the investment banking division, or in sales and trading. - But recently, this division has been dying, and is on a downtrend. - Trading can be divided into two types: prop trading or proprietary trading, and flow trading. - Prop trading refers to the type of trading that we know, where traders buy low, and sell high. - Flow trading refers to order flows, where if a client makes an order the trading desk fills that order on the client’s behalf. - In that process, they leave a small profit margin and take a certain amount of fees. - In the past, both types of trading were extremely active. - But with the global financial crisis in 2008, prop trading within investment banks got banned, according to the Volcker rule. - As a result, most major banks spun off their prop trading desks, and the people who used to be prop traders in investment banks left to create their own hedge fund. - What’s left now is flow trading, but since flow trading refers to simply filling orders on the customer’s behalf, this process has recently been automated to a huge extent, especially with the emergence of high frequency trading - Along with this, their profit margins and commission started to decline, and the sales and trading industry as a whole is shrinking over time. - As such, the teams left in this division are teams such as high frequency trading teams, quant teams, and OTC market traders. (OTC refers to over-the-counter, which is where customized products are bought and sold, as opposed to standardized products that we see in secondary markets.) 3) Research - The research division is in charge of market research. - They make analyst reports that we’re familiar with. - But this is another division that’s dying. - Research conducted by these institutions were actually provided to their clients as a token of gratitude for using their services, and paying commission. - But, with brokers like WeBull and Robinhood offering zero commission, their business model deteriorated. - Especially in Europe, laws have been set to distinguish payments for commissions and payments for research material, and people don’t really want to pay money for services like these. - Lastly, with the development of data science, the way research is conducted has completely changed. - It has become more technical, using machine learning techniques of pattern recognition, and it’s becoming more common on the buy side. Mutual Funds, Hedge Funds, Proprietary Trading Firms - In the case of mutual funds, the capital of the fund comes from people, or the general public. - The capital for hedge funds come from accredited investors who qualify the capital requirement. - Normally, these investors need to invest a minimum of $500,000 to $1 million. - In the case of prop trading firms, they trade with their own money. Hence the term ‘proprietary’. - In terms of their investments, mutual funds are mostly limited to investments in stocks and bonds. - Hedge funds and prop trading firms don’t have any limitations or regulations in terms of the asset they want to invest in. - Even in terms of the trading/investment strategies that are used, mutual funds strategies are quite limited and regulated heavily, as opposed to hedge funds or prop trading firms that have no restrictions in their strategies. - The logic behind restricting strategies that mutual funds use is that mutual funds manage capital of the general public, and thus have to be more careful with how they manage their funds. - The regulations that the government poses on mutual funds are essentially ways to protect the general public from potential losses that might incur. - As such, even when it comes to revealing information, mutual funds need to be transparent about everything. - In the case of hedge funds, the government acknowledges that accredited investors with $3-4 million to invest are probably aware of the potential risks, and thus is relatively less limited in having to reveal their information. - Lastly, in the case of prop trading firms, because they’re trading with their own money, they have no obligation to reveal any of their information. - This is why prop trading firms use exclusive trading techniques and strategies that cannot be exposed to the general public. - Mutual funds take a 1-2% management fee, and don’t take any other incentive fees. - Thus, they focus on gathering as many people as possible in order to capitalize on a huge management fee. - They are also legally allowed to advertise and do sales. - Hedge funds take 1-2% as management fees, and 15-20% in incentives. This is also known as the Two and Twenty. - Hedge funds are also limited from advertising. - Lastly, prop trading companies take all of the profits they generate, and thus do not need any advertising at all. - Examples of mutual funds include Vanguard, Fidelity, and State Street. - Famous hedge fund examples include Bridgewater Associates, Renaissance Technologies, and Elliott. - Lastly, prop trading companies are companies like D. E. Shaw, Hudson River Trading, and DRW. Private Equity - Private equities are very similar to hedge funds in terms of their nature, the way they receive management fees and incentives. - But as opposed to hedge funds that normally invest and trade in the secondary market, private equities directly invest in a company. Hence the name ‘private’ equity. - A prime example is a leveraged buyout fund. This is when private equities acquire a huge stake within a company, increase its profitability, and sell their stake for a higher price. - In movies, these people are portrayed as bloodless and merciless people who lay off tens of thousands of workers to cut costs of a company. - Similarly, there are venture Capital funds that invest in early startups, and Growth Equity Funds that invest in startups at later stages. Exchange Traded Funds (ETFs), Index Funds - Before I explain index funds, it’s important that you understand exchange traded funds, or ETFs. - An ETF is essentially a basket of securities that trades on an exchange like a stock. - In mutual funds, when they have a fund that tracks an underlying index, it’s called an index fund. - Similarly, an ETF that tracks an underlying index is an Index ETF. - An Index ETF is essentially the same thing, but a security listed on an exchange, into smaller bits, so that individuals can buy and sell the ETF like a stock. - For instance, for an individual to invest in all 500 companies on the S&P 500 index is extremely difficult. - What institutions do is, they buy the shares of all 500 companies on the client’s behalf, creating a basket with all companies. - From there, they sell the ownership of the basket to clients, which is the ETF. - Because these companies actually own the underlying asset, they are not exposed to the risk of bankruptcy. - This is a passive fund, in which a fund manager does not really intervene actively. - Thus, the fund manager of an Index ETF just needs to mechanically buy and sell shares according to the index, so that the ETF can perform in correlation to the index. - Ever since the global financial crisis in 2008, quantitative easing has pushed market indices to move upwards over time, making passive Index ETFs a very attractive option for investment. Sovereign Wealth Funds, Pension Funds, Endowment Funds - A sovereign wealth fund is a state-owned investment fund that invests in financial assets, and is run by the state. - A pension fund is a fund that is set up by contributions from employers, unions, or other organizations to provide retirement benefits to its employees or members. - Pension funds are one of the largest players in the market by size. - They invest in stocks and bonds, but also increasingly stated exposing themselves to other asset classes. - There are also endowment funds, which is a fund that invests with the money that was gifted to them. - These funds are often run by universities, nonprofit organizations, and sometimes even churches. - The funds operated by Harvard and Yale are known as Super Endowment Funds due to their fund size and impressive returns. - A general portfolio that consists of 60% stocks and 40% bonds would give an annual return of 5.4%. - Super Endowment Funds have managed to reach an annual return rate of 11.5% over the past 20 years. - These funds have great network value, easy access to premium information, and expertise in alternative asset class investments. - This means that they don’t invest in just stocks and bonds, but also real estate, private equities, emerging equities, global bonds, and natural resources. Brokers, Dealers, Exchanges - Brokers play the role of middlemen who connect buyers and sellers within a market, and profit from commissions. - Exchanges play the same role within the cryptocurrency market. - Dealers play the role of market makers for customized financial products that are traded in the OTC markets. - Essentially, they take the opposite position of the person trying to trade. - Dealers mostly do business with institutional investors, because individual investors normally don’t trade customized financial products. - As a rule of thumb, when someone says dealers, think of investment bankers who trade interest rate swaps, bonds, or CBS over the counter. Insurance Companies - Moving onto insurance companies; they receive premiums from their clients, and while their role is to pay their clients back in case of an accident, during day to day operations, they also participate in the financial markets with the capital they have. - However, compared to the size of their fund, they play a relatively less significant role in the market. Federal Reserve Board - The Federal Reserve Board, or Fed, consists of 12 regional federal banks. - They control the national monetary policy, supervise and regulate banks, and maintain financial stability. - There’s a colloquial term that ‘the Fed prints money’, but this is not to be taken literally. - One of the ways in which they control money supply is by buying or selling bonds in the open market, also called the open market operations. - One of the reasons that all asset markets have been so bullish ever since the market drop in March is because the Fed has increased money supply at an unprecedented rate, thereby inflating asset prices. Limited Liability Companies - Limited liability companies are also players within the financial markets. - They initiate share buybacks, give out dividends to shareholders, and insider transactions take place as well, which is actually highly illegal. - Insider transaction refers to an insider of the company trading the company’s shares based on information asymmetry. - For instance, if an executive at Pfizer bought the company’s shares before the vaccine announcement, knowing that the vaccine was ready, that would be considered insider trading, and he’d do jail time for it. Securities and Exchange Commission (SEC) - The Securities and Exchange Commission is in charge of imposing federal securities laws and regulating the stock and options exchange. - In the example suggested previously of an executive from Pfizer, the SEC would be the entity to investigate the case. Retail Investors, Accredited Investors - Retail investors refer to the general public that take part in the financial market. - These are the people who work 9-5 jobs, and invest in stocks over the long run, or sometimes they’re full time traders and investors. - Accredited investors are similar to retail investors in that they are an individual, but they’re different from other retail investors in the sense that they’re acknowledged by the SEC. - Essentially, the government understands that an accredited investor has more knowledge and capital, and is capable of bearing more risk compared to the average retail investor. - Thus, they get more opportunities to participate in the financial market that normal retail investors don’t. - For instance, they can buy private companies that aren’t listed on the secondary markets, and they can invest their capital in hedge funds. - To become an accredited investor in the US, your net worth must exceed $1 million, not including primary residence, or your annual income must exceed $200,000 for the past 2 years, or $300,000 in annual income with your spouse for the past 2 years. If you like this educational post, please make sure to like, and follow for more quality content! If you have any questions or comments, feel free to comment below! :)
Editors' picks
TVC:SPXEducation
by Michael_Wang_Official
41
Everything You Need to Know About SPACsIn this analysis, I'll be covering everything you need to know about Special Purpose Acquisition Companies, or SPACs, and my own strategy that I use to choose for risk minimization, and profit maximization. SPAK, the chart above, is an ETF that was specifically designed to invest in SPAC companies. This is not investment advice. This is for educational and entertainment purposes only. I am not responsible for the profits or loss generated from your investments. Trade and invest at your own risk. 1. What is a SPAC? - SPAC stands for Special Purpose Acquisition Company. - They’re also called Blank Check Companies or Shell Companies. But what is this special purpose that they’re talking about? - Their purpose is to acquire an existing company, so that it’s available for trades and investments in the stock market. - They need to acquire a company within a given time frame between 18 to 24 months, sometimes 36 months depending on the conditions. 2. SPAC vs. IPO - Normally, companies go public through a process called an Initial Public Offering, or an IPO. - There’s another method called Direct Listing, which is the method that Spotify and Slack used to go public, but for the sake of simplicity, we’ll just look at a comparison of IPOs and SPACs. - In terms of time period, SPACs can help companies go public much faster than if they were to go public through an IPO. - The process is also much simpler, and has less requirements, and it also costs less to go public through a SPAC. - But, the company’s valuation is discounted, when they get listed through a SPAC. - So for instance, if a company that has an enterprise value of 100 billion were to do an IPO, they’d be valued as a 100 billion dollar company, whereas if they get listed through a SPAC, they’d be discounted as an 80 billion dollar company. 3. Who Makes SPACs? - Normally, people with a reputation in the market make these SPACs. - For instance, Bill Ackman, who’s the CEO of Pershing Square Capital, is extremely well known as one of the best investors, and a lot of people want to bet their money on him. - So people like Bill Ackman are the ones who gather investors up, and create a SPAC. 4. Constituents - When a SPAC is created, and goes through an IPO, the shares are owned by three entities: the founder, individuals, and PIPE, which stands for Private Investment in Public Equity. - Private stake refers to the shares that the founders, or the creators of the SPAC get. - Public stke refers to the shares that individuals buy when the SPAC gets listed. - PIPE refers to the investors who lend money to the SPAC so that they can acquire a company. - So for instance, Let’s say that SPAC is trying to acquire a $10 Billion dollar company, but they only have $5 billion in their trust. - A PIPE can hop in, and lend the remaining $5 billion to the SPAC, and in return, they get shares of the acquiring company for a cheap price. 5. One SPAC Unit - One SPAC unit consists of 1 share and the warrant that comes with the share. - The Warrant is essentially the right to purchase the SPAC share at a designated price later in the future. - It essentially acts as an incentive for the SPAC investors who take on risk. - But you can use the warrant only within a designated time period, which is usually divided into two conditions: 1) either 30 days after the new company’s IPO 2) Or 365 days after the SPAC IPO 6. SPAC Trust Account The money for the SPAC is deposited in a trust, and the funds cannot be used for any other purposes than acquiring a company or refunding the investment seeds back to the investors, in case an acquisition does not happen. 7. Negotiation and Acquisition - When the SPAC gets listed, it’s time for people to search for companies to acquire, and negotiate. - Once everything is prepared, they now move onto searching innovative firms, normally between a timeframe of 18 to 24 months, sometimes a little longer depending on the conditions. - The business that they acquire needs to be at least 80% of the value of the trust account. - So for instance, if the trust account has $10 billion, the company that the SPAC acquires needs to be at least around $ 8 billion in fair market value. - Once the negotiation is done, and the acquisition is announced, they go through a process of getting permission from the SPAC shareholders. - If the SPAC shareholders agree to the acquisition, they get shares of the new company equivalent to the shares of the SPAC they hold, at a 1:1 ratio. - If they were to disagree, they can simply cash out their stake. 8. Example Here's an example to help your understanding: - A SPAC sponsored by BIll Ackman’s Pershing Square Capital made its debut to the New York Stock Exchange, with the largest blank-check IPO (PSTH). - The offering includes 200 million units at $20 each, railing $4 billion in proceeds. Each unit consists of one common share and one-ninth of a warrant, exercisable at $23. - So the ticker of this SPAC is PSTH, and the company they’re acquiring hasn’t been announced yet, so let’s just say that they’re buying a company called Mike’s Burgers, which’ll be listed under the ticker MIKE. 1. As an investor, you buy 9 shares of PSTH at $20 as soon as it gets listed. 2. You now have 9 shares, and a warrant that you can use, since 1 unit of the stock includes 1 ninth of a warrant. 3. So you have 9 shares, and a right to purchase 1 more share at $23. 4. Let’s say Mike’s Burgers got listed on the New York Stock Exchange, and the stock goes wild because the burgers taste great. 5. After the IPO, the stock trades at $50 a share. 6. You, as an investor, think that the stock prices could go higher for whatever reason. 7. So, you decide to wait 3 more weeks, so you can use your warrant. 8. 3 weeks later, the stock soars a bit more, and trades at $60 a share. 9. You now have 9 shares that you bought at $20, and you use the right to purchase 1 more share at $23. 10. You then sell all 10 shares at market value. So, when you sell all your shares for $600, and you’re left with an initial investment of $203, and $397 in profits. 11. So in a trade like this, you could double your investment easily. 9. Risks - First of all, there are risks involved with PIPEs selling their stake. - It’s not like these entities have a lockup period, they can sell their shares as long as they have permission granted from the SEC, so there’s risk involved in that. - For instance, Nikola’s stock prices (NKLA) plummeted after its PIPE sold all their stake. - Secondly, you’re investing in a paper company and you don’t know which company they’ll acquire. - Normally, SPACs are run by veteran investors who know what they’re doing, but there’s absolutely no guarantee that the company it acquires will be a good one. - For instance, there were rumors about how Bill Ackman’s SPAC would be acquiring Airbnb (ABNB) , but as you guys know, it turned out to be false. - So as an investor, who’s not an insider, it’s hard to invest in a paper company without knowing what’ll happen to the SPAC company. 10. How to Choose the Right SPACs - So, we obviously want to minimize risk, and maximize our returns, and to do that, it’s important to choose the right SPACs to get into. - I’ll be providing my own strategy on finding the right SPACs. I’ll call this the 2N strategy. - The key of this strategy is the combination of narrative and numbers . - This is how I select stocks to invest as well, but the approach to SPACs are slightly different. - What do I mean by narrative? I mean that the SPAC or the company that they’re acquiring, needs to have a good story. - They need to have a good leader for the SPAC, they need to acquire a company in a prominent field, and a management team with expertise in the field. - So here are some things I’d look for: - First of all, I would want to see a figure who’s already acknowledged and successful. - Of course it’d be better if they have a successful SPAC deal experience. (Bill Ackman is a good example of someone I’d have my money on.) - I’d also look at the backgrounds of members of the management team. - Look into what their expertise is, their work experience, professional backgrounds, and any noteworthy achievements. - This type of information is normally all available on the SPAC’s website, but you can also look them up on linkedin. - Also look into the institutions that are involved. - If big names like BlackRock and CVC are taking part, and they hold SPAC shares, that’s good news. - You want to make sure that acknowledged institutions are behind the project. - Last but not least, it’s important to look at the industry that the SPAC has eyes on. - You want to take part in a prominent industry, and obviously the trend is tech. - Electric vehicle SPACs have also shown some crazy gains recently, but make sure you invest in a SPAC that operates in a field that you’re familiar with, and has high growth potential. - Now, let’s take a look at what I mean by numbers. - Before we can talk about numbers, we first need to understand how we can capitalize on SPAC opportunities . - The best thing about SPACs is that you can minimize your losses, or even trade risk free if you’re lucky enough. - The offering price of a SPAC stock varies, depending on the company, but normally it’s around $10. - And the best thing about investing SPACs is that there is a price floor. - It’s not that prices are legally prevented from trading below the initial IPO price, but there’s no reason for it to be traded anything below than its offering price, because in the unlikely case that an acquisition does not take place, everyone gets a refund anyways. - So basically, given that you enter at the offered price, there’s nothing to lose, and everything to gain. This is what makes SPACs special. You might ask, how much is there to gain? - The answer is at least as much as its net asset value. - In case you don’t know, the net asset value is calculated by subtracting all liabilities from the assets a company has, and dividing it up by the total number of common shares. - If you actually do your due diligence, and calculate the net asset value of the SPAC you’re investing in, you’ll realize that the net asset value normally ranges around $10.10 to $10.25 right off the bat. - This means that you have a 1-2.5% default return before even taking into account the warrant value, which is substantial, and the upside opportunity. - So, going back to what I mean by numbers, you want to either find a SPAC that is traded at around its offered price or below its offered price. - A SPAC that is already trading at 3 times its offered price probably won’t get you the best returns. - You want to find a SPAC that’s cheap. - Also, make sure you check the trust value, the SPAC’s market cap, and their net asset value. - You want to make sure you get into companies with a high trust value, and a net asset value that is not too far from its market price. Conclusion As long as investors conduct their own research, there is huge opportunity they can capitalize on, with very little to no downside. Thus, I highly encourage that people start exploring the world of SPACs, and maybe even consider adding prominent companies to their portfolios early on. If you like this analysis, please make sure to like the post, and follow for more quality content! I would also appreciate it if you could leave a comment below with some original insight :)
Editors' picks
SEducation
by Michael_Wang_Official
42
How I've traded Netflix this year. Morning traders. I just wanted to share how I've traded Netflix this year with the script I am using and the results I've gotten. Traded netflix only on an account with a well known CFD provider. £200 deposited and 76% gains on investments since March risking 1% per trade. This information is all provided by the back test data screen shot at bottom of the screen. As you will see from the idea screen I have provided details of how the script prompts me when to enter the market. I simply enter the market set my stop loss and take profit targets and let the trade play out. That easy! All the back test data backs the strategy up and takes away all the emotion of trading. Something we all struggle with as traders. Once the trade has played out I simply wait for the next signal alert and go again. This particular example is working the H1 and the example is taken from back in June and July. Currently I am in a live long position on this chart as we speak. So we will see how that plays out. For any more information on the script I am using please message me.
NASDAQ:NFLXEducation
by RichScott
Super Simple Smart way to play IPOsMy last video got a lot of traction where I was critical of people that buy IPOs on the day of offering. There is a better way! When you see it and how simple it is... you will laugh! Even if you believe in the company, have done your DD, and are ready to make your investment based on fundamentals this method will help you avoid drawdowns and increase your probability of success! One warning though: it requires PATIENCE which many may lack! :P
DEducation
by norok
15
How To Manage A Trade That's In Trouble - My Options Trade On TQI’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. What Do You Do When You Find Yourself In A Trade That's In Trouble? So you have a trading strategy. You have your trading tools ready to go at your fingertips. You trade with a paper trading account to make sure your trading strategy is solid. You’re finally ready to start making real trades. You start trading and everything goes according to plan until a trade comes along when it doesn’t. Now you find yourself in a trade that is in trouble. How do you handle this? Well, the first thing you need to remember to do is to keep your cool. One of the most important aspects of trading is being in the right mindset. This is important because trades will go against you from time to time. It’s just the nature of the business, and you can’t lose your cool when this happens. If you aren’t in the proper mindset when a trade goes against you, then you will not be properly equipped to manage it, and I have some good news… there IS a way to manage a trade that’s in trouble. I was in such a trade recently, and I will show you how I handled it. How I Managed A Trade In Trouble Step-By-Step I was recently in a trade with TQQQ . I opened up my trading software and say I was at -$3,500 open P&L with this trade. 1) The first thing that I did is I sold a put with 150 strike price and I received $66 in premium . 2) However, what happened is with this particular trade was I got assigned. So I had to buy 100 shares of TQQQ for $150 each. At this time TQQQ was trading at $116 which was not good because I bought it at $150. However, as soon as I was assigned these shares, I starting selling calls against these shares. This is how The Wheel Strategy works. You first sell puts and collect premium. If & when you get assigned, you then sell covered calls against these shares at a higher strike price to try and get “called away” to sell the shares at a profit, and you keep doing this while collecting premium until you do get called away. Now understand, you will get assigned trading The Wheel Strategy, but trust me this is a good thing. 3) So I then sold a call with a strike price of 155 for $2.10 . Now with this call, I could have actually been “called away” on this trade and sold the shares at a profit, but I felt that I could just instead hold onto the shares to possibly sell them for a higher profit. So I just kept the premium of $210 ($2.10 multiplied by 100 shares) I collected on this, and then the next day I bought the call back for $0.37 . So $2.10 I collected in premium minus $0.37 that I paid to buy the call back, comes to $1.73 which means I made $173 in premium. These are realized profits. 4) Next, I sold another call, this time with a strike price of 150 for $0.45 and I also bought it back for $0.05 2 days later to keep from being called away to sell them later at a higher profit, but collected more premium. So this means if you take the $0.45 I collected and subtract the $0.05 I paid to buy the call back this comes to $0.40 which means I made another $40. If you add up all the premium collected so far ($66, $173, &$40) I have made a total realized profit of $279 so far over the last 15 days, which is not too shabby. 5) The price of TQQQ started plummeting, so instead of selling another call, I instead, decided to sell two puts with a strike price of 100 for $1.14 . I chose to sell two, based on what my account size allowed if I were to get assigned again. So with each share yielding me $1.14 in premium a share, this comes to $114 each contract, and since I sold two contracts, I collected $228 in premium total ($507 overall). What Happens If You Get Assigned again? Now you might be thinking selling puts was a bad idea. I mean, what happens if TQQQ is below $100 by expiration, and I have to buy 200 more shares of TQQQ ? It would actually be really, really awesome if this would happen. There are actually two scenarios of what could happen and they are both awesome. In the first possible scenario, TQQQ stays above $100 by expiration, which is in one week. In this case, I keep the $228 and my total profit from this trade goes up to $507. Now scenario two, and this is the one that would make some people nervous, is if TQQQ drops below $100 on expiration. In this case, I have to buy another 200 shares for $100. Here is why this would be a good thing, and why buying more puts was a smart move, but I’ll let you be the judge. If scenario number two happens, I would have bought 100 shares for $150 and I would have bought another 200 shares for $100. So this means that right now my cost basis is lowered when you average the cost of the total price I would have paid for all 300 shares. So I did buy 100 shares times 150, plus 200 times 100, and I’m dividing all of this by 300 so that I get my average price per share. This means $116.60 is the average price I paid per share. So this means as soon as TQQQ moves back up to $116 I break even, and if it moves above $166 I’m making money. So $116.66 is my new magic level instead of $150. Now look at this, is it more likely that over the next few weeks TQQQ goes above $116.66 or $150? $116 right? So by doing this, if scenario one happens, okay, great, I just keep racking up premium, and that’s fine. If scenario two happens even better, I’m lowering my cost basis here. If the new average price per share is $116.66 per share, instead of what it actually was which was $150, it is easier to get back into the green. Summary This is how I managed this trade. At first glance, it simply looked like it was in trouble, but in reality, all you need to do is keep collecting premium, and when you can, lower your average price per share. Both of these things will lower your cost basis, making it easier to get back into the green when a trade is going against you. This is the beauty of The Wheel Strategy, even when a trade is going against you the strategy is still going according to plan.
NASDAQ:TQQQEducation
by rockwelltrading
1
Assigned With A Wheel Trade & The Market TanksI’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. In this article, I want to talk about what to do when you get assigned with a Wheel trade. Previously, I have shown you the Wheel strategy. It’s a strategy that I’ve been trading for several months and I haven’t had a single losing trade yet, knock on wood. So I received a lot of comments on my videos asking, “Yeah. That’s all good. But what do you do when you get assigned with a Wheel trade and the market crashes?” And that’s exactly what we are going to talk about today. What To Do When You Get Assigned With A Wheel Trade I want to show you how to handle getting assigned when the market crashes by using a real trade as an example where this happened to me, and I couldn’t have timed it more perfectly because a little over a month ago, on October 28th, I was recently in such a trade. The market was down more than 3% and it was a bloodbath. Luckily, this scenario provides me with an opportunity to use it as a template to show you what to do when this happens. The TQQQ trade I was in at the time works as a perfect example, so let me just show you how things panned out. So with this TQQQ trade, had an open P&L of -$2,667. So what does this mean? Does it mean that we do have a big loss here? No. This is only an unrealized loss, and this is how I handled it. I simply followed the 5 steps of The Wheel strategy, and the 5 steps are as follows: Pick a stock that’s going sideways or slightly moving up. Sell a Put Option , i.e. you have to buy the stock at the strike price. Collect Premium and buy the Put back when we see 90% of the profits. If we get assigned, i.e. have to buy the stock, we will sell Covered Calls against these shares to try and sell the shares at the strike price. Collect premium and buy the Call back when we see 90% of the profits. Selling Puts The trade initially started on September 3rd, so let’s backtrack a little bit to really dissect it step by step. TQQQ met all my criteria, and on September 3rd is when I first trading this. September 3th, when I started trading this, I sold 150 put for $0.66, which is $66 because I traded one contract, and one contract represents 100 shares. The next day I got assigned. I got assigned because when you’re selling puts it means that if the stock goes below the strike price at expiration, 150 in this case, I would get assigned. This is exactly what happened a day later when the option expired. So I made $66 by collecting premium, even though I got assigned 100 shares at $150/share, but here’s the deal. Since I sold the put for $0.66 this means that my cost basis, since I keep that premium regardless of whether I am assigned or not, gets lower. So this means that the $150 a share I paid minus the $0.66 I collected per share, brings my cost basis down to $149.34. Now doesn’t sound a lot, but it basically means that the stock now does not have to go above $150 anymore. As soon as TQQQ goes up to $149.34 I’m breaking even. Now if it goes above this, I’m making money. Simple right? Selling Covered Calls Now that we have been assigned, this is where we start selling Covered Calls. When you sell Covered Calls against these shares, the goal is to try and sell them at that strike price of that Call, while collecting more premium. Here’s the trade that I did. I sold a 155 Call for $2.10 on the 10th after realizing 90% of the profits, I bought it back for $0.37 the next day. So $2.10 minus $0.37 means I made $173. And now my cost basis gets reduced by another $1.73. Well, now our cost basis is going lower. Our cost basis of $149.34 drops by $1.73, so our new cost basis is now $147.61. This means that if the stock goes back to $147.61 we break even, and if it goes above we are making money. Easy right? Next, I sold the September 80 Call, the September 18 150 Call, for $0.45, then bought it back for $0.05. So this means at this point we made another $40, bringing our cost basis down by another $0.40 to $147.21. The stock kept going against us. It was going down and this is what many of you are concerned about. “What do I do if the stock keeps going down?” Well, you keep selling premium, and by doing so, you’re lowering the cost basis. Well, what I did next was really cool. Selling More Puts? So next, I sold actually two puts for $110 and $118. So that averages out to $114. Then I bought them back at $0.06. This means $114 minus $0.06. So we made another $108 here. Now I’ll explain in a moment why I sold a put here even though right now since we own stocks, and we should be selling calls. There’s a very specific reason for it, and I’ll explain it to you. Looking back at our trade, we are lowering our cost basis to $146.13. Next, after we sold the puts and they expired worthless I actually sold another 100 put for $2.40 and bought it back for $24. So we made another $216 here. Bringing our cost basis down again from $146.13 minus $2.16 to now $143.97. When To Sell Puts INSTEAD Of Calls So if you are supposed to sell Covered Calls during this stage of The Wheel Strategy, why did I sell those Puts? I already owned 100 shares of TQQQ that were assigned to me, so why risk getting assigned more? Well, I sold these Puts, instead of Calls for a specific reason. At this stage of The Wheel Strategy is where you normally would sell Calls, however, if you are on this part of this strategy, and the market is tanking, you have to make an adjustment to this strategy if the price keeps dropping, to help keep your cost basis as low as possible. These were 100 Puts, meaning if the price would have dropped below $100 at expiration for either of them, and I would have been assigned the shares. If that were to happen, I would now own 100 shares at $100 each, on top of the 100 shares I already own at $150 each. So now I own 200 shares, I paid a total of $250 for, bringing the average price per share to $125. Getting assigned these shares would have lowered my cost basis tremendously. If you subtract the total Premium I received on all of these trades, which was $12.05 a share ($1,205 overall) from the average price per share, which in this case is now $125, this comes to a cost basis of $112.95. This is what the cost basis would have been IF I was assigned these additional 100 shares at $100 each. I wasn’t assigned these shares, however, and my final cost basis was $137.95. Do you see why getting assigned is a good thing? People are afraid of getting assigned, but as long as you have adequate buying power, and are following my methods for picking good stocks, assignment should be looked at as a good thing. Selling Premium You see, this is what the Wheel does. You can sell premium while you own the stocks. So I then sold a $150 call for $1.57, bought it back at 15. So this means that I made another $142 bringing down my cost basis again to $142.55. Now, I don’t want to bore you and make this article too long here, but long story short, as you can see, I sold a few more of the calls and I bought them back. So overall, by just selling premium, even though I still owned the stock, I was continuing to lower my cost basis. At this point, the stock was down $2,770. However, by doing this, by selling more calls and puts here, I was able to make $1,748 in premium. So this means I made $17.48 per share on these 100 shares. So if you take the $150 minus $17.48 right now, right now my cost basis to break even on this trade is $132.52. So as soon as TQQQ goes back to $132. Now, what happens if TQQQ keeps going down? I will keep doing what I’ve been doing, following The Wheel Strategy. I’ll keep collecting premium until at some point, I can sell these shares for a profit. Recap So now you know what to do when you get assigned with a Wheel trade, and hopefully, it becomes less scary for you. I look forward to getting assigned with a Wheel trade because that allows me to sell calls and make even more money. If the stock keeps going down, I’ll just keep selling, and I will continue to lower my break even more and more. So, right now, TQQQ does no longer have to go all the way up to 150. It only needs to go up to $132.52. I just wanted to address this process because I know that many people who are trading this strategy are concerned saying, "Oh my gosh, what if I get assigned with a Wheel trade?” It’s a good thing. It’s a good thing and now you know why.
NASDAQ:TQQQEducation
by rockwelltrading
1
Corrective Structures and Fibonacci ExtensionsHere, we will expand the information about the chart. Corrective Structure: Tell us about an accumulation/distribution process. That means that Institutional funds are trying to buy the maximum amount of an asset. Remember, they have a lot of money. They cant set a buy order as Retail traders do. They need to average their buy on a range (that takes time). The same applies to the selling process. A key aspect of this process is the idea that when they buy, they will move the price; after that, they need to sell a partial amount of the previous purchase to keep the price in range. When the price falls again, they loop the process again. These actions create corrective structures that retail trades can use to understand that this is happening and simply wait for the breakout. Fibonacci Extensions: Ralph Nelson Elliott stated that, while stock market prices may appear random and unpredictable, they actually follow predictable, natural laws and can be measured and forecast using Fibonacci numbers. ( In this case, Fibo Extenssions provide us with Targets based on proportions with previous movements) Elliott stated that, while stock market prices may appear random and unpredictable, they actually follow predictable, natural laws and can be measured and forecast using Fibonacci numbers. We hope the information was useful!
NASDAQ:ADBEEducation
by ThinkingAntsOk
2
The Tradesy, my Holy Grail of entry systems in StocksBacktesting my 50% retracement system for Apple stock is a perfect example of how it works. Drawing my bespoke fib levels from the previous low to the new high gives me my entry point, stop and initial target. ENTRY 50% STOP 25% TP1 100% Closing (selling) 50% of the initial position at TP1 allows the remaining 50% of the position to be risk free. There are two methods to manage the trade beyond the initial target:- Scaling out (conservative) = Closing 50% of the remaining position at each TP. TP2 (4R) TP3 (8R) TP4 (16R) TP5 (32R) etc,etc. Balls deep (aggressive) = Moving the stop to the previous entry price as each new TP is hit, accumulating a large risk free position which will eventually close out as structure breaks down.
NASDAQ:AAPLEducation
by Cryptsyxalt
1
How to Develop a Short Trade using Top-Down AnalysisGood morning traders! Today we want to show you a practical case of how to apply multiple timeframes for the complete development of a trade. In this case it is BMY stock, and it is a trade that we ourselves will take if what we are expecting happens. 🔸What can we find in this chart? - First, what we can see is that in the 4H timeframe, the price has been moving in a range of 15-20% since May. - A few days ago, the price faced the resistance zone that is around $64-66. We consider it a resistance zone since every time the price reaches that level, it encounters a strong supply, which generates its subsequent downward movement. - Based on this, we decided that once a clear rejection was given, we would look for an opportunity to take a short trade. 🔸Descending to the 15Min chart, we see that after the rejection in the Resistance zone, the price generates a breakout of the Ascending Trendline. - Added to this behavior, the Support zone is penetrated strongly to the downside, and then the price consolidates forming a corrective structure in a pullback to the Resistance zone (previous support). - This is our opportunity to look for a short trade. - The corrective structure offers us a correct and safe R/R ratio. - The point where we will look for the entry of the trade will be in the breakout of the local low, with a stop loss behind the structure and the resistance zone. - And finally, the maximum target of the movement is the uptrend line.
NYSE:BMYEducation
by ThinkingAntsOk
How to use Corrective Structures to develop a SetupGreat day to learn something, today; we will understand how to use corrective structures to develop a setup on any chart. a) There are 3 types of Corrective Structures, Zig-Zag (first example), Flat (Second Example), Triangles (third example). Use them as an archetype to spot them on a chart. b) Now that you understand the types of corrective structures is time to look at one on the chart ( you can see a Flag Pattern on the real chart) c) Should I trade all the corrective structures I see? NO, YOU DONT! You need Context. Your corrective structure must be well-positioned on the chart, it can be a Trendline, or it can be a Support. Never trade isolated patterns. d) Then you need a clear path in the direction you are expecting. In this case, we are at All-time Highs, so we don't have any Resistance e) How can I calculate my target? Use Fibonacci Extensions. Draw it from the base of the impulse towards its top (where the corrective structure starts) and then take it back to the impulse's bottom. Pay attention to 2 levels only 1.27 for Break Even, and 1.618 for Target f) Only take setups with a risk-reward ratio higher than 1.5 Have a Great Day!!!
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NYSE:CRMEducation
by ThinkingAntsOk
28